Taxpayer Cannot Be Denied TDS Credit For Deductor's Failure To Deposit Tax: Bombay High Court

The Bombay High Court on 5 August held that TDS credit cannot be denied to a taxpayer merely because the person who deducted the tax failed to deposit it with the Central Government, once actual deduction of tax from the income or payment is established.

A Division Bench of Justices B.P. Colabawalla and Firdosh P. Pooniwalla observed that the default of the deductor cannot prejudice the deducted and directed the Income Tax Department to verify claims and grant TDS credit where actual deduction is established. The judges held:

“where tax has in fact been deducted at source from the income or payment of an assessee, the Department cannot deny the deductee the credit thereof merely because the deductor failed to deposit the amount to the credit of the Central Government.”

The petitioners included salaried employees and other taxpayers whose payments were subjected to TDS. In their cases, the deductors had either failed to deposit the tax or properly file the TDS statements. As a result, the amounts did not reflect in the taxpayers' records, following which the Income Tax Department denied TDS credit and raised demands against them.

The principal question before the Court was whether TDS credit could be granted under Section 199 of the Income-tax Act, 1961, when tax had been deducted but not deposited by the deductor, or whether Section 205 merely protected the taxpayer from recovery of the corresponding demand. The Court also considered what evidence could establish deduction where Form 16 or Form 16A was unavailable.

The Court held that Sections 199 and 205 have to be read harmoniously. Section 199 deals with credit for tax deducted at source, while Section 205 protects a taxpayer from recovery of tax to the extent that tax has already been deducted from the income. It held that Section 205 is a substantive protection which comes into operation once tax has been deducted from the taxpayer's income. The protection is not dependent upon the deductor subsequently depositing the amount with the Government.

Further, the Bench observed that a rigid interpretation of Section 199 would defeat the protection granted under Section 205 and effectively make the taxpayer bear the consequences of the deductor's statutory default. It also took note of the Supreme Court's order in Income-tax Assessing Officer, Baroda v. Shobhan Shantilal Doshi, which recorded the Revenue's submission that where TDS had actually been deducted, the taxpayer would get credit even if the deductor had not deposited the amount with the Department, subject to factual verification.

It found that this position supported a harmonious reading of Sections 199 and 205. It also rejected the proposition that the absence of Form 16 or Form 16A would by itself defeat a claim for TDS credit. It noted that under the present electronic system, these certificates are generally generated only after the deductor deposits TDS and files the relevant statement. Therefore, insisting upon such certificates where the deductor itself has defaulted would make it practically impossible for the deductee to establish the deduction.

Moreover, the Court held that the taxpayer can establish actual deduction through other reliable material. Such evidence may include salary slips, bank statements, payment advices, ledgers, invoices, rent records, correspondence, insolvency claims and other surrounding material. The absence of Form 16 or Form 16A is therefore not fatal to a claim for TDS credit.

The Bench also issued directions for dealing with such claims. It state that where a taxpayer furnishes prima facie material showing that TDS was deducted but is not reflected in Form 26AS because of the deductor's default, the jurisdictional Assessing Officer must register the application, keep the corresponding demand in abeyance and ensure that no coercive recovery or adjustment of refund takes place while the claim is being verified. It directed the Assessing Officers to pass reasoned orders preferably within six months.

Accordingly, the High Court set aside the impugned orders and intimations to the extent that they raised demands for TDS deducted but not deposited with the Government. It remanded the matters to the respective Assessing Officers for verification and directed them to grant TDS credit, including consequential refunds wherever applicable, and make the necessary rectification, correction or deletion of the demands after verification.

It clarified that the judgment concerns domestic transactions and does not extend to international transactions.

Appearances: Mr. J.D. Mistri, Senior Advocate and Mr. Harsh Kothari, Advocate, appeared as Amicus Curiae. Mr. Dharan V. Gandhi, Mr. Ansh Agal, Mr. Devendra Jain, Mr. Shashank A. Mehta, Ms. Manini Bharati, Mr. Suyash M. More and Ms. Shreyanshi Srivastava appeared for the petitioners in the connected matters. Mr. Ravi Rattesar, Mr. P.A. Narayanan, Ms. Mamta Omle, Ms. Prajakta Vhatkar and Mr. Akhileshwar Sharma appeared for the Revenue/Respondents.