The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has held that branches of a bank cannot be treated as “assessees in default” under Section 201(1) of the Income Tax Act, 1961 for failure to deduct tax at source on Leave Travel Concession (LTC) reimbursements where the non-deduction was compelled by binding interim directions of the Madras High Court.

The bench of Sanjay Garg (Judicial Member) and R. Govindarajan (Accountant Member) has observed that the bank branches were under a legal obligation to comply with the Madras High Court’s orders. Therefore, they could not be termed assessees in default under Section 201(1) for the relevant period, nor could interest be charged under Section 201(1A).

The central question before the Tribunal was whether the Assessing Officer was justified in treating the bank branches as assessees in default for not deducting TDS on LTC payments made to employees who undertook foreign journeys or journeys involving a foreign leg. 

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The controversy arose from SBI’s reimbursement of LTC to its employees. According to the Tribunal’s order, the bank had issued a circular dated April 15, 2014 withdrawing overseas travel facilities under LTC. The circular was challenged before the Madras High Court by an association of bank employees, following which the High Court stayed its operation on April 25, 2014. 

Significantly, in an interim order dated February 16, 2015, the Madras High Court clarified that amounts paid towards LTC or reimbursement of LTC pursuant to the impugned arrangement would not amount to income so as to enable the bank to deduct tax at source. At the same time, the High Court made it clear that if the writ petition were eventually dismissed, the employees would be liable to pay tax on the amounts paid by the bank. 

Acting pursuant to these interim directions, SBI and its branches did not deduct TDS on reimbursements to employees for LTC involving foreign journeys or journeys containing a foreign leg during the relevant period. The employees themselves had treated such LTC reimbursements as exempt under Section 10(5) of the Income Tax Act. 

The litigation concerning the underlying LTC policy continued. The employees’ writ petition was dismissed on June 24, 2022. In the subsequent appeal, the Madras High Court initially interdicted recovery from employees and, by an order dated June 8, 2023, ultimately set aside the Single Bench order and remanded the question of grant of LTC covering foreign travel to the bank authorities for fresh consideration in accordance with law. 

The matter thereafter reached the Supreme Court. The Tribunal recorded that on August 28, 2023, while issuing notice in the special leave proceedings, the Supreme Court restrained the bank from making recoveries from employees during the pendency of the matter. 

The Assessing Officer noticed that certain employees had undertaken foreign journeys or journeys involving a foreign leg.

The AO took the position that the exemption contemplated under Section 10(5) was available only for travel within India and not where foreign travel formed part of the journey. 

The Tribunal referred to an earlier Ahmedabad Bench ruling involving SBI’s Bhavnagar Para Branch, where the facts and circumstances were identical. In that proceeding, the bank had contended that the designated place of travel was within India, reimbursement was restricted to the fare for the shortest route within India, and that there was no explicit prohibition against a foreign leg during such travel. It had also relied on the interim orders of the Madras High Court to argue that deducting TDS would have violated binding judicial directions. 

The tax authorities, however, relied upon the Supreme Court’s November 4, 2022 judgment concerning Section 10(5), holding that the exemption was available only for travel within India and not where foreign travel was involved. Consequently, the bank was treated as an assessee in default and demand under Section 201(1), together with interest under Section 201(1A), was raised. 

The CIT(A) had similarly held that a combined reading of Section 10(5) and Rule 2B showed that exemption was available only for travel from one place in India to another place in India by the shortest route. Relying on the Supreme Court ruling, the appellate authority held that once foreign travel became part of the journey, it fell outside the scope of Section 10(5). 

The Tribunal acknowledged that the question concerning the availability of exemption under Section 10(5) where a journey involves a foreign leg had already been concluded against the assessee by the Supreme Court’s November 4, 2022 judgment.

However, it held that the limited controversy was different: whether the bank could be treated as an “assessee in default” under Section 201(1) for failing to deduct tax during a period in which it was operating under binding interim judicial directions. 

The bank maintained that the Madras High Court’s February 16, 2015 interim order specifically declared that the LFC/LTC payments would not amount to income so as to enable deduction of tax at source. Therefore, according to the bank, deducting tax despite that direction would itself have amounted to disobedience of the High Court’s order. 

It observed that the interim directions of the Madras High Court were in force during the relevant previous year and the bank, being a party to those proceedings, was duty-bound to comply with them.

The Kerala High Court had held that Section 201 could come into operation only where a person, despite having a liability to deduct tax, failed to do so. Where the Madras High Court had prima facie found that the payments would not constitute income enabling deduction of tax, the provisions of Section 201(1) could not be attracted.

The Kerala High Court had further held that SBI was “under an obligation not to deduct tax at source” and therefore could not be held to be an assessee in default for non-deduction of tax on the impugned LFC payments. 

Another significant principle recorded in the decision concerned the effect of the subsequent Supreme Court ruling.

The Tribunal noted that during the relevant period the assessee was operating under binding interim directions of the Madras High Court and therefore could not have deducted tax at source.

It held that the subsequent Supreme Court decision, although settling the substantive issue concerning LTC exemption on merits, could not retrospectively fasten liability under Section 201(1) for a period during which the bank was acting in compliance with judicial orders. 

The Tribunal further observed that the very scheme of Section 201 contemplates treating a person as an assessee in default only where there has been a failure to deduct tax despite the existence of a legal obligation to do so.

The Tribunal accordingly set aside the demands raised by the Assessing Officer under Sections 201(1) and 201(1A) and allowed all four appeals.

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