Non-Deduction of TDS on LFC Under Binding High Court Orders Not Treated as Default: ITAT Grants Relief to State Bank of India [Read Order]

The Income Tax Appellate Tribunal (ITAT)Ahmedabad Bench has held that non-deduction of tax at source (TDS) on Leave Fare Concession (LFC) payments in compliance with binding interim directions of a High Court cannot render the assessee an assessee in default under Section201(1) of the Income Tax Act.

The assessee State Bank of India, Bhavnagar Para Branch had provided LFC benefits to its employees and treated the same as exempt under Section 10(5) while computing TDS under Section 192. During assessment the Assessing Officer observed that certain employees had undertaken travel involving a foreign leg and held that such travel would not qualify for exemption.

Consequently, the bank was treated as an assessee in default for failure to deduct TDS and demand along with interest was raised.

The assessee contended that it acted in accordance with interim orders passed by the Madras High Court which explicitly directed that LFC payments would not be treated as income for TDS purposes during the pendency of the writ petition. It was argued that any deduction of tax contrary to such directions would have amounted to contempt of court.

The Revenue clarified that exemption under Section 10(5) is not available where the journey involves a foreign aspect, thereby making such LFC payments taxable.

The Tribunal agreed that the matter pertaining to the question of taxability of LFC in relation to foreign travel is already decided against the assessee in favor of the Supreme Court. But it clarified that the real question before the Tribunal was whether the assessee can be deemed as being in default during that period when it was subjected to High Court directions.

The Bench held that while statutory duties under Section 192 were not independent in themselves but should give way to judicial decrees. The Tribunal further clarified that once the High Court had prohibited deduction of TDS then there was nothing left of the legal duty anymore.

The Tribunal comprisingSiddhartha Nautiyal (Judicial Member) and Narendra Prasad Sinha (Accountant Member) ruled in favour of the assessee directing deletion of the demand raised under Sections 201(1) and 201(1A) holding that the obligation to deduct TDS stood overridden by judicial directions during the relevant period.

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