2023 (2) TMI 1079 - HC - Income Tax

Tax Recovery Blocked: Court Stops Revenue from Enforcing Tax Recovery for Employer's Undeposited Withholdings.

The HC ruled that the revenue cannot enforce tax recovery from the petitioner for amounts withheld but not deposited by the employer, citing Section 205 ... Bar against direct demand on assessee under Section 205 - Credit for Tax Deducted at Source under Section 199 - Prohibition on indirect recovery by adjustment against refund - CBDT Instruction dated 01.06.2015 - non-coercion and TDS credit mismatchBar against direct demand on assessee under Section 205 - Credit for Tax Deducted at Source under Section 199 - CBDT Instruction dated 01.06.2015 - non-coercion and TDS credit mismatch - Whether the deductee/assessee can be called upon to pay tax which has been deducted at source by the deductor - HELD THAT: - The Court held that Section 205 bars a direct demand on the assessee to the extent tax has been deducted at source, and the CBDT Instruction dated 01.06.2015 is consistent with that bar by providing that coercive measures should not be taken against the deductee where TDS credit mismatch exists. While Section 199 governs grant of credit only when the amount is received in the Central Government account, that statutory rule does not permit calling on the deductee to pay the withheld tax; the legislative bar in Section 205 prevents treating the deductee as liable to pay tax which has been deducted by the deductor. The determinative legal principle is that the statutory prohibition on direct demand cannot be circumvented by administrative emphasis on receipt of funds under Section 199 or by the fact of non-reflection in Form 26AS. [Paras 7, 8]Deductee cannot be called upon to pay tax to the extent tax has been deducted at source; the bar in Section 205 applies.Prohibition on indirect recovery by adjustment against refund - Bar against direct demand on assessee under Section 205 - Whether the revenue can adjust the withheld tax not deposited by the deductor against a refund payable to the deductee - HELD THAT: - The Court concluded that adjustment of the demand against a future refund constitutes indirect recovery of tax and is therefore barred by the statutory prohibition in Section 205. The CBDT Instruction's statement that coercive measures should not be taken was held insufficient to permit an indirect method of recovery by setting off refunds; the legislative bar prevents both direct compulsion on the deductee and indirect effacement of the deductee's refund on account of the deductor's failure to deposit TDS. [Paras 9, 10, 11]Revenue is not entitled to adjust the demand relating to withheld but undeposited tax against any refund payable to the deductee.Final Conclusion: Notice dated 28.02.2018 quashed; the demand for AY 2012-13 raised on account of TDS not deposited by the employer cannot be recovered from the petitioner nor adjusted against his refund, and the undisputed refund for AY 2015-16 is to be paid to the petitioner. Issues:1. Whether the deductee can be required to pay tax equivalent to the deduction made by the deductorRs.2. Can the revenue adjust withheld tax not deposited by the deductor against the refund due to the deducteeRs.Analysis:1. The petitioner, an ex-employee of Kingfisher Airlines Limited, had withholding tax deducted by the employer for AY 2012-13. The employer did not deposit the tax, leading to a demand on the petitioner. The petitioner's refund for AY 2015-16 was withheld due to this demand. 2. The petitioner challenged a notice compelling payment of the demand, citing Section 205 of the Income Tax Act, 1961, and a CBDT instruction. The revenue argued that withholding tax credit can only be given when the amount is deposited in the Central Government account, and the demand cannot be erased.3. The court held that Section 205 prohibits direct demands on the assessee for tax deducted at source. The CBDT instruction aligns with this provision, stating no coercive measures can be taken against the assessee. The court questioned if the revenue can indirectly recover what is barred directly and concluded that the demand cannot be enforced coercively.4. The court ruled that the revenue cannot recover the tax withheld by the employer from the petitioner or adjust it against future refunds. The notice compelling payment was quashed, and the revenue was barred from adjusting demands across different assessment years.5. The court noted the undisputed refund claim of the petitioner for AY 2015-16, which the revenue acknowledged. The court directed the refund of the undisputed amount to the petitioner, disposing of the writ petition accordingly.