TDS retention from contractor bills is illegal when not deposited or certified, with release, interest, and costs ordered.

An employer cannot retain amounts deducted as TDS from a contractor's running bills merely to secure its own disputed liability with the Income Tax Department. Once tax is deducted, the statutory scheme requires deposit and issuance of a TDS certificate so the contractor can claim credit; withholding the sum outside that scheme is arbitrary and amounts to unjust enrichment. Contract clauses did not authorise keeping the deducted amount as a contingent reserve for an uncertain future demand. The court held the retention illegal and directed release of the amount with interest and costs, finding the employer's stand lacked bona fides.

---

---

Issues: Whether the employer could withhold amounts deducted from the contractor's running bills as a kept-back TDS amount for its own litigation with the Income Tax Department, and whether the contractor was entitled to release of the amount, issuance of TDS certificate, interest, and costs.

Analysis: The withholding of amounts purportedly deducted as TDS cannot be justified as a litigation safeguard when the amount is not deposited with the Income Tax Department and is not reflected in the contractor's tax records. Once tax is deducted at source, the statutory scheme requires deposit and issuance of a certificate to the deductee so that credit may be taken in the return. The contractual clauses relied upon by the employer do not authorize retention of the deducted amount as a kept-back fund for an uncertain future liability, nor can the employer use the tax dispute with the Department to deprive the contractor of money already deducted from its bills. Such retention is arbitrary, speculative, and amounts to unjust enrichment. The employer, being an instrumentality of the State, must act fairly and reasonably, and the amount wrongly retained must be restored with consequential monetary relief. The employer's stand was found to lack bona fides, and costs were warranted.

Conclusion: The withholding was held illegal; the contractor was entitled to release of the retained amount along with interest and costs, and the writ petition was allowed.

---