Revenue cannot recover demand to the extent of TDS deducted despite non payment by deductor

ORDER

D.V. Shylendra Kumar, J.

1. Petitioner is an assessee under the IT Act, 1961 (for short, the Act). This is a peculiar case where the petitioner-assessee is challenging the enforcement of demand made at Annex.-H dt. 5th Dec., 2002, wherein it is indicated that on verification of the records by the authorities under the Act, it was found that income-tax arrears was due from the petitioner for the period as indicated therein, and the petitioner-assessee was called upon to make payment of the amount within 10 days from the date of receipt of the notice, failing which coercive recovery proceedings would be initiated against the petitioner. The amounts mentioned in Annex.-H are as follows :

 2. The assessee had responded to the notice, pointing out that the demands for the years 1999-2000 to 2001-02 were not correct or justified; that the said demand included even the amounts that had been deducted by her tenant, one M/s Krisen Development Corporation, who had taken the property belonging to the petitioner on a monthly rent of Rs 1,35,000; that the said tenant had punctually deducted 20 per cent of the rent amount in terms of Section 194-I of the Act by remitting the rent less 20 per cent to the petitioner every month, but, in fact, had not issued the corresponding deduction certificate in Form 16A and though this aspect had also been brought to the notice of the Department, no action as such had been taken, but nevertheless, the amount having not been remitted to the credit of the Department by the tenant and the Department having not realized the amount, is now looking to the petitioner for recovery of this amount and to such extent, the demand cannot be raised on the petitioner. It is on such stand, the present writ petition is filed praying for quashing of this demand notice to the extent of the amount mentioned therein, being the amount which had already been deducted by the tenant of the petitioner whether remitted or not to the Department.

3. It appears that the petitioner, in fact, had preferred a revision petition to the CIT under Section 264 of the Act, disputing the demand, but ultimately that was not of much success and the petitioner is at the doors of this Court invoking jurisdiction under Article 226/227 of the Constitution of India.

4. Sri S. Parthasarathi, learned counsel appearing for the petitioner, simply points out to Section 205 of the Act and submits that as per this statutory provision, the Revenue cannot raise demands on the assessee to the extent to which tax that had been deducted by the tenant under the provisions of Section 194-I of the Act for the purpose of remitting the amount to the credit of the IT Department. Submission of Sri Parthasarathi is that there is an express statutory bar on the respondents to enforce the demand of this nature in respect of the amount which has already been deducted under Section 194-I of the Act; that in the light of the statutory bar, the demand is illegal and not sustainable in law and it is, therefore, just and necessary for this Court to exercise the writ jurisdiction to quash, such demand as not supportable in law and grant the relief to the petitioner.

5. Respondents had been put on notice and are represented by the learned standing counsel Sri M.V. Seshachala. I have heard Sri M.V. Seshachala, who submits that, while the factum of deduction by the tenant [of the petitioner] was not definite or within the knowledge of the Department, it is a fact that the petitioner had not furnished along with the returns of income for the relevant assessment years, the certificates of deduction as contemplated in terms of Section 203 of the Act. Learned standing counsel drew my attention to the provisions of Section 139(9) of the Act and submits that it is incumbent on an assessee while filing the returns to enclose all such certificates evidencing payment of tax deducted at source; that on the failure, the return can be treated as an incomplete return or wrong return; that it is the statutory requirement that such certificate should be enclosed along with the return itself and undoubtedly in the present case it has not been done so; that even in terms of the provisions of Section 190 onwards in Chapter-XVII of the Act, relating to the collection and recovery of tax, deduction of tax at source is akin to an advance payment of tax; that the deduction of tax at source in respect of rents payable by persons other than individuals or an HUF is provided for under Section 194-I of the Act; that several obligations and responsibilities are cast under the Act on such persons and also the manner in which the amount is to be remitted; that in respect of such tax deducted from out of the income payable to the assessee and on the amount being paid to the Central Government, it has to be treated as payment of tax on behalf of the persons from whose income the deduction was made in terms of Section 199 of the Act; that a conjoint reading of the provisions of Sections 192, 194-J, 199 and 200, the duties of the person deducting the tax in terms of Section 200, consequences of failure to deduct and pay the tax so deducted as envisaged in Section 201, as also provisions of Section 202 of the Act, indicating that the deduction is only one mode of recovery; that Section 203 itself, which enables or compels issue of a certificate by the persons deducting tax, indicating that the amount is so deducted and remitted to the credit of the Central Government, etc.; that the word ‘deduction’ should be understand as meaning not mere deduction by the person responsible for paying, but ‘deduction and payment’ to the account of the Central Government; that when one examines the scheme of these provisions, it becomes clear that it is only when the amount is deducted and paid, the said amount is given credit to the tax liability of the assessee as also it is treated as a payment of tax on behalf of the assessee and not otherwise. Submission is that unless the amount deducted is remitted to the Central Government and certificate issued by the person (for amounts) so deducted and further the assessee produces the certificate along with the returns while filing the return under Section 139 of the Act, the assessee cannot claim that the amount has been deducted. Learned standing counsel further submitted that the concept of deduction is complete only if all these steps have been completed and not otherwise. Submission is on the premise that Section 205 cannot be read in isolation but has to be read in conjunction with all these provisions; that the object of protecting an assessee is to avoid recovery of tax twice–once from the person deducting and later from the assessee; that the assessee, to whom certain amount was to reach as income, has already been deprived of the said amount by the person responsible for making the payment and if such amount is already paid to the Central Government, it should be treated as payment on behalf of the assessee and then only it can be recovered from the person deducting the tax and if such event has not happened, the assessee cannot call in aid the protection under Section 205 of the Act; that the Bar does not operate in a situation where the amount has not reached the coffers of the Government. It is accordingly submitted by the learned standing counsel appearing for the respondents that so long as the amount has not reached the coffers of the State, it is still open to the Revenue to recover the amount either from the person who has deducted or from the assessee himself/herself, and if the provisions are understood in such a manner, no exception can be taken in regard to the impugned demand and there is no occasion for this Court to interfere or intervene in exercise of extraordinary writ jurisdiction and therefore, the writ petition deserves to be dismissed.

6. Before I discuss the legal position, it is necessary to notice certain factual aspects peculiar to this case. They are : the deduction by the lessee, the person responsible for doing so, is not much in dispute in this case, as the subsequent development does indicate that the Revenue had taken steps to realize the amount that had been deducted by the tenant but it is not fully successful in doing so and therefore, looking to the assessee herself for recovery of the balance amount. While this is the assertion on the definite instructions by Sri Parthasarathi, learned counsel for the petitioner, Sri Seshachala, learned standing counsel appearing for the respondents, submits that unless it is confirmed from verification of the records also, he is not in a position to dispute the submission one way or the other. It appears that the Revenue had proceeded against the person responsible and has realized some amount and in respect of the balance it is now enforcing the demand against the assessee. If that is the factual position, it could be presumed that the tenant had, in fact, deducted the amount but had failed to remit the same to the Central Government.

7. The question is to whether the failure on the part of such person should result in the assessee making good the amount, though in reality, to that extent of such tax liability, the assessee has already been relieved of the amount.

8. Section 205 of the Act reads as under:

“205. Bar against direct demand on assessee : Where tax is deductible at the source under Sections 192 to 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D, Section 194E, Section 194EE, Section 194F, Section 194G, Section 194H, Section 194-I, Section 194J, Section 194K, Section 195, Section 196A, Section 196B, Section 196C and Section 196D, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”

On a plain reading of this provision, it is very clear that in a situation where the tax is deductible at source under Section 194-I of the Act, as in the present case, and to the extent to which the tax has been deducted from the income, the assessee shall not be called upon to pay the tax himself/herself to such extent. That means what the section provides for is to put an embargo or prohibition from raising a demand on the assessee in respect of the amount, which was deductible and actually deducted to the extent it has been deducted. The section by itself does not say that the amount should also be paid to the Central Government. There is no doubt that such an obligation is cast on the person responsible namely, the person who has deducted the amount and the Act also provides for initiation of proceedings against the person on his/her failure to do so, right upto the prosecution of the person for recovery of the amount with interest. The condition of remittance is not referred to or made a requirement for the protection to the assessee under Section 205 of the Act. Even if one reads the earlier provisions such as 192, 194-I, 199, 200, 201, 202 and 203 to presume that payment being on behalf of the assessee having expressly made applicable when the amount is remitted and granted to give credit to the amount of the tax payable by the assessee also, only when the amount deducted is also remitted, whereas, there is a clear departure in the case of Section 205 by not mentioning the words ‘remittance of the amount’ in this section. Here again, for imposing the bar on the Revenue for making a direct demand on the assessee, what is indicated in the section is a requirement in law for deduction and factual deduction and nothing more. Insofar as such requirements are concerned, in the present case, it is not much in dispute that it has happened or fulfilled. In fact, the bar only is not to raise demand on the assessee herself or to enforce recovery on the assessee after the deduction is made in respect of the amount deducted. That means, once deduction is made, the Revenue is expected to look upto the person who had deducted the tax for realizing the amount, if such person fails in remitting the amount to the Central Government.

9. I am of the view that this understanding and such interpretation of Section 205 of the Act is also in consonance with the general principles of law, particularly the principles of the Law of Principal and Agent. If we look at the scheme for the provision of deduction of tax at source, it becomes obvious that such person is acting on behalf of the Revenue, i.e., as an agent of the Revenue. In fact, the person is enabled statutorily to make deduction and remit the amount to the Central Government, though in the instant case, the person who has deducted the amount may be the tenant or lessee of the petitioner and there is such inter se relationship as between the two, insofar as the deduction of tax at source representing 20 per cent of the monthly rent payable as envisaged under Section 194-I of the Act is concerned, the deduction is under the statutory obligation and on behalf of the Revenue and because of the compulsion herein. It is not as if the petitioner could prevent such deduction. When the person like a tenant acts as a representative or agent of the Revenue for such deduction and if there is any violation on his/her part, the consequence should fall only on the Revenue and that cannot be foisted on the assessee. It is no doubt true that the assessee if pays the tax in terms of the tax liability, i.e., under the assessment order and to the extent of the amount is not paid to the Government remains a liability on the assessee also and could look upto the tenant to recover the amount for reimbursement. The question in the light of the provisions is that, should the assessee be driven to that plight ? I think that the provision is to provide a protection to the assessee and to prevent the Revenue from embarking on the recovery proceedings in respect of such amount. If such being the object of the provision, it is not possible to understand the word ‘deduct’ occurring in Section 205 as ‘deducted and remitted’.

10. Even on the general principles of law, the Law of Principal and Agent, as discussed above, for a default of the agent of the Revenue, the petitioner-assessee, who is a third party in relation to such relationship cannot be penalised. In the circumstances, I am of the view that the Revenue is to be definitely restrained in terms of Section 205 of the Act from enforcing any demand on the assessee-petitioner insofar as the demand with reference to the amount of tax which had been deducted by the tenant of the assessee in the present case, and assuming that the tenant had not remitted the amount to the Central Government. The only course open to the Revenue is to recover the amount from the very person who has deducted and not from the petitioner.

11. In the result, this writ petition is allowed in part and demand under the impugned notice at Annex.-H dt. 5th Dec., 2002, insofar as it relates to the demand for payment of tax; which had already been deducted by the tenant of the petitioner for the three asst. yrs. 1999-2000, 2000-01 and 2001-02 are concerned, stands quashed. The Revenue is restrained from enforcing such demand as against the petitioner either by raising a demand or by any other coercive method. It is open to the Revenue to realize the amount from the other person and if the assessee pays it voluntarily, receive it, but not otherwise, Rule issued and made absolute.

NF