Can employees be made liable if TDS is deducted but not paid by the employer?
1. Background: Sec 199 of the Income Tax Act states that TDS deducted by the payer and paid to the government is treated as tax paid on behalf of the payee. The Central Board of Direct Taxes (CBDT) is authorized to issue rules for crediting TDS 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 employee?
2. Section 205 bars recovery from the assessee: Sec 205 Explicitly bars income tax authorities from directly recovering unpaid TDS from the payee if it was already deducted by the deductor.
3. CBDT instructions also bar recovery:
The CBDT issued clear instructions in 2015 and 2016 stating, The Act puts a bar on direct demand against the assessee in cases where TDS has been deducted by the payer and the demand on account of tax credit mismatch cannot be enforced coercively.
4. Some latest High Court judgements on the matter:
Satwant Singh Sanghera (Delhi HC) (167 taxmann 713) Ruled in favor of the employee, allowing TDS credit despite the employer failing to deposit the deducted tax.
Orissa High Court in case of Malay Kar v. Union of India [2024] 162 taxmann 767 (Orissa) allowed the TDS credit to the employee where the employer had deducted tax at source but had not deposited 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.
5. Conclusion: Sec 205, CBDT Instructions and a series of High Court judgements 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.
The copy of the order is as under:
