Employees cannot be held liable for TDS amounts not deposited by employers under Section 205

Bombay HC quashed demand notices issued to employees for TDS amounts not deposited by their employers. The court held that Section 205 of the Income Tax Act clearly mandates that assessees cannot be called upon to pay taxes to the extent tax has been deducted at source. The liability to deposit TDS rests with the employer, and this obligation cannot be shifted to employees when employers default. The department's action of raising demands against employees for their employers' non-compliance violated Section 205 and was therefore impermissible.

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Issues:
Petitioners seek to quash demand notices for non-deposit of TDS amounts by their employer, citing Section 205 of the Income Tax Act. The petitioners argue that the demand notices issued by respondent No. 1 are invalid as tax was deducted at source by the employer. The petitioners claim that the demands are contrary to the provisions of Section 205 and an office memorandum issued by the Central Board of Direct Taxes. The petitioners also highlight a previous case where similar demands were withdrawn upon furnishing evidence of TDS deductions. The Revenue argues that petitioners must submit evidence to the Assessing Officer for consideration. The Court examines Section 205 and rules in favor of the petitioners, quashing the demand notices.

Analysis:

The petitioners in a batch of petitions prayed for the quashing of demand notices issued by respondent No. 1 due to non-deposit of TDS amounts by their employer, respondent No. 2. The petitioners were former employees of respondent No. 2 and received salary after TDS deductions. They contended that the demands were unjust as tax had already been deducted at source by the employer, as evidenced by their pay slips. The petitioners emphasized that they were not liable to pay tax themselves under Section 205 of the Income Tax Act, which prohibits demands against assessees where tax has been deducted at source. The petitioners also referred to an office memorandum by the Central Board of Direct Taxes reinforcing this provision.

The petitioners further elaborated on the financial irregularities of respondent No. 2, leading to defaults in salary payments and statutory dues. Due to these circumstances, the petitioners left their employment, with substantial dues outstanding. The petitioners were surprised to receive demand notices from respondent No. 1 for income tax along with interest, despite TDS deductions by the employer. The petitioners argued that such demands were unlawful and contrary to Section 205, which shields assessees from such liabilities.

In response, the Revenue contended that the petitioners must provide evidence to the Assessing Officer to support their claims, similar to a previous case where demands were withdrawn upon furnishing proof of TDS deductions. The Revenue also addressed the petitioners' additional prayer for granting credit for the TDS amounts deducted from their salaries.

Upon analyzing the arguments and provisions of Section 205, the Court found that the demand notices were in violation of the Income Tax Act. The Court emphasized that the employer's obligation to deposit tax cannot be shifted to the employee, who is the ultimate beneficiary of the payment. Therefore, the Court ruled in favor of the petitioners, quashing the demand notices based on the clear mandate of Section 205.

In conclusion, the Court allowed the petitions, quashing the demand notices and leaving other tax demands open for further adjudication. The Court clarified that the petitioners could pursue appropriate steps regarding the credit of TDS amounts during assessment proceedings, keeping all contentions open. The petitions were partly allowed, with no costs imposed.

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