Your employer deducted TDS and never deposited it. The demand is not yours to pay

Short answer: if your employer deducted tax from your salary and never paid it to the government, the demand is not yours. Section 205 of the Income-tax Act 1961, carried forward as Section 401 of the 2025 Act, bars the department from calling on you to pay tax that has already been deducted from your income. The Delhi High Court applied it again on 21 August 2026, quashing demands for four assessment years against a former Kingfisher Airlines employee and ordering the refunds that had been adjusted against them to be returned.

The credit is denied by an automated process that only reads Form 26AS. Getting it back is a matter of putting the deduction on the record and citing the bar.

What has happened

Form 16 shows tax deducted. Form 26AS shows nothing, or less. When the return was processed under Section 143(1), the system gave credit only for what appeared in 26AS, treated the balance as unpaid tax, and either raised a demand with interest or, more often, said nothing until a later year's refund was set off against it under Section 245. The full mechanics of that set-off, and why prior intimation is mandatory, are in refund adjusted against outstanding demand.

Form 26AS is built from the deductor's quarterly TDS returns and challans. An employer that deducted and did not file, or filed and did not pay, leaves no trace there. The processing does not ask whether tax was deducted; it asks whether tax was received. Those are different questions, and the statute answers the first one in your favour.

The bar

Section 205 of the 1961 Act:

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.

It is a bar on the department, not a relief you apply for. Once the deduction has happened, the person to pursue is the deductor. Section 201 makes the employer an assessee in default for the amount, Section 201(1A) charges interest at 1.5% a month from the date of deduction, and Section 276B makes non-deposit a prosecutable offence. Every one of those remedies runs against the employer.

The 2025 Act keeps the bar in the same words as Section 401, so the position for tax year 2026-27 onwards is unchanged. The credit mechanics move with it: the rule that tax deducted is treated as income received sits in Section 396, and the credit provisions follow.

What the courts have done with it

The Delhi High Court has now applied the bar three times to the same employer's former staff, which is why the point is worth stating plainly.

In Yatish Saxena the court accepted that the department might have been justified in not giving credit through 26AS, since the deductor had not deposited the amount, and held that this did not matter: the employee could not be made to pay for the employer's default, and the demands could not stand. Gujarat and Bombay benches have reached the same result on the same section in other cases.

The department's own position is not different. A CBDT office memorandum of 11 March 2016 (F.No. 275/29/2014-IT(B)) instructs assessing officers not to enforce demands created on account of TDS deducted but not deposited, and to pursue the deductor instead. The automated processing does not read it; the officer handling your rectification is bound by it.

What to do

1. Establish the deduction. The evidence is that tax was taken from you, not that it was paid:

• Form 16 or 16A issued by the employer, showing the deduction;
• where none was issued, salary slips showing TDS deducted and bank statements showing the net salary credited;
• the employment contract or offer letter for the gross figure;
• any correspondence with the employer or its insolvency professional about the shortfall.

2. File a rectification. The demand from a Section 143(1) processing is corrected by an application under Section 154, now Section 287 of the 2025 Act, through the e-filing portal, citing Section 205 and attaching the documents above. State expressly that credit is claimed on the basis of deduction, that the deductor's default is a matter between the department and the deductor, and that recovery from you is barred. Cite the three Delhi decisions and the 2016 memorandum. The intimation itself, and the 30-day window it carries, are explained in got a 143(1) intimation?.

3. Where a refund has already been adjusted, say so in the rectification and ask for the amount to be refunded with interest. Adjustment under Section 245, now Section 438, is recovery, and recovery of deducted tax is what the section bars. That was the relief in Yatish Saxena.

4. Raise a grievance on the portal in parallel, under TDS credit mismatch, so that a human officer sees the file. Rectification requests on 26AS mismatches are frequently rejected by the same automated logic that created the demand.

5. If the rectification is rejected, the routes are an appeal under Section 246A, now Section 357, or a writ petition where the demand is being enforced. Every one of the cases above was a writ, because the point is one of jurisdiction: the department has no power to recover, and a court can say so without going into the merits.

6. Tell the department where the employer is. If the employer is in liquidation or insolvency, the department's claim for the TDS sits in that process, and your file should say so. It is one more reason the recovery is not yours.

What this does not cover

Section 205 protects the deductee where tax was deducted. It does not help where the employer paid you gross and deducted nothing, however the payslip was labelled; in that case the tax is yours to pay and the employer's failure to deduct is a separate default. Nor does it convert a wrong figure on a Form 16 into a credit: the credit is for what was actually taken from your salary, which the bank credits will show.

Where the question is not the employer's default but a mismatch in what was reported, the reconciliation is a different exercise and is usually resolved through the deductor's correction statement rather than through Section 205.

Section numbers are given under both Acts because the demands in these cases reach back to years governed by the 1961 Act while the bar now operates through the 2025 Act. The office memorandum and the decisions cited are as at the date above; confirm the current position before relying on them in a reply.