A Landmark Judgment on Tax Credit Entitlement - Credit of TDS if deductor failed to deposit the TDS to the Government

2023 (12) TMI 34 - DELHI HIGH COURT

Background

In a significant ruling, the Delhi High Court adjudicated the case, involving complex issues related to tax credit entitlement. The primary question was whether the assessee was entitled to credit for tax deducted at source (TDS) in a transaction with Koutons Group​​.

Transaction Details and Initial Proceedings

The assessee held a 25% equity stake in S.R. Resorts Pvt. Ltd. and engaged in a transaction with a total consideration of Rs. 198,99,66,655. After TDS deduction at 10.3%, he received Rs. 178,50,00,000, with the absolute tax deducted amounting to Rs. 20,49,66,655​​. Initially, the assessee was treated as an 'assessee-in-default,' but the Commissioner of Income Tax (Appeals) granted relief under Section 205 of the Income Tax Act 1961, although he was not granted credit for the deducted tax​​.

Appeal to the Income Tax Appellate Tribunal (ITAT)

Assessee appealed to the ITAT, which ruled in his favor, stating he was entitled to tax credit for the TDS deducted by the buyer of the shares, regardless of whether the buyer had deposited the TDS​​.

Income Tax Department (Revenue) filed an appeal against the order of ITAT.

High Court's Analysis

1. Section 205 of the Income Tax Act 1961: The High Court noted that Section 205 prohibits direct tax demands on an assessee to the extent tax has been deducted from their income​​.

2. Indirect Recovery and Adjustment of Demand: The Court observed that indirect recovery of tax or adjustment of demand against future refunds, when tax has been deducted at source, is barred under Section 205​​.

3. Section 199 of the Act: The Court examined Section 199, which deals with the credit of tax deducted at source. It found that the provision does not limit credit only to those deductees whose deductors have deposited the amount with the Central Government​​.

4. Legislative Scheme for Tax Collection: Chapter XVII of the Act outlines various modes of tax collection, including TDS. The Court emphasized that the amount retained by the deductor as tax continues to remain 'tax' and thus, the deductee should be entitled to credit for it​​.

Court's Decision

The Delhi High Court dismissed the appeal, holding that no substantial question of law arose for consideration. It concluded that the assessee was entitled to the credit of the amount retained as tax by the deductor, irrespective of whether the deductor deposited it with the Central Government. The Court's decision was based on the principle that the nature of the amount retained by the deductor does not change and remains as 'tax'. As a result, the assessee cannot be denied credit for the tax deducted at source, even if the deductor, acting as an agent of the Central Government, fails to deposit the amount with the government​​.

Implications of the Judgment

1. Protection of Deductee Rights: The judgment significantly protects the rights of deductees (taxpayers) from being unfairly penalized for the deductor's failure to deposit the TDS with the government.

2. Clarity on Tax Credit Entitlement: It clarifies the entitlement of tax credit to taxpayers, reinforcing that the credit for tax deducted at source should be given irrespective of its deposit by the deductor.

3. Precedent for Future Cases: This ruling sets a precedent for similar cases, ensuring that taxpayers are not held accountable for the actions or inactions of the deductors.

Conclusion

This case marks a landmark decision in the realm of Indian tax law. It underscores the principle of fairness in tax administration and reinforces the legislative intent behind tax credit provisions. This ruling serves as a protective measure for taxpayers, ensuring that they are not wrongfully burdened due to procedural lapses by deductors.

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2023 (12) TMI 34 - DELHI HIGH COURT