TDS credit cannot be denied to employee once deducted; Revenue must recover unpaid tax from defaulting employer, ss.205,201

ITAT Kolkata allowed the assessee's appeal, holding that, in terms of s.205 of the Income-tax Act and CBDT's binding instructions, once tax is deducted at source from an employee's salary, it is deemed to have been paid by the employee and the Revenue cannot deny TDS credit merely because the employer failed to deposit the tax. The AO was directed to grant full TDS credit as claimed. ITAT emphasized judicial discipline, stating that subordinate authorities must follow binding instructions and precedent, and clarified that the Revenue remains at liberty to recover the unpaid TDS from the defaulting employer under s.201.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether credit of tax deducted at source from salary can be denied and consequential tax demand raised on the assessee where the deductor has failed to deposit such TDS into the Government account.

1.2 Whether, in such circumstances, the assessee can be fastened with tax liability despite the bar contained in section 205 of the Income-tax Act, 1961, read with CBDT Instructions/Office Memorandum.

1.3 Whether the appellate authority and the Revenue are bound by decisions of coordinate benches of the Tribunal and decisions of High Courts, and what is the proper course for recovery where the deductor has not deposited TDS (section 201).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Denial of TDS credit and fastening liability on assessee where deductor has not deposited TDS

Legal framework (as discussed)

2.1 The Court examined section 199 of the Income-tax Act, 1961, as referred to in CBDT Instruction No. 275/29/2014-IT(B), which provides that credit for TDS is to be given only if tax is paid to the Central Government.

2.2 The Court relied upon section 205 of the Act, which provides that where tax is deductible at source under Chapter XVII and has been deducted, the assessee shall not be called upon to pay the tax to the extent of such deduction.

2.3 The Court considered CBDT Instruction No. 275/29/2014-IT(B) dated 1-6-2015 and the subsequent Office Memorandum dated 11-03-2016, which clarify that where tax has been deducted from the assessee's income but not deposited by the deductor, the assessee should not be put to inconvenience and the demand on account of tax credit mismatch cannot be enforced coercively against the assessee.

Interpretation and reasoning

2.4 The Court held that, read together, section 205 and the CBDT Instruction/Office Memorandum make it clear that once TDS has been deducted from the salary of an employee, it is deemed that taxes to that extent have already been paid by the employee.

2.5 The Court reasoned that, in view of the statutory bar in section 205, the assessee cannot be revisited or fastened with tax liability in respect of amounts already deducted at source from salary, even if the deductor has failed to deposit such tax to the credit of the Central Government.

2.6 The Court relied on a coordinate bench decision and a High Court decision, both holding that the assessee is not liable to pay tax again in such circumstances and that appropriate action must instead be taken against the deductor.

Conclusions

2.7 It was concluded that the assessee is entitled to the benefit of TDS credit corresponding to the tax deducted from his salary, notwithstanding the non-deposit of such TDS by the employer.

2.8 The Assessing Officer was directed to grant the assessee full credit of the TDS deducted from salary and to delete the consequential tax demand raised for non-grant of such credit.

Issue 3: Binding nature of coordinate bench and High Court decisions; proper recovery mechanism under section 201

Legal framework (as discussed)

3.1 The Court referred to section 201 of the Income-tax Act, under which the Revenue is empowered to treat the deductor as an assessee in default and recover TDS that has been deducted but not deposited.

Interpretation and reasoning

3.2 The Court noted that the appellate authority had taken the view that decisions of a coordinate bench of the Tribunal and of a High Court not having territorial jurisdiction over the assessee were not binding on it.

3.3 The Court held that judicial discipline requires that subordinate authorities follow decisions of superior forums, including coordinate benches of the Tribunal and High Courts in the country, and that failure to do so leads to miscarriage of justice.

3.4 The Court emphasized that the Revenue has a clear statutory remedy under section 201 to recover tax from the defaulting deductor who has deducted but not deposited TDS, and that any inaction or failure of the Revenue to take such steps cannot be treated as a default on the part of the assessee, nor can it justify raising demand on the assessee.

Conclusions

3.5 It was held that the appellate authority erred in disregarding the binding effect of the coordinate bench and High Court decisions, contrary to the requirements of judicial discipline.

3.6 It was further held that the appropriate course for the Revenue is to recover the unpaid TDS from the deductor under section 201, and not to enforce tax demand against the assessee in respect of amounts already deducted from his salary.

3.7 On these findings, the appeal was allowed and the assessee was granted credit of the TDS as claimed.

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