How to get the credit of TDS deducted by the employer but not paid to the government?

Mr A worked for ABC Ltd as an Accountant. The Company, which went bankrupt subsequently, took tax from his wages but neglected to deposit the TDS with the government. Kartik, on the other hand, received a notice from the tax department requiring him to pay the tax.

This issue (i.e. TDS not being deposited with the government) is not unique to salary income; it can occur in any scenario where tax is deducted but not submitted with the government by the income payer. The income-tax authorities discovered Rs. 3,200 crore scam in 2018, in which 447 companies deducted tax from employees’ salaries but failed to deposit the TDS with the government.

If you’re having a similar situation, keep reading to see how to overcome it and what happened to Kartik.

Basic Information about TDS

If any Tax is Deducted at the Source and deposited with the government, it is considered a payment of tax on behalf of the person whose income was deducted. In other words, the person whose income tax has been deducted at the source is entitled to a TDS credit.

A tax passbook Form 26AS records all taxes paid by or on behalf of a person (such as TDS, TCS (Tax Collected at Source), advance-tax, and self-assessment tax). This Form26AS is linked to the individual’s PAN.

If TDS does not appear on Form 26AS, it is a red flag.

If the tax deducted by the payer is not shown in this tax passbook, it means the payer has either not paid the taxes to the central government or has not filed the TDS statement/TDS report with the income tax department after payment. The tax agency disallows TDS credit in both cases and issues the taxpayer with a notice of tax demand.

What does the law say about this?

Section 205 of the Income Tax Act forbids a deductor from recovering tax from a taxpayer if the deductor has already deducted tax from his income. If a tax was deductible from a person’s income and that tax was deducted, the individual cannot be forced to pay it. Furthermore, Section 191 of the Act states that a person is only obliged to pay tax on salary income directly (on his or her own) if tax has not been deducted from the salary in the form of TDS.

As a result, a taxpayer will only be responsible for paying the tax if a certain income is not covered by the TDS rules or is covered but no tax has been deducted. If tax has been deducted but not paid to the government, he cannot be held accountable.

What causes a tax demand?

A disparity between the credit claimed in the ITR and the TDS credit reflecting/available on Form 26AS has resulted in a tax demand. When the TDS credit available in Form 26AS is less than that claimed in the ITR, the automated system at CPC (the income tax department’s Central Processing Centre) compares the two records, and if the TDS credit available in Form 26AS is less than that claimed in the ITR, the ITR filer receives a tax demand notice.

Judicial Decisions

On several instances, the courts have heard this case and decided in favour of the taxpayer.

The Gujarat High Court recently annulled a tax claim against an employee for TDS amounts not paid to the government by his employer in the matter of Kartik Vijaysinh Sonavane Click here to Download the Judgement. TDS had been deducted from the salary of Kingfisher Airlines’ employee Kartik. The corporation, on the other hand, did not pay the tax to the government. Kartik received a notice from the assessment officer to pay the tax. Despite the fact that the airline has not paid the TDS credit, the Gujarat High Court has determined that it should be awarded to the assessee (Kartik).

In the matter of Anusuya Alva Click here to Download the Judgement, the Karnataka High Court declared that if the tenant deducts tax from the rent but does not pay it to the government, the tax department’s only option is to recover the TDS amount from the tenant who deducted the tax, not from the landlord.

Clarifications from the CBDT

The Central Board of Direct Taxes (CBDT) has issued directions on this topic due to the seriousness of the situation and the ongoing dispute. The CBDT has said unequivocally that if TDS is deducted by the employer or deductor but not deposited with the government, the Assessing Officer cannot issue tax demands against the payees, i.e. the salary/other income recipients.

So, why is a tax demand notice being sent out?

ITR processing is automated and handled by the CPC. TDS credit is only allowed in the system to the degree that it shows on Form 26AS. As a result, if there is a TDS amount discrepancy, CPC will almost certainly issue a tax demand.

Because the ITR forms lack an annexure, a taxpayer cannot attach any supporting papers to the ITR to substantiate a TDS claim. If a disparity is discovered between the TDS reflected in Form 26AS and the TDS credit claimed in the ITR, the taxpayer is almost certain to get a notification.

Before submitting an ITR, it is a good idea to examine Form 26AS, and if any discrepancies are discovered, they should be remedied before the ITR is filed. As a result, it’s a good idea to verify Form 26AS ahead of time so that any anomalies can be addressed as soon as possible.

What to do?

If the taxpayer notices that Form 26AS does not display the full amount of TDS deducted from his or her income, he or she should contact the deductor. The TDS credit mismatch could be caused by one of the following factors:

(a) The TDS is not paid to the government.

(b) TDS has been deposited, but the TDS statement has not yet been filed with the tax department;

(c) The deductor has stated the erroneous PAN in the TDS statement, or

(d) The TDS amount has been mentioned incorrectly in the TDS statement.

Only the deductor has the ability to fix these errors. As a result, the taxpayer should ask his deductor to remedy the error as soon as possible and ensure that it is done before filing the ITR.

A taxpayer has no legal authority to compel a deductor to deposit TDS or fix any errors in the deductor’s TDS statement. If the deductor refuses to comply with the taxpayer’s request, the taxpayer can submit TDS documentation to the IRS.

The taxpayer can respond to the demand notice by filing an e-filing site answer with supporting documents proving TDS deducted from his income. The taxpayer can present pay stubs and bank statements that demonstrate a credit of net salary/other income after TDS is deducted.

If the documents submitted are deemed to be valid, the AO is obligated to give the taxpayer TDS credit. If he continues to refuse the credit, the only alternative is to submit an appeal with the Commissioner of Income Tax (Appeals).