2025 (5) TMI 835 - HC - Income Tax

Demand notices issued by the Income Tax Department u/s 143(1) pertaining to different Financial Years - Denial of credit of TDS (deducted at source) while computing the income tax - petitioner had served as a Judge of the Gauhati High Court from October 1997 to August 2007 and thereafter had also worked as Upa-Lokayukta Assam from 28.04.2010 to 31.08.2012 - advance taxes deducted at source (TDS) were not reflected in Form 26AS (TDS/TRACES) due to inadvertence by the respective employers and as a consequence of which the respondent authorities did not allow credit of TDS (deducted at source) while computing the income tax of the petitioner and raised demands calling upon the petitioner to pay the said amount. HELD THAT - We are of the view that the action of the Income Tax Department of raising demand against the petitioner vide demand notices issued u/s 143 (1) pertaining to the different Financial Years starting from 2008- 2009 2010-2011 2011-2012 2012-2013 and 2013-14 is not sustainable and the action of the respondent Income Tax Department of not allowing credit of the demanded amount in computing the income tax of the petitioner for the aforesaid Financial Years is also unreasonable and cannot be sustained. The law is well settled on this point. The responsibility to deposit the amount deducted at the source as tax is of the person who is responsible to deduct the tax at source. It is also the responsibility of the person who has deducted the tax at source to deposit the same with the Central Government. Where the tax is deducted and deposited as per the provisions of the Income Tax Act by the person who is responsible for deduction and deposition the assessee cannot be forced to pay the tax which has already been deducted and deposited. In the present case from the affidavits filed on behalf of the respondent No. 5 (Registrar General Gauhati High Court) and respondent No. 6 (Registrar-cum-Secretary to the Lokayukta Assam) it is clear that the tax for the concerned financial years for which demand is raised against the petitioner by the Income Tax Department has already been deducted and deposited as evident from Annexures filed along with the affidavits filed on behalf of the Registrar General Gauhati High Court and the Registrar-cum-Secretary to the Lokayukta Assam. Simply because the tax deducted at source by the Gauhati High Court and Lokayukta Assam is not reflected in the Form 26AS the respondent Income Tax Department cannot raise demand against the petitioner for the concerned Financial Years or cannot refuse to credit the tax already deducted in computing the income tax of the petitioner for the concerned Financial Years. The defect pointed out by the respondent Income Tax Department of non-reflection of tax deduction in Form 26AS by the employer can very well be cured by the Income Tax Department in consultation with the employers of the petitioner i.e. Gauhati High Court and the Lokayukta Assam. Writ petition filed by the petitioner is allowed. The demand notices are set aside and the respondents in the Income Tax Department are directed to allow credit of the amount demanded.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the Income Tax Department was justified in issuing demand notices under Section 143(1) of the Income Tax Act, 1961, seeking payment of taxes allegedly due for the Financial Years 2008-2009, 2010-2011, 2011-2012, 2012-2013, and 2013-2014, despite the petitioner's claim that tax was deducted at source (TDS) and deposited by the employers for those years?

(b) Whether the Income Tax Department was correct in refusing to allow credit of TDS amounts deducted and deposited by the petitioner's employers due to the non-reflection of such TDS in Form 26AS (TDS/TRACES) while computing the petitioner's income tax liability?

(c) What is the legal obligation of the employer (deductor) regarding deduction and deposit of TDS, and the consequent entitlement of the deductee (assessee) to claim credit for such TDS in the computation of income tax?

(d) Whether the petitioner is liable to pay the tax demanded again when evidence of TDS deduction and deposit is produced, albeit not reflected in Form 26AS?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Validity of demand notices and refusal to allow TDS credit due to non-reflection in Form 26AS

Relevant legal framework and precedents: Section 143(1) of the Income Tax Act empowers the Income Tax Department to issue demand notices for any shortfall in tax payments. Section 205 of the Act mandates that the person deducting tax at source must deposit the amount with the Central Government. The deductee is entitled to credit for TDS only if the tax has been properly deposited and reflected against the PAN in Form 26AS. The law is well settled that the responsibility to deposit TDS lies with the deductor, and the deductee cannot be compelled to pay tax already deducted and deposited.

Precedents relied upon include:

Assistant Commissioner of Income Tax Circle, Jorhat & Ors. Vs. Om Prakash Gattani [2000(1) GLT 294]
Pushkar Prabhat Chandra Jain Vs. Union of India & Anr. [(2019) 309 CurTR 2018 : (2019) 262 Taxman 118]
Incredible Unique Buildcon Private Limited Vs. Office of the Income Tax Officer Ward (12)(1) New Delhi [CM Appl. No. 50728/2023 & Review Pet. No.26/2023 in WP(C) 7797/2023, decided on 03.10.2023 by the High Court of Delhi]

Court's interpretation and reasoning: The Court acknowledged that the Income Tax Department's issuance of demand notices was premised on the non-reflection of TDS in Form 26AS, which is the standard evidence of tax deposit for the deductee. However, the Court emphasized that the fundamental obligation to deposit TDS rests with the deductor (employer). The deductee's entitlement to credit arises once the tax is deducted and deposited by the employer, irrespective of the technical non-reflection in Form 26AS.

Key evidence and findings: The petitioner produced Form 16AS, certificates of deduction from the employers (Gauhati High Court and Lokayukta, Assam), and affidavits from the Registrar General of the Gauhati High Court and the Registrar-cum-Secretary of the Lokayukta, Assam. These affidavits confirmed that TDS was deducted from the petitioner's salary/pay and deposited with the Central Government through respective treasury offices for the relevant financial years.

Application of law to facts: The Court found that the tax was indeed deducted and deposited by the petitioner's employers, satisfying the conditions under Section 205 of the Income Tax Act. The failure of the employers to ensure reflection of such deposits in Form 26AS was a procedural lapse that should not prejudice the petitioner.

Treatment of competing arguments: The Income Tax Department contended that the onus was on the petitioner to produce evidence of deposit and that credit could only be given if the TDS was reflected in Form 26AS. The Court rejected this narrow approach, holding that the Department's refusal to allow credit solely on the ground of non-reflection in Form 26AS was unreasonable. The Court observed that the Department could coordinate with the employers to rectify the non-reflection issue.

Conclusions: The demand notices issued under Section 143(1) were not sustainable. The petitioner was entitled to credit for the TDS deducted and deposited by his employers, notwithstanding the non-reflection in Form 26AS. The Income Tax Department was directed to allow credit of the demanded amounts in computing the petitioner's income tax for the respective financial years.

Issue (c): Legal obligations of the employer and entitlement of the deductee

Relevant legal framework: Section 205 of the Income Tax Act mandates that the person responsible for deduction of tax at source must deposit the amount with the Central Government. The deductee's entitlement to TDS credit depends on the deductor's compliance with this obligation.

Court's interpretation and reasoning: The Court reiterated that the deductor's responsibility is not only to deduct TDS but also to deposit it timely and correctly against the deductee's PAN. The deductee cannot be compelled to pay tax twice where the TDS has been legitimately deducted and deposited. The Court emphasized that the failure of the deductor to ensure proper reflection in Form 26AS does not extinguish the deductee's right to credit.

Key evidence and findings: The affidavits and documentary evidence filed by the petitioner's employers established compliance with the deduction and deposit obligations. The Court relied on these to affirm the petitioner's entitlement.

Application of law to facts: The employers' compliance with deduction and deposit obligations discharged the petitioner's tax liability for the amounts deducted. The Income Tax Department's demand notices were therefore unjustified.

Treatment of competing arguments: The Department's argument that non-reflection in Form 26AS negated the petitioner's claim was rejected as it ignored the substantive compliance by the employers.

Conclusions: The Court held that the deductor's responsibility to deposit TDS is paramount, and the deductee's entitlement to credit arises from such deposit. The petitioner's tax liability was discharged by the employers' actions.

Issue (d): Liability to pay tax demanded again despite evidence of TDS deduction and deposit

Court's reasoning and conclusions: The Court held that the petitioner cannot be forced to pay the tax again where the TDS has already been deducted and deposited by the employers. The demand notices seeking payment of the same amounts were quashed. The Court directed the Income Tax Department to allow credit of the deducted and deposited amounts forthwith.

3. SIGNIFICANT HOLDINGS

The Court held:

"The action of the Income Tax Department of raising demand against the petitioner vide demand notices issued under Section 143 (1) of the Income Tax Act pertaining to the different Financial Years starting from 2008-2009, 2010-2011, 2011-2012, 2012-2013 and 2013-14 is not sustainable and the action of the respondent Income Tax Department of not allowing credit of the demanded amount in computing the income tax of the petitioner for the aforesaid Financial Years is also unreasonable and cannot be sustained."

"The responsibility to deposit the amount deducted at the source as tax is of the person who is responsible to deduct the tax at source. It is also the responsibility of the person who has deducted the tax at source to deposit the same with the Central Government. Where the tax is deducted and deposited, as per the provisions of the Income Tax Act, by the person who is responsible for deduction and deposition, the assessee cannot be forced to pay the tax which has already been deducted and deposited."

"Simply because the tax deducted at source by the Gauhati High Court and Lokayukta, Assam is not reflected in the Form 26AS, the respondent Income Tax Department cannot raise demand against the petitioner for the concerned Financial Years or cannot refuse to credit the tax already deducted in computing the income tax of the petitioner for the concerned Financial Years. The defect pointed out by the respondent Income Tax Department of non-reflection of tax deduction in Form 26AS by the employer can very well be cured by the Income Tax Department in consultation with the employers of the petitioner."

The Court set aside the demand notices and directed the Income Tax Department to allow credit of the TDS amounts deducted and deposited by the petitioner's employers for the relevant financial years.

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