TDS credit on salary where employer deducted tax but failed to deposit it in Form 26AS; recovery barred

Where an assessee claimed TDS credit on salary based on a TDS certificate but the credit did not reflect in Form 26AS due to the employer's non-deposit, the Tribunal held that the assessee cannot be fastened with liability for the employer's default. Relying on HC authority, it held that once salary is received after deduction, the assessee has no control over remittance; the employer, as a tax-collecting agent under Chapter XVII, bears the statutory duty to deposit the deducted tax. Consequently, the AO was directed not to recover the resulting demand from the assessee, with liberty to proceed against the employer, and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether an employee can be subjected to recovery of tax demand created on processing of return due solely to the employer's non-deposit of TDS, resulting in mismatch between TDS claimed (as per TDS certificate) and TDS reflected in Form 26AS.

(ii) Whether, in such circumstances, the proper course is for the Revenue to pursue recovery from the employer under the statutory TDS recovery machinery rather than enforce the demand against the employee-deductee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Recovery from employee where TDS deducted but not deposited; mismatch with Form 26AS

Legal framework (as discussed): The Tribunal considered the statutory scheme governing deduction and deposit of TDS, including that recovery for failure to deposit TDS lies against the deductor under sections 200 and 201. In applying the relied-upon judicial approach, the Tribunal accepted that section 205 operates as a bar against calling upon the deductee to pay tax to the extent tax has been deducted, and that section 199 cannot be used to deny relief where the deductee had no control over deposit after deduction.

Interpretation and reasoning: The Tribunal found, on the facts, that salary was paid after deduction of tax at source and the assessee possessed a TDS certificate evidencing deduction, but the employer did not deposit the deducted amount, causing a mismatch with Form 26AS and consequent demand on processing. The Tribunal held that once tax is deducted by the employer, the employee cannot be compelled to "make good" the employer's failure to deposit. The Tribunal treated the employer's default as not transferable to the employee, particularly where the employee has no further control over remittance after deduction. The Tribunal expressly followed the principle that the Revenue cannot recover from the deductee amounts already deducted at source merely because the deductor failed to deposit them.

Conclusions: The demand created on account of TDS mismatch attributable to the employer's non-deposit was held not recoverable from the assessee-employee. The Tribunal set aside the appellate order upholding such demand and directed that no recovery be made from the assessee on this basis.

Issue (ii): Correct remedial action-proceeding against employer under TDS recovery provisions

Legal framework (as discussed): The Tribunal referred to sections 200 and 201 as the mechanism enabling the Revenue to proceed against the deductor for non-deposit of TDS. It also noted the factual complication that the employer was under liquidation, impacting practicality of recovery but not shifting liability to the employee.

Interpretation and reasoning: The Tribunal reasoned that the statutory responsibility to deposit TDS rests with the employer-deductor; therefore, the Revenue's remedy is to proceed against the employer for recovery or adopt other lawful remedial measures. The Tribunal rejected the approach of enforcing the demand against the employee as a substitute for action against the deductor, even where liquidation may hinder recovery from the employer.

Conclusions: The Tribunal directed the assessing authority not to recover the demand from the assessee and observed that the assessing authority may proceed against the employer to recover the amount or take other remedial steps consistent with law. The appeal was allowed on this basis.

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