Employee entitled to TDS credit despite employer's non-deposit and IBC moratorium; payer's obligation remains; penalties preserved

ITAT, Bangalore (AT) allowed the appeal and directed the AO to grant TDS credit to the employee within 60 days, despite the employer's non-deposit of TDS and its admission into CIRP under IBC, 2016 which creates a moratorium. The Tribunal held that TDS is an obligation of the payer but the employee cannot be denied credit where conclusive evidence of deduction is furnished; penalties/prosecution against responsible officers remain available. Decision follows prior HC rulings to the same effect.

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ISSUES PRESENTED AND CONSIDERED

1. Whether an employee is entitled to claim credit for Tax Deducted at Source (TDS) from salary in the return of income where the employer has deducted tax from salary but has failed to deposit the deducted tax to the Government, resulting in absence of the TDS entry in the employee's Form 26AS.

2. Whether the insolvency/Corporate Insolvency Resolution Process (CIRP) status or moratorium available to the employer affects the employee's right to claim TDS credit when the employee produces evidence of actual deduction (e.g., pay slips).

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Entitlement to TDS credit where employer deducted tax but did not deposit it (Form 26AS shows no credit)

Legal framework: The statutory scheme treats TDS as an advance tax credit to the deductee when tax is deducted by the payer; statutory mechanisms (Form 26AS, TDS certificates) serve as evidence and records of deposit, but the core obligation to remit TDS lies on the deductor. The assessing authority grants tax credit on verification of tax having been deducted and deposited to the Government's account.

Precedent Treatment: The Court followed high-court decisions holding that when an employee produces conclusive evidence that tax has been deducted from salary (e.g., payslips, employer statements), denial of TDS credit solely on the ground of non-appearance in Form 26AS (because the employer failed to deposit) is not justified. Those authorities were applied and not distinguished or overruled.

Interpretation and reasoning: The Court noted that TDS is an onerous obligation of the payer but the employee, who has in fact borne the deduction from salary, should not be penalised for the deductor's failure to deposit. The absence of an entry in Form 26AS is a consequence of non-deposit by the employer, not proof that TDS was not deducted from the employee's salary. When the employee furnishes conclusive documentary evidence (pay slips, annual salary statement) establishing actual deduction, the assessing officer is directed to allow the credit. The Court observed that statutory penal/prosecution remedies against responsible officers remain available and that employer insolvency or CIRP proceedings do not extinguish the employee's right to claim credit based on proof of deduction.

Ratio vs. Obiter: Ratio - An employee who proves that tax was deducted from salary by the employer is entitled to TDS credit even if the employer failed to deposit such tax and Form 26AS does not show the credit; the assessing officer must verify the documentary evidence and allow the credit if satisfied. Obiter - Observations on availability of penalty/prosecution and administrative inaction may be persuasive but are not necessary to the legal holding.

Conclusions: The Court directed the assessing officer to grant TDS credit to the employee upon verification of payroll evidence within a stipulated time. The denial of pre-paid tax credit by reliance solely on absence in Form 26AS was held to be impermissible where the employee has established actual deduction.

Issue 2 - Effect of employer's CIRP/moratorium on employee's claim to TDS credit

Legal framework: Insolvency proceedings and moratorium under the Insolvency and Bankruptcy Code place restrictions on certain actions against the corporate debtor, but do not automatically negate statutory obligations or the rights of third parties to claim relief under other enactments.

Precedent Treatment: The Court applied prior high-court rulings recognizing the employee's entitlement to credit despite the employer's insolvency status; these authorities were followed rather than distinguished or overruled.

Interpretation and reasoning: The Court reasoned that employer's admission to CIRP and the consequent moratorium do not extinguish the employee's substantive right to seek credit for tax actually deducted from salary. The moratorium affects enforcement against the corporate debtor but does not operate to deprive the employee of statutory tax credit where documentary evidence of deduction exists. The Court further observed that regulatory or penal remedies against responsible officers remain available and are independent of the employee's right to claim credit.

Ratio vs. Obiter: Ratio - Employer's CIRP/moratorium does not preclude an employee from obtaining TDS credit when the employee establishes that tax was deducted at source. Obiter - Comments about the Revenue's inaction in pursuing penalty/prosecution or recovery during CIRP are ancillary.

Conclusions: The Court ordered the assessing officer to allow TDS credit to the employee notwithstanding the employer's CIRP status, directing compliance within a specified period; the employer's insolvency does not bar granting credit where deduction is proven.

Cross-reference

The conclusion on Issue 1 directly supports Issue 2: allowance of TDS credit is based on proof of deduction and is unaffected by the employer's failure to deposit or by insolvency proceedings; assessing officers must verify documentary evidence rather than rely solely on Form 26AS.

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