ITAT Agra Deletes TDS Demand on Foreign LFC Payments by SBI: Interim Order of Madras High Court Held Binding

Overview of the Dispute

The Income Tax Appellate Tribunal, "SMC" Bench, Agra, in the matter of State Bank of India Vs CIT (ITA No. 514/Agr/2024), rendered a significant ruling on 28 March 2025 concerning Assessment Year 2016-17. At the heart of the dispute was a demand raised by the Assessing Officer under Section 201(1) and Section 201(1A) of the Income-tax Act, 1961, treating State Bank of India as an assessee-in-default for not deducting tax at source on Leave Fare Concession (LFC) payments that involved a foreign travel leg.

The Tribunal's ruling draws a critical distinction between the substantive question of exemption under Section 10(5) and the procedural obligation to deduct TDS during a period when a binding interim order of the Madras High Court was in active operation — ultimately allowing the appeal and deleting the impugned demand in its entirety.

Background: The LFC Payments and the TDS Demand

State Bank of India reimbursed LFC payments to two of its employees during the period 15 February 2016 to 24 February 2016. These payments, aggregating to Rs. 7.06 lakh, involved a foreign leg of travel. The assessee-bank did not deduct tax at source on these reimbursements, contending that it operated under a bona fide belief that no TDS obligation arose in respect of such payments.

The Assessing Officer, by order dated 31 March 2023, rejected this position. Relying on the Supreme Court's ruling in the assessee's own case, the Assessing Officer held that the LFC payments involving a foreign leg were not exempt under Section 10(5) of the Income-tax Act, 1961, and accordingly treated the assessee-bank as an assessee-in-default. A demand of approximately Rs. 4.05 lakh, inclusive of applicable interest under Section 201(1A), was raised for short deduction of tax at source.

On first appeal, the learned Additional/Joint Commissioner of Income Tax (Appeals), Prayagraj, by order dated 30 September 2024, confirmed the demand raised by the Assessing Officer. State Bank of India then preferred a further appeal before the ITAT Agra.

Hearing Before the Tribunal

At the time of hearing before the Tribunal, no representative appeared on behalf of the assessee. The appeal was accordingly heard with the assistance of the learned Senior Departmental Representative, who argued for dismissal of the appeal by placing reliance on the decision of the Supreme Court in the assessee's own case.

The Supreme Court's Ruling on the Substantive Exemption Issue

The Tribunal first addressed the substantive question regarding the availability of exemption under Section 10(5) of the Income-tax Act, 1961, in cases where LTC/LFC involves a foreign leg.

The Supreme Court, in State Bank of India Vs. Assistant Commissioner of Income Tax, Civil Appeal No. 8181 of 2022, dated 4 November 2022, reported at 144 Taxmann.com 131, had conclusively settled this issue. The following key propositions were laid down by the Supreme Court: