Employees Liable To Pay Tax Even If Employer Deducts TDS but Fails To Deposit It: Kerala High Court

Holding that employees cannot avoid their income tax liability merely because their employer deducted tax at source from their salaries but failed to deposit it with the Income Tax Department, the Kerala High Court has ruled that the statutory protection under Section 205 of the Income Tax Act applies only when the deducted tax is actually paid to the Central Government.

A division bench of Justice A K Jayasankaran Nambiar and Justice Jobin Sebastian madethe ruling while dismissing writ appeals filed by former employees of Attinad Software Pvt. Ltd. It  clarified that “no credit for tax deducted at source can be granted to an assessee claiming the same unless a deduction of tax at source has been made in accordance with the provisions of the IT Act and paid to the Central Government.”

The appellants, former employees of Attinad Software Pvt. Ltd., had contended that although tax had been deducted from their salaries as TDS, their employer failed to remit the deducted amounts to the Income Tax Department.When their individual income tax assessments were completed, the tax department raised demands against them for amounts matching the unpaid TDS.

The employees challenged these demands, saying that once tax had been deducted from their salaries, Section 205 of the Income Tax Act prevented the department from recovering it from them. They also argued that they should not be forced to pay again for a failure that was entirely their employer's.

A single judge of the High Court rejected this argument on April 3, 2025. The judge said Sections 199 and 205 had to be read together and that employees could get credit for TDS only if the deducted amount was actually paid to the government. Since the employer had not deposited the tax, no such credit was available to the employees.

The division bench agreed, noting that Section 205 only stops recovery where tax has been both deducted and paid in line with the law. It does not protect an assessee where the employer has only deducted TDS on paper but failed to deposit it. The court explained that the demand raised by the department was not a recovery of TDS but a recovery of the employees' own assessed tax liability on account of non-deposit of TDS.

The bench further noted that while TDS is ordinarily adjusted against the final tax liability, no such adjustment was possible in the present case because the employer never paid the tax to the Central Government. The employees' remedy, the Court said, lies against their employer, who had effectively reduced their take-home salary without discharging the corresponding statutory obligation.

The Division Bench also recorded the safeguard granted by the Single Judge that if the Income Tax Department subsequently recovers any amount from the employer, the same must be credited to the employees concerned and their outstanding tax demands reduced accordingly.

With these observations, the writ appeals were dismissed.

Case Title: Sarath V S v. The Commissioner of Income Tax

Citation: 2026 LLBiz HC (KER) 5

Case Number: WA NO. 2142 OF 2025

For Petitioners: Advocate Adarsh Sivadasan

For Respondents: Advocates Navaneeth N Nath and P G Jayashankar