SBI could Not be Treated as an "Assessee in Default" for Non-deduction of TDS on LTC Payments: Kerala HC [Read Order]

The Kerala High Court allowed SBI's appeal, holding that SBI could not be treated as an "assessee in default" for non-deduction of TDS on LTC ( Leave Travel Concession )payments. The income tax department's action under Sections 201(1) and 201(1A) was set aside.

The State Bank of India (SBI) challenged the tax department's action treating it as an "assessee in default" under Section 201 of the Income Tax Act for failing to deduct Tax Deducted at Source (TDS) on Leave Travel Concession (LTC) payments to employees during FY 2015-16 (AY 2016-17). The tax department demanded tax and interest under Sections 201(1) and 201(1A), upheld by the Income Tax Appellate Tribunal.

The bank argued that since the payments were made under the authority of these interim orders, they did not constitute "income" for the employees, and thus, no tax was deductible at source. It further contended that the issue was sub judice, as the matter was the subject of pending writ petitions.

The Income Tax Department opposed the appeal, asserting that the bank had a statutory obligation under Section 201 of the Income Tax Act to deduct TDS at the time of payment. The department argued that interim court orders could not override this statutory duty and that the bank's failure to deduct TDS, irrespective of the court orders, unequivocally made it an assessee in default under Section 201(1), attracting penalties.

SBI had withdrawn overseas LTC benefits (circular dated 15.04.2014), challenged by employees before the Madras High Court. The Court (order dated 16.02.2015) explicitly clarified that LTC payments made pursuant to its interim order would not constitute taxable income, prohibiting SBI from deducting TDS. The order specified that if the writ petition was later dismissed, employees (not SBI) would be liable for tax.

Section 201 applies only when a person has a liability to deduct tax but fails to do so. Here, SBI had no statutory liability to deduct TDS due to the Court order. The interim order superseded SBI's obligation under Section 192 (TDS deduction), making Section 201 inapplicable.

The Court relied on Leema Resorts P. Ltd. v. C.G. Suryakant (1995), where the Madras High Court held that compliance with a court order prohibiting TDS deduction shields the payer from "assessee in default" liability under Section 201. The first proviso to Section 201 also protects SBI, as employees could pay tax directly if the LTC was later deemed taxable.

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The tax department's claim that the Madras High Court's order was irrelevant to transactions in Kerala was rejected, as the Income Tax Act is an all-India statute, and SBI was bound by the Court's directive.

A division bench of Justice A.Muhamed Mustaque and Justice Harisankar V. Menon observed that the Apex Court has found that, as against payments made by the appellant bank to its employees towards LTC, it was bound to deduct tax at source. But this finding was with respect to the Assessment Year 2013-14 (financial year 2012-13).

In the case at hand, during the financial year 2015-16 relevant to the assessment year 2016-17, the interim directions issued by the Madras High Court governed the field, and the appellant-assessee was justified in not having deducted the tax.

In a result, this appeal would stand allowed, answering the questions formulated in favour of the assessee and against the revenue.

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