STATE BANK OF INDIA (NELSON MANICKAM ROAD),CHENNAI vs. INCOME TAX OFFICER, TDS WARD-3(1), CHENNAI, CHENNAI

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ITA 1718/CHNY/2026Status: DisposedITAT Chennai05 August 2026AY 2016-1715 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the assessee bank cannot be treated as an assessee in default for not deducting tax at source. This is because the bank acted in compliance with the subsisting judicial orders of the Madras High Court and the Supreme Court.

What were the facts?

The assessee, State Bank of India, did not deduct tax at source on Leave Travel Concession (LTC) paid to its employees. This was done in compliance with interim orders from the Madras High Court, which had stayed a circular regarding overseas LTC. The Assessing Officer treated the bank as an assessee in default.

What were the issues?

Whether the assessee bank is liable as an assessee in default for not deducting TDS on LTC payments when it was following court orders. Whether compliance with judicial orders overrides the obligation to deduct tax at source.

Which sections of the Income-tax Act were involved?

Section 192,Section 201,Section 201(1A),Section 10(5)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI

Before: SHRI GEORGE GEORGE K & MS PADMAVATHY S

Hearing: 30.07.2026Pronounced: 05.08.2026

आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT: This appeal filed by the assessee is directed against the order of Addl./Joint Commissioner of Income Tax, Siliguri dated 27.01.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The order of the appellate authority arise out of the

- 2 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) order of the AO passed u/s.201 r.w.s. 201(1A) of the Act. The relevant Assessment Year is 2016-17.

2.

The grounds raised read as follows:- 1.The Learned Commissioner of Income-tax (Appeals) ("CIT(A)") erred in confirming the order of the Assessing Officer ("AO") holding the appellant to be an assessee in default for failing to deduct tax at source under section 192 of the Income-tax Act, 1961 ('the Act). 2. The CIT(A) erred in not appreciating that the Appellant had issued e- Circular no. CDO/P&HRD-PM/7/2014-15 dated 15th April 2014 stating that the employees shall not be entitled to visit overseas countries/ centers as part of leave travel concession ("LTC") which Circular was challenged by the All India State Bank Officers Federation & Ors. before the Madras High Court by way of a writ petition (WP no. 11991 of 2014) and that the Madras High Court had vide its order dated 25th April 2014 granted interim stay of the Circular. 3.The CIT(A) further erred in not appreciating that tax was not deducted at source by the Appellant on the LTC paid to its employees during the year under consideration in view of the specific interim directions issued by the Hon'ble Madras High Court in its order dated 16th February 2015 by which the Court held that the LTC paid or reimbursed would not amount to income and that no tax was to be deducted thereon. The CIT(A) ought to have appreciated that if the LTC was not to be treated as income of the employees as per the order of the Hon'ble Madras High Court, the same even otherwise would not require withholding of tax under section 192 of the Act. 4. The CIT(A) further erred in not appreciating that the Madras High Court vide its said order dated 16th February 2015 having directed the Appellant not to deduct at source on LTC had further stated that if the writ petition challenging the Circular was dismissed, the employees would be liable to pay tax on the LTC amount paid by the Appellant and, therefore, the CIT(A) ought to have quashed the order of the AO holding the Appellant to be an assessee in default. 5. The CIT(A) erred in not quashing the order of the AO holding the Appellant to be an assessee in default for the reason that the Appellant, even if it wanted to, could not have deducted tax at source on LTC paid during the year under consideration in view of the orders of the Hon’ble

- 3 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) Madras High Court till the time they were in force as acting contrary to the orders of the Hon'ble Court would have amounted to contempt of Court. 6. The CIT(A) erred in not following the judgment of the Hon'ble Kerala High Court in State Bank of India v. CIT (IТА по. 45 of 2025) where the Hon'ble Court after considering the above set of facts held that the Appellant was justified in not deducting tax at source in view of the interim directions issued by the Madras High Court asking the Appellant not to deduct tax at source. 7. The CIT(A) erred in observing that the legal obligation to deduct tax was reinstated once the interim order passed by the Hon’ble Madras High Court was vacated without appreciating that the order of the Single Judge of the Hon'ble Madras High Court was challenged before the Division bench and later the Division bench's order before the Hon'ble Supreme Court and that the Hon'ble Supreme Court in SLP(C) no. 16734 of 2023 has ordered the Appellant bank from not making any recoveries from its employees during the pendency of the petition. 8.Without prejudice to above grounds, the CIT(A) erred in not holding that the Appellant could not have been deemed to be an assessee in default under section 201(1) of the Act if the employee had furnished the return of income, taken into account such sum for computing income and paid the tax due on income declared by the employee.

3.

Brief facts of the case are as follows :- The assessee / deductor is a branch of nationalized bank having TAN CHES302D for the relevant assessment year. The ITO-TDS (the AO) issued notice seeking details of LFC (Leave Fare Concession)/ LTC (Leave Travel Concession), which was claimed as deduction during the assessment year 2016-17 in its P&L account. A show-cause notice was issued to the assessee/deductor why it should not be treated as ‘assessee in default’ for non-deduction of tax on the said reimbursement of LFC / LTC involving foreign travel to its

- 4 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) employees. In response, the assessee filed its letter dated 07.06.2023 contending LFC involving foreign travel to its employees is not chargeable to tax u/s.10(5) of the Act. Further, it was contended that the assessee’s circular issued to its employees stating such LFC / LTC would be liable for TDS was challenged by the employees of the assessee before the Hon’ble Madras High Court and the same was stayed by the Hon’ble High court by writ petition No.11991 of 2014 dated 25.04.2014. However, the AO relied on the Hon’ble Supreme Court judgment in State Bank of India vs. ACIT dated 04.11.2022 (Civil Appeal No.8181 of 2022) and raised a demand u/s.201 (1) & 201 (1A) of the Act as detailed below:- LFC paid to Tax deductible @ Interest u/s Total (INR) employee (INR.) 30% (INR) 201(1A) INR 3,76,308/- 1,12,892/- 1,08,376/- 2,21,268/-

4.

Aggrieved, assessee filed appeal before the First Appellate Authority (FAA). The assessee contended that the AO erred in treating it as an assessee in default under section 201(1) and levying interest under section 201(1A) for non-deduction of tax at source on reimbursement of Leave Fare Concession (LFC) to its employees. It was submitted that the assessee had not deducted tax at source in compliance with the interim order dated 16.02.2015

- 5 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) passed by the Hon'ble Madras High Court in W.P. No.11991 of 2014, whereby the Court had directed that no tax should be deducted on such payments and had further observed that, in the event of dismissal of the writ petition, the concerned employees would be liable to pay the tax. The assessee submitted that the interim directions of the Hon'ble High Court were binding upon it and that any deduction of tax at source in violation thereof would have amounted to disobedience of the judicial order. The FAA, however, rejected the contentions of the assessee and upheld the action of the AO by dismissing the appeal. The FAA, after extracting the sequence of events, observed that there was no interim stay in force during the periods from 24.06.2022 to 08.08.2022 and from 08.06.2023 to 08.08.2023. Accordingly, the FAA held that the assessee, being the deductor, ought to have recovered the tax on the entire LTC amount paid to its employees during the aforesaid periods. Since the assessee failed to do so, it was held to be an assessee in default u/s.201(1) and 201(1A) of the Act, and the action of the AO was accordingly confirmed.

5.

Aggrieved by the order of the FAA, the assessee / deduction has filed the present appeal before the Tribunal. The Ld.AR has filed a paper-book enclosing therein chronology of relevant events, written

- 6 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) submission, SBI Circular dated 15.04.2014, orders of the Hon’ble High Court and Hon’ble Supreme Court granting stay in the case filed by the employees against the State Bank of India Circular dated 15.04.2025, Case laws relied on, etc. The Ld.AR submitted that the issue in question is squarely covered by the judgment of the Hon’ble Kerala High Court in the case of State Bank of India vs. CIT (judgment dated 18.11.2025) reported in [2025] 180 taxmann.com 837 (Kerala).

6.

The Ld.DR supported the orders of the AO and the FAA.

7.

We have heard rival submissions and perused the material on record. We have heard the rival submissions and perused the material available on record. The short issue for our consideration is whether the assessee-bank could be treated as an assessee in default under sections 201(1) and 201(1A) of the Act for non- deduction of tax at source on Leave Fare Concession (LFC) payments made to its employees during the period when the interim orders of the Hon'ble Madras High Court were in operation.

8.

It is an undisputed fact that the assessee was initially under a bona fide belief that reimbursement of Leave Fare Concession

- 7 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) involving a foreign stopover was exempt under section 10(5) of the Act. However, upon receipt of notices from the Department and after deliberations with the Indian Banks' Association and the Ministry of Finance, the assessee took a conscious decision to deduct tax at source on such payments and commenced deduction from November, 2014. Thereafter, by interim order dated 16.02.2015 in W.P. No.11991 of 2014, the Hon'ble Madras High Court restrained the assessee from deducting tax at source on the LFC payments by observing, prima facie, that the reimbursement would not constitute income in the hands of the employees and further clarified that, in the event of dismissal of the writ petition, the liability to pay tax would rest upon the concerned employees. Thus, the assessee was bound by the judicial directions of the Hon'ble High Court and any deduction of tax contrary thereto would have amounted to disobedience of a subsisting judicial order.

9.

The Revenue seeks to sustain the impugned demand primarily on the reasoning adopted by the First Appellate Authority that there was no interim protection during the periods from 24.06.2022 to 08.08.2022 and from 08.06.2023 to 28.08.2023 and, therefore, the assessee ought to have recovered the tax from its employees during the said interregnum. We are unable to subscribe to the said

- 8 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) reasoning. The interim order dated 16.02.2015 had specifically provided that, if ultimately the writ petition failed, the employees themselves would be liable to discharge the tax liability. Therefore, the interim protection governed the period during which it remained in force and did not create any retrospective obligation upon the assessee to recover tax relating to payments already governed by the judicial order. When an interim order is vacated, the obligation to deduct tax, if any, would operate prospectively from the date of such vacation and cannot be stretched to fasten liability in respect of transactions protected by the earlier judicial order.

10.

Further, we find that when the interim protection was restored by the Hon'ble Madras High Court on 08.08.2022, the Court specifically directed that no recovery should be effected from the salaries of the employees and that no coercive proceedings should be initiated against them during the pendency of the writ appeal. Likewise, while restoring protection on 28.08.2023, the Hon'ble Supreme Court directed that the petitioner-bank shall not make any recovery from its employees during the pendency of the Special Leave Petition. Therefore, even assuming that the assessee had intended to recover the tax from its employees, such recovery stood expressly interdicted by the judicial orders. Any recovery by the

- 9 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) assessee would have defeated the very object and intent of the interim protection granted by the constitutional courts.

11.

We also find considerable force in the reliance placed by the learned Authorised Representative on the judgment of the Hon'ble Kerala High Court in State Bank of India v. CIT [2025] 180 taxmann.com 837 (Ker.), wherein, after considering the very same issue, the Hon'ble High Court categorically held that an employer cannot be treated as an assessee in default under section 201(1) when it had acted in obedience to the interim orders of the Hon'ble Madras High Court. The Hon'ble High Court held that the provisions of section 201(1) become applicable only where the deductor, despite being under a legal obligation to deduct tax, fails to do so. In the present case, the interim directions of the Hon'ble Madras High Court governed the field and the assessee was legally justified in not deducting tax at source. Consequently, the provisions of section 201(1A) providing for levy of interest were also held to be inapplicable. The Hon'ble Kerala High Court has further observed that the interim order had specifically cast the ultimate liability upon the employees if the writ petition failed and, therefore, the Department could not, after dismissal of the writ petition, ignore the liability of the deductee employees and proceed only against the

- 10 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) employer. The Hon’ble Kerala High Court also took note of the judgment of the Hon’ble Apex Court dated 04.11.2022 relied on by the AO and held that Hon’ble Apex court findings were for assessment year 2012-13, when the Hon’ble Madras High Court stay was not operative. The relevant finding of the Hon’ble Kerala High Court in assessee’s reads as under : “8………………………..But in the case at hand, when so visualised, there cannot be any dispute that the appellant-assessee could not have made any deduction in view of the interim order issued as noticed earlier. 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 'assessee 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. For the same reasons, the provisions of sub-section (1A) of Section 201 of the Act providing for the levy of interest are also not attracted.

9.

The issue can be addressed from yet another angle, also. Section 192 of the Act, as noticed earlier, provides for making deductions while making payments to the employee. At the time of such payment, the interdiction by the Madras High Court did not permit the appellant to deduct tax, since the appellant-assessee was directed to make such payments without deduction of tax. The Court, however, cautiously made it clear that it is for the employees to pay tax directly on the amount paid by the bank, if ultimately, the writ petition is dismissed. Therefore, the appellant could not be called upon to make payment on a later date- after the dismissal of the writ petition in 2022- ignoring the liability of the payee to satisfy the tax.

10.

We also take note of the first proviso to Section 201(1) of the Act, as per which the payer is not to be treated as an 'assessee in default' if a payee has furnished the return of income under the Act, taking into account the amount received for computing the income. The

- 11 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) circumstances like the one herein are taken care of, through the first proviso to Section 201 of the Act.

11.

We also notice the judgment of the Madras High Court in Leema Resorts (P.) Ltd. v. C.G. Suryakant [1995] 129 CTR 317/215 ITR 618/[1996] 85 Taxman 475 (Madras), wherein a more or less similar issue arose for consideration. In that case, the appellants were the tenants of the premises concerned in the appeal. The appellants were found guilty of contempt of court for having wilfully disobeyed certain orders of the Court in an appeal filed against the order of the learned Single Judge. In the contempt appeal, the enforcement of the order was postponed in view of the undertaking made by the appellants to pay a certain sum of rupees ten lakhs on or before 01.08.1994. The amount of rupees ten lakhs was paid on 01.08.1994. The Division Bench recorded the payment of rupees ten lakhs on the previous day and permitted the appellants to make a deposit of rupees three lakhs in the manner stated thereunder. After payments were made as above, a notice was issued by the income tax department to the appellant in the contempt appeal, inviting attention to the provisions of Section 194-I of the Act introduced in June 1994, as per which 20% ought to have been deducted when rent exceeding Rs.1,20,000/- was paid in a financial year. The appellant in such circumstances approached the court seeking permission to deduct 20% of the amount already paid pursuant to the order noticed earlier. Considering this issue, the Court found as under: -

"One more question that remains for consideration is as to whether the petitioners should be subjected to the proceedings that are now initiated against them by notice dated September 2, 1994, which is extracted above. We have already extracted the relevant portion of our order dated August 2, 1994, which directed the mode of payment. Further, the petitioners/appellants in Contempt Appeal No. 5 of 1994, were required to pay under the teeth of punishment imposed in the contempt proceedings. Our order did not give any scope or option to the appellants in the contempt appeal to deduct 20 per cent, of the amount payable to the respondents at source. In such a situation, the proviso to section 201 of the Act is attracted as it specifically empowers the concerned Assessing Officer to extend the benefit to such an assessee and not to treat him as the assessee in default in respect of the tax. On this question also, we have heard learned senior standing counsel for the Department, who fairly submitted that as the petitioners were obliged to make payment pursuant to the order of this court, they cannot be treated as

- 12 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) defaulters and they would fall within the proviso to section 201 of the Act, and the Assessing Officer would be suitably advised in this regard, on an application filed by the petitioners pursuant to the notice dated September 2,1994. As the case falls under the proviso to section 201(1) of the Act and as the submission of learned senior standing counsel is also to the same effect, and in addition to this it is also submitted by learned senior standing counsel that the Assessing Officer would be advised, accordingly, we do not consider it necessary to issue any such direction as prayed for in this miscellaneous petition as it would be sufficient to place the submissions made by learned standing senior counsel for the Department on record." (Underlining supplied)

Thus, it is clarified by the Madras High Court that the appellant therein is not to be proceeded against for payments already made pursuant to the orders issued, as per which there was no scope for tax deduction at source. We are of the opinion that the same is the position herein also, as the appellant, having complied with the orders of the Madras High Court, cannot be treated as an 'assessee in default' under the provisions of Section 201 of the Act.

12.

The Apex Court in State of U.P. v. Prem Chopra [2022] 2 SCR 990, considering the effect of an interim order granted by the Court, once the main matter itself is disposed of, has observed as under:-

"24. From the above discussion, it is clear that imposition of a stay on the operation of an order means that the order which has been stayed would not be operative from the date of passing of the stay order. However, it does not mean that the stayed order is wiped out from the existence, unless it is quashed. Once the proceedings, wherein a stay was granted, are dismissed, any interim order granted earlier merges with the final order. In other words, the interim order comes to an end with the dismissal of the proceedings. In such a situation, it is the duty of the Court to put the parties in the same position they would have been but for the interim order of the court, unless the order granting interim stay or final order dismissing the proceedings specifies otherwise. On the dismissal of the proceedings or vacation of the interim order, the beneficiary of the interim order shall have to pay interest on the amount withheld or not paid by virtue of the interim order." (underlining supplied) Thus, though the effect of an interim order would come to an end upon the final disposal of the main case that would be subject to the observation to

- 13 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) the contrary in the interim order or the final judgment. Applying this principle to the case at hand, even though the main writ petition/writ appeal has been later disposed of insofaras the interim order has directed the treatment of the amount paid without deduction of tax in the manner laid down therein, the appellant bank cannot be treated as an assessee in default.

13.

Sri. Jayashankar also contended that insofar as steps under Section 201 of the Act were initiated with reference to the deduction within the State of Kerala, the interim orders issued by the Madras High Court were of no consequence, and hence the appellant cannot seek refuge thereunder. But we are of the opinion that since the Act is an all-India statute and since what was challenged before the Court was the circular issued by the bank at the instance of the Association of Bank employees, the appellant cannot be faulted for having honoured the stay orders issued by the Madras High Court. Therefore, the afore contention raised is only to be rejected.

14.

We also take note of the fact that the Apex Court, by judgment dated 04.11.2022 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, has found that, as against payments made by the appellant bank to its employees towards LTC, it was bound to deduct tax at source. But this finding was with respect to the Assessment Year 2013-14 (financial year 2012-13). In the case at hand, during the financial year 2015-16 relevant to the assessment year 2016- 17, the interim directions issued by the Madras High Court governed the field, and the appellant-assessee was justified in not having deducted the tax.”

12.

Further, the charge of income-tax u/s.4 of the Act is upon the recipient of income and the employer merely acts as a collecting agency through the mechanism of tax deduction at source. The liability u/s.201 of the Act is not automatic and before treating a deductor as an assessee in default, the Department is required to ascertain whether the deductees have discharged their tax liability.

- 14 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road) If the employees have paid the due taxes, the deductor cannot be fastened with liability; if they have not, the primary liability continues to remain with the employees. In the light of the above factual and legal position, we are of the considered opinion that the assessee cannot be treated as an assessee in default u/s.201(1) and 201(1A) of the Act for having acted in faithful compliance with the subsisting judicial orders of the Hon'ble Madras High Court and the Hon'ble Supreme Court. The reasoning adopted by the First Appellate Authority in fastening liability upon the assessee for the interregnum period is legally unsustainable. Accordingly, the orders of the Income-tax authorities are set aside and the demand raised u/s. 201(1) and 201(1A) of the Act is deleted. The grounds raised by the assessee are allowed.

13.

In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on 5th August, 2026 at Chennai.

Sd/- Sd/- (प�मावती एस) (जॉज� जॉज� के) (PADMAVATHY S) (GEORGE GEORGE K) लेखा सद�य/ACCOUNTANT MEMBER उपा�य� /VICE PRESIDENT चे�नई/Chennai, �दनांक/Dated, the 5th August, 2026 RSR, Sr.PS

- 15 - ITA No.1718/CHNY/2026 SBI (Nelson Manickam Road)

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त /CIT, Chennai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF. By Order Digitally signed by REKHA REKHA SENTHIL RAJ SENTHIL RAJ Date: 2026.08.06 15:43:39 +05'30'

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