Employer does not credit TDS to Govt - Can it be recovered again
from employee by Income Tax? No, says Bombay HC
MUMBAI, JULY 26, 2007 : BEWARE your employer may run away with your
TDS or refuse to give you a TDS certificate! What happens then? Here
is a case where the employer did not credit the TDS in government
accounts an amount of Rs.6.6 Lakhs, and so the powerful Income Tax
department attached the bank account of the employee and recovered
from him Rs. 12.7 Lakhs! Imagine the plight of an employee, if Rs.
12 Lakhs of his hard earned money is looted illegally by the taxmen!
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.
v 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.
v 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,
1. 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.
2. 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.
3. 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.
4. Authenticity of the said pay slips and bank statements have not
been disputed by the revenue.
5. 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,
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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
8. 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.
9. 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.
10. 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.
We had carried a similar order from the ITAT a few years ago - 2004-
TIOL-114-ITAT-MUM
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