LTC foreign travel not exempt u/s 10(5); bank held assessee in default under ss. 201(1), 201(1A)

ITAT held the assessee, a nationalized bank, in default under ss. 201(1) and 201(1A) for failure to deduct TDS on Leave Travel Concession payments to employees. The bank's plea that LTC was exempt u/s 10(5) and that it acted under a bona fide belief was rejected, noting it had not sought relief u/s 197 and had ignored mandatory TDS provisions. Relying on SC interpretation of "any place in India" in s. 10(5), the Tribunal held the exemption did not cover foreign travel and dismissed the assessee's appeal.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether non-deduction of tax at source on Leave Travel Concession payments relating to foreign travel of employees constitutes a default under section 201 of the Income-tax Act, 1961.

1.2 Whether an interim order of a High Court and the assessee's alleged bona fide belief that no TDS was deductible on such LTC payments can absolve the assessee from liability under sections 201(1) and 201(1A).

1.3 Whether the interpretation of section 10(5), particularly the expression "any place in India" as settled by the Supreme Court, operates retrospectively from the inception of the provision or only prospectively from the date of the judgment.

1.4 Whether failure to approach the income-tax authorities under section 197 for a certificate of lower or nil deduction of tax affects the assessee's claim that it was not in default for non-deduction of TDS on LTC payments.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Default under section 201 for non-deduction of TDS on LTC for foreign travel

Legal framework (as discussed)

2.1 The Tribunal considered sections 201(1) and 201(1A) concerning an assessee deemed to be in default for failure to deduct tax at source, and section 10(5) regarding exemption of leave travel concession for travel to "any place in India". The Tribunal noted the Supreme Court's decision in a Civil Appeal dismissing a bank's challenge and holding that once an employee undertakes foreign travel, such travel is not covered under section 10(5).

Interpretation and reasoning

2.2 The Tribunal observed that the assessee, a nationalised bank, had made LTC payments relating to foreign travel of its employees without deducting tax at source.

2.3 The assessee contended that such payments were exempt in the hands of the employees under section 10(5), and hence TDS provisions were not attracted.

2.4 The Tribunal noted that the Supreme Court has categorically held that when an employee undertakes travel in a foreign land, such journey is not covered by section 10(5). Thus, LTC relating to foreign travel cannot be treated as exempt.

2.5 Since the payments were not exempt under section 10(5), the Tribunal held that the assessee was obliged to deduct tax at source on such LTC payments.

Conclusions

2.6 Non-deduction of TDS on LTC payments for foreign travel constituted a default, and the assessee was correctly treated as an assessee in default under sections 201(1) and 201(1A).

Issue 2: Effect of interim High Court order and alleged bona fide belief on liability under section 201

Legal framework (as discussed)

2.7 The Tribunal referred to the interim order granted by a High Court in a writ petition concerning withdrawal of leave concession facilities and to the final dismissal of the writ petition by the High Court, followed by dismissal of the bank's appeal by the Supreme Court.

2.8 The Tribunal invoked the settled principle that interim orders are temporary, effective only during the pendency of proceedings, and referred by analogy to Order XXXIX Rules 1 to 3 of the Code of Civil Procedure, which contemplate the limited life of interim orders.

Interpretation and reasoning

2.9 The assessee argued that, in view of the interim order of the High Court and its understanding that LTC payments did not attract TDS, it acted under a bona fide belief and therefore should not be treated as in default.

2.10 The Tribunal held that interim orders do not constitute final adjudication; they subsist only till the final outcome of the writ petition or proceeding. Once the writ petition was finally dismissed and the Supreme Court dismissed the appeal, the interim order lost all force.

2.11 The Tribunal emphasised that the assessee had not taken any protective or precautionary statutory step, such as approaching the tax department under section 197, despite being a nationalised bank with full awareness and capacity to comply with mandatory legal procedures.

2.12 In these circumstances, the plea of bona fide belief based solely on an interim order and without recourse to statutory mechanisms was held to be untenable.

Conclusions

2.13 The interim order of the High Court and the assessee's alleged bona fide belief did not exonerate the assessee from its statutory obligation to deduct TDS, nor from consequent liability under sections 201(1) and 201(1A).

Issue 3: Temporal operation of Supreme Court's interpretation of section 10(5) ("any place in India")

Legal framework (as discussed)

2.14 Section 10(5)(a) contains the expression "any place in India". The Tribunal noted that the Supreme Court, while dismissing the bank's appeal, interpreted this expression to exclude foreign travel from the scope of exemption.

Interpretation and reasoning

2.15 The Tribunal held that it is a well-settled position of law that the interpretation given by the Supreme Court to a statutory provision applies from the date of the birth of that provision, and not merely from the date of the interpretative judgment.

2.16 Consequently, the Supreme Court's construction that LTC for foreign travel is outside the purview of section 10(5) operates retrospectively, covering the assessment year in question as well.

Conclusions

2.17 The Supreme Court's interpretation of section 10(5) that LTC exemption applies only to travel to "any place in India" is deemed to have been the correct legal position from the inception of the provision, and the assessee cannot claim that the law was unsettled or prospectively clarified for the relevant year.

Issue 4: Relevance of not invoking section 197 to assessee's default under section 201

Legal framework (as discussed)

2.18 The Tribunal referred to section 197 of the Income-tax Act, which provides a mechanism for an assessee to obtain a certificate for deduction of tax at a lower rate or for non-deduction.

Interpretation and reasoning

2.19 It was an admitted fact that the assessee had not approached the Income Tax Department under section 197 seeking authorisation for non-deduction of TDS on LTC payments.

2.20 The Tribunal contrasted the bank's strict insistence on compliance and documentation when dealing with its customers (such as PAN and other formalities) with its failure to follow mandatory tax deduction procedures for its own employees, despite availability of a statutory route under section 197.

2.21 This conduct was taken as a factor undermining the credibility of the assessee's plea of bona fide belief and reinforcing the conclusion that it did not act in accordance with law.

Conclusions

2.22 The assessee's failure to utilise section 197 and obtain a certificate for non-deduction or lower deduction of tax reinforces the finding that it committed a default in not deducting TDS and is liable under sections 201(1) and 201(1A).

2.23 In view of the above findings on all issues, the appeal of the assessee was dismissed.

---