Introduction
The Hon’ble Delhi High Court, in the case of Satwant Singh Sanghera v. Assistant Commissioner of Income-tax[i], addressed the critical issue of an employee liability when an employer deducts tax at source (‘TDS’) but fails to deposit it with the tax authorities. The Court deliberated on whether the Revenue could recover such TDS directly from the employee in view of s. 205 of the Income-tax Act, 1961 (‘Act’). This judgement delves into the respective obligations of employers and employees in such situations, offering significant relief to employees unfairly burdened by employer non-compliance.
Brief Facts
The Petitioner, Mr. Satwant Singh Sanghera, was employed as a co-pilot with Kingfisher Airlines Ltd (‘KIL’) from 01.04.2008 to 15.12.2011. During this period, KIL deducted TDS from his salary as required by law, with the deductions reflected in Form 16A issued by KIL. Despite deducting TDS, KIL failed to deposit the amounts with the tax authorities. The deducted TDS, however, was documented in Form 16A issued to the Petitioner.
The Revenue subsequently raised a tax demand of Rs. 11,07,970/- (inclusive of interest) vide notices dated 10.01.2019 and 09.11.2023, under s. 245 of the Act. These demands pertained to the assessment years (‘AYs’) 2009-10, 2010-11, and 2011-12, corresponding to the unpaid TDS that KIL had failed to deposit.
While the Petitioner accepted and paid a demand of Rs. 42,070/- for AY 2017-18, he challenged the demands for the earlier AYs. The Petitioner argued that under s. 205, he could not be held liable for TDS already deducted from his salary. He further relied on Central Board of Direct Taxes (‘CBDT’) instructions dated 01.06.2015[ii], which clarify that employees should not be held accountable for an employer’s failure to deposit TDS.
Held
The Delhi High Court quashed the recovery demands against the Petitioner, ruling that the tax authorities could not directly recover the unpaid TDS from him. The Court relied on the principles established in Sanjay Sudan v. Assistant Commissioner of Income Tax and Another[iii], emphasising the protection afforded to employees under s. 205 of the Act. The Court reiterated that once TDS is deducted, the responsibility to deposit it lies solely with the employer. Consequently, the employee is absolved of liability for non-payment by the employer.
Our Analysis
This judgment by the Delhi High Court provides a progressive interpretation of employee rights in the context of TDS compliance. By reaffirming the protective ambit of s. 205, the Court has shielded employees from unjust penalties due to their employer’s non-compliance.
The Court’s reasoning builds on the principles established in Sanjay Sudan (supra). In that case, the Court held that s. 205 prevents both direct and indirect recovery of unpaid TDS from employees. It clarified that adjusting a taxpayer’s refund to offset unpaid TDS constitutes indirect recovery, which is equally barred by s. 205 of the Act. The legislative intent behind s. 205, as interpreted by the Court, is to place the responsibility for TDS compliance squarely on the deductor/employer and not on the deductee/employee. Furthermore, the Court highlighted in Sanjay Sudan (supra) that CBDT’s 2015 instructions align with this principle by protecting coercive measures for recovering unpaid TDS from employees. Therefore, the Delhi High Court had already laid down in that case that what the Revenue cannot do directly – recover TDS from employees – cannot be achieved indirectly through refund adjustments or similar mechanisms.
For employees, particularly those in middle-income or lower-income brackets, being held liable for their employer’s failure to remit TDS can result in severe financial hardship. This judgment not only alleviates such undue burdens but also highlights the judiciary’s role in addressing the practical difficulties faced by taxpayers. By fortifying the precedent set in Sanjay Sudan (supra), the Delhi High Court has ensured consistent judicial protection for employees in cases of unpaid TDS, setting a strong precedent for future disputes.
End Notes
[i] [2024] 167 taxmann.com 713 (Delhi)[01-10-2024].
[ii] CBDT Instructions No. 275/29/2014-IT-(B) dated 01.06.2015.
[iii] (2023) 1 HCC (Del) 237: (2023) 452 ITR 107: 2023 OnLine Del 1160: (2023) 331 CTR 797.
Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.