Future refunds can not be adjusted for TDS mismatch – High Court quashes demand

Future refunds can not be adjusted for TDS mismatch in terms of Section 205 of the Income Tax Act 1961

ABCAUS Neutral Case Law Citation:
ABCAUS 3674 (2023) (02) HC

In the instant case, the assessee had filed a Writ Petition before the Hon’ble High Court challenging the non payment of refund due to set-off against the tax demand raised.

For the relevant Assessment Year, the employer of the Petitioner had deducted tax at source (TDS) on salary income. The said deduction was reflected in salary certificate/Form 16 issued by the employer.

However, the employer did not deposit the tax deducted to the credit of the Government and, hence, a demand  was raised by the Income Tax Department against the Petitioner.

Because of the outstanding demand the refund payable to the Petitioner for subsequent assessment year was not paid to him, and instead, set-off against the said demand.

When the Petitioner raised the grievance before the Revenue Authorities, it was stated that since the tax  amount was not reflected in Form 26AS, the demand shall remain outstanding.

Before the Hon’ble High Court the petitioner stated that said set-off virtually amounted to compelling him to pay the demand, which was not recoverable from him, as per the provisions of Section 205 of the Income Tax Act, 1961 (the Act).

In support of this plea, the petitioner placed reliance on the CBDT instruction dated 01.06.2015

The Revenue contended that the credit for tax can only be given in terms of Section 199 of the Act, when the amount is received in the Central Government account.

The Hon’ble High Court observed that Section 205 read with CBDT instruction dated 01.06.2015, clearly provide the direction that the deductee/assessee cannot be  called upon  to  pay  tax,  which  has  been  deducted  at source from his income.

The Hon’ble High Court opined that the adjustment of demand against future refund amounts to an indirect recovery of tax, which is barred under Section 205 of the Act.

The Hon’ble High Court also opined that the CBDT instruction merely provides that no coercive measure will  be  taken against  the  assessee, which falls short  of what is put in place by the legislature via Section 205 of the Act.

Accordingly, their Lordships held that petitioner was right inasmuch as neither can the demand qua the tax withheld by the deductor/employer be recovered from him, nor can the same amount be adjusted against the future refund, if any.

As a result, the Hon’ble High Court quashed the demand notice holding that the revenue are not entitled in law to adjust the demand against any other Assessment Year.

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