Employee Cannot Be Made To Pay Tax Already Deducted Due To Employer's TDS Default: Orissa High Court

The Orissa High Court has ruled that an employee cannot be made to pay income tax again to the extent tax has already been deducted from their salary, merely because the employer failed to deposit it or correctly report the deductions.

A Division Bench of Justice Sanjeeb K. Panigrahi and Justice Murahari Sri Raman observed that employees should not suffer because of their employers' failure to deposit tax deducted at source (TDS) with the Income Tax Department.

“As it is specific case of the petitioner that the TDS amount has not been correctly reflected by the deductor(s), the petitioner should not be made to suffer double jeopardy. The assessing authority, in such situation, may call for confirmation from the employer(s)/deductor(s) and/or issue summons to produce concerned records showing deductions made from payments made to the petitioner at the relevant period. The deducting authority is obligated to make deposits of the amounts of tax deducted at source,” the court observed.

The case concerned Nirupama Nanda, a former college lecturer in Odisha, who challenged outstanding income tax demands despite claiming that tax had already been deducted from her salary.

Nanda had worked at several colleges in the State. According to the petition, the Principal of Salepur College deducted TDS from her salary for assessment years 2010-11, 2011-12, 2012-13 and 2013-14 but failed to correctly report the deductions in the returns filed with the Income Tax Department.

She was transferred to Sri Jayadev College of Education and Technology in 2012. For assessment year 2013-14, ₹3,92,913 was deducted from her salary as TDS, but the Principal failed to correctly reflect the amount in the return.

As a result, the deductions were either missing or incorrectly reflected in her Form 26AS, which records tax deducted and deposited against a taxpayer's account.

Nanda approached the Income Tax Officer on April 8, 2016, seeking rectification of tax demands for assessment years 2009-10 to 2013-14. She claimed to have submitted salary certificates and TDS details, but her requests remained unaddressed.

The Income Tax Department argued that TDS credit could be granted only if the deducted amount was deposited with the Central Government and reflected in Form 26AS.

The court referred to Sections 191, 201, 203 and 205 of the Income Tax Act, 1961, observing that employers who deduct tax but fail to deposit it can be treated as assessees in default and face statutory consequences.

It emphasised that Section 205 bars recovery from employees to the extent tax has already been deducted from their income. The Bench also relied on Kartik Vijaysinh Sonavane v. CIT, Chintan Bindra v. CIT and Malay Kar v. Union of India.

The court directed Nanda to submit supporting documents within 15 days. The jurisdictional authority must verify the deductions, summon employers if necessary, and rectify the outstanding demands if the claims are established. The exercise must be completed within three months of her first appearance.

The petition was disposed of without the court directly quashing the demands.