Employees liable to Tax If Employer Deducted TDS but Did not Deposit: Kerala HC Dismisses Writ Appeals [Read Order]

The Kerala High Court has held that employees can be made liable to pay income tax even if their employer had deducted TDS ( Tax deducted at Source) from salary but failed to deposit the same with the Income Tax Department.

Justice Dr. A.K. Jayasankaran Nambiar and Justice Jobin Sebastain, noting Bombay High Court’s ruling in Aslam Checkar v. Income Tax Officer which stated that “since the amounts deducted as TDS from the salaries paid to them had not been remitted by the employer to the Central Government/Income Tax Department, the appellants could not be granted the relief of a direction to the Income Tax Department to grant credit to the extent of tax deducted from their salaries by the employer concerned.”

The appeals were filed by the employees of Attinad Software Pvt. Ltd. The employees challenged the decision of the Single bench. The income tax department raised a demand during completion of their individual assessments.

The employees contended that their employer had deducted amounts as TDS from their salaries, but did not remit the deducted amounts to the Department. Therefore, it had denied the credit.

The demand stated that the employees had to pay the tax again. The employees approached the High Court contending that once TDS was deducted from their salaries, they could not be forced to pay the same amount again.

Section 205 ofthe Income Tax Act, 1961 bars direct demand of tax from an assessee in cases where tax is deductible at source, said the appellants before the court.

They argued that since TDS had already been deducted from their salaries, the Department was prohibited from raising demand against them to the extent of such deducted amount.

On the initial writ petition of this case, the Single Judge, while dismissing the writ petitions, examined Sections 199 and 205.

The bar by Section 205 would only apply in cases where tax deduction at source had taken place in the manner specified by the Act, including payment to the Central Government.

According to the single bench, since the employer had not deposited the deducted tax, the Department could not be directed to grant TDS credit to the employees at the time of finalisation of assessments.

The division bench, in this writ appeal, agreed with the observations of the single bench.

The court noted that Section 205 starts with the phrase “where tax is deductible at source under the foregoing provisions of this Chapter”, and the prohibition can arise only when the deduction and fulfilment are made as per Sections 192 and 199.

Section 199 mandates that credit for TDS can be granted only if the tax has been deducted and paid to the Central Government, said the court. Therefore, where the employer has deducted TDS from salary but has not deposited it, employees cannot insist on TDS credit as a matter of right.

The Bench also clarified that the demand raised by the Department was not a “direct demand of TDS” as such, but a demand of tax payable upon completion of assessment, which ordinarily gets adjusted against available TDS credit.

In the present case, since no credit was available due to non-remittance by the employer, the employees were called upon to pay the assessed tax liability.

The Court further noted that the appropriate remedy for employees is to proceed against their employer to recover the portion of salary that was short-paid under the pretext of TDS deduction.

The Division Bench further stated that the Single Judge had protected employees by stating that in the case that the Department later recovered any money from the company, the employees should receive the appropriate credit and the demand would be reduced or removed to that degree.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates