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 revenue cannot directly demand payment from the deductee nor adjust the amount against future refunds. Section 205's prohibition on direct recovery applies and the retained amount remains tax in nature, so denial of credit because the deductor defaulted is impermissible. The appeal was dismissed and no substantial question of law was found.

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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 TDS

The 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, 1961

The 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 TDS

The 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.

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