State Bank of India Vs ITO (ITAT Agra)
No TDS Default for Following Binding Court Direction: ITAT Allows SBI’s LFC Appeal
Introduction
The Agra Bench of the Income Tax Appellate Tribunal (ITAT) allowed State Bank of India’s appeal against a demand of ₹1,43,968 under sections 201(1) and 201(1A) concerning non-deduction of tax on employees’ Leave Fare Concession reimbursements involving foreign travel.
The Tribunal held that the bank could not be treated as an assessee in default when its conduct was governed by a binding interim direction of the Madras High Court.
It distinguished the substantive taxability of the reimbursement from the bank’s liability as a tax deductor. A subsequent judicial declaration of taxability could not retrospectively turn compliance with an operative court direction into a statutory default.
Background of the Dispute
A TDS survey conducted on 7 March 2019 revealed that the bank had reimbursed Leave Fare Concession expenses to employees whose journeys included travel to foreign countries.
The disputed payment was made on 23 July 2014, without deduction of tax at source.
The Assessing Officer issued notices under sections 201(1) and 201(1A). According to the order, the bank did not comply with those notices.
The Assessing Officer consequently treated the bank as an assessee in default and raised a total demand of ₹1,43,968 through an order dated 29 March 2022.
The CIT(A), by an order dated 1 July 2026, dismissed the bank’s appeal and sustained the demand. The bank then approached the Tribunal.
Bank Challenges Appellate Order
The bank’s grounds alleged that the CIT(A) had failed to properly adjudicate its objections, consider written submissions and documentary evidence, and provide reasons addressing the issues raised.
It also questioned whether the statutory conditions for treating it as an assessee in default had been satisfied.
Although no representative appeared for the bank before the Tribunal, the Bench examined the record and heard the Revenue’s representative.
The Tribunal identified the central issue as whether the bank could be held in default for short deduction on LFC reimbursements during the operation of the Madras High Court’s interim directions.
Revenue Relies on Supreme Court’s Taxability Ruling
The Revenue relied on the Supreme Court’s judgment dated 4 November 2022 in State Bank of India vs. ACIT, Civil Appeal No. 8181/2022.
That judgment, concerning Assessment Year 2013-14, held against the bank on the tax treatment of LFC reimbursements involving foreign travel.
The Revenue therefore sought dismissal of the appeal.
However, the Tribunal considered that the present dispute required examination of an additional factor: the judicial directions governing the bank during the period of the disputed payment.
Effect of Madras High Court’s Interim Directions
The Tribunal discussed the Madras High Court’s interim order dated 25 April 2014 and the subsequent directions dated 16 February 2015.
The litigation concerned bank circulars restricting overseas travel as part of leave travel facilities.
As reproduced in the Tribunal’s discussion of precedent, the February 2015 direction stated that the relevant reimbursement would not be treated as income enabling the bank to deduct tax at source. It also provided that employees would bear the tax liability if the writ petition failed.
The Agra Bench found that the payment made on 23 July 2014 fell within the period when the bank was governed by the earlier interim protection.
It accordingly treated the bank as judicially bound in relation to the disputed reimbursement.
Taxability and Deductor Default Are Separate Questions
The Tribunal relied extensively on the Mumbai Bench’s consolidated order dated 3 September 2026, which examined the same controversy.
That decision recognised that foreign-leg LFC reimbursements were not exempt under section 10(5). Nevertheless, it distinguished that conclusion from liability under section 201.
The relevant reasoning was that a person expressly restrained by a judicial direction from deducting tax could not simultaneously be faulted for complying with that direction.
This did not create a general reasonable-cause defence under section 201. Instead, it concerned whether an enforceable deduction obligation could be treated as breached while the judicial restraint operated.
Subsequent Judgment Cannot Retrospectively Create Default
The Agra Bench agreed that the Supreme Court’s subsequent declaration of substantive taxability could not retrospectively convert obedience to a binding judicial command into default.
It also noted the Kerala High Court’s examination of the same distinction in State Bank of India vs. CIT, ITA No. 45 of 2025.
As discussed in the order, the Kerala High Court distinguished the Supreme Court ruling by reference to the assessment year and operation of the interim directions.
The Tribunal followed this reasoning and the Mumbai Bench’s detailed consideration of the issue.
Final Outcome
The Tribunal held that SBI could not be treated as an assessee in default under section 201(1) for the disputed LFC payment in Assessment Year 2015-16.
Consequently, interest under section 201(1A) also could not survive.
The bank’s appeal was allowed. The relief concerned its liability as a deductor under the operative judicial protection; it did not grant substantive exemption to foreign-travel LFC reimbursements or decide the employees’ tax liability.
Cases Discussed
- State Bank of India Vs ACIT (Supreme Court); Civil Appeal No. 8181/2022; 04/11/2022: Held that LFC involving a foreign leg does not qualify for exemption under Section 10(5). The Agra Bench distinguished the subsequent-year deductor-default question.
- State Bank of India — Consolidated Appeals (ITAT Mumbai); ITA No. 1387/Mum/2026 and 38 other matters; 03/09/2026: Followed for the distinction between substantive taxability and deductor default under an operative judicial direction.
- State Bank of India Vs ACIT (ITAT Mumbai); ITA Nos. 2886 and 2887/Mum/2024; 30/05/2025: Relied upon in the reproduced coordinate-bench reasoning concerning compliance with the Madras High Court’s interim directions.
- State Bank of India Vs ITO (TDS) (ITAT Chennai); ITA No. 1465/Chny/2024; 27/06/2025: Adverse decision considered and distinguished in the Mumbai Bench’s reasoning reproduced by the Agra Tribunal.
- State Bank of India Vs CIT (Kerala High Court); ITA No. 45/2025; 18/11/2025; [2025] 180 taxmann.com 837: Held that Sections 201(1) and 201(1A) were not attracted where the bank was prevented from deducting tax by the Madras High Court’s interim directions.
- State Bank of India — Connected Appeals (ITAT Chennai); ITA Nos. 938, 939, 940 and 942/Chny/2026; 30/06/2026: Followed the Kerala High Court’s approach and allowed the bank’s appeals.
- State Bank of India — Connected Appeals (ITAT Chennai); ITA No. 734/Chny/2026 and connected appeals; 19/08/2026: Contrary decision considered and distinguished in the Mumbai Bench’s reproduced reasoning.
- All India State Bank Officers Association Vs SBI (Madras High Court); 140 taxmann.com 221: Litigation concerning the withdrawal of overseas LTC facilities and the interim directions governing the bank.
FULL TEXT OF THE ORDER OF ITAT AGRA
This appeal is directed against the impugned order dated 01.07.2026 passed in appeal No NFAC/2013-14/10123304by the ld. Commissioner of Income Tax, Appeal/ ADDL/JCIT (A)-6 KOLKATA [(hereinafter referred to as the “CIT(A)] u/s. 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) for the A.Y. 2015-16, wherein, ld CIT(A) has dismissed assessee’s appeal, confirming the addition of Rs. 1,43,968/- made vide assessment order dated 29.03.2022 passed u/s 201(1) and 201(1A) of the Act.
2. The brief facts of the case are that the assessee is a public sector bank(SBI). A TDS survey was conducted by the department at the premises of the assessee on 07.03.2019. It came to the notice of the assessing officer that the assessee, while reimbursing the cost of LFC to its employees, who had travelled to foreign countries, did not deduct TDS, while making payment on 23.07.2014. Show cause notices u/s 201(1) and 201(1A) of the Act were issued and served upon the assessee, however the assessee failed to comply. Therefore, the assessing officer held the assessee to be in default for not deducting TDS and raised a total demand of Rs. 1,43,968/-, vide assessment order dated 29.03.2022 passed u/s 201(1) and 201(1A) of the Act
3. Aggrieved, assessee preferred an appeal before ld CIT(A), who dismissed assessee’s appeal.
4. Assessee has preferred this second appeal mainly on the following grounds:
“(1) That the learned Commissioner of Income Tax (Appeals) (C IT (A)) has erred both in law and on facts in passing the impugned order under section 250 of the Income tax Act, 1961, dated 01-07-2026 without properly adjudicating and deciding all the grounds of appeal raised by the Appellant against the order passed under section 201(1) of the Act.
(2) That the learned CIT(A) has erred in law and on facts in not considering the written submission,explanations and documentary evidence filed by the appellant in support of the grounds of appeal and has passed the impugned order without dealing with the material facts and evidence placed on record.
(3) That the learned CIT(A) has erred in law and on facts in not considering and adjudicating Grounds of the Appeal, wherein the appellant had specifically challenged the legality and validity of the order passed under section 201(1),
despite the said ground being specifically raised and argued before the learned CIT (A).
(4) That the learned CIT(A) has erred in law and on facts in not recording any finding on the specific prayer made by the Appellant that the demand raised under section 201(1) be deleted/quashed, although the said prayer was specifically made before the appellate authority.
(5) That the impugned order is contrary to the mandatory requirements of section 250(6) of the Income Tax Act, 1961 in as much as the learned CIT(A) has failed to state and adjudicate all the points arising for determination and has failed to give reasons for not accepting the grounds and submissions of the appellant.
(6) That the learned CIT(A) has erred in law by confirming the order under section 201(1) without independently examining the specific objections raised by the appellant against the finding of the Assessing Officer (TDS).
(7) That the learned CIT(A) has erred in law and on facts in confirming the demand under section 201(1) without examining whether the statutory conditions necessary for treating the appellant as an assesses in default were actually satisfied.
(8) That the learned CIT(A) has erred in passing in law and on facts in confirming the order of the Assessing Officer without dealing with the specific legal submissions and judicial precedents relied upon by the appellant.
(9) That the Learned CIT(A) has erred in passing a non-speaking and incomplete appellate order, inasmuch as material grounds of appeal raised by the appellant have neither been adjudicated nor rejected by the recording any cogent or legally sustainable reasons.
(10) That the failure of the learned CIT(A) to adjudicate each specific ground of appeal has resulted in denial of an effective appellate remedy to the appellant and is contrary to the principle of natural justice.
(11) That the learned CIT(A) ought to have independently examined the entire matter arising from the order under section 201(1) and ought not to have confirmed the demand merely by relying upon the findings of the Assessing officer without dealing with the appellant’s specific objections.
(12) That the learned CIT(A) has erred in not granting the specific relief prayed for by the appellant, despite the appellant having placed all relevant facts, documents and legal submissions on record.
(13) That the appellant craves leave to add, amend, alter, modify, substitute or withdraw any of the grounds of appeal at or before the time of hearing.
(14) That the learned CIT(A) has further failed to consider the specific prayer of the appellant as contained in the memorandum of appeal/written submission dated 09-04-2026 vide Acknowledgement Number: -736778451190426, whereby the appellant had prayed for opportunity of personal hearing.
(15) That in view of the aforesaid failure to adjudicate the specific grounds and prayer, the matter may kindly be restored to the file of learned CIT(A) with a direction to adjudicate each ground and prayer on merits after considering the written submission and evidence filed by the appellant, or alternatively, the Hon’ble Tribunal may kindly adjudicate the grounds on merits on the basis of the material available on records.”
5. We have perused the records. None responded for the appellant assessee. Heard ld Sr (DR) for the respondent revenue.
6. The small issue involved before us is as to whether the assessee bank can be treated as assessee in default u/s 201(1) and 201(1A) for short deduction of tax from the employee’s LFC reimbursements on journey to foreign leg during the period when the interim directions dated 25.04.2014 r.w. 16.02.2015 issued by the Hon’ble Madras High Court were operative?
7. None responded for the assessee bank.
8. Ld DR has submitted that Hon’ble Supreme Court, vide order dated 04.11.2022, passed in State Bank of India v. ACIT, Civil Appeal No. 8181/2022 (arising out of SLP(C) No. 9876 of 2020) for (A.Y. 2013-14), held that the assessee bank was in default for not deducting tax at source while releasing payments to its employees as Leave Fare Concession (LFC). Ld Sr DR prayed to dismiss assessee’s appeal.
9. It is pertinent to mention that Hon’ble Madras High Court, vide order 25.04.2014 passed in MP No. 2 of 2014 in WP No. 11991 of 2014, granted an interim stay order until 12.06.2014 in respect of the impugned circular dated 07.04.2014 r/w e-circular dated 15.04.2014 issued by the respondent/State Bank of India, which directed that the officers/ employees shall not be entitled to visit overseas countries/centres as part of LTC/HTC. The conditional interim stay was further extended till the disposal of writ petition vide order dated 16.02.2015 with the direction that if the writ petition is dismissed, the employees shall be liable to pay tax on the amount paid by the bank. The said writ petition was however dismissed on 24.06.2022. This order was challenged before the division bench of the Madras high Court in writ appeal no. 1653/2022 and CMP Nos. 11323 and 23230 of 2022. The DB of Madras High Court, vide order dated 08.06.2023, set aside the order dated 24.06.2022 passed by ld Single Judge of the Madras High Court and the matter was remanded to the respondent bank authorities for fresh consideration after affording opportunity of hearing to the appellant bank officers federation etc. This order was challenged by the bank before the Supreme Court in SLP(C) No. 16734/2023.The Apex Court, vide order dated 08.06.2023, directed that the petitioner bank shall not make any recoveries from its employees during the pendency of the present petition. In another SLP (C) 26667/2024 filed on behalf of the bank, the Apex court, vide order dated 02.12.2024, stayed the demand notices issued by the department of Income Tax till next date of hearing and this SLP was directed to be tagged with SLP(C) No. 16734/2023 and is still said to be pending before the Hon’ble Supreme Court.
10. The present appeal is related to A.Y. 2015-16. We note that the similar issue was also involved before the Mumbai bench of this tribunal, which vide consolidated order dated 03.09.2026, passed in ITA No. 1387/Mum/2026 + 38 Other matters has held as under:
“62. We have considered the rival submissions, the written submissions filed by the learned DR, the orders of the authorities below and the decisions placed on record by both sides. The substantive question whether LFC reimbursement involving a foreign leg qualifies for exemption under section 10(5) is no longer open for examination. The Hon’ble Supreme Court, in the assessee’s own case, has held that such reimbursement does not qualify for exemption and that tax is deductible under section 192.
63. The controversy before us is, however, narrower. It is whether the assessee can be treated as an assessee in default under sections 201(1) and 201(1A) for not deducting tax from LFC reimbursements during the period when the interim directions dated 16.02.2015 of the Hon’ble Madras High Court were operative.
64. The relevant portion of the interim directions of the Hon’ble Madras High Court, as reproduced in the orders placed before us, reads as under:
“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.”
65. The aforesaid direction did more than merely stay recovery of tax. It expressly regulated the manner in which the assessee was required to treat the LFC reimbursement for the purpose of deduction of tax at source. It directed that the payment would not be treated as income so as to enable the assessee-bank to deduct tax at source. It further provided that, if the writ petition ultimately failed, the liability to pay tax would rest upon the concerned employees.
66. We agree with the learned DR that an interim judicial order does not amend section 10(5) or create a substantive statutory exemption. The LFC reimbursements involving a foreign leg continued to possess the substantive character subsequently declared by the Hon’ble Supreme Court. However, the substantive taxability of the reimbursement and the liability of the assessee as a deductor under section 201 are separate questions.
67. Section 201(1) operates where a person who is required to deduct tax fails to deduct it. During the period governed by the interim direction, the assessee was expressly restrained from treating the reimbursement as income for the purpose of deducting tax at source. The assessee could not simultaneously comply with the judicial direction and deduct tax under section 192. Compliance with one obligation would necessarily have resulted in breach of the other.
68. The present conclusion does not import a general defence of reasonable cause into section 201. We accept the Revenue’s submission that section 201 does not contain a general reasonable-cause exception comparable to section 273B. Our conclusion rests upon the anterior question whether the assessee could, during the subsistence of the judicial direction, be regarded as having failed to perform an enforceable obligation to deduct tax. A person judicially restrained from deducting tax cannot be said to have failed to deduct tax within the meaning contemplated under section 201(1).
69. We also accept that the judgment of the Hon’ble Supreme Court declaring the correct interpretation of section 10(5) was not prospective. Nevertheless, a subsequent declaration of the substantive legal position cannot retrospectively convert an act performed in obedience to a binding judicial command into a statutory default. The judgment of the Hon’ble Supreme Court determined the taxability of the reimbursement. It did not decide the distinct consequence of a deductor having acted during a later assessment year under an operative judicial direction which expressly restrained deduction.
70. The judgment of the Hon’ble Supreme Court concerned assessment year 2013-14, when the interim direction dated 16.02.2015 was not in existence. The present appeals relate to assessment years 2016-17 and 2017-18. The material distinction is, therefore, not the date on which the Hon’ble Supreme Court pronounced its judgment, but the existence of the specific interim direction governing the conduct of the assessee during the relevant previous years.
71. The learned DR submitted that the assessee was required to establish, payment by payment, that each LFC reimbursement fell within the scope and operative period of the interim order. In principle, there can be no dispute with this proposition. Judicial protection can operate only to the extent of its terms, duration and subject matter.
72. In the present appeals, however, the Revenue has not identified any particular reimbursement pertaining to assessment years 2016-17 or 2017-18 which was paid outside the operative period of the interim direction dated 16.02.2015. Nor has any intervening order applicable during the relevant previous years been brought to our notice whereby the direction not to deduct tax had been modified or vacated.
73. The Revenue has referred to periods from 24.06.2022 to 08.08.2022 and from 08.06.2023 to 28.08.2023, when, according to it, no active stay operated. Those periods fall several years after the previous years relevant to the present appeals. A temporary cessation or modification of protection in 2022 or 2023 cannot retrospectively create a default in relation to payments made during previous years 2015-16 and 2016-17 when the interim direction dated 16.02.2015 governed the parties.
74. Thus, while we accept the necessity of correlating judicial protection with the relevant payments, the assessment years and chronology contained in the record establish that the impugned reimbursements were governed by the interim direction. No contrary payment-specific material has been brought on record by the Revenue.
75. The chronological position of the relevant judicial decisions is as follows:
| Date | Authority and case | A.Y. | Outcome relevant to the present controversy |
|---|---|---|---|
| 04.11.2022 | Hon’ble Supreme Court in State Bank of India v. ACIT, Civil Appeal No. 8181 of 2022 | 2013-14 | LFC involving a foreign leg not exempt under section 10(5) |
| 27.06.2025 | Chennai Bench in State Bank of India v. ITO (TDS), ITA No. 1465/Chny/2024 | 2015-16 | Assessee treated as an assessee in default |
| 18.11.2025 | Hon’ble Kerala High Court in State Bank of India v. CIT, ITA No. 45 of 2025, reported in [2025] 180taxmann.com 837 (Kerala) | 2016-17 | Sections 201(1) and 201(1A) held inapplicable during the period governed by the Madras High Court direction |
| 30.06.2026 | Mumbai Bench in ITA No. 1832/Mum/2026 and connected appeals | 2016-17 and 2017-18 | Appeals allowed and orders under sections 201(1) and 201(1A) quashed |
| 30.06.2026 | Chennai Bench in ITA Nos. 938, 939, 940 and 942/Chny/2026 | 2016-17 and 2017-18 | Appeals allowed by following the Kerala High Court |
| 28.07.2026 | Mumbai Bench in ITA No. 2453/Mum/2026 and connected appeals | 2016-17 and 2017-18 | Appeals allowed by following the earlier Mumbai Bench |
| 19.08.2026 | Chennai Bench in ITA No. 734/Chny/2026 and connected appeals | 2016-17 and 2017-18 | Substantive liability under section 201 sustained. |
76. In ITA No. 1832/Mum/2026 and connected appeals, the Coordinate Bench, after considering the earlier decisions and the interim directions of the Hon’ble Madras High Court, recorded the following operative finding:
“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.”
77. Before reaching to such findings the Co-ordinate Bench considered various judicial precedents as –
5. The Ld. Counsel for the assessee further, referring to thedecision of the Hon‟ble Kerala High Court, which is placed at pages69 to 86 of the paper book, in ITA No.45 of 2025 dated18.11.2025, submitted that recently the Hon‟ble Kerala High Courtheld that the provisions of section 201/201(1A) are not attractedto the facts and circumstances of the assessee‟s case. Ld. Counselfurther stated that the appeal against the decision of the Hon‟bleMadras High Court, which granted interim stay, is still pendingbefore the Hon‟ble Supreme Court for adjudication.
6. Heard rival contentions and perused the orders of theauthorities below. We observe that an identical issue came up forconsideration before various Benches of the Tribunal, including theCoordinate Bench of Mumbai in the case of State Bank of India vs.ACIT in ITAs No.2886 and 2887/Mum/2024. The Tribunal, videorder dated 30.05.2025, held that the assessee cannot be treatedas an assessee-in-default since the directions issued by the Hon‟bleMadras High Court on 16.02.2015 were binding on the assesseeduring the period under consideration. While holding so, theCoordinate Bench observed as under:
“8. We have heard the rival submissions and perused the materialplaced before us. We have also gone through various decisions ofthe coordinate benches cited by the assessee for the sameassessment year, i.e. AY 2016-17. Specifically, in the case of StateBank of India v/s CIT(A) in ITA No.514/Agr/2024, it has been heldby 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 15-02-2016to 24-02-2016 when the operation of interim order dated 16-02-2015of 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 (140Taxmann.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.”
78. The subsequent Co-ordinate Bench in ITA No. 2453/Mum/2026 and connected appeals examined the distinction between the substantive taxability of the LFC reimbursement and the default of the assessee as a deductor. The relevant findings read as under:
32. The fact that the Hon‟ble Supreme Court subsequently settled the substantive issue relating to exemption under section 10(5) against the assessee does not alter the position obtaining during the period when the binding interim order governed the parties. The issue of substantive taxability of the reimbursement and the issue whether the assessee could be declared an assessee in default for obeying a subsisting judicial order operate in distinct fields. The subsequent declaration of the correct legal position cannot retrospectively convert an act performed in obedience to a binding judicial direction into a default under section 201(1).”
“35. The facts of the present appeals are, therefore, materially identical to those considered by the Co-ordinate Bench in ITA No. 1832/Mum/2026 and connected appeals. No distinguishing feature has been brought to our notice. The learned Departmental Representative also agreed that the issue stood covered by the decisions of the Co-ordinate Benches.
36. Respectfully following the aforesaid decision of the Co-ordinate Bench, we hold that the assessee cannot be treated as an assessee in default under section 201(1) in respect of the impugned LFC reimbursements. Consequently, the interest charged under section 201(1A), being consequential to the default contemplated under section 201(1), cannot survive.
37. Accordingly, the orders passed by the Assessing Officers under sections 201(1) and 201(1A), as sustained by the learned CIT(A), are set aside and the demands raised in all the appeals are deleted.”
79. The Chennai Bench, in SBI Coimbatore Branch and connected appeals v. ACIT/ITO (TDS), ITA Nos. 938, 939, 940 and 942/Chny/2026, also considered the judgment of the Hon’ble Supreme Court and the intervening judicial directions. In paragraph 9, the Co-ordinate Bench noted that there was no dispute regarding the subsequent judgment of the Hon’ble Supreme Court holding that LFC reimbursement involving foreign travel was not exempt under section 10(5). It, however, found that during the previous years relevant to assessment years 2016-17 and 2017-18, the assessee was governed by the binding directions of the Hon’ble Madras High Court not to recover tax from the employees on such payments. The Bench further observed that, although the Hon’ble Supreme Court subsequently stayed the judgment of the Hon’ble Madras High Court, it specifically directed the assessee-bank not to make recoveries from its employees during the pendency of the proceedings. Considering that the obligation under section 192 was required to be determined at the time of payment on the basis of a bona fide estimate of the employee’s income, the Bench held that the subsisting judicial directions precluded the assessee from deducting tax during the relevant period. Following the judgment of the Hon’ble Kerala High Court in the assessee’s own case on identical facts, the Bench concluded as under:
“10. In view of the above legal position, we are of the considered opinion that the appellant bank cannot be treated as „assessee in default‟.”
“13. To sum up, all the four appeals filed by the Assessee are allowed.”
80. More importantly, the aforesaid decision followed the judgment of the Hon’ble Kerala High Court in State Bank of India v. CIT, ITA No. 45 of 2025, wherein the effect of the very same interim directions was examined. The relevant findings of the Hon’ble Kerala High Court, as reproduced in the order of Coordinate Bench, read as under:
“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.”
81. The Hon’ble Kerala High Court expressly distinguished the judgment of the Hon’ble Supreme Court on the basis of the assessment year and the operation of the interim directions:
“We also take note of the fact that the Apex Court, by judgment dated 04.11.2022 in State Bank of India v. Assistant Commissioner of Income- tax [2022] 144 taxmann.com 131/449 ITR 192/[2023] 290 Taxman 129(SC)/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 appellantassessee was justified in not having deducted the tax.”
82. The judgment of the Hon’ble Kerala High Court, though not of the jurisdictional High Court, is a decision of a superior constitutional court directly on the same issue, involving the same assessee, the same interim direction and the same assessment year. No order staying or reversing the said judgment has been placed before us. Its ratio possesses greater persuasive authority than a contrary order of a Tribunal Bench.
83. The first decision relied upon by the learned DR is the order dated 27.06.2025 in ITA No. 1465/Chny/2024. The Chennai Bench sustained the order under sections 201(1) and 201(1A) and observed:
“We note the ld. CIT(A) observed that there was no stay from 24.06.2022 to 08.08.2022 and from 08.06.2023 to 28.08.2023 and that the assessee neither deducted tax on LTC nor made recovery, accordingly held the order of the Assessing Officer is correct in holding that the assessee is in default for non-deduction of TDS during 24.06.2022 to 08.08.2022 and from 08.06.2023 to 28.08.2023. We find no infirmity in the order of the ld. CIT(A) as we completely agree with the reasons recorded from paras 5.8 to 5.10 of the impugned order in confirming the order of the Assessing Officer. Thus, the grounds raised by the assessee are dismissed.”
84. This decision was pronounced on 27.06.2025. It preceded the judgment of the Hon’ble Kerala High Court dated 18.11.2025 and, therefore, did not have the benefit of the later judgment directly deciding the effect of the interim directions upon liability under sections 201(1) and 201(1A).
85. Further, the Chennai Bench relied upon periods in 2022 and 2023 during which the interim protection was considered not to be operative. The appeal before it pertained to assessment year 2015-16, while the present appeals, according to the Tribunal appeal particulars, relate to assessment years 2016-17 and 2017- 18. The cessation of protection during specified periods in 2022 and 2023 does not answer whether the assessee committed a default in relation to payments made in the earlier previous years when the interim direction dated 16.02.2015 was operative.
86. The second decision relied upon by the learned DR is the order dated 19.08.2026 in ITA No. 734/Chny/2026 and connected appeals. The Chennai Bench held:
“5. The obligation of deducting tax is distinct from the payment or recovery of tax. Even if recovery proceedings were suspended or the bank was prevented from recovering amounts from employees, the duty to deduct TDS, based on the taxability of the income still exists.”
“7. In the result, the appeal of the appellants are dismissed on substantive issue and partly allowed for statistical purposes only on the issue of interest u/s. 201(1A) of the Act.”
87. The order dated 19.08.2026 is later in point of time. Mere chronology, however, does not resolve a conflict between Coordinate Bench decisions. The later Chennai order does not discuss or distinguish the earlier Chennai order dated 30.06.2026 in ITA Nos. 938, 939, 940 and 942/Chny/2026. It also does not analyse the Mumbai Bench orders dated 30.06.2026 and 28.07.2026, although those orders had already been pronounced.
88. The order in ITA No. 734/Chny/2026 records the judgment of the Hon’ble Kerala High Court in its chronology, but does not examine or distinguish its ratio that sections 201(1) and 201(1A) are not attracted where the assessee could not deduct tax because of the interim direction. The conclusion of the Coordinate Bench was also substantially founded upon periods in 2022 and 2023 when the stay was considered inoperative, without correlating those periods to the payments pertaining to assessment years 2016-17 and 2017-18.
89. We are, therefore, unable to apply the two adverse Chennai Bench orders to the present appeals. The decision in ITA No. 1465/Chny/2024 preceded the directly applicable judgment of the Hon’ble Kerala High Court. The subsequent decision in ITA No. 734/Chny/2026 did not reconcile the contrary superior-court authority or the earlier Co-ordinate Bench decisions rendered on the same issue.
90. Our conclusion does not rest merely upon the numerical preponderance of decisions. It follows from the language of section 201, the precise terms of the interim direction and the chronology of the relevant payments.
91. The substantive taxability of LFC involving a foreign leg stands concluded against the assessee. However, section 201(1) requires a failure by a person who was required to deduct tax. During the relevant previous years, the assessee was expressly directed not to treat the reimbursement as income so as to deduct tax at source. The same order placed the eventual tax liability upon the employees if the writ petition failed.
92. The assessee could not have deducted tax without acting contrary to the judicial direction. The later declaration of substantive taxability did not retrospectively erase the judicial restraint or render the assessee’s compliance therewith a default. The statutory obligation to deduct tax had to operate subject to the binding order governing the parties at the time of payment.
93. The Revenue’s apprehension that this conclusion would create a substantive exemption is misplaced. We do not hold that the reimbursements were exempt under section 10(5). We hold only that the assessee cannot be treated as an assessee in default under section 201(1) for not deducting tax during the period when it was judicially restrained from doing so. The substantive tax liability of the concerned employees is not the subject matter of these appeals and remains unaffected.
94. Respectfully following the judgment of the Hon’ble Kerala High Court and the Co-ordinate Bench orders in ITA No. 1832/Mum/2026, ITA No. 2453/Mum/2026 and ITA Nos. 938, 939, 940 and 942/Chny/2026, and for the independent reasons recorded above, we hold that the assessee cannot be treated as an assessee in default under section 201(1). Consequently, interest under section 201(1A), being founded upon the default contemplated under section 201(1), cannot survive.
95. The orders passed under sections 201(1) and 201(1A), as sustained by the respective first appellate authorities, are accordingly set aside and the demands raised in all 21 quantum appeals are deleted. The alternative ground concerning the first proviso to section 201(1) is rendered academic and is left open.”
11. In the instant case, according to the assessment order, the revenue treated the assessee bank in default for short deduction of TDS on LFC payment made on 23.07.2014. The interim order was passed by Hon’ble Madras high Court on 25.04.2014. The assessee bank was judicially bound under the interim direction of the Hon’ble Madras High Court during the relevant period and therefore, could not have deducted tax at source. The subsequent order dated 04.11.2022 passed by the Hon’ble Apex Court for A.Y. 2013-14 in respect of the substantive legal decision may not retrospectively convert an act performed in obedience to the binding judicial command into a statutory default. Hon’ble Kerala High Court has examined the issue and expressly distinguished the judgment of the Hon’ble Supreme Court on the basis of assessment year and the period of said interim protections granted by the Madras High Court. All these aspects have also been minutely dealt with by the Mumbai bench of this tribunal in detail. We are thus in respectful agreement with the order dated 03.09.2026 passed by the Mumbai bench of the tribunal and hold that the assessee bank cannot be treated as assessee in default u/s 201(1) for the year under consideration for short deduction of tax on payment of LFC to its employees. Consequently, the interest u/s 201(1A), being founded upon the default contemplated u/s 201(1) does not survive. The aforesaid point is accordingly decided in positive in favour of the assessee bank and against the revenue.
12. In the result, the appeal of the assessee is allowed.
Order pronounced in Open Court on- 22.10.2026
