The Bombay High Court has held that TDS credit can’t be denied merely because deductor failed to deposit tax and Form 16 is not a mandatory proof.
The bench of Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla has observed that once an assessee establishes that tax was actually deducted at source, the Income Tax Department cannot deny TDS credit merely because the deductor subsequently failed to deposit the amount.
The lead petitioner had been employed with Uniply Décor Limited. For Assessment Year 2019-20, he declared salary income and claimed credit for TDS deducted from his salary. However, the employer failed to deposit the deducted TDS with the Central Government. Consequently, the TDS did not appear in Form 26AS, and the return was processed under Section 143(1) without granting the full TDS credit, resulting in a demand.
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The petitioner subsequently pursued revision proceedings under Section 264, but those proceedings were rejected. The record also showed that he had informed the TDS authorities about the employer’s default through a communication dated January 18, 2020. He had pointed out that tax had been deducted from his salary but had not been deposited and that the TDS was consequently absent from Form 26AS.
The petitioner also pursued his claim in the corporate insolvency proceedings concerning his former employer. His claim included the TDS component, and the Resolution Professional admitted the net salary component reflected in the company’s books. The petitioner argued that the circumstances demonstrated that the tax had actually been deducted and that the employer, rather than the employee, was responsible for depositing it with the Government.
The principal legal controversy before the High Court concerned the interaction between Sections 199 and 205 of the Income-tax Act.
Section 199 deals with credit for TDS and provides, in substance, that tax deducted in accordance with the relevant provisions and paid to the Central Government is treated as tax paid on behalf of the person from whose income the deduction was made. Section 205, on the other hand, contains a protective provision stating that where tax is deductible at source, the assessee cannot be called upon to pay the tax himself to the extent to which the tax has already been deducted from his income.
The Revenue had argued that TDS credit could not be granted unless the deducted tax had actually been paid to the Government. According to the Department, Section 199 read with Rule 37BA required payment of the deducted amount before credit could be granted. At the same time, the Department accepted that Section 205 could prevent recovery of the amount from a deductee once the fact of actual deduction was established.
The petitioners, however, contended that such an approach would create an anomalous situation. The taxpayer would first lose the amount through deduction and would then be denied credit because the deductor failed to deposit it, effectively forcing the taxpayer to bear the tax twice.
The High Court rejected an interpretation that would allow the operation of Section 199 to defeat the protection expressly provided by Section 205.
The Bench held that Sections 199 and 205 must be read harmoniously. According to the Court, Section 205 is a substantive protection available to the deductee once deduction of tax has actually occurred. The provision does not make the protection conditional upon the deductor subsequently depositing the amount with the Government.
The Court relied upon its earlier decision in Yashpal Sahni v. Rekha Hajarnavis, Assistant Commissioner of Income-tax, where it had held that once TDS deduction is established, the Revenue cannot recover the same amount again from the employee merely because the employer failed to deposit it.
The Bench noted that the Income-tax Act contains extensive machinery for recovering TDS from a defaulting deductor, including proceedings under Sections 200, 201, 221, 271C and 276B. Therefore, the Department is not without remedy against a deductor who withholds tax but fails to remit it.
The Bombay High Court also examined the subsequent Supreme Court proceedings in Income-tax Assessing Officer, Baroda v. Shobhan Shantilal Doshi.
The Gujarat High Court in that matter had granted relief where TDS had been deducted but was not reflected in the taxpayer’s records. The Revenue challenged directions concerning modification of the software system, but did not challenge the substantive relief granted to the assessee.
The Supreme Court’s order recorded the Revenue’s submission that where TDS had in fact been deducted from payments made to an assessee, the assessee would receive credit even if the deductor had not deposited the amount with the Department, subject to factual verification. The Bombay High Court treated this as consistent with a harmonious interpretation of Sections 199 and 205.
The Bombay High Court also noted that the Revenue had not demonstrated that the various High Court decisions granting TDS credit in such circumstances had been challenged on the ground that they were contrary to Section 199 read with Rule 37BA. The Bench held that the existing CBDT instructions would have to be read consistently with the law declared by the Supreme Court.
The Court categorically held that where an assessee establishes that tax was actually deducted from his income or payment, the Department must grant appropriate TDS credit.
The Department cannot recover the corresponding amount directly or indirectly from the deductee. If the grant of TDS credit results in a refund, that consequential relief must also follow. Further, demands raised solely because the deductor failed to deposit the deducted TDS cannot be allowed to survive on the Department’s records or portal.
The Court stressed that the deductee has no control over whether the deductor deposits TDS, files the correct statement, quotes the correct PAN or uploads accurate particulars. Those are statutory obligations of the deductor.
One of the most important aspects of the judgment concerns the evidence required to establish TDS deduction where Form 16 or Form 16A is unavailable.
The Court recognised that the electronic TDS system itself creates a difficulty. Under the present mechanism, the deductor generally has to deposit TDS and file the relevant statement before the electronic system generates Form 16 or Form 16A. Therefore, if the deductor fails to deposit the tax and file the statement, the taxpayer may be unable to obtain the very certificate that the Department seeks as evidence of deduction.
The Court held that this cannot become a closed loop in which the taxpayer is denied credit because the deductor’s default prevented the taxpayer from obtaining the prescribed certificate.
Accordingly, where TDS is not reflected in Form 26AS and Form 16 or Form 16A is unavailable, the claim cannot be rejected solely on that basis. The assessee may establish the deduction through other reliable and cogent material.
The Bench laid down illustrative categories of evidence that may be considered for establishing actual TDS deduction.
In salary cases, evidence may include computer-generated salary slips showing gross salary, TDS deduction and net salary; appointment or employment documents coupled with bank statements; employer payroll and year-end tax workings; email communications; cost-to-company break-ups; tax computation sheets; and communications in which the employee informed the employer about deduction but non-payment or non-issuance of Form 16.
For contractors, professionals, rent recipients and similar taxpayers, the Court identified invoices or fee memos together with bank statements, payment or remittance advice, ledger accounts showing gross amount, TDS and net payment, payer confirmations and contemporaneous correspondence seeking a TDS certificate or deposit of the tax as possible evidence.
For interest, dividend and similar receipts, interest or dividend advice, payment warrants, payer confirmations and ledger accounts showing the net receipt after TDS may be relevant. Common corroborative evidence can include communications with the deductor, correspondence with the Department, claims lodged in insolvency or liquidation proceedings and admissions by the deductor in books, correspondence, affidavits, balance-sheet notes or other proceedings.
The Court further held that the absence of direct evidence from the deductor cannot, by itself, justify rejection of a TDS claim. Circumstances such as closure of business, insolvency, disappearance of management, hostility or deliberate non-cooperation may explain why the taxpayer cannot obtain direct evidence from the deductor.
The Court made it clear that recognition of alternative evidence does not mean that every TDS claim must automatically be accepted.
Once an assessee produces prima facie material establishing the deduction, the Department is required to verify the claim. The Assessing Officer may make inquiries with the deductor, the relevant TDS officer, a Resolution Professional or Liquidator and may issue summons or notices to obtain relevant information.
If the deductor’s default is established, the Department must proceed against the deductor for recovery of the resulting revenue loss rather than shifting the burden to the deductee.
The High Court also addressed the practical problem of demands continuing to appear on the income-tax portal even after the taxpayer has informed the Department that the TDS was deducted but not deposited.
The Court directed that where an assessee claims TDS credit on the basis of deduction that is not reflected in Form 26AS because of the deductor’s default and provides prima facie supporting material, the jurisdictional Assessing Officer must register and acknowledge the application.
The corresponding demand must be kept in abeyance pending determination of the claim under Section 205. The demand must also be appropriately marked in the system as stayed, not recoverable or kept in abeyance so that there is no coercive recovery or adjustment of subsequent refunds.
The Assessing Officer is required to undertake factual verification and pass a reasoned order as expeditiously as possible, preferably within six months from receipt of the application. If the assessee remains dissatisfied with the Department’s decision, the assessee remains free to pursue remedies available under law.
The Court recognised that the initial denial of TDS credit during automated processing under Section 143(1) may occur mechanically because the present system is driven by information contained in TDS statements.
However, the Bench clarified that once the taxpayer approaches the Department with prima facie material, the authorities cannot simply rely on the electronic mismatch. The matter has to be examined on its factual and legal merits.
The Bombay High Court set aside the orders or intimations to the extent they raised demands arising from TDS that had allegedly been deducted but not paid to the Government. The matters were remanded to the respective Assessing Officers for fresh consideration.
The petitioners were directed to produce relevant records before their jurisdictional Assessing Officers to establish the deduction of TDS. The Court then directed the Department to verify the claims, grant appropriate TDS credit, consider consequential refunds and carry out appropriate rectification, correction or deletion of demands appearing against the petitioners after verification.
The Court clarified that its ruling concerns domestic transactions and does not cover international transactions, which were not examined in the batch. All other individual merits were left open for the parties to raise if necessary.
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