ITAT Ahmedabad Rules SBI Branches Not in TDS Default on LTC With Foreign Leg Due to Binding Court Orders

1. Background and Context

The Income Tax Appellate Tribunal, Ahmedabad Bench, dealt with a batch of seventeen appeals filed by different branches of State Bank of India. Each branch had challenged separate orders passed by the Commissioner of Income Tax (Appeals) under Section 250 of the Income Tax Act 1961.

Although the appeals related to different assessment years, they all revolved around a single legal controversy:

  • Whether various SBI branches could be treated as “assessees in default” under Section 201(1) and Section 201(1A) for not deducting TDS on Leave Travel Concession (LTC) or Leave Fare Concession (LFC) payments where the employee’s journey included a foreign trip or foreign leg.

The Tribunal passed a consolidated order disposing of all the appeals together because the factual setting and legal issues were identical.

2. SBI’s LTC Policy and the Madras High Court Interim Directions

2.1 Withdrawal of Overseas LTC and Initial Stay

SBI had a policy of reimbursing LTC to its employees. By Circular dated 15.04.2014, the Bank withdrew LTC benefits relating to overseas travel.

  • This Circular was challenged before the Madras High Court by the association of SBI officers in W.P. No.11991 of 2014.
  • On 25.04.2014, the Madras High Court initially stayed the operation of the SBI Circular.

2.2 Clarificatory Interim Order Dated 16.02.2015

Later, the petitioners sought clarification / modification of the interim stay. On 16.02.2015, the Madras High Court issued a detailed interim order, which inter alia stated:

“There is no dispute that the Bank would be paying LTC amount to the concerned officers pursuant to the interim order granted by this Court. The Interim Order is subject to the result of the writ petition. The learned counsel for the petitioner is correct in his contention that the there is no taxable income for deduction at source.

The interim order granted by this Court is explained to the effect that any amount paid to the petitioner towards LTC or reimbursement of LTC pursuant to the impugned order would not amount to income so as to enable the Bank to deduct tax at source. It is made clear that if the writ petition is dismissed, the employees are liable to pay tax on the amount paid by Bank.”

In essence, the High Court:

  • Treated LTC payments made under its interim order as not constituting income for TDS purposes;
  • Specifically indicated that TDS should not be deducted on such LTC payments during the pendency of the writ petition;
  • Clarified that if the writ petition ultimately failed, employees, and not the Bank, would bear the tax liability.

2.3 Assessee’s Conduct in Light of the Interim Order

In the Financial Year 2015-16 (relevant to Assessment Year 2016-17):

  • SBI and its branches did not deduct TDS under Section 192 on LTC/LFC reimbursements where the employees’ journeys involved foreign travel or a foreign leg, relying on the above interim directions.
  • Employees, in their respective returns of income, claimed LTC reimbursement as exempt under Section 10(5) of the Income Tax Act.

3. Later Developments in High Court and Supreme Court Proceedings

3.1 Dismissal of Writ Petition and Subsequent Writ Appeal

The writ petition in W.P. No.11991 of 2014 was ultimately dismissed on 24.06.2022 by the Madras High Court.

  • Following this dismissal, W.A. No.1653 of 2022 was filed before the Division Bench.
  • On 08.08.2022, the Division Bench passed an interim order restraining SBI and other concerned assessees from recovering any amount from the salaries of employees on account of the disputed LTC payments.

Subsequently, on 08.06.2023, the Division Bench of the Madras High Court:

  • Set aside the order of the Single Judge; and
  • Remanded the matter to SBI authorities for fresh consideration on the issue of grant of LTC covering foreign travel, to be decided on merits and in accordance with law.

3.2 SLP Before Supreme Court and Interim Protection

SBI carried this judgment further in SLP (C) No.16734/2023 before the Supreme Court of India.

  • By order dated 28.08.2023, the Supreme Court issued notice and restrained SBI from making recoveries from employees during the pendency of the SLP.