TDS Deducted but Not Deposited by Employer: Bombay High Court Protects the Deductee
Once deduction of tax at source is established on facts, the taxpayer cannot be made to suffer merely because the deductor failed to deposit the tax
Imagine an employee receives a salary of ₹20 lakh. The employer deducts ₹4 lakh as TDS and pays the employee the balance ₹16 lakh. The employee, therefore, quite reasonably assumes that ₹4 lakh has already gone towards his income-tax liability.
But when the employee files his return, the TDS does not appear in Form 26AS because the employer has deducted the tax but failed to deposit it with the Government. The return is processed, the TDS credit is denied and, suddenly, the employee receives a tax demand for ₹4 lakh.
The employee is then caught in an uncomfortable situation: the tax has already been deducted from his income, but the department says that the credit cannot be given because the deductor did not deposit it.
Can the Revenue recover the same tax from the employee again?
The Bombay High Court has recently dealt with this important issue in Manohar Ramabtar Jhunjhunwala v. Principal Commissioner of Income Tax-17, Mumbai & Ors., Writ Petition No. 2063 of 2025, along with connected petitions. The judgment provides significant protection to taxpayers facing TDS mismatches arising from the default of the deductor.
The problem: Employee pays tax, employer fails to deposit it
The batch of writ petitions before the Bombay High Court involved salaried employees and other deductees whose payers had deducted tax at source but had either failed to deposit the tax with the Government or had failed to properly file the corresponding TDS statements.
In the lead matter, the employer had deducted TDS from the petitioner’s salary for AY 2019-20. However, the amount was not remitted to the Government. Consequently, the TDS credit did not appear in Form 26AS.
The return was processed under section 143(1), resulting in a demand because the TDS credit was not fully allowed. The taxpayer subsequently approached the authorities for relief, including through revision proceedings under section 264, but the relief was not granted.
What makes the case particularly significant is that the taxpayer had not remained silent. He had contemporaneously informed the jurisdictional TDS officer about the employer’s default and had even lodged a claim in the employer’s Corporate Insolvency Resolution Process (CIRP) for the gross salary amount.
Thus, the taxpayer had documentary circumstances supporting the fact that tax had actually been deducted.
Revenue’s argument: No payment to Government, no credit
The Revenue relied upon section 199 read with Rule 37BA and CBDT office memoranda to contend that TDS credit could be granted only when the tax deducted had actually been paid to the Government.
According to the Revenue’s stand, where the deductor had failed to deposit the tax, the demand against the deductee could at best be treated as “not recoverable” on the income-tax portal.
The issue, therefore, was not merely a technical Form 26AS mismatch.
It raised a fundamental question:
Can a taxpayer be asked to pay tax a second time merely because the person who deducted it failed to deposit it with the Government?
Section 205 provides the crucial protection
The Bombay High Court examined the interplay between sections 199 and 205 of the Income-tax Act.
Section 199 deals with credit for tax deducted at source, whereas section 205 contains an important protective principle:
«Where tax is deductible at source, 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 Court held that these provisions have to be read harmoniously.
A rigid interpretation of section 199, under which credit would depend entirely upon the subsequent remittance by the deductor, could effectively defeat the protection contained in section 205.
In other words, the statutory protection available to the deductee cannot disappear merely because the deductor subsequently commits a default.
“Deducted” is different from “deposited”
This distinction is at the heart of the judgment.
The employee’s obligation and the employer’s obligation are different.
Once the employer deducts tax from the employee’s income, the employee has suffered the deduction. The subsequent statutory obligation to deposit the amount with the Government is primarily that of the deductor.
Therefore, if the employee can establish that the tax was genuinely deducted, the employee cannot ordinarily be treated as though the tax was never deducted merely because the employer failed to fulfil its separate obligation.
This principle is consistent with the judicial approach in Shobhan Shantilal Doshi and related cases.
The Supreme Court, while dealing with the Revenue’s appeal in Income Tax Assessing Officer, Baroda & Ors. v. Shobhan Shantilal Doshi, did set aside the Gujarat High Court’s directions requiring changes to the income-tax software. However, importantly, the Revenue had not challenged the relief granted to the taxpayer on merits, and the Supreme Court expressly left that relief undisturbed.
Thus, the Supreme Court’s order should not be misunderstood as taking away the substantive protection available to a deductee. The Court’s intervention was confined to the software-related directions.
Form 16 is not the only evidence
One of the most useful aspects of the Bombay High Court ruling is that a taxpayer is not necessarily helpless merely because Form 16 or Form 16A is unavailable.
The Court recognised that the fact of deduction can be established through other reliable evidence.
Depending upon the circumstances, such evidence may include:
– Salary slips;
– Bank statements;
– Payroll records;
– Tax workings;
– Invoices;
– Remittance advices;
– Ledger accounts;
– Confirmation from the deductor;
– Correspondence with the deductor;
– Insolvency claims filed against the deductor;
– Contemporaneous correspondence with the Income Tax Department; and
– Other documents demonstrating that tax was actually deducted.
This list is illustrative and not exhaustive.
The underlying principle is simple: substance cannot be defeated merely because the deductor has failed to perform the reporting formalities.
What should the Assessing Officer do?
The Bombay High Court also laid down a practical course of action for dealing with such cases.
Where a taxpayer approaches the department with evidence establishing that TDS was deducted but not deposited, the application should be properly registered.
Pending verification, the demand should be kept in abeyance and marked as not recoverable, so that the taxpayer does not face coercive recovery or adjustment of refunds.
The Assessing Officer should then verify the factual claim and pass a reasoned order.
The Court indicated that such matters should preferably be dealt with within six months.
This is particularly important because a demand existing on the income-tax portal can have consequences beyond the mere appearance of an outstanding amount. It may result in adjustment of refunds and create unnecessary difficulties for the taxpayer.
What if TDS does not appear in Form 26AS?
This judgment is particularly relevant in the era of AIS, Form 26AS and automated processing.
A taxpayer may be tempted to believe that if TDS is absent from Form 26AS, there is no way to obtain credit.
That is not the correct legal position.
Form 26AS is an important piece of evidence, but the taxpayer’s substantive rights cannot necessarily be determined solely by what is or is not reflected in the tax statement.
Where there is credible evidence that tax was actually deducted, the taxpayer should place that evidence before the Assessing Officer and seek appropriate relief.
The Bombay High Court’s approach reinforces the distinction between data appearing in the tax system and the actual factual position.
Technology may identify a mismatch; it cannot by itself determine whether tax was genuinely deducted.
A word of caution for taxpayers
The judgment does not mean that every claim of TDS deduction should automatically be accepted merely because a taxpayer makes such a claim.
The Supreme Court’s observations in Shobhan Shantilal Doshi are important in this regard. The Revenue had argued that factual verification is necessary before a TDS claim is accepted, and the Supreme Court accepted that software cannot substitute for adjudication of factual disputes.
Therefore, the taxpayer must be able to demonstrate the actual deduction.
A mere entry in a self-prepared statement may not be sufficient.
The stronger the documentary trail, the stronger the taxpayer’s case.
Practical checklist for taxpayers facing such a demand
If TDS has been deducted but does not appear in Form 26AS, the taxpayer should immediately collect and preserve:
1. Proof of gross income – salary slips, invoices, agreements or other payment records.
2. Proof of TDS deduction – salary slips, payroll statements, tax deduction workings or correspondence.
3. Proof of net payment – bank statements showing receipt of the amount after deduction.
4. Communication with the deductor – emails, letters or confirmations regarding the TDS.
5. Evidence of the deductor’s default – correspondence, insolvency proceedings or other available material.
6. Communication with the Income Tax Department – particularly contemporaneous complaints or applications made to the TDS authorities.
7. A reconciliation – clearly showing gross amount, TDS deducted and net amount received.
A properly documented claim can make the difference between a genuine dispute and a straightforward verification exercise.
The larger principle: taxpayer should not pay twice
The significance of the Bombay High Court judgment extends beyond salary TDS.
The principle applies to the broader relationship between a deductee and a deductor.
The law creates a mechanism under which tax is collected at source. Once the deductee has suffered the deduction, the deductee should not ordinarily be made to bear the consequences of the deductor’s failure to deposit that amount.
Otherwise, the same income can effectively suffer taxation twice from the taxpayer’s perspective:
First, tax is deducted from the payment.
Second, the taxpayer is asked to pay the same amount again because the deductor did not deposit it.
That cannot be the intended operation of section 205.
A welcome message in the age of automated tax processing
The case also carries an important message for the modern tax administration.
Automated systems are extremely useful for processing millions of tax returns. But a mismatch is not necessarily a tax liability.
A computer can see that TDS is missing from Form 26AS. It cannot automatically know whether:
– the employer actually deducted the tax;
– the employee received only the net amount;
– the employer subsequently became insolvent;
– the deductor failed to file the TDS statement; or
– the taxpayer possesses independent evidence proving the deduction.
Such questions require examination of facts.
The Bombay High Court has therefore reinforced an important taxpayer-friendly principle: technology should facilitate tax administration, not override substantive statutory protection.
Conclusion
The Bombay High Court’s decision in Manohar Ramabtar Jhunjhunwala is an important development for taxpayers facing TDS-related demands because of the default of their employers or other deductors.
The essence of the ruling can be stated in one sentence:
Once actual deduction of TDS is established on facts, the deductee should receive credit for the tax deducted and should not be compelled to pay that amount again merely because the deductor failed to deposit it with the Government.
At the same time, taxpayers should remember that proof remains important. The absence of Form 26AS, Form 16 or Form 16A may create a verification issue, but it does not necessarily extinguish the taxpayer’s substantive claim where other credible evidence establishes the deduction.
For taxpayers, the message is reassuring:
Your employer’s default should not automatically become your tax liability.
And for the tax administration, perhaps an equally important message is this:
A mismatch is a signal for verification—not a substitute for justice.
The judgment discussed is Manohar Ramabtar Jhunjhunwala v. Principal Commissioner of Income Tax-17, Mumbai & Ors., Writ Petition No. 2063 of 2025 with connected petitions, Bombay High Court. The subsequent Supreme Court order in Income Tax Assessing Officer, Baroda & Ors. v. Shobhan Shantilal Doshi, Civil Appeal No. 197 of 2026, dated 12 January 2026, set aside only the Gujarat High Court’s directions concerning software changes while leaving the taxpayer’s substantive relief undisturbed.
The copy of the order is as under:
