The Revenue Cannot Demand Tax Directly from an Employee if the Employer Deducted TDS but Failed to Deposit It
Issue
Whether the Income Tax Department can raise a tax demand against an individual employee under Section 143(1) when their employer has deducted Tax Deducted at Source (TDS) from their salary but failed to remit that amount to the Government treasury.
Facts
The Deduction: For Assessment Years 2020-21 and 2021-22, the assessee’s employer deducted TDS from their salary income.
The Default: The employer failed to deposit the deducted tax with the Government.
The Demand: When the assessee filed their Return of Income (ITR) claiming credit for the TDS, the system flagged a mismatch (as the tax didn’t appear in Form 26AS). Consequently, an automated demand was raised via an intimation under Section 143(1).
Legal Context: The assessee challenged this demand based on Section 205, which prohibits the government from recovering tax from the assessee if it has already been deducted at the source.
Precedent: The matter was linked to a Supreme Court ruling in Income-tax Assessing Officer, Baroda v. Shobhan Shantilal Doshi [2026], which addressed the technical system errors causing these demands.
Decision
Statutory Bar (Section 205): The High Court held—and the Supreme Court affirmed the principle—that Section 205 provides an absolute bar against direct demand on the assessee once the tax is deducted. The Revenue must pursue the deductor (the employer) for the recovery, not the deductee (the employee).
Administrative Instructions: The court relied on Instruction No. 275 (2015) and the Office Memorandum (2016), which explicitly direct tax officers not to resort to coercive measures against employees for the employer’s default.
System Adjustments: The Supreme Court noted that directions have already been issued (in the Shobhan Shantilal Doshi case) to make necessary changes in the tax processing software to prevent such automated demands from being generated in the future.
Final Ruling: As the legal position was already clarified and the software update was mandated, the Special Leave Petition (SLP) filed by the Revenue was dismissed. [In favour of assessee]
Key Takeaways
Employee Protection: If your salary slip shows a TDS deduction, you are legally discharged of your tax liability for that amount. Even if the employer goes bankrupt or defaults, the Department cannot ask you to pay that tax again.
Section 205 is Your Shield: This section is the primary defense against “TDS Mismatch” demands. If you receive an automated notice, citing Section 205 and the 2015 Instruction usually resolves the issue at the rectification stage.
Software vs. Law: The Supreme Court has acknowledged that “system mismatches” are technical hurdles that do not override the substantive law protecting the taxpayer.