Where a company has deducted Tax at Source (TDS) from the salary of an employee, but did not deposit the same to the Government treasury, can the Revenue Department recover the TDS amount with interest from the employee in spite of the bar under Section 205 of the Income Tax Act, 1961?
This issue was raised in the case of Yashpal Sahni vs Rekha Hajarnavis, as reported in 2007 (109) Bom L R 1537.
Brief facts of the case:
On 28.3.1996 the petitioner was appointed as “Managing Director-Information Technology” by the respondent Company from 1.4.1996 at a basic salary of Rs. 1, 20,000/-
From April to December, 1996 the respondent company paid salary to the petitioner after deducting TDS amounting to Rs. 6,66,000/- in total. Thereafter, the employer terminated the services of the petitioner sometime in March, 1997 for some mutual disputes.
The petitioner filed his return for the Assessment Year 1997-‘98 claiming credit of TDS. The assessing officer issued a notice under Section 143(1) (a) of the Income Tax Act, 1961 denying credit of the TDS amount. The petitioner applied under Section 154 of the Act asking for rectification of the said notice on the ground that the TDS amount with interest cannot be recovered from him due to the bar provided in Section 205 of the Act.
The Income Tax Department attached the bank account of the petitioner and from there it recovered a sum of Rs. 17, 89,587/-The petitioner filed the case before the Hon’ble High Court at Bombay for challenging the said act of the Tax department.
Arguments in favor of the petitioner:
The learned advocate appearing for the petitioner argued that if an employer responsible to deduct the TDs has deducted TDS from the salary, then under Section 205 of the Act, the employee cannot be asked to pay the said tax himself.
The employer was bound to deposit the said amount into the Government treasury within due time and to issue TDS certificate to the petitioner but the employer failed to do so. The said TDS amount cannot be recovered again from the petitioner.
Arguments in favor of the revenue:
The learned advocate appearing for the revenue stated that TDS has neither been paid to the Central Government nor any Form No. 16 has been issued by the employer proving deduction of tax at source. So in the present case the responsibility of providing sufficient proof regarding the payment of tax and to pay the same was upon the petitioner.
Judgment with reasons:
It was stated that it is a well settled principle of law that if a company bound to deduct TDS fails to deduct the same or after deducting it fails to pay the same to the Central Government within due time, then the company shall be considered to be a defaulter in respect of the tax and shall be liable to pay interest at the rate of 12% p.a. on the TDS amount.
According to Section 205 of the Act if tax is deducted at the source, the assessee cannot be asked to pay the tax himself.
In view of the above it was held that the revenue cannot recover the TDS along with interest from the petitioner, as such the petition was allowed. The revenue was directed to refund the amount deducted to the petitioner along with interest at the rate of 6%.