Court sets aside tax demands on ex-gratia payments, criticizes authorities for non-compliance.

The Court allowed the writ petition challenging tax and interest demands under Sections 201 and 201(1A) of the Income Tax Act, 1961, related to non-deduction of tax on ex-gratia payments to employees opting for voluntary retirement. Relying on a Division Bench judgment, the Court criticized authorities for not following binding judgments due to a pending Supreme Court appeal without a stay order. Consequently, the Court set aside the assessment and revisional orders, ruling in favor of the petitioner, with no costs imposed.

---

---

Issues:
Challenge of demand of tax and interest under Sections 201 and 201(1A) of the Income Tax Act, 1961 due to non-deduction of tax at source on ex-gratia payments made to employees under a voluntary retirement scheme.

Analysis:
The petitioner, a branch of a Nationalized Bank, contested the demand of tax and interest imposed under Sections 201 and 201(1A) of the Income Tax Act, 1961, related to ex-gratia payments made to employees who opted for voluntary retirement. The branch made these payments without tax deduction at source based on Section 89(1) of the Income Tax Act, following instructions from the Head Office. The dispute arose for the financial year 2000-2001, with the 2nd respondent rejecting the claim of relief under Section 89(1) and raising a tax demand along with interest. Additionally, the 3rd respondent proposed a penalty. The petitioner's contentions were dismissed by the assessing officer, resulting in a modified order being passed. The petitioner's revision was also rejected, citing a previous decision challenged before the Supreme Court as a reason for denial.

The petitioner argued that a Division Bench of the High Court had allowed a similar claim by another bank in State Bank of Travancore & Ors. v. Central Board of Director Taxes & Anr., asserting that the Department should follow binding judgments. The Court criticized the authorities for not adhering to binding judgments merely because a Special Leave Petition had been filed before the Supreme Court, highlighting the absence of a stay order from the Supreme Court. Given that the issue raised in the present case was covered by the Division Bench judgment, the Court held that the writ petition should be allowed, setting aside the assessment order and the revisional order, and ruling in favor of the petitioner, with no costs incurred.

---