Employee Not Liable for Employer's Tax Deduction Defaults: Demand Notices Quashed, Amounts to Be Refunded with Interest

HC ruled that demand notices for AY 2009-10, 2011-12, and 2012-13 were illegal, as the employee cannot be held liable for employer's TDS defaults. The court quashed the notices, ordered refund of adjusted amounts totaling Rs. 2,65,080/- from AYs 2015-16 to 2019-20, and directed the Revenue to pay applicable interest. The decision affirmed that TDS liability rests with the employer, not the employee.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the impugned notice dated 21.01.2022 and the associated demand notices for Assessment Years (AY) 2009-10, 2011-12, and 2012-13, demanding Rs. 49,12,332/-, are illegal and contrary to the provisions of the Income Tax Act;

(b) Whether the demand references for the said AYs, which were created by the Revenue, are valid or liable to be quashed;

(c) Whether the adjustment of refunds due to the petitioner for AYs 2015-16, 2017-18, 2018-19, and 2019-20 against the demand for AY 2009-10 is lawful;

(d) Whether the petitioner is entitled to a refund of the amounts adjusted against the demands for the above-mentioned AYs along with applicable interest;

(e) Whether the Revenue is entitled to adjust any refund due to the petitioner against the demands for AY 2009-10, 2011-12, and 2012-13;

(f) Any other appropriate reliefs in the circumstances of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) & (b): Legality of the Impugned Demand Notices and Demand References for AY 2009-10, 2011-12, and 2012-13

Relevant legal framework and precedents: The demands were raised under the Income Tax Act based on alleged defaults by the petitioner's employer in depositing tax deducted at source (TDS). The legal principle relevant here is that the liability to deposit TDS lies with the employer and not the employee, and demands raised on the employee for the employer's default are not sustainable. The Court relied heavily on the precedent set in Sanjay Sudan v. The Assistant Commissioner of Income Tax & Another, where it was held that demands raised on employees for TDS defaults of their employers are illegal.

Court's interpretation and reasoning: The Court observed that the demands for AY 2009-10, 2011-12, and 2012-13 arose solely due to the employer's failure to deposit deducted tax. The petitioner had correctly filed returns, and the tax deducted was reflected in the returns. The Court held that since the employer failed to deposit the deducted tax, the Revenue cannot legally hold the employee liable for the same.

Key evidence and findings: The petitioner's returns for the relevant AYs were filed in accordance with law, and the demands were created due to defaults by the employer, Kingfisher Airlines Limited. The Revenue did not dispute this factual matrix and conceded the applicability of the precedent.

Application of law to facts: Applying the principle from the cited precedent, the Court found the demands to be illegal and liable to be quashed.

Treatment of competing arguments: The Revenue did not oppose the petitioner's submissions and agreed that the issue was squarely covered by the earlier decision.

Conclusions: The demands for AY 2009-10, 2011-12, and 2012-13 raised by the Revenue were quashed as illegal and contrary to the provisions of the Income Tax Act.

Issue (c) & (e): Legality of Adjustment of Refunds Against Demands for AY 2009-10, 2011-12, and 2012-13

Relevant legal framework and precedents: The Income Tax Act permits adjustment of refunds against outstanding demands; however, such adjustment must be lawful and in accordance with the correct identification of liability. The principle that an employee cannot be held liable for the employer's TDS default impacts the legality of such adjustments.

Court's interpretation and reasoning: The Court held that since the demands themselves were illegal, the Revenue was not entitled to adjust refunds due to the petitioner against these demands. The adjustment of refunds for AYs 2015-16, 2017-18, 2018-19, and 2019-20 against the illegal demands was therefore also illegal.

Key evidence and findings: The petitioner demonstrated that refunds amounting to Rs. 35,570/- (AY 2015-16), Rs. 1,43,630/- (AY 2017-18), Rs. 37,320/- (AY 2018-19), and Rs. 48,560/- (AY 2019-20) were adjusted against the illegal demands.

Application of law to facts: Since the demands were quashed, the adjustments made against such demands were invalid, and the petitioner was entitled to recovery of the adjusted amounts.

Treatment of competing arguments: The Revenue did not challenge the petitioner's claim for refund of the adjusted amounts.

Conclusions: The Revenue was restrained from adjusting any refund due to the petitioner against the demands for AY 2009-10, 2011-12, and 2012-13, and the amounts so adjusted were ordered to be refunded.

Issue (d): Entitlement to Refunds and Interest

Relevant legal framework: Under the Income Tax Act, where refunds are due and have been wrongly adjusted, the taxpayer is entitled to receive the refund along with applicable interest.

Court's interpretation and reasoning: The Court directed the Revenue to refund the amounts adjusted against the illegal demands along with applicable interest, recognizing the petitioner's right to restitution.

Key evidence and findings: The petitioner quantified the amounts adjusted and claimed refund accordingly.

Application of law to facts: The Court applied the principle of restitution and ordered refund of the specified amounts.

Conclusions: Refunds amounting to Rs. 35,570/- (AY 2015-16), Rs. 1,43,630/- (AY 2017-18), Rs. 37,320/- (AY 2018-19), and Rs. 48,560/- (AY 2019-20) were ordered to be paid to the petitioner along with applicable interest.

Issue (f

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