2024 (9) TMI 1526 - HC - Income Tax

Demand raised on Non-deposit of the TDS amounts by the Employer - as argued that the demand notices issued by respondent No. 1 are invalid as tax was deducted at source by the employer - HELD THAT - The mandate of Section 205 is absolutely clear that the assessee shall not be called upon to pay taxes himself to the extent to which tax has been deducted from the asessee s income. The object and purpose behind the provision is to the effect that when an obligation to deposit the tax as in the present case, is on the employer and if the employer has defaulted, the liability to pay such tax cannot be shifted so as to be foisted on the employee, who is in fact the beneficiary of the payment to be received from the employer and who would also become the beneficiary of the tax being deposited at source on his behalf. Such is the object of the provision. However, what the department has done is that without a warrant in law, the liability to pay such tax is being foisted on the petitioners, which is clearly in the teeth of Section 205 of the Income Tax Act. Thus, looked from any angle, it was not permissible for respondent No. 2 to raise any such demand against the petitioners. The impugned demand notices issued to the petitioners stand quashed and set aside being in breach of Section 205 of the Income Tax Act,1961. As clarified that if there is any other tax demand from the petitioners on any other count, all issues on the same are expressly kept open, as we have not adjudicated the other issues except the demand notice in relation to the TDS amounts not deposited by the petitioners employers.

Summary

Issues:
Petitioners seek to quash demand notices for non-deposit of TDS amounts by their employer, citing Section 205 of the Income Tax Act. The petitioners argue that the demand notices issued by respondent No. 1 are invalid as tax was deducted at source by the employer. The petitioners claim that the demands are contrary to the provisions of Section 205 and an office memorandum issued by the Central Board of Direct Taxes. The petitioners also highlight a previous case where similar demands were withdrawn upon furnishing evidence of TDS deductions. The Revenue argues that petitioners must submit evidence to the Assessing Officer for consideration. The Court examines Section 205 and rules in favor of the petitioners, quashing the demand notices.

Analysis:

The petitioners in a batch of petitions prayed for the quashing of demand notices issued by respondent No. 1 due to non-deposit of TDS amounts by their employer, respondent No. 2. The petitioners were former employees of respondent No. 2 and received salary after TDS deductions. They contended that the demands were unjust as tax had already been deducted at source by the employer, as evidenced by their pay slips. The petitioners emphasized that they were not liable to pay tax themselves under Section 205 of the Income Tax Act, which prohibits demands against assessees where tax has been deducted at source. The petitioners also referred to an office memorandum by the Central Board of Direct Taxes reinforcing this provision.

The petitioners further elaborated on the financial irregularities of respondent No. 2, leading to defaults in salary payments and statutory dues. Due to these circumstances, the petitioners left their employment, with substantial dues outstanding. The petitioners were surprised to receive demand notices from respondent No. 1 for income tax along with interest, despite TDS deductions by the employer. The petitioners argued that such demands were unlawful and contrary to Section 205, which shields assessees from such liabilities.

In response, the Revenue contended that the petitioners must provide evidence to the Assessing Officer to support their claims, similar to a previous case where demands were withdrawn upon furnishing proof of TDS deductions. The Revenue also addressed the petitioners' additional prayer for granting credit for the TDS amounts deducted from their salaries.

Upon analyzing the arguments and provisions of Section 205, the Court found that the demand notices were in violation of the Income Tax Act. The Court emphasized that the employer's obligation to deposit tax cannot be shifted to the employee, who is the ultimate beneficiary of the payment. Therefore, the Court ruled in favor of the petitioners, quashing the demand notices based on the clear mandate of Section 205.

In conclusion, the Court allowed the petitions, quashing the demand notices and leaving other tax demands open for further adjudication. The Court clarified that the petitioners could pursue appropriate steps regarding the credit of TDS amounts during assessment proceedings, keeping all contentions open. The petitions were partly allowed, with no costs imposed.