Direct Tax Alert - TDS amount not deposited into Government Treasury cannot be recovered from deductee

BACKGROUND

Taxpayers (deductee) often face challenges to claim credit for taxes withheld (TDS) when there is a mismatch between the TDS claimed and the amount appearing in Form 26AS. There are various reasons for such mismatches – income offered to tax in current year, but TDS done in earlier year, income offered in this year but the TDS done in a subsequent year, non-filing of eTDS return by the deductor, non-depositing of TDS into government treasury by the deductor etc. Where the mismatch arises on account of default committed by the deductor – i.e., post withholding tax, failure to deposit into the government treasury, a question arises as to whether the credit for such taxes can be granted to the deductee or not and whether the Tax Officer can hold the deductee liable and thereby recover the amount from such deductee.

Recently, the Delhi Tax Tribunal1 had an occasion to delve upon a similar question. We, at BDO in India, have summarised the ruling of the Delhi Tax Tribunal and provided our comments on the impact of this decision.

FACTS OF THE CASE

The taxpayer a non-resident Indian, sold 25% of its holding of an Indian private limited company (ICo) to an Indian Group (K Grp). In terms of section 195 of the Income-tax Act, 1961 (IT Act), K Grp withheld tax from the sales consideration and remitted net consideration to the taxpayer. While K Group withheld the tax from the sales consideration, it did not deposit the said TDS to the treasury of Central Government. Further, K Grp did not issue any TDS certificate. At the time of filing the tax return, the taxpayer offered the said income to tax and claimed credit for the taxes withheld. However, the tax officer denied the TDS credit and treated the taxpayer as ‘assessee-in-default’. The First-Appellate Authority granted partial relief by holding the taxpayer not an ‘assessee-in-default’. However, it upheld that TDS credit cannot be allowed to the taxpayer. Aggrieved, the taxpayer filed an appeal before the Delhi Tax Tribunal.

TRIBUNAL RULING

While granting credit for the taxes withheld, the Delhi Tax Tribunal made following observations:

  • The provisions of Section 195 of the IT Act require any person responsible for paying to a non-resident to deduct income tax thereon at the time of credit of such income to the account of the deductee. Further, Section 205 of the IT Act states that the taxpayer shall not be called to pay tax himself to the extent tax has been deducted from that income.
  • As per Office Memorandum2 issued by the CBDT, demands created on account of the credit mismatch due to non-payment of TDS amount to the credit of Government by the deductor were not to be enforced.
  • Legislative intent of Section 195 and Section 205 of the IT Act, pursuant to which office memorandum has been issued by the CBDT, is that the taxpayer whose tax has been deducted by the deductor under section 195 of the IT Act shall not be treated as ‘assessee-in-default’. Fresh demand on account of mismatch of credit due to non-deposit of TDS amount by the deductor shall not be enforced and credit of TDS deducted shall be given to him irrespective of the fact that TDS so deducted has not been deposited with the state exchequer by the deductor.   
  • A similar issue was dealt by Gujarat High Court in the case of Devarsh Pravinbhai Patel3 wherein it was held that the Tax Authorities cannot deny the benefit of TDS by the employer of the petitioner during the relevant fiscal years. Credit of such tax would be given for the respective years.
  • When the tax authorities have accepted that the taxpayer cannot be treated as assessee-in-default, the TDS credit cannot be denied to taxpayer.
  • The tax authorities had not taken any action under the IT Act or under the Indian Penal Code4 against the deductor despite the taxpayer filing a police complaint against the deductor and its directors for illegal misappropriation of TDS deducted.
  • It relied on Bombay High Court’s ruling in the case of Pushkar Prabhat Chandra Jain5 wherein under identical facts, it was directed to tax authorities to make coercive recovery of tax not deposited from the deductor and to refund the amount to the taxpayer. Accordingly, the tax tribunal directs the tax authorities to refund the TDS deducted along with interest to the taxpayer.               

BDO COMMENTS

This is a welcome ruling for taxpayer as it once again supports taxpayers’ contention of claiming TDS credit in the absence of Form 16/Form 16A. Courts in several cases6 have granted the credit for the TDS even though the same was not deposited into the government treasury. This ruling further strengthens this aspect. The taxpayer could take support of this and other Rulings to claim credit for taxes even if the deductor has either not deposited the taxes or post depositing the taxes has not filed the eTDS return. However, in such cases, it is advisable that appropriate documentation should be maintained to establish that the taxes have been withheld.

1Shri Jasjit Singh vs ITO (ITA No. 4097/Del/2016, Delhi Tribunal)

2Office Memorandum F.No. 275/29/2014-IT(B), dated 11 March 2016

3Devarsh Pravinbhai Patel Vs. ACIT, Circle 5(1)(1) (Gujarat High Court)

4Section 409 of the Indian Penal Code provides that in case there is an omission on the part of deductor in depositing the TDS(deducted under statutory obligation on behalf of tax authorities as its agent), it is liable to be prosecuted being an agent of tax authorities

5Pushkar Prabhat Chandra Jain Vs. UOI [2019] 103 taxmann.com 106 (Bombay High Court)

6ACIT Vs. Om Prakash Gattani [2000] 242 ITR 638 (Guwahati High Court)

Yashpal Sahni Vs. Rekha Hajarnavis, ACIT [2007] 293 ITR 539 (Bombay High Court)    

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