Employee cannot be penalized for employer's failure to deposit TDS under Section 199

Delhi HC ruled in favor of employee whose employer failed to deposit TDS. The court held that employee cannot be penalized for employer's default in depositing tax deducted at source. While Section 199 of Income Tax Act requires actual deposit for TDS credit, employee had no control over deposited amounts after salary deduction. Revenue must recover outstanding dues from employer, not employee. Court set aside tax demand against employee and restrained recovery proceedings, but clarified that any TDS amount later recovered from employer must be deposited with revenue.

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Issues Involved:

1. Legality of tax and interest demand against the petitioner for AYs 2009-10, 2011-12, and 2012-13.
2. Entitlement to refund and interest on the illegally adjusted amount.
3. Validity of multiple intimations/orders issued under Section 143(1) of the Income Tax Act.
4. Compliance with CBDT instructions and statutory provisions by the Respondents.
5. Prohibition on coercive action against the petitioner during the pendency of the writ petition.

Summary:

Issue 1: Legality of Tax and Interest Demand

The petitioner sought to declare that the tax and interest demand for AYs 2009-10, 2011-12, and 2012-13, due to TDS deducted by his employer but not deposited, should not lie against him. The court noted that the petitioner was employed by Kingfisher Airlines Limited, which deducted TDS from his salary but failed to deposit it with the revenue. Despite repeated communications, the demands were not withdrawn. The core issue was whether recovery could be effected against the petitioner given that the employer did not deposit the deducted tax.

Issue 2: Entitlement to Refund and Interest

The petitioner claimed a refund of Rs. 3,88,209/- adjusted against the erroneous demand and sought statutory and compensatory interest on this amount. The court held that the petitioner, who had accepted the salary after TDS, had no control over the subsequent deposit of the tax. Since the employer failed to deposit the deducted tax, the petitioner could not be penalized, and the revenue should proceed against the employer for recovery.

Issue 3: Validity of Multiple Intimations/Orders

The petitioner challenged various intimations/orders under Section 143(1) of the Income Tax Act for different AYs, which raised demands based on "Unmatched Tax Deducted at Source." The court set aside these intimations/communications, restraining the respondents from carrying out any recovery proceedings related to these demands.

Issue 4: Compliance with CBDT Instructions and Statutory Provisions

The petitioner sought compliance with CBDT Instruction No. 275 dated 01.06.2015 and other related communications. The court referred to Section 205 of the Act, which bars direct demand on the assessee for tax deducted at source. The court emphasized that the instruction aligned with this provision, prohibiting coercive enforcement of tax credit mismatches.

Issue 5: Prohibition on Coercive Action

The petitioner requested that no coercive action be taken during the pendency of the writ petition. The court noted that the adjustment of demand against future refunds amounted to an indirect recovery of tax, which is barred under Section 205 of the Act.

Conclusion:

The court allowed the petition, setting aside the impugned intimations/communications for AYs 2009-10, 2011-12, and 2012-13, and restrained the respondents from recovery proceedings. The respondents were directed to refund Rs. 3,88,209/- to the petitioner within four weeks. If the petitioner recovers any amount from his employer, it must be deposited with the revenue.

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