State Bank of India Vs ITO (ITAT Rajkot)
Employer Cannot Be Penalised for Obeying a High Court: SBI Not an Assessee-in-Default for Non-Deduction of TDS on Foreign-Leg LFC
The Rajkot ITAT has held that State Bank of India could not be treated as an assessee-in-default u/s 201(1) for not deducting TDS on Leave Fare Concession payments involving foreign travel where, during the relevant period, the bank was acting in obedience to a binding interim order of the Madras High Court.
The subsequent Supreme Court decision holding that LFC involving a foreign leg was not exempt u/s 10(5) could settle the taxability of the payment but could not retrospectively convert SBI’s compliance with the prevailing judicial order into a TDS default. Consequently, the demands raised u/s 201(1) & 201(1A) and the connected penalty u/s 271C were deleted.
The four appeals were filed by different branches of SBI and related to AYs 2016-17 & 2017-18. The disputes arose from orders treating the respective branches as assessees-in-default for failure to deduct tax u/s 192 from LFC reimbursements paid to employees who undertook journeys involving a foreign destination or foreign leg.
The Supreme Court, by its decision dated 04.11.2022 in State Bank of India v. ACIT – Civil Appeal No. 8181 of 2022, held that once an employee undertakes travel involving a foreign leg, the journey cannot be regarded as travel “within India.” Consequently, such reimbursement does not fall within the exemption available u/s 10(5).
The Supreme Court further held that the employer must apply its mind while estimating an employee’s taxable salary and discharge its obligation to deduct tax at source u/s 192. Following the judgment, the Department collected information regarding SBI employees who had availed LFC involving foreign travel and initiated proceedings u/s 201.
The AO held that SBI ought to have deducted tax from the impugned payments. The branches were consequently treated as assessees-in-default u/s 201(1), interest was charged u/s 201(1A), and penalty proceedings u/s 271C were also pursued in the connected matters.
SBI did not dispute the legal position ultimately declared by the Supreme Court regarding the non-availability of exemption u/s 10(5). Its defence was founded upon the peculiar legal position prevailing during the years in question.
SBI had challenged the taxability issue before the Madras High Court in WP No. 11991 of 2014. By an interim order dated 16.02.2015, the High Court clarified that the LFC payments would not amount to income in the hands of the employees so as to enable the bank to deduct tax at source. The order further provided that if the writ petition was ultimately dismissed, the concerned employees would become liable to pay tax on the amounts received.
Therefore, during the relevant previous years, SBI was not merely proceeding on its own interpretation of Section 10(5). It was acting under an express judicial direction which treated the LFC payments as not requiring deduction of tax at source.
The Tribunal observed that an employer can be treated as an assessee-in-default u/s 201(1) only when a legal obligation to deduct tax exists and the employer fails to comply with that obligation. In the present case, the ordinary obligation under Section 192 stood eclipsed by the binding interim order of the Madras High Court.
The bank, being a party to the proceedings, was duty-bound to comply with the order. Had it deducted tax contrary to the interim direction, it could have exposed itself to the allegation of disobedience of the Court’s order. Conduct mandated by a judicial order could not subsequently be characterised as a statutory default.
The Tribunal followed its earlier decision in State Bank of India – ITA No. 771/Rjt/2026, order dated 11.06.2026, which in turn followed the Ahmedabad ITAT ruling in SBI’s own case in ITA No. 365/Ahd/2026 dated 09.04.2026 and State Bank of India, Bhavnagar v. ITO – ITA Nos. 453 & 454/Ahd/2026 dated 26.03.2026.
The earlier Benches had also relied upon the decision of the Agra ITAT in State Bank of India – ITA No. 514/Agr/2024, where it was held that SBI could not be treated as an assessee-in-default because it had no option but to comply with the interim directions of the Madras High Court.
More importantly, the Kerala High Court in State Bank of India v. CIT, ITA No.45 of 2025, order dated 18.11.2025, held that Section 201 becomes applicable only where the employer had a liability to deduct tax and nevertheless failed to do so. Since the interim judicial order treated the LFC payment as not constituting income requiring TDS, SBI was under an obligation not to deduct tax during the relevant period.
The Rajkot ITAT found no change in the factual matrix or legal position warranting a different conclusion. It accordingly held that SBI could not be treated as an assessee-in-default u/s 201(1). Once the principal demand failed, the consequential interest charged u/s 201(1A) also could not survive.
In ITA No. 852/Rjt/2026, the dispute concerned penalty imposed u/s 271C. Since the underlying TDS default itself was deleted, the Tribunal held that the penalty had no legs to stand on and deleted it. All four appeals filed by the respective SBI branches were allowed.
Author’s Comment
The decision draws an important distinction between the taxability of the employee’s receipt and the employer’s liability as an assessee-in-default.
The Supreme Court has conclusively held that LFC involving a foreign leg does not qualify for exemption u/s 10(5). Therefore, the employee’s substantive tax liability may continue in accordance with law. However, it does not automatically follow that SBI committed a TDS default during years when a binding High Court order specifically directed it not to deduct tax.
Section 192 requires an employer to make a bona fide estimate of taxable salary. Ordinarily, an employer who incorrectly treats a taxable component as exempt may face proceedings u/s 201. The present case is exceptional because non-deduction was not based merely on SBI’s internal interpretation or administrative convenience; it resulted from compliance with an operative judicial direction.
A later judgment declaring the correct legal position generally applies to the issue decided. Yet it would be plainly inequitable to penalise a party for conduct that the Court had expressly required during the intervening period. Obedience to a subsisting judicial order cannot be retrospectively labelled disobedience of the tax law.
The ruling must therefore be applied within its factual limits. It does not grant a general exemption from TDS on foreign-leg LFC, nor does it erase the employee’s possible tax liability. It protects SBI from Sections 201, 201(1A) & 271C for the period during which the interim judicial protection governed its conduct.
The principle is simple: a later Supreme Court ruling may determine what was taxable, but it cannot punish an employer for having obeyed the High Court when the deduction was due.
Cases Discussed
- State Bank of India v. Assistant Commissioner of Income-tax, Civil Appeal No. 8181 of 2022
- State Bank of India v. CIT, ITA No.45 of 2025
- State Bank of India, ITA No.514/Agr/2024
- State Bank of India, ITA No.771/Rjt/2026
- State Bank of India, Bhavnagar v. ITO, ITA Nos.453 & 454/Ahd/2026
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT RAJKOT
1. Captioned four appeals filed by different assessees, pertaining to assessment year 2016-17 and 2017-18, are directed against the separate orders passed by the Commissioner of Income Tax (Appeals), which in turn arise out of separate orders passed by the Assessing Officer (in short ‘AO’) u/s.201(1) and 201(1A) and penalty appeal u/s 271C of the Income Tax Act, 1961.
2. When these appeal were called out for hearing, the Ld. Counsel for the assessee invited my attention towards the decision of the Hon’ble ITAT, Rajkot Bench in the case of State Bank of India in ITA No.771/Rjt/2026 for AY 2017-18, vide order dated 11.06.2026. The Ld. Counsel submitted that present four appeals are squarely covered by the above said judgement of the Tribunal. A copy of the judgement was also placed before the Bench.
3. On the other hand, the Learned DR for the revenue relied on the findings of the Ld. CIT(A).
4. I have heard both the parties. I see no reason to take any other view of the matter then the view so taken by the Hon’ble ITAT, Rajkot Bench in the case of State Bank of India in ITA No.771/Rjt/2026 for AY 2017-18, vide order dated 11.06.2026. In this order, the Tribunal has inter alia observed as under:
6. We have heard, rival submissions and perused the material available on record. We find that the issue involved in the present appeal in identical and issue considered by the coordinate bench of Ahmedabad Bench in the assessee’s own case in ITA No.365/Ahd/2026, dt. 09.04.2026. For seeking up ready reference the authority portion of the said order is reproduced as under:
The facts of the case are that assessee, M/s. State Bank Of India (TAN: BRDS034528), is a banking branch of M/s. State Bank of India (SBI), which is engaged in the banking business. The Hon’ble Supreme Court, vide order dated 04.11.2022 in Civil Appeal No. 8181 of 2022, held that once an employee undertakes travel involving a foreign leg, such travel cannot be regarded as travel “within India” and, therefore, does not fall within The ambit of section 10(5) of the Act. The Court further held that it is incumbent upon the employer to apply its mind and discharge its statutory obligation under section 192(1) of the Act by deducting tax at source. In view of the above decision of the Hon’ble Apex Court, information was obtained regarding employees who had availed Leave Fare Concession (LFC) during the relevant period, in Uo instant case, in order to verify the correctness of the TDS liability and compliance with the TDS provisions of the appellant, the Assessing Officer (AO) initiated proceedings under section 201(1) of the Act. Consequently, vide order passed under sections 201 and 201(1A) dated 31.03.2023, the AO held the appellant to be an “assessee in default for non-deduction of TDS on an amount of Rs. 20,69,011/-
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 appeals 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 Coordinate 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 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.”
“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 Coordinate 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.
5. I note that appeal in ITA No.814/Rjt/2026, is quantum appeal, pertaining to assessment year 2016-17, wherein the order u/s 201(1), 201(1A) was made therefore it is squarely covered in favour of the assessee by the above said judgment.
6. The appeal in ITA No.852/Rjt/2026 pertains to penalty u/s 271C of the Act. Since, the quantum appeal has been allowed by me therefore penalty imposed in appeal in ITA No.852/Rjt/2026 does not have leg to stand, and therefore, will not survive, hence penalty is deleted.
7. In the result, appeals filed by the assessee (in ITA No.813/Rjt/2026, in ITA No.814/Rjt/2026, in ITA No.852/Rjt/2026 & in ITA No.853/Rjt/2026) are allowed.
Order is pronounced in the open Court on 11/09/2026.
