• Jul
  • 27
  • 2007

Employer does not credit TDS to Govt – Can it be recovered again from employee by Income Tax?

Posted In Income Tax Case Laws | | No Comments » Print Friendly and PDF

The interesting question raised in this petition is, where a company deducts tax at source (TDS) from the salary payable to an employee, but fails to deposit the said amount into the Government treasury, whether, the revenue can recover the TDS amount with interest from the employee concerned in spite of the express bar contained in section 205 of the Income Tax Act, 1961.

On 30th September, 1997 the petitioner filed return of income for A.Y. 1997-98 inter alia claiming credit of TDS amounting to Rs.6,66,000/ -.

The return of income was processed and on 29th March, 2000 the assessing officer issued an intimation under section 143(1) (a) of the of the Income Tax Act, 1961 (‘the Act’ for short) denying credit of the TDS amount of Rs.6,66,000/ – and after imposing interest under section 234A, 234B and 234C of the Act raised a demand of Rs.12,73,940/ -.

The petitioner made an application under section 154 of the Act on 6/4/2000 seeking rectification of the intimation issued under section 143(1)(a) of the Act inter alia on the ground that the credit of the TDS amount of Rs.6,66,000/ – cannot be denied to the petitioner and in any event the TDS amount with interest cannot be recovered from the petitioner in view of the bar contained in section 205 of the Act. However, no order was passed on the said application. The petitioner addressed several letters to various authorities including a letter addressed to the Income Tax Officer, TDS Circle , Hyderabad calling upon them to initiate necessary action against the employer-respondent No.6so as to recover the TDS amount collected and to compel the respondent No.6 to issue TDS certificate in favour of the petitioner.

Instead of recovering the TDS amount with interest from the employer, the income tax authorities, in furtherance of the intimation issued under section 143(1) (a) of the Act initiated penalty proceedings against the petitioner under section 221(1) of the Act and by attaching the bank account of the petitioner recovered a sum of Rs.17,89,587/ – from the petitioner.

Challenging the above action, the present petition is filed in the High Court.

The High Court first looked into the statutory provisions.

Section 201 of the Act inter alia provides that where a company bound to deduct tax at source fails to deduct tax or after having deducted fails to pay the said tax to the credit of the Central Government within the stipulated time, then the company shall be deemed to be an assessee in default in respect of the tax and the said company shall be liable to pay simple interest @ 12% p.a. on the TDS amount from the date on which such tax was deductible upto the date on which such tax is actually paid to the Central Government. Section 201(2) of the Act further provides that till the TDS amount with interest as stated above is paid to the Central Government, there shall be a charge upon all the assets of the company. Moreover, section 221 of the Act inter alia provides for the levy of penalty and section 276 B of the Act inter alia provides that where a person fails to pay to the credit of the Central Government, the tax deducted at source, such person shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and provides for levy of fine. Thus, the Act provides for complete machinery to recover tax deducted at source from the person who has deducted it.

Every person deducting tax at source is required to issue a certificate under section 203 of the Act specifying the amount of tax deducted, the rate at which the tax has been deducted and such other particulars as may be prescribed. Section 199 of the Act provides that any tax deducted at source under the provisions of Chapter XVII and paid to the Central Government shall be treated as payment of tax on behalf of the person from whose income the deduction was made and the credit shall be given to him for the amount so deducted on production of the TDS certificate issued under section 203 of the Act.

v Section 205 of the Act provides that where tax is deductible at the source under Chapter XVII of the Act, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted.

From the legal position as above, the High Court observed,

From the language of section 205, it is clear that once the tax is deducted at source, the same cannot be levied once again on the assessee who has suffered the deduction.

Once it is established that the tax has been deducted at source from the salary of the employee, the bar under section 205 of the Act comes into operation and it is immaterial as to whether the tax deducted at source has been paid to the Central Government or not, because elaborate provisions are made under the Act for recovery of tax deducted at source from the person who has deducted such tax.

In the present case, the petitioner – assessee has furnished monthly pay slips and bank statements to show that from his salary tax was deducted at source by the employer – respondent No.6.

Authenticity of the said pay slips and bank statements have not been disputed by the revenue.

Thus, it is clear that the tax has been deducted at source by the respondent No.6 from the salary paid to the petitioner.

So the question to be considered by the Court was if the employer has failed to deposit the tax deducted at source from the salary income of the petitioner to the credit of the Central Government, whether the revenue can recover the TDS amount with interest once again from the petitioner.

And the High Court observed,

Though the employer deducted the tax at source from the salary income of the petitioner, he has not issued the TDS certificate in Form No.16 to the petitioner. As a result, the petitioner is not entitled to avail credit of the tax deducted at source.

However, once it is established that the tax has been deducted at source, the bar under section 205 of the Act comes into operation and the revenue is barred from recovering the TDS amount once again from the employee from whose income, TDS amount has been deducted.

the purpose of issuing TDS certificate under section 203 of the Act is to enable the assessee to avail credit of the tax deducted at source in the relevant assessment year.

From the language of section of 205 of the Act, it is clear that the bar operates as soon as it is established that the tax has been deducted at source and it is wholly irrelevant as to whether the tax deducted at source is paid to the credit of Central Government or not and whether TDS certificate in Form No.16 has been issued or not.

Also the mere fact that the employer may not issue TDS certificate to the employee does not mean that the liability of the employer ceases. The liabilty to pay income tax if deducted at source is upon the employer.

once the mode of collecting tax by deduction at source is adopted, that mode alone is to be adopted for recovery of tax deducted at source.

Although it is obligatory on the part of the person collecting tax at source to pay the said TDS amount to the credit of the Central Government within the stipulated time, if such person fails to pay the TDS amount within the stipulated time, then, section 201 of the Act provides that such person shall be deemed to be an assessee in default and the revenue will be entitled to recover the TDS amount with interest at 12% p.a. and till the said TDS amount with interest is recovered there shall be a charge on all the assets of such person or the company.

Penalty under section 221 of the Act and rigorous imprisonment under section 276 B of the Act can also be imposed upon such defaulting person or the company.

Thus complete machinery is provided under the Act for recovery of tax deducted at source from the person who has deducted such tax at source and the revenue is barred from recovering the TDS amount from the person from whose income, tax has been deducted at source.

Therefore, the fact that the revenue is unable to recover the tax deducted at source from the person who has deducted such tax would not entitle the revenue to recover the said amount once again from the employee-assessee, in view of the specific bar contained in section 205 of the Act.

So the petition succeeds and the High Court directed Revenue to refund to the petitioner within 8 weeks the amount of Rs.17,89,587/ – with interest @ 6% from the date of recovery till the date of payment. Though the credit of the tax deducted at source is not available to the petitioner, since the said liability is not recoverable from the petitioner, the revenue is directed to earmark the said TDS liability as “not recoverable” from the petitioner.


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