TDS is exempt in the reimbursement of LTA for travels outside India: ITAT

Different branches of Syndicate Bank (Assessee) in Bengaluru were penalized by the Income Tax Department (Department) for failure to deduct tax at source (TDS) of its employees on Leave Travel Allowance (LTA) reimbursement when the employees had travelled outside India.

According to the provisions of the IT Act, the non exempt LTA will be in the nature of salary and the assessee ought to have deducted tax at source. However, the assessee failed to do so under the impression that if the destination is India, irrespective of the fact that en- route the journey is out of India, the entire LTA is exempt. The Department was however of the view that when the travel is outside India irrespective of the fact that the ultimate destination is India, tax ought to have been deducted at source.

The Assessing Officer accordingly proceeded and charged the assessee under sections 200(1) & 200(1A) of the Income Tax Act, 1961 (IT) Act for failure to deduct tax at source and was held to be in default in respect of taxes not deducted at source and also liable for interest.

The Revenue authorities proceeded to impose penalty under Section 271C of the IT Act on the assessee rejecting the plea that the failure to deduct tax at source was on a reasonable belief that assessee failed to do so under the impression that if the destination is India, irrespective of the fact that en-route the journey is out of India, the entire LTA is exempt.

Aggrieved by the orders of the Commissioner of Income Tax (Appeals) the assessee appealed before the Income Tax Appellate Tribunal (ITAT), Bangalore.

The question of law before the ITAT was with the only issue of validity of imposition of penalty on the Assessee under section 271-C of the IT Act.

The ITAT cited a case of the Hon'ble Supreme Court which had previously held that an assessee employer is under no statutory obligation under the IT Act and/or the Rules to collect evidence to show that its employees had actually utilized the amount paid towards leave travel concession (LTC). However in this case, the assessee bank had diligently collected and brought on record evidence to show that its employees had actually utilized the amount paid towards LTC.

The assessee stated that while calculating the tax liability of its employees, the figure of LTC was always exempted and this thumb rule was being followed for the past many years and TDS exemption of LTC was thus allowed almost mechanically year after year. However, the Revenue's argued that the bank failed to consider that the travel plan included the foreign leg of travel and corresponding travel expenses which are not eligible for exemption under section 10(5) of the IT Act. However, the bank explained that section 10(5) and Rule 2B of the IT Act do not place a bar on travel to a foreign destination during the course of travel to a place in India and there is nothing explicit provided therein to prohibit such travel in order to deny the exemption.

The bank, while calculating the estimated tax liability of its employees, considered LTC claim as exempt under section 10(5) of the IT Act and followed the same position in the current financial year as well. However, on survey by the tax department, when this issue arose for consideration, and after the judgment of the Tribunal and clarification of the matter, the assessee bank had duly complied and deposited the outstanding demand along with interest and had taken corrective steps in subsequent years as well.

The ITAT thus concluded that in light of the above-mentioned points, there was reasonable cause in terms of section 273B of the IT Act for not deducting tax by the assessee Bank and directed that the penalty levied under section 271C of the IT Act be deleted.

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