The deductor deducted my tax and never deposited it. The Assessing Officer says he cannot give me credit until the money reaches the treasury, and has attached my bank account. Is he right on both counts?
He may be right on the first and is wrong on the second. This is the foundational decision holding that s.205 bars any recovery from the deductee once tax has in fact been deducted, whether or not the deductor paid it over - the garnishee notices under s.226(3) were quashed - while at the same time holding that credit under s.199 is contingent on the tax being paid to the Central Government, so the Assessing Officer's note withholding credit until proof of payment was allowed to stand.
Decided by the High Court (Brijesh Kumar CJ and D. Biswas J) on 2000-01-04, reported as [2000] 242 ITR 638 (Gauhati); writ appeal from the judgment of the single judge dated 2 August 1996 in Civil Rule No. 1487 of 1991, reported at [1996] 222 ITR 489. It bears on section 205, section 199, section 201, section 203, section 194B, section 200, section 226(3) of the Income Tax Act 1961, in TDS Defaults, Demand, Recovery & Stay and How Tax Law Is Read matters.
The Gujarat line - Sumit Devendra Rajani, Devarsh Pravinbhai Patel and Kartik Sonavane, the last of which reproduces paras 13 to 16 of this judgment verbatim - rests on this decision, so it is worth citing at source rather than at second hand; whether the other decisions in this field (Yashpal Sahni, Anusuya Alva, Sanjay Sudan) cite it was not checked. But read it for what it actually decided: the Court split the question in two. The bar on recovery in s.205 is absolute and does not depend on credit being given under s.199. The right to credit is not. Later High Courts have gone further and directed credit to be given, and in practice that is the relief a deductee should ask for; but if the department pleads Gattani against you on the credit limb, the answer is the later authority, not a misreading of this one. The distinction also explains why s.205 relief is available even in a year for which no Form 16A exists: s.205 turns only on deduction having happened.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee won lottery prizes of Rs.10,50,000 and Rs.18,000 in the period relevant to AY 1986-87. The payer, Chandra Agencies, deducted Rs.2,62,500 and Rs.4,500 at source under s.194B and issued certificates under s.203, but did not deposit the money in the Government treasury; asked for the date of payment, it replied that the records had been sent to the chairman of Vaibhavshali Bumper. The Assessing Officer completed the assessment on 14 August 1986 with a note that credit for the deducted tax would be given only when evidence of actual payment was produced. On 20 February 1991 two notices under s.226(3) were issued to the assessee's bankers to realise Rs.2,35,479. The single judge quashed the officer's order as contrary to s.205; the Revenue appealed. It was never the Revenue's case that deduction had not in fact occurred - its objection was that the certificates were incomplete and that credit could follow only on the money reaching the Central Government.
The appeal succeeded only in part. The Assessing Officer's note declining credit under s.199 until proof of payment to the Central Government was restored, and the single judge's order set aside to that extent. The quashing of the s.226(3) notices dated 20 February 1991 was maintained: recovery could be pursued only against the person responsible for deducting the tax, as an assessee in default under s.201, and not against the deductee (paras 14, 16 and 17).
The deductee does nothing in the transaction except accept payment of the reduced amount; the obligation to deposit is the deductor's, and the deductee has no control over him. Where the amount has been deducted and not made over, the statutory answer is s.201, which deems the deductor an assessee in default so that coercive process runs against him. Deduction at source is only one mode of recovery of tax, and once that mode has been adopted and the deduction made, the deductee cannot be subjected to a second mode and made to pay twice (para 14). Credit under s.199, however, is by its terms given where the tax is deducted 'and paid to the Central Government' on production of the s.203 certificate; if credit followed on mere deduction, the tax liability would stand discharged and there would be no justification for treating the deductor as an assessee in default at all (para 15). Section 205 is different in kind: its applicability is not dependent on credit being given under s.199, and all it requires is that the amount has been deducted from the income; the case of deduction without payment is taken care of by s.201 (para 16).
The assessee cannot be doubly saddled with the tax liability.
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Handle my notice → Ask a CA on WhatsAppHe may be right on the first and is wrong on the second. This is the foundational decision holding that s.205 bars any recovery from the deductee once tax has in fact been deducted, whether or not the deductor paid it over - the garnishee notices under s.226(3) were quashed - while at the same time holding that credit under s.199 is contingent on the tax being paid to the Central Government, so the Assessing Officer's note withholding credit until proof of payment was allowed to stand. This was decided by the High Court (Brijesh Kumar CJ and D. Biswas J) and bears on section 205, section 199, section 201, section 203, section 194B, section 200, section 226(3) of the Income Tax Act 1961. It is reported as [2000] 242 ITR 638 (Gauhati); writ appeal from the judgment of the single judge dated 2 August 1996 in Civil Rule No. 1487 of 1991, reported at [1996] 222 ITR 489. The Gujarat line - Sumit Devendra Rajani, Devarsh Pravinbhai Patel and Kartik Sonavane, the last of which reproduces paras 13 to 16 of this judgment verbatim - rests on this decision, so it is worth citing at source rather than at second hand; whether the other decisions in this field (Yashpal Sahni, Anusuya Alva, Sanjay Sudan) cite it was not checked. But read it for what it actually decided: the Court split the question in two. The bar on recovery in s.205 is absolute and does not depend on credit being given under s.199. The right to credit is not. Later High Courts have gone further and directed credit to be given, and in practice that is the relief a deductee should ask for; but if the department pleads Gattani against you on the credit limb, the answer is the later authority, not a misreading of this one. The distinction also explains why s.205 relief is available even in a year for which no Form 16A exists: s.205 turns only on deduction having happened. If it applies to you, the first step is this: Plead s.205 as a bar on recovery independently of any claim to credit - the two arguments are separate and the s.205 one is the stronger.
The assessee won lottery prizes of Rs.10,50,000 and Rs.18,000 in the period relevant to AY 1986-87. The payer, Chandra Agencies, deducted Rs.2,62,500 and Rs.4,500 at source under s.194B and issued certificates under s.203, but did not deposit the money in the Government treasury; asked for the date of payment, it replied that the records had been sent to the chairman of Vaibhavshali Bumper. The Assessing Officer completed the assessment on 14 August 1986 with a note that credit for the deducted tax would be given only when evidence of actual payment was produced. On 20 February 1991 two notices under s.226(3) were issued to the assessee's bankers to realise Rs.2,35,479. The single judge quashed the officer's order as contrary to s.205; the Revenue appealed. It was never the Revenue's case that deduction had not in fact occurred - its objection was that the certificates were incomplete and that credit could follow only on the money reaching the Central Government. The matter was decided on 2000-01-04 by the High Court (Brijesh Kumar CJ and D. Biswas J). On those facts the High Court held as follows. The appeal succeeded only in part. The Assessing Officer's note declining credit under s.199 until proof of payment to the Central Government was restored, and the single judge's order set aside to that extent. The quashing of the s.226(3) notices dated 20 February 1991 was maintained: recovery could be pursued only against the person responsible for deducting the tax, as an assessee in default under s.201, and not against the deductee (paras 14, 16 and 17).
The deductee does nothing in the transaction except accept payment of the reduced amount; the obligation to deposit is the deductor's, and the deductee has no control over him. Where the amount has been deducted and not made over, the statutory answer is s.201, which deems the deductor an assessee in default so that coercive process runs against him. Deduction at source is only one mode of recovery of tax, and once that mode has been adopted and the deduction made, the deductee cannot be subjected to a second mode and made to pay twice (para 14). Credit under s.199, however, is by its terms given where the tax is deducted 'and paid to the Central Government' on production of the s.203 certificate; if credit followed on mere deduction, the tax liability would stand discharged and there would be no justification for treating the deductor as an assessee in default at all (para 15). Section 205 is different in kind: its applicability is not dependent on credit being given under s.199, and all it requires is that the amount has been deducted from the income; the case of deduction without payment is taken care of by s.201 (para 16). In the words reproduced by the source cited on this page: "The assessee cannot be doubly saddled with the tax liability."
It was decided by the High Court on 2000-01-04 and is reported as [2000] 242 ITR 638 (Gauhati); writ appeal from the judgment of the single judge dated 2 August 1996 in Civil Rule No. 1487 of 1991, reported at [1996] 222 ITR 489. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 205, section 199, section 201, section 203, section 194B, section 200, section 226(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeal succeeded only in part. The Assessing Officer's note declining credit under s.199 until proof of payment to the Central Government was restored, and the single judge's order set aside to that extent. The quashing of the s.226(3) notices dated 20 February 1991 was maintained: recovery could be pursued only against the person responsible for deducting the tax, as an assessee in default under s.201, and not against the deductee (paras 14, 16 and 17). It arises in TDS Defaults, Demand, Recovery & Stay and How Tax Law Is Read matters, on section 205, section 199, section 201, section 203, section 194B, section 200, section 226(3) of the Income Tax Act 1961, and was decided by Brijesh Kumar CJ and D. Biswas J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Attack any garnishee notice under s.226(3), attachment or refund adjustment head-on: those are the coercive measures the Court held to be illegal against a deductee. Press the department to proceed against the deductor under s.201 and say so in writing; the Court's reasoning is that the deductor steps into the assessee's shoes. For the credit limb, rely on the later High Court decisions that direct credit to be given (Gujarat and Delhi), not on this judgment, which on that point went the department's way. If deduction itself is denied, put the Form 16/16A certificate under s.203 on record - it was the s.203 certificates at annexures 1 and 2 that made deduction an admitted fact here.
Still good law. Paras 13 to 16 are reproduced verbatim and approved in the Gujarat High Court's decision in Kartik Vijaysinh Sonavane (15 November 2021), which is how the text was independently corroborated here. On the SEPARATE question whether credit under s.199 must be given before the deductor deposits, later High Courts have gone the other way and directed credit to be given to the deductee (Gujarat in Sumit Devendra Rajani, Devarsh Pravinbhai Patel and Kartik Sonavane; Delhi in Sanjay Sudan). Paras 15 and 16 of this judgment therefore no longer represent the position those courts take on the credit limb, though the s.205 holding on recovery is universally followed. That divergence is between different High Courts on a subsidiary point and has not, so far as could be checked, been resolved by the Supreme Court. A full citator check was NOT carried out. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The statutory extracts in this judgment are printed with ellipses: s.199 (para 8), s.203 (para 11) and s.205 (para 12) are each set out as applying to "Sections 192 to 194, Section 194A, Section 194B .....", so the full list of sections then covered cannot be read off this report. Note also that the s.199 text at para 8 is NOT the version in force for AY 1986-87: it closes with "in the assessment made under this Act for the assessment year for which such income is assessable", which is the wording substituted by the Direct Tax Laws (Amendment) Act 1987; the pre-1987 wording gave credit "in the assessment ... made for the immediately following assessment year" (see the extract at para 9 of Bhura Mal Raj Mal). Section 199 has since been substituted again with effect from 1 April 2010 and the year-of-credit rule now lives in Rule 37BA(3), so do not quote the extracts in paras 8 and 12 as current law. The operative words of s.205 relied on ("the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income") are unchanged. The department's own page at incometaxindia.gov.in/w/section-205-27 is an archived version carrying the note "As Amended by the Finance Act, 1976" and must not be used to state the current section either. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal succeeded only in part. The Assessing Officer's note declining credit under s.199 until proof of payment to the Central Government was restored, and the single judge's order set aside to that extent. The quashing of the s.226(3) notices dated 20 February 1991 was maintained: recovery could be pursued only against the person responsible for deducting the tax, as an assessee in default under s.201, and not against the deductee (paras 14, 16 and 17).
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