(2007) 293 ITR 226 (SC)
TDS on specified payments; consequences of failure to deduct or pay
No. Once the recipient has discharged the tax on the income, the same tax cannot be collected a second time from the deductor. The deductor remains liable for interest for the period of default and for any penalty.
Where a payer fails to deduct tax at source but the recipient has already paid tax on that income, can the tax again be recovered from the payer?
The assessee had made payments in respect of the use of warehousing facilities. It treated the arrangement as one for services and deducted tax at the lower rate applicable to contractual payments rather than the higher rate applicable to rent. The Assessing Officer held that the payments were rent, treated the assessee as an assessee in default for the shortfall, and raised a demand for the tax itself. The recipient had, however, already filed its return disclosing the receipts and had paid the tax due on them.
The demand was upheld through the appellate stages. The assessee appealed to the Supreme Court, relying on a long-standing Board circular which directed that tax should not be recovered from the deductor where the recipient had paid it.
For the assessee
The object of the withholding machinery is to collect tax on the recipient's income. Once that tax has been paid by the recipient, the objective is fulfilled, and recovering the same amount again from the payer would collect the tax twice on a single income. The Board had itself directed as much in a circular binding on the Revenue.
For the Revenue
The obligation to deduct is independent, and a person who fails to comply is by statute an assessee in default in respect of the tax not deducted. The recipient's conduct in paying its own tax does not discharge the payer's separate statutory obligation.
The Court accepted that the deductor's obligation is independent and that a failure to deduct attracts the consequences the statute prescribes, but held that the character of those consequences must be kept in view. The withholding machinery exists to collect, at source, tax that is ultimately due on the recipient's income. Where the recipient has filed a return and paid the tax on that very income, the sum has been collected and there is no further tax outstanding to be recovered. Permitting the Revenue to demand it again from the payer would result in the same tax being collected twice on one income, which the scheme does not contemplate. The Court relied on the Board's circular to the same effect, noting that such circulars bind the Revenue. It was careful, however, to confine the relief: the deductor is not absolved altogether. It remains liable to interest from the date the tax ought to have been deducted until the date the recipient paid, compensating the Revenue for the delay, and it remains exposed to penalty for the failure to deduct.
Withholding is consolidated in Section 393 of the IT Act 2025, with the consequences of default in Section 399. This remains the primary defence to a demand for tax raised on a deductor, though it requires evidence that the recipient returned the income and paid the tax — typically a certificate from the payee's accountant, which the statute now contemplates in terms. Interest exposure survives, so the relief is partial.