Facts of the Case

The present writ petition pertains to Financial Year 2010–11 (Assessment Year 2011–12). The petitioner, Incredible Unique Buildcon Pvt. Ltd., rendered services to Clutch Auto Ltd. (CAL) amounting to ₹8,50,26,199/-. Tax Deducted at Source (TDS) of ₹24,96,199/- was deducted by CAL.

However, CAL deposited only ₹69,897/- with the revenue, resulting in a shortfall of ₹24,26,302/-. The petitioner also asserted that the balance payment post TDS deduction was not remitted and the issue was pending before the NCLT.

Despite TDS being deducted, the Income Tax Department denied credit for the same and raised a demand of ₹15,24,840/- against the petitioner.

Issues Involved

  1. Whether the assessee can be denied TDS credit where the deductor has deducted tax but failed to deposit it with the government.
  2. Whether the Income Tax Department can recover such tax from the assessee or adjust it against refunds.
  3. Applicability and interpretation of Section 205 of the Income Tax Act, 1961.

 Petitioner’s Arguments

  • The petitioner contended that TDS had already been deducted from its income by CAL.
  • As per law, once tax is deducted at source, the assessee cannot be held liable for non-deposit by the deductor.
  • Denial of credit and raising demand is contrary to statutory provisions and settled law.
  • The petitioner sought refund of ₹11,39,870/- for AY 2011–12.

 Respondent’s Arguments

  • The Revenue did not dispute the factual matrix regarding deduction and partial non-deposit of TDS.
  • It was acknowledged that the issue is covered by the earlier judgment of the Delhi High Court in Sanjay Sudan v. ACIT & Anr.
  • The matter involved a pure question of law; hence, no counter-affidavit was necessary.

 Court’s Findings / Order

The Delhi High Court held:

  • Section 205 of the Income Tax Act clearly bars direct recovery of tax from the assessee where TDS has already been deducted.
  • The Revenue cannot indirectly recover such tax by adjusting it against refunds.
  • The principle applies even if the deductor fails to deposit TDS with the government.

The Court observed that:

What cannot be done directly cannot be permitted to be done indirectly.

Final Order:

  • The writ petition was allowed.
  • The Revenue was directed to refund ₹11,39,870/- to the petitioner.
  • Demand raised against the petitioner was held unsustainable.

 Important Clarification

  • The liability to deposit TDS rests with the deductor, not the deductee.
  • Even in cases of TDS mismatch or non-deposit, the assessee cannot be penalized.
  • Adjustment of demand against refunds is also prohibited under Section 205.

 Sections Involved

  • Section 205, Income Tax Act, 1961 – Bar against direct demand on assessee
  • Section 199, Income Tax Act, 1961 – Credit for TDS
  • CBDT Instruction dated 01.06.2015

Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/RAS31052023CW77972023_181049.pdf

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