Is it fair to Initiate Recovery Proceedings When Tax is Already Deducted?

One and major mode of collection of tax preferred by the Department is through Tax Deduction at Source — TDS. The other mode is to collect taxes directly from the assessee — this is used where tax deduction is not provided for or TDS is not enough to meet the tax liability — advance tax and other modes of collection prescribed in Chapter XVII. In the recent years the Income Tax Department has pursued vigorously the TDS mode of collection of taxes by extending the areas of Tax Deducted at Source — refer section 192 to section 206 of the Act.

Section 205 grants protection to the deductee assessee. This is a logical step on having adopted ‘Tax Deducted at Source’ mechanism. The section reads as under:

“205. Bar against direct demand on assessee. — Where tax is deductible at the source under (the foregoing provisions of this Chapter), the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”

The Plain reading of this section makes it clear that whenever and wherever tax is deductible under the provisions of this Chapter and where the tax has been so deducted, no direct demand can be raised on the deductee. This implies that to the extent of TDS, demand cannot be raised on the deductee. For raising demand on the deductor a suitable provision has been inserted in section 201 of the Act. Under this provision whenever there is a default in deducting either the whole tax or part of the tax the deductor is deemed to be an ‘assessee in default’.

Thus there are self-contained foolproof provisions in the Act to protect the deductee under Chapter XVII.

The Act provides for filing of returns of income by individuals, trusts and businesses wherein the assessee has to provide detailed information regarding the name and address of the deductor, along with the TAN of the deductor and the amount of tax deducted at source based on the certificate issued by the deductor in Form 16A. Under the previous rules these certificates were to be attached with the return of income. However, in the present era of computerisation, the tax credits can be viewed under Form 26AS online. These returns of income are also affirmed by the assessee by verification provided in the form of return of income. Thus he is held responsible for claims of tax credits he is making.

After the deductee has filed the return and complied with all the formalities, no demand can be raised against the assessee for the amount of Tax Deducted at Source.

Reality

In this case the assessee was a salaried employee and the tax deducted at source by his employer was not paid to the Government. Hence even Form No. 16 was not issued to the employee. At the time of assessment the employee produced all the proofs including salary slips to prove that ‘tax was deducted’. The Assessing Officer without paying any attention to the legal provisions u/s. 205 referred above, raised a demand on the employee and even issued order for attaching employee’s bank account. The employee-assessee even wrote letters to Income-tax Officer, TDS circle of the employer to initiate necessary proceedings against the employer. The employee challenged the action of Assessing Officer of attaching his bank account. The Court rightly held that the action of the Assessing Officer was not as per law and even if the credit of the TDS is not available to the petitioner-assessee for want of TDS certificate, the fact that the tax has been deducted at source from salary income of the petitioner would be sufficient to hold that u/s.205 of the Act, the Revenue cannot recover the TDS amount with interest from the employee. While dealing with this judgment the Court also referred and relied upon decisions reported in 242 ITR 638 (Gauhati) and 278 ITR 206 (Kar.).

Without paying any heed to such crucial decisions the Department continues its unlawful actions against thousands of assessees, mostly salaried. As a result, assessees having salary income continue to receive intimations under the section 143(1) with demands calculated along with interest and have to file rectification applications either themselves or through their chartered accountants or lawyers or ITP’s. As is the practice, the Department does not act on these rectification applications and keep on sending illegal demand notices to the employee-assessees, irrespective of the fact that there is bar against raising direct demand on the employee. Unfortunately, at times the professionals involved also do not point out the provisions of section 205. This unlawful practice continues unabated leading to harassment of the assessee and results in corruption. This author has not seen any indirect demand on the employer deductor raised by the Income-tax Department under such circumstances. However, the employees are made to dance to the tune of recovery officers and at times suffer at the half-baked computer system of the Department.

Very recently the matter again came up before the Bombay High Court in writ petition No. 6861 of 2011. The Court vide its order clearly held that the intimation demand is not correct and hence set aside the same.

Although procedural, section 205 grants protection to the employee (deductee) whose tax is fully deducted but unfortunately they are still made to visit incometax offices for no fault of theirs and in blatant violation of the legal provisions. The irony is that even the newly created CPC Bangalore has continued this unlawful practice.

This author has drawn the attention of the regulator i.e., the CBDT to stop this harassment. This step will be in the interest of the Department because of its avowed objective of being ‘assessee friendly’.

In all fairness the author advocates and expects the CBDT to issue proper instructions urgently to its officers to:

• desist from attaching assets of the deductee.

• take action against the deductor.