SBI Branches Complying with High Court Stay Orders Cannot

SBI Branches Complying with High Court Stay Orders Cannot Be Assessed in Default Under Section 201

Issue

Whether SBI branches can be treated as “assessees in default” under Section 201(1) and charged interest under Section 201(1A) for failing to deduct TDS on LTC reimbursements involving foreign travel, when non-deduction was done in compliance with interim orders of the Madras High Court.

Facts

The assessees were branches of the State Bank of India (SBI) that provided Leave Travel Concession (LTC) reimbursements to their employees.
SBI issued an internal circular withdrawing overseas travel facilities under the LTC scheme.
Employees challenged the circular, and the Madras High Court stayed the circular and issued subsequent interim directions regarding LTC benefits.
Employees declared these LTC reimbursements as tax-exempt under Section 10(5) in their submissions to the employer.
Adhering to the interim directions of the Madras High Court, the assessees did not deduct Tax Deducted at Source (TDS) on LTC reimbursements that involved foreign legs of travel.
The Assessing Officer (AO) treated the SBI branches as “assessees in default” under Section 201(1) for failing to deduct TDS on these payments and levied consequential interest under Section 201(1A).

Decision

Compliance with Judicial Orders Excuses TDS Default [In favour of assessee]: The Tribunal held that since the assessees were under a mandatory legal obligation to comply with the interim directions of the Madras High Court, their non-deduction of TDS was bona fide.
Not Assessees in Default: The branches cannot be treated as “assessees in default” under Section 201(1) of the Income-tax Act, 1961 for adhering to judicial mandates.
No Interest Liability under Section 201(1A): Since the primary default characterization fails, interest under Section 201(1A) cannot be charged on the assessees.

Key Takeaways

Judicial Orders Supercede Administrative TDS Duties: Employers acting in good faith to comply with High Court interim stay orders cannot be penalized or treated as defaulting deductors under tax law.
Bona Fide Belief Protects Deductors: When an employer relies on binding judicial instructions and declarations by employees regarding exemptions under Section 10(5), Section 201 default provisions are not attracted.
Section 201(1A) Interest Dependency: Interest under Section 201(1A) is consequential; if an entity is held not to be an assessee in default under Section 201(1), liability for interest automatically falls away.

IN THE ITAT AHMEDABAD BENCH ‘C’

State Bank of India

Income-tax Officer, TDS

Sanjay Garg, Judicial Member
and Smt. Annapurna Gupta, Accountant Member

IT Appeal No. 630 (Ahd) of 2026 and others
[Assessment years 2016-17 and 2017-18]

JULY 21, 2026

Lokesh Karia, AR for the Appellant. Rohit Aasudani, Sr. DR for the Respondent.

ORDER

Sanjay Garg, Judicial Member. – The captioned five appeals have been preferred by different assessees, which are separate Branches of State bank of India, against the separate orders of the Commissioner of Income Tax (Appeals) [hereinafter referred to as ‘CIT(A)’] passed under Section 250 of the Income Tax Act (hereinafter referred to as the ‘Act’) pertaining to different assessment years. Since common facts and issues are involved in all these appeals, these were heard together and are being disposed of by this consolidated order.

2. The sole and common issue involved in all the captioned appeals is as to whether the Assessing Officer (in short ‘the AO’) was justified in treating the assessees, which are separate branches of the State Bank of India (in short ‘SBI’), as assessees in default, u/s 201(1) and 201(1A) of the Act for non-deduction of TDS on the amount paid as Leave Travel Concession (in short ‘LTC’) for undertaking the foreign journeys or journeys involving foreign leg.

3. SBI had been providing reimbursement of LTC to its employees. Pursuant to a Circular dated 15.04.2014 issued by the Bank, the LTC as regards overseas travel facilities to the employees, stood withdrawn. The Circular was challenged before the Hon’ble Madras High Court at the instance of the Association of employees of the bank. The Madras High Court vide order dated 25.04.2014 stayed operation of the Circular. Later on, the aforesaid stay order was sought to be modified / clarified at the instance of the petitioners. The Hon’ble Madras High Court, therefore, issued interim order dated 16.02.2015 in W P No.11991 of 2014 clarifying the said order as under:

“5. There is no dispute that the Bank would be paying LTC amount to the concerned officers pursuant to the interim order granted by this Court. The Interim Order is subject to the result of the writ petition. The learned counsel for the petitioner is correct in his contention that the there is no taxable income for deduction at source.

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 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 Bank. “

(emphasis supplied)

4. The employees of the SBI in their return of Income, treated the LTC reimbursement as exempt u/s 10(5) of the Act. Pursuant to the above stated interim directions of the Hon’ble Madras High Court, SBI and its various branches, did not deduct TDS upon the remittance to their employees on account of reimbursement of LTC involving foreign journeys or journeys involving foreign leg during F.Y. 2015-16 relevant to A.Y. 2016-17.

5. However, the aforesaid writ petition filed by the Association of employees of Bank was ultimately dismissed on 24.06.2022, against which, W.A. No.1653 of 2022 was filed, wherein, vide order dated 08.08.2022 interim directions were issued by the Hon’ble High Court interdicting assessees / banks from making recovery from salary of the employees. Ultimately, the Division Bench of Hon’ble Madras High Court vide order dated 08.06.2023 set aside the order passed by the Single Bench and the matter was remanded to the bank authorities for fresh consideration in respect to grant of LTC to cover foreign travel on merits in accordance with law.

6. The aforesaid judgment of the Hon’ble Madras High Court was again challenged by the assessee Bank before the Hon’ble Apex Court. The Hon’ble Supreme Court pased in State Bank of India v. All India State Bank Officers Federation [SLP to Appeal (C) No(s). 16734 of 2023, dated 28-8-2023], while issuing notice to the Respondents, restrained the bank from making recoveries from employees during the pendency of the matter.

7. During the course of assessment proceedings, the AO noticed that certain employees had undertaken foreign journeys or journeys involving a foreign leg. The AO observed that exemption u/s 10(5) of the Act was available only in respect of travel within India and not in respect of journeys where foreign travel is involved.

8. However, the issue is no mor res integra as various benches of this Tribunal has decided the issue in favour of the SBI Bank holding that the assessee bank was prevented from deducting the TDS on the reimbursement of LTC paid to its employees because of the interim directions of the hon’ble Madras High Court restraining the SBI to do so. Even the Hon’ble Kerala High Court, in State Bank of India v. CIT (Ker)/ITA No.45 of 2025 (order dated 18th November 2025) has held that the assessee (SBI) under the circumstances, 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. The co-ordinate Ahmedabad Bench of the Tribunal in ITA Nos.453 & 454/Ahd/2026 in the case of State Bank of India Bhavnagar Para Branch v. ITO, TDS (Ahd-Trib) vide order dated 26.03.2026, in the identical facts and circumstances, after taking note of the above decision of the hon’ble Kerala High Court and also of the decision of the other co-ordinate Bench of this Tribunal, has held as under:

“3. The brief facts of the case are that the assessee is a branch of State Bank of India which had provided Leave Fare Concession (LFC) to its employees and had treated the same as exempt under section 10(5) of the Income-tax Act (“the Act”) while computing TDS under section 192 of the Act. During the course of assessment proceedings, the Assessing Officer noticed that certain employees had undertaken journeys involving a foreign leg and the assessee had not deducted tax at source on such payments. Accordingly, notices were issued to the assessee asking it to explain as to why it should not be treated as an assessee in default under section 201(1) and liable for interest under section 201(1A) of the Act.

4. In response, the assessee submitted that the LFC benefit was granted strictly in accordance with section 10(5) of the Act read with Rule 2B, as the designated place of travel was within India and the reimbursement was restricted to the fare of the shortest route within India. The assessee further submitted that there is no explicit prohibition in the Act or Rules against a foreign leg in the course of such travel. The assessee also relied upon industry practice, guidelines issued by the Indian Banks’ Association, and various judicial precedents to contend that the assessee had acted under a bona fide belief and therefore could not be treated as an assessee in default. Further the assessee placed reliance on interim orders of the Hon ‘ble Madras High Court, wherein it was held that LFC payments would not amount to income for the purpose of TDS during the pendency of the writ proceedings, and therefore the assessee could not have deducted tax without violating the court’s directions.

5. However, the Assessing Officer did not accept the contentions of the assessee. the Assessing Officer, relying upon the judgment of the Hon ‘ble Supreme Court dated 04.11.2022, held that exemption under section 10(5) of the Act is available only in respect of travel within India and not where foreign travel is involved. The Assessing Officer observed that once the journey includes a foreign leg, the exemption is not admissible and the amount becomes taxable in the hands of the employee. Accordingly, the assessee was held to be an assessee in default for non-deduction of tax at source and demand under section 201(1) along with interest under section 201(1A) was raised.

6. Aggrieved by the order of the Assessing Officer, the assessee preferred an appeal before the CIT(Appeals). Before CIT(Appeals), the assessee reiterated its submissions regarding compliance with Rule 2B, absence of any statutory bar on foreign travel during the journey, and its bona fide belief supported by judicial precedents. It was also contended that the Bank had only allowed exemption where the designated place was in India and that the foreign leg was merely incidental.

7. The CIT(A), however, did not accept the submissions of the assessee. The CIT(Appeals) observed that a combined reading of section 10(5) of the Act and Rule 2B clearly indicates that the exemption is available only for travel from one place in India to another place in India by the shortest route. The CIT(A) further relied upon the decision of the Hon’ble Supreme Court dated 04.11.2022, wherein it was categorically held that LTC/LFC exemption is not available in cases where the travel involves a foreign leg. The CIT(Appeals) held that the moment foreign travel is involved, the journey ceases to be a journey within India and therefore falls outside the scope of section 10(5) of the Act.

8. With regard to the argument of bona fide belief and reliance on earlier judicial orders, the CIT(A) held that in view of the authoritative pronouncement of the Hon ‘ble Supreme Court, the issue has attained finality and the assessee cannot escape liability on this ground. The CIT(A) further held that the Assessing Officer was justified in treating the assessee as an assessee in default and in raising demand under section 201(1) along with interest under section 201(1A). Accordingly, all the grounds raised by the assessee were dismissed and the order of the Assessing Officer was upheld.

9. The assessee is in appeal before us against the order passed by the CIT(Appeals) dismissing the appeal of the assessee.

10. We have heard the rival contentions and perused the material on record.

11. We have heard the rival contentions and perused the material available on record.

12. At the outset, we note that the issue on merits regarding allowability of exemption under section 10(5) of the Act in cases where the journey involves a foreign leg now stands concluded against the assessee by the judgment of the Hon ‘ble Supreme Court dated 04.11.2022. There is no dispute on this legal position and the same is duly acknowledged. However, the limited controversy before us is whether, in the peculiar facts of the present case, the assessee can be treated as an “assessee in default” under section 201(1) of the Act for non-deduction of tax at source during the relevant period.

13. The contention of the assessee has consistently been that during the year under consideration, it was bound by the interim orders passed by the Hon’ble Madras High Court in W.P. No.11991 of 2014, wherein vide order dated 16.02.2015 it was specifically clarified that the LFCpayments would not amount to income so as to enable deduction of tax at source andfurther that if the writ petition was ultimately dismissed, the employees would be liable to pay tax. The assessee has submitted that in view of such binding judicial directions, it could not have deducted tax at source and any such deduction would have amounted to disobedience of the order of the Hon’ble High Court.

14. We find considerable merit in the aforesaid contention of the assessee. The interim directions of the Hon’ble Madras High Court were in force during the relevant previous year and the assessee, being a party to the proceedings, was duty bound to comply with the same. The obligation under section 192 of the Act to deduct tax at source cannot be read in isolation and must yield to binding judicial orders. Therefore, the failure to deduct tax in such circumstances cannot be equated with a default contemplated under section 201(1) of the Act.

15. We further find that an identical issue has been considered by the Coordinate Bench of the Tribunal in the case of State Bank of India in ITA No.514/Agr/2024, wherein after considering the decision of the Hon’ble Supreme Court as well as the interim orders of the Hon ‘ble Madras High Court, ITAT held that the assessee bank could not be treated as an assessee in default since it was bound to follow the interim directions of the Hon’ble High Court. The Tribunal categorically observed that the assessee had no option but to comply with the orders of the Hon ‘ble High Court and non-deduction of tax in such circumstances could not invite the rigours of section 201(1) and 201(1A) of the Act.

16. More importantly, the Hon’ble Kerala High Court in ITA No.45 of 2025 (order dated 18^th November 2025) has examined this issue in detail and has held in favour of the assessee. The relevant findings of the Hon’ble High Court, which have a direct bearing on the issue before us, are reproduced below for ready reference:

“The interim order granted by this Court is explained to the effect that any amount paid to the petitioner towards LTC or re-imbursement of LTC pursuant to the impugned order would not amount to 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 Bank. ”

“It is only when the appellant-assessee, after having a liability to deduct tax, fails to do so, the question of invoking Section 201 of the Act and treating it as an ‘assesses in default’ arises. Here, the Madras High Court found, prima facie, that the amount paid would not be the income of a payee so as to deduct tax. Therefore, we are of the opinion that the provisions of Section 201(1) of the Act are not attracted to the case at hand. ”

“The appellant-assessee 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. ”

17. The Hon ‘ble High Court has thus clearly held that where the assessee was restrained by judicial orders from deducting tax at source, the provisions of section 201 of the Act cannot be invoked and the assessee cannot be treated as an assessee in default.

18. In the present case also, the facts are materially identical. The assessee was operating under the binding interim directions of the Hon ‘ble Madras High Court during the relevant period and therefore could not have deducted tax at source. The subsequent decision of the Hon’ble Supreme Court, though settling the issue on merits, cannot retrospectively fasten liability under section 201(1) of the Act for a period during which the assessee was acting in compliance with judicial orders.

19. We also find force in the argument of the assessee that the scheme of section 201 of the Act itself contemplates that a person can be treated as an assessee in default only when there is a failure to deduct tax in spite of a legal obligation to do so. In the present case, such legal obligation stood eclipsed by the interim directions of the Hon’ble High Court.

20. In view of the above discussion, respectfully following the decision of the Hon’ble Kerala High Court in ITA No.45 of 2025 and the decision of the Coordinate Bench in ITA No.514/Agr/2024, we hold that the assessee cannot be treated as an assessee in default under section 201(1) of the Act for the impugned period. Consequently, the interest charged under section 201(1A) also does not survive.

21. Accordingly, we direct the Assessing Officer to delete the demand raised under section 201(1) and 201(1A) of the Act. “

9. We are in agreement with the above decision of the coordinate bench of the Tribunal. Since the assessees were under legal obligation to comply with the orders of the Hon’ble Madras High Court (supra), hence the assessees, herein, can not be termed as assessees in default under section 201(1) of the Act for the impugned period and interest cannot be charged from them under section 201(1A). Accordingly, the demand raised by the Assessing Officer under section 201(1) and 201(1A) of the Act, is hereby set aside.

10. In the result, all the captioned appeals of the assessees are, hereby, stand allowed.