Leave travel concession exemption is limited to domestic travel, and failure to deduct tax on foreign-leg payments triggers default liability.

Leave travel concession exemption under section 10(5) read with Rule 2B applies only to travel from one place in India to another by the shortest route, and it does not extend to journeys involving a foreign leg. On the facts, no binding interim judicial protection excused the employer from deducting tax during the relevant period, so the statutory duty under section 192 continued to apply. Failure to deduct tax therefore attracted treatment as an assessee in default under section 201(1), with interest under section 201(1A) following as a consequential liability. The ITAT upheld the demand arising from non-deduction on the impugned LFC payments.

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Issues: Whether the assessee-employer could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, with consequential interest under section 201(1A), for not deducting tax at source on leave fare concession paid to employees whose travel included a foreign leg.

Analysis: The exemption under section 10(5) read with Rule 2B applies to travel from one place in India to another place in India by the shortest route, and the Supreme Court has settled that LTC/LFC does not extend to journeys involving a foreign leg. On the facts, no binding interim judicial order protecting the assessee from deduction was shown to govern the present assessee during the relevant period. In the absence of such protection, the statutory duty under section 192 remained operative, and failure to deduct tax attracted the deeming consequence under section 201(1), with interest under section 201(1A) following as a consequence.

Conclusion: The assessee was rightly held to be an assessee in default and the consequential interest was sustainable.

Final Conclusion: The appeal failed and the demand arising from non-deduction of tax on the impugned LFC payments was upheld.

Ratio Decidendi: Leave travel concession exemption is confined to travel within India by the shortest route, and where no binding judicial restraint excuses non-deduction, an employer who fails to deduct tax on taxable LFC payments is liable to be treated as an assessee in default under section 201.

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