Recently, the Delhi Bench of the Income Tax Appellate Tribunal (TAT) ruled that an employee cannot demand his employer to remit the Deducted Tax at Source (TDS) with regard to foregone salary as per a settlement agreement signed between the employer and the employee before the accrual of the same. The case involved an ex-Chief Manager of Oriental Bank of Commerce who was removed from the services of the bank. He challenged the removal by way of a writ petition before the Delhi High Court and was entitled to pension, gratuity, and leave encashment. On the amount forgone by the appellant as per the terms of settlement, the entries of deduction made by the bank towards TDS were also reversed.

“Landmark Ruling: TDS Deduction on Foregone Salary as per Settlement Agreement Clarified”

The bank submitted that the amount of TDS was part of arrears of wages which was foregone by the employee as per the settlement agreement. The appellate authority held that as the amount of wages was not payable to the employee, the question of deduction and payment of TDS does not arise. The bench observed that the appeal is not maintainable by the employee since he is neither an assessee nor an assessee in default. Therefore, the appeal preferred by him against the order as a review order under Section 263 of the Income Tax Act, 1961 is not maintainable.

The bench further held that on merits, it can be observed that Section 102 of the Income Tax Act provides for the deduction of tax at the time of payment. However, in the present case, as admitted by the appellant, there was no payment of the salary etc., which was foregone as per the terms of settlement in the mediation proceedings. This ruling clarifies the position of law regarding the deduction of TDS in cases where the salary is foregone as per the settlement agreement.

-Navneet Shukla