2025 (4) TMI 481 - HC - Income Tax

Employees get TDS credit only when tax authorities actually receive withheld salary TDS; employer may be assessed in default

Kerala HC held that credit for TDS is available only to the extent the Income Tax Department actually receives the amount; employees are not entitled to ... Credit for TDS - Non remittances of TDS by employer to the Income Tax Department - Demand raised on employees, from whose salaries Tax Deducted at Source (TDS) has been deducted - whether employee should not be mulcted with any liability for the amount of TDS deducted from their salaries by their employer even if such amounts have not been remitted to the Income Tax Department? - HELD THAT:- Standing Counsel for the Income Tax Department is right in contending that the Income Tax Department can give credit of TDS only to the extent of receipt. This is clear from a reading of Section 199. Denial of credit may ultimately result in a recovery, if the proceedings against the deductor u/s 201 do not end in recovery. This does not lead me to give any other meaning to Section 205. Thus, find myself in disagreement with the view taken by the Delhi High Court in Sanjay Sudan [2023 (2) TMI 1079 - DELHI HIGH COURT] to the extent it holds that on deduction credit is immediately available to an assessee from whose income such deduction has been made even if such amount has not been paid over to the Central Government/Income Tax Department by the deductor. The instructions contained in the Office Memorandum (F.No.275/29/2014-IT(B) dated 11.3.2015) only deal with the aspect of initiation of recovery proceedings against a person from whose income a tax deduction has been made and does not deal with the question as to whether credit of such unpaid amounts of TDS has to be given to such person. Therefore, these writ petitions will stand disposed of holding that the petitioners are not entitled to the credit of any amount of TDS deducted from their salaries but not paid over to the Income Tax Department by the entity in which they were working. The petitioners are also not entitled to a writ directing the Income Tax Department to cancel the demands pending against them even though the amounts (TDS) have not been remitted to the Central Government/Income Tax Department. It will be open to the Income Tax Department to proceed against the entity (2nd respondent in all these cases) for non-payment of TDS deducted from the salaries of the petitioners by treating the 2nd respondent as an assessee in default u/s 201. If any amount is paid by the 2nd respondent or recovered from it, credit to the extent of such payment/recovery shall be given to the petitioners in these cases and demands to the extent of such recovery will be effaced. ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this judgment is whether employees, from whose salaries Tax Deducted at Source (TDS) has been deducted but not remitted to the Income Tax Department by their employer, are entitled to claim credit for such TDS amounts. Additionally, the issue of whether the Income Tax Department can enforce tax demands against such employees was also examined.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework primarily involves Sections 199 and 205 of the Income Tax Act, 1961. Section 199 stipulates that credit for TDS is given only when the deducted amount is paid to the Central Government. Section 205 bars direct demand on the assessee to the extent of tax deducted at source. The court also referenced several precedents, including the Supreme Court's decision in CIT v. Eli Lilly & Company (India) (P) Ltd., and judgments from the Delhi High Court in Sanjay Sudan v. Asst. CIT, the Gauhati High Court in Om Praksh Gattani, and the Bombay High Court in Aslam Checkar v. Income Tax Officer.Court's Interpretation and ReasoningThe court interpreted Section 199 as requiring actual payment of the deducted tax to the Central Government for credit to be granted. The court noted that Section 205 prevents direct demand from the assessee but does not automatically grant credit for TDS not remitted by the employer. The court emphasized that the statutory provisions must be harmoniously interpreted, where Section 199's requirement for payment cannot be overlooked by Section 205's bar on direct demand.Key Evidence and FindingsThe court acknowledged that the employer, Attinad Software Pvt. Ltd., did not remit the TDS amounts to the Income Tax Department. It was also noted that notices to the employer were returned undelivered, indicating the entity's non-operational status.Application of Law to FactsApplying the law, the court concluded that the employees cannot claim credit for TDS amounts not remitted to the government. The court held that the Income Tax Department is not obliged to grant credit for unremitted TDS, and recovery proceedings cannot be initiated against the employees for such amounts.Treatment of Competing ArgumentsThe petitioners' counsel argued for credit based on precedents suggesting that employees should not be liable for unremitted TDS. However, the court found these precedents unconvincing in the context of credit entitlement, aligning with the reasoning in Om Praksh Gattani and Aslam Checkar, which emphasized the necessity of actual payment for credit under Section 199.ConclusionsThe court concluded that the petitioners are not entitled to credit for TDS amounts not paid to the Income Tax Department. It also held that the Income Tax Department could pursue recovery from the employer as an assessee in default under Section 201 of the Income Tax Act.SIGNIFICANT HOLDINGSThe court held that:'Credit for tax deducted would be given when the amount is deducted and paid to the Central Government...'The court emphasized the harmonious interpretation of Sections 199 and 205, stating that Section 205's bar on direct demand does not equate to an automatic credit entitlement under Section 199.The court's final determination was that the petitioners are not entitled to credit for TDS not remitted by their employer, nor to a writ directing the cancellation of pending tax demands. The Income Tax Department is entitled to proceed against the employer for recovery.