TaxTMI 
TaxTMI 
2026 (8) TMI 1189
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....tition (L) No. 31169 Of 2025, Writ Petition (L) No. 31258 Of 2025, Writ Petition (L) No. 31429 Of 2025, Writ Petition (L) No. 31460 Of 2025, Writ Petition (L) No. 35206 Of 2025, Writ Petition (L) No. 40158 Of 2025, Interim Application (L) No. 4622 Of 2026, 40158 Of 2025, - -<br>Income Tax<br>B.P. COLABAWALLA AND FIRDOSH P. POONIWALLA, JJ. Writ Petition No. 2063 Of 2025, Writ Petition No. 1480 Of 2025, Writ Petition No. 1481 Of 2025, Writ Petition (L) No. 20749 Of 2025, Writ Petition (L) No. 20750 Of 2025, Writ Petition (L) No. 30175 Of 2025, Writ Petition (L) No. 30190 Of 2025, Writ Petition (L) No. 30365 Of 2025, Writ Petition (L) No. 30376 Of 2025, Writ Petition (L) No. 31169 Of 2025, Writ Petition (L) No. 31258 Of 2025, Writ Petition (L) No. 31429 Of 2025, Writ Petition (L) No. 31460 Of 2025, Writ Petition (L) No. 35206 Of 2025, Writ Petition (L) No. 40158 Of 2025, Interim Application (L) No. 4622 Of 2026, 40158 Of 2025, Writ Petition No. 10325 Of 2023, Writ Petition No. 8927 Of 2025, Writ Petition No. 8929 Of 2025, Writ Petition No. 13623 Of 2025. Mr. J. D. Mistri, Senior Advocate, and Adv. Harsh Kothari, appointed as Amicus Curiae. For the Petitioner: Mr. Dharan V. Ga....
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....ring questions of considerable importance, and since certain decisions were pressed before us to indicate a supposed friction between Sections 199 and 205 of the IT Act, we considered it appropriate to hear the matters in some detail. To assist the Court, we requested Mr. J.D. Mistri, the learned Senior Advocate, to render assistance. He graciously accepted our request. We have heard Mr. Mistri, the learned Senior Counsel, other Counsels appearing for the various Petitioners, and as also the learned standing Counsels appearing for the Department. 4. During the course of hearing, it became evident that the controversy has significance beyond the immediate parties. It affects a broad spectrum of taxpayers, including salaried employees, contractors, professionals, landlords, pensioners, and small Assessees whose taxes are collected through the vicarious machinery of deduction at source. The issues are also intertwined with the electronic compliance architecture under the IT Act, including Form 26AS, processing under Section 143(1), portal-based demand reflection, and automatic refund adjustments. 5. The lead petition being Writ Petition No. 2063 of 2025, the facts therein may be....
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....rnment", the same must be read in context and harmoniously with the rest of the statutory scheme. Section 199, according to him, cannot be interpreted in a manner that destroys or weakens Section 205. A deductee who has offered the gross receipt to tax cannot be denied the corresponding TDS credit simply because the deductor defaulted. Such a construction, it was argued, would produce manifest injustice and allow the Revenue to achieve indirectly what Section 205 forbids directly. 10. Mr. Mistri has fairly pointed out the cleavage of judgments on the aspect of Sections 199 and 205 of various High Courts, including this Court. He has pointed out that some decisions have allowed credit of TDS despite non-deposit of the same with the Government, whereas some judgments have directed the Department to not recover the demand arising on account non-grant of credit of TDS. He also pointed out some decisions, where the distinction between Sections 199 and 205 have been blurred or not appreciated. These judgments have been dealt with later on in our analysis. 11. Mr. Mistri further emphasized the refund dimension. In many cases, an Assessee may be entitled to refund because his final l....
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....ly written to the TDS officer, the Assessing Officer, or other departmental officers, bringing to their notice that tax had been deducted but not deposited. Yet, no meaningful corrective step was taken and the Department continued to keep the demand alive on the portal, often adjusting subsequent refunds. Further, such demands have to be deleted from the portal and mere marking of a demand as non-recoverable would not serve any purpose as the system is amenable to modification by the Assessing Officers and possibly the CPC, which will again entail the Petitioners having to knock on the doors of the Department in case such demands become alive and refunds start getting adjusted. 15. Insofar as the lead matter is concerned, the learned Counsel appearing for the Petitioners, apart from the broad legal challenge, submitted that the Petitioner had contemporaneously taken steps to bring the employer's default to the notice of the Department. The Petitioner addressed a letter dated 18.01.2020 to the Income-tax Officer (TDS), Circle 3(1), Chennai, being the jurisdictional TDS officer of the employer company, specifically pointing out that though tax had been deducted from his salary, th....
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....A, credit for tax deducted at source can be granted only if the tax deducted is also paid to the Central Government and corresponding information is furnished by the deductor to the Income-tax authority. It was, therefore, contended that the statutory condition of payment to the Government cannot be diluted. 18. The Department's affidavit also referred to the CBDT Office Memorandum dated 14.01.2026, which reiterated the Board's stand that while Section 205 may bar direct recovery from the deductee, Section 199 and Rule 37BA require payment to the Government before credit can be granted. The Department, thus, sought to preserve a distinction between non-recovery and actual grant of credit. 19. The Revenue has fairly contended that as per Section 205 of the IT Act, demands to the extent of tax deducted at source but not deposited, cannot be recovered from the deductees. However, for the same to apply, the Assessee/deductees would have to prove to the satisfaction of the Assessing Officers that tax was actually deducted at source but not paid to the Government. It was submitted that there is no question of either granting credit of TDS or removing the demand from the Portal. The....
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....though the Department may not enforce collection where the default lies at the end of deductor; iv. Subsequent years' refunds, if any, gets adjusted against such demand, only if such demand exceeds Rs. 10,00,000/- and if the Assessee and JAO certify such demand to be not enforceable, because of TDS mismatch, then the refund is not adjusted; 24. The stand of the Department is emphatically made clear that credit of TDS would not be given where TDS is not paid to the Government, but the demand would not be collected if the demand does not exceed Rs. 10 lakhs. If the demand exceeds Rs. 10 lakhs, then the demand may be enforced unless the Assessee and JAO marks such demand as non-enforceable, due to TDS mismatch. In such cases, no refunds would be adjusted. COURSE OF HEARING AND SUBSEQUENT DEVELOPMENT 25. During the course of hearing, the parties placed before us the decision of the Gujarat High Court in Gayatri Snehal Rao v. Income-tax Assessing Officer [2024] 168 taxmann.com 466 (Gujarat), and the subsequent order of the Hon'ble Supreme Court in Income-tax Assessing Officer, Baroda v. Shobhan Shantilal Doshi [2026] 182 taxmann.com 555 (SC). It was contended by the Pe....
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....rely directed not to recover such demand in terms of Section 205 of the IT Act? ii. What would constitute sufficient or satisfactory proof or evidence to demonstrate deduction of tax at source in the absence of Form 16 and Form 16A? STATUTORY FRAMEWORK 29. Before dealing with these issues, it is necessary to notice the relevant provisions. i. Section 190 provides that notwithstanding the fact that regular assessment is to be made in a later Assessment Year, tax on such income shall be payable by deduction at source, collection at source, or advance payment in accordance with Chapter XVII. ii. Section 191 contemplates direct payment by the Assessee where no deduction provision applies, or where tax has not been deducted in accordance with Chapter XVII. iii. Section 197 empowers the Assessing Officer to issue a certificate authorising deduction of tax at source at a lower rate or, where appropriate, at a nil rate, if the total income of the recipient justifies such reduced deduction. Once such a certificate is issued and furnished to the deductor, the deductor is bound to deduct tax in accordance with the certificate and not at the standard r....
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.... on the deductor and not on the deductee. x. Section 203 requires the person deducting tax at source to furnish to the deductee a certificate to the effect that tax has been deducted, specifying the prescribed particulars such as the amount deducted, rate of deduction and other relevant details. In salary cases, this is ordinarily Form 16; in many other cases, it is Form 16A. xi. Section 205 provides that where tax is deductible at source under the foregoing provisions of Chapter XVII, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income. 30. These provisions show that deduction at source is a statutory mode of tax collection. The deductor acts under a vicarious statutory obligation, and once he withholds a part of the payee's income as tax, that amount passes out of the deductee's control by operation of law. 31. Some of the important TDS provisions and the nature of payments they deal with are brought out hereunder: Section Nature of payment 192 Salary 194A Interest other than securities 194C Contractors / sub-contractors 194H Commission / brokerage 194-I....
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....he modern system, the deductor first deposits the tax, files the relevant TDS return/statement by entering the relevant challan details, and only thereafter the certificate is generated through the TRACES mechanism. As a result, where the deductor has not deposited the tax or not filed the statement, Form 16 or Form 16A often cannot be generated at all. 37. This change has a crucial consequence. If the Department were to insist rigidly on Form 16 or Form 16A as the only acceptable evidence of deduction, a deductee in the very category of cases before us would be left remediless. The absence of the certificate would not be because no deduction occurred but because the deductor defaulted in the later statutory steps of deposit and statement filing. DECISION OF THE DELHI HIGH COURT IN COURT ON ITS OWN MOTION 38. One of the first decisions of a High Court to deal with the intricacies of TDS procedures is the decision by the Delhi High Court in Court on its Own Motion v. Commissioner of Income-tax [2013] 352 ITR 273 (Delhi). It would be pertinent to notice the same in some detail. In the said case, the Delhi High Court was, inter alia, dealing with the problem arising from the ....
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....ed the Board to take appropriate steps to ameliorate and help the small taxpayers." (emphasis supplied) 40. The Court then laid down the Department's duty in no uncertain terms: "50. It is unfortunate that the Board did not take immediate steps after even noticing lacuna and waited till Finance Act, 2012, when Section 234E was enacted. Mere writing of a letter by the Assessing Officer to the deductor by no stretch can be treated as sufficient action on the part of the respondents. Even this, it appears, was done in a few cases as the respondents in the counter affidavit have stated that they have written 20119 communications to the tax deductors, where TDS credit claimed by the taxpayers did not match with the details loaded by the deductors. The Act empowers and authorises the Assessing Officer to verify the contents of the return and notices can be issued to a third party, i.e. the deductor, to furnish information and details. The deductor, the principal officer or person responsible for making deduction, once issued notice to appear, in most cases, would like to comply with the statutory requirements and also furnish details with regard to TDS deducted from ....
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....gic would still remain the same, and we apply the same logic here as well. ISSUE NO. (i) : SECTION 199 AND SECTION 205 42. The first issue concerns the relationship between Sections 199 and 205. The Department says that under Section 199, unless the tax deducted is paid to the Central Government, no credit can be granted. The Petitioners say that Section 205 bars recovery and that the statutory scheme requires either a grant of credit or complete neutralisation of the demand. 43. In our view, the two provisions must be read harmoniously. Section 205 is a substantive protective provision. It is triggered once tax has been deducted from the Assessee's income. It does not say that the bar operates only after the deductor pays over the amount to the Government. Section 199, on the other hand, concerns the mechanics of tax accounting and attribution. If Section 199 is interpreted in isolation and rigidly, it would defeat Section 205 and permit the very mischief that Section 205 was enacted to avoid. 44. In one of the first decisions, this Court in Yashpal Sahni vs. Rekha Hajarnavis, Assistant Commissioner of Income-tax reported in [2007] 293 ITR 539 (Bombay), held that once ....
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....suing TDS certificate under section 203 of the Act is to enable the assessee to avail credit of the tax deducted at source in the relevant assessment year. If the TDS certificate is not issued, then under section 199 of the Act, the assessee from whose income, tax has been deducted at source will not be entitled to take credit of the said amount. In that event, on account of the non-availability of the credit, the assessee would be liable to pay tax once again even though the tax was deducted at source. Thus, it would be a case of double taxation which is not permissible in law. To avoid such anomaly, section 205 has been enacted, to the effect that, once the tax is deducted at source by the employer-company, then, the person from whose income, the tax has been deducted at source shall not be called to pay the said tax again. From the language of section 205 of the Act, it is clear that the bar operates as soon as it is established that the tax has been deducted at source and it is wholly irrelevant as to whether the tax deducted at source is paid to the credit of the Central Government or not and whether TDS certificate in Form No. 16 has been issued or not. Also, the mere fact th....
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....rvindbhai Patel v. ACIT [2023] 455 ITR 82 (Gujarat) iii. Malay Kar v. UOI [2025] 472 ITR 714 (Orissa) 48. In the following decisions, it was held that TDS credit cannot be given under Section 199 of the IT Act in the absence of tax having been paid by the deductor to the Government :- i. Assistant Commissioner of Income-tax v. Om Prakash Gattani [2000] 242 ITR 638 (Gauhati) ii. Mridul Raj Kunnon v. CIT [2025] 174 taxmann.com 164 (Kerala) 49. Thus, it can be observed that there are divergent views of the Courts on the provisions of Sections 199 and 205 of the IT Act. However, the common thread running through all the decisions is that once tax is deducted, though not paid, the said amount cannot be recovered from the deductee. Consequently, there cannot be any question of adjustment of refund against such demand. 50. The practical consequences of keeping a demand alive on the IT portal are grave. Refunds of later years get adjusted. Interest continues to run. The Assessee suffers as though he were a defaulter. In such a case, saying that the Department will not "recover" directly is no answer. Perils of automation and technology are very well know....
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....he Act and the binding instructions of the CBDT. Therefore, we are of the opinion that necessary action be taken by the respondent-department so as to see that in future, no such inconvenience or harassment to the assessee is caused in breach of the provisions of the Act and the instructions issued by the CBDT. The respondents are directed to comply with the aforesaid directions forthwith and pass necessary orders to rectify the software which creates mismatch between the Tax Deducted at Source and the tax not deposited by the deductor in case of deductee. In no case there has to be a demand in case of a deductee for mismatch of the amount of Tax Deducted at Source not being found deposited by the deductor in view of the provision of section 205 which puts a bar on a direct demand in case of deductee." (emphasis supplied) 53. The Revenue carried the matter to the Hon'ble Supreme Court. Before the Hon'ble Supreme Court, no challenge was laid to the relief granted on merits, but the Department contended that the directions qua the amendments to the software be deleted. Moreover, the said order records the Department's concession that credit of TDS which has been deducted ....
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....With the aforesaid clarification in the impugned order passed by the High Court, the present appeal is disposed of." (emphasis supplied) 54. The Hon'ble Supreme Court's order is clear. The Gujarat High Court had set aside the intimation under Section 143(1) which had, in fact, denied the credit of TDS and raised a demand. The Gujarat High Court did not merely direct non-recovery of demand or removal of demand from the portal, but it, in fact, set aside the very intimation which had denied TDS credit to the Assessee therein. Such relief granted to the Assessee on merits was not challenged by the Department. The Hon'ble Supreme Court interfered only with the separate directions to amend the software. Further, it recorded the ASG's submission/concession that where TDS has in fact been deducted, the Assessee gets credit, though such TDS may not be deposited with the Government Treasury. The Department further stated that such a grant of credit would require certain verification, which in our view is a harmonious view of the provisions of Sections 199 and 205 of the IT Act. 55. Further, the Department has not shown to us that they have challenged any order of any High Cou....
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....rol over the amount so withheld. The amount never reaches his hands. He cannot compel the deductor to deposit it except by making requests or pursuing separate proceedings. Further, filing of TDS statements and issuance of Form 16/16A are also beyond his control. Therefore, after deduction, performance of the remaining statutory steps lies entirely outside the deductee's power and control. To deny credit to the deductee, on the ground that the deductor failed to perform a duty which only the deductor could perform would amount to insisting upon an impossible condition from the deductee. The law does not compel a person to do that which he cannot possibly do. This aspect becomes even more evident when the present TDS system is examined. Under the electronic regime, the deductor must first deposit the TDS, then file the statement, and only thereafter does the system recognise the entry in Form 26AS and enable generation of Form 16 or Form 16A or other forms. If the deductor defaults at that stage, the deductee is rendered incapable of producing the very form which the system then expects him to rely upon. The deductee cannot force generation of Form 16 or Form 16A; he cannot alter Fo....
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....d above, the operational sequence is now: deduction, payment through challan, filing of return/statement, and generation of Form 16 / Form 16A through the electronic mechanism. In practical terms, without payment and/or statement filing, Form 16 or Form 16A cannot be generated at all. Manual Form 16/16A cannot be issued and even if issued has no evidentiary value. Therefore, insisting on these forms as the only proof would make relief impossible in precisely the category of cases that require relief. 64. Further, once a proper statement is filed and matched, the amount ordinarily reflects in Form 26AS or the relevant electronic record. To that extent, Form 16 and Form 16A have become less important as proof in ordinary compliant cases. Their real significance now arises in non-standard or disputed situations. 65. In fact, as rightly argued by the Petitioners herein, this highlights the reduced importance of Section 203, which requires the deductor to issue TDS certificates in Form 16/16A. If TDS is deducted and paid, TDS statements are filed, then the relevant amount of TDS gets reflected in Form 26AS of the deductee, in which case he would not require the help of Form 16/ 16....
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....r cases, the following may constitute satisfactory evidence: i. invoice or fee memo showing gross claim and bank statement showing receipt of net amount, and justifying the difference being TDS thereon with the difference approximating being the TDS amount at the TDS rate prescribed; ii. payment intimation or remittance advice issued by the client; iii. ledger accounts maintained by client or deductee showing gross amount, TDS, and net payment; iv. confirmation from payer, if any; v. contemporaneous correspondence, if any, demanding a TDS certificate or deposit of TDS. 70. In interest / dividend / similar receipt cases, the following may constitute satisfactory evidence: i. interest advice, dividend advice, payment warrant, or other similar intimation; ii. payer's confirmation; iii. ledger account of the payee showing net receipt after withholding of TDS. 71. Common corroborative evidence across all categories may include: i. communications by the deductee to the deductor regarding TDS deduction and default; ii. communications by the deductee to the Department/TDS officer/ Assessing Offi....
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....stment takes place, as per provision of Section 205; iv. undertake factual verification in the manner indicated above; v. pass a reasoned order, as expeditiously as possible and preferably within six months from receipt of the application; vi. in the event the Assessee is not satisfied with the orders passed by the Department then the Assessee shall be free to pursue all remedies available to him as per law. 77. We clarify that the initial denial of credit in a Section 143(1) intimation may occur mechanically on account of the current statement-driven processing architecture. But once an application supported by prima facie material is received, the Department must move beyond the mechanical mismatch and adjudicate the matter in accordance with law and in light of the directions issued in this judgment. CONCLUSION 78. For the reasons aforesaid, we hold as follows :- i. First, where tax has in fact been deducted at source from the income or payment of an assessee, the Department cannot deny the deductee the credit thereof merely because the deductor failed to deposit the amount to the credit of the Central Government. Upon verification, a....