Summary: Under the Income Tax Act, 1961, tax deducted or collected at source (TDS/TCS) is treated as a statutory deposit by the deductor acting as a trustee for the government. Section 205 clearly bars the department from recovering tax from the deductee once it has been deducted, regardless of whether the deductor actually deposited it. Several judicial decisions, including Hindustan Coca-Cola Beverage Pvt. Ltd., Yashpal Sahni, and BDR Finvest Pvt. Ltd., confirm that the liability lies solely with the deductor, and recovery from the employee violates Article 265 of the Constitution. Even if TDS/TCS does not reflect in Form 26AS, the deductee cannot be penalized; the remedy is to pursue the defaulting deductor under sections 201, 220, 221, or 276B. Deducees are advised to report non-reflection, claim credit in returns, follow up with the deductor, and, if necessary, seek rectification under section 154 or appeal with CIT(A). This framework ensures that the government’s right to tax does not shift unfairly to taxpayers.
Brief Introduction:
Tax is deducted / Collected at source on supply of services, interest, salary and goods etc. to bring various transactions under the scanner of the government to ensure check and balances under various law under section 199 to 206 A of the income tax act 1961. This provides regular cash flow to treasury also to meet day to day expenses of government also.
Here diductor of ITDs / TC assumed the statutory role of agent and held as that amount in a fiduciary capacity (as a trustee) of the central government. He is duty bond to deposit the tax under correct head timely, file returns and generate tax deduction certificates. The provisions provide interest, fine, penalty and even prosecutions for any default.
Issue in Hand
Tax is deducted at source but not reflected in 26 AS. The real issue crops up at the time of filing return for non-reflection of tax deducted at source. when processing of returns by CPC , it will raise demand for short payment of taxes under section 143 (1) of the Income tax Act 1961. The deducee generally take in to account the amount of ITDS/TCS while discharging his advance tax.
The law position:
Section 205 of the Income Tax Act, 1961 provides that “Where tax is deductible at the source under the provisions of this Act, the assessee shall not be called upon to pay the tax himself to the extent to which such tax has been deducted from that income”
Accordingly, once tax has been deducted, the department cannot recover the same amount again from the assessee, irrespective of whether the deductor has deposited it or not.
Constitutional Mandate under Article 265 provides that this demand violates Article 265 of the Constitution of India, which mandates that “No tax shall be levied or collected except by authority of law.” The “authority of law” in this context is the Income Tax Act, 1961. Since Section 205 of the Act expressly forbids the recovery of this tax from the deductee, the Department has no legislative authority to collect this amount from me. Attempting to recover tax that has already been deducted tantamount to double taxation without legal authority, rendering the demand unconstitutional and void.
In the case of CIT vs. Shelley Products (2003) 261 ITR 367 (SC), The Hon’ble Supreme Court held that if any tax is collected or retained without the authority of law, it amounts to a violation of Article 265 of the Constitution and is liable to be refunded. In my case, retaining the demand despite the bar under Section 205 is a direct violation of this principle.
Further, Young Women’s Christian Association of Delhi vs. ITO (ITAT Delhi), The Tribunal held that Article 265 mandates that no tax shall be levied or collected except by authority of law. If tax has been collected without authority (or credit denied without authority), the same has to be refunded/rectified.
The Hon’ble Supreme Court in Hindustan Coca-Cola Beverage Pvt. Ltd. vs. CIT (2007) 293 ITR 226 (SC) held that once tax has been deducted at source, the department cannot recover the same amount from the deductee, even if the deductor fails to deposit it.
The Hon’ble Bombay High Court in Yashpal Sahni vs. Rekha Hajarnavis (2007) 293 ITR 539 (Bom) reiterated that the Revenue is barred from recovering tax from the employee when TDS has been deducted by the employer, irrespective of deposit status.
Asst. CIT vs. Om Prakash Gattani (2000) 242 ITR 638 (Gauhati HC) ruled that the remedy for the Revenue is to recover the amount from the defaulting employer, not the employee.
Smt. Anusuya Alva vs. DCIT (2005) 278 ITR 206 (Karnataka HC) reaffirmed that Section 205 acts as an absolute bar on the department from demanding the tax from the employee once it has been deducted.
Shri Chintan Bindra vs. Deputy Commissioner of Income Tax & Ors. (W.P.(C) 2164/2022)Dated: – 29-11-2023, Non deposit of TDS by employer – Kingfisher Airlines Limited – employer had not deposited the tax deducted at source, so the outstanding dues be recovered by the respondents from his employer – recovery from employee for default in TDS deposits – credit of TDS deduction denied – as per revenue no credit for tax can be given to the petitioner, since in view of the provisions u/s 199 of the Income Tax Act the credit can be given only when the tax which was deducted at source is paid to the Central Government and in the present case, admittedly the tax deducted from salary of the petitioner has not been deposited by his employer. Whether any recovery towards the said outstanding tax demand can be affected against the petitioner in view of the admitted position that the tax payable on salary of the petitioner was being regularly deducted at source by his employer namely Kingfisher Airlines Ltd. who did not deposit the deducted tax with the revenue?
HELD THAT: – In the case of BDR Finvest Pvt. Ltd. vs DCIT, [2023 (11) TMI 808 – DELHI HIGH COURT] it was clarified that payment of the tax deducted at source to the Central Government has to be understood as the payment in accordance with law. The petitioner having accepted the salary after deduction of income tax at source had no further control over it in the sense that thereafter it was the duty of his employer acting as tax collecting agent of the revenue under Chapter XVII of the Act to pay the deducted tax amount to the Central Government in accordance with law. The employer of the petitioner having failed to perform his duty to deposit the deducted tax with the revenue, petitioner cannot be penalized. It would always be open for revenue to proceed against employer of the petitioner for recovery of the deducted tax. Same view has been taken by this court in the case of PCIT vs Jasjit Singh [2023 (12) TMI 34 – DELHI HIGH COURT] Section 199 of the Act, in our view cannot operate as impediment to grant relief to the petitioner.
The petition is allowed, thereby setting aside the intimations/communications issued by respondent no. 3 u/s 143 of the Act raising a demand of tax to the tune and consequently, also restraining the respondents from carrying out any recovery proceedings pertaining to the said intimations/ communications. However, it is clarified that in case the petitioner is able to obtain any amount of money towards tax deducted from his income at source for the Assessment Year 2012-13 from his employer, the same shall be deposited by him with the revenue forthwith.
CBDT Instructions:
CBDT Office Memorandum F.No. 275/29/2014-IT(B) dated 11.03.2016, clearly directs that in cases where tax has been deducted but not deposited by the deductor, no coercive recovery should be made from the deductee. Section 205 creates a statutory bar against such recovery.
Specific Recovery Provisions Against the Defaulting Diductor
The Income Tax Act, 1961, provides robust and specific mechanisms to pursue the defaulting deductor , not deductee.
Section 201: Treating the deductor as an assessee in default for non-deposit of tax.
Section 220 & 221: Recovery of tax from the defaulting deductor, along with interest and penalties.
Section 276B: Prosecution of the person responsible for the company’s affairs for the failure to deposit the deducted tax.
Options for the Deductee:
1. The tax deducee should quarterly check 26 As and report for for non-reflection of credit to diductor.
2. He should fully report his income on which tax has been deducted in his tax return.
3. He should claim ITDS/TCS deducted in his return in the year of accruing income.
4. He should respond to notice under section143(1) within 30 days and inform regarding deduction of tax which has not been elected in 26 AS despite follow up.
5. He should do follow up with diductor to deposit tax with interest in case not deposited or correct his ITDS/TCS return.
6. Even in case nothing happens with all documentary evidence he can file rectification request with his jurisdictional AO to drop the demand under section 154 of income tax act 1961 within four years and in case rectification rejected then he can file appeal with CIT Appeals within 30 days of order of rejection.
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S.K.Periwal B.Com , F.C.A , CS Director Tax corner India LLP Moble no 9119337201
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