2023 (4) TMI 488 - AT - Income Tax

Reversal of TDS by the employer on salary foregone by the employee (after termination) as per the settlement agreement - Appellant (employee) seeking release of TDS amount - obligation of the employer to deduct TDS on salary foregone after accrual of salary but not paid - HELD THAT - The Bench is of considered view that the foregone salary may after its accrual be chargeable to tax in the hands of appellant, but the appellant cannot claim that his employer should have deducted tax on the basis of accrual. The grounds raised have no substance. Maintainability of appeal in pursuance of order of Hon ble High Court - Liability of employer to deductTDS u/s 192 - HELD THAT - As observed this appeal is maintainable by an assessee , however, the aforesaid discussion establish that appellant is neither assessee nor assessee in default . Therefore, the appeal preferred by him, against the order dated 07.01.2021, mentioned in form 36 as review order u./s 263 of the Income Tax Act, 1961 is not maintainable. Even otherwise on merits it can be observed that section 192 of the Act provides deduction of tax at the time of payment . However, in the case in hand admittedly there was no payment of the salary etc, which was foregone as per terms of settlement in the mediation proceedings. Consequently, the appeal is dismissed.

Summary

Issues involved:
The issues involved in the judgment are the liability of deducting TDS on foregone salary, the interpretation of settlement agreement terms, and the maintainability of the appeal against the order dated 07.01.2021.

Issue 1: Liability of deducting TDS on foregone salary:
The appellant, a former Chief Manager at a bank, challenged his removal and reached a settlement agreement with the bank. The bank reversed TDS deductions on the foregone salary based on the settlement terms. The appellant filed a petition seeking the release of TDS amount, which led to proceedings under Section 201(1) of the Income Tax Act. The DCIT observed that TDS is required to be deducted at the time of actual payment of salary and found no default in the proceedings under Section 201(1) of the Act.

Issue 2: Interpretation of settlement agreement terms:
The appellant contended that TDS should have been deducted on the foregone salary as per the settlement agreement terms. The appellant argued that the foregone salary, after it had accrued, should be subject to TDS. However, the bench noted that Section 192 of the Act mandates tax deduction "at the time of payment," and since there was no actual payment of foregone salary, there was no liability to deduct TDS at that stage. The bench dismissed the appeal, stating that the foregone salary may be taxable in the appellant's hands post-accrual, but the employer was not obligated to deduct tax based on accrual.

Issue 3: Maintainability of the appeal against the order dated 07.01.2021:
The appellant approached the CIT(TDS) by way of a petition under Section 263 of the Act, which was dismissed as non-maintainable. The appellant then appealed against the order dated 07.01.2021, which was deemed not maintainable as the appellant did not fall under the category of 'assessee' or 'assessee in default' eligible to file such an appeal. The bench concluded that the appeal was not maintainable and subsequently dismissed it.