What happen, when TDS deducted but not paid by Employer

Can employees be made liable in case TDS is deducted but not paid by employer?

• Section 199 states that tax deducted at source deducted by the payer and paid to the government is treated as tax paid on behalf of the payee. CBDT is authorized to issue rules for crediting tax deducted at source to the taxpayer. Now a question arises as to when TDS is deducted by the employer but not paid to the credit of the employee would give rise to recovery of income tax from the employee?
• Section 205 of the Income Tax Act bars recovery from the assessee: Section 205 explicitly bars income tax authorities from directly recovering unpaid tax deducted at source from the payee if it was already deducted by the deductor.

CBDT instructions also bar recovery of tax from employee if TDS is deducted but not paid by employer

• Central Board of Direct Taxes issued clear instructions in 2015 and 2016 stating & bar recovery in the above said matter., The Income tax act puts a bar on direct demand against the assessee in cases where Tax Deducted at Source has been deducted by the payer and the demand on account of tax credit mismatch cannot be enforced coercively.

Some latest High Court judgments on the matter:

• Orissa High Court in case of Malay Kar v. Union of India [2024]

Orissa High Court allowed the tax deducted at source credit to the employee where the employer had deducted tax at source but had not deposited the amount to Central Government’s account. Consequently, if an employer fails to remit the deducted tax, the liability to pay that tax cannot be shifted to the employee.

• Satwant Singh Sanghera (Delhi HC)

Delhi High CourtRuled in favor of the employee, allowing  Tax Deducted at Source credit despite the employer failing to deposit the deducted tax. This Delhi High Court ruling in Satwant Singh Sanghera v. I-T Department provides strong judicial backing for employees facing unjust tax demands due to their employer’s failure to deposit deducted TDS. Key Legal Takeaways from the Case:

• Employees Cannot Be Held Liable for Employer’s TDS Defaults: The court reaffirmed that u/s 205 of the Income Tax Act, employees cannot be forced to pay TDS that was deducted but not deposited by their employer.
• No Tax Recovery or Adjustment Against Future refunds The ruling explicitly bars tax authorities from either:
  • Recovering unpaid TDS directly from the employee.
  • Adjusting the unpaid amount against future income tax refunds of the employee.
• Issue of Form 26AS Mismatch: Since Form 26AS only reflects TDS deposited (not just deducted), employees often face tax demands or reduced refunds if employers default. The court recognized this practical hardship.
• Reaffirmation of CBDT Instructions (2015 & 2016) The court relied on CBDT directives, which clarify that tax authorities should not recover TDS from employees in such cases.
• Need for a Systemic Fix: Experts suggest that CBDT should introduce safeguards to prevent employees from having to litigate every such instance, ensuring smoother resolution without legal battles. Impact of this  Ruling which  Provides relief to employees of defunct or troubled companies (e.g., Kingfisher, Byju’s). which shows the systemic improvements in handling TDS defaults at the employer level.

Conclusion:

The Central Board of Direct Taxes effectively clarifies that employees cannot be held liable if their employer deducts TDS but fails to deposit it with the government.

• Section 199: TDS deducted and deposited is treated as tax paid on behalf of the payee.
• Section 205 explicitly prohibits tax authorities from recovering unpaid TDS from the employee if it was deducted by the employer.
• CBDT Instructions (2015 & 2016): Confirm that demand due to TDS credit mismatch cannot be enforced coercively against the employee.
• High Court Rulings: Multiple judgments (Delhi HC, Orissa HC) have upheld employees’ rights to TDS credit, even if the employer defaults on the deposit.

Section 205 of the Income Tax Act, Central Board of Direct Taxes Instructions, & a series of High Court judgments have reinforced a basic jurisprudence that where TDS has been deducted by the employer but not paid to the government, recovery of the same cannot be made from employees, even in situations of any financial difficulties.

Employees are protected from tax recovery if their employer fails to remit deducted TDS. The liability remains with the employer, and the employee should be granted TDS credit.

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