Delay Condone and TDS Demands/Penalties Deleted as Compliance Followed Judicial Restraint Against LFC Tax Deductions

ORDER

Makarand Vasant Mahadeokar; Accountant Member.- These three appeals filed by the assessee arise from separate orders passed by the learned Commissioner of Income-tax (Appeals) under section 250 of the Income-tax Act, 1961, hereinafter referred to as “the Act”. Since the appeals involve a common issue relating to nondeduction of tax at source from Leave Travel Concession involving a foreign leg of travel, they were heard together and are being disposed of by this common order.

2. The particulars of the appeals are as under:

3. At the outset, it is noticed that ITA No. 870/Jodh/2024 has been filed belatedly. The assessee has filed an application seeking condonation of delay, supported by an affidavit of the Branch Manager of State Bank of India, Pal Link Road Branch, Jodhpur. It has been stated in the affidavit that the order dated 21.09.2022 passed by the learned CIT(A) came to the knowledge of the assessee only on 16.10.2024, when the Income Tax Officer contacted the branch regarding payment of the outstanding demand. The assessee has further explained that its TDS functions had been centralised with effect from 01.04.2017 and that the login credentials pertaining to TAN JDHS09836B were not available with the concerned branch. Consequently, the branch could not access the e-filing portal or ascertain the status of the appellate proceedings. It has further been stated that the assessee thereafter undertook the necessary administrative steps for restoration of access to the e-filing account through the Digital Signature Certificate of the authorised representative. Upon restoration of access and examination of the records available on the portal, the complete facts concerning the proceedings and the appellate order came to its knowledge, whereupon immediate steps were taken for filing the present appeal.

4. We have considered the explanation furnished by the assessee and the contents of the affidavit. The explanation shows that the delay arose on account of the non-availability of the e-filing credentials at the concerned branch and the lack of knowledge of the appellate order. There is no material before us to suggest that the delay was deliberate, mala fide or attributable to a conscious disregard of the statutory remedy. Once the assessee acquired knowledge of the impugned order and restored access to the portal, it took steps to pursue the appellate remedy. In these circumstances, and having regard to the settled principle that a matter should ordinarily be adjudicated on merits where the delay is satisfactorily explained, we are satisfied that the assessee was prevented by sufficient cause from filing the appeal within the prescribed period. The Departmental Representative (DR) has not raised objection for condoning the delay. Accordingly, the delay in filing ITA No. 870/Jodh/2024 is condoned and the appeal is admitted for adjudication on merits.

5. The assessee has raised the following grounds of appeal:

6. In case of ITA No. 870/JODH/2024, the assessee is a branch of State Bank of India. The Assessing Officer received information that the assessee had reimbursed Leave Travel Concession to its employees for journeys involving travel within India as well as foreign destinations, but had not included such reimbursement in the taxable salary of the employees or deducted tax at source therefrom. The assessee, by its letter dated 25.11.2014, informed the Assessing Officer that Leave Travel Concession of Rs.4,61,770/- had been paid to Shri Surendra Deo Solanki. It was further stated by the assessee in its letter dated 11.08.2015 that the payment had been made on 30.11.2011. The Assessing Officer issued letters dated 25.03.2015, 13.07.2015, 05.08.2015, 06.02.2018 and 28.02.2018 requiring the assessee to furnish Form No. 16 issued to the employee, a break-up of the reimbursed expenditure and an explanation as to why the assessee should not be treated as an assessee in default. According to the Assessing Officer, the required details were not furnished. The proceedings were, therefore, concluded on the basis of the material available on record. The Assessing Officer found that the employee had undertaken a journey to Port Blair through Kuala Lumpur and Bangkok. Out of the total reimbursement of Rs.4,61,770/-, the Assessing Officer allowed Rs.63,632/- as relating to travel within India and treated the balance amount of Rs.3,98,138/- as taxable salary. The assessee was held to be an assessee in default for failure to deduct tax under section 192. The Assessing Officer computed the liability under section 201(1) at Rs.82,017/- and interest under section 201(1A) at Rs.67,253/-, resulting in an aggregate demand of Rs.1,49,270/-.

7. The assessee carried the matter in appeal. The learned CIT(A) found that the first appeal had been filed with a delay of 131 days and declined to condone that delay. Without prejudice thereto, the learned CIT(A) also adjudicated the controversy on merits and upheld the order passed under sections 201(1) and 201(1A). The appeal was accordingly dismissed.

8. In case of ITA No. 52/Jodh/2025, information was received from the DCIT, TDS Circle-2(2), Mumbai, that during the financial year 201516 the assessee had made payments to its employees under the head Leave Fare Concession without deducting tax at source. Proceedings under sections 201(1) and 201(1A) were consequently initiated. The Assessing Officer found that the assessee had reimbursed Rs.3,60,864/-to Shri Sunil Raj Dadda for a journey involving foreign travel. The Assessing Officer held that such reimbursement was not eligible for exemption under section 10(5) read with Rule 2B of the Income-tax Rules, 1962. The assessee was consequently treated as an assessee in default and the Assessing Officer raised a demand of Rs.2,05,164/-, comprising tax of Rs.1,11,502/- under section 201(1) and interest of Rs.93,662/- under section 201(1A).

9. The learned CIT(A) upheld the order of the Assessing Officer. The learned CIT(A), inter alia, relied upon the judgment of the Hon’ble Supreme Court in State Bank of India v. Assistant Commissioner of Income-tax [2022] 144 taxmann.com 131/449 ITR 192/[2023] 290 Taxman 129 (SC)/Civil Appeal No. 8181 of 2022, dated 04.11.2022, and dismissed the appeal.

10. Consequent to the order dated 31.12.2018 passed under sections 201(1) and 201(1A) for A.Y. 2012-13, penalty proceedings under section 271C were initiated. The Joint Commissioner of Income-tax (TDS), Jodhpur, observed that the assessee had failed to deduct tax of Rs.82,017/- under section 192 from the LFC reimbursement paid to Shri Surendra Deo Solanki. The Joint Commissioner, by order dated 05.10.2020, imposed a penalty of Rs.82,017/- under section 271C, being an amount equal to the tax allegedly not deducted by the assessee. The learned CIT(A), by order dated 06.06.2024, upheld the penalty on the ground that the assessee had failed to establish a reasonable cause within the meaning of section 273B.

11. Aggrieved by the orders, the assessee is in further appeal before us.

12. The learned Authorised Representative (AR) reiterated the grounds of appeal and the written submissions. On merits, he submitted that the assessee-bank had acted under a bona fide belief based upon the applicable service rules, circulars and interim orders passed in the proceedings instituted by the employees’ associations. The assessee-bank had also been restrained from making recoveries from its employees. It was contended that the employees who had received and enjoyed the benefit of LFC were primarily liable to discharge the corresponding tax liability under sections 4 and 191 of the Act. Therefore, the assessee-bank could not mechanically be treated as an assessee in default under section 201(1) without examining whether the tax had been paid by, or could be recovered from, the concerned employees.

13. The learned AR further submitted that the controversy stood covered in favour of the assessee by the decisions of the Jaipur Bench of the Tribunal in the assessee’s own case in State Bank of India v. ACIT/DCIT (TDS) [ITA No. 728/JPR/2024, dated 7-1-2025], A.Y. 2014-15 and State Bank of India v. JCIT holding charge of DCIT, Circle-TDS [ITA No. 1391/JPR/2024, A.Y. 2016-17, order dated 13.03.2025]. It was submitted that in [ITA No. 1391/JPR/2024, dated 13-3-2025], dated 13-3-2025], the coordinate Bench had considered an identical controversy concerning non-deduction of tax at source from LFC reimbursement involving a foreign leg of travel and had quashed the orders passed under sections 201(1) and 201(1A) of the Act. Since the material facts and the issue involved in the present appeals were identical, the learned AR prayed that the impugned orders be set aside by respectfully following the aforesaid decisions.

14. In respect of the connected penalty appeal, the learned AR submitted that the penalty of Rs.82,017/- imposed under section 271C was entirely consequential to the underlying order passed under section 201(1). Once the underlying order and the corresponding demand were set aside, the foundation for imposition of penalty under section 271C would cease to exist. He, therefore, prayed that the consequential penalty be deleted.

15. The learned DR fairly conceded that the controversy arising in the two quantum appeals was covered by the orders of the coordinate Jaipur Bench in the assessee’s own case. The learned DR did not point out any material factual distinction warranting a different view. The learned DR also fairly accepted that the penalty imposed under section 271C would be consequential to the decision in the connected proceedings under sections 201(1) and 201(1A).

16. We have considered the rival submissions and examined the orders of the authorities below, the material available on record and the decisions relied upon by the learned AR. The controversy before us is whether the assessee-bank could be treated as an assessee in default under sections 201(1) and 201(1A) for not deducting tax under section 192 from the LFC reimbursement paid to its employees in cases where the journeys involved a foreign leg.

17. In [ITA No. 728/JPR/2024, dated 7-1-2025], the coordinate Bench quashed the proceedings under sections 201(1) and 201(1A). The relief in that case was principally founded upon the absence of the requisite approval for the spot verification conducted under section 133A. The coordinate Bench also took note of the interim order dated 28.08.2023 passed in SLP (C) No. 16734/2023.

18. The controversy arising in the present appeals is more directly covered by the subsequent decision of the Jaipur Bench in ITA No. 1391/JPR/2024, dated 13-3-2025. In that case also, the assessee-bank had reimbursed LFC involving foreign travel during F.Y. 2015-16 and had been treated as an assessee in default under sections 201(1) and 201(1A). The coordinate Bench considered the respective obligations of the employer and employees under sections 4, 191, 192 and 201. The relevant findings recorded in paragraphs 7 and 8 of that order read as under:

7. The scheme of the assessment proceedings can’t be equated with the scheme as envisaged in section 201(1) and 201(1A) of the Act. The liability of the deductor u/s. 201(1) of the Act is not automatic, the department must verify and bring on record, whether action against the beneficiary has been initiated and due taxes by them have been paid or not. If the deductee had paid taxes, this will automatically absolve the deductor and if not still, the deductee is liable to pay as per section 4 of the Act.

8. Without being prejudice to the above factual and legal observation, it is also brought to our notice (Before the Ld. CIT (A) also) that the SLP (C) No. 16734/2023 is pending before the Hon’ble Apex Court, wherein the Hon’ble Apex Court has restrained the deductor Bank from making any recovery from its beneficiary employees during the pendency of the SLP mentioned (supra). In this SLP Ld. Commissioner of Income Tax (TDS), Chennai is also a party as respondent no. 5. There was a stay on the bank from recovering amount from its employees but there is no restriction as such on the Revenue to proceed against the beneficiary employees. How it can be justified that the beneficiary who enjoyed the perks is nowhere in picture and facing no heat, where as the employer is being dragged for his tax of recovery. In view of this discussion and observation of the bench Ground Nos. 2, 3, 4 and 5 are allowed and the order of the AO (TDS) is quashed alongwith the confirmatory order of the Ld. CIT (A).”

19. The coordinate Bench thus held that the liability of the deductor under section 201(1) was not automatic and that the Department was required to examine whether the concerned employees had discharged the tax liability. The Bench further noticed that, while the assessee-bank had been restrained from recovering the amount from its employees, there was no corresponding restraint upon the Revenue from proceeding against the employees who had received the benefit.

20. In the present cases also, the orders of the Assessing Officer do not record any inquiry or finding as to whether proceedings were initiated against the concerned employees or whether the employees had paid tax on the LFC reimbursement received by them. The demands were raised directly against the assessee-bank on the basis that the foreign leg of travel rendered the reimbursement taxable. No material distinction between the present cases and the decision in ITA No. 1391/JPR/2024, dated 13-3-2025], dated 13-3-2025] has been brought to our notice. On the contrary, the learned DR has fairly conceded that the controversy is covered by the aforesaid coordinate Bench decision.

21. Viewed independently on merits, the decisive consideration is not whether LFC reimbursement involving a foreign leg was ultimately eligible for exemption under section 10(5), but whether the assessee could lawfully be regarded as having committed a default under section 201(1) during the subsistence of the binding interim direction dated 16.02.2015. Under that direction, the reimbursement was not to be treated as income so as to enable the assessee-bank to deduct tax at source, and the eventual tax liability, in the event of dismissal of the writ petition, was expressly placed upon the concerned employees. The assessee was, therefore, under a judicial restraint against treating the reimbursement as taxable salary for the purpose of deduction under section 192. In these circumstances, its compliance with the subsisting judicial direction could not constitute a failure attracting section 201(1). The subsequent determination of the substantive taxability of foreign-leg LFC does not retrospectively render the assessee an assessee in default for the period during which the interim direction remained operative. Consequently, the demand under section 201(1), as well as the corresponding interest under section 201(1A), cannot be sustained.

22. Judicial discipline requires consistency in adjudication, particularly where the controversy arises in the case of the same assessee and the material facts and statutory provisions are substantially the same. Respectfully following the decision of the coordinate Jaipur Bench in [ITA No. 1391/JPR/2024, dated 13-3-2025, we hold that the assessee cannot be treated as an assessee in default on the basis adopted by the Assessing Officer in the present cases.

23. Accordingly, the orders passed under sections 201(1) and 201(1A) in ITA Nos. 52/Jodh/2025 and 870/Jodh/2024 are quashed and the corresponding demands are deleted. The substantive grounds concerning the treatment of the assessee as an assessee in default are allowed. Since the assessee has obtained complete relief on this issue, the remaining jurisdictional and procedural grounds are rendered academic and are not separately adjudicated. The general grounds require no independent adjudication.

24. The penalty of Rs.82,017/- under section 271C was imposed solely on the basis of the alleged failure of the assessee to deduct tax of an equivalent amount from the LFC reimbursement paid to Shri Surendra Deo Solanki. The penalty thus derives its foundation from the order dated 31.12.2018 passed under section 201(1).

25. While disposing of ITA No. 870/Jodh/2024, we have quashed the underlying order passed under sections 201(1) and 201(1A) and deleted the corresponding demand. Once the principal order holding the assessee to be in default does not survive, the consequential penalty imposed under section 271C cannot independently subsist. The very foundation upon which the penalty was imposed has ceased to exist.

26. We, therefore, set aside the order of the learned CIT(A) in ITA No. 872/Jodh/2024 and direct the Assessing Officer to delete the penalty of Rs.82,017/- imposed under section 271C. Ground No. 1 is allowed. Ground No. 2 is general and requires no separate adjudication.

27. In the result all the appeal in ITA No. 52/Jodh/2025, ITA No. 870/Jodh/2024 and ITA No. 872/Jodh/2024 are allowed.