TaxTMI 
TaxTMI 
TaxTMI 
Author’s note
Few days ago, a client came to me for consultancy and asked that his employer haven’t paid TDS, still he claimed the same in his return, now he received demand notice, I understood his situation and gave my recommendations, but a case law was very important part of my advisory, let’s discuss with this article. Happy Reading:)
Introduction
We all know everyone whose income exceeds a specific limit need to pay tax, but for salaried people tax as per their slabs is deposited by the employer. What if employer fails to deposit it? Will it be the mistake of employee or employer? Of Course, employer right? Then why employees get penalised? What are Judicial precedents regarding the same?
What does Delhi HC say?
The Delhi High Court said that where tax is deducted at source from an employee’s salary, the employee cannot be denied TDS credit only because the employer failed to deposit that tax with the government; recovery must be pursued against the employer/deductor and not the deductee.
But before I could advise that client, in litigation, as per my past experience, the “facts of the case” is more important than judicial precedents, hence in depth I analysed the case of my client along with case laws relevant to the same.
Venkatachalam Thangavelu v. ITO
Facts of the case
The citation of case is W.P.(C) 538/2026 Venkatachalam Thangavelu v. ITO that concerns an employee of Kingfisher Airlines whose employer deducted tax at source but did not remit the deducted amounts to the Government.
The Assessing Officer issued an intimation under section 143(1) (Section 270 of New Direct tax code 2025) and disallowed the credit as well as issued a demand, it was somewhat similar to my client’s case. In that case, the assessee challenged that intimation and went to litigation regarding the consequent recovery and adjustment.
Later, The Delhi High Court quashed the intimation to the extent it denied credit, set aside the consequential demand and recovery inclusive of refund adjustments, and asked department to refund of amounts recovered with interest.
Legal framework
First one that applied is Section 199 (Section 390 and 391 of New Direct tax code 2025) of Income tax act, 1961 that deal with TDS credit, which entitles the person from whose income tax is deducted to the credit of the tax, subject to the tax being actually deposited/reflecting in records.
Other one is Section 205 (Section 401 of New Direct tax code 2025) which provides that a person shall not be called upon to pay any tax which has already been deducted at source from his income, it means that the deductee is protected once tax is deducted.
Also, in this case CBDT had provided with the instructions by it’s circulars and instructions regarding recovery where deductor has defaulted as well as departmental guidance mostly indicated that recovery for non-remittance should be pursued against the defector, who haven’t paid the tax, and the deductee should not be made to suffer where the employer has deducted tax.
Above, I directly explained the judgement, do you know irrespective of section 199 stating “subject to the tax being actually deposited/reflecting in records” how court directed for refund?
Reasons given by Delhi High court
First reason is the separate liabilities, that means the statutory scheme separates the liability of employer as collector to deposit TDS and the tax liability of the employee, and main motive of TDS is that once tax is deducted the employee’s liability to that extent is discharged. The statutory duty to deposit rests on the employer/deductor, not the deductee.
Second is the protection given by Section 205 that prevents calling upon the deductee to pay again for amounts already deducted, hence the recovery from the deductee where deduction has occurred is inconsistent with the statutory design.
Thirdly, there is no lawful basis for refund-set-off or ongoing demand against deductee, hence the Court held that revenue may not adjust future refunds of the employee to satisfy an unpaid TDS of the employer where the employee has suffered deduction, recovery remedies remain against the defaulting employer/deductor.
Last point that the court mentioned, we may call it as a Remedial direction is that where recovery already took place from the employee like setting off against refunds, then the tax authorities were directed to refund with interest.
I want to tell you that even under the New Income-tax Code, 2025 where deduction is proved, credit must follow, and recovery must be pursued only from the employer, not the employee.
Other cases
Above is a recent judgement, but there are even other Important precedents and rulings that we should note
(Reader must note that to maintain flow, I will quote all citations at the end of this article)
Sanjay Sudan v. ACIT the case of Delhi High Court of the year 2023
The Court in the case of Sanjay Sudan held that where tax is deducted at source but not deposited by the employer, the department cannot recover the amount from the deductee nor adjust the deductee’s refunds for that unpaid TDS, any coercive remedy must be directed to the deductor.
The decision emphasised Section 205 and refused indirect recovery methods that effectively make the deductee pay for the employer’s default. Sanjay Sudan is a controlling precedent often relied upon in later writs.
Satwant Singh Sanghera v. ACIT of Delhi High Court in year 2024
A Kingfisher-related writ, where the Court granted relief to a former Kingfisher employee who had Form-16A showing TDS deduction but faced notice/demand because Kingfisher had not deposited the sums. The Court quashed demands and prohibited appropriation of the employee’s refunds to meet the employer’s unpaid TDS. This case is directly on point and was cited in the later Venkatachalam decision.
Karnataka High Court and several ITAT benches have taken a similar approach, the employees should not be penalized where the employer deducted TDS but failed to remit the amount, administrative remedies should be against the employer/deductor.
Also, ITAT Mumbai, Gauhati High Court, ITAT Kolkata as per the recently reported decisions, also reflect judicial sensitivity to the unfairness of making deductees bear employer default, hence the tribunals have ordered in the favour of granting credit or relief where deduction is proved and the employer is the defaulting party.
CBDT instructions
CBDT instructions/circulars along with the departmental notes, have repeatedly directed that the IT department should pursue the deductor for non-remittance and should not unduly recover from the deductee where deduction can be proved. Courts often reference these instructions when construing the statutory scheme.
Hence the case of Venkatachalam is not a individual case rather, it is part of a consistent and different judicial and administrative line of judgements which separates the deductor’s duty to remit from the deductee’s entitlement to credit once deduction is made and documented.
Practical reality
Although using section 205 as a protective section is clear, revenue departments have advanced two contentions-
First one is Form 26AS and IT portal mismatch, that means where the revenue says credit under section 199 is properly given only when tax is shown as deposited that is reflected in Form 26AS. Secondly the courts have responded that non-reflection cannot be used mechanically to deny credit where there is credible proof such as Form 16A, employer certificates, payroll records, etc, and that TDS was deducted.
Next is the textualism given by the statute, that means when the revenue has argued that literal reading of section 199 requires payment into Government account, here the courts have balanced this with section 205 and the overall statutory framework and concluded the remedy is to pursue the employer. The case of Sanjay Sudan is instructive on the limits of revenue’s literalism.
What steps I took in case of my client?
First of all, I collected the primary proof of deduction like Form 16A, his pay-slips showing TDS deduction, bank statements showing salary paid net of TDS, as well as the employer communication. As these are essential to establish the deduction even if it did not reflect in 26AS.
Post that I filed a representation before AO with legal authorities
If your client’s demand already adjusted with the refund then you are required to seek refund along with interest, As discussed above, the courts have ordered refund of amounts adjusted against the employee with interest under section 244(1). Hence you can ask AO for reversal pending judicial review.
Hence the documentary proofs of deduction shall be preserved for litigation. If employer is insolvent, then you can consider insolvency or claims route separate from tax proceedings.
Where the AO refuses, then you can file writ petition as many employees have successfully done before the different courts, or appeal through the statutory appellate route, but emphasising the urgency if refunds have been set off.
Citations
1. Venkatachalam Thangavelu Versus ITO, Ward 70 (1), Delhi - 2026 (1) TMI 1208 - DELHI HIGH COURT
2. Satwant Singh Sanghera Versus The Assistant Commissioner of Income Tax & Anr. - 2024 (10) TMI 762 - DELHI HIGH COURT relating to Kingfisher pilot case.
Conclusion
Where TDS is actually deducted from salary, the employee cannot be denied credit or subjected to demand merely because the employer failed to deposit it. Law and courts consistently hold that the statutory obligation to remit TDS lies on the employer, and Section 205 (and its corresponding provision under the New Income-tax Code, 2025) bars recovery from the employee. Even portal/Form 26AS mismatches cannot override credible proof of deduction; recovery must be pursued only against the defaulting employer, not the employee.
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Author can be contacted at [email protected]