Should employees suffer incase the employer defaults in payment of TDS?

[Vivek Jalan]

On 15.07.2014, Karnataka High Court in ITA 165/2012  [THE COMMISSIONER OF INCOME TAX AND THE ACIT VERSUS M/S. KINGFISHER AIRLINES LTD - 2014 (9) TMI 364 - KARNATAKA HIGH COURT] directed the revenue authorities to recover TDS amounting to Rs.302 crores from the Kingfisher airlines. On 18.11.2016, the Kingfisher Airlines Limited was ordered to be wound up by the Karnataka High Court. Now, the question before the Court in the case of SHRI CHINTAN BINDRA VERSUS DEPUTY COMMISSIONER OF INCOME TAX & ORS. -  2023 (12) TMI 63 - DELHI HIGH COURT was whether any recovery towards the said outstanding TDS demand can be affected against the employees, in view of the admitted position that the tax payable on salary of the employee was being regularly deducted at source by Kingfisher Airlines Ltd. who did not deposit the deducted tax with the revenue.

Section 205 read with instruction dated 01.06.2015, clearly point in the direction that the deducted/assessee cannot be called upon to pay tax, which has been deducted at source from his income. Extract of Section 205 is as under –

“Section 205 Bar against direct demand on assessee. Where tax is deductible at the source under the foregoing provisions of this Chapter, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”

Extract of instruction dated 01.06.2015 is as under –

“…2. As per Section 199 of the Act credit of Tax Deducted at Source is given to the person only if it is paid to the Central Government Account. However, as per Section 205 of the Act the assessee shall not be called upon to pay the tax to the extent tax has been deducted from his income where the tax is deductible at source under the provisions of Chapter XVII. Thus, the Act puts a bar on direct demand against the assessee in such cases and the demand on account of tax credit mismatch cannot be enforced coercively…”

Read harmoniously, it was considered that neither can the demand qua the tax withheld by the diductor/employer be recovered from employee, nor can the same amount be adjusted against the future refund, if any, payable to him. Payment of the tax deducted at source to the Central Government as mentioned in Section 199 read with Section 205, has to be understood as the payment in accordance with law.

Thus, where the employer fails to perform his duty to deposit the deducted tax with the revenue, the employee cannot be penalized. It would always be open for revenue to proceed against employer for recovery of the deducted tax.

This is one of the judgements which will go down as one which provide relief to the masses and those who do not generally knock the doors of the Court.