Gujarat High Court Rules: Employees Cannot Be Taxed for Employer’s Failure to Deposit Deducted TDS
In a significant relief to salaried professionals facing recovery proceedings due to the financial mismanagement of their employers, the Gujarat High Court has reinforced the principle that an assessee cannot be penalized for the non-deposit of Tax Deducted at Source (TDS) by the deductor.
The High Court, in the case of Arpit Pravinbhai Shah Vs ACIT, quashed the income tax demands raised against a former pilot of Kingfisher Airlines. The Court held that once tax is deducted from the salary, the liability shifts to the employer, and the Department must pursue the employer for recovery rather than harassing the employee.
The Core Dispute: TDS Deducted but Not Deposited
The tax machinery in India operates heavily on the mechanism of TDS. Under the Income Tax Act 1961, an employer is statutorily mandated to deduct tax from an employee's salary and deposit it into the Central Government's account. However, complications arise when the employer deducts the amount but fails to remit it to the exchequer.
In the instant case, the petitioner, Mr. Arpit Pravinbhai Shah, was employed as a pilot with Kingfisher Airlines. For the Assessment Years (AY) 2009-10 to 2012-13, the airline deducted tax from his salary. The petitioner, relying on the Form 16 issued by the employer, filed his Income Tax Returns claiming credit for the TDS.
The specific amounts deducted were:
- AY 2009-10: Rs. 6,28,551
- AY 2010-11: Rs. 14,80,466
- AY 2011-12: Rs. 14,17,015
- AY 2012-13: Rs. 20,68,596
Despite the deduction, the employer failed to deposit these amounts with the Government. Consequently, the Income Tax Department’s automated systems detected a mismatch between the tax credit claimed by the assessee and the tax credit available in the government records. This led to the issuance of demand notices and intimations under Section 143(1). Furthermore, when the assessee sought refunds for subsequent years (AY 2016-17), the Department issued an intimation under Section 245, proposing to adjust the refunds against the outstanding demands created due to the non-deposit of TDS.
The Assessee’s Contention
The petitioner approached the High Court seeking a writ of certiorari to cancel the outstanding demands and the intimation under Section 245. The primary arguments advanced by the assessee were: