TDS Deducted but Not Deposited? Deductee Cannot Be Asked to Pay Again
Bombay High Court Reaffirms: Section 205 Protects the Taxpayer From the Deductor’s Default
Imagine this.
Your employer deducts ₹2 lakh as TDS from your salary.
You receive only the net salary.
You naturally assume that the ₹2 lakh has gone to the Income-tax Department.
But the employer does not deposit it.
Later, your Form 26AS does not reflect the credit properly.
The tax system sees a mismatch.
And suddenly, you receive a demand asking you to pay the very same ₹2 lakh once again.
The obvious question is:
Why should the taxpayer pay twice for something that was already deducted from him?
Section 205 of the Income-tax Act, 1961 provides an important answer.
Where tax has actually been deducted at source, the deductee cannot be called upon to pay that tax again merely because the deductor subsequently failed to deposit it with the Government.
This principle has been repeatedly recognised by the Bombay High Court, including in Aslam Checkar v. ITO, following the earlier landmark decision in Yashpal Sahni v. Rekha Hajarnavis.
The Supreme Court has also reinforced the principle in its recent order in Income-tax AO v. Gayatri Snehal Rao, SLP (Civil) Diary No. 1528 of 2026.
The Problem With TDS Mismatch
TDS operates on a simple principle.
The payer deducts tax.
The payer deposits it with the Government.
The recipient gets credit for the tax deducted.
But what happens when the first two steps are not properly completed by the deductor?
The deductee is often left facing a practical problem.
The taxpayer may have:
• Received only the net amount;
• Had tax actually deducted from the payment;
• Reported the corresponding income in the return; and
• Claimed credit for the TDS.
Yet the credit may not appear in Form 26AS or may not match the Department’s records.
The system may consequently treat the taxpayer as having an unpaid tax liability.
This is where Section 205 becomes important.
What Does Section 205 Say?
Section 205 provides a statutory protection:
“Where tax is deductible at the source under the provisions of this Chapter, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.”
The underlying logic is simple.
If the tax has already been deducted from the taxpayer’s income, the taxpayer should not be made to pay that tax again merely because the person responsible for depositing it defaulted.
The Government’s remedy is against the deductor.
Not against the deductee.
A Simple Example
Suppose:
Gross salary = ₹10 lakh
TDS deducted = ₹1 lakh
Net salary received = ₹9 lakh
The employer subsequently fails to deposit the ₹1 lakh.
The Department discovers the default and finds that the employee’s Form 26AS does not properly reflect the credit.
Can the Department simply demand ₹1 lakh from the employee?
Section 205 says that the employee cannot be called upon to pay the same tax again to the extent tax was actually deducted.
The employee has already suffered the deduction.
The failure occurred thereafter.
The Bombay High Court’s Consistent Position
The Bombay High Court has dealt with this issue on several occasions.
One of the important decisions is Yashpal Sahni v. Rekha Hajarnavis, decided in 2007.
The Court recognised the distinction between the deductee and the deductor.
The deductee cannot be made to suffer merely because the deductor failed to fulfil the statutory obligation of depositing the amount deducted.
The principle has subsequently been followed in other cases, including Aslam Checkar v. ITO.
The message has remained consistent:
Once actual deduction is established, the Department should not recover the same tax from the deductee merely because the deductor defaulted in depositing it.
What If Form 26AS Does Not Show the TDS?
This is where taxpayers often become unnecessarily worried.
Form 26AS is an important information statement.
But a mismatch in Form 26AS does not necessarily mean that no tax was deducted.
The taxpayer may have other evidence demonstrating the deduction.
For example:
Salary case:
Salary slips, Form 16, payroll records and bank statements.
Professional receipts:
Invoices, payment statements, agreements and bank records showing receipt of the net amount.
Contract receipts:
Invoices, payment advice, TDS certificates and bank statements.
The important question is:
Was tax actually deducted from the amount payable to the assessee?
If the answer can be established through credible evidence, Section 205 becomes highly relevant.
The Deductor’s Default Is Not the Deductee’s Default
This is perhaps the most important conceptual distinction.
There are two persons involved:
Deductor
The person responsible for deducting and depositing TDS.
Deductee
The person from whose income tax has been deducted.
If the deductor deducts tax but does not deposit it, the default is attributable to the deductor.
The Department has separate provisions to deal with that default.
The law provides for recovery of tax and interest from the person responsible, subject to the statutory framework.
Therefore, making the deductee pay the same amount again would effectively result in double recovery of the same tax.
The Department Has Other Remedies
The Income-tax Act contains several provisions to deal with a deductor who fails to comply.
For example, proceedings may arise under:
• Section 201(1) for tax-related default;
• Section 201(1A) for interest;
• Section 271C for penalty in appropriate cases; and
• Section 276B in relation to prosecution for failure to pay tax deducted at source, subject to the statutory requirements.
Thus, the Act does not leave the Revenue remediless.
It simply directs the remedy towards the person who committed the default.
CBDT Instruction Also Recognises the Principle
The position is not merely a judicial creation.
The CBDT has also issued Instruction No. 275/29/2014-IT(B) dealing with the issue of TDS mismatch and the inconvenience caused to taxpayers where the deductor has failed to deposit tax.
The administrative approach is intended to ensure that genuine taxpayers are not unnecessarily harassed because of the deductor’s failure.
This is an important reminder that tax administration should distinguish between:
taxpayer default and
third-party default.
What Should a Taxpayer Do?
Suppose a taxpayer receives a demand because TDS credit is missing or because the deductor has not deposited the amount.
The taxpayer should not simply ignore the demand.
At the same time, the taxpayer should not automatically pay the disputed TDS amount again.
A practical approach would be:
1. Collect evidence of actual deduction
Obtain salary slips, TDS certificates, invoices, payment statements, agreements or other relevant documents.
2. Match the gross and net amounts
Demonstrate that the gross income was ₹X, TDS was ₹Y and the amount actually received was ₹X minus ₹Y.
3. Check Form 26AS/AIS
Identify exactly what is missing or mismatched.
4. Make a written representation
Explain that tax was actually deducted and invoke the protection available under Section 205.
5. Request verification
Ask the Assessing Officer to verify the deduction and keep the demand in abeyance to the extent protected under Section 205.
The key is to create a proper documentary trail.
But One Important Caution
Section 205 should not be misunderstood as a blanket provision granting TDS credit merely because the taxpayer claims that tax was deducted.
The taxpayer should be able to establish the fact of deduction.
There is an important difference between:
“Tax was deducted from my payment.”
and
“I was entitled to TDS credit because the deductor was supposed to deduct tax.”
Section 205 protection operates where tax has actually been deducted.
Therefore, evidence remains important.
The Supreme Court’s Role
The principle has also reached the Supreme Court.
In Income-tax AO v. Gayatri Snehal Rao, the Revenue’s challenge was dismissed in the Supreme Court proceedings.
This provides further support to the proposition that a deductee should not ordinarily be made to suffer a second tax demand for tax that has already been deducted from the deductee’s income.
The responsibility for depositing the deducted amount lies with the deductor.
The Larger Lesson
TDS is designed as a mechanism of tax collection at source.
It is not designed to create a second tax liability for the person whose money has already been deducted.
A taxpayer should not become the collection agent’s casualty.
If:
Income = ₹10 lakh
TDS actually deducted = ₹1 lakh
Net amount received = ₹9 lakh
then the taxpayer has already borne the ₹1 lakh deduction.
If the deductor subsequently fails to deposit that amount, the Government’s remedy is against the defaulting deductor.
The taxpayer should not ordinarily be asked to pay the ₹1 lakh again.
The Message Is Simple
A TDS mismatch can be alarming, especially when it results in a tax demand.
But taxpayers should remember:
Form 26AS mismatch does not automatically mean that the taxpayer has to pay the TDS amount again.
Where actual deduction is established, Section 205 provides an important statutory shield.
The taxpayer should substantiate the deduction with proper documents and request appropriate relief from the demand.
The law has placed the obligation of depositing TDS on the deductor.
Therefore:
If the deductor deducted the tax but did not deposit it, the solution is to pursue the deductor-not to tax the deductee twice.
After all, you cannot make someone pay the same tax twice simply because the person entrusted with depositing it decided to keep it!
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Case at a Glance
Key provision: Section 205
Core principle: Where tax has actually been deducted at source, the deductee cannot be called upon to pay that tax again merely because the deductor failed to deposit it.
Bombay High Court: Yashpal Sahni v. Rekha Hajarnavis; subsequently followed/reaffirmed in Aslam Checkar v. ITO
Supreme Court: Income-tax AO v. Gayatri Snehal Rao, SLP (Civil) Diary No. 1528 of 2026
Administrative guidance: CBDT Instruction No. 275/29/2014-IT(B)
Practical evidence: Salary slips, Form 16/16A, invoices, payment records, bank statements and other proof of actual deduction.
Disclaimer: This article is intended for general information and awareness purposes and should not be construed as professional advice. The applicability of Section 205 and the relief available in a particular case should be examined with reference to the evidence establishing actual deduction and the facts of the case.
The copy of the order is as under:
