The Madras High Court has clarified that where tax has already been deducted at source (TDS) by an employer from payments made under a Voluntary Retirement Scheme (VRS) and wage settlement, employees cannot compel the employer to refund the deducted amount. Instead, the appropriate remedy is to file income tax returns and claim the eligible refund from the Income Tax Department, which must process such claims expeditiously.
The writ petition was filed representing 61 workers of Bata India Limited. The dispute originated from a wage revision proceeding pending before the Industrial Tribunal. During the pendency of the dispute, the parties entered into a settlement dated January 10, 2026 under the Industrial Relations Code, 2020.
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Under the settlement each worker was entitled to ₹5 lakh under the Voluntary Retirement Scheme (VRS); ₹40.50 lakh as compensation for loss of salary for the remaining service period up to December 31, 2032; and ₹50,000 towards arrears of wage revision for the period from December 1, 2023 to December 31, 2025.
The compensation was payable in two instalments. However, while releasing the payments, the company deducted TDS on the amounts, treating them as taxable salary income.
The union argued that although the settlement expressly recognised that employees could submit Form 10E for relief under Section 89 of the Income Tax Act, the employer deducted TDS on the entire compensation without granting the benefit of spreading the income over multiple years.
According to the union, this resulted in excessive tax deduction by placing workers in a higher tax slab and sought directions compelling the employer to refund the deducted TDS.
Bata India contended that it had discharged its statutory obligation under Section 192 of the Income Tax Act by deducting tax at source and depositing the same with the Income Tax Department.
It argued that once the TDS had been deposited, it could not be directed to refund the amount. If any employee believed excess tax had been deducted, the proper course was to claim relief under Section 89 and seek refund through the statutory assessment process.
The Income Tax Department submitted that filing Form 10E does not eliminate an employer’s statutory obligation to deduct TDS. Relief under Section 89(1) is examined by the Assessing Officer during assessment. Any excess tax deducted can be refunded only through the mechanism provided under the Income Tax Act. Therefore, the writ petition seeking refund from the employer was not maintainable.
The court examined the interplay between Sections 10(10C), 17(3), 89 and 192(2A) of the Income Tax Act.
The Court observed that section 10(10C) grants exemption in respect of VRS payments subject to statutory conditions. Section 89 provides relief where salary or compensation is received in arrears, in advance or as profits in lieu of salary. Such relief is available only upon compliance with the statutory procedure, including furnishing Form 10E under Rule 21A of the Income Tax Rules.
The Court held that although the employees might ultimately be entitled to relief or exemption, the employer cannot voluntarily grant such benefit without an application in the prescribed form.
Accordingly, the employer had correctly complied with its statutory obligation under Section 192(2A) by deducting tax at source.
The Court recognised that the compensation paid under the settlement may ultimately not form part of the employees’ taxable income after applying the relevant provisions of the Income Tax Act. However, since TDS had already been deposited with the Income Tax Department, the employer could not be faulted or directed to refund the amount directly.
Instead of directing the employer to refund the TDS, the High Court issued the various directions.
Firstly, the concerned employees shall file their income tax returns under Section 139(1) within 30 days from receipt of the order.
Secondly, upon filing of the returns, the Income Tax Officer shall process them under Section 143(1) and refund the eligible amount within two months.
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