Income Tax Dept. Can’t Recover TDS Shortfall from Employee When Employer Failed to Deposit Deducted Tax: Gujarat HC

The Gujarat High Court has held that the Income Tax Department cannot deny credit of Tax Deducted at Source (TDS) to an employee merely because the employer, after deducting tax from salary, failed to deposit the same with the Central Government. The bench of Justice A.S. Supehia and Justice Pranav Trivedi has observed the assessee/employee cannot be saddled with double tax liability merely because employer defaulted in depositing TDS and directs grant of credit and refund with interest The petitioner, a professional pilot, was employed with M/s Kingfisher Airlines during the relevant assessment years. For Assessment Years (AYs) 2009–10 to 2012–13, the employer deducted substantial amounts towards TDS from the petitioner’s salary, aggregating to several lakhs of rupees. However, Kingfisher Airlines failed to deposit the deducted tax with the Government. Despite the petitioner having duly filed income tax returns and claimed credit of TDS on the strength of Form 16 issued by the employer, the Income Tax Department denied the credit on account of mismatch and raised tax demands along with interest. Subsequently, refunds due to the petitioner for later years were also adjusted against these demands by issuing intimations under Section 245 of the Act. Aggrieved by the denial of TDS credit and adjustment of refunds, the petitioner approached the Gujarat High Court seeking quashing of the outstanding demands and refund of the adjusted amounts. The petitioner argued that the issue was no longer res integra and stood squarely covered by earlier decisions of the Gujarat High Court in cases involving similarly placed pilots of Kingfisher Airlines. It was contended that once tax was deducted from the salary, the responsibility to deposit the same with the Government lay entirely with the employer, and the employee could not be penalised for the employer’s default. Reliance was placed on earlier judgments, including those following the principles laid down by the Bombay High Court and Gauhati High Court, interpreting Sections 199, 201 and 205 of the Income-tax Act. The department opposed the petition on the ground of delay and submitted that there was no conclusive proof to establish that the deducted TDS was actually deposited with the Government. It was argued that credit under Section 199 could be granted only when tax was both deducted and paid to the Central Government. The court observed that the facts of the present case were identical to earlier cases decided by the Court involving Kingfisher Airlines employees. The Court reiterated that under Section 205 of the Income-tax Act, once tax is deductible at source, the assessee cannot be called upon to pay the tax himself to the extent it has been deducted from his income. Relying extensively on precedents, including the decision in Assistant Commissioner of Income Tax v. Om Prakash Gattani, the Court emphasised that while credit of TDS under Section 199 may technically depend on deposit of tax with the Government, recovery proceedings cannot be initiated against the assessee when tax has already been deducted from his income. In such cases, the employer-deductor is deemed to be an “assessee in default” under Section 201, and recovery must be pursued against the employer, not the employee. The Court noted that the petitioner had furnished Form 16 issued by the employer, clearly evidencing deduction of tax, and the assessee had no control over the employer’s failure to deposit the same. The Court directed the Income Tax Department shall grant credit of the TDS deducted from the petitioner’s salary for the relevant assessment years. Any recovery or adjustment made by the Department from the petitioner’s refunds shall be returned along with statutory interest. The refund and interest must be paid within eight weeks from the date of receipt of the order. Liberty was reserved for the Department to initiate appropriate proceedings against the employer, Kingfisher Airlines, for recovery of the unpaid TDS. Case Details Case Title: Arpit Pravinbhai Shah Versus Assistant Commissioner Of Income Tax Circle 5(1)(1) & Ors. Case No.: R/Special Civil Application No.5092 Of 2021 Date: 23/12/2025 Counsel For Petitioner: Darshan R Patel Counsel For Respondent: Dev D Patel Click Here To Read Order Read More: No Interest Disallowance When Sufficient Interest-Free Funds Exist Despite Partners’ Drawings: ITAT

Income Tax Dept. Can’t Recover TDS Shortfall from Employee When Employer Failed to Deposit Deducted Tax: Gujarat HC

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