Proof of Travel to Claim Leave Travel Allowance (LTA): Supreme Court Ruling and Employer Obligations
The Supreme Court, in the landmark case of Larsen & Toubro Ltd. and ITI Ltd., has provided significant clarity on the statutory obligations of employers concerning Leave Travel Allowance (LTA). The judgment holds that employers are under no statutory obligation to collect or verify documentary evidence to demonstrate that employees have utilized amounts claimed under LTA for travel and related expenses. This ruling has reshaped the understanding of the employer’s role in such claims and shifted the responsibility onto the employees.
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Employer Obligations under the Income Tax Act
Section 10(5) of the Income Tax Act, 1961, provides for exemption of LTA to employees for travel within India, subject to certain conditions. However, the Supreme Court’s judgment clarified that the exemption under Section 10(5) is a benefit extended to individual employees, and employers are not required to act as adjudicators of the claims made by their employees. Notably, the Central Board of Direct Taxes (CBDT) has not issued any circular mandating employers to collect and examine supporting evidence for employee declarations under Section 192.
In light of this, while employers may assess LTA claims based on declarations provided by employees, they are not obligated to collect proof such as tickets, boarding passes, or travel invoices. However, depending on internal policies, employers retain the right to demand such proof for internal audit or compliance purposes.
Supreme Court Ruling: Key Highlights
- The responsibility of proving the validity of LTA claims lies with the individual employee.
- Assessing Officers (AOs) may still request supporting documentation from employees during audits or assessments of their tax returns.
- Employees are advised to retain travel-related proofs such as tickets, invoices, and boarding passes for their records.
Circular No. 8/2013: Conflicting Guidance
Circular No. 8/2013, dated 10-10-2013, states that employers must satisfy themselves that the LTA claims made by employees are genuine and keep and preserve evidence supporting such claims. However, this circular does not align with the Supreme Court’s judgment in the Larsen & Toubro case. The circular’s directive places an additional compliance burden on employers that the Supreme Court’s decision has deemed unnecessary. It is therefore critical for employers to carefully evaluate their policies, balancing adherence to the circular with the legal precedent set by the apex court.
Case Law: CIT vs. HCL Info System Ltd. [(2006) 282 ITR 263 (Del)]
In a related case, CIT vs. HCL Info System Ltd., the Delhi High Court addressed the issue of employer obligations in verifying LTA claims. The Assessing Officer (AO) argued that HCL failed to deduct tax on LTA due to insufficient supporting evidence from employees. However, the court upheld the employer’s reliance on bona fide declarations from employees, emphasizing that:
- Employers are not adjudicating authorities for verifying employee claims.
- The responsibility for verifying the validity of such claims rests with the AO during individual assessments.
- Employers’ actions based on employee declarations, if in good faith, cannot be deemed non-compliant.
Practical Implications for Employers and Employees
- Employers: While not legally bound to collect and retain proof of travel, employers may establish internal policies requiring such documentation to ensure transparency and compliance.
- Employees:
- The onus of providing proof of travel lies with the individual.
- Employees must maintain travel-related documentation, such as tickets, invoices, and boarding passes, for at least the duration required for tax audits.
Conclusion
The Supreme Court’s ruling in Larsen & Toubro Ltd. and ITI Ltd. underscores the principle that the responsibility for justifying LTA claims rests with the individual employee and not the employer. Employers, however, must navigate conflicting guidance such as Circular No. 8/2013, which places additional expectations on them. A balanced approach, informed by judicial precedents and operational policies, can help employers and employees alike meet their respective obligations effectively.
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