Supreme Court Quashes Gujarat HC Order To Modify Income Tax Software To Prevent TDS-Default Demands Against Deductee

The Supreme Court on January 12, 2026, set aside directions issued by the Gujarat High Court requiring the Central Board of Direct Taxes (CBDT) to modify the income-tax department's software. The court, however, left untouched the relief granted to the taxpayer on merits.

A bench of Justices Rajesh Bindal and Vijay Bishnoi was hearing an appeal filed by the Income Tax Department against a Gujarat High Court order passed in favour of Shobhan Shantilal Doshi, an individual taxpayer.

The Court noted that the Revenue's only grievance was against paragraphs 10 and 11 of the High Court's judgment. Those directions had required the CBDT to make changes in its software so that no tax demand is raised against a deductee where tax has been deducted at source but not deposited by the deductor.

As these directions had nothing to do with the taxpayer's case, the top court set aside the same.

“As the aforesaid directions issued have nothing to do with the case on merits and will not affect the respondent-assessee, in our opinion, the present appeal can be disposed of with the observation that the direction issued by the High Court in paragraph Nos. 10 and 11 of the impugned order for changes to be made in the software are set aside," the court said.

The Revenue had not challenged the High Court's finding on merits. In view of this, the Supreme Court declined to issue notice to the taxpayer, observing that the order proposed to be passed would not affect the relief already granted.

Before the High Court, Doshi had challenged tax demands raised despite his employer having deducted tax at source from his salary but failing to deposit it with the government. The High Court held that Section 205 of the Income-tax Act bars any direct demand on a taxpayer to the extent tax has already been deducted.

While granting relief, the High Court also directed strict compliance with Section 205 and binding CBDT instructions. It further ordered the department to make necessary corrections in its software to ensure that no such demands are raised in the future.

Challenging only this aspect, the Additional Solicitor General appearing for the Revenue argued before the Supreme Court that TDS credit can be granted only after verification of relevant facts. He submitted that technology is meant to assist data processing and not adjudication, and that blanket software changes could result in genuine tax demands being ignored.

Accepting this submission, the Supreme Court held that the directions to alter the software had no connection with the merits of the individual case.

Accordingly, it set aside the High Court's directions requiring changes to the income-tax software. The appeal was disposed of, leaving the relief granted to the taxpayer undisturbed.

For Petitioners/Income Tax Department: ASG Raghavendra P. Shankar; Advocates Madhulika Upadhyay (AOR), Karan Lahiri, Bhuvan Kapoor, Udit Dedhiya and Shashank Bajpai.

For the respondent: None.