Facts of the Case

The petitioner, Sanjay Sudan, was employed with Kingfisher Airlines Limited from 12.01.2008 to 10.02.2012. For Assessment Year 2012–13, tax amounting to ₹13,98,901/- was deducted at source (TDS) from his salary by the employer, as reflected in Form 16A. However, the employer failed to deposit the deducted tax with the Central Government.

Subsequently, the Income Tax Department raised a demand of ₹11,62,580/- against the petitioner. Further, the refund due to the petitioner for AY 2015–16 was adjusted against this outstanding demand.

The petitioner challenged the action of the Revenue, contending that once tax is deducted at source, he cannot be made liable for non-deposit by the employer.

Issues Involved

  1. Whether an assessee can be held liable to pay tax where TDS has already been deducted by the employer but not deposited.
  2. Whether the Revenue can adjust such unpaid TDS demand against refunds due to the assessee.
  3. Scope and applicability of Section 205 and Section 199 of the Income Tax Act, 1961.

 Petitioner’s Arguments

  • The petitioner argued that Section 205 of the Income Tax Act, 1961 bars direct demand on the assessee once tax has been deducted at source.
  • The failure of the employer to deposit TDS cannot be attributed to the employee.
  • Reliance was placed on CBDT Instruction dated 01.06.2015, which clarifies that recovery cannot be enforced against the deductee in such cases.
  • Adjustment of refund against such demand amounts to indirect recovery, which is impermissible.

 Respondent’s Arguments

  • The Revenue contended that credit of TDS can be granted only under Section 199, i.e., when the amount is actually deposited with the Central Government.
  • Since the amount was not reflected in Form 26AS, the demand remains valid.
  • However, it was conceded that no coercive action would be taken against the petitioner.

 Court Findings / Judgment

The Delhi High Court held:

  • Section 205 clearly prohibits recovery of tax from the assessee once tax has been deducted at source, irrespective of whether it has been deposited by the deductor.
  • The Court emphasized that what cannot be done directly cannot be done indirectly.
  • Adjustment of demand against refund amounts to indirect recovery, which is also barred under Section 205.
  • The CBDT Instruction dated 01.06.2015 supports this legal position.

Accordingly:

  • The impugned notice dated 28.02.2018 was quashed.
  • The Revenue was restrained from adjusting the demand against any refund.
  • The refund due to the petitioner was directed to be released.

 Important Clarification

  • Even if TDS is not deposited by the employer, the assessee cannot be penalized.
  • The liability shifts to the deductor (employer), not the deductee (employee).
  • Adjustment of refund is treated as indirect recovery, which is legally impermissible under Section 205.

 Sections Involved

  • Section 205 – Bar against direct demand on assessee
  • Section 199 – Credit for tax deducted at source
  • CBDT Instruction dated 01.06.2015

 Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS17022023CW66102019_162140.pdf

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