2023 (2) TMI 1079 - HC - Income Tax

Bar against direct demand on assessee u/s 205 - Withholding tax payable on salary - Adjustment of the withheld tax not been deposited by the deductor in the Central Government Account against the refund due and payable to the deductee/assessee - whether the respondents/revenue can do indirectly what they cannot do directly? - petitioner was an employee of Kingfisher Airlines - Revenue says that the credit for withholding tax can only be given in terms of Section 199 of the Act, when the amount is received in the Central Government account - HELD THAT - According to us, Section 205 read with instruction dated 01.06.2015, clearly point in the direction that the deductee/assessee cannot be called upon to pay tax, which has been deducted at source from his income. The plain language of Section 205 of the Act points in this direction The adjustment of demand against future refund amounts to an indirect recovery of tax, which is barred under Section 205 of the Act. The fact that the instruction merely provides that no coercive measure will be taken against the assessee, in our view, falls short of what is put in place by the legislature via Section 205 of the Act. Therefore, in our view, the petitioner is right inasmuch as neither can the demand qua the tax withheld by the deductor/employer be recovered from him, nor can the same amount be adjusted against the future refund, if any, payable to him. Thus,we are inclined to quash the notice dated 28.02.2018, and also hold that the respondents/revenue are not entitled in law to adjust the demand raised for AY 2012-13 against any other AY. It is ordered accordingly.

Summary

Issues:
1. Whether the deductee can be required to pay tax equivalent to the deduction made by the deductor?
2. Can the revenue adjust withheld tax not deposited by the deductor against the refund due to the deductee?

Analysis:
1. The petitioner, an ex-employee of Kingfisher Airlines Limited, had withholding tax deducted by the employer for AY 2012-13. The employer did not deposit the tax, leading to a demand on the petitioner. The petitioner's refund for AY 2015-16 was withheld due to this demand.

2. The petitioner challenged a notice compelling payment of the demand, citing Section 205 of the Income Tax Act, 1961, and a CBDT instruction. The revenue argued that withholding tax credit can only be given when the amount is deposited in the Central Government account, and the demand cannot be erased.

3. The court held that Section 205 prohibits direct demands on the assessee for tax deducted at source. The CBDT instruction aligns with this provision, stating no coercive measures can be taken against the assessee. The court questioned if the revenue can indirectly recover what is barred directly and concluded that the demand cannot be enforced coercively.

4. The court ruled that the revenue cannot recover the tax withheld by the employer from the petitioner or adjust it against future refunds. The notice compelling payment was quashed, and the revenue was barred from adjusting demands across different assessment years.

5. The court noted the undisputed refund claim of the petitioner for AY 2015-16, which the revenue acknowledged. The court directed the refund of the undisputed amount to the petitioner, disposing of the writ petition accordingly.