2023 (12) TMI 34 - HC - Income Tax

Assessee entitled to TDS credit despite deductor's non-deposit; revenue cannot directly recover under Section 205

The HC held that an assessee is entitled to credit for tax deducted at source even if the deductor failed to deposit the TDS with the government; the ... Credit of TDS if deductor failed to deposit the TDS - whether the assessee is entitled to credit concerning the tax which had been deducted with respect to the transaction entered into by him with Koutons Group? - Bar against direct demand on assessee u/s 205 - as per revenue credit for the said amount, sought by assessee, could not be given since the deductor, i.e., Koutons Group had not deposited the said amount with the appellant/revenue - HELD THAT:- As SANJAY SUDAN VERSUS THE ASSISTANT COMMISSIONER OF INCOME TAX & ANR. [2023 (2) TMI 1079 - DELHI HIGH COURT] Section 205 read with instruction dated 01.06.2015, clearly point in the direction that the deductee/assessee cannot be called upon to pay tax, which has been deducted at source from his income. The plain language of Section 205 of the Act points in this direction The adjustment of demand against future refund amounts to an indirect recovery of tax, which is barred under Section 205 of the Act.The fact that the instruction merely provides that no coercive measure will be taken against the assessee, in our view, falls short of what is put in place by the legislature via Section 205 of the Act. Therefore, in our view, the petitioner is right inasmuch as neither can the demand qua the tax withheld by the deductor/employer be recovered from him, nor can the same amount be adjusted against the future refund, if any, payable to him. Act does not seem to cast a burden on the deductee/payee with regard to the deposit of money, which is retained as tax, by the payer i.e., the deductor. Therefore, insofar as the deductee/payee is concerned, once the payer/deductor, who acts as an agent of the Central Government, has retained money towards tax, credit for the same cannot be denied, having regard to the consequences and the modes available for recovering the said amount from the payer/deductor. Deductors are individuals who, concededly, after retaining the tax deducted at source did not fully deposit the same, as noted above, with the Central Government. Upon the respondent/assessee becoming aware of this fact, a police complaint was lodged, which was brought to the notice of the appellant/revenue. Despite this aspect being brought to the notice of the appellant/revenue, no steps were taken either under the provisions of the Act or under the common law for recovery or even under the extant statute(s) for bringing deductors to book in accordance with the law. In our opinion, the argument advanced by revenue that the amount deducted towards tax at source will not be given credit because the deductor has chosen not to deposit the amount with the Central Government is erroneous for another reason, which is that the nature of the amount retained by the deductor continues to remain as ‘tax’. Act has, thus, provided a regime as to how tax is required to be collected against certain payments. Once the deductee adheres to the statutory regime and allows the deductor to retain money towards tax, the nature of the amount cannot change and, therefore, the deductee, in our view, would be entitled to the credit of the amount retained by the deductor towards tax. Any other view would result in a situation where even though the assessee would have grossed up his income [by including the tax deducted at source] and offered the same for taxation, he would be denied the benefit of having the resultant tax demand adjusted against tax deducted at source by the payer. This handicap the assessee/deductee would suffer only because the deductor, who acts as the agent of the Central Government, chooses not to deposit the amount retained towards tax. Appeal dismissed - no substantial question of law arises. Issues Involved:1. Entitlement to tax credit for tax deducted at source (TDS).2. Application of Section 199 and Section 205 of the Income Tax Act, 1961.3. Legal consequences for deductors failing to deposit TDS with the Central Government.Summary:Issue 1: Entitlement to Tax Credit for TDSThe primary issue was whether the assessee is entitled to credit for the tax deducted at source (TDS) concerning a transaction with the Koutons Group. The assessee held 25% equity shares in S.R. Resorts Pvt. Ltd., and the total consideration for the transaction was Rs. 19,89,96,655/-. After deducting TDS at 10.3%, the assessee received Rs. 17,85,00,000/-, with Rs. 2,04,96,655/- being the deducted tax. Initially, the assessee was treated as an assessee-in-default, but the Commissioner of Income Tax (Appeals) granted relief under Section 205 of the Income Tax Act, 1961. However, credit for the deducted tax was not granted, leading the assessee to appeal to the Income Tax Appellate Tribunal, which ruled in favor of the assessee, stating that the assessee is entitled to tax credit for the TDS deducted by the buyer, even if the buyer did not deposit the TDS with the government.Issue 2: Application of Section 199 and Section 205 of the Income Tax Act, 1961The appellant/revenue argued that credit for the deducted tax could not be given since the Koutons Group had not deposited the amount with the government, relying on Section 199 of the Act. However, the court referenced a previous judgment (Sanjay Sudan vs. Assistant Commissioner of Income Tax) which clarified that under Section 205, the assessee cannot be called upon to pay tax that has been deducted at source from their income. The court emphasized that the Act bars direct demand against the assessee in such cases, and any demand due to tax credit mismatch cannot be enforced coercively.Issue 3: Legal Consequences for Deductors Failing to Deposit TDSThe court highlighted that the Act provides a comprehensive legislative scheme for tax collection, including provisions for penalizing deductors who fail to deposit TDS with the government. Sections 201 and 221 of the Act impose interest and penalties on such deductors, and Section 276B provides for rigorous imprisonment. The court noted that the burden of depositing TDS lies with the deductor, not the deductee. Therefore, once the deductor retains money towards tax, credit for the same cannot be denied to the deductee, as the nature of the amount remains as 'tax'. The court concluded that denying credit to the deductee because the deductor failed to deposit the tax would be erroneous.Conclusion:The court ruled that no substantial question of law arises in the appeal and disposed of the appeal, affirming that the assessee is entitled to tax credit for the TDS deducted by the buyer, despite the buyer not depositing the TDS with the government. The judgment underscores the statutory protection provided to deductees under Section 205 of the Income Tax Act, 1961, and the legal obligations and consequences for deductors under the Act.