TDS Deducted But Not Deposited: Section 205 Is Your Shield
Your employer deducted TDS from your salary. Your tenant deducted TDS from your rent. Your client deducted TDS from your professional fees. You filed your ITR claiming credit for that TDS. And then you received a demand notice from the Income Tax Department.
Why? Because your deductor pocketed the TDS instead of depositing it with the government.
This is one of the most stressful scenarios for any taxpayer. You did nothing wrong, since the tax was deducted from your income. Yet the department is asking you to pay it again. The good news: Section 205 of the Income Tax Act exists precisely to protect you in this situation.
Short answer: The bar operates the moment deduction is established. It does not matter whether the deductor deposited the tax, filed the return, or issued a certificate. Claim the full amount actually deducted, keep proof of deduction, and cite Section 205 if CPC raises a demand.
What Section 205 Says
Section 205 of the Income Tax Act, 1961 is titled "Bar against direct demand on assessee."
The provision reads:
Where tax is deductible at the source under the provisions of Chapter XVII, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income.
In simpler terms: if tax has been deducted from your income, you cannot be asked to pay that same tax again, even if the deductor failed to deposit it with the government.
The Position Under the Income Tax Act, 2025
Under the Income Tax Act, 2025, in force from April 1, 2026, the corresponding provision is Section 401, which also carries the heading "Bar against direct demand on assessee" and is drafted in substantially the same terms. The substantive protection is unchanged: the assessee is not to be called upon to pay tax to the extent it has been deducted at source.
For assessments under the old Act, cite Section 205. For Tax Year 2026-27 onwards, cite Section 401. Note that Section 205 of the new Act is an entirely unrelated provision dealing with conditions for tax on income of certain companies and co-operative societies, so quoting the old number against the new Act will point an officer at the wrong text. Our Income Tax Act 2025 section mapping guide covers the wider renumbering.
The Core Protection: What Section 205 Does For You
1. You Cannot Be Asked to Pay Tax Already Deducted
The moment it is established that tax has been deducted at source from your income, Section 205 operates as a complete bar against any direct demand on you.
As legal commentary on the provision puts it, the bar under Section 205 operates as soon as it is established that tax had been deducted at source, and it is wholly irrelevant whether the tax deducted at source was deposited or not, and whether Form 16A has been issued or not.
The protection is automatic. You do not need to prove the deposit, only the deduction.
2. Form 26AS Non-Reflection Is Not a Ground to Deny Credit
If TDS is not reflected in Form 26AS because the deductor failed to deposit it, you cannot be denied the TDS credit. The credit must be given on evidence of deduction, not evidence of deposit.
The Gujarat High Court in Kartik Vijaysinh Sonavane v. DCIT [2021] held:
A perusal of Section 205 clarifies the position where it provides that where tax is deductible at source, the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income. Further, if the amount has been deducted but not paid to the Central Government, that eventuality is taken care of by Section 201 of the Income-tax Act.
Our guide on TDS not showing in Form 26AS sets out the reconciliation steps, and AIS vs Form 26AS vs TIS explains how the three statements differ.
3. The Deductor, Not You, Is Responsible for Non-Deposit
If the deductor fails to deposit TDS, the liability falls on the deductor under Section 201, not on you. Section 201 empowers the Assessing Officer to treat the deductor as an assessee in default and recover the tax from them, along with interest and penalties. See our guide on Section 201(1A) interest on late TDS deposit.
What the Courts Have Said: Key Precedents
Gauhati High Court: Om Prakash Gattani
The foundational authority. The Gauhati High Court held that an employer's failure to deposit TDS cannot be transferred to the employee. Once tax is deducted at source, the mode of recovery remains confined to the deducting entity. This judgment has been followed repeatedly by other High Courts.
Gujarat High Court: Kartik Vijaysinh Sonavane v. DCIT
The High Court held that the Assessing Officer cannot deny TDS credit to an employee solely because the employer did not deposit the deducted tax, relying on the Gattani line of authority. The department is precluded from denying the benefit of TDS, and where recovery was made, the assessee is entitled to a refund with statutory interest.
Delhi High Court: Sanjay Sudan v. ACIT
The Delhi High Court held that what the Revenue cannot do directly, it is impermissible for it to do indirectly. The department cannot deny TDS credit to a deductee by taking the route of Form 26AS non-reflection.
Delhi High Court: Incredible Unique Buildcon (P.) Ltd. v. ITO
The Court held that the payee is entitled to credit for tax deducted at source, regardless of whether the payer deposits it with the government.
Delhi High Court: Harshdip Singh Dhillon v. UOI
The Court again applied the principle that the Revenue cannot reach indirectly an end it cannot reach directly, and directed a refund of the tax collected from the assessee.
ITAT Delhi: Anita Grover
In a ruling dated August 31, 2026, the ITAT Delhi held that the department cannot deny TDS credit to an assessee merely because the deductor defaulted on depositing the tax. The case involved a landlady whose tenant deducted TDS on rent under Section 194-I but failed to deposit it. The tribunal held that, respectfully following the earlier decisions, credit of TDS cannot be denied to the assessee.
The pattern across these decisions is consistent. No court has required the deductee to prove deposit. Every one of them locates the remedy in Section 201 proceedings against the deductor.
CBDT Instructions: The Department's Own Guidance
The CBDT has issued instructions confirming the Section 205 protection, which bind assessing officers.
CBDT Instruction dated June 1, 2015
The CBDT clarified that where TDS has been deducted by the employer or deductor and not deposited with the Government, the Assessing Officer cannot raise tax demands upon the deductee. Recovery is to be pursued against the deductor.
CBDT Instruction dated March 11, 2016
This instruction reiterated that credit of TDS shall be given to the assessee, and that where any recovery or adjustment was made, the assessee is entitled to a refund with statutory interest.
These are administrative instructions issued under Section 119. They bind the department, which means you can rely on them without proving anything beyond the fact of deduction.
What Happens If You Receive a Demand Notice?
Despite the clear protection under Section 205, you may still receive a demand notice from CPC Bengaluru denying TDS credit because the TDS is not reflected in Form 26AS. This is an automated output, not a considered decision. Here is what to do.
Step 1: Gather Evidence of TDS Deduction
| Document type | Evidence |
|---|---|
| Form 16 or Form 16A | TDS certificate issued by the deductor |
| Salary slips | Showing the TDS deduction line item |
| Bank statements | Showing the net payment received after TDS |
| Ledger accounts | Showing the deduction entry |
| Invoice or payment records | For professional fees or rent |
Note: the Delhi High Court has held that Form 16A is not the only admissible evidence. Other reliable material can establish that TDS was deducted. Our guides on Form 16 vs Form 16A and downloading Form 16A from TRACES cover what these certificates should contain.
Step 2: Respond to the Notice
- File a rectification request online on the Income Tax e-filing portal
- Respond to the outstanding demand under Pending Actions, selecting that the demand is not correct
- Submit all evidence of TDS deduction to CPC, citing Section 205 and the CBDT instructions
Step 3: If the Demand Is Not Resolved
- Approach your Jurisdictional Assessing Officer with a written representation
- File an appeal before the CIT Appeals or the ITAT as applicable
- Cite Section 205 and the judicial precedents set out above
Step 4: Claim Refund with Interest
If the department has made any recovery or adjustment, you are entitled to a refund with statutory interest under Section 244A. See our guide on claiming a TDS refund when the ITR mismatches.
Important Limits to the Section 205 Protection
While Section 205 offers strong protection, there are important caveats.
1. It Only Applies If TDS Was Actually Deducted
If the deductor did not deduct TDS at all, even where they were required to, Section 205 does not apply. In that case you are liable to pay the tax directly, and the deductor faces separate consequences for failure to deduct.
2. The Burden of Proof Is on You
You must be able to prove that TDS was actually deducted. Form 16A is evidence, but as the Delhi High Court has held, other evidence can also establish deduction. This is why payslips and bank statements matter, and why they should not be discarded once a certificate arrives.
3. It Gives the Deductor No Protection
Section 205 protects the deductee, not the deductor. The deductor remains liable under Section 201 to deposit the TDS with interest and penalties, and faces a fee under Section 234E for the unfiled statement. See Section 234E and 271H penalties.
Summary Table: Section 205 at a Glance
| Aspect | Details |
|---|---|
| What Section 205 does | Bars direct demand on the assessee to the extent TDS has been deducted |
| Key condition | TDS must have been actually deducted from the assessee's income |
| Does it require deposit? | No, protection applies even if the deductor did not deposit |
| Does it require Form 26AS? | No, other evidence can establish deduction |
| Who bears liability for non-deposit? | The deductor, under Section 201 |
| Corresponding provision under ITA 2025 | Section 401 |
| Relief available | TDS credit must be given, with refund and interest if recovery was made |
Common Questions
Q: I received a demand notice because my employer deducted TDS but did not deposit it. Can the department recover it from me?
A: No. Section 205 expressly bars the department from recovering tax from you to the extent it has already been deducted from your income.
Q: What if the TDS is not reflected in my Form 26AS?
A: The Gujarat and Delhi High Courts have held that the department cannot deny TDS credit solely because it is not reflected in Form 26AS, provided you can prove the deduction.
Q: What documents should I keep to prove TDS deduction?
A: Form 16 or Form 16A, salary slips, bank statements showing the net payment, ledger accounts, and any other records showing the deduction.
Q: What happens to the deductor if they do not deposit TDS?
A: The deductor is treated as an assessee in default under Section 201 and is liable to pay the tax with interest and penalties.
Q: Does Section 205 apply if the deductor did not deduct TDS at all?
A: No. Section 205 protects you only where TDS was actually deducted from your income.
Q: What is the corresponding section under the Income Tax Act, 2025?
A: Section 401, which carries the same heading and substantially the same wording. Section 205 of the new Act deals with an unrelated subject, so do not carry the old number across.
Q: Does this apply only to salary?
A: No. The bar applies to every payment subject to TDS, including rent under Section 194-I, professional fees under Section 194J, commission under Section 194H, and interest under Section 194A.
Where Tax Garden Helps
Tax Garden's TDS compliance plans reconcile your payslips and certificates against Form 26AS and AIS before the return is filed, claim the correct credit, and handle the response if CPC raises a demand. You should not lose money because someone else failed to deposit it.
For related topics, see our guides on TDS not showing in Form 26AS, claiming a TDS refund when the ITR mismatches, Section 201(1A) interest on late TDS deposit, TDS return correction on TRACES, Form 16 vs Form 16A, the TDS rate chart for FY 2026-27, and the ITR filing guide for AY 2026-27.
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Sources
This guide is verified against Section 205 of the Income Tax Act, 1961 (bar against direct demand on assessee) and Section 401 of the Income Tax Act, 2025, which carries the same heading and substantially the same wording and applies from April 1, 2026. Section 205 of the Income Tax Act, 2025 is a distinct provision dealing with conditions for tax on income of certain companies and co-operative societies, confirmed from the text of the 2025 Act. Judicial authority drawn from Om Prakash Gattani v. CIT (Gauhati High Court), Kartik Vijaysinh Sonavane v. DCIT [2021] (Gujarat High Court), Sanjay Sudan v. ACIT (Delhi High Court), Incredible Unique Buildcon Private Limited v. ITO (Delhi High Court), Harshdip Singh Dhillon v. Union of India (Delhi High Court), and the ITAT Delhi decision in Anita Grover dated August 31, 2026. Departmental guidance drawn from the CBDT instruction dated June 1, 2015 and the CBDT instruction dated March 11, 2016, both directing that demands not be enforced against the deductee where the deductor has defaulted. Related provisions referenced are Section 199 (credit for tax deducted), Section 201 and 201(1A) (assessee in default and interest), Section 234E (fee for late filing of TDS statements), and Section 244A (interest on refunds). Verify current provisions on incometax.gov.in before acting, as rules may be updated periodically. This article is general information on Section 205 and not a substitute for professional advice.
