Court-ordered non-deduction of TDS on leave travel concession payments barred default and interest for the interim period.

Binding interim High Court directions requiring non-deduction of tax at source on leave travel concession payments prevented the assessee from being treated as an assessee in default for that period. Although the substantive exemption issue under section 10(5) stood decided against the assessee on merits, the Tribunal held that the TDS obligation under section 192(1) had to yield to the operative court orders. Accordingly, section 201(1) default could not be invoked for the interim period, and the consequential interest demand under section 201(1A) also did not survive.

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Issues: Whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, and made liable to interest under section 201(1A), for non-deduction of tax at source on leave travel concession payments made during the period when it was bound by interim directions of the Madras High Court.

Analysis: The substantive exemption issue under section 10(5) stood concluded against the assessee on merits, but the limited controversy was whether the assessee's failure to deduct tax at source during the relevant period could be treated as default. The Tribunal noted that the assessee was acting under binding interim judicial directions which required it not to deduct tax at source on the impugned LTC payments. It held that the obligation to deduct tax under section 192(1) could not be viewed in isolation and had to yield to the operative court orders. On that basis, the failure to deduct tax during the period when the interim orders were in force could not attract section 201(1), and the consequential interest under section 201(1A) also could not survive. The Tribunal followed the earlier coordinate bench decision and the Kerala High Court decision on the same controversy.

Conclusion: The assessee was not liable to be treated as an assessee in default for the impugned period, and the demand under sections 201(1) and 201(1A) was not sustainable.

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