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 of the Income Tax Act, 1961. The court quashed the notice demanding payment and barred the revenue from adjusting the demand against future refunds. The court directed the refund of the undisputed amount for AY 2015-16 to the petitioner, effectively disposing of the writ petition.

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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.

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