Employee cannot be taxed twice when employer fails to deposit deducted TDS, benefit allowed under Sections 199 and 205

ITAT Mumbai allowed the appeal, holding that the employee-assessee is entitled to credit of TDS deducted by the employer but not deposited into the Government account. Based on affidavit, salary slips, bank statements and a reconciliation chart, the assessee established that TDS was in fact deducted from salary. ITAT held that, under ss. 199 and 205 of the Act, only the employer can be treated as "deemed to be in default" for non-deposit of TDS, and the assessee cannot be required to pay such tax again. The AO was directed to grant TDS credit and recompute the assessee's income accordingly.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether an assessee-employee is entitled to credit of tax deducted at source on salary where the employer has deducted TDS from salary but failed to deposit the same into the Government account.

1.2 Whether the non-reflection of such TDS in Form 26AS and/or non-furnishing of Form 16 by the employer can be a valid ground for denying TDS credit to the assessee-employee.

1.3 Whether, in such circumstances, the assessee-employee can be treated as an assessee in default, or whether the liability to recover unpaid TDS rests exclusively on the employer under the Income Tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Entitlement to TDS credit where employer deducted but did not deposit TDS; effect of non-reflection in Form 26AS / non-issuance of Form 16

Legal framework (as discussed)

2.1 The Tribunal referred to and relied upon its Co-ordinate Bench decision in an identical factual situation, wherein the provisions of sections 201 and 205 of the Income Tax Act, 1961 were analyzed. Section 201 deems a person who fails to deduct or, after deduction, fails to pay tax as an "assessee in default". Section 205 provides a bar against direct demand on the assessee, stipulating that where tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent tax has been deducted from that income.

2.2 The Tribunal further noted judicial precedents discussed in the Co-ordinate Bench decision: (i) the jurisdictional High Court decision holding that non-issuance of Form 16 and non-deposit of TDS by the employer does not shift liability to the employee, and the Revenue cannot recover the same tax again from the employee merely because it could not recover from the employer; and (ii) another High Court decision holding that the Department is precluded from denying the benefit of TDS deducted by the employer, and credit must be given to the assessee even if the employer has not deposited the tax.

Interpretation and reasoning

2.3 The Tribunal recorded that the assessee's employer paid salary of Rs. 57,50,000 and deducted TDS of Rs. 17,50,000, but failed to deposit the TDS in the Government account, resulting in the CPC allowing credit of only Rs. 60,000 as per Form 26AS.

2.4 Following the Co-ordinate Bench's reasoning, the Tribunal accepted that once TDS has in fact been deducted from the assessee's income, section 205 bars the Revenue from calling upon the assessee to pay the tax to that extent, irrespective of the employer's subsequent failure to deposit such TDS.

2.5 The Tribunal, adopting the earlier decision, held that the non-issuance of Form 16 or mismatch/non-reflection in Form 26AS cannot defeat the substantive right of the assessee to TDS credit where the deduction of tax from salary is factually established through evidence such as salary slips, bank statements and reconciliation of salary and net credits.

Conclusions

2.6 The assessee is entitled to the benefit and credit of the TDS of Rs. 17,50,000 deducted by the employer from salary, notwithstanding the employer's failure to deposit the same and the consequent non-reflection in Form 26AS or non-issuance of Form 16.

2.7 The Assessing Officer is directed to grant full credit of the TDS deducted by the employer and to re-compute the assessee's income accordingly.

Issue 3: Liability as "assessee in default" and locus of recovery of unpaid TDS

Legal framework (as discussed)

3.1 Based on the Co-ordinate Bench decision, the Tribunal reiterated the import of sections 201 and 205. Under section 201, the person obliged to deduct and pay TDS (here, the employer) is deemed to be an "assessee in default" if, after deduction, he fails to pay such tax. Under section 205, where tax is deductible at source, the assessee from whose income tax has been deducted shall not be called upon to pay such tax to the extent of deduction.

Interpretation and reasoning

3.2 The Tribunal held that the statutory scheme makes the deductor (employer) alone liable as the "assessee in default" for non-payment of TDS after deduction and not the deductee (employee). The bar under section 205 operates to prevent direct demand from the employee for the tax already deducted from his income.

3.3 The Tribunal concurred with the jurisprudence that mere inability of the Department to recover TDS from the employer does not authorize it to recover the same tax again from the employee when tax has already been deducted from his income.

Conclusions

3.4 The assessee-employee cannot be treated as an assessee in default in respect of TDS deducted from his salary but not deposited by the employer.

3.5 The liability and recovery, if any, for non-deposit of TDS rest with the employer as the person deemed to be in default; the Department is at liberty to take appropriate action under law against the employer for recovery of the TDS amount but not against the employee for such deducted but un-deposited TDS.

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