TDS credit cannot be denied to an employee when the employer deducts tax but fails to deposit it.

Once tax is deducted at source from salary, section 205 bars direct recovery of that tax from the employee, even if the employer fails to deposit it with the Government. The ITAT Pune treated TDS as an indirect mode of tax discharge and held that the proper remedy lies against the deductor as the person in default. On that reasoning, denial of TDS credit to the salaried assessee was unsustainable, and the demand raised against the assessee could not be enforced.

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Issues: Whether TDS credit could be denied to the salaried assessee merely because the employer deducted tax at source but failed to deposit it with the Government, and whether recovery could still be made from the deductee.

Analysis: The assessee had salary income on which tax was deducted by the employer under the TDS mechanism, but the employer did not remit the amount to the credit of the Central Government. The Tribunal applied the statutory scheme of deduction and recovery under the Income-tax Act, 1961, and treated TDS as an indirect mode of tax discharge. It held that once tax is deducted at source, section 205 creates a bar against direct recovery from the person from whose income tax was deductible, even if the deductor defaults in remittance. The proper course is to proceed against the deductor, who is the person in default.

Conclusion: The denial of TDS credit was unsustainable and the demand raised against the assessee could not be enforced.

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