2026 (3) TMI 1568 - AT - Income Tax

Binding interim court restraint protects payer from TDS default and interest when tax deduction is prohibited during the relevant period.

A payer restrained by binding interim judicial directions from deducting tax at source cannot be treated as an assessee in default for that period under ... TDS u/s 192 - Tax deduction at source on leave fare concession payments - assessee is a branch of State Bank of India which had provided Leave Fare Concession (LFC) to its employees and had treated the same as exempt under section 10(5) - assessee in default u/s 201(1) and interest u/s 201(1A) - AO noticed that certain employees had undertaken journeys involving a foreign leg and the assessee had not deducted tax at source on such payments HELD THAT: - The Tribunal held that, although the question on the merits of exemption under section 10(5) stood concluded against the assessee, the determinative issue was whether default under section 201(1) could be fastened for the relevant period. It found that the interim directions of the Madras High Court were in force and specifically governed the assessee's conduct regarding deduction of tax on LFC payments. We further find that an identical issue has been considered by the Co-ordinate Bench of the Tribunal in the case of State Bank of India [2025 (4) TMI 44 - ITAT AGRA], wherein after considering the decision of the Hon’ble Supreme Court as well as the interim orders of the Hon’ble Madras High Court, ITAT held that the assessee bank could not be treated as an assessee in default since it was bound to follow the interim directions of the Hon’ble High Court. The Tribunal categorically observed that the assessee had no option but to comply with the orders of the Hon’ble High Court and non-deduction of tax in such circumstances could not invite the rigours of section 201(1) and 201(1A) of the Act. Hon’ble Kerala High Court [2025 (11) TMI 1773 - KERALA HIGH COURT] has examined this issue in detail and has held in favour of the assessee. Since the assessee was bound to obey those judicial directions, the obligation to deduct tax under section 192 could not be enforced in isolation. A default under section 201 presupposes an existing legal obligation to deduct tax; where that obligation stood displaced for the relevant period by binding court orders, non-deduction could not attract treatment as an assessee in default. The subsequent Supreme Court decision settling the substantive exemption issue could not retrospectively create liability under section 201(1) for a period in which the assessee had acted in compliance with the court's interim orders. [Paras 14, 18, 19, 20] The demand under section 201(1) and the consequential interest under section 201(1A) were directed to be deleted. Final Conclusion: The Tribunal allowed both appeals and held that the assessee, having acted in conformity with binding interim directions of the High Court, could not be treated as an assessee in default for the relevant period. The demand and consequential interest were deleted. Issues: Whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, and charged interest under section 201(1A), for non-deduction of tax at source on leave fare concession payments during the period when binding interim directions of the Madras High Court restrained deduction.Analysis: The issue on the merits of exemption under section 10(5) was already concluded against the assessee, but the dispute before the Tribunal was confined to the effect of the interim judicial orders in force during the relevant period. The Tribunal noted that the assessee was bound by the interim directions of the Madras High Court, which clarified that the payments would not amount to income so as to enable deduction at source and that the employees would be liable if the writ petition failed. It held that the obligation under section 192 could not be viewed in isolation and had to yield to the binding court order. Following the Kerala High Court and a coordinate bench decision, the Tribunal held that failure to deduct tax in compliance with a subsisting judicial restraint could not be treated as a default under section 201(1).Conclusion: The assessee could not be treated as an assessee in default for the impugned period, and the interest under section 201(1A) also did not survive.Ratio Decidendi: Where a payer is restrained by binding judicial directions from deducting tax at source, non-deduction during the period of such restraint does not attract section 201(1) or section 201(1A) of the Income-tax Act, 1961.