In a significant ruling concerning Tax Deducted at Source (TDS), the Bombay High Court has held that where an assessee establishes that tax was actually deducted from his income or payment, the Income Tax Department cannot deny corresponding TDS credit merely because the deductor failed to deposit the tax with the Central Government.
The judgment was delivered by the Bombay High Court in Manohar Ramabtar Jhunjhunwala v. Principal Commissioner of Income Tax-17, Mumbai and Others, along with a batch of connected writ petitions, on 5 August 2026. The Division Bench comprised Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla. The lead matter was Writ Petition No. 2063 of 2025, and the judgment bears the neutral citation 2026:BHC-OS:18498-DB.
Background of the Dispute
The batch of petitions concerned taxpayers, including salaried employees and other assessees, whose income or payments had suffered deduction of tax at source. However, the deductors either failed to deposit the deducted tax with the Government or failed to file the necessary TDS statements.
Because the deducted amounts did not appear in Form 26AS, the Income Tax Department denied TDS credit and raised demands against the deductees.
In the lead petition, the petitioner was employed with Uniply Décor Limited. For Assessment Year 2019-20, he offered salary income and claimed TDS credit. Although tax had allegedly been deducted from his salary, the employer did not deposit the TDS with the Government, resulting in non-reflection of the amount in Form 26AS and consequent denial of credit.
Section 199 and Section 205 Must Be Read Harmoniously
The principal issue before the Court was whether TDS credit could be granted under Section 199 of the Income-tax Act, 1961, despite the deductor not depositing the amount with the Government, or whether the deductee was merely protected from recovery under Section 205.
The Court held that the provisions must be read harmoniously. Section 205 is a substantive protection which operates once tax has actually been deducted from the assessee’s income. It does not make such protection dependent upon the deductor subsequently depositing the amount with the Government.
The Court observed that a rigid interpretation of Section 199, divorced from Section 205, could impose upon the deductee the consequences of a default over which the deductee has no control.
TDS Credit Cannot Be Denied Once Deduction Is Established
After examining the statutory framework and several High Court decisions, as well as the Supreme Court’s order in Income-tax Assessing Officer, Baroda v. Shobhan Shantilal Doshi, the Bombay High Court held that once actual deduction of tax at source is established, the deductee is entitled to appropriate TDS credit.
The Department may verify whether the deduction actually took place. However, after that foundational fact is established, subsequent non-payment by the deductor cannot be relied upon to deny the deductee the benefit of the tax already withheld from his income.
The Court accordingly held that the Department cannot recover, directly or indirectly, the corresponding tax from the deductee. Consequential relief, including refund wherever due, must also follow. Demands arising solely because the deductor did not deposit the deducted tax cannot continue against the deductee.
Law Does Not Compel the Impossible
The Court also applied the principle “Lex non cogit ad impossibilia”, meaning that the law does not compel a person to perform the impossible.
Once tax has been deducted, the deductee has no control over whether the deductor subsequently deposits the amount, files the required TDS statement, correctly reports the PAN, or generates Form 16 or Form 16A.
The Court observed that under the electronic TDS framework, the deductee cannot alter Form 26AS, upload the deductor’s statement or independently cure the mismatch. Denying credit because of steps which only the deductor can perform would therefore impose an impossible condition upon the deductee.
Form 16 or Form 16A Is Not the Only Evidence of TDS
Another important issue considered by the Court was the manner in which deduction could be proved where Form 16 or Form 16A is unavailable.
The Court recognised that in the current electronic system, Form 16 or Form 16A may itself not be generated when the deductor fails to deposit the TDS or file the necessary statement. Accordingly, absence of these certificates cannot, by itself, defeat a genuine claim.
For salary cases, evidence may include salary slips showing gross salary, TDS and net salary; employment documents read with bank statements; payroll records; tax workings; and correspondence relating to non-deposit of TDS.
For professional fees, contractual payments, rent and similar receipts, evidence may include invoices, bank statements reflecting net payments, remittance advice, ledger accounts, payer confirmations and contemporaneous correspondence.
The Court clarified that these categories are illustrative and not exhaustive, and the sufficiency of evidence will depend upon the circumstances of each case.
Department Must Verify the Claim Instead of Rejecting It Mechanically
Where the assessee produces prima facie evidence showing that TDS was deducted, the Department is required to examine the claim. It may make inquiries with the deductor, the jurisdictional TDS officer, a Resolution Professional or Liquidator, as appropriate.
The Court emphasised that the Department possesses sufficient statutory machinery to proceed against a defaulting deductor through adjudication, recovery, penalty and prosecution proceedings. The consequences of the deductor’s failure cannot simply be shifted to the deductee.
Directions to Assessing Officers
The Bombay High Court issued important administrative directions for cases where TDS credit is claimed even though the amount is not reflected in Form 26AS.
Where prima facie supporting material is furnished, the jurisdictional Assessing Officer must register and acknowledge the application, keep the corresponding demand in abeyance, ensure that no coercive recovery or refund adjustment occurs, conduct factual verification, and pass a reasoned order as expeditiously as possible and preferably within six months from receipt of the application.
The Court further clarified that although an initial denial of credit during automated processing under Section 143(1) may result from the statement-driven system, once an assessee approaches the Department with supporting material, the issue cannot continue to be dealt with purely as an electronic mismatch.
Final Decision of the Bombay High Court
The Court held that where tax has actually been deducted from an assessee’s income or payment:
TDS credit cannot be denied merely because the deductor failed to deposit the amount with the Central Government.
Upon verification, appropriate credit must be granted and the related demand cannot be enforced or continued against the deductee.
The absence of Form 16 or Form 16A is not fatal where actual deduction can be established through other reliable and cogent evidence.
In the batch of petitions, the Court set aside the orders and intimations to the extent they raised demands because TDS deducted from the petitioners had not been deposited by the deductors. The matters were remanded to the respective Assessing Officers for verification.
The Department was directed, after due verification, to grant the claimed TDS credit, deal with refunds wherever applicable, and make appropriate rectification, correction or deletion of demands appearing against the petitioners. The writ petitions were accordingly allowed.
Importantly, the Court expressly clarified that the judgment concerns domestic transactions and does not cover international transactions, which were not examined in this batch of petitions.
Why This Judgment Matters
The judgment provides substantial guidance for salaried employees, professionals, contractors, landlords and other taxpayers facing TDS mismatches caused by a deductor’s default. It confirms that the Department may verify whether TDS was genuinely deducted, but a taxpayer who has actually suffered the deduction cannot be made to bear the tax again merely because the person responsible for depositing the TDS failed to comply with the law.
It is also significant for cases where Form 26AS does not reflect the deduction and Form 16 or Form 16A cannot be produced, as the Court has expressly recognised alternative forms of reliable evidence.
