When your employer defaults on TDS payment

It's July again, the time of the year when every taxpayer has to discharge his/her obligation of filing annual returns.

For most salaried people, the process is essentially straight, whereby the details of salary income and the taxes deducted thereon every month is furnished to the Income Tax (I-T) Department in the prescribed form and, more often than not, there is no additional tax payable by the employee.

But, what if the taxes deducted at source (TDS) from an employee's salary is not paid by the company into the government treasury? In such a case, can the department recover the tax amount (along with the applicable interest and penalties) from the employee?

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There was a case in this regard, decided some time earlier by the high court at Mumbai in the case of taxpayer Yashpal Sahni versus assistant commissioner, I-T. Sahni was paid salary along with other benefits after a total TDS of Rs 666,000.

Accordingly, in his return for the said year, the payer filed the return of income after claiming credit for the TDS as above.

When the returns were processed by the I-T officer, the credit for TDS was denied and a total demand of about Rs  12,73,000 (including tax and interest under various provisions) was raised.

Sahni applied for rectifying the said demand, saying the TDS amount so deducted from his salary should be recovered from the company and, in any event, the credit for the TDS along with the interest could not be recovered from him.

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However, the department further imposed a penalty on Sahni, raising the total demand to about Rs  17,90,000. In response, Sahni appealed to the high court.

During the proceedings, the taxpayer's representative argued that once the company had deducted TDS from the salary, this could not be recovered from the former.

It was the duty of the deductor to provide the TDS certificate to the taxpayer, to enable him to claim credit for the TDS so deducted. The I-T Act has the necessary provisions to levy and recover interest from the company for the period the TDS was deducted but not deposited in the government account.

It could also levy a penalty and the company was liable to punishment under the Act.

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Verdict and Why

The court said it was the employer's responsibility towards employees to deduct the applicable tax at source on their income at the applicable rates. Further, such taxes had to be paid to the credit of the central government within the prescribed time limit.

In case the company defaulted on depositing the TDS collected, it shall be liable to pay interest at the prescribed rate on the tax amount.

Also, the Act had enough provision to both punish the defaulter and recover the TDS from the person who had deducted it.

The HC also noted Section 205 of the I-T Act said that where tax was deductible at source, the taxpayer shall not be called upon to pay the amount himself to the extent of deduction.

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The court deduced from the language of this section that once it was established that the tax had been deducted at source from the salary of the employee, the bar under Section 205 comes into operation.

It matters not whether the tax deducted at source was paid to the central government or not, because elaborate provisions are made under the Act for recovery of TDS from the person who did the deduction.

In this case, Sahni had furnished monthly pay slips and bank statements to show that the employer had deducted taxes at source from his salary; the department hadn't disputed this.

In the absence of the TDS certificate being issued to the taxpayer, said the court, it may not be possible to give credit for the TDS to him. Still, if he was made to pay the tax again, it would amount to double taxation, which was illegal.

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The fact that the employer had not issued the TDS certificate to the employee did not mean the liability ended. The liability to pay income tax, if deducted at source, was on the employer.

And, even if the credit of the TDS amount was not available to the taxpayer for want of the TDS certificate, the fact that the tax had been deducted at source from his salary would be sufficient to ensure the department could not recover the amount with interest from him again.

The department was asked to refund the demand amount paid by the former (at the time of filing the appeal to the court), along with the prescribed interest.

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This case should be noted by taxpayers. To summarise:

- Preserve your monthly pay slips till at least the time you get Form 16 for the year;

- If Form 16 isn't received, you can file your returns on the basis of the pay slips;

- The employee can get credit for the TDS if deducted, even if Form 16 is not available;

- The employee need not worry about paying taxes again on the income just for want of Form 16.

The writer is a certified financial planner.