ITAT Ahmedabad Quashes Assessee-in-Default Tag for SBI Over Foreign LTC TDS, Citing Binding High Court Interim Orders
In a significant judicial development concerning the withholding tax obligations of employers, the Income Tax Appellate Tribunal (ITAT), "C" Bench, Ahmedabad, has delivered a consolidated ruling in favor of various branches of the State Bank of India. The Tribunal adjudicated upon the critical question of whether an employer can be penalized as an "assessee in default" for failing to deduct tax at source (TDS) when such non-deduction was the direct result of compliance with a binding interim judicial directive.
The dispute, encapsulated in the case of State Bank of India Vs ITO, dealt with four separate appeals filed by three different branches of the bank. The appeals in question—ITA Nos. 1817 and 1818/Ahd/2026 for AY 2017-18, and ITA Nos. 1847-1848/Ahd/2026 for AYs 2016-17 and 2017-18—challenged the appellate orders passed under Section 250 of the Income Tax Act 1961. The core grievance revolved around the Assessing Officer (AO) invoking Section 201(1) and Section 201(1A) of the Income Tax Act 1961 against the assessee for not deducting TDS on Leave Travel Concession (LTC) reimbursements that included a foreign travel component.
The Genesis of the LTC Dispute
The factual matrix of the controversy dates back to a policy shift by the State Bank of India. Historically, the bank had permitted its personnel to claim LTC reimbursements for travel that included overseas destinations. However, via a Circular dated 15.04.2014, the bank formally withdrew the overseas travel facility under the LTC scheme.
This administrative decision triggered immediate legal action from the employees' association, which challenged the validity of the Circular before the Hon’ble Madras High Court in All India State Bank Officers Federation v. State Bank of India, W.P. No.11991 of 2014.
The judicial timeline that followed created a complex compliance environment for the assessee:
- 25.04.2014: The Madras High Court granted an initial stay on the operation of the bank's Circular.
- 16.02.2015: The High Court issued a crucial interim clarification. It explicitly directed that any LTC amounts reimbursed to the employees pursuant to the court's orders would not be construed as taxable income for the purpose of TDS deduction by the bank. The Court further clarified that if the writ petition ultimately failed, the individual employees would bear the liability to discharge the applicable tax on those amounts.
Operating under the strict mandate of these interim directions, the various branches of SBI refrained from withholding TDS under Section 192 of the Income Tax Act 1961 on LTC payouts involving foreign legs during FY 2015-16 (relevant to AY 2016-17) and subsequent periods. Correspondingly, the employees claimed these reimbursements as exempt income under Section 10(5) of the Income Tax Act 1961 in their personal tax returns.