Introduction
The interplay between a binding judicial directive and statutory obligations forms the crux of a significant ruling by the Income Tax Appellate Tribunal (ITAT), Agra Bench. In State Bank of India, RBO v. ITO, TDS, ITA No.667/Agr/2026 (A.Y. 2015-16), the Tribunal was tasked with determining whether a deductor could be branded an “assessee in default” under Sections 201(1) and 201(1A) of the Income Tax Act, 1961, for failing to deduct Tax at Source (TDS) on Leave Fare Concession (LFC) reimbursements. The central tension arose because the payments were made during a period when the Hon’ble Madras High Court had issued interim directions expressly restraining the bank from treating such reimbursements as income for TDS purposes. This case commentary analyses the ITAT’s decision to delete the demand, exploring how the Tribunal distinguished substantive taxability from the procedural liability of a deductor acting under judicial command.
Facts of the Case
The appellant, State Bank of India (SBI), a public sector bank, found itself at the receiving end of a TDS survey conducted on 07.03.2019. The Assessing Officer (TDS) observed that the bank, while reimbursing LFC costs to employees who had travelled to foreign countries, failed to deduct TDS on a payment made on 23.07.2014. Consequently, show cause notices under Sections 201(1) and 201(1A) were issued. As the assessee failed to comply, the Assessing Officer passed an assessment order dated 29.03.2022, holding the bank to be in default and raising a total demand of Rs. 1,43,968/-.
The assessee’s appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] was dismissed, confirming the addition. This led to the second appeal before the ITAT. The Revenue relied heavily on the Hon’ble Supreme Court’s order dated 04.11.2022 in State Bank of India v. ACIT (Civil Appeal No. 8181/2022), which held that the bank was in default for not deducting tax at source on LFC payments. However, the factual matrix of the present appeal was complicated by a series of judicial interventions by the Madras High Court. Specifically, an interim stay order dated 25.04.2014, later extended until the disposal of the writ petition via order dated 16.02.2015, directed that the payments would not amount to income so as to enable the bank to deduct tax at source. The writ petition was eventually dismissed on 24.06.2022, but the matter remained sub judice before the Supreme Court, which had stayed the demand notices issued by the Income Tax Department.
Reasoning and Legal Analysis
The ITAT’s reasoning is a masterclass in distinguishing between substantive tax law and the procedural obligations of a deductor. The Tribunal framed the core issue: whether the bank could be treated as an assessee in default for short deduction of tax during the period when the interim directions of the Madras High Court were operative.
The Revenue’s primary argument rested on the Supreme Court’s 2022 ruling, which established that LFC reimbursements involving foreign travel do not qualify for exemption under Section 10(5) and that tax is deductible under Section 192. The Tribunal acknowledged this substantive position but noted that the controversy before it was narrower. It was not about whether the reimbursement was taxable, but whether the failure to deduct during a specific window constituted a default under Section 201(1).
The Tribunal relied on the interim direction dated 16.02.2015, which stated: “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 ITAT observed that this direction did more than merely stay recovery; it expressly regulated the manner in which the assessee was required to treat the LFC reimbursement. The bank was judicially restrained from treating the payment as income for TDS purposes. The Tribunal agreed with the Revenue that an interim judicial order does not amend Section 10(5) or create a substantive statutory exemption. However, it forcefully held that the substantive taxability of the reimbursement and the liability of the assessee as a deductor under Section 201 are separate questions.
Section 201(1) operates where a person “who is required to deduct tax” fails to do so. The Tribunal reasoned that during the period governed by the interim direction, the assessee was expressly restrained from treating the reimbursement as income. Therefore, the assessee could not be said to have “failed” to deduct tax within the meaning of Section 201(1). The failure was not volitional; it was mandated by a binding judicial command.
The Tribunal further bolstered its reasoning by referencing the decision of the Mumbai Bench of the ITAT in ITA No. 1387/Mum/2026, which held that a person judicially restrained from deducting tax cannot be treated as an assessee in default. The subsequent declaration of the correct legal position by the Supreme Court in 2022 could not retrospectively convert an act performed in obedience to a binding judicial command into a statutory default. The Tribunal noted that the Revenue had not identified any payment made outside the operative period of the interim direction. The temporary cessation of protection in 2022-2023, when the writ petition was dismissed, could not retrospectively create a default for earlier years.
Consequently, the ITAT held that the assessee was not an assessee in default under Section 201(1). Since the principal demand under Section 201(1) was unsustainable, the interest levied under Section 201(1A) could not survive. The Tribunal followed the decisions of the Mumbai and Chennai Benches and the Kerala High Court, which consistently held that a deductor acting in obedience to a judicial order cannot be treated as in default. The appeal was allowed, and the demand was deleted.
Conclusion
The ITAT, Agra Bench’s decision in State Bank of India v. ITO, TDS provides a crucial clarification on the limits of the “assessee in default” doctrine. It establishes that while the Supreme Court’s ruling on the taxability of LFC reimbursements is the final word on substantive law, it cannot be applied retrospectively to penalise a deductor who was acting under the explicit protection of a High Court’s interim order. The judgment reinforces the principle that a statutory obligation to deduct TDS is suspended when a competent court expressly restrains the deductor from doing so. This ruling protects assessees from being penalised for complying with judicial directives and underscores the distinction between the taxability of a perquisite and the procedural default of a deductor.