ITAT Ahmedabad Rules State Bank of India Cannot Be Treated as Assessee in Default for Non-Deduction of TDS on LFC Payments During Pendency of High Court Interim Orders
Background and Overview
The Income Tax Appellate Tribunal, Ahmedabad Bench, delivered a significant ruling in State Bank of India Vs ITO (ITAT Ahmedabad) by allowing both appeals preferred by the assessee for Assessment Year 2016-17. The central question before the Tribunal was whether a bank that withheld TDS deduction pursuant to binding interim directions issued by a High Court could subsequently be branded an "assessee in default" under Section 201(1) of the Income-tax Act, 1961, once the underlying legal issue was conclusively decided against it by the Supreme Court.
The Tribunal answered this question in favour of the assessee, holding that compliance with operative judicial orders cannot be construed as a statutory default. Demands raised under Section 201(1) and Section 201(1A) were directed to be deleted.
Facts of the Case
The LFC Payment and TDS Treatment
The assessee, a branch of State Bank of India, extended Leave Fare Concession (LFC) benefits to its employees and treated such payments as exempt under Section 10(5) of the Income-tax Act, 1961 while computing tax deductible at source under Section 192. The exemption was applied on the basis that the designated destination of travel was located within India and that reimbursement was restricted to the fare for the shortest route within the country.
During the course of assessment proceedings, the Assessing Officer identified that certain employees had undertaken journeys that included a foreign leg, and the assessee had not deducted tax at source on those payments. Show cause notices were issued, calling upon the assessee to explain why it should not be declared an assessee in default under Section 201(1) and made liable to pay interest under Section 201(1A).
The Assessee's Defence Before the Assessing Officer
In response to the notices, the assessee put forward several arguments:
- The LFC benefit was extended in strict conformity with
Section 10(5)read withRule 2Bof the Income-tax Rules, since the designated place of travel was within India and only the Indian-route fare was reimbursed. - Neither the Act nor the Rules contained any explicit prohibition against a foreign component being part of the overall journey.
- The assessee had acted on the basis of industry-wide practice, Indian Banks' Association guidelines, and favourable judicial precedents available at the relevant time.
- Most critically, the Madras High Court, in W.P. No. 11991 of 2014, had issued interim directions on 16.02.2015, clarifying that LFC payments made or reimbursed would not constitute income for the purposes of TDS deduction, and had further directed that if the writ petition were ultimately dismissed, the liability to pay tax would fall upon the employees.
The assessee contended that deducting tax contrary to these judicial directions would have amounted to contempt of court, rendering non-deduction not merely permissible but legally obligatory.