ITAT absolves SBI for non-deduction of TDS on LFC available to employees

ITAT absolves SBI for non-deduction of TDS on LFC available to employees

While Leave Fair Concession was paid by the shortest route for a journey where the designated place was in India but it also involved some en-route foreign travel being undertaken by the employee

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, ruled in favor State Bank of India (SBI) (appellant) and quashed the demand against it for non-deduction of Tax Deducted at Source (TDS) in respect of Leave Fare Concession (LFC) provided to employees, while allowing the appeal.

The ITAT ruling was delivered by Coram comprising of Pramod Kumar (Vice President) and Saktijit Dey (Judicial Member) on 27 January 2021.

The assessee/appellant, SBI claimed to be a public sector bank, the branch office was subjected to survey proceedings under section 133A of the Income Tax Act, 1961 (IT Act). During the course of this survey, it was found that certain employees have claimed the LFC facility, wherein travel to places outside India was involved. It was noted that some of the employees, in these LFC claims, have taken a very circuitous route, involving travel abroad to one or more domestic destinations.

The Assessing Officer (AO) passed an order on 11 December 2018 and held the assessee in default on account of non-deduction of tax at source in respect of LFC provided by the appellant to its employees amounting to Rs 3,09,576 in cases where LFC was paid by the shortest route for a journey where the designated place was in India but the same also involved some en-route foreign travel being undertaken by the employee.

The AO was, however, of the view that exemption under section 10(5) of the IT Act, was not available in such cases if the employee travels out of India, the LFC amount cannot be claimed as exempt under section 10(5) of IT Act, and, to that extent, the assessee was in error in not deducting tax at source in respect of such payment of the LFC facility.

The AO also noted that "the employees travelled to the Indian destinations not by direct and shortest route but by circuitous route including foreign journey." Aggrieved, the assessee carried the matter in appeal before the CIT(A) which was rejected.

The issue raised before the ITAT was whether the AO erred in not appreciating that the appellant was of the bona fide belief that it was not liable to deduct tax at source in respect of LFC provide to employees, and accordingly, the appellant cannot be held to be an assessee in default within the meaning of section 201 and 201(1A) of the IT Act.

The ITAT highlighted that while dealing with the demands relating to a tax deduction of at source from payments of salaries that there was a subtle line of demarcation between what was taxable in the hands of the assessee and what was the amount of estimated income in respect of which tax was required to be deducted at source by the employer.

"Section 192 (1) of IT Act, which imposes tax withholding obligations on the employers in respect of payments for salaries, requires that tax deduction is made by the employer on the estimated income of the assessee under this head (i.e., income from salaries) for that financial year. Thus, the tax withholding obligation is clearly in respect of estimated income of the assessee and not in respect of taxable income of the assessee. The mere fact of taxability of a payment is not in respect of taxable income in the hands of an assessee under this head," ITAT observed.

Therefore, ITAT said that taxability of an income, while in the hands of the employee was concerned, under the head income from salaries' per se was thus not sufficient to invoke the tax withholding obligations of the employer and the question as to whether the employer has properly discharged his duties under section 192 of IT Act, all that was to be seen was whether the employer had reasonably, or bonafide, estimated the income of the employees and deducted tax in respect of such estimated income.

The ITAT proceeded to elucidate Section 10(5) read with Rule 2B of IT Act, that the provisions do not indicate any requirement of taking the shortest route for travelling to any place in India or putting any kind of restrictions on the route to be adopted for going to such a destination.

However, ITAT pointed out, "quite to the contrary, the statutory provisions do envisage the possibilities of someone taking a route other than the shortest route, as is implicit in the restriction that an amount not exceeding the air economy fare of the national carrier by the shortest route to the place of destination will only be eligible for exemption under Section 10(5) of IT Act."

In the light of the aforesaid analysis of the legal position and the factual backdrop, whatever may be the position with respect of taxability of such a leave travel concession in the hands of the employee, ITAT held that the assessee employer cannot be faulted for not deducting tax at source from the leave travel concession facility allowed by him to the employees.