Orissa High Court shields employees from tax demands over employers’ TDS failures

The court has directed tax officials to verify salary deductions with employers rather than make workers pay again when deducted TDS is missing from official records.

The Orissa High Court has said a salaried employee should not be forced to pay income tax twice when an employer has deducted tax from pay but failed to deposit it with the tax authorities or report it correctly in the employee’s tax records.

In a ruling delivered by a Division Bench comprising Justice Sanjeeb K. Panigrahi and Justice Murahari Sri Raman, the court said workers must not be made to bear the consequences of an employer’s default in remitting tax deducted at source, commonly known as TDS. The court said that where a taxpayer can show that tax was deducted from salary, the assessing officer should verify the position with the employer or deductor rather than press ahead with recovery from the employee.

The case involved Nirupama Nanda, a former college lecturer in Odisha, who challenged outstanding tax demands for assessment years 2009-10 through 2013-14. According to the petition, her salary at different colleges had been subject to TDS, including a deduction of Rs 3,92,913 for assessment year 2013-14, but the corresponding amounts were not properly reflected in Form 26AS, the tax credit statement used to match deductions against a taxpayer’s account. She said she had submitted salary certificates and TDS details to the income tax department, but her requests for correction were not resolved.

The income tax department argued that credit can be granted only when the deducted amount is actually deposited with the Central Government and appears in Form 26AS. The court, however, referred to sections 191, 201, 203 and 205 of the Income Tax Act, 1961, and said an employer that deducts tax but fails to deposit it may be treated as an assessee in default and face statutory consequences. It relied on earlier decisions including Kartik Vijaysinh Sonavane v. CIT, Chintan Bindra v. CIT and Malay Kar v. Union of India.

At the same time, the Bench did not immediately wipe out the tax demand. It directed Nanda to produce supporting documents within 15 days, and said the jurisdictional authority should examine the evidence, seek confirmation from the employer if necessary and summon records where needed. If the deductions are verified, the outstanding demands are to be corrected. The exercise is to be completed within three months of her first appearance before the authority.

The ruling fits a broader line of judicial decisions protecting employees from the fallout of employer failures on TDS compliance. The Bombay High Court has also recently taken a similar approach in a case involving employees of a company under insolvency resolution, reinforcing the principle that the duty to deposit deducted tax lies with the deductor, not the salary earner.