Tax Deducted at Source liability for employees challenged after employer failed to deposit TDS; automated demands quashed and software must be rectified

Failure of an employer to deposit tax deducted at source from employees' salaries does not create a prima facie demand against the employees; the legal basis is that the deposit obligation rests with the deductor and administrative instructions of the CBDT require correction of departmental processes, so demands raised via automated intimation are liable to be quashed. The operative effect mandates departmental compliance with binding CBDT instructions, correction of assessment software to prevent generation of demands on deductees for deductor defaults, and relief to affected employees from such computer-generated tax demands.

---

---

Issues: Whether intimation under Section 143(1) and consequential demands raised against deductees on account of TDS appearing in their returns but not reflected as deposited by the deductor can be enforced; and whether such intimations/demands are liable to be quashed where tax was deducted by the employer but not deposited.

Analysis: The Court examined the statutory scheme governing tax deducted at source including Sections 199 and 205 of the Income-tax Act, 1961, and relevant administrative directions issued by the Central Board of Direct Taxes (Instruction No.275 dated 01.06.2015 and Office Memorandum dated 11.03.2016). Section 199 provides that credit for TDS is given only if the amount is paid into Government account, while Section 205 bars direct demand on an assessee to the extent tax has been deducted from his income. The CBDT instructions explicitly direct assessing officers not to enforce demands against deductees where the deductor has failed to deposit the TDS, and such instructions fall within the administrative direction-making power under Section 119. Applying these provisions and instructions to the undisputed facts that the employer deducted TDS from petitioners' salary but did not deposit it, the Court considered the incompatibility between the departmental software/process that creates automatic demands on credit mismatch and the statutory/administrative mandate preventing direct demand on the deductee.

Conclusion: The intimation under Section 143(1) and the consequent demands raised against the petitioners are quashed and set aside. The respondents are directed to comply with Section 205 and the CBDT instructions, rectify the software/process to prevent such demands in future, and pass consequential orders giving effect to this decision. The petitions are allowed in favour of the petitioners.

---