Tenant deducted TDS on rent but didn't deposit it. Can taxmen deny your credit? ITAT says no

The Income Tax Appellate Tribunal (ITAT), Delhi Bench has held that the department cannot deny TDS credit to an assessee merely because the deductor defaulted on depositing the tax.

The ruling may come as a relief to thousands of taxpayers, whose tax deducted at source (TDS) credit is held up because a deductor failed to deposit the money with the government.

The order dated August 31, 2026 came in the case of Mrs. Anita Grover, a Delhi housewife who had rented out her property to M/s Paramount Coaching Centre Pvt. Ltd. at a monthly rent of ₹90,000. The tenant deducted TDS at 10% under Section 194-I of the Income-tax Act,1961, i.e., ₹9,000 per month, and paid her the balance ₹81,000 per month.

Grover filed her return for Assessment Year 2019-20 on August 7, 2019, declaring the gross rental income and claiming credit for the TDS. However, the Centralised Processing Centre (CPC), Bengaluru, issued an intimation under Section 143(1) on October 22, 2019 denying the TDS credit and raising a demand of ₹81,000 against her, solely because the tenant had not deposited the deducted tax with the government.

Her first appeal before the Additional/Joint Commissioner of Income Tax (Appeals) was dismissed on February 24, 2026, with the authority holding the appeal to be belated and refusing to condone the delay. That left her with a tax demand of ₹29,517 against a refund of ₹54,600 that she claimed was due to her.

The Revenue, represented by Senior Departmental Representative Shri Manoj Kumar, relied on the lower authorities' orders.

The Tribunal observed that "the non-deposit of TDS by the deductor and failure on its part will not impact the declaration of income by the assessee." Relying on an earlier ITAT Mumbai Bench order in Mrs. Rekha Maheshwari vs. ITO (ITA No. 152/Mum/2024), which itself drew on decisions of the Gujarat, Gauhati, Karnataka and Delhi High Courts, the Tribunal held that the protection under Section 205 is triggered the moment tax is actually deducted from the income, regardless of whether it is remitted to the treasury.

Quoting from the Rekha Maheshwari order, the Tribunal reproduced the Karnataka High Court's reasoning in Smt. Anusuya Alva vs. DCIT-8(1): "On a plain reading of this provision, it is very clear that in a situation where the tax is deductible at source under Section 194-I of the Act... the assessee shall not be called upon to pay the tax himself/herself to such extent." The High Court had added that "the section by itself does not say that the amount should also be paid to the Central Government," and that the remedy lies against the deductor, not the assessee.

The Tribunal further quoted the Delhi High Court's observation in the Jasjit Singh case that the nature of the amount retained by the deductor "continues to remain as 'tax'," and that once a deductee allows the deductor to retain money towards tax, "the nature of the amount cannot change."

"Respectfully following the aforesaid decision, we hold that credit of TDS cannot be denied to the assessee," the ITAT said, directing the Assessing Officer to allow the TDS credit. The appeal was allowed.

The ruling carries wide significance for landlords, freelancers, contractors and others whose income is subject to TDS, making clear that a deductor's failure to deposit tax cannot lead to a denial of a taxpayer's statutory right to credit.