TDS Credit Cannot Be Denied to Employee When Employer Fails to Deposit Deducted Tax: ITAT Mumbai in Sophia Rick Vs ITO
Overview of the Ruling
The Mumbai Bench of the Income Tax Appellate Tribunal has delivered a significant ruling in Sophia Rick Vs ITO, affirming that an employee cannot be made to bear the consequences of an employer's failure to deposit tax deducted at source with the government treasury. The Tribunal granted full TDS credit to the assessee despite the absence of the corresponding credit in Form 26AS, marking an important reaffirmation of taxpayer rights under Section 205 of the Income-tax Act, 1961.
This decision carries considerable practical significance for salaried assessees whose employers have deducted TDS from their salaries but defaulted on remitting the same to the government — a situation that leaves the employee in an unjust position where they are taxed twice, once through deduction and again through a demand raised by the Revenue.
Background and Key Facts
The assessee in this case was an employee of Trimax IT Infrastructure & Services Ltd. She had filed her return of income declaring a total income of ₹18.41 lakh for the relevant assessment year. In the return, she claimed TDS credit amounting to ₹3,91,241, which had been deducted from her salary by her employer.
When the return was processed by the Centralised Processing Centre (CPC) under Section 143(1) of the Income-tax Act, 1961, the credit allowed was restricted to merely ₹79,030. This shortfall resulted in a tax demand of ₹3,36,373 being raised against the assessee — a demand that arose entirely out of the employer's failure to deposit the deducted tax and not due to any fault on the part of the assessee herself.
The root cause of the dispute was a mismatch between the TDS claimed by the assessee and the amount reflected in Form 26AS, which showed no credit for the unremitted portion of the tax.
Why the Mismatch Occurred
The employer had deducted tax from the assessee's salary on a monthly basis and had paid only the net salary into her bank account. However, the employer subsequently failed to deposit the deducted amounts into the government account. Since the TDS credit visible in Form 26AS is populated only when the deductor actually deposits the tax and files the relevant TDS returns, the assessee's Form 26AS did not reflect the full amount of TDS that had been deducted.
The CPC, relying solely on Form 26AS, denied credit for the undeposited portion and raised a demand accordingly.
Procedural History: Rectification and Appeal
Efforts Before CPC
Rather than immediately filing an appeal, the assessee chose to pursue the statutory remedy of rectification before the CPC. She filed multiple rectification applications, hoping that the discrepancy would be resolved once the employer's default was addressed or acknowledged. However, these efforts did not yield any relief, as the CPC continued to restrict credit to the amount reflected in Form 26AS.