2023 (4) TMI 488 - AT - Income Tax

Bank Manager Appeals TDS Deduction on Foregone Salary, Court Dismisses Appeal

Sh. Rajeshwera Rao Peri Versus CIT (TDS) -2, New Delhi & Anr

The appellant, a former Chief Manager at a bank, challenged the deduction of TDS on foregone salary in a settlement agreement. The court held that since ... Reversal of TDS by the employer on salary foregone by the employee (after termination) as per the settlement agreement - Appellant (employee) seeking release of TDS amount - obligation of the employer to deduct TDS on salary foregone after accrual of salary but not paid - HELD THAT:- The Bench is of considered view that the foregone salary may after its accrual be chargeable to tax in the hands of appellant, but the appellant cannot claim that his employer should have deducted tax on the basis of accrual. The grounds raised have no substance. Maintainability of appeal in pursuance of order of Hon’ble High Court - Liability of employer to deductTDS u/s 192 - HELD THAT:- As observed this appeal is maintainable by an ‘assessee’, however, the aforesaid discussion establish that appellant is neither ‘assessee’ nor ‘assessee in default’. Therefore, the appeal preferred by him, against the order dated 07.01.2021, mentioned in form 36 as “review order u./s 263 of the Income Tax Act, 1961” is not maintainable. Even otherwise on merits it can be observed that section 192 of the Act provides deduction of tax ‘at the time of payment’. However, in the case in hand admittedly there was no payment of the salary etc, which was foregone as per terms of settlement in the mediation proceedings. Consequently, the appeal is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the appellant had locus to file an appeal to the Tribunal against the Revisional Authority's order under section 263 of the Act. 2. Whether the Revisional Authority's order (maintained as non-maintainable) was open to challenge before the Tribunal by the appellant who was neither the assessee, nor the deductor, nor an assessee-in-default. 3. Whether tax deduction at source under section 192 is required to be made on the basis of accrual of salary (including arrears) or only at the time of actual payment. 4. Whether reversal/forgoing of accrued salary pursuant to a settlement (mediated) after accrual imposes liability on the employer/deductor to deposit previously withheld TDS to the Government (i.e., whether employer could reverse TDS entries instead of depositing the same). 5. Whether the appellant's reliance on section 15 (definition of salary), section 89 relief and judicial authorities concerning taxation of foregone income alter the employer's obligation to deduct TDS under section 192. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Maintainability: appellant's locus to appeal Legal framework: Section 253(1) permits an appeal to the Tribunal by an 'assessee' aggrieved by specified orders; Section 2(7) defines 'assessee' and includes persons by whom any tax or other sum of money is payable or persons in respect of whom proceedings for assessment have been taken; appeals against orders of the Assessing Officer are, however, ordinarily available to the assessee, deductor or collector under the appeal provisions (see ref. to section 246(1)(i) r.w.s. 146A(1)(ha)). Precedent treatment: No new precedent was laid down; the Tribunal applied statutory definitions and appealability provisions as interpreted in practice. Interpretation and reasoning: The Tribunal examined the record and found that the lower tax proceedings were initiated on complaint of the appellant but notices and proceedings under section 201 were directed at the bank (the deductor). The appellant was neither the deductor nor an assessee in default and did not fall within the statutory definition permitting an appeal under section 253(1). The proper remedy against an AO order was by the deductor/assessee or via appeal provisions available to them, not by this complainant. Ratio vs. Obiter: Ratio - an appellant who is neither an assessee, deductor nor assessee-in-default lacks locus to maintain an appeal to the Tribunal against an order arising from revisional proceedings under section 263; Obiter - none. Conclusion: The appeal was not maintainable on locus/standing grounds and therefore liable to be dismissed on that basis. Cross-reference: Issue 2 (related procedural/appealability point) confirms that the appropriate appellant would have been the deductor or assessee and not the complainant. Issue 2 - Correct forum and scope of challenge to Revisional Authority's order Legal framework: Section 263 confers revisional power on the Commissioner; appeals therefrom lie as provided under chapter VIII; appealability depends on status of the appellant as an assessee or other statutory person. Precedent treatment: The Tribunal relied upon the statutory scheme rather than any external precedent to determine appealability. Interpretation and reasoning: The Tribunal considered that the appellant invoked review of a revisional order but did not qualify as an 'assessee' under the Act for the purpose of filing an appeal to the Tribunal under section 253(1). The Tribunal thus treated the Revisional Authority's dismissal as non-maintainable and affirmed that the appellant lacked the statutory right to assail that order before the Tribunal. Ratio vs. Obiter: Ratio - limitation on who may appeal a revisional order to the Tribunal is determined strictly by the statutory definition of 'assessee' and related appellate provisions; Obiter - none. Conclusion: Appeal against the Revisional Authority's order was not maintainable by the appellant and was dismissed on that ground. Issue 3 - Temporal operation of section 192 (time of deduction of TDS on salary/arrears) Legal framework: Section 192 mandates deduction of tax at source on salary; the provision contemplates deduction 'at the time of payment' of salary. Precedent treatment: The Tribunal noted parties' references to case law on taxation of foregone income but relied on the statutory language of section 192 for determining TDS obligation. Interpretation and reasoning: The Tribunal held that section 192 requires deduction at the moment of actual payment of salary. Where a portion of salary/arrears is not actually paid (having been foregone pursuant to a settlement), no obligation arises on the employer to deduct TDS on the basis of mere accrual. The Tribunal accepted that foregone salary, after accrual, may be chargeable in the hands of the employee, but emphasized the distinction between the employee's tax liability and the employer's TDS deduction obligation. The Revenue's representative accepted there is no liability to deduct on accrual. Ratio vs. Obiter: Ratio - TDS under section 192 is deductible on payment, not on accrual; an employer is not obliged to deduct TDS on amounts that are never paid due to settlement foregone post-accrual; Obiter - the statement that foregone accrued salary may remain chargeable in the hands of the employee is observational but aligns with established taxation principles. Conclusion: No default under section 201(1) was found against the deductor because there was no actual payment of the foregone amounts; the grounds asserting duty to deduct on accrual lacked substance. Issue 4 - Effect of settlement and reversal of TDS entries by employer Legal framework: Employer obligations to deposit TDS are derived from deduction at source provisions; settlement agreements may alter payment obligations between employer and employee but do not automatically convert past bookkeeping adjustments into statutory breaches unless deduction and deposit obligations were in fact contravened. Precedent treatment: The appellant pointed to authorities stating foregone income after accrual is taxable; the Tribunal distinguished the employers' TDS obligation from the substantive taxability of the employee's income. Interpretation and reasoning: The Tribunal observed that the bank reversed TDS entries in accounting pursuant to the settlement and did not, on the available record, have an obligation to deposit TDS on amounts that were not payable under the settlement. Orders of the AO had concluded no default and closed the section 201 proceeding. While prior orders directed deposit of TDS, the Tribunal confined itself to appealability and section 192 timing; it did not accede to the appellant's contention that unilateral reversal, as a matter of law, amounted to an unlawful failure to deposit TDS given that payment was not due under the settlement. Ratio vs. Obiter: Ratio - absent payment, reversal of prior TDS bookkeeping entries pursuant to a lawful settlement does not per se create employer liability for non-deposit under section 192; Obiter - commentary that waiver of accrued income may still be taxable in the hands of the employee. Conclusion: The Tribunal found no merit in the contention that the bank's reversal created a deductible/deposit obligation where payment was not made; the AO's finding of no default stands. Issue 5 - Relevance of sections 15 and 89 and cited judicial authorities to employer's TDS duty Legal framework: Section 15 defines salary (including salary due whether paid or not); Section 89 provides relief for tax spread on arrears; judicial decisions govern taxation of surrendered/forgone income in the hands of the recipient. Precedent treatment: Appellant cited authorities that foregone income after accrual may be taxable; Tribunal accepted the principle as to chargeability but distinguished it from employer's TDS duty under section 192. Interpretation and reasoning: The Tribunal acknowledged that section 15 may render salary chargeable when it accrues and that judicial authority supports taxation of foregone accrued income in the hands of the recipient. Nonetheless, the statutory scheme for TDS under section 192 requires deduction on payment; relief under section 89 concerns computation of tax on arrears and does not convert the employer's obligation into one of deducting on accrual. Therefore, the appellant's reliance on sections 15/89 and case law did not alter the employer's statutory duty to deduct only on payment. Ratio vs. Obiter: Ratio - substantive taxability of an employee and the employer's TDS obligation are distinct; section 15/89 and related case law do not impose an accrual-based withholding obligation on the employer under section 192; Obiter - the applicability of section 89 relief is a matter for assessment/review in the employee's tax proceedings. Conclusion: Reliance on sections 15 and 89 and the cited judgments did not establish a legal basis to hold the deductor liable under section 192 for amounts not paid; grounds based on these provisions lacked substance. Overall Conclusion The Tribunal concluded that the appeal was not maintainable by the appellant (lack of statutory locus) and, on merits, affirmed that section 192 requires TDS on payment not on accrual; accordingly, no default was found against the deductor and the appellant's grounds failed. The appeal was dismissed.