Kerala High Court Holds SBI Not Assessee-in-Default for Non-TDS on LTC Paid Under Madras HC’s Interim Order

Kerala High Court Holds SBI Not Assessee-in-Default for Non-TDS on LTC Paid Under Madras HC’s Interim Order

State Bank of India’s Poovar Branch reimbursed Leave Travel Concession (LTC) to its employees. In 2014, SBI withdrew overseas LTC benefits, which was challenged before the Madras High Court. The circular was stayed, and on 16.02.2015, the High Court clarified that LTC payments made under the interim order “would not amount to income” so as to permit TDS, and that if the writ petition ultimately failed, employees themselves would be liable to pay tax.

Relying on this subsisting order, SBI released LTC amounts during FY 2015-16 without deducting tax. After the writ petition was dismissed in June 2022, the department treated SBI as an assessee-in-default under Sections 201(1) and 201(1A). SBI explained that it could not have deducted tax due to the binding stay order, but the AO, CIT(A), and ITAT rejected this explanation.

Aggrieved, State Bank of India appealed to the High Court.

Main Issue: Whether SBI could be treated as an assessee-in-default for non-deduction of TDS on LTC reimbursements when a binding interim order of the High Court expressly prohibited the deduction of tax.

HC’s Decision: The High Court held that SBI could not be treated as an assessee-in-default. The High Court’s interim order clearly stated that LTC reimbursements made during the pendency of the writ would not constitute income for TDS purposes and that the bank could not deduct tax. The Court found that Section 201(1) applies only where a statutory obligation to deduct tax exists; here, the obligation was suspended by judicial order.

The Court also relied on the first proviso to Section 201 and on the decision in Leema Resorts, noting that no assessee can be faulted for complying with a court’s binding directions. The argument that the Madras HC order had no bearing in Kerala was rejected, since the Income Tax Act operates nationally and the stay concerned the very payments in dispute.

The appeal was allowed, and the questions of law were answered in favour of SBI.

To Read Full Judgment, Download PDF Given Below