2026 (1) TMI 305 - AT - Income Tax

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, ... Non-deposit of TDS by the employer of the assessee - mismatch between TDS claimed (as per TDS certificate) and TDS reflected in Form 26AS - responsibility to pay TDS - HELD THAT:- Non-deposit of TDS on the part of the employer cannot be slapped on the assessee more so no action against the employer can be taken under the Act. The case of the assessee find support from the decision of Shri Cintan Bindra [2023 (12) TMI 63 - DELHI HIGH COURT] as held petitioner having accepted the salary after deduction of income tax at source had no further control over it in the sense that thereafter it was the duty of his employer acting as tax collecting agent of the revenue under Chapter XVII of the Act to pay the deducted tax amount to the Central Government in accordance with law. The employer of the petitioner having failed to perform his duty to deposit the deducted tax with the revenue, petitioner cannot be penalized. We direct the ld. AO not to recover any demand from the assessee. The ld. AO can proceed against the employer to recover such demand or take any other remedial measure. Consequently, the appeal of the assessee is allowed. 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.