SBI Not In Default For Not Deducting TDS On Employees' LFC In View Of Madras HC Order: ITAT Ahmedabad

The Ahmedabad Income Tax Appellate Tribunal (ITAT) has held that State Bank of India (SBI) cannot be treated as an “assessee in default” for failure to deduct tax at source on Leave Fare Concession (LFC) payments made to its employees, where such non-deduction was in compliance with binding interim orders of a High Court.

A coam of Judicial Member Siddhartha Nautiyal and Accountant Member Narendra Prasad Sinha observed that, during the relevant period, the bank was bound by interim orders of the Madras High Court, which had directed that LFC payments would not be treated as income and no tax was required to be deducted at source.

The case arose from appeals filed by the State Bank of India, Bhavnagar Para Branch, against orders of the Commissioner of Income Tax (Appeals), wherein the bank had been treated as an assessee in default for not deducting TDS on LFC payments made to employees during the Assessment Year 2016–17.

The bank placed reliance on interim orders of the Hon'ble Madras High Court, wherein it was held that LFC payments would not amount to income for the purpose of TDS during the pendency of the writ proceedings, and therefore the assessee could not have deducted tax without violating the court's directions.

The Assessing Officer had taken the view that once the journey includes a foreign leg, the exemption is not admissible and the amount becomes taxable in the hands of the employee.

Accordingly, the assessee was held to be an assessee in default for non-deduction of tax at source, and demand under section 201(1), along with interest under section 201(1A), was raised.

The Tribunal observed that, at the time, the assessee was bound by interim orders of the Madras High Court, which had expressly directed that LFC payments would not be treated as income and no tax was required to be deducted at source.

The bench stated that "The interim directions of the Hon'ble Madras High Court were in force during the relevant previous year and the assessee, being a party to the proceedings, was duty bound to comply with the same.The obligation under section 192 of the Act to deduct tax at source cannot be read in isolation and must yield to binding judicial orders. Therefore, the failure to deduct tax in such circumstances cannot be equated with a default contemplated under section 201(1) of the Act."

Taking note of these facts, the tribunal held that the bank had no option but to comply with the judicial directions, and any deduction of tax in violation of such orders would have amounted to contempt of court. Therefore, the failure to deduct tax could not be regarded as a default under the law.

The tribunal further relied on the judgment of the Kerala High Court, which had categorically held that where the assessee was restrained by judicial orders from deducting tax at source, the provisions of section 201 of the Act cannot be invoked and the assessee cannot be treated as an assessee in default.

The coram stated that "The assessee was operating under the binding interim directions of the Hon'ble Madras High Court during the relevant period and therefore could not have deducted tax at source. The subsequent decision of the Hon'ble Supreme Court, though settling the issue on merits, cannot retrospectively fasten liability under section 201(1) of the Act for a period during which the assessee was acting in compliance with judicial orders."

Accordingly, the tribunal set aside the orders of the lower authorities and directed the deletion of the entire demand raised under the Act, including interest. The appeals of the assessee were allowed.

For Appellant: Dinesh Nair, AR

For Respondent: Sudhakar Verma, Sr. DR