2026 (1) TMI 415 - HC - Income Tax

Employee's TDS credit dispute when employer deducted tax but failed to deposit it; credit granted, recovery refunded with interest.

The dominant issue was whether an assessee could be denied credit of TDS where the employer-deductor failed to deposit the deducted tax in the Central ... Denial of TDS - TDS not deposited by the deductor in the Central Government Account - petitioner is a pilot by profession, who was an employee of M/s Kingfisher Airlines - Since the tax was not deposited by the deductor, demands were raised in petitioner's case - HELD THAT:- As relying on Kartik Vijaysinh Sonavane [2021 (11) TMI 682 - GUJARAT HIGH COURT] we direct that the credit of the tax shall be given to the petitioner and if in the interregnum any recovery or adjustment is made by the respondent, the petitioner shall be entitled to the refund of the same, with the statutory interest, within eight (8) weeks from the date of receipt of copy of this order. Petition succeeds. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the income-tax department can deny credit of Tax Deducted at Source (TDS) claimed by an assessee on salary income, when the employer deducted TDS as evidenced by a TDS certificate but did not deposit the deducted amount in the Central Government account, and consequently raise/maintain outstanding demand and adjust refunds against such demand. 2. Whether, upon denial of such TDS credit and consequential recovery/adjustment, the assessee is entitled to grant of TDS credit and refund of any amount already recovered/adjusted, together with statutory interest, and whether the department's remedy lies against the employer-deductor. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Denial of TDS credit and sustainability of outstanding demand/adjustment where employer deducted TDS but did not deposit it Legal framework (as applied by the Court): The Court proceeded on the legal position applied in an earlier co-ordinate bench order, which in turn applied the statutory scheme concerning credit and recovery where tax is deductible at source, including the protection that an assessee should not be subjected to recovery to the extent tax has been deducted, and the corresponding ability of the department to proceed against the deductor for default. Interpretation and reasoning: The Court treated the matter as covered by a prior co-ordinate bench decision on materially identical facts. The Court noted that the factual matrix-salary TDS being deducted by the employer but not deposited-was not disputed. On the evidentiary aspect, the Court found that the assessee had supplied a certified TDS certificate (Form-16) showing deduction of TDS. In view of the settled position applied in the earlier decision, the Court concluded that the department is precluded from denying the benefit of TDS deducted by the employer during the relevant financial years, and consequential demand/adjustment based on non-grant of such credit cannot stand against the assessee. Conclusion: The Court held that TDS credit must be granted to the assessee for the relevant years notwithstanding the employer's non-deposit, and the department cannot sustain recovery/adjustment against the assessee on that basis. Issue 2: Refund of any recovery/adjustment with statutory interest; liberty to proceed against employer Legal framework (as applied by the Court): The Court applied the operative directions from the earlier co-ordinate bench order governing relief where refunds had been adjusted against such disputed demand. Interpretation and reasoning: Since the Court directed grant of TDS credit, it followed that any amount already recovered or adjusted from refunds in the meantime had no basis to be retained. The Court therefore ordered refund of such recovered/adjusted amount with statutory interest and fixed a time-bound compliance period. Simultaneously, the Court clarified that the department remains free to initiate or continue proceedings against the employer (deductor) for failure to deposit deducted TDS. Conclusion: The Court directed (i) grant of TDS credit, and (ii) refund of any recovery/adjustment with statutory interest within eight weeks from receipt of the order, while expressly leaving it open to the department to proceed against the employer for the default.