Case Law Details
State Bank of India Vs ACIT (ITAT Ahmedabad)
The ITAT Ahmedabad considered an appeal against an order passed by the Commissioner of Income Tax (Appeals) for Assessment Year 2016–17, wherein the Assessing Officer had disallowed exemption under Section 10(5) of the Income Tax Act due to differing interpretation of law and treated the assessee as an “assessee in default” under Sections 201(1) and 201(1A) for non-deduction of tax at source (TDS) on Leave Travel Concession (LTC) payments. The CIT(A) upheld this action.
Before the Tribunal, both parties agreed that the issue was covered by an earlier Tribunal decision in the assessee’s own case. The Tribunal noted that while the Supreme Court had subsequently settled the issue on merits against the assessee regarding exemption under Section 10(5) where foreign travel was involved, the limited question was whether the assessee could be treated as in default for non-deduction of TDS during the relevant period.
The assessee contended that it was bound by interim orders of the Madras High Court, which clarified that LTC payments would not constitute income for the purpose of TDS and directed that if the writ petition was later dismissed, the employees would be liable to pay tax. The Tribunal found merit in this argument, holding that the assessee, being bound by judicial directions, could not have deducted tax without disobeying the court’s order.
The Tribunal observed that the obligation to deduct tax under Section 192 must yield to binding judicial orders and cannot be applied in isolation. It relied on prior Tribunal decisions and a Kerala High Court ruling, which held that when an assessee is restrained from deducting TDS by court orders, it cannot be treated as an “assessee in default” under Section 201.
It was further held that Section 201 applies only when there is failure to deduct tax despite a legal obligation. In this case, such obligation stood overridden by interim judicial directions. The Tribunal also noted that a subsequent Supreme Court judgment cannot retrospectively impose liability for a period during which the assessee acted in compliance with court orders.
Accordingly, the Tribunal held that the assessee could not be treated as an assessee in default under Section 201(1), and the interest under Section 201(1A) also did not survive. The Assessing Officer was directed to delete the demand. The appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals) (in short “Ld. CIT(A)”), ADDL/JCIT(A)-2, Siliguri vide order dated 08.12.2025 relevant to Assessment Year 2016-17.
2. The assessee has raised the following grounds of appeal:
In our case assessing officer has disallowed exemption u/s.10(5) of Income Tax Act, on the base of differences in interpretation of law and treated us an assessee in default and passed order against us u/s. 201(1) and 201(1A) of the Income Tax Act and we filed appeal against said order before CIT (Appeals), which is dismissed and order was issued u/s.250 of the Income Tax Act.
The Kerala High Court has held in a recent judgement that State Bank of India (SBI) cannot be treated as an “Assessee in Default” under section 201 of the Income Tax Act for not deducting Tat at Source (TDS) on Leave Travel Concession (LTC) payments, as it was bound by an interim order which prohibited such deduction. The copy of said order is attached herewith.
Therefore, against said order u/s.250 and u/s. 201(1) and 201(1A), we prefer to file appeal before ITAT and furnished facts of the case along with said appeal along with relevant documentary evidences and we demand the withdrawal of the same from your honour by allowing our appeal on the basis of grounds and evidences furnished by us.
3. In the present case, the Assessing Officer disallowed the exemption claimed under Section 10(5) of the Income Tax Act, 1961 on the basis of a difference in interpretation of the provisions of law. Consequently, the Assessing Officer treated the assessee as an assessee in default and passed an order under Section 201(1A) of the Income Tax Act, 1961. Aggrieved by the said action, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) who, confirmed the action of the Assessing Officer.
4. Heard the argument of both the parties and perused the material available on record.
5. At the outset, both the parties fairly submitted that the issue raised by the assessee in the present appeal stands covered by the order of the Tribunal in the case of State Bank of India, Bhavnagar Vs. ITO for A.Y 2016-17 in ITA Nos.453 & 454/Ahd/2026 dated 26.03.2026. For the sake of ready reference, the operative portion of said order is reproduced as under:
“…11. We have heard the rival contentions and perused the material available on record.
12. At the outset, we note that the issue on merits regarding allowability of exemption under section 10(5) of the Act in cases where the journey involves a foreign leg now stands concluded against the assessee by the judgment of the Hon’ble Supreme Court dated 04.11.2022. There is no dispute on this legal position and the same is duly acknowledged. However, the limited controversy 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 obligation under section 192 of the Act to deduct tax at source cannot be read in isolation and must yield to binding judicial orders. Therefore, the failure to deduct tax in such circumstances cannot be equated with a default contemplated under section 201(1) of the Act.
15. We further find that an identical issue has been considered by the Co-ordinate Bench of the Tribunal in the case of State Bank of India in ITA No.514/Agr/2024, wherein after considering the decision of the Hon’ble Supreme Court as well as the interim orders of the Hon’ble Madras High Court, ITAT held that the assessee bank could not be treated as an assessee in default since it was bound to follow the interim directions of the Hon’ble High Court. The Tribunal categorically observed that the assessee had no option but to comply with the orders of the Hon’ble High Court and non-deduction of tax in such circumstances could not invite the rigours of section 201(1) and 201(1A) of the Act.
16. More importantly, the Hon’ble Kerala High Court in ITA No.45 of 2025 (order dated 18th November 2025) has examined this issue in detail and has held in favour of the assessee. The relevant findings of the Hon’ble High Court, which have a direct bearing on the issue before us, are reproduced below for ready reference:
“The interim order granted by this Court is explained to the effect that any amount paid to the petitioner towards LTC or reimbursement of LTC pursuant to the impugned order would not amount to income so as to enable the Bank to deduct tax at source. It is made clear that if the writ petition is dismissed, the employees are liable to pay tax on the amount paid by Bank.”
“It is only when the appellant-assessee, after having a liability to deduct tax, fails to do so, the question of invoking Section 201 of the Act and treating it as an ‘assessee in default’ arises. 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 appellant-assessee was under an obligation not to deduct tax at source and therefore, the assessee could not be held to be assessee in-default for non-deduction of tax at source on impugned LFC payments.”
17. The Hon’ble High Court has thus 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 Kerala High Court in ITA No.45 of 2025 and the decision of the Co-ordinate Bench in ITA No.514/Agr/2024, we hold that the assessee cannot be treated as an assessee in default under section 201(1) of the Act for the impugned period. Consequently, the interest charged under section 201(1A) also does not survive.
21. Accordingly, we direct the Assessing Officer to delete the demand raised under section 201(1) and 201(1A) of the Act…”
6. In the absence of any change in factual matrix and legal proposition brought to our notice, the appeal of the assessee is hereby allowed.
7. In the result, the appeal of the assessee is allowed.
The order is pronounced in the open Court on 09.04.2026.
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