ITAT Patna: Employee Not Liable for Employer’s TDS Default under Section 205

When Form 16 Says TDS, but 26AS Says “No”: The Real-World Dilemma

Picture this: You’ve worked hard all year, your salary slips show TDS deductions, and your Form 16 is in hand. But when you check your Form 26AS or AIS, the TDS credit is missing. Suddenly, a demand notice lands in your inbox—CPC has processed your return under Section 143(1), denied TDS credit, and raised a hefty tax demand. Sometimes, your expected refund is quietly adjusted against this “outstanding” demand.

This is not a rare glitch. It’s a growing problem, especially in cases where employers—often in financial distress, liquidation, or simply negligent—deduct TDS from employees’ salaries but fail to deposit it with the government. The result? Employees face the threat of double taxation, emotional stress, and even banking or credit complications, all for no fault of their own.

Key questions arise:

• “Do I really have to pay this tax again?”
• “Is it my responsibility if my employer defaults?”
• “Can the CPC legally deny my TDS credit or adjust my refunds?”
• “How should I respond to a 143(1) intimation or demand?”

This is not just a technical mismatch. For many, it means real cash-flow pain, risk to their financial reputation, and a sense of helplessness—especially when the employer is unreachable, in liquidation, or has vanished.

The Legal Backbone: Section 205 and Its Practical Power

Section 205 of the Income-tax Act is the employee’s shield in these situations. Its language is simple and direct:

“Where tax is deductible at source…the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”

In plain English: If TDS has actually been deducted from your salary, you cannot be asked to pay that portion of tax again—even if your employer never deposited it with the government. The protection is “quantum-specific”—it covers you only to the extent of the TDS actually deducted.

But what about Section 199, which says TDS credit is given only when tax is paid to the Central Government? Here’s where confusion often arises. The Revenue’s standard argument is: “No deposit, no credit.” But courts have clarified that Section 199 (credit mechanism) and Section 205 (bar on recovery) serve different purposes. Even if the credit system is imperfect—if the TDS doesn’t show up in 26AS—Section 205 still prohibits the tax department from recovering that amount from the employee, provided you can prove the deduction.

Where should the Revenue go? The law is clear: Sections 200 and 201 make the employer responsible for depositing TDS. If the employer defaults, the Revenue’s remedy is to proceed against the employer—not the employee. The employer is the agent of the government for TDS; the risk of default is the government’s, not the employee’s.

Practical boundaries: Section 205 protection applies only if TDS was actually deducted (not just promised) and you have credible evidence—Form 16, payslips, bank credits. It does not protect income where no TDS was ever deducted, or amounts beyond what was actually deducted.

Case Law Pillars: How Courts Have Interpreted Employee Protection

ITAT Patna in Ashish Ranjan vs ITO: Employee vs Employer in Liquidation

Let’s break down the facts. The assessee, an employee of Think and Learn Pvt. Ltd. (which later went into liquidation), received salary after TDS deduction and was issued Form 16. The employer, however, did not deposit the TDS, leading to a mismatch in 26AS. The CPC raised a demand of ?9.42 lakh, and the CIT(A) upheld it, citing the absence of 26AS credit and TDS certificate.

The ITAT Patna decisively held:

• Once TDS is deducted from salary, the employee cannot be forced to make good the shortfall caused by the employer’s non-deposit.
• Section 205 squarely applies: the bar on direct demand from the employee to the extent tax has been deducted.
• The Revenue’s remedy lies only against the employer under Sections 200/201—even if the employer is in liquidation.
• The Tribunal relied on the Delhi High Court’s decisions in Chintan Bindra and Sanjay Sudan.

Why is this crucial? Even if the employer is in liquidation and the Revenue has no realistic chance of recovery, the law does not allow the employee to be made a soft target. Administrative convenience or revenue loss cannot override Section 205.

Delhi High Court in Sanjay Sudan: No Indirect Recovery, No Refund Adjustment

In Sanjay Sudan, the employer deducted TDS but failed to deposit it. The Revenue argued that credit under Section 199 is only available when tax is actually deposited, so the demand must remain outstanding (though no coercive recovery would be taken). The key question: Can the Revenue keep the demand alive and adjust future refunds?

The Delhi High Court held:

• Section 205 prevents calling upon the assessee to pay tax already deducted.
• CBDT’s own Instruction (1-6-2015) recognises the bar on coercive recovery, but the Court went further: even indirect recovery, like adjustment of future refunds, is barred if it relates to tax already deducted.
• The Court asked: “Can Revenue do indirectly what it cannot do directly?” The answer: No. Adjustment of refunds is an indirect form of recovery, violating Section 205.

Practical takeaway: Demands attributable to TDS already deducted cannot be kept “parked” and adjusted against future refunds. Employees can resist both coercive demands and silent set-offs.

Delhi High Court in Chintan Bindra: Consolidating the Protection

In Chintan Bindra, the employee (of Kingfisher Airlines) faced demands for multiple years where TDS was deducted but not deposited. The Court followed Sanjay Sudan and clarified:

• Section 205, CBDT Instruction, and fairness principles bar recovery from the employee.
• Section 199 cannot act as an impediment to relief when TDS was deducted.
• Where TDS has been deducted but not deposited, the employee cannot be penalised; the Revenue may proceed only against the employer.
• The Court set aside 143(1) intimations, restrained recovery, and directed refund of amounts wrongly adjusted.

Doctrine emerging: If TDS is deducted but not deposited:

• No direct recovery (no demand, no coercive measures).
• No indirect recovery (no refund adjustment).
• Exclusive remedy: action against employer under Section 201.

What Employees Must Do: Documentation & Evidence Strategy

If you’re facing a TDS mismatch, your best defence is solid documentation. Here’s what you should maintain:

1. Primary evidence of TDS deduction

• Form 16 (or 16A) for the relevant year, showing gross salary, TDS amount, TAN & PAN details.
• Monthly payslips with salary structure, TDS, and net pay fields.

2. Bank statements / salary credit proofs

• Highlight net salary credited.
• Where payslip shows gross – TDS = net, bank entries corroborate deduction.

3. Employer communications

• Full & Final Settlement statement, if resigned.
• Emails or HR/payroll correspondence confirming TDS deduction or mentioning TDS amounts deposited (if any).
• Any internal statements (salary ledger, tax working sheets).

4. Compliance trail with Revenue

• Copies of filed ITR acknowledgements, 143(1) intimations, notices under 143(2)/154/156, prior responses, and grievances filed (e.g., e-Nivaran).
• See this guide on ITR filing for smooth submission and document management.

5. Where employer is unresponsive / in liquidation

• Proofs of company’s insolvency/liquidation status (MCA records, NCLT orders, public announcements).
• Attempts made to contact or get TDS clarification from employer/liquidator.
• For more on company liquidation processes, check our LLP closure and restoration service.

Having this evidence ready is your first line of defence if a demand is raised due to a TDS mismatch.

Responding to a CPC 143(1) Demand: A Step-by-Step Playbook

When a demand notice arrives because your employer deducted TDS but didn’t deposit it, don’t panic. Here’s a practical, legally sound approach:

Step 1: Pinpoint the Mismatch

• Compare the TDS claimed in your ITR, the TDS reflected in Form 16/payslips, and what appears in Form 26AS/AIS.
• Confirm that the demand is solely due to the employer’s non-deposit of TDS.

Step 2: File an Online Response or Rectification

• Use the “Response to Outstanding Demand” feature on the e-filing portal, or file a rectification request under Section 154 (if within the time limit).
• Attach Form 16, payslips, and relevant bank statement extracts.
• Clearly state that TDS was deducted from your salary, and cite Section 205, along with the Delhi High Court’s Sanjay Sudan and Chintan Bindra rulings, and ITAT Patna’s Ashish Ranjan order.

Step 3: Structure Your Representation

• Briefly narrate the facts: salary received after TDS, Form 16 issued, employer defaulted on deposit.
• Make legal submissions: Section 205 bars recovery from the employee once TDS is deducted; Section 199 (credit) and Section 205 (recovery) serve different purposes.
• Request: withdrawal of demand to the extent of TDS deducted, and direction not to adjust any refund against such demand.

Step 4: Escalate if Needed

• If the CPC does not resolve the issue, approach your Jurisdictional AO with a written application and supporting documents.
• Request a speaking order or rectification at the AO level.

Step 5: Appeal if Necessary

• If the AO persists, file an appeal to CIT(A) within the limitation period, annexing all evidence and case law.
• Emphasise the hardship, double taxation, and consistent High Court precedent.

Scope and Limits of Section 205 Protection

What Section 205 Clearly Protects

• Employees where TDS has actually been deducted and is evidenced by Form 16/payslips.
• No direct demand can be made through 143(1) adjustments or 156 notices.
• No indirect recovery through adjustment of future refunds (as per Sanjay Sudan and Chintan Bindra).

Practical Limitations

• The onus is on the employee to prove deduction—absence of Form 16, payslips, or bank proof weakens the Section 205 defence.
• Protection is only “to the extent to which tax has been deducted”—any tax beyond that remains payable if law requires.
• Section 205 does not automatically correct 26AS; the remedy is on the recovery side, not the credit ledger side.

Grey Areas

• If the employer manipulates Form 16 without actual deduction, or salary is paid in cash without transparent TDS records, Section 205 protection may not apply.
• Employees of non-compliant small entities with poor documentation face higher risk.

When Revenue Attempts Indirect Recovery: How to Push Back

Spotting Indirect Recovery

• Unexplained reduction in tax refund as per intimation under 143(1) or 245.
• Demand shown in the portal as “adjusted” or “partially recovered” without a fresh notice.

Immediate Action Plan

• Obtain all relevant intimations and refund computation details.
• File a representation pointing out that the demand relates to tax already deducted at source.
• Cite Section 205, Sanjay Sudan (refund adjustment = indirect recovery, impermissible), and Chintan Bindra (direction to refund amounts wrongly adjusted).

Escalation Routes

• File a rectification application under Section 154.
• Lodge a grievance on the e-filing portal or CPGRAMS with legal grounds.
• If unresolved, approach CIT(A) or consider a writ petition in the High Court, especially if recovery/adjustment has already happened.

Key Reliefs to Seek

• Deletion of demand to the extent of TDS deducted.
• Re-credit of any refund amount wrongly adjusted.
• Direction that no further recovery measures or adjustments shall be undertaken for such portion.

Special Situations: Employer in Liquidation, Unresponsive, or Vanished

If Employer is in Liquidation or Insolvency

• Collect NCLT orders, public notices, and details of the appointed liquidator/IRP.
• In your representation, explain that you have no practical control or recourse over the deposit.
• Argue that recovery from the employee would transfer insolvency risk from Revenue to employee, contrary to Section 205 and Ashish Ranjan.
• For related legal compliance and company liquidation assistance, consider expert help from Chartered Accountants in Chandigarh.

If Employer is Unresponsive or Trace-less

• Gather evidence of multiple emails/letters to HR/finance, returned mail, or undeliverable notices.
• Assert that you have acted with due diligence; the law does not impose an investigation duty on the employee beyond reasonable steps.

Communication Strategy

• Keep all communication written and dated.
• Clearly assert: “TDS deducted; employee protected under Section 205; Revenue must proceed only against employer.”
• Preserve the entire trail for potential appeal or writ.

Employer & Payroll Compliance: Preventing Disputes and Section 200/201 Exposure

Best Practices for Employers and Payroll Teams

• Timely deposit of TDS within prescribed due dates.
• File correct quarterly TDS returns (Form 24Q).
• Reconcile salary ledgers, TDS returns, challans, and Form 16.
• Share TDS challan details and Form 16 on time; promptly correct any PAN/TAN/amount errors.
• For payroll compliance, explore Payroll Outsourcing Services to reduce errors and risks.

Consequences of Failure to Deposit TDS

• Under Section 201, the employer is treated as an assessee in default, liable for principal TDS not deposited, interest under Section 201(1A), and possible penalties/prosecution.
• Reputational and HR risk: employee litigation and regulatory scrutiny.

Why HR/Finance Must Align with Legal Reality

• Courts are placing the risk squarely on the employer.
• Non-compliance can lead to tax costs and litigation against company management.

Closing Synthesis: Key Takeaways for Employees, Advisors, and Employers

• For employees and tax professionals: If TDS is actually deducted and you can prove it, you cannot be compelled to pay that tax again—even if the employer defaults. Both direct and indirect recovery are legally barred by Section 205 as interpreted by courts.
• For employers and payroll teams: Non-deposit of TDS is not just a clerical issue; it exposes the company to serious liability under Sections 200/201 and creates employee disputes and litigation. Compliance discipline is the only sustainable solution.
• For all stakeholders: Ashish Ranjan (ITAT Patna), Chintan Bindra, and Sanjay Sudan (Delhi HC) collectively build a robust shield for employees. The law’s design is clear: the deductor bears the risk of default, not the deductee. With proper documentation, timely responses, and correct legal reliance on Section 205, employees can and should resist unlawful double taxation.

If you’re facing a TDS mismatch or demand, gather your evidence, assert your rights, and don’t hesitate to seek professional help from expert Chartered Accountants in Delhi.