ITAT Ahmedabad Rules State Bank of India Not an Assessee in Default for Non-Deduction of TDS on LFC: Madras HC Interim Directions Held Binding
Background and Context
The Income Tax Appellate Tribunal, Ahmedabad Bench, recently pronounced a significant ruling in two consolidated appeals filed by State Bank of India, Bhavnagar Para Branch, pertaining to Assessment Year 2016-17. The appeals arose from orders passed by the Commissioner of Income Tax (Appeals) dated 12.01.2026 and 22.12.2025. The central question before the Tribunal was not merely whether Leave Fare Concession (LFC) payments qualified for exemption under Section 10(5) of the Income Tax Act, 1961 — that issue had already been settled by the Supreme Court — but rather whether the Bank could be held liable as an assessee in default under Section 201(1) for failing to deduct tax at source during a period when a binding interim order of the Madras High Court expressly restrained it from doing so.
The Tribunal, after examining the facts and precedents, ruled in favour of the assessee and directed deletion of demands raised under Section 201(1) and Section 201(1A).
Factual Matrix: What Led to the Dispute
State Bank of India, through its Bhavnagar Para Branch, extended Leave Fare Concession benefits to its employees. While computing TDS under Section 192, the Bank treated these LFC payments as exempt under Section 10(5) of the Income Tax Act, 1961 read with Rule 2B of the Income Tax Rules, 1962.
The Bank's position was grounded in the following reasoning:
- The designated place of travel was located within India.
- Reimbursement was restricted to the shortest route within India.
- There was no explicit statutory prohibition on the journey involving a foreign leg, provided the Indian route reimbursement conditions were met.
- The Bank had further relied upon guidelines issued by the Indian Banks' Association, industry practice, and a body of judicial precedents.
However, during assessment proceedings, the Assessing Officer identified that certain employees had undertaken journeys that included a foreign leg and that tax had not been deducted on those LFC payments. This triggered proceedings under Section 201(1) for failure to deduct tax at source, along with interest under Section 201(1A).
The Assessee's Critical Defence: Madras High Court Interim Order
Beyond the merits of the exemption claim, the assessee placed before the authorities a critical and distinct argument — the existence of binding interim directions of the Madras High Court.
The background to this judicial intervention is as follows:
- State Bank of India had issued e-Circular No. CDO/P&HRD-PM/7/2014-15 dated 15th April 2014, specifying that employees would not be entitled to visit overseas destinations as part of Leave Travel Concession.
- This circular was challenged before the Madras High Court by the All India State Bank Officers Federation & Others through Writ Petition No. 11991 of 2014.
- The Madras High Court, vide its order dated 25th April 2014, granted an interim stay of the circular.
- Subsequently, through its order dated 16th February 2015, the Madras High Court specifically clarified that LTC payments made or reimbursed during the pendency of the writ proceedings would not amount to income so as to attract deduction of tax at source under
Section 192. - The High Court further made it clear that if the writ petition were ultimately dismissed, the employees themselves would be liable to pay tax on such amounts.
The assessee's argument before the Assessing Officer and the CIT(A) was categorical: acting contrary to the Madras High Court's directions would have amounted to contempt of court. In these circumstances, the Bank could not legally have deducted tax at source even if it had wanted to.