SBI Not Assessee-in-Default for LTC TDS Barred by High Court Order: ITAT Mumbai

SBI Bullion Branch Vs ACIT (TDS) (ITAT Mumbai)

Summary: ITAT Mumbai allowed eight appeals filed by State Bank of India and its branches for assessment years 2016-17 and 2017-18, holding that SBI could not be treated as an assessee-in-default under Sections 201(1) and 201(1A) for non-deduction of TDS on Leave Travel Concession payments during the period governed by binding interim directions of the Madras High Court. SBI had initially considered LFC involving foreign stopovers exempt under Section 10(5) and subsequently commenced TDS deduction. However, the Madras High Court, by interim order dated 16.02.2015, clarified that LTC paid or reimbursed pursuant to its order would not constitute income enabling the bank to deduct tax at source. The Tribunal held that SBI was bound to obey that judicial direction and could not lawfully have deducted tax contrary to it. It followed the Kerala High Court ruling in State Bank of India v. CIT and its coordinate Bench ruling in State Bank of India v. ACIT, ITA Nos. 2886 and 2887/Mum/2024. Since the facts of the remaining connected appeals were identical, the same ruling was applied mutatis mutandis. The orders under Sections 201/201(1A) were quashed and all appeals were allowed.

Cases Discussed

• State Bank of India Vs CIT, ITA No. 45 of 2025 (Kerala High Court), decided 18.11.2025 — Followed. The Kerala High Court held that SBI could not be faulted for complying with the Madras High Court’s interim direction restraining deduction of tax; consequently Sections 201(1) and 201(1A) were not attracted during the protected period.
• State Bank of India Vs ACIT, ITA Nos. 2886 & 2887/Mum/2024 (ITAT Mumbai), order dated 30.05.2025 — Followed. The coordinate Bench held that SBI could not be treated as an assessee-in-default because the Madras High Court’s directions dated 16.02.2015 were binding during the relevant period. :chatgpt-content-reference{index=”3″}
• State Bank of India Vs CIT(A), ITA No. 514/Agr/2024 (ITAT Agra) — Followed in the quoted coordinate-Bench ruling. SBI was held bound by the operative Madras High Court interim order and therefore could not be treated as an assessee-in-default for not deducting TDS on the impugned LFC reimbursements.
• All India State Bank Officers Association Vs SBI, 140 Taxmann.com 221 (Madras High Court), decided 14.06.2022 — Discussed in the quoted Agra Bench decision concerning withdrawal of the additional concession permitting SBI officers to travel abroad under LTC and the effect of the earlier interim protection.
• Vodafone Essar Limited, ITA Nos. 6058, 6059 & 6060/Mum/2009 (ITAT Mumbai) — Relied upon in the assessee’s submissions for the proposition that the Assessing Officer should verify whether taxes had already been paid by the respective payees before fastening Section 201 liability upon the deductor.

FULL TEXT OF THE ITAT MUMBAI ORDER

All these appeals are filed by the assessee – State Bank of India and its associates against different orders of the learned Commissioner of Income Tax (Appeals), [“Ld. CIT(A)”], for various assessment years.

2. First, we take up the appeal of the assessee in the case of State Bank of India in ITA No.1382/Mum/2026. The assessee has raised the following grounds:

“1. The Learned Commissioner of Income-tax (Appeals) (“CIT(A)) erred in confirming the order of the Assessing Officer (“AO”) holding the appellant to be an assessee in default for failing to deduct tax at source under section 192 of the Income-tax Act, 1961 (‘the Act).

2. The CIT(A) erred in not appreciating that the Appellant had issued e-Circular no. CDO/P&HRD-PM/7/2014-15 dated 15th April 2014 stating that the employees shall not be entitled to visit overseas countries/ centers as part of leave travel concession (“LT”) which Circular was challenged by the All India State Bank Officers Federation & Ors. before the Madras High Court by way of a writ petition (WP no. 11991 of 2014) and that the Madras High Court had vide its order dated 25th April 2014 granted interim stay of the Circular.

3. The CIT(A) further erred in not appreciating that tax was not deducted at source by the Appellant on the LTC paid to its employees during the year under consideration in view of the specific interim directions issued by the Hon’ble Madras High Court in its order dated 16th February 2015 by which the Court held that the LTC paid or reimbursed would not amount to income and that no tax was to be deducted thereon. The CIT(A) ought to have appreciated that if the LTC was not to be treated as income of the employees as per the order of the Hon’ble Madras High Court, the same even otherwise would not require withholding of tax under section 192 of the Act.

4. The CIT(A) further erred in not appreciating that the Madras High Court vide its said order dated 16th 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 LT amount paid by the Appellant and, therefore, the CIT(A) ought to have quashed the order of the AO holding the Appellant to be an assessee in default.

5. The CIT(A) erred in not quashing the order of the AO 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 deduct tax at source.

7. The CIT(A) erred in observing that the legal obligation to deduct tax was reinstated once the interim order passed by the Hon’ble Madras High Court was vacated without appreciating that the order of the Single Judge of the Hon’ble Madras High Court was challenged before the Division bench and later the Division bench’s order before the Hon’ble Supreme Court and that the Hon’ble Supreme Court in SLP(C) no. 16734 of 2023 has ordered the Appellant bank from not making any recoveries from its employees during the pendency of the petition.

8. Without prejudice to above grounds, the CIT(A) erred in not holding that the Appellant could not have been deemed to be an assessee in default under section 201(1) of the Act if the employee had furnished the return of income, taken into account such sum for computing income and paid the tax due on income declared by the employee.”

3. Ld. Counsel for the assessee, at the outset, submitted that the issue in appeal is squarely covered by the decisions of the Coordinate Benches of various Tribunals, wherein the Tribunal held that the assessee is not in default u/s 201/201(1A) of the Act. Ld. Counsel for the assessee submitted that the assessee had earlier deducted TDS on the LTC paid to its employees; however, due to specific interim directions issued by the Hon’ble Madras High Court in its order dated 16.02.2015 holding that LTC paid or reimbursed to the employees would not amount to income and no tax was liable to be deducted, the assessee was prevented from making TDS and, therefore, should not be treated as an assessee-in-default within the meaning of the provisions of section 201/201(1A) of the Act for non deduction of TDS subsequent to the decision of the Hon’ble Madras High Court.

4. The assessee further made the following elaborate submissions at pages 4 to 8 of the paper book.

“Ground No. 3

The CIT(A) further erred in not appreciating that tax was not deducted at source by the Appellant on the LTC paid to its employees during the year under consideration in view of the specific interim directions issued by the Hon’ble Madras High Court in its order dated 16th February 2015, by which the Court held that the LTC paid or reimbursed would not amount to income and that no tax was to be deducted thereon. The CIT(A) ought to have appreciated that, if the LTC was not to be treated as income of the employees as per the order of the Hon’ble Madras High Court, the same would not require withholding of tax under section 192 of the Act.

Our Submission

SBI was under a bona fide belief that LFC involving a foreign stopover was within the ambit of section 10(5) of the Act and was, therefore, exempt. Subsequently, when several tax notices were received, SBI, after due interaction with the Indian Banks’ Association (IBA) and the Ministry of Finance, took a decision to deduct tax at source on LTC payments. SBI started deducting tax from November 2014 onwards.

However, by interim order dated 16.02.2015, the Hon’ble Madras High Court (Page-12) restrained SBI from deducting tax at source, holding as under:

(a) LTC paid or reimbursed would not amount to income and, therefore, no tax was to be deducted thereon. (Para 6 of page-14)

(b) 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. (Para 6 of page-14)

If SBI had continued to deduct tax at source despite the subsisting court order, such action would have amounted to a violation of the said order and could have exposed SBI to proceedings for contempt of court.

Ground No. 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), wherein 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 Hon’ble Madras High Court directing the Appellant not to deduct tax at source.

Our Submission

1. The Hon’ble Kerala High Court order was passed on 18.11.2025, (Page-69) much after the Hon’ble Supreme Court order dated 04.11.2022.

2. The Hon’ble Kerala High Court has clearly held that the Appellant cannot be faulted for having honoured the stay orders issued by the Hon’ble Madras High Court. (Para- 11, Page-83)

3. Referring to Section 201(1)/201(1A) liability it held:

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. (Para-8 concluding portion, Page-79)

4. Referring to the Hon’ble Supreme Court judgment dated 04.11.2022 the court observed that:

(a) Apex court findings were for AY 2012-13 when the Hon’ble Madras High Court stay was not operative; (Para 14 of Page-85)

and

(b) in the case at hand, the interim directions issued by the Hon’ble Madras High Court governed the field and the Appellant-assessee was justified in not having deducted tax. (Para 14 of Page-85)

5. Attention is further invited to the following judgments passed in favour of SBI after the Hon’ble Supreme Court judgment dated 04.11.2022:

Ground No. 7

The CIT(A) erred in observing that the legal obligation to deduct tax was reinstated once the interim order passed by the Hon’ble Madras High Court was vacated, without appreciating that the order of the Single Judge of the Hon’ble Madras High Court was challenged before the Division Bench and, thereafter, the Division Bench’s order was challenged before the Hon’ble Supreme Court.

Further, the Hon’ble Supreme Court, in SLP(C) No. 16734 of 2023, has restrained the Appellant Bank from making any recoveries from its employees during the pendency of the petition.

Our Submission

1. The Ld. CIT(A) erred in observing that SBI ought to have recovered taxes during the period when the stay stood vacated, i.e., from 24.06.2022 to 08.08.2022 and again from 08.06.2023 to 28.08.2023.2.

2. As per the Hon’ble Madras High Court interim order dated 16.02.2015, 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. (Para-6 of Page-14)

3. When a stay is vacated the protection granted through the interim order ceases and accordingly the assessee is liable to deduct tax for payments made from the date when the stay is vacated. It does not re-state the liability for the past period governed by the interim order.

4. The Ld. CIT(A) ought to have appreciated that:

(a) when the stay was restored on 08.08.2022, the Hon’ble Madras High Court directed that no recovery shall be effected from the salary of the employees and that no coercive proceedings shall be instituted by any authority against them during the pendency of the writ appeal. (Para-7 of Page-37)

(b) when the stay was restored on 28.08.2023 by the Hon’ble Supreme Court, it was mentioned that the petitioner-bank shall not make any recoveries from its employees during the pendency of the present petition. (Para-7 of Page-68)

If the bank had recovered the tax amount, the subsequent intent of the Hon’ble High Court & Hon’ble Supreme court directing non-recovery would have been defeated.

5. The Hon’ble Kerala High Court on the same issue observed as under:

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. (Para-9 of Page-79)

6. Reference is made to Hon’ble ITAT, Jaipur Bench judgment dated 13.03.2025 (ITA No.1391 (A.Y.2016-17)/JPR/2024) in the case of SBI wherein the following observations were made:

(a) The settled principle is that the payer cannot be held liable for payment of the tax demand in cases involving non-deduction of tax at source, and only interest liability under section 201(1A) of the Act, if any, can be levied in such cases. The Coordinate Mumbai Bench, in the case of Vodafone Essar Limited (ITA Nos. 6058, 6059 and 6060/Mum/2009), directed the Assessing Officer to invoke his powers under the Act and verify payment of taxes by the payees from the respective Assessing Officers assessing such payees, with the help of the PANs furnished by the Appellant. In the present case also, the relevant information with respect to the beneficiaries is already available with the Department and, therefore, the ultimate tax liability, if any, lies with the beneficiaries and not with the assessee. (Para-3 of Page-129)

(b) The ultimate charge of tax, by virtue of section 4 of the Act, is cast upon the actual beneficiary of the income. The employer is only an instrumental medium for collection of revenue in the form of TDS. In the present matter, it has not been demonstrated how the Department has proceeded against the beneficiary employees. (Para-4 of Page-130)

(c) The scheme of assessment proceedings cannot be equated with the scheme envisaged under sections 201(1) and 201(1A) of the Act. The liability of the deductor under section 201(1) is not automatic. The Department must verify and bring on record whether action against the beneficiaries has been initiated and whether due taxes have been paid by them. If the deductees have paid taxes, the deductor stands absolved; if not, the deductees remain liable to pay tax under section 4 of the Act. (Para-7 of Page-132)

(d) It is also brought to notice that SLP(C) No. 16734 of 2023 is pending before the Hon’ble Supreme Court, wherein the Hon’ble Supreme Court has restrained the deductor Bank from making any recovery from its beneficiary employees during the pendency of the said SLP. The Commissioner of Income Tax (TDS), Chennai is also a party to the said SLP as Respondent No. 5. Thus, there was a stay operating against the Bank from recovering the amount from its employees. However, there is no corresponding restriction on the Revenue from proceeding against the beneficiary employees. It would be inequitable and unjustified if the beneficiaries, who enjoyed the perquisite, are not proceeded against, while the employer is fastened with the recovery burden. (Para-8 of Page- 132).”

5. The Ld. Counsel for the assessee further, referring to the decision of the Hon’ble Kerala High Court, which is placed at pages 69 to 86 of the paper book, in ITA No.45 of 2025 dated 18.11.2025, submitted that recently the Hon’ble Kerala High Court held that the provisions of section 201/201(1A) are not attracted to the facts and circumstances of the assessee’s case. Ld. Counsel further stated that the appeal against the decision of the Hon’ble Madras High Court, which granted interim stay, is still pending before the Hon’ble Supreme Court for adjudication.

6. Heard rival contentions and perused the orders of the authorities below. We observe that an identical issue came up for consideration before various Benches of the Tribunal, including the Coordinate Bench of Mumbai in the case of State Bank of India vs. ACIT in ITAs No.2886 and 2887/Mum/2024. The Tribunal, vide order dated 30.05.2025, held that the assessee cannot be treated as an assessee-in-default since the directions issued by the Hon’ble Madras High Court on 16.02.2015 were binding on the assessee during the period under consideration. While holding so, the Coordinate Bench observed as under:

“8. We have heard the rival submissions and perused the material placed before us. We have also gone through various decisions of the coordinate benches cited by the assessee for the same assessment year, i.e. AY 2016-17. Specifically, in the case of State Bank of India v/s CIT(A) in ITA No.514/Agr/2024, it has been held by the coordinate bench at Agra as under:

4. At the same time, it could be seen that the impugned payments pertain to LTC granted by assessee bank for the period 15-02-2016 to 24-02-2016 when the operation of interim order dated 16-02-2015 of Hon’ble High Court of Madras was in operation, the relevant portion of which read as under: –

“6. 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 the 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 the bank.”

The Hon’ble Court thus restrained the assessee bank not to deduct tax at source on such reimbursement. Finally, the decision has been rendered by Hon’ble High Court of Madras in case titled as All India State Bank Officers Association us. SBI (140 Taxmann.com 221; dt. 14-06-2022) holding that withdrawal of additional facility would not infringe services rights or service conditions of officers of respondent bank and therefore, there was no perversity in respect of decision taken for withdrawal of additional concession granted to officers of respondent bank to travel abroad under LTC. It is thus clear that at the time of impugned payments, the interim order of Hon’ble High Court of Madras was in force which assessee bank was bound to follow. We concur that assessee bank had no option but not to deduct TDS on such reimbursements as per the interim order of Hon’ble Madras High Court. The directions given by the Hon’ble High Court were binding on the assessee and had the assessee deducted tax at source on impugned payment, it would have been contrary to the orders of Hon’ble High Court which could have amounted to contempt of court order. Finally, the decision in the aforesaid case has been rendered by Hon’ble High Court on 14-06-2022. Under these circumstances, we would hold that assessee bank, by interim order of Hon’ble High Court of Madras, 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. We order so. The impugned demand as raised against the assessee stand deleted.”

9. As the facts in the present case are identical, respectfully following the above decision of the coordinate bench, we hereby hold that the assessee cannot be treated as ‘assessee in default’, as directions of the Hon’ble High Court of Madras issued vide order dated 16.02.2015 were binding on the assessee during the period under consideration. Accordingly, the demand raised by Ld. AO against the assessee u/s 201(1)/201(A) is without any justification and is hereby deleted. Accordingly, the appeal of the assessee is allowed.”

7. The facts being identical in the present case, respectfully following the above decision of the Coordinate Bench, we hold that the assessee is not in default within the meaning of the provisions of section 201/201(1A), and accordingly, the order passed by the Assessing Officer u/s 201/201(1A) is hereby quashed.

8. In the result, the appeal of the assessee is allowed.

ITA No.1565/Mum/2026 (A.Y.2016-17)
ITA No.1566/Mum/2026 (A.Y. 2017-18)
ITA No.1569/Mum/2026 (A.Y. 2017-18)
ITA No.1570/Mum/2026 (A.Y. 2016-17)
ITA No.1572/Mum/2026 (A.Y. 2017-18)
ITA No.1803/Mum/2026 (A.Y. 2017-18)
ITA No.1802/Mum/2026 (A.Y. 2016-19)

9. The issue in the above appeals is identical to the issue decided by us in ITA No.1382/Mum/2026. Since the facts are identical, the decision taken therein shall apply mutatis mutandis to the appeals of the assessee in ITA No.1565/Mum/2026 (A.Y. 2016-17), ITA No.1566/Mum/2026 (A.Y. 2017-18), ITA No.1569/Mum/2026 (A.Y. 2017-18), ITA No.1570/Mum/2026 (A.Y. 2016-17), ITA No.1572/Mum/2026 (A.Y. 2017-18), ITA No.1803/Mum/2026 (A.Y. 2017-18), and ITA No.1802/Mum/2026 (A.Y. 2016-19). We order accordingly.

10. In the result, all the appeals of the assessee are allowed.

Order pronounced in the open Court on 30/06/2026