SBI Not In Default For Not Deducting Tax On Leave Travel Claims Under HC Directions: ITAT Ahmedabad

The Ahmedabad Bench of the Income Tax Appellate Tribunal on Friday held that the State Bank of India could not be treated as an assessee in default for failing to deduct tax at source on Leave Fare Concession payments made to employees.

The tribunal found that the bank had acted in accordance with binding interim directions of the Madras High Court.

A bench of Vice President Dr. B.R.R. Kumar and Judicial Member Rahul Chaudhary allowed four appeals filed by different SBI branches.

The tribunal noted that an identical issue had already been decided by a coordinate bench in State Bank of India, Bhavnagar v. ITO. Finding no distinction in the facts or legal position, it followed that ruling and observed

“There is no change in factual matrix or the legal position. Therefore, respectfully following the above decision of the Tribunal we hold that the Assessee cannot be treated as 'Assessee in Default' for non-deduction tax at source from the payments made towards LFC.”

The dispute arose from Leave Fare Concession reimbursements paid by SBI to employees who undertook journeys involving a foreign leg.

In 2022, the Supreme Court held that travel involving a foreign destination falls outside the exemption available for Leave Travel Concession. Following that ruling, the Income Tax Department initiated proceedings against SBI. The department treated the bank as an assessee in default for not deducting tax at source on such payments. Demands were raised against various SBI branches and a penalty was imposed in one of the matters.

SBI argued that it had not deducted tax because it was bound by interim orders passed by the Madras High Court in litigation initiated by the All India State Bank Officers Federation.

The bank pointed out that the High Court had clarified on February 16, 2015 that LFC payments would not amount to income so as to enable the deduction of tax at source. It also relied on the High Court's clarification that if the writ petition ultimately failed, the employees themselves would be liable to pay tax. SBI contended that deducting tax despite those directions would have amounted to disobedience of a judicial order.

The tribunal noted that the issue regarding the availability of exemption had already been settled by the Supreme Court. The question before it was whether SBI could nevertheless be treated as an assessee in default for the period during which the Madras High Court's interim directions remained in force.

Accepting SBI's contention, the tribunal followed its earlier coordinate bench ruling on identical facts. It held that there was no change in either the factual matrix or the legal position warranting a different view. The tribunal consequently deleted the demands raised against the bank.

In the penalty appeal, the tribunal further observed,

“Since we have deleted the demand raised by the Assessee vide Order, dated 21/03/2024, the consequential levy of penalty under Section 271C read with Section 201(1) of the Act cannot be sustained.”

The tribunal accordingly deleted the penalty imposed on the bank. All four appeals filed by SBI were allowed.