ITAT Bangalore Ruling: Employer Cannot Be Deemed Assessee-in-Default for TDS Non-Deduction on LTC Under Binding High Court Stay

The intersection of statutory tax withholding obligations and binding judicial interim orders often creates a complex compliance labyrinth for employers. A fundamental question arises: can an employer be penalized under the Income Tax Act 1961 for failing to deduct Tax Deducted at Source (TDS) on employee payments when a constitutional court has explicitly restrained such deduction?

This precise conundrum was addressed by the Income Tax Appellate Tribunal (ITAT) Bangalore in the landmark case of State Bank of India Vs ITO. The dispute centered on whether the banking institution could be branded as an "assessee-in-default" under Section 201(1) and burdened with interest under Section 201(1A) for not withholding tax under Section 192 on Leave Travel Concession (LTC) or Leave Fare Concession (LFC) reimbursements during the Assessment Year 2017-18. The Tribunal's comprehensive ruling clarifies the hierarchy of legal compliance, establishing that statutory duties must yield to specific judicial mandates, and an assessee cannot be punished for avoiding contempt of court.

The Statutory Framework Governing the Dispute

To fully grasp the nuances of this adjudication, it is imperative to examine the underlying statutory provisions that govern salary deductions and travel exemptions.

The Obligation to Deduct Tax: Section 192

Under Section 192 of the Income Tax Act 1961, any person responsible for paying income chargeable under the head "Salaries" is statutorily mandated to deduct income tax at the time of payment. This deduction is based on the estimated income of the assessee for that financial year.

The Exemption Mechanism: Section 10(5) and Rule 2B

Employees are entitled to claim exemptions on travel concessions received from their employers under Section 10(5), subject to the conditions and monetary limits prescribed in Rule 2B. Historically, disputes arose when employees designated an Indian destination but traveled via a foreign route.

Illustrative Scenario:
Suppose a bank employee, Mr. Sharma, intends to travel from New Delhi to Chennai. Instead of a direct domestic flight, he chooses a circuitous route: New Delhi to Colombo (Sri Lanka) to Chennai, claiming a total reimbursement of Rs. 1.25 lakh. The employer, interpreting Rule 2B, might restrict the eligible exemption to the cost of the shortest direct route via the national carrier (e.g., Rs. 25,000) and grant the Section 10(5) exemption for that limited amount, deducting TDS only on the balance. The Revenue authorities subsequently contested this practice, arguing that any foreign leg completely disqualifies the travel from the Section 10(5) exemption.

Consequences of Non-Compliance: Section 201(1) and Section 201(1A)

When an employer fails to deduct the requisite tax, or fails to remit the deducted tax to the Central Government, Section 201(1) triggers, deeming the employer an "assessee-in-default." This classification allows the Revenue to recover the un-deducted tax directly from the employer. Furthermore, Section 201(1A) imposes a mandatory statutory interest on this shortfall, calculated from the date the tax was deductible until the date it is actually paid.

Factual Matrix of the Case

The genesis of the dispute in State Bank of India Vs ITO (Appeal Number ITA 747/BANG/2026, dated 27/07/2026) traces back to a series of administrative circulars and subsequent judicial interventions.

The Administrative Crackdown on Foreign LTC

The State Bank of India (the assessee) traditionally provided LTC/LTA benefits to its workforce in accordance with the State Bank of India Officers’ Service Rules, 1992. While processing payroll, the bank treated these reimbursements as exempt under Section 10(5) read with Rule 2B and refrained from withholding TDS.