TDS liability on lottery winnings rests with deductor, recovery under section 226(3) quashed applying section 205 protection

HC held that the assessee was not liable for deposit of TDS on lottery winnings; that obligation rested solely on the deductor. As the deductor failed to remit the TDS to the Government, the Assessing Officer's note that credit would be allowed only on proof of actual payment was treated as valid. However, applying section 205, HC ruled that no direct recovery could be made from the assessee for tax already deducted at source. Consequently, the recovery proceedings and notices issued under section 226(3) attaching the assessee's bank account were declared illegal and quashed, while the denial of TDS credit pending proof of deposit was upheld.

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Issues Involved:
1. Validity of the Income-tax Officer's order denying credit for tax deducted at source (TDS).
2. Legality of the notices issued under section 226(3) of the Income-tax Act for recovery of tax from the assessee's bank account.
3. Interpretation and application of sections 194B, 199, 200, 201, 203, and 205 of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the Income-tax Officer's Order Denying Credit for TDS:
The petitioner-respondent won two lottery prizes amounting to Rs. 10,50,000 and Rs. 18,000 for the assessment year 1986-87. Chandra Agencies, responsible for paying the prize money, deducted Rs. 2,62,500 and Rs. 4,500 at source but did not deposit these amounts in the Government treasury. Consequently, the assessing authority did not credit the TDS in the petitioner-respondent's assessment, stating that credit would be given only upon evidence of actual payment to the Government.

2. Legality of Notices Issued Under Section 226(3):
The Income-tax Department issued notices under section 226(3) to the bankers of the petitioner-respondent for recovery of Rs. 2,35,479, which led to the attachment of the assessee's bank account. The petitioner-respondent challenged these notices, arguing that the amount had already been deducted at source and that the responsibility for depositing it lay with Chandra Agencies.

3. Interpretation and Application of Relevant Sections:
- Section 194B: Mandates deduction of income-tax at source on lottery winnings exceeding Rs. 5,000.
- Section 199: States that credit for TDS is given when the amount is deducted and paid to the Central Government, upon production of a certificate under section 203.
- Section 200: Requires the person deducting tax to deposit it to the credit of the Central Government within the prescribed time.
- Section 201: Deems the person who fails to deduct or deposit the tax as an assessee in default, subject to penalties.
- Section 203: Obligates the person deducting tax to issue a certificate specifying the amount deducted and other particulars.
- Section 205: Prohibits direct demand of tax from the assessee to the extent tax has been deducted from their income.

Conclusion:
The court observed that the assessee is not responsible for the deposit of TDS into the Government treasury; this responsibility lies with the person who deducts the tax. The court noted that the assessee should not be subjected to double taxation or recovery proceedings if the deductor fails to deposit the TDS. Consequently, the court held that while the note by the Assessing Officer denying credit for TDS was valid, the recovery proceedings initiated against the assessee were illegal. The court quashed the notices issued under section 226(3) but upheld the Assessing Officer's note that credit for TDS would be given only upon evidence of actual payment to the Government.

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