Taxpayer entitled to TDS credit and refund despite employer non-deposit; department may pursue recovery against employer

ITAT-Kol allowed the assessee's appeal and directed the AO to grant credit for TDS reflected as deducted by the employer though not deposited. Relying on HC precedent, the tribunal held the department cannot deny credit to the assessee for tax deducted at source during the relevant years and ordered refund if recovery or adjustment had occurred. The Revenue was permitted to pursue recovery or other action against the employer for non-deposit in accordance with law.

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ISSUES PRESENTED AND CONSIDERED

1. Whether an assessee is entitled to credit for tax deducted at source (TDS) from salary where the employer deducted a higher amount but deposited a lesser amount with the Government, and the excess deducted amount does not reflect in the employer's Form 24Q or the assessee's Form 26AS.

2. Whether absence of the assessee's name or the full deducted amount in Form 24Q/Form 26AS precludes allowance of TDS credit when the employer issues a letter admitting deduction of the larger amount but depositing a lesser sum due to banking restrictions and insolvency/CIRP proceedings.

3. Whether, if TDS credit is allowed to the assessee despite non-deposit by the employer, the revenue retains the right to proceed against the employer for non-deposit in accordance with law and whether any interim recoveries/adjustments affect the assessee's entitlement.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to TDS credit where employer deducted a larger amount but deposited a lesser amount

Legal framework: The Income Tax Act confers credit for tax deducted at source to the deductee where tax has been deducted from specified income; compliance under section(s) relating to TDS is operationalised by employer filings (Form 24Q) and integration into the deductee's Form 26AS. Rule 31A (statement of deduction) and provisions governing credit reconciliation under the Act are relevant. The Act also contemplates departmental recourse against a defaulting deductor.

Precedent treatment: The Tribunal and various High Courts have, in a line of decisions cited in the record, held that an assessee should not be penalised for the employer's default in depositing TDS that was actually deducted; such decisions direct allowance of TDS credit to the deductee even where employer failed to remit the deducted amount to Government. The Gujarat High Court decision discussed in the record (and subsequent coordinate bench decisions) has held the department precluded from denying benefit of TDS actually deducted by the employer.

Interpretation and reasoning: The Tribunal accepts the principle that tax already deducted from the assessee's income should not result in double taxation of the same income due to employer default. Where there is credible proof that TDS was deducted at source, equity and the statutory scheme favour allowing credit to the deductee, subject to departmental remedies against the deductor. The Tribunal relied on the employer's admission in writing that the higher amount was deducted and the jurisprudence treating such situations as entitling the employee to credit.

Ratio vs. Obiter: Ratio - Where an employer has deducted TDS from salary, the deductee is entitled to TDS credit even if the employer has not deposited the full amount, provided there is evidence of actual deduction (admission by employer and supporting facts). Obiter - Broader policy discussion about employer insolvency and banking restrictions as general excuses for non-deposit.

Conclusions: The Tribunal allowed TDS credit for the amount admitted as deducted by the employer notwithstanding the employer's non-deposit, directing the Assessing Officer to grant credit and permitting departmental action against the employer under law.

Issue 2: Effect of absence of deductee's name or full amount in Form 24Q/Form 26AS on entitlement to TDS credit

Legal framework: Form 24Q and Form 26AS are statutory/administrative records used for reconciliation of TDS credits. Presence of entries in these forms is standard evidence of deposit and credit. The Act contemplates that credit is given where tax is deducted and accounted for, but administrative records may lag or be incomplete.

Precedent treatment: Prior decisions relied upon by the Assessing Officer and the first appellate authority treat the absence of entries in Form 24Q/Form 26AS as a significant factor against allowing credit, distinguishing cases where deduction is acknowledged in employer records but non-deposit occurred versus cases where deduction itself is not evidenced. Coordinate bench decisions cited by the appellant tended to allow credit where deduction was established despite non-deposit.

Interpretation and reasoning: The Tribunal noted the Assessing Officer's reliance on Forms 24Q/26AS to find absence of evidence of deduction. However, the Tribunal gave primacy to the employer's express written admission that the larger amount was deducted and to higher court authority holding that the department cannot deny benefit of TDS actually deducted. The Tribunal distinguished the AO/CIT(A) approach that relied solely on statutory statements when contemporaneous admissions and facts show deduction occurred.

Ratio vs. Obiter: Ratio - Absence of entries in Form 24Q/Form 26AS does not automatically preclude TDS credit if there is other compelling evidence (such as employer's admission and supporting facts) establishing that tax was actually deducted from the assessee. Obiter - The relative probative weight of Forms 24Q/26AS versus other evidence in general circumstances.

Conclusions: The Tribunal held that the employer's admission and applicable judicial precedent outweigh the absence of the full amount in statutory statements, and directed grant of TDS credit notwithstanding the lacuna in Forms 24Q/26AS.

Issue 3: Rights of revenue to pursue employer and treatment of interim recoveries or adjustments if credit is granted to the assessee

Legal framework: The Act permits the revenue to take recovery or enforcement action against withholding agents for failure to deposit deducted taxes. Where TDS credit is given to a deductee and the revenue later recovers amounts from the deductor or makes adjustments, statutory provisions and judicial decisions address the rights to refund or interest to the deductee if any recovery affects the deductee.

Precedent treatment: The Gujarat High Court decision referenced directed that if any recovery or adjustment is made in the interregnum, the petitioner shall be entitled to refund with statutory interest. Coordinate judgments allowed the taxpayer relief while preserving departmental remedies against employers.

Interpretation and reasoning: The Tribunal followed the approach of allowing credit to the deductee while explicitly preserving the Revenue's liberty to initiate action against the employer for non-deposit. The Tribunal also accepted the remedial posture of ordering that any recovery/adjustment effected earlier should be refunded to the deductee with statutory interest, consistent with the cited higher court direction.

Ratio vs. Obiter: Ratio - Granting credit to the deductee does not preclude the revenue from pursuing the employer; any departmental recoveries affecting the deductee must be refunded with interest if the deductee is held entitled to credit. Obiter - Specific mechanics of subsequent recovery vis-à-vis third-party insolvency proceedings.

Conclusions: The Tribunal allowed the assessee's appeal, directed the AO to grant TDS credit for the amount deducted but not deposited by the employer, and observed that the Revenue remains free to take action against the employer; any interim recovery or adjustment should be refunded to the deductee with statutory interest as per precedent.

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