Employee Cannot Be Denied TDS Credit for Employer’s Default: Mumbai ITAT
The Mumbai ITAT has delivered an important taxpayer-friendly ruling in Sophia Rick v. ITO, holding that an employee cannot be denied credit of TDS merely because the employer deducted tax from salary but failed to deposit the same with the Government. The case involved AY 2019-20, salary income of about ₹18.41 lakh, TDS credit claimed at ₹3.91 lakh, and CPC allowance of only ₹79,030, which resulted in a substantial tax demand.
The taxpayer had pursued rectification before CPC. When that did not resolve the mismatch, she filed an appeal, which was dismissed by the CIT(A) as time-barred. The ITAT condoned the delay, observing that the taxpayer had been bona fide pursuing the statutory remedy of rectification. On merits, the Tribunal found that salary slips, Form 16, bank statements and other records showed that TDS had indeed been deducted and only net salary had been credited.
The ruling rests substantially on section 205 of the Income-tax Act, 1961, which bars direct demand from an assessee to the extent tax has been deducted from the relevant income. (Etds)
The statutory scheme also makes the deductor accountable. Section 201 provides consequences where a person required to deduct tax fails to deduct or, after deducting, fails to pay. Therefore, once deduction from salary is proved, the Department’s remedy should be against the defaulting employer and not by double recovery from the employee. (Etds)
The decision aligns with earlier judicial precedent, including Devarsh Pravinbhai Patel v. ACIT, where the Gujarat High Court held that credit could not be denied to an employee merely because the employer failed to deposit TDS. (itatonline.org)
Key Legal Position
The employee must prove actual deduction of tax from salary. Form 26AS mismatch by itself should not defeat a genuine claim where supporting records establish deduction. However, the ITAT did not grant credit mechanically; it directed the Assessing Officer to verify the documentary evidence and then grant credit.
Practical Impact
This ruling is highly relevant for salaried taxpayers facing CPC demands due to employer default, insolvency, payroll irregularity, or incorrect TDS return filing. It also reinforces the need to preserve salary slips, Form 16, bank statements, employment records, rectification acknowledgements and communication with the employer.
For employers, the ruling does not dilute compliance responsibility. Non-deposit of TDS after deduction remains a serious default carrying interest and other consequences.
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