STATE BANK OF INDIA versus ASSISTANT COMMISSIONER OF INCOME TAX on 4 November 2022

1. Leave granted. The appellant (State Bank of India) haschallenged the judgement dated 13.01.2020 passed by a Division Benchof the Delhi High Court in ITA No. 05/2020 which has dismissed theCappeal filed by the appellant and upheld the order passed by the IncomeTax Appellate Tribunal (ITAT) dated 09.07.2019, holding the appellantas an assessee in default for the Assessment Year (AY) 2013-14, fornot deducting TDS of its employees.

2. The question which has fallen for our consideration is whetherDthe appellant was in default for not deducting tax at source while releasingpayments to its employees as Leave Travel Concession (LTC).

3. LTC is a payment made to an employee which is exempted as‘income’ and hence under normal circumstances, there should be noquestion of TDS on this payment. All the same, LTC has to be availedby an employee within certain limitations, prescribed by the law. Firstly,Ethe travel must be done from one designated place in India to anotherdesignated place within India. In other words, LTC is not for a foreigntravel. Secondly, LTC is given for the shortest route between these twoplaces. Admittedly, the employees of SBI in the present case, had donetheir travel not just within India but their journey involved a foreign legFas well. It was also not the shortest route, consequently, according to theRevenue this was not a travel from a designated place within India toanother designated place in India and thus it was in violation of thestatutory provisions and hence the payment made to its employees bythe Bank could not be exempted, and the Bank ought to have deductedTax at source, while making this payment. To give an example of one ofGthe employees of the appellant who availed LTC taking a circuitousroute of Delhi- Madurai- Columbo- Kuala Lampur- Singapore- Columbo-Delhi and his claim was fully reimbursed by the appellant and no taxwas deducted under Section 192(1) for the same.

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4. The appellant on the other hand through its counsel senioradvocate Shri K.V. Vishwanathan, would argue that though the travelmade by its employees under LTC did involve a foreign leg and admittedlya circuitous route as opposed to the shortest route was taken, yet twothings go in the favour of the employees. Firstly, the employees of theappellant did travel from one designated place in India to another placewithin India (though in their travel itinerary a foreign country was alsoinvolved), and secondly the payments which were actually made to theseemployees was for the shortest route of their travel between twodesignated places within India. In other words, no payment was madefor foreign travel though a foreign leg was a part of the itineraryundertaken by these employees.

5. The above reasons given by the appellant-bank however, hasnot found favour either with the Assistant Commissioner of Income Taxor with the Commissioner of Income Tax (Appeals) or even the HighCourt. After examining the matter our considered opinion is that theview taken by the Delhi High Court and the Tribunal and even by therevenue in its initiation of proceedings cannot be faulted. The appellantwhom we shall refer to as the ‘assessee-employer’ ought to havededucted tax at source.

6. Let us first go through some of the relevant provisions of theIncome Tax Act, 1961 (for short ‘the Act’) and the Income Tax Rules,1962 framed therein. Let us first take Section 192(1) of the Act whichcasts a statutory duty on the employer to deduct Tax at source from thesalary of its employee “192(1) Any person responsible for paying any income chargeableunder the head “Salaries” shall, at the time of payment, deductincome-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financialyear in which the payment is made, on the estimated income ofthe assessee under this head for that financial year.”

The consequences of failure to deduct tax at source when it isdue, is given in Section 201, which reads as follows:- “Consequences of failure to deduct or pay.

201. (1) Where any person, including the principal officer of acompany,—

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A(a) who is required to deduct any sum in accordance with theprovisions of this Act; or

(b) referred to in sub-section (1A) of section 192, being anemployer, does not deduct, or does not pay, or after so deductingfails to pay, the whole or any part of the tax, as required by orBunder this Act, then, such person, shall, without prejudice toany other consequences which he may incur, be deemed to bean assessee in default in respect of such tax:

Provided that any person, including the principal officer of acompany, who fails to deduct the whole or any part of the tax inCaccordance with the provisions of this Chapter on the sum paid toa payee or on the sum credited to the account of a payee shall notbe deemed to be an assessee in default in respect of such tax ifsuch payee-

(i) has furnished his return of income under section 139;D(ii) has taken into account such sum for computing income insuch return of income; and

(iii) has paid the tax due on the income declared by him in suchreturn of income, and the person furnishes a certificate to thiseffect from an accountant in such form as may be prescribedEProvided further that no penalty shall be charged under section221 from such person, unless the Assessing Officer is satisfiedthat such person, without good and sufficient reasons, has failedto deduct and pay such tax.

Section 10(5) which exempts payments received as LTC withFwhich we are presently concerned. It reads as under :- “10. In computing the total income of a previous year of any person,any income falling within any of the following clauses shall not beincluded—

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(5) in the case of an individual, the value of any travel concessionor assistance received by, or due to him,—

(a) from his employer for himself and his family, inconnection with his proceeding on leave to any place inHIndia; (b) from his employer or former employer for himself andhis family, in connection with his proceeding to any place inIndia after retirement from service or after the terminationof his service, subject to such conditions as may be prescribed includingconditions as to number of journeys and the amount whichshall be exempt per head having regard to the travel concessionor assistance granted to the employees of the CentralGovernment :

Provided that the amount exempt under this clause shall in nocase exceed the amount of expenses actually incurred for thepurpose of such travel:

[Explanation 1].—For the purposes of this clause, “family”,in relation to an individual, means—

(i) the spouse and children of the individual ; and

(ii) the parents, brothers and sisters of the individual or anyof them, wholly or mainly dependent on the individual.”

The above provision has to be read along with Rule 2B of IncomeTax Rules. Rule 2B reads as under :- “[Conditions for the purpose of section 10(5) .

2B. (1) The amount exempted under clause (5) of section 10 inrespect of the value of travel concession or assistance receivedby or due to the individual from his employer or former employerfor himself and his family, in connection with his proceeding,—

(a) on leave to any place in India;

(b) to any place in India after retirement from service or afterthe termination of his service, shall be the amount actuallyincurred on the performance of such travel subject to thefollowing conditions, namely :—

[(i) where the journey is performed on or after the 1st dayof October, 1997, by air, an amount not exceeding the aireconomy fare of the national carrier by the shortest routeto the place of destination; A

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(ii) where places of origin of journey and destination areconnected by rail and the journey is performed on or afterthe 1st day of October, 1997, by any mode of transportother than by air, an amount not exceeding the air-conditioned first class rail fare by the shortest route to theplace of destination; and A

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(iii) where the places of origin of journey and destination orpart thereof are not connected by rail and the journey isperformed on or after the 1st day of October, 1997, betweensuch places, the amount eligible for exemption shall be :—

(A) where a recognised public transport system exists, anamount not exceeding the 1st class or deluxe class fare, as thecase may be, on such transport by the shortest route to theplace of destination; and C

(B) where no recognised public transport system exists, anamount equivalent to the air-conditioned first class rail fare,for the distance of the journey by the shortest route, as if thejourney had been performed by rail.]”

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7. The appellant before us is a Public Sector Bank, namely, StateBank of India (SBI). The Revenue has held the appellant to be anE“assessee in default”, for not deducting the tax at source of its employees.

8. These proceedings started with a Spot Verification under Section133A when it was discerned by the Revenue that some of the employeesof the assessee-employer had claimed LTC even for their travel to placesoutside India. These employees, even though, raised a claim of theirFtravel expenses between two points within India but between the twopoints they had also travelled to a foreign country as well, thus taking acircuitous route for their destination which involved a foreign place. Thematter was hence examined by the Assessing Officer who was of theopinion that the amount of money received by an employee as LTC isexempted under Section 10(5) of the Act, however, this exemption cannotGbe claimed by an employee for travel outside India which has been donein this case and therefore the assessee-employer defaulted in notdeducting tax at source from this amount claimed by its employees asLTC. There were two violations of the LTC Rules, pointed out by theAssessing Officer:

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A. The employee did not travel only to a domestic destinationbut to a foreign country as well and B.The employees had admittedly not taken the shortest possibleroute between the two destinations thus the Applicant washeld to be an assessee in default by the Assessing Officer.

The travel undertaken by the employees as LTC was hence inviolation of Section 10(5) of the Act read with Rule 2B of theIncome Tax Rules, 1962, both of which have been reproducedabove. The order of the Assessing Officer was challenged beforeCIT (A), which was dismissed and so was their appeal before theIncome Tax Appellate Tribunal.

9. The Delhi High Court vide its order dated 13.01.2020 dismissedthe appeal holding that there was no substantial question of law in theAppeal. It was held that the amount received by the employees of theassessee employer towards their LTC claims is not liable for theexemption as these employees had visited foreign countries which is notpermissible under the law.

10. The provisions of law discussed above prescribe that the airfare between the two points, within India will be given and the LTCwhich will be given will be of the shortest route between these twoplaces, which have to be within India. A conjoint reading of the provisionsdiscussed herein with the facts of this case cannot sustain the argumentof the appellant that the travel of its employees was within India and nopayments were made for any foreign leg involved.

11. We do not want to get into the role of the travel agencies andthe present dynamics of air fare, but it is difficult for us to accept that aperson will avail foreign tour without paying any price for it. We leave itat that.

12. It can be seen from the records that many of the employeesof the appellants had undertaken travel to Port Blair via Malaysia,Singapore or Port Blair via Bangkok, Malaysia or Rameswaram viaMauritius or Madurai via Dubai, Thailand and Port Blair via Europe etc.It is very difficult to appreciate as to how the appellant who is theassessee-employer could have failed to take into account this aspect.This was the elephant in the room.

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A13. The contention of the Appellant that there is no specific barunder Section 10(5) for a foreign travel and therefore a foreign journeycan be availed as long as the starting and destination points remain withinIndia is also without merits. LTC is for travel within India, from oneplace in India to another place in India. There should be no ambiguity onthis.B

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14. The second argument urged by the appellant that paymentsmade to these employees was of the shortest route of their actual travelcannot be accepted either. It has already been clarified above, that inview of the provisions of the Act, the moment employees undertaketravel with a foreign leg, it is not a travel within India and hence notCcovered under the provisions of Section 10(5) of the Act.

15. A foreign travel also frustrates the basic purpose of LTC. Thebasic objective of the LTC scheme was to familiarise a civil servant or aGovernment employee to gain some perspective of Indian culture bytraveling in this vast country. It is for this reason that the 6[th] PayDCommission rejected the demand of paying cash compensation in lieu ofLTC and also rejected the demand of foreign travel. In para 4.3.4 of the6[th] Pay Commission Report dated March, 2008 this is what was said :- “4.3.4. The demand for allowing travel abroad at least once in theentire career under the scheme is not in consonance with theEbasic objective of the scheme. The Government employee cannotgain any perspective of the Indian culture by traveling abroad.Besides, the attendant cost in foreign travel would also make theexpenditure under this scheme much higher. The Commission is,therefore, not inclined to concede the demand to allow foreigntravel under LTC.”F

This is also an objection of the Revenue which has been raised inits counter affidavit filed by respondent no. 1-Assistant Commission ofIncome Tax wherein the Revenue has asserted that the provision forLTC was introduced to motivate employees and encourage its employeestowards tourism in India and it is for this reason that reimbursement ofLTC was exempted. There was no intention of legislature to allow theemployees to travel abroad in the garb of LTC available by virtue ofSection 10(5) of the Act. Therefore, the Revenue has a valid objection(apart from other objections which are clearly violative of the Statute), G

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that the intention and purpose of the scheme is also violated in the garbof tour within India, foreign travel is being availed.

16. The aforementioned order passed by the CIT(A) has rightlyheld that the obligation of deducting tax is distinct from payment of tax.The appellant cannot claim ignorance about the travel plans of itsemployees as during settlement of LTC Bills the complete facts areavailable before the assessee about the details of their employees’ travels.Therefore, it cannot be a case of bonafide mistake, as all the relevantfacts were before the Assessee employer and he was therefore fully ina position to calculate the ‘estimated income’ of its employees. Thecontention of Shri K.V. Vishwanathan, learned senior advocate that theremay be a bonafide mistake by the assessee-employer in calculating the‘estimated income’ cannot be accepted since all the relevant documentsand material were before the assessee- employer at the relevant timeand the assessee employer therefore ought to have applied his mind anddeducted tax at source as it was his statutory duty, under Section 192(1)of the Act.

17. In conclusion we do not find any reason to interfere with theorder passed by the Delhi High Court. The appeal is dismissed.

Nidhi Jain(Assisted by : Shashwat Jain, LCRA)

Appeal dismissed.

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