My employer deducted TDS but never deposited it. The department has raised a demand on me and set my later refund off against it. Can it do that?
No. s.205 bars a direct demand on the person from whose income the tax was deducted, and the Court held that adjusting a later year's refund against that demand is an indirect recovery of the same tax. The demand notice and the adjustment were quashed and the refund directed to be released.
Decided by the High Court (Delhi High Court — Rajiv Shakdher and Tara Vitasta Ganju JJ.) on 2023-02-17, reported as [2023] 148 taxmann.com 329 / 292 Taxman 138 / 452 ITR 107 (Delhi); W.P.(C) No. 6610 of 2019. It bears on section 205, section 199, section 237, section 245, section 192 of the Income Tax Act 1961, in TDS Defaults, Refunds, Interest & Condonation and Demand, Recovery & Stay matters.
This is the entry that turns s.205 from a defence against a demand into a defence against the department's preferred method of collecting it. CPC rarely 'demands' in the coercive sense; it simply withholds or adjusts the next refund. The Court's answer is that the revenue cannot do indirectly what s.205 stops it doing directly. The department's usual counter is that s.199 permits credit only for tax actually paid into the Central Government account, and this decision holds that s.199 governs credit while s.205 governs recovery, so the deductee is not the person to chase.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The petitioner was an employee of Kingfisher Airlines Limited from 12 January 2008 to 10 February 2012. For assessment year 2012-13 the employer withheld Rs 13,98,901 of tax on his salary, which was reflected in the Form 16A it issued, but did not deposit it with the Central Government. A demand of Rs 11,62,580 was raised on the petitioner for that year. When a refund of Rs 1,94,410 became due to him for assessment year 2015-16 it was not paid but set off against that demand. His application of 5 February 2019 was answered by the department to the effect that because the withholding tax was not reflected in Form 26AS the demand would remain outstanding. He challenged the notice of 28 February 2018, relying on s.205 and on the CBDT instruction of 1 June 2015. Counsel for the revenue accepted that no coercive measure could be taken against him but argued that credit could be given only under s.199, when the amount reaches the Central Government account, so the demand could not be effaced.
The writ petition was disposed of in the petitioner's favour. The deductee cannot be called upon to pay tax that has been deducted at source from his income; adjusting a demand of that kind against a future refund is an indirect recovery of the same tax and is barred by s.205. The Court quashed the notice of 28 February 2018 and held that the revenue is not entitled in law to adjust the demand raised for assessment year 2012-13 against any other assessment year, and directed that the refund of Rs 1,94,410 for assessment year 2015-16, which the revenue did not dispute, be paid (paras 11 to 13). Note what the order does and does not do: it quashes the notice and bars recovery and adjustment. It does not in terms cancel the underlying demand, and the revenue's stated position at para 5.1 was that the demand would remain outstanding.
The Court set out s.205 and held that its plain language points in one direction: where tax is deductible at source, the assessee shall not be called upon to pay it himself to the extent it has been deducted from his income (para 7). It read the CBDT instruction of 1 June 2015 as aligned with that provision, paragraph 2 of the instruction acknowledging that credit under s.199 is given only on payment into the Central Government account but recording that the Act nevertheless bars a direct demand on the deductee and that a tax-credit-mismatch demand cannot be enforced coercively (para 8). The question then framed was whether the revenue can do indirectly what it cannot do directly, and the answer was that adjustment of a demand against a future refund is an indirect recovery barred by s.205 (para 9). The Court added that the instruction, in providing only that no coercive measure will be taken, falls short of what the legislature has put in place by s.205 (para 9.2). The revenue's s.199 argument is recorded at para 5 and is answered only through this reading of the instruction; the judgment contains no separate analysis of s.199.
The adjustment of demand against future refund amounts to an indirect recovery of tax, which is barred under section 205 of the Act.
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Handle my notice → Ask a CA on WhatsAppNo. s.205 bars a direct demand on the person from whose income the tax was deducted, and the Court held that adjusting a later year's refund against that demand is an indirect recovery of the same tax. The demand notice and the adjustment were quashed and the refund directed to be released. This was decided by the High Court (Delhi High Court — Rajiv Shakdher and Tara Vitasta Ganju JJ.) and bears on section 205, section 199, section 237, section 245, section 192 of the Income Tax Act 1961. It is reported as [2023] 148 taxmann.com 329 / 292 Taxman 138 / 452 ITR 107 (Delhi); W.P.(C) No. 6610 of 2019. This is the entry that turns s.205 from a defence against a demand into a defence against the department's preferred method of collecting it. CPC rarely 'demands' in the coercive sense; it simply withholds or adjusts the next refund. The Court's answer is that the revenue cannot do indirectly what s.205 stops it doing directly. The department's usual counter is that s.199 permits credit only for tax actually paid into the Central Government account, and this decision holds that s.199 governs credit while s.205 governs recovery, so the deductee is not the person to chase. If it applies to you, the first step is this: Prove the deduction first — salary slips, Form 16, the credit entries and the employer's ledger; the bar under s.205 operates on the fact of deduction, not on the deposit.
The petitioner was an employee of Kingfisher Airlines Limited from 12 January 2008 to 10 February 2012. For assessment year 2012-13 the employer withheld Rs 13,98,901 of tax on his salary, which was reflected in the Form 16A it issued, but did not deposit it with the Central Government. A demand of Rs 11,62,580 was raised on the petitioner for that year. When a refund of Rs 1,94,410 became due to him for assessment year 2015-16 it was not paid but set off against that demand. His application of 5 February 2019 was answered by the department to the effect that because the withholding tax was not reflected in Form 26AS the demand would remain outstanding. He challenged the notice of 28 February 2018, relying on s.205 and on the CBDT instruction of 1 June 2015. Counsel for the revenue accepted that no coercive measure could be taken against him but argued that credit could be given only under s.199, when the amount reaches the Central Government account, so the demand could not be effaced. The matter was decided on 2023-02-17 by the High Court (Delhi High Court — Rajiv Shakdher and Tara Vitasta Ganju JJ.). On those facts the High Court held as follows. The writ petition was disposed of in the petitioner's favour. The deductee cannot be called upon to pay tax that has been deducted at source from his income; adjusting a demand of that kind against a future refund is an indirect recovery of the same tax and is barred by s.205. The Court quashed the notice of 28 February 2018 and held that the revenue is not entitled in law to adjust the demand raised for assessment year 2012-13 against any other assessment year, and directed that the refund of Rs 1,94,410 for assessment year 2015-16, which the revenue did not dispute, be paid (paras 11 to 13). Note what the order does and does not do: it quashes the notice and bars recovery and adjustment. It does not in terms cancel the underlying demand, and the revenue's stated position at para 5.1 was that the demand would remain outstanding.
The Court set out s.205 and held that its plain language points in one direction: where tax is deductible at source, the assessee shall not be called upon to pay it himself to the extent it has been deducted from his income (para 7). It read the CBDT instruction of 1 June 2015 as aligned with that provision, paragraph 2 of the instruction acknowledging that credit under s.199 is given only on payment into the Central Government account but recording that the Act nevertheless bars a direct demand on the deductee and that a tax-credit-mismatch demand cannot be enforced coercively (para 8). The question then framed was whether the revenue can do indirectly what it cannot do directly, and the answer was that adjustment of a demand against a future refund is an indirect recovery barred by s.205 (para 9). The Court added that the instruction, in providing only that no coercive measure will be taken, falls short of what the legislature has put in place by s.205 (para 9.2). The revenue's s.199 argument is recorded at para 5 and is answered only through this reading of the instruction; the judgment contains no separate analysis of s.199. In the words reproduced by the source cited on this page: "The adjustment of demand against future refund amounts to an indirect recovery of tax, which is barred under section 205 of the Act."
It was decided by the High Court on 2023-02-17 and is reported as [2023] 148 taxmann.com 329 / 292 Taxman 138 / 452 ITR 107 (Delhi); W.P.(C) No. 6610 of 2019. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 205, section 199, section 237, section 245, section 192, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The writ petition was disposed of in the petitioner's favour. The deductee cannot be called upon to pay tax that has been deducted at source from his income; adjusting a demand of that kind against a future refund is an indirect recovery of the same tax and is barred by s.205. The Court quashed the notice of 28 February 2018 and held that the revenue is not entitled in law to adjust the demand raised for assessment year 2012-13 against any other assessment year, and directed that the refund of Rs 1,94,410 for assessment year 2015-16, which the revenue did not dispute, be paid (paras 11 to 13). Note what the order does and does not do: it quashes the notice and bars recovery and adjustment. It does not in terms cancel the underlying demand, and the revenue's stated position at para 5.1 was that the demand would remain outstanding. It arises in TDS Defaults, Refunds, Interest & Condonation and Demand, Recovery & Stay matters, on section 205, section 199, section 237, section 245, section 192 of the Income Tax Act 1961, and was decided by Delhi High Court — Rajiv Shakdher and Tara Vitasta Ganju JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Take the point against the s.245 intimation itself, not only against the underlying demand, since the adjustment is the act being challenged. Cite the CBDT instruction of 1 June 2015 alongside the section — it is binding on the officer and says the mismatch demand cannot be enforced coercively. Ask expressly for the refund to be released with interest rather than merely for the demand to be cancelled.
High Courts differ on this point. Followed by a later Division Bench of the same Court. In Incredible Unique Buildcon (P.) Ltd. v. ITO [2023] 153 taxmann.com 179 (Delhi), 31 May 2023, Rajiv Shakdher and Girish Kathpalia JJ, this judgment was set out at length and followed, the Court holding that the revenue could neither recover the undeposited deduction from the deductee nor refuse credit for it; the revenue's review application against that order was dismissed on 3 October 2023, [2023] 155 taxmann.com 603 (Delhi). Note that Shakdher J presided in both. There is now a contrary view in another High Court. In Mridul Raj Kunnon v. CIT [2025] 174 taxmann.com 164 (Kerala), 3 April 2025, Gopinath P. J. recorded disagreement in terms with this judgment to the extent it holds that credit becomes available on deduction even where the deductor has not paid the amount over, holding that s.199 allows credit only to the extent of receipt and that the heading of s.205 shows it bars recovery from the assessee without mandating credit. That Court followed CIT v. Om Prakash Gattani [2001] 117 Taxman 549 / 242 ITR 638 (Gauhati) and the Bombay order in Aslam Checkar v. ITO, and left it to the department to proceed against the deductor under s.201, credit to follow any recovery. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A short judgment on a narrow point, and its limits matter. It decides that the deductee cannot be made to pay tax his employer withheld and that a demand of that kind cannot be set off against a refund otherwise due; it quashes the notice of 28 February 2018 and directs payment of the undisputed refund. It does not cancel the underlying demand in terms, and the revenue's recorded position was that the demand would remain outstanding. The revenue's argument that credit under s.199 arises only on payment into the Central Government account is recorded at para 5 and is met only through the CBDT instruction of 1 June 2015; there is no separate discussion of s.199, so no reasoned rejection of that argument should be attributed to the Court beyond that. The judgment records that the deduction was reflected in a Form 16A issued by the employer. It says nothing about the employer being in liquidation, and an earlier note in this entry that relied on that should not be followed. The judgment has now been read. It does not say what the department may do against the defaulting deductor, beyond what s.201 provides, and it does not decide whether credit must be given where the deduction is established but nothing has reached the Government — the point on which the Kerala High Court has since taken the opposite view. It says nothing about a deductee who cannot produce a deduction certificate; that was answered later, in the review order in Incredible Unique Buildcon. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The writ petition was disposed of in the petitioner's favour. The deductee cannot be called upon to pay tax that has been deducted at source from his income; adjusting a demand of that kind against a future refund is an indirect recovery of the same tax and is barred by s.205. The Court quashed the notice of 28 February 2018 and held that the revenue is not entitled in law to adjust the demand raised for assessment year 2012-13 against any other assessment year, and directed that the refund of Rs 1,94,410 for assessment year 2015-16, which the revenue did not dispute, be paid (paras 11 to 13). Note what the order does and does not do: it quashes the notice and bars recovery and adjustment. It does not in terms cancel the underlying demand, and the revenue's stated position at para 5.1 was that the demand would remain outstanding.
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