Binding court directions barred TDS default on leave travel concession payments, and the related penalty was also deleted.

Binding interim judicial directions restraining tax deduction on leave travel concession payments prevented the payer from being treated as an assessee in default under section 201(1). The Tribunal applied its coordinate bench view and Kerala High Court reasoning to hold that statutory withholding default cannot be fastened where the payer complies with subsisting court orders, so the demand under sections 201(1) and 201(1A) was deleted. Once that foundation failed, the consequential penalty under section 271C also lacked an independent basis and was deleted.

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Issues: (i) Whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, for not deducting tax at source on leave travel concession payments made during the period when it was bound by interim judicial directions. (ii) Whether the consequential penalty under section 271C of the Income-tax Act, 1961, could survive once the demand under section 201(1) and section 201(1A) was deleted.

Issue (i): Whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, for not deducting tax at source on leave travel concession payments made during the period when it was bound by interim judicial directions.

Analysis: The liability to deduct tax at source under section 192(1) was examined in the context of binding interim orders of the High Court that restrained deduction on the LTC payments during the relevant period. The order proceeded on the basis that where a payer acts in obedience to subsisting judicial directions, the statutory obligation to deduct cannot be applied so as to fasten default under section 201(1). The Tribunal followed its earlier coordinate bench view and the Kerala High Court's reasoning that, in such circumstances, the payer cannot be treated as an assessee in default.

Conclusion: The assessee was not liable to be treated as an assessee in default under section 201(1), and the demand raised under section 201(1) and section 201(1A) was deleted.

Issue (ii): Whether the consequential penalty under section 271C of the Income-tax Act, 1961, could survive once the demand under section 201(1) and section 201(1A) was deleted.

Analysis: The penalty was treated as consequential to the primary finding that no default could be attributed to the assessee for the relevant period. Once the foundation for treating the assessee as an assessee in default was removed, the penalty based on that default had no independent footing.

Conclusion: The penalty under section 271C did not survive and was deleted.

Final Conclusion: The assessee succeeded in all appeals, with the tax demand and the connected penalty both set aside on the footing that compliance with binding interim judicial directions negatived default under the withholding provisions.

Ratio Decidendi: Where a payer is restrained by binding interim judicial orders from deducting tax at source, failure to deduct during that period does not constitute default under section 201(1), and any consequential penalty cannot stand.

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