SBI Not TDS Defaulter for LFC Paid During Madras HC No-TDS Order: ITAT Mumbai

State Bank of India Vs ITO (TDS) (ITAT Mumbai)

Summary: ITAT Mumbai allowed nine appeals of State Bank of India branches for AYs 2016-17 and 2017-18 and deleted demands raised under Sections 201(1) and 201(1A) for non-deduction of TDS on Leave Travel/Fare Concession reimbursements involving foreign travel. The Tribunal accepted that the Supreme Court in State Bank of India v. ACIT had settled the substantive issue against SBI by holding that LFC involving a foreign leg does not qualify for exemption under Section 10(5) and attracts the employer’s TDS obligation under Section 192. However, the present reimbursements related to AYs 2016-17 and 2017-18, when the Madras High Court’s interim direction dated 16.02.2015 was operative. That order directed that LTC paid or reimbursed would not be treated as income enabling SBI to deduct tax at source. SBI was bound by that judicial direction and could not simultaneously comply with it and deduct TDS. Following its coordinate Bench ruling in SBI Bullion Branch and connected appeals, the Tribunal held that the later declaration of the substantive tax position could not retrospectively convert conduct performed in obedience to a binding court order into a Section 201 default. It therefore set aside the Section 201(1) demands and consequential Section 201(1A) interest in all nine appeals. The alternative ground concerning the first proviso to Section 201(1) was left open.

Cases Discussed

• SBI Bullion Branch and connected appeals Vs ACIT/ITO (TDS), including ITA No. 1832/Mum/2026, order dated 30.06.2026 (ITAT Mumbai) — Followed. The coordinate Bench held on materially identical facts that SBI could not be treated as an assessee-in-default where non-deduction of TDS resulted from compliance with the operative Madras High Court interim direction.
• State Bank of India, Bhavnagar Para Branch Vs ITO, ITA Nos. 453 & 454/Ahd/2026, order dated 26.03.2026 (ITAT Ahmedabad) — Relied upon by the assessee as a coordinate-Bench ruling on materially identical facts concerning the binding Madras High Court direction and Section 201 default.
• State Bank of India Vs ITO, ITA Nos. 365 & 400/Ahd/2026, order dated 09.04.2026 (ITAT Ahmedabad) — Relied upon as another coordinate-Bench decision concerning LFC reimbursements and the effect of the subsisting Madras High Court directions.
• State Bank of India Vs ACIT, ITA Nos. 2886 & 2887/Mum/2024, order dated 30.05.2025 (ITAT Mumbai) — Quoted through the earlier coordinate-Bench order for the proposition that SBI could not be treated as an assessee-in-default while the Madras High Court’s direction dated 16.02.2015 bound the bank.
• State Bank of India Vs CIT(A), ITA No. 514/Agr/2024 (ITAT Agra) — Quoted in the coordinate-Bench ruling. The Tribunal held that SBI had no option but to obey the Madras High Court’s interim order and could not be treated as an assessee-in-default for the covered LFC payments.
• State Bank of India Vs Assistant Commissioner of Income Tax, Civil Appeal No. 8181 of 2022, judgment dated 04.11.2022, [2022] 144 taxmann.com 131 / 449 ITR 192 / [2023] 290 Taxman 129 (Supreme Court) — Followed on the substantive issue that LFC involving a foreign leg does not qualify for Section 10(5) exemption; distinguished for the present Section 201 controversy because the payments here were made while the Madras High Court’s interim direction operated.
• State Bank of India, Chennai Vs ACIT, TDS, ITA No. 1465/Chny/2024, order dated 27.06.2025 (ITAT Chennai) — Relied upon by the CIT(A) while sustaining the substantive findings against SBI.
• All India State Bank Officers Association Vs SBI, 140 Taxmann.com 221, decided 14.06.2022 (Madras High Court) — Discussed in the quoted coordinate-Bench ruling concerning the withdrawal of the additional concession for foreign travel under LTC and the earlier interim protection.

FULL TEXT OF THE ITAT MUMBAI ORDER

These nine appeals by the assessee are directed against separate orders passed by the learned Commissioner of Income Tax (Appeals), Addl./JCIT(A)-2, Siliguri [hereinafter referred to as “the CIT(A)”], under section 250 of the Income Tax Act, 1961[hereinafter referred to as “the Act”], for Assessment Years 2016-17 and 2017-18. Since the appeals arise from an identical factual background, involve a common issue, the appeals were heard together and are being disposed of by this consolidated order.

2. At the outset, it is noted that the assessee had moved an application seeking consolidation of the present appeals. During the course of hearing, it was submitted that the issues arising in these appeals stood covered by the decisions of the Co-ordinate Benches, copies of which were placed on record. The learned Departmental Representative (DR) fairly agreed that the issues were covered by the aforesaid decisions. Accordingly, the appeals were treated as heard.

3. The particulars of the appeals are as under:

Facts of the Case

4. The assessee had reimbursed Leave Travel Concession or Leave Fare Concession to certain employees in accordance with its service rules and the administrative framework governing the employees of the Bank. In the cases under consideration, the employees had designated a place in India but the travel itinerary included one or more destinations or sectors outside India. The assessee did not deduct tax at source under section 192 from such reimbursement.

5. The Assessing Officers initiated proceedings under sections 201(1) and 201(1A) on the ground that exemption under section 10(5), read with rule 2B of the Income Tax Rules, 1962, was available only where the employee travelled to a place in India. According to the Assessing Officers, the moment a foreign destination or foreign leg formed part of the journey, the reimbursement lost the character of an exempt allowance and became taxable as part of the salary of the concerned employee. The employer was, therefore, required to take the reimbursement into account while estimating salary income and deducting tax under section 192.

6. The assessee submitted before the Assessing Officers that the LFC scheme was governed by the State Bank of India Officers’ Service Rules, 1992, industry-level settlements and clarifications issued by the Indian Banks’ Association. It was contended that the reimbursement was made only where the employee had designated and actually visited a place situated in India. Even where the journey involved a circuitous route or foreign sector, the reimbursement was restricted to the lower of the actual fare incurred and the eligible fare to the designated Indian destination by the shortest route and entitled class. It was thus argued that no exemption was granted in respect of a foreign destination as such.

7. The assessee further contended that section 10(5) and rule 2B did not expressly prohibit an employee from passing through or visiting a foreign destination while proceeding to a designated place in India. According to the assessee, the expression “shortest route” governed only the monetary ceiling of the exemption and did not prescribe the actual route that the employee was required to follow. The Bank maintained that it had allowed exemption only to the extent of the eligible domestic fare and had acted on a bona fide interpretation of the statutory provisions and the prevailing industry practice. These submissions are summarised in the appellate orders, which record the assessee’s stand that the designated place was always situated in India and that the exemption was restricted to the eligible fare under rule 2B.

8. The assessee also relied heavily upon the proceedings before the Hon’ble Madras High Court. It was submitted that the Bank had issued e-Circular No. CDO/P&HRD-PM/7/2014-15 dated 15 April 2014 stating that employees would not be entitled to visit overseas countries or centres as part of LTC. The said circular was challenged by the All India State Bank Officers Federation and others in W.P. No. 11991 of 2014. By an interim order dated 25 April 2014, the operation of the circular was stayed. Thereafter, by order dated 16 February 2015, the Hon’ble Madras High Court directed that the LTC paid or reimbursed during the pendency of the writ petition would not be treated as income so as to enable deduction of tax at source, subject to the employees bearing the tax consequences in the event of dismissal of the writ petition.

9. The assessee contended that the interim directions were binding upon it and that deduction of tax contrary to those directions would have exposed it to proceedings for contempt. It was therefore submitted that the failure to deduct tax was not voluntary or deliberate but was occasioned by the judicial restraint operating against the Bank.

10. The Assessing Officers did not accept the explanation. They held that an internal settlement, administrative framework or circular of the Bank could not override the provisions of the Income Tax Act. According to the Assessing Officers, the complete itinerary and supporting documents were available with the Bank at the time of settlement of the LFC claims. The Bank was consequently aware that the employees had travelled outside India and ought to have treated the reimbursement as taxable salary. The assessee was accordingly treated as an assessee in default under section 201(1), and interest was charged under section 201(1A).

11. In the later proceedings, the Assessing Officers also placed reliance upon the judgment of the Hon’ble Supreme Court in State Bank of India v. Assistant Commissioner of Income Tax, Civil Appeal No. 8181 of 2022, dated 4 November 2022. The Assessing Officers recorded that the Hon’ble Supreme Court had held that LTC contemplated under section 10(5) was for travel within India and that the involvement of a foreign leg took the journey outside the scope of the exemption.

12. Where the employee-wise Form No. 16 or precise rate of tax was not furnished, the Assessing Officers adopted a flat rate of 30 per cent on the LFC reimbursement and computed interest under section 201(1A) from the respective dates of payment. In certain orders, the Assessing Officer also directed initiation of penalty proceedings under section 271C.

13. Year specific particulars are tabulated below:

14. Aggrieved by the orders passed under sections 201(1) and 201(1A), the assessee preferred appeals before the learned CIT(A). In the appellate proceedings, the assessee reiterated that the reimbursement had been granted only in respect of a designated place situated in India and that the admissible exemption was restricted to the fare prescribed under rule 2B.

15. The learned CIT(A) held that exemption under section 10(5), read with rule 2B of the Income Tax Rules, 1962, is available only for travel from one place in India to another place in India. Once the journey undertaken by an employee includes a foreign leg, the reimbursement of LTC or LFC does not qualify for exemption, notwithstanding that the designated destination is situated in India or that the reimbursement is restricted to the fare by the shortest domestic route.

16. The learned CIT(A) observed that the controversy regarding taxability of LFC involving foreign travel stood concluded by the judgment of the Hon’ble Supreme Court in State Bank of India v. Assistant Commissioner of Income Tax, Civil Appeal No. 8181 of 2022, dated 4 November 2022. Accordingly, the reimbursement constituted taxable salary and the assessee-bank was required to deduct tax at source under section 192. The plea that the assessee had acted on a bona fide or possible interpretation of section 10(5) and rule 2B was, therefore, rejected.

17. As regards the interim orders passed by the Hon’ble Madras High Court, the learned CIT(A) held that such orders merely suspended deduction or recovery during the period of their operation and did not extinguish the underlying tax liability. The learned CIT(A) noted that no operative stay existed during the periods from 24 June 2022 to 8 August 2022 and from 8 June 2023 to 28 August 2023. Since the assessee neither deducted tax nor recovered the reimbursement during those periods, the action of the Assessing Officer in treating the assessee as an assessee in default under section 201(1) was upheld.

18. The learned CIT(A) further held that the obligation to deduct tax was distinct from recovery of the amount from the employees. Following the decision of the Chennai Bench of the Tribunal in State Bank of India, Chennai v. ACIT, TDS, ITA No. 1465/Chny/2024, dated 27 June 2025, the learned CIT(A) found no reason to interfere with the substantive findings of the Assessing Officer.

19. Interest charged under section 201(1A) was held to be mandatory and consequential. The assessee was, however, granted liberty to approach the competent authority under section 119(2)(a) for waiver of interest relating to the period covered by the judicial stay.

20. On the question of quantification, the learned CIT(A) directed that a flat rate of 30 per cent should not be mechanically applied. The assessee was directed to furnish the computation of income and the applicable tax rate in respect of each employee, and the Assessing Officer was directed to rectify the orders and reduce any excess demand. Recovery of the demand was also directed to remain stayed until vacation of the stay granted by the Hon’ble Supreme Court.

21. Subject to these directions, all the grounds raised by the assessee were dismissed and the appeals were formally dismissed.

22. Accordingly, the assessee is in further appeal before us. The assessee has raised eight substantially identical grounds in all the appeals. The grounds filed in ITA No. 2440/Mum/2026 for Assessment Year 2017-18 are treated as representative and are reproduced as under:

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 (“LTC”) 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 LTC 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.

9. The appellant craves leave to add, amend, alter or delete and/or modify the above grounds of appeal before or during the course of hearing.

23. The grounds in the remaining appeals are identical in substance and language, except for the particulars of the concerned branch, TAN and assessment year.

24. During the course of hearing, the learned Authorised Representative (AR) reiterated the factual background of the appeals and placed on record a paper book containing the relevant circulars issued by the Bank, the interim and final orders passed in the proceedings before the Hon’ble Madras High Court, the subsequent orders passed in the writ appeal and the proceedings before the Hon’ble Supreme Court, the orders of the authorities below and the judicial precedents relied upon by the assessee. The paper book also contained a chronological statement of the material events and judicial proceedings relating to the controversy.

25. The learned AR further relied upon the following decisions of the Co-ordinate Benches, copies of which were placed on record:

1. State Bank of India, Bhavnagar Para Branch v. ITO, ITA Nos. 453 and 454/Ahd/2026, order dated 26 March 2026;

2. State Bank of India v. ITO, ITA Nos. 365 and 400/Ahd/2026, order dated 9 April 2026; and

3. SBI Bullion Branch and connected appeals v. ACIT/ITO (TDS), including ITA No. 1832/Mum/2026, order dated 30 June 2026.

26. It was submitted that the Co-ordinate Benches, on materially identical facts, had held that although LFC involving foreign travel was not exempt under section 10(5), the assessee-bank could not be treated as an assessee in default where non-deduction of tax was attributable to compliance with the subsisting interim directions of the Hon’ble Madras High Court.

27. The learned AR, therefore, submitted that the facts and the issue arising in the present batch of appeals were squarely covered by the aforesaid decisions and prayed that the orders passed under sections 201(1) and 201(1A), as confirmed by the learned CIT(A), be set aside.

28. We have considered the rival submissions and perused the material placed on record, including the paper book filed by the assessee and the decisions of the Co-ordinate Benches relied upon by the learned AR. The substantive position that LFC reimbursement involving a foreign leg does not qualify for exemption under section 10(5) of the Act stands concluded by the judgment of the Hon’ble Supreme Court in the assessee’s own case. The controversy in the present appeals, however, is confined to whether the assessee-bank could be treated as an assessee in default under sections 201(1) and 201(1A) in respect of payments made during the period when the interim directions of the Hon’ble Madras High Court dated 16 February 2015 were operating.

29. We find that an identical issue has been considered by the Co-ordinate Bench in the assessee’s own case in ITA No. 1832/Mum/2026 and connected appeals, order dated 30 June 2026. The relevant findings of the Co-ordinate Bench are reproduced below:

“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 vs. 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.”

30. The Co-ordinate Bench thereafter applied the aforesaid conclusion to all the connected appeals before it on the ground that the issue and the material facts were identical.

31. On examination of the facts of the present appeals, we find that the LFC reimbursements in dispute pertain to Assessment Years 2016-17 and 2017-18. Thus, the relevant payments were made during the period when the interim order dated 16 February 2015 passed by the Hon’ble Madras High Court was operative. Under the said order, the amount paid or reimbursed towards LTC was not to be regarded as income so as to enable the Bank to deduct tax at source. The assessee was, therefore, bound by the judicial directions and could not have deducted tax at source contrary thereto.

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).

33. We further find that the learned CIT(A) proceeded on the basis that the obligation to deduct tax stood revived upon vacation of the interim stay and that the assessee ought to have deducted or recovered tax during the periods from 24 June 2022 to 8 August 2022 and from 8 June 2023 to 28 August 2023. However, the demands impugned in the present appeals arise from LFC reimbursements pertaining to Assessment Years 2016-17 and 2017-18. The learned CIT(A), therefore, erred in relying upon subsequent periods during which the interim protection was allegedly not operative to sustain a default relating to payments made in the earlier assessment years when the interim order dated 16 February 2015 was admittedly in force.

34. The learned CIT(A) also failed to appreciate that the interim order itself stipulated that, in the event of dismissal of the writ petition, the employees would be liable to pay tax on the amount reimbursed by the Bank. Thus, the judicial arrangement placed the eventual tax liability upon the concerned employees and restrained the assessee from deducting tax at source during the pendency of the proceedings. The assessee could not have simultaneously complied with the interim direction and deducted tax under section 192.

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. In view of this conclusion, the alternative ground concerning the benefit of the first proviso to section 201(1) does not require separate adjudication and is left open.

38. In the result, all the appeals filed by the assessee are allowed.

Order pronounced in the open court on 28.07.2026.