2024 (11) TMI 88 - HC - Income Tax

Demand raised in the intimation issued u/s 143 (1) - employer of the petitioners did not pay the Tax Deducted at Source from the salary of the petitioners - HELD THAT - Employer of the petitioners deducted the Tax at Source from the salary income of the petitioners for two years but did not deposit the same with the Government. Thus, there is failure on the part of the employer to deposit tax deducted at source from the salary income income of the petitioners. Therefore, the respondent could not have raised any demand against the petitioners in view of the provisions of section 205 of the Act read with Instruction No. 275 dated 01.06.2015 and Office Memorandum dated 11.03.2016. The impugned intimation issued under section 143 (1) of the Act and consequential demand raised upon the petitioners are liable to be quashed and set aside. The respondents are hereby directed to see that strict compliance of the provision of section 205 of the Act as well as Instruction issued by the CBDT are followed and necessary corrections be made in the software so as to see that no demand is raised in case of the deductee on account of failure to deposit the amount of Tax Deducted at Source by the deductor. The Instruction issued by the CBDT under section 119 of the Act are binding upon all the officers of the department including the computer center which is now almost doing the job of the Assessing Officer. The technology used cannot be made to cause inconvenience to the tax payers contrary to the provisions of the Act and the Instruction issued by the CBDT resulting into helplessness on the human agency who has created the software resulting into the slavery of the technology. This is a classic case where the technology has failed to consider the provisions of the Act and the binding instructions of the CBDT.

Issues Involved:

1. Legality of demand notices under Section 143(1) of the Income Tax Act, 1961, in the context of non-deposit of Tax Deducted at Source (TDS) by the employer.
2. Applicability of Section 205 of the Income Tax Act, 1961, which bars direct demand on the assessee when TDS has been deducted but not deposited.
3. Compliance with CBDT Instructions and Office Memorandum regarding non-enforcement of demand due to TDS credit mismatch.
4. Technological failures in the tax administration system leading to demands against the assessee.

Issue-wise Detailed Analysis:

1. Legality of Demand Notices:

The core issue revolves around the demand notices issued under Section 143(1) of the Income Tax Act, 1961, for the assessment years 2020-21 and 2021-22. The petitioners, former employees of a stock broking company, faced demands despite TDS being deducted from their salaries but not deposited by their employer. The court noted that such demands should not have been raised, considering the statutory provisions and CBDT instructions. The court stayed the impugned demand notices until the final disposal of the petition, recognizing the undue hardship caused to the petitioners due to the employer's failure to deposit the deducted tax.

2. Applicability of Section 205:

Section 205 of the Income Tax Act, 1961, explicitly states that an assessee shall not be called upon to pay the tax to the extent it has been deducted at source. The court emphasized that this provision bars direct demand against the assessee when TDS has been deducted but not deposited. The court found that the respondent's actions were contrary to this section, as the demand was raised despite the employer's failure to deposit the TDS. This statutory protection aims to prevent the assessee from being penalized for the deductor's default.

3. Compliance with CBDT Instructions and Office Memorandum:

The judgment highlighted the importance of adhering to CBDT Instruction No. 275/29/2014-IT-(B) and the Office Memorandum dated 11.03.2016. These directives instruct that demands should not be enforced against assessees in cases of TDS credit mismatch due to non-deposit by the deductor. The court noted that these instructions were not being strictly followed, resulting in undue inconvenience to taxpayers. The court directed the respondents to ensure compliance with these instructions and to make necessary corrections in the tax administration software to prevent such issues in the future.

4. Technological Failures in Tax Administration:

A significant aspect of the judgment was the critique of technological failures in the tax administration system. The court observed that the software used by the tax department failed to account for the statutory provisions and binding instructions, leading to erroneous demands against the petitioners. The court stressed that technology should not cause inconvenience to taxpayers and should align with the legal framework. The judgment called for immediate rectification of the software to prevent future mismatches and ensure that no demands are raised against deductees due to the deductor's failure to deposit TDS.

Conclusion:

The court quashed the impugned intimation under Section 143(1) and the consequential demands raised against the petitioners. It directed the respondents to comply with Section 205 and CBDT instructions, rectify the software issues, and report compliance within four weeks. The petitions were allowed, and the rule was made absolute to the extent outlined in the judgment. The decision underscores the need for administrative and technological adherence to statutory provisions to protect taxpayers from unwarranted demands.

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