1. Core Principle (Tax Credit Mechanism)
- Shield for Taxpayers: When tax has been duly deducted at source (TDS)and deposited to the government, the Income Tax Department cannot demand the same tax again from the recipient (assessee).
- Objective: Prevents double taxationon the same income.
2. Conditions for Protection
For Section 205 to apply:
- TDS must be correctly deductedas per applicable rates.
- Tax must be actually depositedwith the government (visible in Form 26AS).
- Income must be declaredin the assessee’s tax return.
3. Exceptions Where Protection Fails
The bar does not apply if:
- TDS was not deducted(even if assessee pays tax later).
- Deductor didn’t depositTDS with the government.
- Income is concealed(not shown in ITR).
- Wrong PAN quoted(TDS credit not traceable to assessee).
4. Judicial Precedents
| CASE | RULING |
| Hindustan Coca-Cola (SC 2007) | Tax credit allowed even if deductor defaults in deposit |
| Yashpal Sahni (SC 2007) | Assessee can’t be harassed for deductor’s mistakes |
| CIT vs. Kotak Securities (2013) | Protection applies only for tax actually deposited |
5. Practical Implications
- For Employees/Salaried Persons:
- No additional demand if Form 16 shows proper TDS.
- Must reconcile Form 26AS with Form 16.
- For Business Recipients:
- Can claim expense deduction only if TDS deposited (Section 40(a)(ia)).
- Need to follow up with clients for missing TDS credits.
6. Recovery Process When TDS Not Deposited
- Department Action:
- Recover from deductorfirst (Section 201).
- Approach assessee only if recovery from deductor fails.
- Assessee’s Rights:
- Can demand indemnityfrom deductor.
- May claim refundif tax paid twice (via rectification).
7. Recent CBDT Clarifications (2023)
- Form 26AS Matching: Mandatory for processing refunds.
- TRACES Verification: Deductors must resolve mismatches within 30 days.
- Pre-assessment Notices: Now specify whether demand arises from TDS shortfall.
8. Proactive Protection Measures
- Quarterly Checks:
- Verify TDS credits in Form 26AS/AIS.
- Reconcile with books of account.
- For Missing Credits:
- Approach deductor for correction statement.
- File Form 71 for manual credit (with bank challan proof).
- Dispute Resolution:
- File rectification under Section 154.
- Seek stay of demand during appeal.
Example: A consultant receives ₹10L fee with ₹100K TDS shown in Form 16A. If this appears in Form 26AS, the department cannot demand ₹100K again – even if the client hasn’t deposited it (though the client may face penalties).
Key Takeaway: While Section 205 provides vital protection, taxpayers must actively verify TDS credits and maintain documentation to invoke this safeguard effectively. For high-value transactions, consider obtaining advance tax rulings to confirm TDS applicability.
