In a significant ruling for salaried taxpayers, the Mumbai bench of the income tax appellate tribunal (ITAT) has held that an employee cannot be denied tax deducted at source (TDS) credit merely because the employer deducted tax from salary but failed to deposit it with the government. The tribunal, while allowing an appeal filed by a taxpayer, directed the assessing officer (AO) to verify documentary evidence and grant full TDS credit of ₹3.91 lakh claimed by the taxpayer. It also ruled that the delay in filing the appeal deserved to be condoned as the assessee had been diligently pursuing rectification proceedings before the centralised processing centre (CPC).
In
an order last week, a division bench of judicial member Pawan Singh and accountant member Manoj Kumar Aggarwal said, "...we find that full TDS credit has not been granted since the assessee’s employer has deducted TDS but has not remitted the same to the revenue. Accordingly, full TDS credit is not reflected in form 26AS of the assessee, and credit thereof has not been allowed in full to the assessee. In support of her claim, the assessee has furnished salary slips, form 16, bank statements and other documents in the paper-book which would establish that TDS was deducted by the employer against salary payments and net salary was remitted to the assessee...we would hold that the assessee would be entitled for full TDS credit as deducted by assessee’s employer. The AO is directed to verify the same and allow credit of the same to the assessee."
The case relates to assessment year (AY)19-20. The assessee, an employee of Trimax IT Infrastructure & Services Ltd, had filed her income tax return (ITR) declaring income of ₹18.41 lakh. However, while processing the return under Section 143(1) of the Income-tax Act, the CPC allowed TDS credit of only ₹79,030 against her claim of ₹391,241, resulting in a tax demand of ₹336,373.
The mismatch arose because the employer had deducted TDS from the employee's salary but allegedly failed to deposit the amount with the income tax department. As a result, the corresponding credit was not reflected in Form 26AS.
The assessee repeatedly approached the CPC through rectification applications seeking correction of the error. When those efforts failed to provide relief, she filed an appeal before the commissioner of income-tax (appeals) (CIT(A)).
However, the CIT(A) dismissed the appeal at the threshold on the grounds that it was filed beyond the prescribed limitation period, without examining the substantive issue relating to TDS credit.
The tribunal disagreed with the appellate authority's approach and observed that the taxpayer had been continuously pursuing the statutory remedy of rectification before the CPC.
"It could be observed that the assessee was pursuing rectification before CPC, which did not fructify. Left with no option, the assessee preferred a further appeal. On these facts, the delay should have been condoned," the tribunal noted.
The bench held that the delay was bona fide and arose because the taxpayer was attempting to resolve the matter through the prescribed rectification mechanism before approaching the appellate forum.
On the merits of the case, the tribunal examined the documents produced by the assessee, including salary slips, Form 16, bank statements and other supporting records.
According to the tribunal, these documents clearly demonstrated that TDS had been deducted from the employee's salary and that only the net salary amount had been credited to her bank account.
The bench noted that the denial of credit was solely due to the employer's failure to remit the deducted tax to the government, resulting in the absence of corresponding entries in Form 26AS.
Relying on Section 205 of the Income-tax Act and judicial precedents, the tribunal held that once tax has been deducted at source, the tax department cannot seek to recover the same amount from the employee merely because the employer failed to deposit it.
The tribunal referred to the Gujarat High Court's ruling in Gayatri Snehal Rao vs Income Tax Assessing Officer, which held that where an employer deducts tax from salary but does not deposit it with the government, no demand can be raised against the employee. The tribunal noted that the judgment was subsequently affirmed by the Supreme Court in February 2026, while the apex court had also taken a similar view in Income Tax Assessing Officer vs Shobhan Shantilal Doshi.
Following these precedents, the tribunal held that the assessee was entitled to full TDS credit for the amount deducted by her employer.
Allowing the appeal, the ITAT directed the assessing officer to verify the documentary evidence regarding TDS deduction and grant the corresponding credit to the taxpayer.
The ruling is expected to provide important relief to salaried taxpayers facing demands due to employer defaults in depositing TDS. It reinforces the principle embodied in Section 205 of the Income-tax Act that an employee cannot be made to suffer for an employer's failure to fulfil its statutory obligation after deducting tax from salary.
(ITA No.3362/MUM/2026 Date: 18 June 2026)
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