[Opinion] Bar on Direct Demand against Deductee – Jus in re

CMA Raji Nathani & CA Gopal Nathani – [2023] 149 taxmann.com 134 (Article)

The Delhi High Court in a landmark decision in Sanjay Sudan v. Asstt. CIT and another [2023] 148 taxmann.com 329/452 ITR 107 provided relief to an ex-kingfisher airlines employee in whose case taxes are deducted by the employer who defaulted in deposit of such TDS with the government. The Court prevented the department from recovering such TDS as well as also called upon the department not to make any adjustment of such amounts from any refunds due and payable in future. The judgement ruled:

“that neither could the demand in respect of the tax withheld by the deductor-employer be recovered from him, nor could such amount be adjusted against the future refund, if any, payable to the assessee. The Department was not entitled in law to adjust the demand raised for the assessment year 2012-13 against any other assessment year. The assessee was entitled to refund under section 237 in respect of the assessment year 2015-16.”

The revenue plea that since the withholding tax amount is not reflected in form 26AS, the demand shall remain outstanding and that it cannot be effaced is not acceded to by the Court who quashed the demand notice in this case.

This has been a case of Kingfisher Airlines Limited employee who is a well known defaulter. The initial efforts made by filing grievances even failed in this case.

In this case providentially following were marked:

A. The record showed that the withholding tax is reflected in form 16A (should be read as Form16) issued by the petitioner’s employer, i.e., Kingfisher Airlines Limited.

B. It has also come to knowledge of the revenue that Kingfisher Airlines Limited did not deposit the withholding tax and, hence, a demand amounting to Rs. 11,62,580 was raised by the respondents-Revenue, for the assessment year 2012-13.

On a similar issue, the Gujarat High Court, in the case of Kartik Vijaysinh Sonavane v. Dy. CIT [2021] 132 taxmann.com 293/[2022] 284 Taxman 278/440 ITR 11 (Gujarat), cancelled the demand raised upon an employee for the TDS amount not paid by his employer. Kartik was also a pilot in Kingfisher Airlines. Surprisingly, this case was not cited in Sanjay Sudan case (supra).

Also, Other than salary issue, in the case of deduction under sec 194I, The Karnataka High Court in the case of Smt. Anusuya Alva v. Dy. CIT [2005] 147 Taxman 152/278 ITR 206 also held that if the tenant has deducted tax from the rent but has not paid it to the Government, the only course open to the revenue is to recover the amount from the tenant who has deducted the tax and not from the landlord.

Like this there are several other cases of employer companies who step in or out of NCLT forums or Enforcement Directorate or CBI or income tax lead investigations where the revenue is seized of information on defaults in deposit of taxes deducted from individual employees but are not deposited by the employer. The affected employees of such companies may take shelter from this decision of the Delhi High Court in Delhi NCR jurisdiction though but to make such plea it would be hard for them to gather fact of deduction of tax by the employer in the absence of Form 16 in their possession as no employer would issue a certificate admitting taxes withheld but not deposited with the government. Often in such case there is no even payslip issued by the employer. On the other hand, for an employee to follow the course of a writ petition often would be cost ineffective.

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