The Hindu Business Line : Taxpayer vs tax deductor

THE Finance Minister has reportedly said that in the ensuing Finance Bill provision will be made to exempt those with salary incomes from the obligation of filing returns of income every year. This will be a welcome relief.

Tax on salaries is deducted at source and the disbursing officer takes into account matters such as rental incomes, interest payment obligations and investments to claim rebates. The TDS certificate is crucial in finalising the assessment.

In this context, the filing of a return by the salaried taxpayer is more a formality required to enable the Income-Tax Department to keep count of the number of taxpayers.

Now that the tax administration has been revamped, the Annual Information Return (AIR) will take care of the problems of the Department in this regard.

But the more important issue is that of fixing responsibility for failure to deduct tax at source.

This may not be a problem in government departments, but in the private sector, there may be cases where tax is not properly deducted at source or, even if deducted, it may not be fully paid into government account. In such cases, should the income-tax officer (ITO) hold the taxpayer or the tax deductor liable?

It can be argued that once deduction is made, the Revenue is expected to follow up with the person who had deducted the tax for realising the amount if such person failed in remitting the amount to the Central Government. Deduction is a statutory obligation and is done on behalf of the Revenue.

This matter was considered by the Karnataka High Court in Smt. Anusuya Alva vs Deputy Commissioner of Income Tax (278 ITR 206). The assessee, Anusuya Alva, owned a property which was let out to a corporation on a monthly rent of Rs 1,35,000. In terms of Section 194 (I), the tenant deducted 20 per cent of the rent and paid the balance to the landlady. However, the tenant did not remit the amount already deducted for the assessment years 1997-98 to 2001-02 to the credit of the Central Government.

The Revenue proceeded against the tenant and realised part of the amount. In respect of the balance, the Department enforced the demand against Anusuya Alva. On a writ petition, the Karnataka High Court held that Section 205 of the I-T Act prohibits raising a demand on the assessee in respect of the amount which was deductible and actually deducted to the extent it has been deducted. Though the section by itself does not say so, there is an obligation cast on the deductor to pay the tax to the government account.

The Act also provides for initiation of proceedings against the person for failure to pay the tax to government account. For imposing the bar on the Revenue for making a direct demand on the assessee, what is indicated in the section is a requirement in law for deduction and factual deduction and nothing more.

Once deduction is made, the Revenue is expected to look to the person who had deducted the tax for realising the amount, if such person fails in remitting the amount to the Central Government. This is in keeping with the general principles of law governing the agent and his principal.

The tax deductor is the agent of the Revenue and if there is any violation on his part, the consequence should fall only on the Revenue and that cannot be foisted on the assessee.

However, as per the assessment order, the assessee is liable for payment of tax to the extent the amount is not paid to the Government and it can also look to the tax deductor to recover the amount for reimbursement. But the law envisaged that he should not be driven to that plight.

There is protection to the assessee and the Revenue is prevented from embarking on recovery proceedings against the asseseee in respect of the default by the tax deductor. The only course open to the Revenue is to recover the amount from the very person who has deducted and not from the assessee.

One hopes that the Finance Bill has necessary safeguards to protect the salaried taxpayer against defaults by the tax deductor at source.

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

More Stories on : Taxation | Income Tax | Courts/Legal Issues

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The new age intermediaries

What's special?

Nepal at the crossroads

Flour, ghee and sugar to make bread, biscuits and cakes

Taxpayer vs tax deductor

Worth further study

Phase out the ambiguities

Precarious irreversibility of climate change