When you make a withdrawal from a 401k, you pay ordinary income tax on the total amount of the withdrawal. You also pay a penalty of 10% of the total amount of the withdrawal. The fact that you did not get the amount withheld for tax as cash in hand does not matter. Any amount withheld was used for your benefit - it was withheld to pay the tax that you owe on the total withdrawal. That is the tax law.
When you report the withdrawal on your tax return, the total amount of the withdrawal is added to your other income and is taxed at whatever your marginal tax rate is. The 10% penalty for early withdrawal is added if appropriate.
You get full credit for any tax withheld, so you are not taxed twice, only once accurately.
