The Hindu Business Line : Liability for TDS

Elaborate machinery has been built into the tax code for securing the rights of the Revenue for recovery of tax on incomes assessable under salary. In spite of these provisions being in operation for several decades, difficulties arise in fixing responsibility for the unrealised taxes in respect of such salaries. The employer may deduct tax and fail to deposit the same into government account.

The employee may file the return of income disclosing salary. Who, then, is responsible for the taxes due on the salary? Is it possible to recover the same from the employee merely because he has filed a return admitting salary income?

Yashpal Sahni Case

As per the facts of this case (293 ITR 539 Bombay), Yashpal Sahni was the Managing Director of a company in Mumbai. In 1996, his company paid him salary after deducting a tax of Rs 6.66 lakh. Disputes arose and Sahni’s services with the company were terminated in March 1997.

Sahni filed a return of income for the assessment year (AY) 1997-98 claiming credit of TDS amounting to Rs 6.66 lakh. The assessing officer (AO) found that no TDS certificate was filed with the return; the company did not issue the certificate. There was no evidence to show that the TDS was paid into government account. The company did not file its return.

Sahni, on the other hand, had furnished monthly payslips and bank statements to show that tax was deducted at source by the employer from his salary. The Revenue did not dispute these statements. Yet, the AO imposed a huge burden and demanded the tax and interest totalling Rs 12.74 lakh from Sahni. He attached the bank account and recovered the money from Sahni.

Sahni filed a writ petition in the Bombay High Court. The court pointed out that under Section 205 of the Income-Tax Act, 1961 the Revenue is barred from recovering the TDS amount from the employee from whom the TDS amount has already been deducted. If the TDS certificate is not issued, the salaried employee concerned will not be entitled to take credit for the said amount. But recovering the same from the employee would amount to double taxation.

Section 205 solves this problem laying down that in such cases, the employee will not be called upon to pay the said tax again. It is wholly irrelevant whether the TDS is paid to the credit of the Central Government or not. It is also immaterial that the TDS certificate in Form 16 has not been issued. The liability is on the employer and the Revenue will not be entitled to recover the same from the employee.

The High Court directed the Department to refund the amount recovered from Sahni with interest at 6 per cent from the date of recovery. He, however, lost the case for credit of TDS in his own assessment in the absence of Form 16. The Revenue was directed to earmark the TDS liability in this case as “not recoverable” from Sahni.

Shortfall in deduction

What happens if there is a shortfall in TDS? Hindustan Coca-Cola entered into an agreement with Pradeep Oil Corporation for use of the latter’s premises for storage of goods. Warehousing charges were paid to Pradeep Oil. Tax was deductible under Section 194C at 2 per cent.

However, the AO took the view that the warehousing charges were in the nature of rent and tax was deductible at 20 per cent under Section 194 I. Hindustan Coca-Cola was considered an assessee in default. The company pointed out that Pradeep Oil had already paid the taxes on the amount received from Hindustan Coca-Cola and there can be no question of recovering the alleged short deduction of tax from Hindustan Coca-Cola.

The Revenue conceded before the Income-Tax Appellate Tribunal (ITAT) that recovery could not once again be made from the tax deductor where the payee included the income on which tax was alleged to have been short deducted in its taxable income and paid taxes thereon.

The matter went to the Supreme Court. Hindustan Coca-Cola had paid interest under Section 201 (1A) of the I-T Act. Tax due has been paid by the deductee-assessee (Pradeep Oil Corporation).

Circular 275 dated January 29, 1997, of the Central Board of Direct Taxes (CBDT) was cited by the Supreme Court in support of the view that no demand should be enforced after the tax deductor has satisfied the department that taxes due have been paid by the deductee-assessee. This however will not alter the liability for interest under Section 201 (1A) or the liability for penalty under Section 271 C of the I-T Act (163 Taxman 355 (SC)).

The department recovers about one-third of the budgeted revenues through TDS. It should not prove to be painful for the salaried taxpayer or for the person responsible for paying rent. Attempts to make double recovery, once from the tax deductor and again from the tax deductee, should be frowned upon.

(The author is a former Chief Commissioner of Income-Tax.)