Opinion Of Eminent Legal Luminaries On Controversial Issues

Can Demand Be Made From Deductee If TDS Has Not Paid By Deductor?

QUERY: A demand has been raised on ‘X’ for the short credit in 26AS in respect of TDS deducted by the deductor but not paid to the Government. Whether ‘X’ is liable to pay the demand.
ANSWER: Section 205 of the Income-tax Act, 1961 provides that in case tax is deductible at source under chapter XVII of the Act, the assessee shall not be called upon to pay the tax himself to the extent of the deduction so made irrespective of the fact whether the tax so deducted has been actually deposited with the Government by the payer.

The Karnataka High Court in Smt. Anusuya Alva v. SCIT [278 ITR 206] has held that once deduction was made, the revenue was expected to look to the person who had deducted the tax for realising the amount, if such person failed to remit the amount to the Central Government, the consequence shall fall only on the Revenue and cannot be forced on the assessee. The deduction was under the statutory obligation and on behalf of the Revenue. Section 205 provides a protection to the assessee and to prevent the Revenue from embarking on the recovery proceedings in respect of such amount. The word “deduct” accruing in the said section can not be understood “deducted and remitted”. Even on the general principles of law, the law of principal and agent, for a default of the agent of the Revenue, the assessee who was third party in relation to such relationship could not be penalised. The only course open to the Revenue was to recover the amount from the very person who had deducted and not from the assessee.

In Yashpal Sahani v. Rekha Hajarnavis ACIT [293 ITR 539] the Bombay High Court, further held that complete machinery is provided under the Act for recovery of TDS from the person who has deducted such tax at source and the Revenue was barred from recovery of the amount from the person from whose income tax has been deducted at source.
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