Facts of the Case

The present appeal arose from an order passed by the Income Tax Appellate Tribunal (ITAT) in favor of the assessee, Jasjit Singh. The assessee held 25% equity shares in S.R. Resorts Pvt. Ltd., which were sold to Koutons Group for a total consideration of ₹19,89,96,655.

After deduction of tax at source (TDS) at 10.3%, the assessee received ₹17,85,00,000, while ₹2,04,96,655 was deducted as TDS by the buyer.

Subsequently, it was discovered that the deductor (Koutons Group) failed to deposit the deducted TDS with the Central Government. Initially, the assessee was treated as an “assessee-in-default.” However, the Commissioner of Income Tax (Appeals) granted relief under Section 205 of the Income Tax Act, 1961, but denied credit of the TDS amount.

The ITAT later ruled in favor of the assessee, granting TDS credit despite non-deposit by the deductor, which led to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether the assessee is entitled to claim credit of TDS deducted from his income when the deductor has failed to deposit such tax with the Central Government.
  2. Whether Section 199 of the Income Tax Act restricts TDS credit only to cases where the deducted tax is actually deposited.
  3. Whether denial of TDS credit amounts to indirect recovery from the assessee contrary to Section 205 of the Act.

Petitioner’s (Revenue’s) Arguments

  • The Revenue contended that TDS credit can only be granted if the deducted tax is actually deposited with the Central Government, as per Section 199 of the Income Tax Act.
  • It was argued that since the deductor failed to deposit the TDS amount, the assessee is not entitled to claim credit.
  • The Revenue emphasized the phrase “and paid” under Section 199(1), asserting that payment to the government is a prerequisite for granting credit.

Respondent’s (Assessee’s) Arguments

  • The assessee argued that once tax has been deducted from his income, he cannot be made liable for the default of the deductor.
  • Reliance was placed on Section 205 of the Income Tax Act, which bars direct recovery from the assessee where tax has already been deducted at source.
  • The assessee also relied on judicial precedent, including Sanjay Sudan vs Assistant Commissioner of Income Tax, to assert that denial of credit would result in unjust double taxation.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT’s decision and ruled in favor of the assessee.
  • The Court held that once tax is deducted at source, the assessee cannot be denied credit merely because the deductor failed to deposit the same.
  • Section 205 clearly bars recovery from the assessee to the extent tax has already been deducted.
  • The Court clarified that the Revenue cannot indirectly recover tax (e.g., by denying credit or adjusting refunds) when direct recovery is barred.
  • It further held that the statutory scheme places responsibility on the deductor, not the deductee, for deposit of TDS.
  • Consequently, the appeal filed by the Revenue was dismissed, holding that no substantial question of law arose.

Important Clarification

  • TDS deducted retains its character as “tax” even if not deposited by the deductor.
  • The deductee (assessee) cannot be penalized for the failure of the deductor.
  • The Income Tax Act provides separate mechanisms (Sections 201, 221, 271C, 276B) to recover tax and penalize the deductor.
  • Denial of TDS credit would lead to unjust enrichment of the Revenue and double taxation of the assessee.

Sections Involved

  • Section 199 – Credit for TDS
  • Section 205 – Bar against direct demand on assessee
  • Section 201 – Consequences of failure to deduct/pay TDS
  • Section 198 – Grossing up of income
  • Section 221, 271C – Penalties
  • Section 276B – Prosecution for failure to deposit TDS
  • Rule 37BA – Credit for TDS

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS02112023ITA2952023_115222.pdf

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