Kerala High Court Clarifies TDS Default Exposure When Payer Follows Court Interim Orders

Background of the Dispute

The Kerala High Court in State Bank of India Vs CIT (Kerala High Court) examined whether State Bank of India (SBI) could be treated as an assessee in default under Section 201(1) and subjected to interest under Section 201(1A) of the Income Tax Act 1961 for non-deduction of tax at source on Leave Travel Concession (LTC) payments made to employees for assessment year 2016-17.

The appeal (ITA No.45 of 2025) arose from the order dated 09.12.2024 of the Income Tax Appellate Tribunal, Cochin Bench, in ITA No.274 of 2024, which had affirmed the action of the Income-tax Department under Section 201 against SBI.

SBI is a nationalised bank which had been extending LTC/LFC benefits to its employees. By a circular dated 15.04.2014, the bank withdrew the facility permitting overseas travel under its LTC scheme. This circular was challenged before the Madras High Court by the employees’ association.

Litigation Before Madras High Court and Its Impact

Madras HC’s Interim Directions on LTC and TDS

In the writ proceedings before the Madras High Court (W.P. No.11991 of 2014), two important interim orders were passed:

  1. 25.04.2014 – The Madras High Court stayed the operation of SBI’s circular withdrawing the overseas LTC facility.
  2. 16.02.2015 – On an application seeking clarification, the Madras High Court passed a detailed interim order (Annexure-A), noting that SBI was proposing to deduct tax at source from LTC payments being made under the protection of the interim stay.

In this order, the Madras High Court:

  • Recognised that SBI would be paying LTC amounts to employees pursuant to the interim order.
  • Recorded a prima facie view that there was no taxable income for deduction at source at that stage.
  • Clarified expressly that:
    • Any amount paid towards LTC or reimbursement of LTC under the impugned order “would not amount to income so as to enable the Bank to deduct tax at source”.
    • If the writ petition were ultimately dismissed, the employees would be liable to pay tax on the amounts received from the bank.

Relying on this interim protection, SBI did not deduct TDS on LTC payments during financial year 2015-16, which corresponds to assessment year 2016-17.

Subsequent Madras HC and Supreme Court Developments

The writ petition before the Madras High Court was eventually dismissed on 24.06.2022. The employees’ association then filed W.A. No.1653 of 2022, in which an interim order dated 08.08.2022 (Annexure-C) restrained SBI from recovering amounts from employees’ salaries.

Subsequently, by judgment dated 08.06.2023 (Annexure-D), a Division Bench of the Madras High Court directed reconsideration of the withdrawal of LTC benefits. SBI challenged this judgment before the Supreme Court in SLP (C) No.16734 of 2023. On 28.08.2023, the Supreme Court, while issuing notice, directed SBI not to recover any amount from employees during the pendency of the matter.

Thus, throughout the period relevant to financial year 2015-16, the field was governed by an operative interim order of the Madras High Court which clearly restrained SBI from treating LTC as taxable income for TDS purposes and directed that no TDS be deducted at source on such payments.

Proceedings Under Section 201 Against SBI

Departmental Action

Despite the above judicial background, the Income-tax Department initiated proceedings under Section 201(1) and Section 201(1A) of the Income Tax Act 1961 against SBI for assessment year 2016-17, alleging failure to deduct TDS on LTC payments.

SBI argued before the Assessing Officer that:

  • LTC payments were made in compliance with binding interim orders of the Madras High Court.
  • Those judicial directions prohibited SBI from treating the LTC amounts as income and from deducting TDS at the time of payment.
  • Any contrary action would have exposed SBI to contempt of court.

However, by order dated 30.03.2023 (Annexure-B), the Assessing Officer:

  • Rejected the explanation offered by SBI.
  • Treated SBI as an assessee in default under Section 201(1).
  • Raised a demand for tax and interest under Section 201(1A)`.

The first appellate authority confirmed this position. SBI’s further appeal before the ITAT, Cochin Bench in ITA No.274/COCH/2024 was dismissed by order dated 09.12.2024 (Annexure-G).

Aggrieved, SBI approached the Kerala High Court.

Questions of Law Before Kerala High Court

The Kerala High Court reformulated the issues to focus precisely on the consequences of complying with a binding interim court order:

  1. Whether, in the facts and circumstances, SBI could be regarded as an assessee in default under Section 201 of the Income Tax Act 1961?