ITAT Holds SBI Not in Default for Non-Deduction of TDS on LFC During Interim Protection:

The appeals were filed by different branches of SBI against orders of the CIT(A), which had confirmed the AO’s action treating the bank as an assessee in default under Sections 201(1) and 201(1A) for failure to deduct tax at source from LFC reimbursements granted to employees whose journeys involved a foreign leg. Three appeals were filed with delays of 15, 67 and 45 days, which were also condoned on the ground that the delay arose due to bona fide administrative reasons, including obtaining approval from the competent authority.

The dispute arose from interim directions issued by the Madras High Court on 25 April 2014 in proceedings concerning SBI’s circular restricting overseas travel under LTC or HTC. The interim protection was subsequently extended on 16 February 2015 until disposal of the writ petition.

The Madras High Court clarified that amounts paid towards LTC or reimbursement of LTC after the order would not be treated as income so as to enable the bank to deduct tax at source. It further directed that, if the writ petition was ultimately dismissed, the employees would be liable to pay tax on the amounts received from the bank. The dispute thereafter reached the Supreme Court, where the proceedings are pending. 

The Tribunal emphasised that it was not holding the foreign-travel LFC reimbursements to be exempt under Section 10(5). Rather, the limited question was whether SBI could be treated as an assessee in default for not deducting tax during the period in which it was judicially restrained from doing so. It held that Section 201(1) presupposes a failure by a person who was required to deduct tax. During the relevant period, SBI was expressly directed not to treat the reimbursement as income for the purpose of deducting tax. 

The Tribunal held that SBI could not be treated as an assessee in default under Section 201(1) in respect of the impugned LFC reimbursements. Since the interest under Section 201(1A) was consequential to the alleged default under Section 201(1), the interest liability also could not survive. Accordingly, the orders passed under Sections 201(1) and 201(1A), as sustained by the respective CIT(A)s, were set aside and the demands raised against SBI were deleted.