One TDS is deducted, credit has to follow, failure of deductor to deposit the amount to the credit of the Central Government no excuse to deny TDS credit to the deductee – High Court
In a landmark judgment, a Division Bench of the Hon’ble High Court while issuing detailed directions to CBDT on grant of TDS has held that where assessee is able to establish that TDS was in fact deducted from his income or payment, the Department must grant appropriate TDS credit and cannot recover, directly or indirectly, the corresponding amount from the deductee.
ABCAUS Case Law Citation:
5218 (2026) (08) abacus.in HC
Important Case Laws relied upon by Parties:
Gayatri Snehal Rao v. Income tax Assessing Officer
Income-tax Assessing Officer vs. Shobhan Shantilal Doshi
In a batch of Petitions, a common grievance raised by the Petitioners was concerning grant of credit for Tax Deducted at Source (TDS) which was not deposited by the deductor to the credit of the Central Government.
According to the Petitioners, tax was in fact deducted from their income or payments, but since the deductors failed to deposit the same and/or failed to file proper TDS statements, the Income tax Department (‘Department’) denied credit of such TDS and had raised demands against the Petitioners.
The Petitioners had relied principally on Section 205 of the Income Tax Act, 1961 (the Act), and on decisions of various High Courts, which either held that TDS credit must be granted, even if the deductor has not paid over the amount, or at the very least that the Department cannot recover such tax once again from the deductee.
The Hon’ble High Court observed that the controversy had significance beyond the immediate Petitioners as it affected a broad spectrum of taxpayers, including salaried employees, contractors, professionals, landlords, pensioners, and small Assessees. The issues are also intertwined with the electronic compliance mechanism including Form 26AS, processing under Section 143(1), portal-based demand reflection, and automatic refund adjustments.
The Amicus Curiae appointed by the Hon’ble High Court submitted that once tax is deducted from the income payable to the Assessee, the deductor acts as an agent of the State, and the deductee has neither possession nor control over the amount so withheld. Therefore, once tax has, in fact, been deducted, the deductee/assessee cannot be called upon to pay it again. He pointed out that the Department has ample machinery under the IT Act to proceed against the deductor, including Sections 200, 200A, 201, 221, 271C, 276B and allied provisions.
He further submitted that as regards Section 199, though the language speaks of tax “deducted” and “paid to the Central Government”, 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.
The Hon’ble High Court noted 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.
The Hon’ble High Court further opined that the practical consequences of keeping a demand alive on the IT portal are grave as it adjusts refunds of later years and interest continues to run.
The Hon’ble High Court opined that 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 known. The demand must not merely be kept dormant; it must be removed or treated as not enforceable in a manner that does not prejudice the deductee.
The Hon’ble High Court stated that the Revenue before the Hon’ble Supreme Court has stated that in cases where any TDS has been deducted from the payment made to an Assessee, then he must get credit for the same, despite the fact that the amount may not have been paid to the Revenue by the person who deducted the TDS. For ascertaining as to whether TDS has been deducted, the facts would always have to be verified. Therefore, once TDS is in fact deducted and verified, the Department contend that the deductee is not entitled to credit of such TDS amount, and all the consequential reliefs have to follow. The deductee cannot be burdened with the demand merely because the deductor has not paid the amount to the Government even though the same has been deducted from the amount payable to the assessee.
The Hon’ble High Court opined that once actual deduction of tax at source is established on facts, credit must follow. At the highest, the Department may verify whether a deduction did in fact occur, but once that foundational fact is proved, the subsequent non-payment of tax to the credit of the Central Government by the deductor cannot be used to defeat the deductee’s entitlement.
The Hon’ble High Court also opined that in a case where TDS credit is claimed though the amount is not reflected in Form 26AS and Form 16 / Form 16A is unavailable, the claim cannot be rejected solely on that basis. In such a situation, the assessee may establish a deduction by producing other reliable and cogent material. The evidence required will necessarily depend on the nature of the payment. Based on the suggestions received, the Hon’ble High Court illustrated what could constitute as satisfactory categories of evidence as under:
| Type of income | Illustrative evidences |
| Salary cases In salary cases, where Form 16 may not be available, the following illustrations may constitute satisfactory evidence, singly or cumulatively: |
i. salary slips showing gross salary, tax deductions and net salary. The salary slips are now a days computer generated and need not contain signature and therefore, the same may not be considered as the sole reason to reject the slips;
ii. appointment / offer letter or employment contract showing salary structure, together with bank statement showing receipt of the corresponding net amount; iii. employer’s payroll workings of the concerned employee, year-end tax workings by the employer of the concerned employee, email communications, internal cost-to-company break-up, and any tax computation sheet generated by the employer and shared with the employee; iv. communications, if any, by the employee to the employer pointing out that tax has been deducted but not deposited or that Form 16 has not been issued or incorrectly issued |
| Contractor / professional fee / rent cases or other similar cases | 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 |
| Interest / dividend / similar receipt | 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 |
| Corroborative evidence across all categories of income |
i. communications by the deductee to the deductor regarding TDS deduction and default;
ii. communications by the deductee to the Department/TDS officer/ Assessing Officer bringing to their notice the deduction but nonpayment to the Government; iii. claims made in insolvency or liquidation proceedings; iv. any admission by deductor in books, correspondence, affidavit, balance sheet note, or proceedings. |
However, the Hon’ble High Court further held that the absence of direct evidence from the deductor cannot be the sole basis to reject the claim. There may be several reasons why no direct document from the deductor is available including hostility, closure of business, insolvency, disappearance of management, or deliberate non-cooperation, and the Department may consider the same on a case-to-case basis.
The Hon’ble High Court pointed out that the Department has ample power to issue summons or notices to the directors or principal officers and get relevant information in this regard. If default is established, the Department must take action against the deductor for recovery of revenue loss, in accordance with law. The Hon’ble High Court held that while Form 16 / Form 16A may still remain valid evidence where available, they cannot be treated as the only mode of proving deduction in cases of deductor’s default. The law must cater to the realities of the present system.
The Hon’ble High Court has issued the following administrative Directions to CBDT/Department where an Assessee claims TDS credit on the basis that tax was deducted but not reflected in Form 26AS due to the deductor’s default and furnishes prima facie supporting material, the jurisdictional Assessing Officer shall:
i. register and acknowledge the application;
ii. keep the corresponding demand in abeyance pending disposal of the claim as per the provisions of Section 205;
iii. mark the demand appropriately in the system as stayed / not recoverable / kept in abeyance so that no coercive recovery or refund adjustment 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.
It was also clarified that the initial denial of credit in a Section 143(1) intimation may occur mechanically on account of the current 26AS 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.
The Hon’ble High Court held as under:
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, as set out earlier, appropriate TDS credit must be granted, and the corresponding demand cannot be enforced or continued against the deductee.
ii Secondly, in the absence of Form 16 or Form 16A or similar other forms, deduction may be established by other cogent material such as salary slips, bank statements, payment advices, ledgers, invoices, rent records, correspondence, insolvency claims and other surrounding evidence; absence of the formal certificate in Form 16 or 16A, by itself shall not be fatal.
iii The Department is directed to follow the directions which we have given earlier in respect of dealing with an application received for grant of credit of TDS where tax is deducted at source but not paid, where credit is denied while processing the Return of Income.
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