Bank's appeal dismissed for failing to deduct TDS on employee foreign travel reimbursements under sections 201(1) and 201(1A)

ITAT Lucknow dismissed the assessee bank's appeal against demand under sections 201(1) and 201(1A) for failure to deduct TDS on LFC reimbursements for employees' foreign travel. The tribunal held that the assessee's plea of bonafide belief that TDS was not required cannot constitute reasonable cause under section 273B. Being a leading corporate entity with adequate intellectual resources, the assessee should have exercised due diligence. The tribunal confirmed CIT(A)'s order upholding the TDS demand.

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The core legal questions considered in these appeals pertain to the applicability of tax deduction at source (TDS) provisions under the Income Tax Act, 1961, specifically regarding Leave Fare Concession (LFC) payments made to employees involving foreign travel segments. The principal issues are:

1. Whether the orders passed under sections 201(1) and 201(1A) of the Income Tax Act, 1961 are barred by limitation and thus void ab initio.

2. Whether the appellant can be held as an assessee in default for non-deduction of tax at source on LFC payments made to employees for journeys that include foreign travel, despite the designated place being in India.

3. Whether the exemption under section 10(5) of the Income Tax Act, 1961, which exempts LFC payments, applies when the journey undertaken by an employee involves a foreign leg but the designated place is in India and the employee actually visits that designated place.

4. The validity and relevance of reliance on the Central Board of Direct Taxes (CBDT) circular for tax deduction on salary payments for the financial year 2012-13.

5. Whether the appellant's bona fide belief regarding non-liability to deduct tax at source on such LFC payments can absolve it from being treated as an assessee in default under sections 201 and 201(1A).

Issue-wise Detailed Analysis

1. Limitation of Orders under Sections 201(1) and 201(1A)

Legal Framework and Precedents: Section 201(1) and 201(1A) of the Income Tax Act deal with treating a person as an assessee in default for failure to deduct or pay TDS. Limitation provisions under section 253(3) prescribe the time limit for filing appeals against such orders.

Court's Interpretation and Reasoning: The appeals were filed beyond the prescribed time limit under section 253(3). However, the assessee submitted applications for condonation of delay, citing reasons beyond its control. The learned Departmental Representative (D.R.) did not object to condonation, and the Tribunal admitted the appeals for hearing on merits.

Conclusion: The Tribunal condoned the delay in filing the appeals and proceeded to decide the matter on merits, thereby rejecting the limitation plea.

2. Liability to Deduct Tax at Source on LFC Payments Involving Foreign Travel

Legal Framework and Precedents: Section 10(5) of the Income Tax Act exempts leave travel concession or assistance received by an employee for travel within India. Rule 2B of the Income Tax Rules, 1962, specifies conditions for such exemption, including travel by the shortest route within India. Section 192 mandates deduction of tax at source on salary payments, including perquisites like LFC.

Judicial precedents cited include decisions by various High Courts and ITAT benches, notably the Karnataka High Court ruling holding that LFC exemption does not cover foreign travel legs and that the assessee is liable as an assessee in default for non-deduction of TDS in such cases.

Key Evidence and Findings: The Assessing Officer (TDS) found that the appellant reimbursed LFC to employees who undertook journeys involving foreign travel, which is not exempt under section 10(5). Show cause notices were issued, and the appellant failed to provide satisfactory explanations or evidence to justify non-deduction of TDS.

Court's Interpretation and Reasoning: The Tribunal noted that section 10(5) and Rule 2B clearly limit exemption to travel within India. The presence of a foreign leg in the journey disqualifies the exemption. The appellant's argument that the exemption applies if the designated place is in India, regardless of foreign travel en route, was rejected. The Tribunal emphasized that the legislative intent was to encourage tourism within India, not abroad, and the exemption is strictly confined to travel within Indian territory.

The Tribunal also referred to the CBDT circular No. 8/2013 clarifying that exemption is limited to the shortest route within India and that circuitous routes involving foreign travel are not covered.

Application of Law to Facts: The appellant reimbursed LFC for journeys including foreign travel without deducting tax at source. Since such payments are not exempt under section 10(5), the appellant was liable to deduct TDS under section 192 but failed to do so.

Treatment of Competing Arguments: The appellant contended that it complied with all conditions under section 10(5) and Rule 2B, relying on judicial decisions and a bona fide belief of non-liability. The Tribunal found these arguments unpersuasive, noting that the appellant did not demonstrate reasonable cause under section 273B for failure to deduct TDS and that mere bona fide belief without due diligence is insufficient.

Conclusion: The appellant is rightly treated as an assessee in default under sections 201(1) and 201(1A) for non-deduction of TDS on LFC payments involving foreign travel legs.

3. Applicability of Exemption under Section 10(5) for Journeys Involving Foreign Legs

Legal Framework and Precedents: Section 10(5) exempts travel concession or assistance for journeys within India. Rule 2B prescribes conditions including travel by the shortest route within India. The CBDT circular and judicial precedents reinforce that exemption does not extend to foreign travel.

Court's Interpretation and Reasoning: The Tribunal held that the exemption under section 10(5) is strictly limited to travel within India. The presence of a foreign leg in the journey disqualifies the exemption. The appellant's argument that exemption should apply if the designated place is in India and the employee actually visits it, even when foreign travel is involved, was rejected. The Tribunal noted that if the legislature intended to allow exemption in such cases, it would have explicitly provided so.

Application of Law to Facts: The appellant allowed LFC reimbursements for journeys including foreign travel, which is not exempt. Hence, the exemption under section 10(5) does not apply.

Treatment of Competing Arguments: The appellant cited judicial decisions and CBDT guidelines, but the Tribunal distinguished those decisions on facts and emphasized the statutory language and legislative intent.

Conclusion: Exemption under section 10(5) is not available for LFC payments involving foreign travel, even if the designated place is in India and visited by the employee.

4. Reliance on CBDT Circular for Tax Deduction on Salary Payments

Legal Framework and Precedents: CBDT Circular No. 8/2013 clarifies the scope of exemption under section 10(5) and the requirement of TDS deduction.

Court's Interpretation and Reasoning: The Tribunal upheld the reliance on the CBDT circular, which states that exemption is limited to the shortest route within India and that foreign travel legs are not covered. The circular supports the view that TDS deduction is mandatory on LFC payments involving foreign travel.

Conclusion: The Tribunal found no error in the CIT(A)'s reliance on the CBDT circular to uphold the demand for TDS deduction.

5. Bona Fide Belief of the Appellant Regarding Non-liability to Deduct TDS

Legal Framework and Precedents: Section 273B allows waiver of penalty if failure to deduct TDS is due to reasonable cause. The appellant's bona fide belief alone is not sufficient.

Court's Interpretation and Reasoning: The Tribunal observed that the appellant, being a large corporate entity with access to legal expertise and knowledge, failed to exercise due diligence. The appellant did not provide any material to establish reasonable cause under section 273B. Mere bona fide belief without supporting evidence or due diligence cannot absolve the appellant from liability as an assessee in default.

Application of Law to Facts: The appellant did not submit any reply to show cause notices or provide reasonable cause for non-deduction of TDS. No explanation was advanced during appellate proceedings before the Tribunal.

Conclusion: The appellant cannot avoid liability under sections 201 and 201(1A) on the ground of bona fide belief alone.

Significant Holdings

"Section 10(5) of the Income Tax Act, 1961 states that the exemption is allowed for the journey to any place in India. In the case of the assessee, the payment/reimbursement has been allowed by the assessee to the employee in respect of journeys performed by him including places outside India. Therefore, in view of the above facts and circumstances, there is no doubt that such payment/reimbursement is not exempt under section 10(5) of the Income Tax Act, 1961 and the assessee was liable to deduct tax at source on such payment/reimbursement but the assessee has failed to do so."

"The language of the provision thus does not leave scope for any ambiguity on the issue that the LTC is meant only for the purpose of 'proceeding on leave to any place in India' and not abroad."

"Failure to observe due diligence in deducting tax at source, despite informed resources easily available to the assessee, pleading that it failed to deduct tax at source due to lack of knowledge or due to bona fide belief that tax was not deductible at source, cannot be accepted as a reasonable explanation."

"The Hon'ble Karnataka High Court has held that Leave Travel Concession is available for an employee to proceed on leave to any place in India and thereafter return to place of origin in shortest route but without a foreign leg, hence, where employees of assessee-bank reached destination place in India after taking a foreign tour, they would not be entitled to claim reimbursement as per section 10(5) read with rule 2B and authorities had rightly held assessee to be an 'assessee in default' under section 201(1)."

In conclusion, the Tribunal dismissed both appeals filed by the appellant, confirming the demand for TDS on LFC payments involving foreign travel and holding the appellant liable as an assessee in default under sections 201(1) and 201(1A) of the Income Tax Act, 1961. The exemption under section 10(5) does not extend to journeys involving foreign legs, and the appellant's failure to deduct TDS cannot be excused on the basis of bona fide belief or delay in filing appeals.

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