2021 (5) TMI 37 - HC - Income Tax

Default u/s 201 - demand notices challenged by the petitioners on the ground that the tax that has been demanded as arrears of tax from the petitioners Tax Deducted at Source by the second respondent but was not paid the credit of the Central Government - HELD THAT - The counters filed by the first and the third respondent do not give the exact amount of tax that was allegedly due from the petitioners which ought to have been paid by the petitioners as per the assessments completed for the respective petitioners under section 143 of the Income Tax Act, 1961 as modified by orders passed under section 154 of the Income Tax Act, 1961. During the intervening period, orders have been passed under section 201(i) and 201(IA) of the Income Tax Act, 1961 against the second respondent by three separate orders dated 16 01.2018 for the assessment years 2011-12, 2012-13 and 2013-14 as mentioned above. These have to be factored while demanding arrears of tax to the petitioners. To the extent tax was deducted by the second respondent and not remitted by the second respondent to the Income Tax Department, recovery can be only directed against the second respondent as the second respondent is the assessee in default. The petitioner cannot be made to pay tax twice. Recovery of any of such Tax Deducted at Source but not remitted by the second respondent has to be recovered only from the second respondent. We quash the respective demand notices and direct the third respondent to issue fresh demand notices to the petitioners after taking note of the subsequent developments and payments made by the 2nd respondent. It is made clear that to the extent Tax was Deducted by the second respondent but not remitted, no demand shall be made against the petitioners. If the second respondent had failed to remit the tax to the credit of the Income Tax Department, it is however open to the department to recover the same from the 2nd respondent in the manner known to Law. Balance of tax if any, which has escaped payment alone can be recovered from the Petitioners, by issuing suitable notice under the provisions of the Income Tax Act, 1961. Such notice may be issued within a period of four weeks from the date of receipt of copy of this order.

Summary

Issues Involved:
1. Validity of impugned demand notices for tax arrears.
2. Liability of petitioners for tax deducted but not remitted by the second respondent.
3. Application of Section 201 and Section 205 of the Income Tax Act, 1961.
4. Discrepancies in tax amounts and adjustments.
5. Procedural fairness in issuing demand notices.

Detailed Analysis:

1. Validity of Impugned Demand Notices for Tax Arrears:
The petitioners challenged the impugned demand notices which required them to clear tax arrears. They argued that the tax demanded as arrears was deducted at source by the second respondent but was not credited to the Central Government. Therefore, they contended that they should not be held liable for the tax as the second respondent was the assessee in default under Section 201 of the Income Tax Act, 1961.

2. Liability of Petitioners for Tax Deducted but Not Remitted by the Second Respondent:
The petitioners submitted that the second respondent, a tenant under the petitioners, had deducted TDS but failed to remit it to the Income Tax Department. This issue was previously addressed by the court, directing the respondents to consider the petitioners' representation and conduct an enquiry. The enquiry led to orders against the second respondent, acknowledging their default in remitting the deducted tax.

3. Application of Section 201 and Section 205 of the Income Tax Act, 1961:
The petitioners argued that under Section 205, they should not be liable for the tax deducted but not remitted by the second respondent. The court noted that Section 205 prevents double taxation on the same income. The petitioners also cited a Memorandum of Understanding (MOU) with the second respondent, which acknowledged the latter's responsibility to remit the deducted tax.

4. Discrepancies in Tax Amounts and Adjustments:
The court observed discrepancies in the amounts deducted and remitted by the second respondent. The MOU detailed specific amounts for various financial years that were deducted but not credited to the Income Tax Department. The court found inconsistencies in the tax amounts reflected in the demand notices versus those acknowledged in the MOU.

5. Procedural Fairness in Issuing Demand Notices:
The court emphasized that any recovery of tax should be directed at the second respondent, who was the assessee in default. The petitioners should not be made to pay the tax twice. The court quashed the impugned demand notices and directed the third respondent to issue fresh notices after considering the payments made by the second respondent. The court clarified that any balance of tax that escaped payment could be recovered from the petitioners, but only after issuing a suitable notice under the Income Tax Act, 1961.

Conclusion:
The court disposed of the writ petitions, quashing the impugned demand notices and directing the third respondent to issue fresh notices considering the subsequent developments and payments by the second respondent. The court reiterated that no demand should be made against the petitioners for tax deducted but not remitted by the second respondent. The department was directed to recover such amounts from the second respondent and issue suitable notices for any balance of tax due from the petitioners within four weeks. The writ petitions were disposed of with these observations, and no costs were awarded.