2024 (9) TMI 1847 - AT - Income Tax

Employee Not Assessee in Default When Employer Withholds But Fails to Deposit TDS Under Sections 199 and 205

ITAT Mumbai-AT allowed the appeal, holding that the assessee-employee could not be treated as 'assessee in default' under s.199 where the employer had ... Default u/s 199 - denying the benefit of tax deducted at source by the employer during the relevant financial year to the petitioner - HELD THAT:- Addl/Joint Commissioner that the Assessee failed to provide even Form-16 from the employer and therefore there is no fault of the CPC in not granting the TDS. As in the case of Yashpal Sahni [2007 (7) TMI 7 - HIGH COURT, BOMBAY] also considered the non-issuing Form No.16 and not depositing the TDS in the Government account. There will not be any cessation of liability of employer for not issuing the TDS certificate/Form-16 to the employee, the liability would be upon the employer but not on the employee and the Revenue on the ground that it is unable to recover the TDS deducted from the employer, that alone would not entitle Revenue to recover the amount once again from the Assessee. As in the case of Kartik Vijaysinh Sonavane [2021 (11) TMI 682 - GUJARAT HIGH COURT] with the identical issue as involved in the instant case to the effect that the same airline i.e. M/s. Kingfisher Airlines though deducted the TDS but not deposited in the Government account, which resulted into non-grant of credit of TDS to the Assessee. The Hon’ble High Court held that the Department is precluded from denying the benefit of tax deducted at source by the employer during the relevant financial year to the petitioner and the credit of the tax shall be given to the petitioner and if in the interregnum any recovery or adjustment is made by the Revenue Department, then the petitioner shall not be entitled for the refund of the same. Assessee, by filing a specific affidavit as well as annexures such as salary slips and bank statements etc. and detailed chart containing total salary, TDS deducted and net salary received in particular months and corresponding bank entries depicting credit of actual salary amounts credited/received, demonstrated the genuineness of its case. It was a fault of the employer, as the employer though deducted the TDS but not deposited the same in the Government account, which resulted into mismatch in the Form-26AS and therefore the employer can only be considered as “deemed to be in default” in respect of such TDS deducted but not the Assessee, because as per section 205 of the Act, the Assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from his income. Assessee cannot be treated as Assessee in default as per the provisions of section 199 of the Act and the recovery can be effected from the employer but not from the Assessee herein and therefore the Assessee is entitled to get the benefit of the TDS deducted by his employer. Consequently, we direct the AO to grant the credit of TDS and re-compute the income of the Assessee accordingly. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether an employee-assessee is entitled to credit of tax deducted at source on salary, where the employer has deducted tax but not deposited it to the Government account and the TDS is not reflected in Form 26AS and no Form 16 is issued. 1.2 Whether, in such circumstances, the tax liability for the deducted but undisclosed TDS can be fastened on the employee-assessee or only on the employer, in the light of sections 201 and 205 of the Income-tax Act, 1961. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Entitlement to TDS credit and fastening of liability where employer deducts but does not deposit TDS; effect of sections 201 and 205 Legal framework 2.1 The Tribunal examined sections 201 and 205 of the Income-tax Act, 1961. Section 201 deems a person, including an employer, who is required to deduct tax at source but does not deduct, or after deducting fails to pay, such tax, to be an 'assessee in default' in respect of that tax. Section 205 provides that where tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income. 2.2 The Tribunal also relied on the decisions of the jurisdictional High Court holding that non-issuance of Form 16 and non-deposit of TDS by the employer does not shift liability to the employee, and that once tax is deducted from the employee's income, the Revenue cannot recover that tax again from the employee merely because it is unable to recover the same from the employer. A similar view was noted from another High Court decision concerning the same employer-airline where TDS was deducted but not deposited, leading to denial of TDS credit. Interpretation and reasoning 2.3 The Tribunal noted the undisputed factual position established through salary slips and corresponding bank statements that: (i) total salary was credited; (ii) specific amounts were shown as TDS deducted from salary; and (iii) only the net salary (after such TDS deductions) was actually received by the assessee in his bank account. 2.4 The Tribunal recorded that there was a mismatch in Form 26AS and that the employer had not issued Form 16. The question was framed whether, in these circumstances, liability can be fastened on the assessee in respect of TDS deducted but not deposited by the employer, and/or for non-issuance of Form 16 and mismatch in Form 26AS. 2.5 Interpreting section 201, the Tribunal held that the person required to deduct and deposit tax, i.e., the employer, is to be deemed an 'assessee in default' where, after deduction, he fails to pay the tax to the Government. The deeming provision applies to the deductor and not to the deductee-employee in respect of the same tax already deducted from his income. 2.6 Interpreting section 205, the Tribunal held that, where tax is deductible at source on an income, the assessee 'shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.' Thus, once deduction from salary is established, the bar under section 205 precludes direct demand on the employee for that part of the tax. 2.7 The Tribunal rejected the reasoning of the appellate authority that denial of TDS credit was justified solely because (a) the TDS amount was not reflected in Form 26AS, and (b) the assessee could not produce Form 16 due to the employer's failure to issue it. Relying on the jurisdictional High Court, the Tribunal held that non-issuance of Form 16 and non-deposit of TDS does not result in cessation of the employer's liability and does not transfer that liability to the employee. 2.8 The Tribunal accepted the assessee's evidence, including a specific affidavit, salary slips, bank statements, and a detailed month-wise chart of gross salary, TDS deducted, net salary received, and corresponding bank entries, as sufficient to demonstrate that TDS had in fact been deducted from the assessee's salary and borne by him economically. 2.9 On this factual and legal foundation, the Tribunal concluded that the mismatch in Form 26AS and the absence of Form 16 were consequences of the employer's default in depositing and reporting TDS, and cannot be used to deny TDS credit to the assessee or to treat him as an assessee in default for that tax. Conclusions 2.10 The Tribunal held that, in a case where the employer has deducted tax at source from the employee's salary but failed to deposit it and has not issued Form 16, the liability to pay such tax remains with the employer, who is to be treated as a deemed assessee in default under section 201, and not with the employee. 2.11 By virtue of section 205, the employee-assessee cannot be called upon to pay the tax to the extent it has been deducted from his income, notwithstanding the employer's default in depositing such tax or the non-reflection of the TDS in Form 26AS. 2.12 The assessee is entitled to the benefit and credit of the TDS amount actually deducted from his salary as evidenced by salary slips and bank statements, and the Revenue's inability to recover such TDS from the employer cannot justify recovery from, or denial of credit to, the assessee. 2.13 The Tribunal directed the Assessing Officer to grant credit of the TDS deducted by the employer and to recompute the assessee's income accordingly. On the same reasoning, all connected assessment years under appeal were allowed on identical facts and issues.