Tenant deducted TDS on rent, but it never reached govt: Can landlord lose tax credit? Here's what ITAT recently ruled

A Delhi taxpayer found herself in an unusual income tax dispute after her tenant deducted tax at source (TDS) from the rent but failed to deposit the amount with the government. Since there were no records of the deduction, the landlord was denied credit for the TDS, prompting her to challenge the decision.

This case concerns Anita Grover, a 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, amounting to ₹9,000 per month, and paid her the remaining ₹81,000.

The landlady filed her income tax return (ITR) for AY 2019-20 on August 7, 2019, in which she declared the gross rental income and claimed credit for the TDS deducted each month by the tenant.

However, the Centralised Processing Centre (CPC), Bengaluru, issued an intimation under Section 143(1) on October 22, 2019, denying her TDS credit and raising a demand of ₹81,000. The credit was denied solely because the tenant had failed to deposit the deducted tax with the government.

What was the assessee's argument?

Aggrieved by the decision, Grover first approached the Additional/Joint Commissioner of Income Tax (Appeals), though her appeal was dismissed on February 24, 2026. The authority held the appeal to be belated and refused to condone the delay, leaving her with a tax demand of ₹29,517 against a refund of ₹54,600 that she claimed was due to her.

She later approached ITAT Delhi, where her counsel argued that Section 205 of the Income-tax Act expressly bars recovery of tax from an assessee to the extent that the tax has already been deducted from her income. He relied on a number previous judgments, to argue that a deductee cannot be penalised for a default committed by the deductor.

Representing the Revenue, Senior Departmental Representative Shri Manoj Kumar relied on the orders passed by the lower authorities.

ITAT Delhi rules in assessee's favour

In an order dated August 31, 2026, the Income Tax Appellate Tribunal (ITAT), Delhi Bench held that the income tax department cannot deny TDS credit to an assessee merely because the deductor defaulted on depositing the tax.

"Respectfully following the aforesaid decision, we hold that credit of TDS cannot be denied to the assessee and accordingly, the grounds raised by the assessee are allowed. In the result, the appeal filed by the assessee is allowed,” the ITAT Delhi judgement in the case read.

After hearing both sides and considering material placed on record, the court 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. This ruling provided relief to thousands of taxpayers, whose TDS credit may be held up because a deductor failed to deposit the money with the government.

The tribunal also cited several other judgements while pronouncing its decision. "This issue is squarely covered by the decision of the ITAT, Mumbai Bench in the case of Mrs. Rekha Maheshwari (supra), relying on various High Courts decisions and also the decision of Hon'ble High Court of Delhi in Sanjay Sudan v. Assistant Commissioner of Income Tax (supra), and the relevant findings of the aforesaid decision is reproduced below,” it said.