No TDS Default on LFC Payments Made Under Binding High Court Directions: ITAT Deletes Demand on Payments Raised Against State Bank of India [Read Order]

The Income Tax Appellate Tribunal (ITAT) Ahmedabad Bench has held that no liability under Section 201(1) of the Income Tax Act, 1961 can be imposed on an assessee for non-deduction of tax at source on payments of Leave Fare Concession (LFC) if such non deduction is in compliance with interim directions of a High Court.

The Tribunal has held that the assessee State Bank of India cannot be treated as an assessee in default for not deducting tax at source under Section 192 on payments of LFC to its employees as it was bound by interim orders of the High Court of Judicature at Madras, restraining deduction of tax at source on payments of LFC.The demand under Section 201(1) read with interest under Section 201(1A) was thus deleted.

The assessee bank had extended LFC benefits to its employees and treated the same as exempt under Section 10(5) while computing TDS. During assessment, the Assessing Officer observed that certain travel itineraries included a foreign leg thereby disentitling the exemption as per the Supreme Court ruling dated 04.11.2022.Consequently,the bank was treated as an assessee in default for non-deduction of TDS.

The assessee bank argued that for the assessment year in question, the bank was bound by the interim directions of the Madras High Court in the writ petition filed by the bank.The Madras High Court had clearly stated in its judgment that the payment of LFC would not amount to taxable income for the purpose of TDS.Any such deduction of TDS would amount to contempt of court. The bank also placed reliance on various judicial precedents, such as the judgment of the Kerala High Court.

The Revenue, on the contrary, placed reliance on the judgment of the Supreme Court, which had clarified the issue of the exemption of LFC benefits and had stated that the exemption of LFC benefits is not applicable in the case of foreign travel.

The Tribunal comprising Siddhartha Nautiyal (Judicial Member) and Narendra Prasad Sinha (Accountant Member) observed that while the issue on merits stands settled against the assessee by the Supreme Court, the limited question was whether TDS default could be alleged during the period when binding judicial directions prohibited deduction. It held that statutory obligations under TDS provisions must yield to judicial orders

Relying on the Kerala High Court decision and a coordinate bench ruling, the Bench held that the assessee had no option but to comply with the High Court’s interim directions. Therefore, non-deduction of TDS in such circumstances could not trigger liability under Section 201.

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