How to claim credit of TDS deducted by employer but not paid to govt?

Kartik was a pilot in Kingfisher Airlines. The airline, which later failed, duly deducted tax from his salary income but didn't deposit the TDS with the government. However, the tax department issued a notice to Kartik to pay the tax.

This problem (i.e., TDS not being deposited with the government) is not specific to salary income but can happen in the case of all those incomes where tax is deducted but not deposited with the government by the payer of the income. In the year 2018, the income-tax department. unearthed a Rs. 3,200 crore scam where 447 companies had deducted tax from employees' salaries but never deposited the TDS with the government.

If you are facing a similar issue, read on to know how your problem can be solved and what happened in Kartik's case.

What is TDS credit?

If any tax has been deducted at source and deposited with the central government, it shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. In other words, the credit of TDS shall be allowed to the person from whose income tax has been deducted at source.

All taxes paid by or on behalf of a person (like TDS, TCS (Tax Collected at Source), advance-tax, and self-assessment tax) reflect in a tax passbook Form 26AS. This Form 26AS is linked to the PAN of the individual.

What if TDS does not show in Form 26AS

If tax deducted by the payer is not visible in this tax passbook, it would mean that the payer has either not paid the taxes to the central government or, after payment, the deductor has not filed the TDS statement/TDS return with the income tax department. In both situations, credit of TDS is disallowed by the tax department and a notice of tax demand is issued to the taxpayer.

What does the income tax law say?
Section 205 of the Income-tax Act prohibits recovery of tax from a taxpayer if tax is already deducted from his income by the deductor. A person cannot be called upon to pay tax if that tax was deductible from his income and such tax has been deducted. Further, according to Section 191 of the Act, a person is liable to pay tax directly (on his/her own) on salary income only if tax has not been deducted from the salary in the form of TDS.

So a taxpayer shall be liable to pay the tax himself/herself only if a particular income is not covered within the TDS provisions or it is covered but tax has not been deducted. He cannot be held liable if tax has been deducted but not paid to the government.

Why does a tax demand arise?

The tax demand arises due to a mismatch in the credit claimed in the ITR and TDS credit reflecting/available in Form 26AS. The automated system at CPC (the Central Processing Centre of the income tax department) compares the two records, and if the TDS credit available in Form 26AS is less than that claimed in the ITR then a tax demand notice is issued to the ITR filer.

Judicial Rulings
The Courts have dealt with this matter on multiple occasions and have ruled in favor of the taxpayer.

Recently, on a similar issue, the Gujarat High Court, in the case of Kartik Vijaysinh Sonavane [2021] Gujarat, has canceled the tax demand raised upon an employee for the TDS amount not paid to the government by his employer. Kingfisher Airlines had deducted TDS from the salary paid to its employee Kartik. However, the company did not deposit the tax with the government. The assessing officer issued a notice to Kartik to pay the tax. The Gujarat High Court has ruled that TDS credit shall be given to the assessee (Kartik) despite the same having not been paid by the airline.

The Karnataka High Court in the case of Anusuya Alva [2005] also held that if the tenant has deducted tax from the rent but has not paid it to the government, the only course open to the tax department is to recover the TDS amount from the tenant who has deducted the tax and not from the landlord.

CBDT's clarifications
Considering the seriousness of the matter and continued litigations, the Central Board of Direct Taxes (CBDT) has issued instructions on this matter. The CBDT has clearly stated that in cases where TDS is deducted by the employer or deductor but the same is not deposited with the government the Assessing Officer cannot raise tax demands upon the payees i.e. the recipient of the salary/other income.

Then why is a tax demand notice issued?
The processing of ITR is automatic and done by the CPC. The system is designed to allow TDS credit only to the extent it appears in Form 26AS. Thus, if there is a TDS amount mismatch, CPC will raise a tax demand for sure.

The ITR forms are annexure-less, and hence, a taxpayer cannot attach any supporting documents along with ITR in support of the TDS claim. Thus, it is almost certain that the taxpayer will receive a notice if any discrepancy is found between the TDS reflecting in Form 26AS and the TDS credit claimed in the ITR.

It is advisable to check Form 26AS before filing ITR and if any discrepancy is found, the same should be corrected before filing ITR. Therefore, it is advisable to check Form 26AS in time to be able to correct the discrepancies at the earliest.

What to do?
If the taxpayer finds that Form 26AS does not show the full TDS deducted from his/her income, he should contact the deductor for such a mismatch. The TDS credit mismatch may be due to the following reasons :
(a)TDS is not deposited with the government.
(b)TDS is deposited, but the TDS statement is not yet filed with the tax department;
(c)The deductor has quoted the wrong PAN in the TDS statement; or
(d)An incorrect TDS amount has been mentioned in the TDS statement.

These mistakes can be corrected by the deductor only. Thus, the taxpayer should ask his deductor to correct the mistake at the earliest and make sure that same is corrected before filing of ITR.

A taxpayer has no legal right to force the deductor to deposit TDS or make any corrections in the TDS statement filed by the deductor. If the deductor refuses to entertain the taxpayer's request, he can submit TDS proof to the income tax department.

In response to the demand notice, the taxpayer can file a reply on the e-filing portal with supporting documents showing TDS deducted from his income. The taxpayer can submit the salary slips and bank statement showing credit of net salary/other income after deduction of TDS.

AO is bound to allow TDS credit to the taxpayer if the documents submitted are found correct. However, if he still doesn't allow the credit, the only option left is to file an appeal before the Commissioner of Income Tax (Appeals).

(CA Naveen Wadhwa, DGM, Taxmann, CA Rahul Singh, Manager, Taxmann)