TaxTMI 
TaxTMI 
2026 (6) TMI 1329
X X X X Extracts X X X X
X X X X Extracts X X X X
....on (LFC) given to its employees who had a foreign leg in their travel. 3. We have heard the rival submissions and perused the material available on record. 4. The employee named Harram Gangolia of the assessee bank/employer, had availed leave travel concession from the bank and had gone to Thiruchirapalli via Gwalior-Delhi-Muscat-Paris visit and an amount of Rs. 3,54,027/- was paid as LFC/HTC on 22.07.2015 i.e. during the year under consideration. The assessee had not deducted tax at source on the payment of Leave Fare Concession (LFC) to its employee on the ground that the same is not taxable in the hands of the said employees as salary in terms of Section 192 of the Act. The assessee bank took shelter of the order of Hon'ble Madras High Court in the case of All India State Bank Officer's Federation and All India Bank Officer's Confederation Vs. State Bank of India and others in MP No. 2 of 2014 in WP No. 11991 of 2014 dated 16.02.2015. Further, the Hon'ble Kerala High Court in the case of State Bank of India Vs. CIT in ITA 45 of 2025 dated 18.11.2025 had also held that assessee bank could not be treated as assessee in default for non-deduction of tax at source on payment of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted 16 February 2015 having directed the Appellant not to deduct at source on LTC had further stated that if the writ petition challenging the Circular was dismissed, the employees would be liable to pay tax on the LTC amount paid by the Appellant and, therefore, the CIT(A) ought to have quashed the order of the AD holding the Appellant to be an assessee in default. 5. The CIT(A) erred in not quashing the order of the AG holding the Appellant to be an assessee in default for the reason that the Appellant, even if it wanted to, could not have deducted tax at source on LTC paid during the year under consideration in view of the orders of the Hon'ble Madras High Court till the time they were in force as acting contrary to the orders of the Hon'ble Court would have amounted to contempt of Court. 6. The CIT(A) erred in not following the judgment of the Hon'ble Kerala High Court in State Bank of India v. CIT (ITA no 45 of 2025) where the Hon'ble Court after considering the above set of facts held that the Appellant was justified in not deducting tax at source in view of the interim directions issued by the Madras High Court asking the Appellant not to de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d under a bona fide belief and therefore could not be treated as an assessee in default. Further the assessee placed reliance on interim orders of the Hon'ble Madras High Court, wherein it was held that LFC payments would not amount to income for the purpose of TDS during the pendency of the writ proceedings, and therefore the assessee could not have deducted tax without violating the court's directions. 5. However, the Assessing Officer did not accept the contentions of the assessee. the Assessing Officer, relying upon the judgment of the Hon'ble Supreme Court dated 04.11.2022, held that exemption under section 10(5) of the Act is available only in respect of travel within India and not where foreign travel is involved. The Assessing Officer observed that once the journey includes a foreign leg, the exemption is not admissible and the amount becomes taxable in the hands of the employee. Accordingly, the assessee was held to be an assessee in default for non-deduction of tax at source and demand under section 201(1) along with interest under section 201(1A) was raised. 6. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sy before us is whether, in the peculiar facts of the present case, the assessee can be treated as an "assessee in default" under section 201(1) of the Act for non-deduction of tax at source during the relevant period. 13. The contention of the assessee has consistently been that during the year under consideration, it was bound by the interim orders passed by the Hon'ble Madras High Court in W.P. No.11991 of 2014, wherein vide order dated 16.02.2015 it was specifically clarified that the LFC payments would not amount to income so as to enable deduction of tax at source and further that if the writ petition was ultimately dismissed, the employees would be liable to pay tax. The assessee has submitted that in view of such binding judicial directions, it could not have deducted tax at source and any such deduction would have amounted to disobedience of the order of the Hon'ble High Court. 14. We find considerable merit in the aforesaid contention of the assessee. The interim directions of the Hon'ble Madras High Court were in force during the relevant previous year and the assessee, being a party to the proceedings, was duty bound to comply with the same. The obliga....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hus clearly held that where the assessee was restrained by judicial orders from deducting tax at source, the provisions of section 201 of the Act cannot be invoked and the assessee cannot be treated as an assessee in default. 18. In the present case also, the facts are materially identical. The assessee was operating under the binding interim directions of the Hon'ble Madras High Court during the relevant period and therefore could not have deducted tax at source. The subsequent decision of the Hon'ble Supreme Court, though settling the issue on merits, cannot retrospectively fasten liability under section 201(1) of the Act for a period during which the assessee was acting in compliance with judicial orders. 19. We also find force in the argument of the assessee that the scheme of section 201 of the Act itself contemplates that a person can be treated as an assessee in default only when there is a failure to deduct tax in spite of a legal obligation to do so. In the present case, such legal obligation stood eclipsed by the interim directions of the Hon'ble High Court. 20. In view of the above discussion, respectfully following the decision of the Hon'ble ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d his claim was fully reimbursed by the appellant and no tax was deducted under Section 192(1) for the same. 4. The appellant on the other hand through its counsel senior advocate Shri K.V. Vishwanathan, would argue that though the travel made by its employees under LTC did involve a foreign leg and admittedly a circuitous route as opposed to the shortest route was taken, yet two things go in the favour of the employees. Firstly, the employees of the appellant did travel from one designated place in India to another place within India (though in their travel itinerary a foreign country was also involved), and secondly the payments which were actually made to these employees was for the shortest route of their travel between two designated places within India. In other words, no payment was made for foreign travel though a foreign leg was a part of the itinerary undertaken by these employees. 5. The above reasons given by the appellant-bank however, has not found favour either with the Assistant Commissioner of Income Tax or with the Commissioner of Income Tax (Appeals) or even the High Court. After examining the matter our considered opinion is that the view taken....
X X X X Extracts X X X X
X X X X Extracts X X X X
....21 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax. Section 10(5) which exempts payments received as LTC with which we are presently concerned. It reads as under :- "10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - XXX XXXXXX (5) in the case of an individual, the value of any travel concession or assistance received by, or due to him,- (a) from his employer for himself and his family, in connection with his proceeding on leave to any place in India ; (b) from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement from service or after the termination of his service, subject to such conditions as may be prescribed including conditions as to number of journeys and the amount which shall be exempt per head having regard to the travel concession or assistance granted to the employees of the Central Government : Provided that the amount exempt under this clause shall....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Revenue has held the appellant to be an "assessee in default", for not deducting the tax at source of its employees. 8. These proceedings started with a Spot Verification under Section 133A when it was discerned by the Revenue that some of the employees of the assessee- employer had claimed LTC even for their travel to places outside India. These employees, even though, raised a claim of their travel expenses between two points within India but between the two points they had also travelled to a foreign country as well, thus taking a circuitous route for their destination which involved a foreign place. The matter was hence examined by the Assessing Officer who was of the opinion that the amount of money received by an employee as LTC is exempted under Section 10(5) of the Act, however, this exemption cannot be claimed by an employee for travel outside India which has been done in this case and therefore the assessee- employer defaulted in not deducting tax at source from this amount claimed by its employees as LTC. There were two violations of the LTC Rules, pointed out by the Assessing Officer: A. The employee did not travel only to a domestic destination but t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from one place in India to another place in India. There should be no ambiguity on this. 14. The second argument urged by the appellant that payments made to these employees was of the shortest route of their actual travel cannot be accepted either. It has already been clarified above, that in view of the provisions of the Act, the moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act. 15. A foreign travel also frustrates the basic purpose of LTC. The basic objective of the LTC scheme was to familiarise a civil servant or a Government employee to gain some perspective of Indian culture by traveling in this vast country. It is for this reason that the 6th Pay Commission rejected the demand of paying cash compensation in lieu of LTC and also rejected the demand of foreign travel. In para 4.3.4 of the 6th Pay Commission Report dated March, 2008 this is what was said:- "4.3.4. The demand for allowing travel abroad at least once in the entire career under the scheme is not in consonance with the basic objective of the scheme. The Government employee cannot ga....