Employee’s Income Tax Liability Not Waived Due To Employer’s Failure To Remit TDS: Kerala HC

In a significant decision affecting salaried taxpayers, the Kerala High Court has recently ruled that an employee’s income tax liability cannot be waived merely because the employer failed to deposit the tax deducted at source (TDS) with the Income Tax Department.

The judgment, delivered by a division bench, upheld that while an employer may deduct TDS from an employee’s salary, the statutory obligation to remit it to the government lies solely with the employer. Consequently, employees remain liable for tax where actual remittance has not been made, and the court has emphasised that the proper course for recovery is against the employer rather than absolving the employee of tax dues.

“The court’s interpretation reinforces the intention behind Sections 199 and 205 of the Income Tax Act, which govern TDS credit, holding that credit for tax deducted will accrue only upon actual deposit with the government. This judgment clarifies controversies that have arisen in cases of corporate defaults, ensuring that the legal obligation to ensure timely deposit of deducted taxes cannot be shifted onto employees,” says Rajarshi Dasgupta, Executive Director - Tax & Data Privacy, AQUILAW.

Tax practitioners note the implications for both employers and employees, urging careful compliance with TDS remittance schedules to avoid unintended tax demands on staff and litigation. The ruling underscores the importance of robust payroll and remittance practices in corporate India.

Aditya Bhattacharya, Partner, King Stubb & Kasiva, Advocates and Attorneys, says, “Failure to deduct or deposit Tax Deducted at Source (TDS) on salaries, as required under Section 192 of the Income-tax Act, 1961, exposes employers to significant statutory consequences. Such default results in the employer being treated as an “assessee in default” under Section 201, attracting mandatory interest, penalties equivalent to the unpaid tax, and potential disallowance of related business expenditure.”

In cases of wilful non-compliance, prosecution proceedings may also be initiated. Importantly, jurisprudence has consistently affirmed that employees cannot be prejudiced or denied credit for TDS due to an employer’s failure to remit the tax.

The framework reinforces that TDS compliance is a substantive legal obligation, and lapses can lead to serious financial, regulatory, and reputational risks for employers.