SBI Escapes LFC TDS Default and Penalty for Obeying Court Orders

By CA Vijayakumar Shetty Income Tax Judiciary October 28, 2026

TaxGuru Citation: 2026 taxguru.in 17126
Case Name: State Bank of India Vs DCIT / JCIT (TDS) (ITAT Rajkot)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Related Assessment Year: 2016-17
Courts: All ITAT, ITAT Rajkot

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State Bank of India Vs DCIT / JCIT (TDS) (ITAT Rajkot)

No TDS Default for Following Binding Court Orders on LFC Payments: ITAT Grants SBI Relief

Detailed Analysis

The Rajkot Bench of the Income Tax Appellate Tribunal (ITAT) has granted relief to State Bank of India in disputes concerning non-deduction of TDS on Leave Fare Concession payments involving foreign travel. The Tribunal followed earlier decisions holding that the bank could not be treated as an assessee in default for a period during which it acted under binding interim judicial directions against deduction.

Allowing both appeals, the Tribunal deleted the disputed section 201 liability and section 271C penalty. The decision did not recognise an exemption for foreign-leg travel. It distinguished the ultimate taxability of the payments from the bank’s obligations while the court orders operated.

Background of the Appeals

The consolidated order concerned two SBI branches: the RPL Projectsite Branch at Motikhavdi for assessment year 2016-17 and the Bhachau Branch for assessment year 2017-18.

The appeals arose from separate CIT(A) orders relating to proceedings under section 201 and the penalty provisions of section 271C of the Income-tax Act, 1961.

At the hearing, the bank’s representative submitted that the controversy was covered by the Rajkot Tribunal’s earlier order in SBI, ITA No. 771/Rjt/2026, dated June 11, 2026.

The Revenue relied on the appellate findings. The Tribunal examined the precedent and found no material distinction requiring a different conclusion.

Foreign-Leg LFC Exemption Issue Already Settled

The earlier decisions reproduced in the order acknowledged the Supreme Court’s judgment dated November 4, 2022, concerning exemption under section 10(5).

Under that ruling, a journey involving a foreign leg could not be regarded as travel within India for the exemption. The employer’s obligation to examine the claim and deduct tax under section 192 was also recognised.

The Tribunal therefore did not reopen the substantive exemption question.

The narrower dispute was whether the bank could face default consequences for not deducting tax while contrary interim judicial directions bound it during the relevant period.

Interim Directions Governed Bank’s Conduct

The precedents followed by the Tribunal considered interim orders of the Madras High Court in W.P. No. 11991 of 2014.

An order dated February 16, 2015, clarified that the relevant LFC payments would not amount to income enabling the bank to deduct tax at source.

It also stated that, if the writ petition were ultimately dismissed, the employees would be liable to pay tax on the amounts received.

The bank maintained that deduction during the operation of those orders would have conflicted with the judicial directions. Its conduct therefore could not be equated with an ordinary failure to comply with an existing TDS obligation.

Binding Judicial Orders Could Not Be Ignored

The reasoning adopted by the Tribunal recognised that the bank, as a party to the proceedings, was duty-bound to comply with the interim orders.

The statutory obligation under section 192 could not be considered in isolation from those directions.

Accordingly, non-deduction in compliance with a binding order could not attract the same consequences as non-deduction despite an enforceable obligation to deduct.

The distinction was between tax ultimately payable on the employee’s receipt and default attributable to the employer during the protected period.

The employees’ possible liability remained separate from the bank’s claim for relief.

Kerala High Court Decision Supported Relief

The earlier coordinate Bench order also relied on the Kerala High Court’s decision in ITA No. 45 of 2025, dated November 18, 2025.

As reproduced, that decision held that section 201 could operate where a person failed to deduct tax despite having a liability to do so.

Where the bank was under an obligation not to deduct because of judicial directions, it could not be treated as an assessee in default.

The coordinate Bench accordingly concluded that interest under section 201(1A) also could not survive once the section 201(1) demand failed in those circumstances.

Later Supreme Court Ruling Did Not Establish Earlier Default

The adopted reasoning also addressed the effect of the subsequent Supreme Court decision settling the exemption issue against the bank.

It held that this later ruling could not retrospectively impose section 201 default consequences for a period during which the bank had complied with operative judicial directions.

This was not a finding that the receipts were permanently exempt. Rather, it concerned the legal position governing the bank’s conduct when the payments were made.

The relief therefore depended on the binding orders and their operation during the relevant period, not merely a general belief that LFC payments were exempt.

Final Decision

The Tribunal found the present appeals covered by the earlier Rajkot decision and noted that the Revenue had produced no material distinguishing the facts or legal position.

It consequently deleted the disputed quantum liability and penalty and allowed both SBI appeals.

The order grants protection for compliance with binding judicial directions while preserving the distinction between employer TDS-default proceedings and the substantive taxability of foreign-leg LFC payments.

Cases Discussed

FULL TEXT OF THE ORDER OF ITAT RAJKOT

Captioned these two appeals filed by the assessee, pertaining different to Assessment Years 2016-17 & 2017-18, are directed against the separate orders passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) by Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC) Delhi, which in turn arise out of separate orders passed by the assessing officer under section 201 and 271C (penalty order), of the Income tax Act 1961.

2. Since, the issues involved in all the appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order.

3. 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 two appeals are squarely covered by the above said judgement of the Tribunal. A copy of the judgement was also placed before the Bench.

4. On the other hand, the Learned DR for the revenue relied on the findings of the Ld. CIT(A).

5. 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.

6. As the issue is squarely covered in favour of the assessee by 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, and there is no change in facts and law and the revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench (supra). I find no reason to interfere in the said order of the Division Bench. Therefore, respectfully following bindings precedent of the Co-ordinate Bench, and I delete the quantum addition and penalty and, allow these appeals of the assessee.

7. In the result, the appeals of the assessee (in ITA Nos. 962 & 978/Rjt/2026 for AY 2016-17 & 2017-18), are allowed.

Order is pronounced in the open Court on 23/10/2026.