The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has asserted that where an employer does not deduct tax at source on Leave Travel Concession (LFC/LTC) payments during the period in which binding interim directions of a High Court are in force, specifically directing that such payments are not to be treated as income for TDS purposes, the employer cannot be treated as an “assessee in default” under Section 201(1) of the Income-tax Act, for that period.
The ITAT clarified that the obligation under Section 192 of the Income Tax Act to deduct tax at source must yield to binding judicial orders, and a subsequent final decision of the Supreme Court settling the substantive tax position cannot retrospectively fasten liability under Section 201(1) or interest under Section 201(1A) for the period during which the employer acted in compliance with such interim judicial directions.
The Division Bench comprising Siddhartha Nautiyal (Judicial Member) and Narendra Prasad Sinha (Accountant Member) noted that the controversy was no longer with respect to the merits of exemption under Section 10(5), because that stood concluded against the assessee by the Supreme Court. The Tribunal identified the limited issue as whether, in the peculiar facts of the case, the assessee could still be treated as an assessee in default under Section 201(1), and consequently be made liable for interest under Section 201(1A), for non-deduction of tax during the period when binding interim judicial directions of the Madras High Court were operating.
The Tribunal held that this issue was covered in favour of the assessee by the Ahmedabad Bench decision in State Bank of India Bhavnagar Para Branch v. ITO, TDS [(2026) 184 taxmann.com 706], where it was reasoned that the assessee, being a party to the proceedings, was duty bound to comply with Madras High Court’s interim orders, and the obligation under Section 192 could not be read in isolation so as to override such judicial directions.
The Tribunal also reiterated that Section 201 can be invoked only where a person, despite having a liability to deduct tax, fails to do so. Since the Madras High Court had prima facie held that the amount paid would not be income so as to warrant TDS, and the assessee was under an obligation not to deduct tax at source during the subsistence of those directions, the assessee could not be treated as an assessee in default for that period.
Applying those principles, the Tribunal found the facts before it to be materially identical. It observed that during the relevant assessment years the assessee-bank was operating under binding interim directions of the Madras High Court specifically clarifying that LFC payments would not constitute income for TDS purposes. In those circumstances, the Tribunal held that failure to deduct tax could not be treated as a default under Section 201(1), and therefore directed deletion of the demand under Section 201(1) and the interest under Section 201(1A).
Briefly, the Assessing Officer proceeded on the basis that exemption under Section 10(5) read with Rule 2B is available only for travel within India, and that once the travel involved a foreign destination, the exemption ceased to apply. For this proposition, reliance was placed on the Supreme Court’s decision in State Bank of India v. Assistant Commissioner of Income Tax [2022] 144 taxmann.com 131 (SC), which held that LTC exemption is restricted to travel from one place in India to another place in India, and is not available where the journey involves a foreign leg.
Before the Assessing Officer, the assessee contended that the designated place of travel of the employees was within India and reimbursement was limited to the eligible fare relatable to Indian travel in accordance with Rule 2B. The assessee further argued that it had acted on a bona fide understanding founded on prevailing industry practice, IBA guidelines and judicial precedents, and specifically relied on interim orders of the Madras High Court in All India State Bank Officers Federation v. State Bank of India [447 ITR 559 (Madras)], under which LFC reimbursement was directed not to be treated as income for TDS purposes, with the further clarification that if the writ petition failed, the employees would bear the tax liability.
The Assessing Officer rejected those submissions and held that, after the Supreme Court judgment dated 04.11.2022, the issue stood concluded against the assessee on merits. Accordingly, the reimbursement was treated as taxable salary where the employee had undertaken travel involving a foreign leg, and SBI was held to have been under a statutory obligation to deduct tax under Section 192. On that basis, the assessee was treated as an assessee in default under Section 201(1), and interest under Section 201(1A) was also levied.
The CIT(A) affirmed the Assessing Officer’s view on the scope of Section 10(5) and Rule 2B, observing that the exemption is admissible only where travel is undertaken from one place in India to another place in India by the shortest route, and that the involvement of a foreign leg takes the case outside the exemption. The CIT(A) also held that though interim protection had existed at various stages, there were periods during which no stay operated, and during such periods the assessee ought to have deducted tax or recovered it from employees.
Appearances:
Lokesh Karia, for Appellant/ Taxpayer
Amit Pratap Singh, for Respondent/ Revenue
