For most salaried employees, the deduction of tax at source (TDS) from their monthly salary marks the end of their tax obligation on that income. But what happens if an employer deducts tax from salary and then fails to deposit it with the government?
Can the Department deny the employee credit for that tax and raise a fresh demand?
The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has answered this question in favour of taxpayers, ruling that an employee cannot be denied TDS credit merely because the employer failed to deposit the deducted amount with the government.
The case before the tribunal
The case involved an employee of Trimax IT Infrastructure & Services Ltd. who filed her income tax return for Assessment Year (AY) 2019-20 declaring income of ₹18.41 lakh.
She claimed TDS credit of ₹3.91 lakh. However, while processing the return under Section 143(1), the Central Processing Centre (CPC) allowed credit of only ₹79,030. The mismatch resulted in a tax demand of approximately ₹3.36 lakh.
The reason was that although the employer had deducted tax from the employee’s salary, the corresponding amount was allegedly not deposited with the government. As a result, the credit did not fully appear in Form 26AS.
The taxpayer repeatedly approached the CPC through rectification applications but failed to get relief. She later filed an appeal before the Commissioner of Income Tax (Appeals), which was dismissed on the grounds of delay.
Before the ITAT, she produced Form 16, salary slips, bank statements and other documents to establish that tax had indeed been deducted from her salary and that she had received only the net amount after deduction of tax.
Why the ITAT sided with the taxpayer
The tribunal first observed that the delay in filing the appeal should have been condoned because the taxpayer had been diligently pursuing rectification proceedings before the CPC for several years.
More importantly, the ITAT held that a taxpayer cannot be made to suffer because of an employer’s failure to fulfil its statutory obligation of depositing TDS.
It referred to Section 205 of the Income-tax Act, which provides that once tax has been deducted at source, the same amount cannot be recovered again from the taxpayer.
The tribunal further noted CBDT Instruction No. 275 dated June 1, 2015, which directs tax authorities not to enforce demand on a taxpayer where tax has been deducted but not deposited by the deductor, subject to verification of facts.
Based on these principles, the ITAT ruled that no tax demand could be raised against the employee merely because the employer failed to deposit the deducted tax.
The assessing officer was directed to verify the supporting documents and grant full credit.
What is Section 205 and why does it matter?
Section 205 acts as a safeguard for taxpayers against double recovery of tax.
The provision states that where tax is deductible at source and has been deducted, the tax department cannot directly recover that amount from the taxpayer.
In simple terms, once an employer has deducted TDS from an employee’s salary, the responsibility for depositing that tax shifts to the employer. If the employer defaults, the department’s remedy is against the employer and not the employee whose salary has already suffered tax deduction.
What should employees do if TDS is missing from Form 26AS?
The ruling also highlights an important practical point. While Form 26AS is a key document for verifying TDS credits, it is not the only evidence available to taxpayers.
Employees facing a TDS mismatch should preserve documents such as:
- issued by the employer
- Monthly salary slips
- Bank statements showing receipt of net salary
- Employment records and payroll documents
These documents can help establish that TDS was actually deducted even if the credit does not appear in tax records because of the employer’s default.
For salaried employees, the decision offers important reassurance. If an employer has deducted TDS from salary, the tax department cannot automatically deny credit and seek to recover the same tax again. Subject to verification of evidence, the liability for the default rests with the employer, not the employee.