Ashok Kumar B. Chowatia Vs JCIT (TDS) (Madras High Court)
Citation – (2021) 435 ITR 449
Issues Involved
Is it possible for an assessee to be held responsible for the undeposited withheld tax if the person or entity that withheld the tax from the assessee’s income failed to do so?
Relevant provisions
Income-tax Act, 1961 – Section 143, Section 154, Section 191, Section 194 I, Section 194-I, Section 200 (3), Section 201, Section 201 (1), Section 201(i), Section 203, Section 205 and Rule 30 (2) of Income-tax Rules, 1962
Facts
The second respondent (deductor), who was a tenant of the petitioner, withheld TDS from the rent he gave the petitioner. The 2nd respondent, however, did not deposit the money into the Income Tax Department’s account. The deductor neglected to submit the TDS to the Income Tax Department, thus even though the petitioner claimed it in his returns, it was not recognised. Regarding outstanding income tax obligations, demand letters were sent to the petitioner.
The petitioner contested the demand letters on the grounds that the second respondent (deductor), in accordance with section 201 of the Income Tax Act of 1961, is a “assessee in default.” The petitioner argued that since the second respondent (deductor) failed to pay the TDS on rent, he could not be held accountable for the tax debt. The petitioner argued that the tax that was sought of them had already been deducted through Tax Deducted at Source (TDS).
Contention of the parties
Petitioner
Since for other years TDS has been deposited with the department, the issue is outstanding only for the financial year 2010-11 where also the liability is partially admitted by the 2nd respondent.
It is submitted that this stand is against the object and purpose of Sec 205 of Income Tax Act, 1961. Further, based on clause 4(c) of the MOU dated 30.7.2014, signed between the petitioner and the 2nd respondent, the contention of the department that there was no actual deduction is contrary to the finding of the 4th respondent.
It is further submitted, as per section 194-I of the Income Tax Act, 1961, TDS of rents does not contemplate payment of rent by cash Hence, adjustment is also permitted as actual payment of cash is not the only mode. Therefore, going by the finding of the 4th respondent and the undertaking the TDS was in fact deducted.
It is submitted that corresponding corrections have not been carried out in website, which continues to show the mismatch. Further, petitioners have also been issued with the impugned demand notices arbitrarily and unreasonably
Respondent
The department in its counter has taken a stand that TDS was not deposited with the department hence petitioners would also be liable to pay tax.
The learned standing counsel for the Income Tax Department submits that the second respondent has made certain payments during the pendency of the writ petition and therefore the petitioners were liable to pay the balance.
The tax deduction at source by the 2nd respondent for the Assessment Years 2011-2012 & 2012-2013 has been remitted by the 2nd respondent and therefore, the balance period the amount has to be paid by the petitioners.
It is further submitted that there was a dispute between the respective petitioners who are the owners/land-lords of the property with the 2nd respondent/tenant which was rented out to the 2nd respondent/tenant and that Memorandum of understanding was signed between them on 30.07.2014 as per which the respective petitioners have secured their interest by asking the 2nd respondent to deposit the amount deducted towards tax. In case such amount is not paid, the 2nd respondent had given cheque to cover the same.
It is submitted that no amount was deducted as no amounts were paid and therefore question of invoking Section 205 of the Income Tax Act, 1961 did not arise at all. He further submits that under Section 191 of the IT Act, in case of income in respect of which provision is not made under the provisions of the IT Act for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of the income-tax shall be payable by the assessee directly.
That apart, it is submitted in the counter filed by the first and the third respondent that under section 194 I of the Income Tax Act, 1961 while making payment of rental income into recipients account, such person is required to deduct tax at source at the rates prescribed by the Central Government and remit the same to the credit of the Central Government by the seventh of the succeeding month as per Rule 30 (2) of the Income Tax Rules.
It is further submitted that, it is the duty of the person deducting tax under section 203 of the Income Tax Act, 1961 to furnish certificate for Tax Deducted at Source to the person to whose account credit has been given and that as per section 200 (3) the person deducting tax has to prepare statement for such period giving the details of the Tax Deducted at Source and remitted in the prescribed form and if such a person fails to remit the same to the credit of the Central Government, then he would be treated as a defaulter under section 201 (1) of the Income Tax Act, 1961.
It is submitted that assessments were completed under section 143 and were modified under section 154 of the Income Tax Act, 1961 and if the petitioners were so aggrieved by any wrong adjustments made in the Assessment Orders as rectified under section 154 of the Income Tax Act, 1961, it was open for the petitioners to file an appeal before the Commissioner of Income Tax (Appeals).
Observation of the court
The court observed that the second respondent was a tenant of the petitioners and few others who belong to the same family. The 2nd respondent had committed default in making payments to the Though copy of the lease agreement signed between the parties is not available for perusal. Since the second respondent is the assessee in default, any tax withholdings made by the second respondent but not paid to the Income Tax Department may only be recovered from the second respondent. It would be unfair to force the petitioner to pay taxes twice. Any Tax Deducted at Source that was not submitted by the second responder may only be collected from them. The Income Tax Department may pursue the 2nd responder for the unpaid tax in the manner prescribed by law if the 2nd respondent fails to pay the tax to the Income Tax Department’s credit. The Income Tax Act of 1961 allows for the recovery of any unpaid tax balance from the Petitioners by serving them with the appropriate notice.
Decision of the court
To the degree that tax was withheld by the deductor but not deposited to the Income-tax Department, the Madras High Court ruled on petition that recovery may only be directed against the deductor since he was the assessee in default. A taxpayer may not be forced to pay income tax twice on the same amount. Any such tax deducted at the source but not submitted must be recovered solely from the person or entity making the deduction.
As a result, the Madras High Court nullified the assessee’s demand notices. In addition, it was made very clear that assessee should not be required to pay any amount of tax that was withheld but not returned. However, the Income Tax Department might pursue legal action against the deductor if the tax was not paid to the government agency. According to the rules of the Income-tax Act of 1961, the assessee may be required to pay back any unpaid taxes after being served with a proper notice.
Comment
On failure on the part of deductor to deposit the amount of TDS deducted to the Income Tax Department, the assessee (deductee) cannot be saddled with tax liability as it was the duty of the Income Tax Department to recover such TDS from the deductor in default. In conclusion, the Hon’ble Madras High Court quashed demand notices and held that recovery action against the petitioner (deductee) is not just and lawful.
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