Taxpayer entitled to TDS credit despite employer's non-deposit; AO directed to allow credit under s.143(1)

ITAT Kolkata held that where an employer deducted TDS from salary but failed to deposit it, the non-deposit cannot be fastened on the deductee; once TDS is deducted the assessee is entitled to claim credit. The Tribunal directed the AO to allow TDS credit in the intimation under s.143(1) despite non-deposit by the deductor, and decided the issue in favour of the assessee.

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ISSUES PRESENTED AND CONSIDERED

1. Whether delay in filing the appeal of 17 days should be condoned where the assessee was out of station.

2. Whether a deductee (assessee) is entitled to claim credit for tax deducted at source under section 143(1)(c) where the employer/deductor has deducted TDS from salary but has not deposited the deducted amount to the Government treasury and the same therefore does not appear in Form 26AS.

3. Whether the Revenue can enforce recovery or demand against the deductee in respect of TDS amounts deducted by the employer but not deposited with the Government.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Condonation of Delay

Legal framework: Principles governing condonation of delay in filing appeals, requiring sufficient cause for delay.

Precedent Treatment: Applied standard practice of considering reasons and material on record to determine sufficiency of cause.

Interpretation and reasoning: The Tribunal noted a 17-day delay and accepted the explanation that the assessee was out of station and filed the appeal after return; after hearing rival contentions and perusing the record the delay was found to be for sufficient reasons.

Ratio vs. Obiter: Ratio - delay condoned as sufficient cause was established on facts.

Conclusion: Delay of 17 days in filing the appeal was condoned and the appeal admitted for adjudication on merits.

Issue 2 - Entitlement to TDS Credit Where Deductor Failed to Deposit

Legal framework: Section 143(1) (specifically clause (c)) which determines the sum payable or refund due after adjustment by "any tax deducted at source"; related provisions referenced include section 205, section 209(1) and section 234B; requirement for claiming TDS credit in returns and reflection in Form 26AS.

Precedent Treatment: The Tribunal followed Coordinate Bench decisions (cited in the judgment) and departmental instructions (CBDT Office Memorandum F.No.275/29/2014-IT (B) dated 11.03.2016) which direct field officers not to enforce demands against deductee for non-deposit by deductor. The Tribunal expressly relied on a Coordinate Bench decision that held credit is available once tax has been deducted at source irrespective of deposit by the deductor.

Interpretation and reasoning: The Tribunal analysed clause (c) of section 143(1) and observed that the provision speaks of "any tax deducted at source" without a textual condition that such tax must have been paid to the Government by the deductor. The Tribunal contrasted the express use of the word "paid" in contexts such as advance tax with the absence of such qualifier in respect of TDS in section 143(1)(c), concluding Parliament intended credit to follow deduction, not necessarily deposit. The Tribunal also examined the interplay with section 209(1)(d) and statutory amendments affecting advance tax treatment, but identified a continuing distinction between "tax deducted at source" and "tax deducted and deposited". The CBDT Office Memorandum was invoked as administrative direction reinforcing that demands should not be enforced against deductees where TDS was deducted but not deposited by the deductor. The Tribunal therefore held that the Assessing Officer and the Commissioner (Appeals) erred in denying credit solely because the employer had not deposited the deducted TDS and the amount did not appear in Form 26AS.

Ratio vs. Obiter: Ratio - Where tax has been deducted at source from salary, the deductee is entitled to claim credit for such tax in computing tax liability under section 143(1)(c) notwithstanding that the deductor failed to deposit the deducted amount with the Government; denial of credit on ground of non-deposit by deductor is not sustainable. Obiter - Observations concerning the interplay with sections 209 and 234B are explanatory of reasoning and supportive but the operative holding concerns construction of section 143(1)(c) and administrative instructions.

Conclusion: The Tribunal set aside the orders denying TDS credit and directed the Assessing Officer to allow credit of the TDS amount which had been deducted by the employer though not deposited, thereby reducing the demand created in the 143(1) intimation.

Issue 3 - Recoverability of Demand Against Deductee for Non-deposited TDS

Legal framework: Section 205 (bar on direct demand), CBDT Office Memorandum (F.No.275/29/2014-IT (B) dated 11.03.2016) reiterating earlier instructions that demands arising from mismatch due to non-deposit by deductor should not be enforced against deductee; principles governing enforcement of tax demands.

Precedent Treatment: The Tribunal followed administrative instructions and judicial decisions that have held that liability resulting from non-deposit by the deductor cannot be fastened on the deductee and that coercive enforcement in such cases is impermissible.

Interpretation and reasoning: The Tribunal observed that section 205 bars direct demand in such situations and the CBDT's instruction recognises field practice and directs non-enforcement of such demands. Based on these materials and the legal construction of section 143(1)(c), the Tribunal concluded that the Revenue cannot call upon the deductee to deposit amounts corresponding to TDS deducted but not paid by the employer.

Ratio vs. Obiter: Ratio - Demand on account of mismatch arising from non-deposit of TDS by the deductor cannot be enforced coercively against the deductee; deductee should not be made liable for the deductor's default in depositing deducted TDS. Obiter - Administrative policy considerations emphasised by the CBDT memorandum.

Conclusion: The Tribunal held that the demand raised against the deductee on account of non-credit of TDS owing to non-deposit by the employer was not sustainable and directed the AO to allow the credit and withdraw/adjust the demand to that extent.

Cross-references

1. Issue 2 and Issue 3 are interrelated: the legal construction of section 143(1)(c) (Issue 2) informs the conclusion on recoverability of demand against the deductee (Issue 3).

2. The CBDT Office Memorandum is treated as binding administrative direction relevant to both entitlement to credit and non-enforcement of demands, and was relied upon alongside judicial authority to reach the conclusions stated above.

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