Interim court restraint on TDS over LTC reimbursements barred default and interest exposure under income tax withholding rules.

LTC reimbursements paid to employees were found not to attract withholding consequences under section 201(1) or interest under section 201(1A) while the Madras High Court's interim restraint on tax deduction remained in force. The Tribunal followed earlier coordinate bench rulings on identical facts and held that the assessee was bound by the court's direction that no tax be deducted on such payments. Deduction contrary to that interim order would have conflicted with the judicial mandate, so the assessee could not be treated as an assessee in default and the default order was quashed.

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Issues: Whether the assessee could be treated as an assessee in default under section 201(1) of the Income-tax Act, 1961, and visited with interest under section 201(1A), for non-deduction of tax at source on LTC payments made to employees during the period when the Madras High Court's interim order restraining deduction of tax was in force.

Analysis: The issue was covered by earlier coordinate bench decisions on identical facts. The operative factor was that, during the relevant period, the assessee was bound by the Madras High Court's interim directions that LTC reimbursements would not be treated as income for the purpose of tax deduction at source and that no tax was to be deducted. Deduction contrary to that direction would have conflicted with the court order. The Tribunal followed the earlier decisions and held that, in these circumstances, the statutory consequences under section 201(1) and section 201(1A) did not arise.

Conclusion: The assessee could not be treated as an assessee in default and the order treating it so was quashed.

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