How to claim TDS credit if TDS is deducted but not deposited by employer

Tax deduction at source (TDS) is an income tax liability that is deducted from salary of the employee. It is similar to advance tax liability which is deducted from the salary of the employee by the employer and deposited it to the central government. Liability to deduct TDS is cast on the employer (person who pays salary). Employer deducts TDS monthly from the salary and remit the balance amount in the bank account of the employee.

Employer deducts TDS and provide TDS certificate in Form 16 to the employee. Form 16 is generated online after depositing TDS and submitting TDS return. We can say that it is an evidence which shows that employer has deducted and deposited TDS of employer.

What will happen when TDS is deducted but not deposited? Can taxpayer claim TDS input in his income tax return without getting Form 16? This issue is a contentious issue which has not been settled yet. There are number of similar cases where TDS credit was disallowed and taxpayer had to approach to the higher authority i.e. CIT(A) or ITAT.

What happen when TDS is deducted but not deposited?

Income tax return filing is an online process and after the ITR filing it is processed online by Centralized Processing Centre (CPC). When TDS is claimed in ITR and if it is not reflected in Form 26AS, then CPC rejects TDS credit automatically. Consequently, income tax demand is raised with interest and Income tax notice is issued to the taxpayer. Hence TDS credit becomes a point where taxpayer starts fighting case against income tax department.

Can taxpayer claim TDS input in his income tax return without getting Form 16?

TDS is allowed as credit even if it is not deposited by the employer provided all supporting documents are maintained by the employee. It is important for the employee to maintain evidence of deduction such as Salary slip, bank statement, communication with employer, etc, so that income tax authority can verify that whether tax is actually deducted by the employer. ITAT is a last fact-finding authority where you can show the evidence to the honourable judges and get relief.

Judicial Pronouncement that may support your case:

In case of Kartik Vijaysinh Sonavane v. Deputy Commissioner of Income Tax [R/Special Civil Application No. 6193 of 2021 dated November 15, 2021] Gujrat high court observed that:

A perusal of Section 205 of the Income-tax Act clarifies the position where it provides that where tax is deductible at source, the taxpayer shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income. What is noticeable in this provision is that its applicability is not dependent upon the credit for tax deducted being given under Section 199 of the Income-tax Act. What is necessary for applicability of this provision is that the amount has been deducted from the income. In case where the amount has been deducted but not paid to the Central Government that eventuality is taken care of by Section 201 of the Income-tax Act.

What should you do?

Taxpayer has no legal right to ask the employer to deposit his/her TDS. He can only request, but if employer refuses to deposit the TDS, he should knock the door of the income tax department and submit the proof whatever he has. Before claiming the TDS credit it is better to consult your income tax consultant. He/she may help you to make your case strong and appear on behalf of you before commissioner of income tax (Appels) or Income tax appellate tribunal.

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