SBI Cannot Be Treated As TDS Defaulter Over LTC Payments To Employees Who Travelled Overseas: ITAT Ahmedabad

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has held that the State Bank of India could not be treated as an “assessee in default” for failing to deduct tax at source (TDS) on Leave Travel Concession payments made to employees whose LTC journeys included overseas travel.

The tribunal held that SBI was acting under binding interim directions of the Madras High Court, which had clarified that such payments would not constitute income for TDS purposes.

A bench of Judicial Member Siddhartha Nautiyal and Accountant Member Narendra Prasad Sinha allowed appeals filed by State Bank of India's Gandhinagar Currency Administration Cell and Bhavnagar branch against orders treating the bank as an assessee in default under Sections 201(1) and 201(1A) of the Income Tax Act for Assessment Years 2016-17 and 2017-18.

The Income Tax Department had initiated proceedings against SBI for not deducting TDS under Section 192 on LTC reimbursements paid to employees who had undertaken journeys involving foreign destinations.

The Assessing Officer relied on the Supreme Court's ruling in State Bank of India v. Assistant Commissioner of Income Tax, which held that the exemption under Section 10(5) is available only for travel within India and does not apply where an employee's journey includes a foreign destination.

SBI, however, maintained that it had reimbursed only the portion of travel eligible within India, and said its approach was guided by prevailing industry practice, Indian Banks' Association guidelines and judicial precedents.

It also pointed to interim orders passed by the Madras High Court in litigation brought by the All India State Bank Officers Federation, where the court had clarified that LFC reimbursements would not be treated as income for TDS purposes, while making it clear that employees would bear the tax liability if the writ petition ultimately failed.

The Commissioner of Income Tax (Appeals), however, upheld the demand, noting that while interim protection had been available at certain stages, there were periods when no stay was in force.

During those intervals, the appellate authority held, the bank ought to have deducted tax at source or recovered the amount from employees.

The appellate authority also relied on a Chennai bench ruling upholding departmental action for periods when no active stay was in force.

Before the tribunal, the limited controversy was not the availability of exemption under Section 10(5), which stood concluded against SBI by the Supreme Court ruling, but whether the bank could be treated as an assessee in default for non-deduction during the period when binding Madras High Court directions were operating.

The Tribunal placed reliance on an earlier Ahmedabad bench decision, as well as rulings of the Kerala High Court and the Agra bench of the Tribunal.

Reproducing an earlier finding, the tribunal noted, “The appellant-assessee was under an obligation not to deduct tax at source and therefore, the assessee could not be held to be assessee in-default for non-deduction of tax at source on impugned LFC payments.”

Holding that SBI was operating under binding interim directions specifically clarifying that LFC payments would not constitute income for TDS purposes, the bench observed that deducting tax contrary to those directions could have exposed the bank to contempt proceedings.

“In such circumstances, the failure to deduct tax at source cannot be treated as a default contemplated under section 201(1) of the Act,” the tribunal held.

The tribunal accordingly directed deletion of the demand raised under Section 201(1) and the consequential interest levied under Section 201(1A). Both appeals were allowed.