Pilot wins TDS credit battle despite employer’s failure to deposit tax to government

Get the full picture - access the original judgement of the court order here

Case Name

Kartik Vijaysinh Sonavane Vs. Deputy Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 6193 of 2021

Date: 15th November 2021

Key Takeaways

• Employee Protection: Employees cannot be held liable for their employer’s failure to deposit TDS with the government
• Form 16A Sufficiency: Having a valid Form 16A certificate is sufficient for claiming TDS credit, even if the employer hasn’t deposited the tax
• Employer Liability: The responsibility for non-deposit of TDS lies solely with the employer, who can be treated as “assessee in default” under Section 201 of the Income Tax Act
• No Double Taxation: Employees cannot be subjected to double taxation - once through TDS deduction and again through direct recovery

Issue

Can an employee claim TDS credit when the employer has deducted tax from salary but failed to deposit it with the Central Government, and the employee possesses valid Form 16A certificates?

Facts

Kartik Sonavane was working as a pilot for Kingfisher Airlines. Like any regular employee, his employer was deducting TDS from his salary - this is pretty standard practice. The amounts were substantial: Rs. 7,20,100/- for the 2009-10 assessment year and Rs. 8,70,757/- for 2011-12.

Kingfisher Airlines, despite deducting this money from Sonavane’s salary, never actually deposited it with the government. When Sonavane filed his tax returns and claimed credit for this TDS (as he rightfully should), the Income Tax Department said “no way” because they couldn’t see any deposits in their system.

The department then issued recovery notices in 2013 and 2014, demanding that Sonavane pay the tax again. They even adjusted Rs. 89,960/- from his 2019-20 refund against this demand. Sonavane tried multiple times to get this sorted through applications under Section 154 of the Income Tax Act, but the department wasn’t budging.

Arguments

Sonavane’s Arguments:

• He had valid Form 16A certificates proving TDS was deducted from his salary
• The employer’s failure to deposit TDS shouldn’t be his responsibility
• He shouldn’t face double taxation - paying once through salary deduction and again through direct recovery
• The obligation to deposit TDS lies with the employer, not the employee

Income Tax Department’s Arguments:

• No TDS credit can be given without actual deposit in government accounts
• The system doesn’t show any TDS deposits by Kingfisher Airlines
• Sonavane should have joined Kingfisher Airlines as a necessary party in the case
• There was delay and laches in filing the petition

Key Legal Precedents

The court relied heavily on several important precedents:

1. Devarsh Pravinbhai Patel vs. Assistant Commissioner of Income Tax Circle 5(1)(1) - This was a very similar case involving another Kingfisher Airlines pilot. The court noted that this case was “no longer res integra” (not a new issue) and was directly covered by this precedent.
2. Assistant Commissioner of Income Tax and Others vs. Om Prakash Gattani [(2000) 242 ITR 638] - This Bombay High Court decision was crucial in establishing the principle that employees shouldn’t bear the burden of employer’s failure to deposit TDS.
3. Section 205 of the Income Tax Act, 1961 - The court examined this provision which states that where tax is deductible at source, the assessee shall not be called upon to pay the tax to the extent it has been deducted.
4. Section 201 of the Income Tax Act - This section makes the person responsible for deducting tax (the employer) liable as “assessee in default” when they fail to deposit the deducted amount.

Judgement

The Gujarat High Court ruled completely in favor of Sonavane. Here’s what they decided:

The Win: The court held that Sonavane is entitled to credit for the TDS deducted by his employer, to the extent that valid Form 16A certificates were issued.

The Reasoning: The court applied the principle established in the Om Prakash Gattani case, emphasizing that:

• Employees have no control over whether employers deposit TDS
• Section 205 of the Income Tax Act protects employees from being asked to pay tax that has already been deducted
• The employer (Kingfisher Airlines) should be treated as “assessee in default” under Section 201

The Orders:

• All recovery notices issued to Sonavane were quashed and set aside
• The department must give him credit for the TDS amounts
• Any money already recovered or adjusted must be returned with statutory interest within 8 weeks
• The department can still recover the money from Kingfisher Airlines as the defaulting employer

FAQs

Q1: What happens if my employer deducts TDS but doesn’t deposit it with the government?

A: Based on this judgment, you’re still entitled to TDS credit if you have valid Form 16A certificates. The employer becomes liable for the non-deposit, not you.

Q2: Do I need to prove that my employer actually deposited the TDS?

A: No, having a valid Form 16A certificate is sufficient. The responsibility to deposit lies with the employer.

Q3: Can the Income Tax Department recover the tax from me if my employer defaults?

A: No, they cannot. Section 205 of the Income Tax Act protects you from double taxation. They must pursue the defaulting employer under Section 201.

Q4: What if the department has already recovered money from me in such cases?

A: Based on this judgment, you’re entitled to get that money back with statutory interest.

Q5: How long do I have to claim such relief?

A: The judgment doesn’t specify a time limit, but it’s advisable to act promptly when you discover such issues.

Q6: What about the employer - do they face any consequences?

A: Yes, the employer becomes an “assessee in default” under Section 201 and the department can initiate recovery proceedings against them.

1. Here is the petitioner who is a pilot by profession and

was an employee of M/s. Kingfisher Airlines. The Kingfisher

Airlines deducted the Tax Deducted at Source (‘TDS’

hereinafter) to the tune of Rs. 7,20,100/- for the Assessment

Year 2009-10 and Rs. 8,70,757/- for the Assessment Year

2011-12 in case of the petitioner. The amount since had not

been deposited by the Airlines in the Central Government

Account, the credit when claimed by the petitioner, the same

was obviously not given by the respondent and the demand

had been raised with interest.

2. This since had aggrieved the petitioner, he approached

this Court challenging the recovery notices dated 19.11.2013

and 21.08.2014 with the following prayers: -

“(A) Issue a writ of certiorari and/or a writ of

mandamus and/or any other writ direction or order

directing the respondent to cancel the outstanding

demand as reflected on IT Portal at Annexure- C and

to cancel the unjust demand raised by the respondent

by issuance of recovery notices dated 19.11.2013 at

Annexure – F, notices dated 21.08.2014 at Annexure -

J (Colly) and notice issued on 22.12.2015 at Annexure

-K;

(B) Issue a writ of certiorari and/or a writ of

mandamus and/or any other writ direction or order

directing the respondent to cancel the outstanding

demand as reflected on IT Portal at Annexure-C and

to cancel unjust demand raised by the respondent by

issuance of recovery notices dated 19.11.2013 at

Annexure -F, notices dated 21.08.2014 at Annexure- J

(Colly) and notice issued on 22.12.2015 at Annexure-

K, and to return the amount already adjusted by the

respondent along with statutory interest.

(C) Award the cost of this petition.

(D) Grant such other and further reliefs as this

Hon’ble Court deems fit.”

3. It is averred that the petitioner had filed the return of

income for the assessment years 2009-10 and 2011-12 and he

claimed the TDS of Rs. 7,20,100/- and Rs. 8,70,757/-

respectively as the tax paid in advance.

3.1. The department had raised the demand of the said

amount and on 12.12.2019, the amount of Rs. 89,960/- had

been adjusted against the demand for the assessment year

2019-2020. This was informed to the petitioner by State Bank

of India.

3.2. He preferred an application under Section 154 of the

Income Tax Act before the respondent no. 1 on 29.03.2010

and sought the refund for the assessment year 2009-10. On

19.11.2013, a notice had been issued to the petitioner for

recovery of the outstanding arrears to the tune of Rs.

11,26,775/- for the assessment year 2011-12.

3.3. The request was made by the petitioner for canceling the

demand for the assessment year 2009-10 vide its

communication dated 07.12.2013. He also filed an application

under Section 154 of the IT Act on 18.12.2013 for the

assessment year 2011-12 and made a similar request to the

respondent no.1. He reiterated such request in a combined

manner on 17.09.2014 and urged for the cancellation of the

demands.

3.4. His essential plea was that the obligation of the

employer cannot be thrust upon him however, paying no head

to such a request, the respondent issued the recovery notice

on 21.08.2014 for both the assessment years 2009-10 and

2011-12.

3.5. Once again, the demand notice had been issued on

22.12.2015 for the assessment year 2011-12. The petitioner

made request on 13.01.2016 to the respondent to drop the

recovery proceedings and cancel the demands. This was

reiterated on 23.12.2019.

3.6. As all such requests fell on deaf ears, he has chosen to

approach this Court with the aforementioned prayers.

4. The affidavit-in-reply is filed by the respondent – Joint

Commissioner of Income Tax (OSD), Circle 1(1)(1), Vadodara,

who inter alia stated that the petitioner failed to disclose the

violation of any of his statutory or constitutional right and

hence, the petition under Article 226 cannot be maintained.

4.1. According to respondent, it was a duty of the petitioner

to join the necessary parties i.e. the Kingfisher Airlines as

according to the petitioner, the employer has deducted the

TDS and not deposited to the government. There is a gross

delay and latches in preferring the petition since the TDS was

deducted during the financial years 2008-09 and 2010-11 and

it was urged that the petition is not to be sustained.

4.2. According to the respondent, it is not in dispute that the

petitioner was working as an employee with the Kingfisher

Airlines and the employer deducted the amount of TDS from

his salary for the assessment years 2009-10 and 2011-12, but

has failed to discharge the liability of depositing the same. In

absence of any TDS reflected in the system, which is averred

to have been deducted by the deductor, and his failure to

submit even Form-16 issued by them for the assessment year

2011-12, would also not entitle him to get the TDS credit.

4.3. It is thus the say of the respondent that in the present

case, the system of Income Tax Department would not allow

such credit on the TDS in absence of the deposit of the TDS by

the deductor, the demand notice had been issued.

5. Rejoinder affidavit also has been filed which may not be

required further elaboration.

6. We have heard learned advocate Mr. Darshan Patel

appearing for the petitioner and learned Senior Standing

Counsel Mr. Varun Patel appearing for the respondent.

7. The factual matrix presented before this Court has not

been disputed. It is also not being disputed that the case is no

longer res integra and is covered by the decision of this very

Court rendered in case of Devarsh Pravinbhai Patel vs.

Assistant Commissioner of Income Tax Circle 5(1)(1)

on 24.09.2018] where too, the petitioner was an employee of

the Kingfisher Airlines and worked as a pilot. In his case also

the TDS on the salary made to the petitioner had not been

deposited. It is only when the department raised the tax

demand with interest and initiated the actions of the recovery

that this Court was approached. Relying on the decision of the

Bombay High Court rendered in case of Assistant

Commissioner of Income Tax and Others vs. Om Prakash

Gattani [(2000) 242 ITR 638], this Court allowed the same.

Vital would be to reproduce the relevant findings and

observations.

“4. The issue is no longer res integra. The

Division Bench of this Court in case of Sumit

Devendra Rajani (Supra) examined the statutory

provisions and in particular Section 205 of the

Income-tax Act, 1961. The Court concurred with the

view of the Bombay High Court in case of Asst.

CIT VS. Om Prakash Gattani, reported in (2000)

242 ITR 638 and observed as under -

“10. We are in complete agreement with the view

taken by the Bombay High Court and Gauhati

High Court. Applying the aforesaid two

decisions of the Bombay High Court as

well as Gauhati High Court, the facts of

the case on hand and even considering

Section 205 of the Act action of the respondent

in not giving the credit of the tax deducted at

source for which form no.16 A have been

produced by the assessee – deductee and

consequently impugned demand notice issued

under Section 221(1) of the Act cannot be

sustained. Concerned respondent therefore,

is required to be directed to give credit

of tax deducted at source to the assessee

deductee of the amount for which form no.16

A have been produced.

11. In view of the above and for the reasons

stated petition succeeds. It is held that

the petitioner assessee deductee is entitled

to credit of the tax deducted at source

with respect to amount of TDS for which Form

No.16A issued by the employer deductor –

M/s. Amar Remedies Limited has been

produced and consequently department is

directed to give credit of tax deducted at

source to the petitioner assessee –

deductee to the extent form no.16 A

issued by the deductor have been issued.

Consequently, the impugned demand notice

dated 6.1.2012 (Annexure D) is quashed

and set aside. However, it is clarified and

observed that if the department is of the

opinion deductor has not deposited the

said amount of tax deducted at source, it will

always been open for the department to recover

the same from the deductor. Rule is made

absolutely to the aforesaid extent. In the facts

and circumstances of the case, there shall

be no order as to costs.”

5. Facts in both case are very similar. Under the

circumstances, by allowing these petitions we

hold that the Department cannot deny the benefit of

tax deducted at source by the employer of the

petitioner during the relevant financial years.

Credit of such tax would be given to the

petitioner for the respective years. If there

has been any recovery or adjustment out of the

refunds of the later years, the same shall be returned

to the petitioner with statutory interest.”

8. In case of Om Prakash Gattani (supra) Gauhati High

Court was dealing with the TDS not deposited of prize money

payable to the petitioner. It held and observed thus: -

“13. From a perusal of the provisions quoted above

relating to the deduction of tax at source in the

matters relating to prize money of lotteries, it is

evident that the person responsible to make the

payment to the assessee is under the statutory

obligation to deduct the amount at source. After

deduction of the amount he is required to deposit the

same to the credit of the Central Government and to

issue a certificate of deduction. So far as credit for

the amount deducted is concerned, it is to be given

on the deposit being made to the credit of the Central

Government on production of a certificate furnished

under Section 203 of the Income-tax Act. On payment

of the amount to the credit of the Central

Government, it would be treated as payment of tax.

14. So far the assessee is concerned, he is not

supposed to do anything in the whole transaction

except that he is to accept the payment of the

reduced amount from which is deducted income-tax

at source. The responsibility to deposit the amount

deducted at source as tax is that of the person who is

responsible to deduct the tax at source. On the

amount being deducted the assessee only gets a

certificate to that effect by the person responsible to

deduct the tax. In a case where the amount has been

deducted by the person responsible to deduct the

amount under the statutory provisions, the assessee

has no control over the matter. In case of default in

making over the amount to the account of the Central

Government, it is obviously the person responsible to

deduct or the person who has made the deduction

who is held responsible for the same. The

responsibility of such person is to the extent that he

has to be deemed to be an assessee in default in

respect of the tax. He may be deemed to be an asses

see in default not only in cases where after deduction

he does not make over the amount to the Central

Government but also in cases where there is failure

on his part to deduct the amount at source. This

responsibility has been fastened upon him under

Section 201 of the Income-tax Act. It is, of course,

without prejudice to any other consequences which

he or it may incur. Presently we are not concerned

with the case where the person responsible to make

the deductions has not deducted the amount at all. It

may or may not fall in a different category from one

where the amount has been deducted and not made

over to the Central Government. We are concerned

with the latter category of cases. As indicated earlier,

on the facts it is nobody's case that the amount was

actually not deducted at source by Chandra Agencies.

What seems to be in dispute is the deposit of the said

amount in the account of the Central Government.

The Income-tax Department seems to have made

enquiries about the exact date of payment to the

Central Government which Chandra Agencies could

not furnish on the ground that the papers were

forwarded to the chairman of Vaibhavshali Bumper.

In such a category of cases we feel that the amount of

tax can be recovered by the Income-tax Department

treating the person responsible to deduct tax at

source as an assessee in default in respect of the tax.

It would not be possible to proceed to recover the

amount of tax from the assessee. The assessee cannot

be doubly saddled with the tax liability. Deduction of

tax at source is only one of the modes of recovery of

tax.. Once this mode is adopted and by virtue of the

statutory provisions the person responsible to deduct

the tax at source deducts the amount, only that mode

should be pursued for the purpose of recovery of tax

liability and the assessee should not be subjected to

other modes of recovery of tax by recovering the

amount once again to satisfy the tax liability. It is,

therefore, provided under Section 201 of the Income-

tax Act that the person responsible to deduct the tax

at source would be deemed to be an assessee in

default in case he deducts the amount and fails to

deposit it in the Government treasury. As observed

earlier, the assessee has no control over such person

who is responsible to deduct the income-tax at

source, but fails to deposit the same in the

Government treasury. In this light of the matter, in

our view, the notices issued under Section 226(3) of

the Income-tax Act to the bankers of the petitioner-

respondent to satisfy the tax liability from the bank

account of the petitioner-respondent are illegal. It is

not that the Income-tax Department was helpless in

the matter. The person responsible to deduct the tax

at source would move into the shoes of the assessee

and he would be deemed to be an assessee in default.

Whatever process or coercive measures are

permissible under the law would only be taken

against such person and not the assessee.

15. However, the position as indicated above would

not mean that mere deduction of the tax amount at

source would amount to total discharge of the tax

liability so long as the amount deducted is not

deposited in the coffers of the Central Government. It

is for this reason Section 199 of the Income-tax Act

makes it clear that credit for tax deducted would be

given when the amount is deducted and paid to the

Central Government and a certificate of deduction is

produced as furnished under Section 203 of the

Income-tax Act. It is obvious that unless the amount

is paid to the Central Government, the tax liability is

not discharged, nor can it be said that the assessee

has made the payment of the tax amount payable to

the Government. We find no force in the submission

made on behalf of the petitioner-respondent that on

mere deduction of the amount at source, credit for

tax deducted must be given and it cannot be withheld

even though the person responsible to deduct the tax

at source has not made it over to the Central

Government. In our view, if that contention is

accepted that credit for tax deducted has to be given

on mere deduction of the amount at source, in that

event, perhaps, there would be no legal justification

to treat the person responsible to deduct the amount

at source as an assessee in default in respect of the

tax. Once credit on account of payment of tax is

given, the tax liability will stand discharged. Any step

to recover the amount of tax can be taken only in

case the tax liability is not discharged and it still

subsists. In this view of the matter, Shri K. P. Sarma,

learned counsel appearing for the Revenue, has

rightly defended the note appended by the Assessing

Officer in the order of assessment making it clear

that credit for the amount deducted was not being

given and that will be given only when evidence as to

actual payment of the amount to the Central

Government is furnished. But this position would not

legally justify initiation of recovery proceedings

against the assessee from whose income tax has been

deducted at source, but the person responsible to

deduct the tax fails to deposit the same in the

Government treasury. The statutory scheme evolved

to employ this mode of recovery of tax at source also

points to the same position and in our view rightly.

Otherwise a taxpayer from whose income tax is liable

to be deducted at source would be exposed to a great

vulnerable position. If some unscrupulous persons

responsible to deduct the tax at source, after

deducting the amount do not deposit the amount in

the Government treasury, such persons should be

saddled with the tax liability. Therefore, under

Section 201 of the Income-tax Act it has been aptly

provided that the person responsible to deduct the

tax would be deemed to be an assessee in default so

that he can be proceeded against for recovery of the

amount instead of the assessee who has already

parted with the amount, but due to some commission

or omission on the part of the person responsible to

deduct the amount at source over whose activity he

has no control, he may not be subjected to double

payment of tax and brunt of arduous recovery

proceeding. The provisions as contained in Section

201 of the Act provide a kind of protection to the

assessee where tax liability as standing against him is

not yet discharged and credit for the amount

deducted cannot be given in terms of Section 199 of

the Income-tax Act.

16. A perusal of Section 205 of the Income-tax Act

clarifies the position where it provides that where tax

is deductible at source, the assessee shall not be

called upon to pay the tax himself to the extent to

which tax has been deducted from that income. What

is noticeable in this provision is that its applicability

is not dependent upon the credit for tax deducted

being given under Section 199 of the Income-tax Act.

What is necessary for applicability of this provision is

that the amount has been deducted from the income.

In case where the amount has been deducted but not

paid to the Central Government that eventuality is

taken care of by Section 201 of the Income-tax Act.

Learned counsel for the appellant could not show

that under the law it may be permissible to proceed

against the assessee even after deduction of the tax

at source, nor learned counsel for the petitioner-

respondent could persuade us to hold that merely by

deduction of tax at source, credit for deduction of tax

at source has to be given even though the amount

may not have been made over to the Government

treasury. The reason for this has already been

explained by us in the discussion held in the earlier

part of this judgment as the mere deduction of tax at

source would not close the chapter of tax liability

unless it is deposited in the Government treasury.”

9. The facts being almost identical, no separate reasoning

are desirable and the petition is being ALLOWED. The

department is precluded from denying the benefit of the tax

deducted at source by the employer during the relevant

financial years to the petitioner.

10. It is given to understand by learned Senior Standing

Counsel Mr. Varun Patel that the proceedings have been

initiated against the employer.

11. The credit of the tax shall be given to the petitioner and

if in the interregnum any recovery or adjustment is made by

the respondent, the petitioner shall be entitled to the refund

of the same, with the statutory interest, within eight (8) weeks

from the date of receipt of copy of this order.

12. Petition is accordingly disposed of.

(SONIA GOKANI, J)

(NISHA M. THAKORE,J)