2025 (11) TMI 1773 - HC - Income Tax

No assessee-in-default for LTC TDS where payments non-taxable on date of payment, s.201 inapplicable and s.192 interest

State Bank of India Versus Commissioner of Income Tax Ernakulam.

HC held that the assessee-bank could not be treated as an assessee in default under s.201 for non-deduction of TDS u/s 192 on Leave Travel Concession ... Assessee in default u/s 201 - non-deduction of tax at source on impugned LFC payments - TDS u/s 192 - Reimbursement of Leave Travel Concession (LTC) to its employees - HELD THAT:- Under Section 192 of the Act, the appellant had a statutory duty to deduct income tax while making payments to the employee ‘at the time of payment’. Here, provisions of Section 201 of the Act have to be read along with Section 192 of the Act, which provides for actual deduction of tax at source. But in the case at hand, when so visualised, there cannot be any dispute that the appellant-assessee could not have made any deduction in view of the interim order issued as noticed earlier. It is only when the appellant-assessee, after having a liability to deduct tax, fails to do so, the question of invoking Section 201 of the Act and treating it as an ‘assessee in default’ arises. Here, the Madras High Court found [1994 (11) TMI 32 - MADRAS HIGH COURT] prima facie, that the amount paid would not be the income of a payee so as to deduct tax. Therefore, we are of the opinion that the provisions of Section 201(1) of the Act are not attracted to the case at hand. For the same reasons, the provisions of sub-section (1A) of Section 201 of the Act providing for the levy of interest are also not attracted. We also take note of the first proviso to Section 201(1) of the Act, as per which the payer is not to be treated as an ‘assessee in default’ if a payee has furnished the return of income under the Act, taking into account the amount received for computing the income. The circumstances like the one herein are taken care of, through the first proviso to Section 201 of the Act. We also take note of the fact that the Apex Court [2022 (11) TMI 426 - SUPREME COURT],has found that, as against payments made by the appellant bank to its employees towards LTC, it was bound to deduct tax at source. But this finding was with respect to the Assessment Year 2013-14 (financial year 2012-13). In the case at hand, during the financial year 2015-16 relevant to the assessment year 2016-17, the interim directions issued by the Madras High Court governed the field, and the appellant-assessee was justified in not having deducted the tax. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, in light of the interim orders of the Madras High Court restraining deduction of tax at source on Leave Travel Concession/Leave Fare Concession payments, the payer could be deemed an 'assessee in default' under Section 201(1) of the Income Tax Act, 1961 for the assessment year 2016-17. 1.2 Whether non-deduction of tax at source by the payer, pursuant to and in obedience of the interim directions of the Madras High Court, could nonetheless attract liability under Sections 201(1) and 201(1A) of the Income Tax Act, 1961, including interest. 1.3 Whether the first proviso to Section 201(1) of the Income Tax Act, 1961, and the legal effect of court orders directing payment without scope for tax deduction at source, preclude treating the payer as an assessee in default. 1.4 Whether interim orders of the Madras High Court governing the treatment of LTC/LFC payments, issued in proceedings challenging the payer's circular, are binding and relevant even where the tax deduction relates to payments within another State. 1.5 Whether subsequent decisions, including those of the Supreme Court on taxability and TDS in respect of earlier assessment years, alter the position regarding the payer's obligation during the period when the interim orders of the Madras High Court were in force. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Assessee-in-default under Section 201(1) in the presence of an interim court order restraining TDS Legal framework 2.1.1 Section 192 of the Income Tax Act obliges an employer to deduct income tax at source from salary 'at the time of payment'. 2.1.2 Section 201(1) stipulates that a person required to deduct tax, who 'does not deduct, or does not pay, or after so deducting fails to pay' tax as required, 'shall be deemed to be an assessee in default' in respect of such tax. 2.1.3 Section 201(1A) provides for interest liability on failure to deduct or pay tax as required. Interpretation and reasoning 2.1.4 The Madras High Court, in its interim order, expressly held that there was 'no taxable income for deduction at source' and clarified that amounts paid towards LTC/reimbursement pursuant to its interim order 'would not amount to income so as to enable the Bank to deduct tax at source', further directing that, if the writ petition was dismissed, 'the employees are liable to pay tax on the amount paid by Bank'. 2.1.5 The Court noted that this position, restraining deduction of tax at source and placing liability on employees in the event of dismissal of the writ petition, continued throughout the financial year 2015-16, relevant to assessment year 2016-17. 2.1.6 Section 201(1) applies where there is a subsisting obligation to deduct/pay tax which is not complied with. In the present case, at the 'time of payment' under Section 192, the payer was under a judicial interdiction not to deduct tax and was bound to pay the amounts without deduction in obedience to the interim order. 2.1.7 The Court held that when a competent High Court has, prima facie, ruled that the amount paid does not constitute 'income' for purposes of TDS and has directed payment without deduction, the statutory condition precedent for invoking Section 201(1) - namely, a failure to deduct tax when required - is not satisfied. 2.1.8 It was also reasoned that, as the interim order placed the tax liability, if any, on the employees upon ultimate dismissal of the writ petition, the payer could not later be called upon, after such dismissal, to make good the tax again under Section 201, ignoring the liability cast on the employees. Conclusions 2.1.9 The provisions of Section 201(1) are not attracted, since the payer, acting under and in compliance with the interim order of the Madras High Court, could not lawfully deduct tax at source during the relevant period. 2.1.10 Consequently, the payer cannot be treated as an 'assessee in default' under Section 201(1) for non-deduction of tax on the impugned LTC/LFC payments for assessment year 2016-17. 2.1.11 For the same reasons, interest liability under Section 201(1A) does not arise. 2.2 Effect of court orders and applicability of the first proviso to Section 201(1) Legal framework 2.2.1 The first proviso to Section 201(1) provides that a person who fails to deduct tax shall not be deemed an assessee in default if the payee has furnished a return under Section 139, has taken into account such sum for computing income, and has paid the tax due thereon, and the payer furnishes a prescribed accountant's certificate. 2.2.2 The second proviso to Section 201(1) clarifies that no penalty under Section 221 shall be charged if the Assessing Officer is satisfied that the failure to deduct and pay tax was for 'good and sufficient reasons'. Interpretation and reasoning 2.2.3 The Court observed that circumstances where, pursuant to judicial directions, the payer is obliged to make payment without any scope for TDS are expressly addressed by the structure of Section 201(1) and its first proviso, which shifts focus to the payee's tax compliance. 2.2.4 The Court relied on the decision of the Madras High Court in Leema Resorts P. Ltd. v. C.G. Suryakant, where, under court orders in contempt proceedings, payments were made without any option to deduct tax at source; the Madras High Court held that such a payer could not be treated as an assessee in default under Section 201(1) because the case fell within the proviso, and the Assessing Officer was obliged to extend the benefit. 2.2.5 Drawing a parallel, the Court held that, in the present matter, the payer was required to comply with the interim orders of the Madras High Court which left no scope to deduct tax at source, and the liability, if any, was placed on the employees directly. 2.2.6 The Court also noted that the second proviso reinforces that where there are 'good and sufficient reasons' for the failure to deduct tax - such as a binding court direction - treatment as an assessee in default, and penalty, is inappropriate. Conclusions 2.2.7 Compliance with a binding court order directing payment without TDS constitutes a good and sufficient reason under Section 201 for non-deduction of tax. 2.2.8 The scheme of Section 201(1), read with its first proviso and in light of Leema Resorts, supports the position that the payer, having acted under court directions, cannot be held to be an assessee in default for such payments. 2.3 Effect of interim orders after final disposal of the main proceedings Legal framework 2.3.1 The Court referred to the Supreme Court's decision in State of U.P. v. Prem Chopra, which explains the effect of interim orders once the main proceedings are disposed of. Interpretation and reasoning 2.3.2 The Supreme Court in Prem Chopra held that a stayed order is not wiped out; the interim order ceases upon disposal of the proceedings, and ordinarily the parties are to be restored to the position they would have been in but for the interim order, unless otherwise specified in the interim or final order. 2.3.3 Applying this, the Court observed that, although the writ proceedings and writ appeal before the Madras High Court were later disposed of, the specific directions in the interim order about the treatment of the LTC/LFC payments - namely, payment without TDS and tax liability on employees if the writ failed - govern the character of the payments during the currency of the interim order. 2.3.4 Therefore, the lapse of the interim order upon final disposal did not retrospectively convert the payer's compliant conduct during 2015-16 into a default under Section 201, nor did it create a fresh obligation on the payer to now bear the tax liability for that period. Conclusions 2.3.5 The cessation of the interim order on final disposal of the writ proceedings does not render the payer retrospectively liable as an assessee in default for payments made in strict compliance with that interim order. 2.3.6 The obligation to bear the tax, consistent with the interim order, rests on the employees for the amounts received, if and when the writ petition is dismissed. 2.4 Territorial relevance of interim orders of another High Court under an all-India statute Interpretation and reasoning 2.4.1 The revenue contended that proceedings under Section 201 were initiated in respect of payments within the State of Kerala and that interim orders issued by the Madras High Court in separate proceedings should not control TDS obligations in Kerala. 2.4.2 The Court rejected this contention, reasoning that the Income Tax Act is an all-India statute, and the circular withdrawing LTC/LFC benefits, which was challenged, was common and operated nationwide. 2.4.3 The payer and the income tax department were both parties to the proceedings before the Madras High Court; thus, the interim orders in those proceedings were binding on them in relation to the subject matter of LTC/LFC payments, irrespective of where the payments were geographically made. 2.4.4 The Court held that the payer could not be faulted for honouring binding interim orders of the Madras High Court, and such compliance could not be ignored or treated as irrelevant by the tax authorities in another State. Conclusions 2.4.5 Interim directions of a High Court, in proceedings where both the payer and the revenue are parties, are binding with respect to the concerned subject matter across jurisdictions under the all-India Income Tax Act. 2.4.6 The payer's reliance on and compliance with the Madras High Court's interim orders preclude treating it as an assessee in default under Section 201 for payments covered by those orders, irrespective of the State in which such payments were made. 2.5 Effect of subsequent Supreme Court decision on LTC TDS obligations for earlier assessment years Interpretation and reasoning 2.5.1 The Court noted the Supreme Court's judgment holding that, in respect of LTC payments for assessment year 2013-14 (financial year 2012-13), the payer was bound to deduct tax at source. 2.5.2 The Court distinguished this decision on the basis that it related to a different assessment year (2013-14) during which the specific interim directions of the Madras High Court, operative in financial year 2015-16 relevant to assessment year 2016-17, were not in force. 2.5.3 For the period in question in the present appeal, the field was governed by the interim orders of the Madras High Court directing payment without TDS and shifting liability to the employees in case of dismissal of the writ. Conclusions 2.5.4 The Supreme Court's finding of a TDS obligation for assessment year 2013-14 does not alter the legal position for assessment year 2016-17, where the payer's conduct was governed by and conformed to subsisting interim orders of the Madras High Court. 2.5.5 The payer remained justified in not deducting tax at source on LTC/LFC payments during financial year 2015-16, and cannot, for that reason, be treated as an assessee in default under Section 201.