My tenant deducted tax from my rent but never paid it over or gave me a Form 16A. The department is now recovering it from me - can it?
No. The Karnataka High Court quashed the demand to that extent. Section 205 bars a direct demand on the assessee to the extent tax has been deducted from her income, and the section says nothing about the deducted tax having been remitted. The word deduct in section 205 cannot be read as deducted and remitted. The person deducting acts as an agent of the Revenue under a statutory compulsion the payee cannot resist, so his default cannot be visited on her. The Revenue must recover from the deductor, and was restrained from enforcing the demand against the landlord by any coercive method.
Decided by the High Court (High Court of Karnataka - D.V. Shylendra Kumar, J. (single bench)) on 2005-06-09, reported as [2005] 278 ITR 206 (Kar); (2005) 197 CTR (Kar) 37; (2005) 147 Taxman 152; 2005 Tax LR 808. It bears on section 205, section 194-I, section 199, section 201 of the Income Tax Act 1961, in Demand, Recovery & Stay and TDS Defaults matters.
This is the case for the taxpayer whose deductor has kept the money. Its force lies in the textual point: sections 199, 200, 201, 202 and 203 all speak of deduction and payment, but section 205 speaks only of tax having been deducted, and the omission is deliberate. That closes the Revenue's usual argument that credit and protection alike depend on the money reaching the exchequer. The Court adds a second, independent reason drawn from the law of principal and agent: the deductor deducts on behalf of the Revenue under statutory obligation, the payee cannot prevent it, and a third party cannot be penalised for the agent's default. It is also useful that the Court granted relief although the assessee had never filed the Form 16A certificates with her returns, because the tenant had never issued them.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioner let her property to M/s Krisen Development Corporation at a monthly rent of Rs.1,35,000. The tenant deducted 20% under section 194-I every month and paid her the balance, but did not issue certificates in Form 16A. On 5 December 2002 the department issued a notice demanding arrears for assessment years 1997-98 to 2001-02, totalling over Rs.6.7 lakh, with ten days to pay before coercive recovery. The petitioner replied that the demands for 1999-2000 to 2001-02 included the very amounts her tenant had deducted, that she had brought the failure to issue certificates to the department's notice and nothing had been done, and that since the tenant had not remitted the money the department could not now look to her. A revision under section 264 was unsuccessful and she moved the High Court under Articles 226 and 227. The Revenue's standing counsel said the fact of deduction was not within the department's knowledge but that the petitioner had not filed the section 203 certificates with her returns as section 139(9) requires, and argued that reading sections 192, 199, 200, 201, 202 and 203 together, deduction means deduction and payment, so the section 205 protection arises only once the money reaches the Central Government. The Court recorded that the Revenue had in fact proceeded against the tenant and recovered part of the amount, and proceeded on the footing that the tenant had deducted but failed to remit.
The writ petition was allowed in part. The demand under the notice of 5 December 2002 was quashed so far as it related to tax already deducted by the tenant for assessment years 1999-2000, 2000-01 and 2001-02. The Revenue was restrained from enforcing that demand against the petitioner, whether by raising a demand or by any other coercive method, and was left to realise the amount from the deductor; it might receive payment from the assessee if she paid voluntarily, but not otherwise. Section 205 imposes an embargo on raising a demand on the assessee in respect of an amount which was deductible and was actually deducted, to the extent of the deduction, and remittance is not a condition of that protection.
The Court read section 205 as it stands. It bars a demand on the assessee where tax is deductible at source under the listed sections, including section 194-I, to the extent tax has been deducted from that income. The section does not say the amount must also be paid to the Central Government. That obligation is undoubtedly cast on the deductor, and the Act provides machinery against him for failure, up to prosecution and recovery with interest. But the condition of remittance is not made a requirement of the protection. Even reading sections 192, 194-I, 199, 200, 201, 202 and 203 - where payment on behalf of the assessee and credit for the tax are expressly tied to remittance - the omission of any reference to remittance in section 205 is a clear departure. What section 205 requires is a legal requirement to deduct and an actual deduction, and nothing more. Once deduction is made the Revenue must look to the deductor. The Court supported this with the law of principal and agent. In deducting, the tenant acts on behalf of the Revenue and under statutory compulsion; the landlord cannot prevent the deduction. Where a person acts as the Revenue's representative for that purpose, the consequences of his default must fall on the Revenue and cannot be foisted on the assessee, who is a third party to that relationship. The assessee could no doubt sue the tenant for reimbursement if she paid, but the object of section 205 is to protect her from being driven to that plight, and on that view the word deduct cannot be read as deducted and remitted.
It is not possible to understand the word 'deduct' occurring in Section 205 as 'deducted and remitted'.
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Handle my notice → Ask a CA on WhatsAppNo. The Karnataka High Court quashed the demand to that extent. Section 205 bars a direct demand on the assessee to the extent tax has been deducted from her income, and the section says nothing about the deducted tax having been remitted. The word deduct in section 205 cannot be read as deducted and remitted. The person deducting acts as an agent of the Revenue under a statutory compulsion the payee cannot resist, so his default cannot be visited on her. The Revenue must recover from the deductor, and was restrained from enforcing the demand against the landlord by any coercive method. This was decided by the High Court (High Court of Karnataka - D.V. Shylendra Kumar, J. (single bench)) and bears on section 205, section 194-I, section 199, section 201 of the Income Tax Act 1961. It is reported as [2005] 278 ITR 206 (Kar); (2005) 197 CTR (Kar) 37; (2005) 147 Taxman 152; 2005 Tax LR 808. This is the case for the taxpayer whose deductor has kept the money. Its force lies in the textual point: sections 199, 200, 201, 202 and 203 all speak of deduction and payment, but section 205 speaks only of tax having been deducted, and the omission is deliberate. That closes the Revenue's usual argument that credit and protection alike depend on the money reaching the exchequer. The Court adds a second, independent reason drawn from the law of principal and agent: the deductor deducts on behalf of the Revenue under statutory obligation, the payee cannot prevent it, and a third party cannot be penalised for the agent's default. It is also useful that the Court granted relief although the assessee had never filed the Form 16A certificates with her returns, because the tenant had never issued them. If it applies to you, the first step is this: Prove the deduction itself - bank credits showing rent received net, the lease terms and the rate - rather than relying on a certificate the deductor has not issued.
The petitioner let her property to M/s Krisen Development Corporation at a monthly rent of Rs.1,35,000. The tenant deducted 20% under section 194-I every month and paid her the balance, but did not issue certificates in Form 16A. On 5 December 2002 the department issued a notice demanding arrears for assessment years 1997-98 to 2001-02, totalling over Rs.6.7 lakh, with ten days to pay before coercive recovery. The petitioner replied that the demands for 1999-2000 to 2001-02 included the very amounts her tenant had deducted, that she had brought the failure to issue certificates to the department's notice and nothing had been done, and that since the tenant had not remitted the money the department could not now look to her. A revision under section 264 was unsuccessful and she moved the High Court under Articles 226 and 227. The Revenue's standing counsel said the fact of deduction was not within the department's knowledge but that the petitioner had not filed the section 203 certificates with her returns as section 139(9) requires, and argued that reading sections 192, 199, 200, 201, 202 and 203 together, deduction means deduction and payment, so the section 205 protection arises only once the money reaches the Central Government. The Court recorded that the Revenue had in fact proceeded against the tenant and recovered part of the amount, and proceeded on the footing that the tenant had deducted but failed to remit. The matter was decided on 2005-06-09 by the High Court (High Court of Karnataka - D.V. Shylendra Kumar, J. (single bench)). On those facts the High Court held as follows. The writ petition was allowed in part. The demand under the notice of 5 December 2002 was quashed so far as it related to tax already deducted by the tenant for assessment years 1999-2000, 2000-01 and 2001-02. The Revenue was restrained from enforcing that demand against the petitioner, whether by raising a demand or by any other coercive method, and was left to realise the amount from the deductor; it might receive payment from the assessee if she paid voluntarily, but not otherwise. Section 205 imposes an embargo on raising a demand on the assessee in respect of an amount which was deductible and was actually deducted, to the extent of the deduction, and remittance is not a condition of that protection.
The Court read section 205 as it stands. It bars a demand on the assessee where tax is deductible at source under the listed sections, including section 194-I, to the extent tax has been deducted from that income. The section does not say the amount must also be paid to the Central Government. That obligation is undoubtedly cast on the deductor, and the Act provides machinery against him for failure, up to prosecution and recovery with interest. But the condition of remittance is not made a requirement of the protection. Even reading sections 192, 194-I, 199, 200, 201, 202 and 203 - where payment on behalf of the assessee and credit for the tax are expressly tied to remittance - the omission of any reference to remittance in section 205 is a clear departure. What section 205 requires is a legal requirement to deduct and an actual deduction, and nothing more. Once deduction is made the Revenue must look to the deductor. The Court supported this with the law of principal and agent. In deducting, the tenant acts on behalf of the Revenue and under statutory compulsion; the landlord cannot prevent the deduction. Where a person acts as the Revenue's representative for that purpose, the consequences of his default must fall on the Revenue and cannot be foisted on the assessee, who is a third party to that relationship. The assessee could no doubt sue the tenant for reimbursement if she paid, but the object of section 205 is to protect her from being driven to that plight, and on that view the word deduct cannot be read as deducted and remitted. In the words reproduced by the source cited on this page: "It is not possible to understand the word 'deduct' occurring in Section 205 as 'deducted and remitted'."
It was decided by the High Court on 2005-06-09 and is reported as [2005] 278 ITR 206 (Kar); (2005) 197 CTR (Kar) 37; (2005) 147 Taxman 152; 2005 Tax LR 808. 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 194-I, section 199, section 201, 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 helps the taxpayer. The writ petition was allowed in part. The demand under the notice of 5 December 2002 was quashed so far as it related to tax already deducted by the tenant for assessment years 1999-2000, 2000-01 and 2001-02. The Revenue was restrained from enforcing that demand against the petitioner, whether by raising a demand or by any other coercive method, and was left to realise the amount from the deductor; it might receive payment from the assessee if she paid voluntarily, but not otherwise. Section 205 imposes an embargo on raising a demand on the assessee in respect of an amount which was deductible and was actually deducted, to the extent of the deduction, and remittance is not a condition of that protection. It arises in Demand, Recovery & Stay and TDS Defaults matters, on section 205, section 194-I, section 199, section 201 of the Income Tax Act 1961, and was decided by High Court of Karnataka - D.V. Shylendra Kumar, J. (single bench). 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. Plead section 205 in terms and point out that it requires deduction alone, not deduction and remittance. Report the deductor's failure to issue Form 16A to the department in writing and keep the correspondence; the assessee here had done so. If a demand or coercive recovery follows, seek a direction restraining recovery from you and requiring the department to proceed against the deductor. Do not treat a section 264 revision as the end of the road; the writ jurisdiction was invoked here after the revision failed.
Still good law. The full judgment was read, ending in the operative order. It turns on the language of section 205, which is set out in the judgment as it then stood, and on a general principle of agency. It is a single judge decision of the Karnataka High Court. I have not checked for any appeal against it or for later authority on section 205, and the interaction between section 205 and the credit mechanism now operating through the department's own systems is not addressed in it. 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 Court proceeded on a presumption that the tenant had deducted but not remitted, the Revenue's counsel being unable to confirm the position from the records; the fact of deduction was therefore not established by evidence but inferred from the department's own recovery efforts against the tenant. Relief was given only for assessment years 1999-2000 to 2001-02, and only to the extent of the amounts deducted; the judgment does not say what those amounts were, nor what became of the demands for 1997-98 and 1998-99. In recording the Revenue's argument the judgment refers to a conjoint reading of sections 192, 194-J, 199 and 200, where the provision in issue is section 194-I. The rate of 20% mentioned is the rate then applying to rent under section 194-I. 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 writ petition was allowed in part. The demand under the notice of 5 December 2002 was quashed so far as it related to tax already deducted by the tenant for assessment years 1999-2000, 2000-01 and 2001-02. The Revenue was restrained from enforcing that demand against the petitioner, whether by raising a demand or by any other coercive method, and was left to realise the amount from the deductor; it might receive payment from the assessee if she paid voluntarily, but not otherwise. Section 205 imposes an embargo on raising a demand on the assessee in respect of an amount which was deductible and was actually deducted, to the extent of the deduction, and remittance is not a condition of that protection.
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