ITAT Rajkot Rules SBI Cannot Be Treated as Assessee in Default for Non-Deduction of TDS on LFC Payments Made Under Binding Judicial Directions

Background and Context

The Income Tax Appellate Tribunal, Rajkot Bench, disposed of four consolidated appeals filed by different branches of State Bank of India, collectively covering Assessment Years 2016-17 and 2017-18. These appeals arose from proceedings initiated against SBI under Section 201(1), Section 201(1A), and Section 271C of the Income Tax Act, 1961, on the ground that the bank had failed to deduct tax at source under Section 192 on Leave Fare Concession (LFC) payments made to employees whose travel itineraries included a foreign leg.

The central legal question before the Tribunal was not whether such payments were taxable — that issue had already been settled by the Supreme Court — but rather whether SBI could be fastened with the liability of an "assessee in default" for a period during which it was operating under express judicial directions restraining it from making any such deductions.

The Supreme Court's Ruling on Section 10(5) and Foreign-Leg Travel

The genesis of the dispute lay in a landmark ruling by the Supreme Court in State Bank of India v. Assistant Commissioner of Income-tax, Civil Appeal No. 8181 of 2022, pronounced on 04.11.2022. In that decision, the Apex Court unequivocally held that where an employee's LFC or LTC journey includes a foreign segment, such travel cannot be considered travel "within India" for the purposes of Section 10(5) of the Income Tax Act, 1961. As a consequence, the exemption available under that provision would not apply, and the employer would be obligated to deduct tax at source under Section 192(1) of the Act.

Armed with this ruling, Assessing Officers across various jurisdictions initiated proceedings under Section 201 of the Act against SBI branches, treating them as assessees in default for not having deducted TDS during the relevant assessment years. The AO in the present matter, vide an order dated 31.03.2023 under Section 201 and Section 201(1A), held the assessee bank to be in default for non-deduction of TDS on an amount of Rs. 20,69,011/-.

The Crucial Factual Distinction: Madras High Court Interim Directions

While the Revenue's case appeared facially strong given the Supreme Court's ruling, SBI placed before the Tribunal a critically different factual position. The bank contended that during the relevant previous years, it was a party to writ proceedings before the Madras High Court, and that court had issued interim directions on 16.02.2015 specifically clarifying that LFC payments made to employees would not constitute income so as to enable the deduction of tax at source. The interim order further clarified that if the writ petition were ultimately dismissed, the employees themselves would bear the liability to pay tax on the amounts received from the bank.