As per Section 205, if the TDS has been deducted from your salary but the same has not been deposited to the government, the income tax department cannot impose a penalty on you.
Nidhi | Jun 25, 2025 |
TDS Discrepancy: Rs. 1 Lakh Deducted by Employer, Only Rs. 10,000 Reflected in 26AS
Taxpayers receive a defective return issued by the income tax department when the return they have filed turns out to be defective. An Income Tax Return (ITR) may be treated as a defective return if the income tax department identifies discrepancies between the income and tax deducted amounts in Form 26AS and those reported in the filed return.
But what if you have received a defective return notice under section 139(9), even though your employer deducted the full TDS, and you claimed that amount in your return? This happens when your employer deducts TDS but fails to deposit it with the government or does not file TDS returns properly. As a result, Form 26AS does not show the full amount, and the system identifies your return as defective.
For example, your employer deducts Rs 50,000 TDS, but in your Form 26AS, it shows only Rs 40,000. So, while filing your Income Tax Return (ITR), you claim the full Rs 50,000 as credit. Out of nowhere, you get a defective return notice due to a mismatch. This is more common in startups or defaulting employers.
Now, in such a situation, you should not panic or assume that you have done something wrong. It is not your fault, and you are still entitled to claim the full Rs 50,000 TDS.
Bar against direct demand on assessee.
205. Where tax is deductible at the source under the foregoing provisions of this Chapter, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.
Section 205 of the Income-tax Act, 1961 protects taxpayers from this exact situation. As per Section 205, if the TDS has been deducted from your salary, the income tax department cannot impose a penalty on you because it was not your fault but the deductor’s fault, as the deductor did not deposit the TDS. Once the TDS is deducted from your salary, your responsibility ends there. The deductor is responsible for depositing that tax with the government and not you.
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.
To defend your claim and respond to the notice, you can gather the following evidence:
You can use this evidence to challenge the notice.
The court has supported the taxpayers in such situations in the cases below:
Yashpal Sahni v. Rekha Hajarnavis (Bombay HC, 2007)
In the present case the petitioner-assessee has established that from his salary income, tax has been deducted at source by the employer and, therefore, it was held that the revenue has to recover the said TDS amount with interest and penalty from the employer alone and the revenue cannot seek to recover the said amount from the petitioner-assessee in view of the specific bar contained under section 205 of the Act.
Kartik Sonavane v. DCIT (Gujarat HC, 2021)
The Kingfisher Airlines deducted the Tax Deducted at Source (“TDS” hereinafter) to the tune of Rs. 7,20,100/- for the Assessment Year 2009-10 and Rs. 8,70,757/- for the Assessment Year 2011-12 in case of the petitioner. The amount since had not been deposited by the Airlines in the Central Government Account, the credit when claimed by the petitioner, the same was obviously not given by the respondent and the demand had been raised with interest.
In this case court also decided in favour of the employee and held that credit of the tax shall be given to the petitioner.
Chintan Bindra v. DCIT (Delhi HC, 2023)
Relevant Text: “The petitioner having accepted the salary after deduction of income tax at source had no further control over it in the sense that thereafter it was the duty of his employer acting as tax collecting agent of the revenue under Chapter XVII of the Act to pay the deducted tax amount to the Central Government in accordance with law. The employer of the petitioner having failed to perform his duty to deposit the deducted tax with the revenue, petitioner cannot be penalized. It would always be open for revenue to proceed against employer of the petitioner for recovery of the deducted tax.”
Mukesh Sogani v. ACIT (ITAT Pune, 2023)
ITAT held that since TDS was duly deducted at source by the employer from the salaries credited/paid to the assessee for the year under consideration, the benefit of such tax deducted at source has to be allowed in Intimation u/s 143(1) of the Act notwithstanding the fact that it was not deposited.
Deepak Ruia v. DCIT (Kolkata ITAT, 2024)
ITAT held that in case of TDS default, The AO, should take action against the defaulting company who has not deposited the tax deducted at source from the salary. Rejecting the claim of TDS of Employee on the ground that there was no deposit thereof is incorrect.
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