Tax department cannot demand TDS payments from employees when employer failed to deposit deducted amounts under Section 205

HC ruled that tax department cannot demand TDS payments from employees when employer failed to deposit deducted amounts. Court held Section 205 of Income Tax Act clearly bars demands against assessees to extent tax was deducted from their income. The provision's purpose is preventing liability shift from defaulting employer to employee who is payment beneficiary. Department's action of demanding tax from petitioners without legal warrant violated Section 205. Court found no permissible angle for raising such demands against employees when TDS was shown deducted from salary slips. Writ petition allowed.

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Issues:
Petitioners seeking to quash demand notices for non-deposit of TDS by their employer; Interpretation of Section 205 of the Income Tax Act; Compliance with office memorandum dated 11 March 2016; Comparison with previous judgments; Entitlement to reliefs sought by petitioners.

Analysis:
The petitioners in two separate petitions sought relief from demand notices issued by respondent No. 1 due to non-deposit of TDS amounts by their employer. The petitioners argued that the demands were improper as taxes had been deducted at source from their salaries by the employer. The petitioners highlighted that the employer faced financial irregularities leading to delayed or unpaid salaries, forcing the petitioners to leave the employment. The petitioners contended that Section 205 of the Income Tax Act prohibits demands against assessees where tax has been deducted at source. They also referenced an office memorandum emphasizing the same. The petitioners compared their situation to previous cases where similar relief was granted by the court, indicating entitlement to relief.

The Revenue, in response, argued that the petitioners must provide evidence to the Assessing Officer to address the demand notices. They also addressed the additional prayer for credit of the TDS amount and related interest/penalty.

Upon review, the Court found Section 205 clear in barring demands against assessees where tax has been deducted at source, emphasizing that the liability cannot be shifted to employees. The Court noted that the department's actions were in breach of Section 205 by imposing tax liability on the petitioners. Consequently, the Court quashed the demand notices, citing the violation of the Income Tax Act. The Court left other tax demands open for further adjudication but allowed the petitioners to pursue appropriate steps for credit of the deducted amount during assessment proceedings. The petitions were partly allowed without costs.

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