State Bank of India Vs ITO (ITAT Bangalore)
Bangalore ITAT: Employer Not Liable as Assessee-in-Default for Non-Deduction of TDS on LTC Reimbursements Paid Under Binding Court Orders
The Bangalore ITAT held that State Bank of India could not be treated as an assessee-in-default under sections 201(1) and 201(1A) for not deducting TDS on Leave Travel Concession (LTC/LFC) reimbursements paid to employees during AYs 2016-17 and 2017-18. The Tribunal observed that the Bank had acted in compliance with the interim orders of the Madras High Court, which had specifically directed that LTC reimbursements made pursuant to those orders would not constitute income for the purpose of TDS deduction, while leaving the employees liable to pay tax if the writ petition ultimately failed. The Tribunal followed the Kerala High Court’s decision in SBI’s own case, which held that an employer cannot be penalised for obeying a binding judicial order, as non-compliance would have amounted to contempt of court. Accordingly, the Tribunal quashed the orders passed under sections 201(1) and 201(1A), holding that no liability to deduct tax or pay consequential interest could be fastened on the Bank in such circumstances.
Cases Discussed
- State Bank of India v. Commissioner of Income Tax (Kerala HC), ITA No. 45 of 2025, reported as 2025:KER:87679
- State Bank of India v. Deputy Commissioner of Income Tax (Karnataka HC), ITA No. 66 of 2025, dated 09.09.2025
- State Bank of India v. Assistant Commissioner of Income Tax (SC), (2022) 449 ITR 1 (SC)
- State of U.P. thr. Secretary and Ors. v. Prem Chopra (SC), (2022) 2 SCR 990
- Leema Resorts P. Ltd. and Another v. C.G. Suryakant and Others (Madras HC), (1995) 215 ITR 618
- CIT v. Vegetable Products Ltd. (SC), [1973] 88 ITR 192 (SC)
FULL TEXT OF THE ORDER OF ITAT BANGALORE
1. ITA 747/BANG/2026 is filed by the Assessee against the order of Ld. ADDL CIT/JCIT (A) – 2 Siliguri [Id. CIT(A)] dated 17-Dec-2025 for the Assessment Year 2017-18 wherein the appeal filed against the order u/s 201 r.w.s.201(1A) of the Income Tax Act, 1961 (the Act) dated 26.09.2023 passed by the ITO TDS WARD MANGALORE (the Id. AO) was dismissed.
2. Asessee has raised following grounds of appeal before us :-
1. The order of the Learned Commissioner of Income Tax (Appeals) [CIT(A)] dated 17.12.2025 is opposed to law, facts, and principles of natural justice as it was passed without considering the written submissions filed by the Appellant, thereby rendering the order defective and liable to be set aside.
2. The Learned CIT(A) erred in law and on facts by upholding the Assessing Officer’s order dated 26.09.2023 under Sections 201(1) and 201(1A) of the Act, deeming the Appellant an “assessee-in-default” for non-deduction of TDS under Section 192(1) on LFC/LTC reimbursements, without appreciating the Appellant’s bona fide compliance with binding interim orders dated 25.04.20 14 and 16.02.2015 of the Hon’ble Madras High Court in W.P. No. 11991/2014, which expressly restrained TDS deductions by clarifying that such payments “would not amount to income so as to enable the Bank to deduct tax at source.’ This binding was prevalent throughout the FY 2016-17 (AY 2017-18).
3. The Learned CIT(A) failed to recognize that the reimbursements were effected pursuant to a judicial mandate, rendering them non-taxable for TDS purposes at the time of payment, as the Madras High Court interim order overrode any statutory obligation under Section 192(1), and any attempt to deduct TDS would have constituted contempt of court, thereby absolving the Appellant o any default under Section 201(1) of the Act.
4. Without prejudice, the Learned CIT(A) erred in mechanically applying State Bank of India v. Assistant Commissioner of Income Tax (2022) 449 ITR 1 (SC), disregarding its distinction from the Appellant’s case (applicable from AY 2014-15 due to interim orders, unlike AY 2013-14 in the judgment), and ignoring the peculiar situation where court directives prevented TDS while tax authorities impose liability.
5. The Ld. CIT(A) ought to have followed the binding precedent of the Hon’ble Kerala I-ugh Court in State Bank of India v. Commissioner of Income Tax (ITA No. 45 of 2025, dated 18.11.2025), which, on materially identical facts involving the same Madras interim order and SBFs policy, categorically held that no liability under Section 20 1(1) of the Act arises when the employer is judicially restrained from deducting TDS, emphasizing that statutory duties must yield to court orders.
6. The adverse decision of the Hon’ble Karnataka High Court in State Bank of India v. Deputy Commissioner of Income Tax (ITA No. 66 of 2025, dated 09.09.2025) for AY 20 16-17 (pertaining to SBI’s LHO), is not final as it stands challenged before the Hon’ble Supreme Court via SLP (Diary No. 2542/2026, filed on 14.01.2026), rendering the issue sub-judice. The Hon’ble Supreme Court in its interim order dated 16.02.2026 has stayed the demand notices issued by the Income Tax Department.
7. In light of the direct conflict between the judgments of the Hon’ble Kerala High Court (favorable to the assessee) and the Hon’ble Karnataka High Court (adverse), the Ld. CIT(A) was duty-bound to adopt the interpretation more beneficial to the Appellant, as per settled law in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) and other precedents.
8. The levy of interest under Section 201(1A) and any penalty is unlawful and unsustainable, as there was no willful or culpable default on the Appellant’s part, but rather mandatory compliance with a subsisting court order, rendering the rendering demands inequitable, unjust, and unreasonable.
3. The facts and circumstances in all the other appeals are similar, except for the quantum of tax and the dates of the respective orders. The core issue in all these appeals is that various branches of the State Bank of India did not deduct tax at source under section 192 of the Income-tax Act on Leave Fare Concession/Leave Travel Concession reimbursements paid to their employees. The Assessing Officers thereafter passed orders under sections 201(1) and 201(1A) of the Income-tax Act, 1961, treating the assessee as an assessee in default and levying interest for non-deduction of tax at source. On appeal, the learned CIT(A) confirmed the Assessing Officers’ action. Hence, all these appeals are before us.
4. The facts show that State Bank of India (“the Bank”) provides Leave Travel Concession/Leave Travel Allowance to its employees under the State Bank of India Officers’ Service Rules, 1992. While deducting tax at source from salary, the Bank treated such LTC payments as exempt under section 10(5) read with Rule 2B and therefore did not deduct tax on the amounts paid. On 30.06.2023, the appellant branch received a letter from the Assessing Officer calling for LFC details for AY 2017-18. In response, the branch furnished details of LTC payments made to employees during the relevant year by letter dated 26.07.2023. Thereafter, the Assessing Officer passed an order dated 26.09.2023 under sections 201(1) and 201(1A). In its reply dated 02.09.2023, the branch submitted that it could not be treated as an “assessee in default” because the All India State Bank Officers Federation and the All India Bank Officers’ Confederation had filed W.P. No. 11991/2014 before the Hon’ble Madras High Court, which stayed the Bank’s circular withdrawing LTC/HTC involving foreign travel. The Court further clarified on 16.02.2015 that any LTC amount or reimbursement paid pursuant to the impugned order would not constitute income enabling the Bank to deduct tax at source, and that employees would be liable to pay tax only if the writ petition was dismissed. The modified interim order continued until disposal of the writ petition. Accordingly, the appellant branch submitted that, in view of the binding interim order, it could not deduct TDS on LTC payments and therefore should not be treated as an “assessee in default”. However, the Assessing Officer treated the Bank as an assessee in default under section 201 and raised a demand of Rs. 1,47,533 towards tax and Rs. 1,32,779 towards interest, aggregating to Rs. 2,80,312. The learned CIT(A) confirmed the said demand. Hence, these appeals are before us.
5. On the above basis, it was contended that the Bank was not liable to deduct tax at source in view of the interim orders of the Hon’ble Madras High Court and the order of the Hon’ble Supreme Court in SLP No. 16734/2023 dated 28.08.2023. The Indian Banks’ Association, by circular dated 07.04.2014, had advised that officers and employees of member banks were not entitled to undertake overseas travel as part of LTC/HTC. The Ministry of Finance, Department of Financial Services, by letter dated 30.04.2014, similarly advised Public Sector Banks and Financial Institutions to frame LTC/LTA schemes in line with Government of India principles, including that travel to foreign destinations, even through foreign destinations, should not be permitted. In compliance, the Bank issued circular dated 15.04.2014 barring officers from undertaking overseas travel under LTC/HTC. This circular was challenged before the Hon’ble Madras High Court in W.P. No. 11991/2014. The Bank filed a counter affidavit on 02.09.2014 opposing the writ petition. By order dated 25.04.2014, the Court granted an interim stay on the petitioners’ undertaking that, if the writ petition was dismissed, members would refund the LTC amounts paid for foreign or overseas travel. The Bank thereafter clarified that foreign travel under LTC/HTC could be undertaken while the stay remained in force, subject to refund if the petition failed. These facts were also communicated to the Ministry of Finance by letter dated 25.08.2014. On 29.04.2015, the Bank filed an affidavit-in-reply stating that the High Court’s order dated 16.02.2015 affected the Income-tax Act, the Rules, CBDT circulars, and the tax authorities, and that such authorities were necessary parties. The Bank accordingly sought vacation of the interim order. On 16.02.2015, the interim stay was extended until disposal of the writ petition, with a clarification that LFC payments or reimbursements made pursuant to the impugned order would not constitute income enabling deduction of tax at source. The Ministry of Finance was again informed on 18.03.2015, and the same position was communicated in response to CBDT’s letter dated 02.02.2018. The writ petitions were dismissed only on 24.06.2022, long after the LFC reimbursements for the relevant year. In W.A. No. 1653/2022, the Division Bench, by order dated 08.08.2022, protected the officers from salary recovery and coercive proceedings during pendency of the appeal. On 04.11.2022, the Hon’ble Supreme Court decided SLP No. 9876 of 2020. Thereafter, by judgment dated 08.06.2023, the Hon’ble Madras High Court allowed W.A. No. 1653/2022, quashed the IBA circular dated 07.04.2014 and the Bank’s letter dated 15.04.2014, and remanded the matter for fresh consideration. The Bank challenged that judgment before the Hon’ble Supreme Court in SLP No. 16734/2023, in which the Commissioner of Income Tax (TDS), Chennai, is Respondent No. 5. By order dated 28.08.2023, the Hon’ble Supreme Court stayed operation of the Madras High Court judgment and directed the Bank not to recover any amounts from employees during pendency of the SLP.
6. The learned authorised representatives, Shri P. Manohar Gupta and Shri Karthik G., Chartered Accountants, submitted that the non-deduction of tax arose solely because of binding court directions and that any deduction contrary to those directions would have exposed the Bank to contempt proceedings. Accordingly, the Bank could not be faulted, and the orders passed under sections 201(1) and 201(1A) were liable to be deleted. They further submitted that the Bank had allowed exemption under section 10(5) on a bona fide belief that employees remained eligible where the designated destination was within India and was actually visited, even if the journey included a foreign leg. This belief was based on the Bank’s LFC framework, IBA guidelines, industry-level settlements, and the absence of any express prohibition in the Income-tax Act or Rules against en-route foreign travel where the designated destination was in India and reimbursement was restricted in accordance with the Rules. Since section 192 requires deduction on estimated salary income, the Bank had made an honest estimate of employees’ taxable income. The issue was clarified only by the Hon’ble Supreme Court’s order dated 04.11.2022 in SLP No. 9876 of 2020, and there was no Supreme Court decision on this issue as on 31.03.2017. Therefore, the Bank could not be denied the benefit of the law and judicial position prevailing at the relevant time. It was also submitted that courts have consistently held that an employer making a bona fide estimate of employees’ income cannot be treated as an assessee in default under section 201. The learned authorised representatives further submitted that the Bank provides LFC under the State Bank of India Officers’ Service Rules, 1992, industry-level settlements, IBA guidelines, and internal circulars. Reimbursement is allowed only where the designated destination is in India and is actually visited. If the journey includes travel outside India, reimbursement is restricted to the lower of the actual fare/hire charges or the fare to the hometown/designated place by the shortest route and entitled class. Only travel expenses are reimbursable, and ancillary benefits are excluded. For instance, where the itinerary is Mumbai—Kolkata—Singapore—Mumbai and Kolkata is the designated Indian destination, exemption is considered only for the national carrier economy fare for Mumbai—Kolkata—Mumbai, subject to the employee’s monetary ceiling. The Bank granted exemption under section 10(5) only where the designated place of travel was in India and was actually visited, and never where the designated destination was outside India. Section 10(5) and Rule 2B do not prohibit en-route foreign travel when the destination is in India. Rule 2B’s reference to the “shortest route” only limits the maximum exempt amount and does not determine eligibility. CBDT’s annual TDS circular also restricts exemption for circuitous or circular routes to the admissible shortest-route amount. Rule 2B prescribes the maximum exempt amount, eligible mode/class, and number of journeys, while the exemption itself flows from section 10(5). The Bank also complied with Rule 2B by limiting the exemption to economy class, based on Air India/national carrier fare, and restricting it to actual expenditure. Thus, exemption under section 10(5) read with Rule 2B was correctly allowed, and the Bank was not liable to deduct TDS or be treated as an assessee in default. They also submitted that incentive provisions should be construed liberally to advance their purpose. Without prejudice, it was submitted that the Assessing Officer had arbitrarily computed TDS liability for each employee at a flat rate of 30%, without applying the slab rate applicable to the individual employee. Therefore, if any liability were to arise, it ought to be computed at the actual rate applicable to each employee. In view of the above, the order treating the appellant as an “assessee in default” was contrary to law and deserved to be quashed.
7. The learned Departmental Representative, Shri Pradeep S., Additional Commissioner of Income Tax, strongly submitted that the assessee was required to deduct tax at source because the impugned amount was taxable in the hands of the employees under section 15 of the Income-tax Act and, consequently, tax was deductible under section 192 of the Act. He further submitted that once the Hon’ble Supreme Court ultimately held that such amounts were taxable in the employees’ hands, it necessarily followed that the assessee had failed to deduct tax at source on the reimbursements made to them. Therefore, according to him, the orders of the lower authorities suffered from no infirmity. He also contended that a declaration of law by the Hon’ble Supreme Court relates back to the date on which the relevant statutory provision came into force. Thus, there was no justification for the assessee’s failure to deduct tax at source on these payments. He submitted that the Assessing Officer had rightly treated the assessee as an assessee in default under section 201 of the Act, and that the shortfall in tax deduction, along with interest, was recoverable from the assessee.
8. In response, the learned authorised representative submitted that an identical issue had arisen before the Hon’ble Kerala High Court in ITA No. 45 of 2025, where the following two questions were answered in favour of the assessee in its own case. He therefore submitted that the orders passed by the learned Assessing Officer and confirmed by the learned CIT(A) deserve to be quashed, as the issue is squarely covered in favour of the assessee. The learned authorised representative referred to the following two questions:
i. Whether, in the facts and circumstances of the case, the appellant could be treated as an assessee in default under Section 201 of the Income Tax Act,1961?
ii. Whether, in the facts and circumstances of the case; when the assessee bank, by the interim order of the High Court of Madras, was under an obligation not to deduct tax at source, could be held to be an assesseein-default for non-deduction of tax at source on impugned LFC payments at all as the non-compliance of the orders would have tantamounted to contempt of court?
8. We have carefully considered the rival contentions and the decision of the Hon’ble Kerala High Court. We find that the issue is squarely covered in favour of the assessee by the said decision in ITA No. 45 of 2025, reported as 2025:KER:87679. Honourable High Court has held as under: –
2. The appellant has been providing reimbursement of Leave Travel Concession (LTC) to its employees. Pursuant to a circular dated 15.04.2014 issued by the bank, LTC as regards overseas travel facility to the employees stood withdrawn. The circular was challenged before the Madras High Court at the instance of the association of the employees of the bank. The Madras High Court, by an order dated 25.04.2014, stayed the operation of the circular. Later, the stay order as above was sought to be modified/clarified at the instance of the petitioners therein complaining that the bank (appellant-assessee) was taking steps to ‘deduct tax at source’, treating the payments to the employees on the basis of the interim order as ‘income’ of the employees. The Madras High Court, therefore, issued Annexure-A interim order dated 16.02.2015 in W.P. No.11991 of 2014 clarifying the earlier order as under: –
“5. There is no dispute that the Bank would be paying LTC amount to the concerned officers pursuant to the interim order granted by this Court. The Interim Order is subject to the result of the writ petition. The learned counsel for the petitioner is correct in his contention that the there is no taxable income for deduction at source.
6. The interim order granted by this Court is explained to the effect that any amount paid to the petitioner towards LTC or re-imbursement 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.”
(Underlining supplied) The appellant-assessee contends that in view of the afore interim order, no tax could be deducted while making payment to the employees, since, in paragraph 6 of the order, it was found that the payment to the employee would not amount to his income so as to enable the bank to deduct tax at source. In view of this, the appellant could not deduct tax while making payment to the employees during the financial year 2015-16 relevant to the assessment year 2016-17. The appellant points out that the afore writ petition was ultimately dismissed on 24.06.2022, against which W.A No.1653 of 2022 was filed, which led to the issuance of Annexure-C interim order dated 08.08.2022 interdicting the appellant from making recovery from the salary of the employee. Ultimately, the appellant points out that by Annexure-D judgment dated 08.06.2023, the Division Bench of the Madras High Court directed reconsideration of the issue as regards the withdrawal of LTC benefits. The afore judgment is again challenged by the appellant bank before the Apex Court, and by an order dated 28.08.2023 in SLP (C) 16734 of 2023, while issuing notice, the Apex Court interdicted the bank from making recoveries from employees during the pendency of the matter. It was the contention of the bank before the department, when steps under Section 201(1) and (1A) of the Act were initiated, that though payments were made, deduction could not be carried out from the employees on such payment by virtue of the stay orders noticed above. However, by Annexure-B order dated 30.03.2023, the explanation offered as above was brushed aside, and the appellant was treated as an ‘assessee in default’ demanding tax under Section 201(1) and interest under Section 201(1A) of the Act. The first appellate authority having confirmed the afore assessment, the appellant was before the Income Tax Appellate Tribunal, Cochin Bench, and by Annexure-G order dated 09.12.2024 in ITA 274/ COCH/2024, the appeal stood rejected.
3 It is in the afore circumstances that the captioned appeal is instituted by the appellant-assessee.
4. The following questions of law, as reframed by us, arise for consideration in this appeal:-
i. Whether, in the facts and circumstances of the case, the appellant could be treated as an assessee in default under Section 201 of the Income Tax Act, 1961?
ii. Whether, in the facts and circumstances of the case; when the assessee bank, by the interim order of the High Court of Madras, was under an obligation not to deduct tax at source, could be held to be an assessee- in-default for non-deduction of tax at source on impugned LFC payments at all as the non-compliance of the orders would have tantamounted to contempt of court?
5. We have heard Sri. A. Kumar, the learned senior counsel for the appellant-assessee, and Sri. P.G. Jayashankar, the learned Standing Counsel for the respondent-revenue.
6. The factual position as noticed earlier is not in dispute. The appellant had been paying various amounts to its employees towards LTC/LFC. The appellant sought to withdraw the benefits of LTC/LFC, which involves travel to places outside India. The circular was challenged before the Madras High Court, as noticed earlier. Both the appellant as well as the income tax department were respondents in the writ petition instituted as above. A reading of paragraphs 5 and 6 of the Annexure-A interim order dated 16.02.2015 shows that:
i. 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.
ii. 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.
iii. Therefore, the bank could not make any deductions at source.
iv. If ultimately the writ petition stood rejected, it is for the employee to pay tax on the amount paid by the bank.
It is also not in dispute that the above state of affairs continued throughout the year 2015-16.
7. It is on the face of the afore, provisions of Section 201 of the Act requires to be analysed so as to consider the question as to whether the appellant could be treated as an ‘assessee in default’. Under Section 192 of the Act, the appellant had a statutory duty to deduct income tax while making payments to the employee ‘at the time of payment’.
8. The provisions of Section 201 of the Act, to the extent relevant herein, read as under: –
“201 Consequences of failure to deduct or pay.
(1) Where any person, including the principal officer of a company,–
(a) who is required to deduct any sum in accordance with the provisions of this Act; or
(b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax:
Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee–
(i) has furnished his return of income undersection 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed:
Provided further that no penalty shall be charged under section 221 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.
(1A) Without prejudice to the provisions of sub-
section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,–
(i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and
(ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid, and such interest shall be paid before furnishing the statement in accordance with the provisions of sub-section (3) of section 200:”
A reading of sub-section (1) to Section 201 of the Act would show that steps thereunder can be taken, and the assessee/payer deemed to be an ‘assessee in default’ when he;
i. does not deduct tax
ii. does not pay, or
iii. after deducting fails to pay whole or any part of the tax as required under the Act. Here, provisions of Section 201 of the Act have to be read along with Section 192 of the Act, which provides for actual deduction of tax at source. But in the case at hand, when so visualised, 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 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. 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.
9. The issue can be addressed from yet another angle, also. Section 192 of the Act, as noticed earlier, provides for making deductions while making payments to the employee. 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, however, cautiously made it clear that it is for the employees to pay tax directly on the amount paid by the bank, if ultimately, the writ petition is dismissed. 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.
10. We also take note of the first proviso to Section 201(1) of the Act, as per which the payer is not to be treated as an ‘assessee in default’ if a payee has furnished the return of income under the Act, taking into account the amount received for computing the income. The circumstances like the one herein are taken care of, through the first proviso to Section 201 of the Act.
11. We also notice the judgment of the Madras High Court in Leema Resorts P. Ltd. and Another v. C.G. Suryakant and Others [(1995) 215 ITR 618], wherein a more or less similar issue arose for consideration. In that case, the appellants were the tenants of the premises concerned in the appeal. The appellants were found guilty of contempt of court for having wilfully disobeyed certain orders of the Court in an appeal filed against the order of the learned Single Judge. In the contempt appeal, the enforcement of the order was postponed in view of the undertaking made by the appellants to pay a certain sum of rupees ten lakhs on or before 01.08.1994. The amount of rupees ten lakhs was paid on 01.08.1994. The Division Bench recorded the payment of rupees ten lakhs on the previous day and permitted the appellants to make a deposit of rupees three lakhs in the manner stated thereunder. After payments were made as above, a notice was issued by the income tax department to the appellant in the contempt appeal, inviting attention to the provisions of Section 194-I of the Act introduced in June 1994, as per which 20% ought to have been deducted when rent exceeding Rs.1,20,000/- was paid in a financial year. The appellant in such circumstances approached the court seeking permission to deduct 20% of the amount already paid pursuant to the order noticed earlier. Considering this issue, the Court found as under: –
“One more question that remains for consideration is as to whether the petitioners should be subjected to the proceedings that are now initiated against them by notice dated September 2, 1994, which is extracted above. We have already extracted the relevant portion of our order dated August 2, 1994, which directed the mode of payment. Further, the petitioners/appellants in Contempt Appeal No. 5 of 1994, were required to pay under the teeth of punishment imposed in the contempt proceedings. Our order did not give any scope or option to the appellants in the contempt appeal to deduct 20 per cent, of the amount payable to the respondents at source. In such a situation, the proviso to section 201 of the Act is attracted as it specifically empowers the concerned Assessing Officer to extend the benefit to such an assessee and not to treat him as the assessee in default in respect of the tax. On this question also, we have heard learned senior standing counsel for the Department, who fairly submitted 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, and the Assessing ITA NO.45 OF 2025 2025:KER:87679 Officer would be suitably advised in this regard, on an application filed by the petitioners pursuant to the notice dated September 2, 1994. As the case falls under the proviso to section 201(1) of the Act and as the submission of learned senior standing counsel is also to the same effect, and in addition to this it is also submitted by learned senior standing counsel that the Assessing Officer would be advised, accordingly, we do not consider it necessary to issue any such direction as prayed for in this miscellaneous petition as it would be sufficient to place the submissions made by learned standing senior counsel for the Department on record.”
(Underlining supplied) Thus, it is clarified by the Madras High Court that the appellant therein is not to be proceeded against for payments already made pursuant to the orders issued, as per which there was no scope for tax deduction at source. We are of the opinion that the same is the position herein also, as the appellant, having complied with the orders of the Madras High Court, cannot be treated as an ‘assessee in default’ under the provisions of Section 201 of the Act.
12. The Apex Court in State of U.P. thr. Secretary and Ors. v. Prem Chopra[(2022) 2 SCR 990], considering the effect of an interim order granted by the Court, once the main matter itself is disposed of, has observed as under:-
“24. From the above discussion, it is clear that imposition of a stay on the operation of an order means that the order which has been stayed would not be operative from the date of passing of the stay order. However, it does not mean that the stayed order is wiped out from the existence, unless it is quashed. Once the proceedings, wherein a stay was granted, are dismissed, any interim order granted earlier merges with the final order. In other words, the interim order comes to an end with the dismissal of the proceedings. In such a situation, it is the duty of the Court to put the parties in the same position they would have been but for the interim order of the court, unless the order granting interim stay or final order dismissing the proceedings specifies otherwise. On the dismissal of the proceedings or vacation of the interim order, the beneficiary of the interim order shall have to pay interest on the amount withheld or not paid by virtue of the interim order.”
(underlining supplied) Thus, though the effect of an interim order would come to an end upon the final disposal of the main case that would be subject to the observation to the contrary in the interim order or the final judgment. 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.
13. Jayashankar also contended that insofar as steps under Section 201 of the Act were initiated with reference to the deduction within the State of Kerala, the interim orders issued by the Madras High Court were of no consequence, and hence the appellant cannot seek refuge thereunder. But we are of the opinion 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. Therefore, the afore contention raised is only to be rejected.
14. We also take note of the fact that the Apex Court, by judgment dated 04.11.2022 in Civil Appeal No.8181 of 2022, has found that, as against payments made by the appellant bank to its employees towards LTC, it was bound to deduct tax at source. But this finding was with respect to the Assessment Year 2013-14 (financial year 2012-13). 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.
In the result, this appeal would stand allowed, answering the questions formulated in favour of the assessee and against the revenue.
10. No contrary decision has been brought to our notice. Respectfully following the decision of the Hon’ble Kerala High Court in the assessee’s own case relating to other branches on similar facts, we hold that the issue is squarely covered in favour of the assessee. Consequently, the assessee cannot be treated as an assessee in default or held liable for tax and interest under sections 201(1) and 201(1A) of the Income-tax Act, as assessed by the Assessing Officer and confirmed by the learned CIT(A). We therefore quash the impugned orders and set aside the orders of the lower authorities.
11. Accordingly, all appeals filed by the assessee are allowed.
Order pronounced in the open court on 27th July, 2026.
