Claim of TDS Credit Deducted by the Employer but not Paid by it to the Government

I. Issue

Mr. A, an employee working in XYZ Ltd., received a demand notice from the Income-tax Dept. asking him to pay tax on salaried income. The demand notice was issued because the amount of TDS credit claimed by Mr. A was higher than the amount of TDS credit appearing in Form 26AS. The mismatch arose because his employer (XYZ Ltd.) deducted tax from his salary but did not deposit the tax so deducted in Central Government’s account.

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II. Rule

a. Relevant Provisions of the Law

Section 205 of the Income-tax Act prohibits recovery of tax from a taxpayer if tax is already deducted from his income by the deductor. A person cannot be called upon to pay taxes if tax was deductible on his income and such tax has been deducted.

Section 191 provides that the liability of a salaried person to make direct payment of the tax arises if no tax has not been deducted from his salary.

So a taxpayer shall be liable to pay the tax himself only if a particular income is not covered within the TDS provisions or if it is covered, but tax has not been deducted. He cannot be held liable if tax has been deducted but not paid to the Govt.

b. Why Does the Demand Arise?

The demand arises due to a mismatch in the credit claimed in the return of income and TDS credit available in Form 26AS. The automated system at CPC compares the two records, and if any difference is found, a tax demand notice is issued.

III. Analysis

a. Judicial Rulings

The Courts have dealt with this matter on multiple occasions and have ruled in favor of the taxpayer.

Recently, on a similar issue, the Gujarat High Court, in the case of Kartik Vijaysinh Sonavane [2021] 132 Taxmann.com 293 (Gujarat), has cancelled the demand raised upon an employee for the TDS amount not paid by his employer. Kartik was a pilot in Kingfisher Airlines. The airline duly deducted tax from his salaried income but didn’t deposit the same with the Government. The Assessing Officer issued a notice to him to pay the tax. The Gujarat High Court has ruled that TDS credit shall be given to the assessee despite the same was not paid by the airline.

The Karnataka High Court in the case of Anusuya Alva [2005] 147 Taxman 152 also held that if the tenant has deducted tax from the rent but has not paid it to the Government, the only course open to the revenue is to recover the amount from the tenant who has deducted the tax and not from the landlord.

b. CBDT’s clarifications

Considering the seriousness of the matter and continued litigations, the CBDT has issued Instruction dated 01-06-2015 and Instruction dated 11-03-2016 on this matter. The CBDT has clearly stated that in cases where TDS is deducted by the employer or deductor and the same has not been deposited with the Government, and the Assessing Officer cannot raise tax demands upon the payees.

IV. Conclusion

If the taxpayer has found discrepancies in Form 26AS, he should contact the deductor for such a mismatch. There might be the following reasons for TDS credit mismatch:

(a) TDS is not deposited with Govt.

(b) TDS is deposited, but the TDS statement is not yet filed;

(c) The deductor has quoted the wrong PAN in the TDS statement; or

(d) An incorrect TDS amount has been mentioned in the TDS statement.

These mistakes can be corrected by the deductor only. Thus, the taxpayer should approach his deductor to correct the mistake at the earliest and make sure that same is corrected before filing of ITR.

A taxpayer has no legal right to force the deductor to deposit TDS or make any corrections in TDS Statement. If the deductor refuses to entertain the taxpayer’s request, he can submit TDS proof to Dept.

In response to the demand notice, the taxpayer can file a reply on the e-filing portal with supporting documents of TDS deducted from his income. The taxpayer can submit the salary slips and bank statement showing credit of net salary/other income after deduction of TDS.

AO is bound to allow TDS credit to the taxpayer if the documents submitted are found correct. However, if he still doesn’t allow the credit, the only option left is to file an appeal before CIT(A).