The Income Tax Appellate Tribunal (ITAT), Kolkata Bench, has delivered an important ruling providing relief to a salaried taxpayer who had received a demand notice due to the employer’s failure to deposit Tax Deducted at Source (TDS) with the Central Government despite deducting it from salary.
Background:
An employee of an edu-tech company received regular salary on which TDS amounting to approximately ₹14.88 lakh was deducted. However, the employer did not deposit this TDS into the Government account. When the employee filed the income tax return claiming credit for the deducted tax, the credit was denied and a consequential tax demand was raised.
The taxpayer submitted before the Tribunal that, in view of CBDT Instruction No. 275/29/2014-IT(B) dated 1 June 2015 and CBDT Office Memorandum dated 11 March 2016, no adverse action should be taken against a deductee in cases where the deductor has defaulted in depositing TDS.
Tribunal’s Observations:
The ITAT noted that:
- Section 205 of the Income-tax Act, 1961 expressly bars direct recovery of tax from an assessee to the extent tax has already been deducted at source.
- Once TDS has been deducted from an employee’s salary, it shall be deemed that the tax to that extent stands paid.
- Any demand raised solely due to the failure of the deductor to deposit the deducted tax cannot be enforced against the employee.
The Tribunal also referred to CBDT’s instructions and memorandum, which reiterate that the taxpayer should not face hardship, inconvenience, or coercive recovery due to the deductor’s default.
Further, the Tribunal highlighted that the Income Tax Department retains full authority under Section 201 to recover the undeposited TDS from the employer, and any inaction on this front by the Department cannot be used to penalise the employee.
The ruling additionally emphasised the importance of judicial discipline, noting that authorities are required to follow binding decisions of higher judicial bodies and coordinate benches to ensure uniformity of tax administration and prevent miscarriage of justice.
Direction Issued by ITAT:
The Tribunal directed the Assessing Officer to:
- Grant full TDS credit to the employee for the tax deducted from salary, treating it as tax already paid under Section 199 read with Section 205.
- Withdraw the demand raised solely due to the employer’s failure to deposit the TDS.
The appeal of the employee was accordingly allowed.
CBDT Instruction Reiterated:
The ITAT placed reliance on CBDT Instruction No. 275/29/2014-IT(B), which states:
- While Section 199 links TDS credit to actual deposit of tax, Section 205 prohibits raising coercive demands on the employee where tax has already been deducted.
- Assessing Officers must ensure that taxpayers are not inconvenienced due to defaults committed by deductors.
This ruling reaffirms statutory protections for employees and ensures that taxpayers are not penalised for lapses committed by employers in depositing TDS with the Government.
Source #ET
