HC Flags “Catch-22” in TDS Prosecution; Directs Liquidator to Act, Grants Limited Protection

Balaji Bhat Vs CIT (Appeals) -V (Karnataka High Court)

HC Flags “Catch-22” in TDS Prosecution; Directs Liquidator to Act, Grants Limited Protection

This case before the Karnataka High Court concerns prosecution of a former Managing Director (MD) for failure to remit Tax Deducted at Source (TDS) by a company that was subsequently wound up.

The petitioner, former MD of M/s Primus Retail Pvt. Ltd., challenged criminal proceedings initiated u/s 276B & 278B of the Income Tax Act for non-payment of TDS. The company, engaged in retail business, had deducted TDS on rent and salaries during FY 2009–10 and 2010–11 but failed to remit the same due to financial difficulties. A survey by the department led to proceedings u/s 201(1)/(1A), raising substantial TDS demands.

A critical aspect of the case was that the TDS liability was allegedly inflated due to a bona fide clerical error in TDS returns (April–June 2010 quarter), where the amount was wrongly reported at an abnormally high figure. Based on this erroneous data, assessment orders were passed raising significant demand.

Subsequently, the company was wound up (2012) and an Official Liquidator took charge. The petitioner claimed that:

• The error in TDS returns required correction and challenge before appellate authorities.
• The responsibility to pursue appeals shifted to the Official Liquidator.
• Despite repeated representations, the Official Liquidator failed to act.
• The petitioner, though no longer in control, was exposed to criminal prosecution.

The petitioner attempted to pursue appellate remedies: