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Facts
The assessee, a public sector bank, did not deduct TDS on LFC payments made to employees, considering them exempt. The AO treated the bank as a defaulter and raised demands. The CIT(A) upheld the AO's order, leading to the present appeal.
Held
The Tribunal held that the primary liability to pay tax lies with the employee, and the employer is merely a collection agent. The bank acted bonafide, and the revenue failed to demonstrate negligence or malafide. The employer cannot be held liable when the employee is primarily responsible for tax payment.
Key Issues
Whether the assessee-bank can be treated as a defaulter for non-deduction of TDS on LFC payments when the primary liability lies with the employee and the bank acted bonafide?
Sections Cited
201, 201(1A), 191, 4, 190
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, JAIPUR BENCH “SMC”, JAIPUR
Before: SHRI GAGAN GOYAL & SHRI NARINDER KUMAR
This appeal by assessee is directed against the order of CIT(A), Prayagraj dated 30.09.2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -
1. Under the facts and circumstances, the Hon'ble CIT (Appeals) erred in confirming the order dated 29.03.2023, as the reference number (DIN) was affixed manually which is in violation of the CBDT Circular No. 19/2019 dated 14th August, 2019. Thus, the proceedings and order were not in accordance to CBDT Circular and judicial pronouncements and therefore, the action of the Ld. A.O. was illegal and therefore deserves to be quashed or set aside.
2. Without prejudice to the GOA-1, under the facts and circumstances of the case, the Hon'ble CIT (Appeals) erred in confirming the demand raised by the Ld. AO on the assessee-in-default (deductor bank) during the pendency of the SLP No. 16734/2023 & stay order wherein the assessee-bank is bound to not to make any recoveries from the employee. Thus, the assessment order passed u/s 201/201(1A) of the Act deserves to be quashed and set-aside.
3. Without prejudice to the GOA-1 to 2, under the facts and circumstances of the case, the Hon'ble CIT & the Ld. AO erred in not considering the fact that the assessee-deductor bank is bound by the orders of the Hon'ble High Court & Apex Court during the matter in pendency and therefore, taking any action by them would have resultant to contempt of court. However, during the proceedings before the Hon'ble Courts, the department is nowhere bound to issue any notice to any of the employees who actually enjoyed the benefit of LTC and initiating proceedings solely on the assessee-bank is against the Principle of Natural Justice. Thus, the assessment order passed u/s 201/201(1A) of the Act deserves to be quashed and set-aside.
4. Without prejudice to the GOA-1 to 3, under the facts and circumstances of the case, the Hon'ble CIT (Appeals) erred in confirming the order passed by the Ld. AO and considering the bank as assessee-in-default despite knowing the fact that the bank is under this bonafide belief of not deducting the TDS amount in LTC due to the bank circulars and not initiating any proceedings against the "assessee-employee who was liable to pay the tax liability on the benefit of LTC, in terms of the provisions of the Act which creates the equal responsibility on the assessee-employee in respect of Section- 4(1) i.e. charge of income r.w.s sections-190 and section-191(1). Thus, considering the provisions stated herein above, the bank cannot be treated as the assessee in default and therefore, the assessment order deserves to be quashed and set-aside.
5. Without prejudice to the GOA-1 to 4, under the facts and circumstances the Hon'ble CIT (Appeals) erred in confirming the order wherein the Ld. A.O. passed the order without referring the legal position, arithmetic calculation for tax payable. The Ld. A.O. also not followed the principal of natural justice and held bank as responsible and treated as assessee in default.
The appellant reserves his right to add, alter, modify, or delete any grounds of appeal.
2. The brief facts of the case are that the assessee deductor is a public sector bank. Information received from DCIT, TDS (Circle) 2(2), Mumbai, dated: 17.03.2023 revealing that during the year under consideration, the deductor had made payments to its employees under the head LFC and no TDS was deducted on such payments. Accordingly, a notice was issued on 18.03.2023 and it was asked to furnish the details of LFC payments made during the F.Y. 2015-16. The assessee furnished the details of the employees along with the amount of LFC payments made vide para 2 of the AO’s order. Total payments under the head LFC were made to the tune of Rs. 9, 79,968/- The assessee deductor had not deducted any TDS on these LFC payments by treating the same as exempt in the hands of the employees. As the assessee was non-compliant before the AO, ultimately after issuance of final show cause notice, matter of the assessee was adjudicated treating the assessee as defaulter for the purposes of section 201(1) and 201(1A) of the Act and demand were created to the tune of Rs. 3,02,810/- and 2,90,698/- respectively. The assessee being aggrieved with the same preferred an appeal before the Ld. CIT (A), who in turn dismissed the Appeal of the assessee deductor and confirmed the order of the AO. The assessee being further aggrieved preferred the present appeal before us.
3. We have gone through the order of the AO, order of the Ld. CIT (A) and submissions of the assessee along with grounds taken before us. The assessee in its submissions before us put light on very important facts relevant to decide the matter. Before that we would like to emphasize that the settled principle is payer cannot be held liable for payment of the tax demand in cases involving non- deduction of tax at source and only interest liability under section 201(1A) of the Act, if any, can be levied in such cases. The coordinate Mumbai Bench in the case of Vodafone Essar Limited (ITA Nos. 6058, 6059, 6060/Mum/2009), wherein, this Tribunal directed the assessing officer to invoke his powers under the Act and verify payment of taxes by the payees from the respective Assessing Officers assessing the payees with the help of the PANs of the payee furnished by the Appellant. Here in this case also the relevant information w.r.t. beneficiaries are there with the department and certainly they are liable for ultimate tax liability and not the assessee.
4. As a matter of procedure and for simultaneous recovery of revenue a duty has been cast on the employer to deduct T.D.S. that does mean that he is liable to pay due taxes of the employee. The ultimate duty by virtue of section 4 of the Act is casted upon the actual beneficiary of the income; employer is just an instrumental media to collect revenue in the form of T.D.S. In the present matter it is not demonstrated before us that how the department has proceeded against the beneficiary employees. Rather, as a matter of convenience, they are chasing the employer bank. The provisions of section 201 of the Act are attracted in the case of an employer only when that employer does not deduct or, after deducting, fails to pay the tax as required by the Act. It was further held that the said section requires an employer to deduct and pay tax on the estimated income of his employee. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly. Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee. None of the employer would like to invite trouble for his employees and will always like to comply to the extent possible with tax laws. In this case also, the revenue is failed to demonstrate any negligence or malafide at the end of the deductor assessee.
The Delhi High Court in the case of CIT v. Delhi Public School [2011] 15 taxmann.com 107/203 Taxman 81 (Delhi)) has held that when TDS has been deducted on "estimated income " of the employee, the employer was not expected to step into the shoes of the Assessing Officer and determine the actual income. Furthermore, under Section 191 of the Act the liability to pay the tax was that of the employee, and that while forming this opinion the employer was undoubtedly expected to act honestly and fairly and, therefore, if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly as held in the decision of Gwalior Rayon Silk Co. Ltd. (supra). Unless that inference can be reasonably raised against an employer, no fault can be found against him and it cannot be held that he has not deducted tax on the estimated income of the employee.
In this matter the AO himself received the information from the DCIT, TDS (Circle) 2(2), Mumbai, dated: 17.03.2023 revealing the whole matter and then the AO proceeded by issuing notice on 18.03.2023. Here it is pertinent to discuss timing and gap involved. The matter pertains to the F.Y. 2015-16 and pursued by the revenue on fag end, i.e. 18.03.2023. Here we deem it fit to raise a question before the revenue about the justification of time lag of seven years, which is not at all reasonable. Here department has to explain when they actually came to know about the matter and why they have not chased the beneficiary assessee, why the deductor assessee being a bank is looked to be an easy target for recovery. The Action of the AO (TDS) is not at all logical and in consonance with the spirit of the provisions of section 201 of the Act and related sections. It is also brought to our notice that there was a spot survey on the deductor assessee on 19.02.2014 but the notices u/s. 201(1) and 201(1A) of the Act was issued only after receiving the information from the DCIT, TDS (Circle) 2(2), Mumbai, dated: 17.03.2023. Why the matter was not examined for this F.Y. also, when the matter was examined for F.Y.s 2012-13 and 2013-14.
The scheme of the assessment proceedings can’t be equated with the scheme as envisaged in section 201(1) and 201(1A) of the Act. The liability of the deductor u/s. 201(1) of the Act is not automatic, the department must verify and bring on record, whether action against the beneficiary has been initiated and due taxes by them have been paid or not. If the deductee had paid taxes, this will automatically absolve the deductor and if not still, the deductee is liable to pay as per section 4 of the Act.
Without being prejudice to the above factual and legal observation, it is also brought to our notice (Before the Ld. CIT (A) also) that the SLP (C) No. 16734/2023 is pending before the Hon’ble Apex Court, wherein the Hon’ble Apex Court has restrained the deductor Bank from making any recovery from its beneficiary employees during the pendency of the SLP mentioned (supra). In this SLP Ld. Commissioner of Income Tax (TDS), Chennai is also a party as respondent no. 5. There was a stay on the bank from recovering amount from its employees but there is no restriction as such on the Revenue to proceed against the beneficiary employees. How it can be justified that the beneficiary who enjoyed the perks is nowhere in picture and facing no heat, where as the employer is being dragged for his tax of recovery. In view of this discussion and observation of the bench Ground Nos. 2, 3, 4 and 5 are allowed and the order of the AO (TDS) is quashed alongwith the confirmatory order of the Ld. CIT (A). Ground No. 1 raised by the assessee is dismissed as there are contradictory views on the same and matter is sub-judice before the Hon’ble Apex Court.
In the result the appeal of the assessee is partly allowed.
Order is pronounced in the open court on the 13th Day of March 2025.
Sd/- Sd/- (NARINDER KUMAR) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Jaipur, िदनांक/Dated: 13/03/2025 Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. आयकर आयु� CIT 3. 4. िवभागीय �ितिनिध, आय.अपी.अिध., Sr.DR., ITAT, 5. गाड� फाइल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar) ITAT, Jaipur
Details Date Initials Designation 1 Draft dictated on PC on 13.03.2025 Sr.PS/PS 2 Draft Placed before author 13.03.2025 Sr.PS/PS 3 Draft proposed & placed before the Second JM/AM Member 4 Draft discussed/approved by Second Member JM/AM 5. Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS/PS 7. File sent to the Bench Clerk Sr.PS/PS 8 Date on which the file goes to the Head clerk 9 Date of Dispatch of order