Income Tax Act | SBI Not Assessee In Default Under Section 201 For Not Deducting TDS On Leave Travel Concession Pursuant To Court’s Interim Order; Kerala High Court
Deekshitha Sharmile
The High Court of Kerala Division Bench of Justice A. Muhamed Mustaque and Justice Harisankar V. Menon held that the assessee, SBI, cannot be treated as an assessee in default under Section 201 of the Income Tax Act for not deducting tax at source on Leave Travel Concession/Leave Fare Concession payments made to its employees, since those payments were made under an interim judicial direction requiring disbursal without tax deduction and treating the amounts as not constituting taxable income at that stage. Allowing the bank’s appeal against the income tax authorities, the Court concluded that Section 201(1) and 201(1A) were inapplicable and that any tax liability arising upon the eventual dismissal of the writ proceedings would rest on the employees, who would have to discharge it directly.
The matter arose from steps initiated under Section 201(1) and 201(1A) of the Income Tax Act, 1961 against SBI in relation to payments made to its employees towards Leave Travel Concession (LTC) for the assessment year 2016-17. The bank had earlier withdrawn overseas travel benefits through a circular dated 15.04.2014, which was stayed by the Madras High Court. Pursuant to interim orders dated 16.02.2015, the Court clarified that payments made under LTC would not constitute taxable income for deduction at source.
The bank contended before the department that it was bound by the interim orders and therefore could not deduct tax while making payments during the financial year 2015-16. The department, however, treated the bank as an assessee in default and demanded tax and interest under Section 201. The first appellate authority confirmed this position, and the Income Tax Appellate Tribunal rejected the bank’s appeal. The bank then approached the High Court of Kerala challenging its liability.
The dispute centered on whether the bank could be held liable as an assessee in default despite the interim orders of the Madras High Court. The statutory provisions primarily invoked were Sections 192 and 201 of the Income Tax Act, 1961.
The Court observed that “Prima facie, the Madras High Court was of the view that there is no taxable income accruing to the employee so as to deduct tax at source.” It was further recorded that “It was clarified that the payment of the bank towards LTC on the basis of the interim direction would not amount to ‘income’ of the employee.”
The Court stated that “Therefore, the bank could not make any deductions at source. It was also noted that “If ultimately the writ petition stood rejected, it is for the employee to pay tax on the amount paid by the bank.”
The Court observed that “There cannot be any dispute that the appellant-assessee could not have made any deduction in view of the interim order issued as noticed earlier.” It was recorded that “Here, the Madras High Court found, prima facie, that the amount paid would not be the income of a payee so as to deduct tax. Therefore, we are of the opinion that the provisions of Section 201(1) of the Act are not attracted to the case at hand.”
The Court stated that “For the same reasons, the provisions of sub-section (1A) of Section 201 of the Act providing for the levy of interest are also not attracted.” It was observed that “At the time of such payment, the interdiction by the Madras High Court did not permit the appellant to deduct tax, since the appellant-assessee was directed to make such payments without deduction of tax.”
The Court recorded that “Therefore, the appellant could not be called upon to make payment on a later date- after the dismissal of the writ petition in 2022- ignoring the liability of the payee to satisfy the tax.” It was further stated that “The circumstances like the one herein are taken care of, through the first proviso to Section 201 of the Act.”
The Court referred to precedent and noted that “As the petitioners were obliged to make payment pursuant to the order of this court, they cannot be treated as defaulters and they would fall within the proviso to section 201 of the Act.” The Court also observed that “Applying this principle to the case at hand, even though the main writ petition/writ appeal has been later disposed of insofar as the interim order has directed the treatment of the amount paid without deduction of tax in the manner laid down therein, the appellant bank cannot be treated as an assessee in default.”
It was recorded that “Since the Act is an all-India statute and since what was challenged before the Court was the circular issued by the bank at the instance of the Association of Bank employees, the appellant cannot be faulted for having honoured the stay orders issued by the Madras High Court.”
Finally, the Court stated that “In the case at hand, during the financial year 2015-16 relevant to the assessment year 2016-17, the interim directions issued by the Madras High Court governed the field, and the appellant-assessee was justified in not having deducted the tax.”
The Court directed: “In the result, this appeal would stand allowed, answering the questions formulated in favour of the assessee and against the revenue.”
Advocates Representing the Parties
For the Petitioners: Smt. G. Mini, Shri. A. Kumar (Sr.), Shri. P. J. Anilkumar, Sri. P. S. Sree Prasad, Shri. Satyajith K. Warrier
For the Respondents: Sri. P. G. Jayashankar, Sri. Navaneeth N. Nath
Case Title: State Bank of India v. Commissioner of Income Tax
Neutral Citation: 2025 : KER : 87679
Case Number: ITA No. 45 of 2025
Bench: Justice A. Muhamed Mustaque, Justice Harisankar V. Menon
