1. The employer cannot be faulted for not deducting tax at source from leave travel concession facility allowed by him to employees where the employee has travelled, as a part of composite itinerary involving a foreign sector as well, to destination in India. The position with respect to the taxability of such a leave travel concession in hands of the employee may be different:- THE ITAT MUMBAI BENCH ‘G’ in the case of State Bank of India v. Assistant Commissioner of Income Tax, TDS Ward (3)(2), Mumbai.


2.1 It is important to bear in mind while dealing with the demands relating to a TDS from payments of salaries that there is a subtle line of demarcation between what is taxable in the hands of the assessee and what is the amount of estimated income in respect of which tax is required to be deducted at source by the employer.

2.2 Section 192 (1), which imposes tax withholding obligations on the employers in respect of payments for salaries, requires that tax deduction is made by the employer “on the estimated income of the assessee under the head, ‘income from salaries ‘ for that financial year”. Thus, the tax withholding obligation is clear in respect of “estimated income of the assessee” and not in respect of “taxable income of the assessee”.

2.3 There can be situations in which the employer genuinely and reasonably estimates income of the employees under the head salaries, and yet actual taxability of income under the head salaries of the related employees may be higher than the employer’s estimation

2.4 Therefore, while examining the question as to whether the employer has properly discharged his duties under section 192, all that is to be seen is whether the employer has reasonably, or bonafide, estimated the income of the employees and deducted tax in respect of such estimated income.

2.5 As long as the conduct of the employer in this exercise is bonafide, he cannot be said to be wanting in his conduct under section 192.

2.6 A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly- Observed by Hon’ble Madhya Pradesh High Court in the landmark judgment in the case of CIT v. Gwalior Rayon & Silk Mills Ltd,

2.7 Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee”


3.1 The assessee employer is a branch office of a public sector bank. Certain employees of the branch have claimed LFC (i.e., Leave Travel Concession) facility, wherein “travel to places outside India was involved”.

3.1.1 The admissible leave travel concession in these cases was treated as tax-exempt under section 10(5), and estimated tax liability was computed without taking into account the admissible leave concession facility in such cases.

3.2 The Assessing Officer was, however, of the view that exemption under section 10(5) was not available in such cases as “if the employee travels out of India, the LFC amount cannot be claimed as exempt under section 10(5)”, and, to that extent, the assessee was in error in not deducting tax at source in respect of such payment of the LFC facility.

3.2.1 The Assessing Officer also noted that “the employees travelled to the Indian destinations not by direct and shortest route but by circuitous route including foreign journey”. It was in this backdrop that the Assessing Officer held that the LFC payment should have been included in the income of the employee concerned while deducting tax at source from the salaries and therefore, the assessee is required to be treated as an assessee in default for not deducting the related tax at source.

3.3 The assessee (bank) carried the matter in appeal before the CIT(A) and filed a detailed statement explaining the following facts:-

(a) The provisions of LTC are governed by the industry level settlement viz. ‘joint Notes’, signed by the Indian Banks’ Association [ISA] on behalf of the member banks and the representatives of Officers’ Organizations after industry level settlement.

(b) Administrative and operating guidelines, issued by the Bank, are based on the clarifications issued by the Indian Banks’ Association i.e. IBA letter Nos. PLI/Set/25 dated 18 September 1982 and CIR/HR&R/2012-13/665/F/6245 dated 12 July 2012.

(c ) So long as the employee’s designated place is anywhere in India and he visits the place as designated, reimbursement may be made to him for his entire journey by the circuitous route provided the reimbursement made to him is limited to the actual fare/hire charges for the entire journey or the cost of a fare to his home town/designated place, by the shortest route, by the entitled class whichever is lower.

(d) The Bank reimburses the LTC claim made by the employees only where the employee’s designated place is anywhere in India and he actually visits the place as designated. In case an employee travels outside India during his visit to a place in India, reimbursement is made to him for his entire journey by the circuitous route provided the reimbursement made to him is limited to the actual fare/hire charges for the entire journey or the cost of a fare to his home town/designated place, by the shortest route, by the entitled class whichever is lower. The bank has issued Circular No. ADM/037239 dated 20 August 1981 in this regard.

(e) An employee undertaking journey under LTC is eligible for reimbursement of travel expenses i.e. air/rail/steamer/road fare by the entitled class for the permissible distance, or the actual cost of travelling for the entire journey, whichever is lower. Further, only travel expenses are reimbursable and other facilities, if any, provided by travel agents are not reimbursable. The Bank has issued Circular No. CDO/P&HRD-PM/41/2013-14 dated 29 October 2013 in this regard.

(f) For example, where there is a single itinerary for India and overseas travel is also involved, say, Mumbai-Kolkata-Singapore-Mumbai, and where the designated place in India is Kolkata, the economy class fare by the national carrier for journey within India (i.e. Mumbai-Kolkata and Kolkata-Mumbai) is considered as exempt, for section 10(5) by the Bank, within the monetary ceiling to which the employee is eligible.

(g) It is submitted that the Bank’s framework for the provision of LTC benefit to employees and the administrative and operating guidelines issued by the IBA are framed taking into account the provisions of the Income-tax Act, 1961 and the Income-tax Rules, 1962.

(h) The Bank provides the LTC exemption only where the employee’s designated place is in India and he actually visits the place as designated.

3.3.1. STATUTORY PROVISIONS the submissions of the branch in relation to grant of exemption under section 10(5) read with rule 2B are as under:

(a) There is no bar under section 10(5) or rule 2B on travel outside India if the designated place is in India

(b) Rule 2B refers to the grant of exemption for travel by the shortest route and envisages that a person can travel by a circuitous route to the designated place in India

(c ) Even in cases where the employee travels outside India during his travel to a place in India, the exemption under section 10(5) is restricted for travel within India

(d) The conditions of travel by economy class, airfare of the national carrier, restriction of exemption to the amount incurred, etc. are also complied with

3.3.2 Where the employee has designated a place of travel in India and travels to such a place in India, the benefit of exemption under section 10(5) cannot be denied merely on the ground that a foreign leg is also involved

3.3.3 In view of the above, the Bank is of the view that it has correctly granted an exemption under section 10(5) to its employees at the time of deduction of tax at source

3.4 SUBMISSION BY THE DEPARTMENT The learned CIT(A) (Commissioner of Income Tax (Appeal) ) was, however, far from impressed from the facts so set out and the arguments advanced before him. He rejected the submissions made by the assessee and concluded as follows

(a) Section 10(5) of the Income-tax Act, 1961 stipulates that exemption under section 10(5) of the Act is available only for travel to any place in India and restricted to the number of expenses incurred for such travel read with conditions as per rule 2B of the Income-tax Rule. 1962.

(b) Nowhere in this clause it has been stated that even if the employee travels to foreign countries, the exemption would be limited to the expenditure incurred to the last destination in India

(c ) This provision was introduced to motivate the employees and also to encourage tourism in India and, therefore, the reimbursement of LTC/LFC was exempted, but there was no intention of the Legislature to allow the employees to travel abroad under the garb of the benefit of LTC available by virtue of section 10(5) of the Act

(d) In the instant case, the employees of the assessee have travelled outside India in different foreign countries and raised a claim of their expenditure incurred therein. No doubt, the assessee may not be aware of the ultimate plan of travel of its employees, but at the time of settlement of the LTC/LFC bills, complete facts are available before the assessee as to where the employees have travelled, for which he has raised the claim; meaning thereby the assessee was aware of the fact that its employees have travelled in foreign countries, for which he is not entitled to exemption under section 10(5)

(e) Thus, the payment made to its employees is chargeable to tax, and in that situation, the assessee is under obligation to deduct TDS on such payment,

 (f) We find no merit in the claim of the assessee in the present case reject the claim of the assessee of exemption under section 10(5) of the Act.

3.5 The assessee is not satisfied and has further appeal before ITAT ( Income Tax Appellate Tribunal). ITAT Mumbai proceeds with the appeal for adjudication on merits and held the followings:-

 (a) We have heard the learned Departmental Representative, perused the material on record, and duly considered facts of the case in the light of the applicable legal position.

 (b) This stand of the assessee remains uncontroverted. There is no reason to doubt the same and prolong the proceedings. In case the Assessing Officer finds that this relief is based on incorrect facts, its open to him to seek appropriate remedy by, inter alia, seeking a recall of this order, but, on our own and merely to double-check, we are not inclined to remit the matter to the file of the Assessing Officer. Inconvenience to the assessee and smallness of the amounts involved apart, this is a case of a public sector undertaking, and any unnecessary further prolonging of the proceedings can only at the cost of taxpayers’ hard-earned monies. We must avoid that

 (c ) With the greatest respect to the coordinate benches, but without the slightest hesitation, we are of the view that the core issue in appeal remained unaddressed in these coordinate bench decisions, and, therefore, even though these coordinate benches decisions are in respect of similarly situated cases, these decisions do not bind us on the conclusions. Finally, we must place on record our deep appreciation for a very well- crafted statement of facts and the grounds of appeal, which, in the absence of any assistance during the hearing, were indeed of immense help to us.

 (d) In the result, the appeal is allowed in the terms indicated above.


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April 2021