The Income Tax Appellate Tribunal (ITAT), Ahmedabad, has delivered a significant ruling clarifying that compliance with judicial interim orders exempts an assessee from being treated as an 'assessee in default' under Section 201(1) of the Income Tax Act, 1961. The Tribunal held that State Bank of India (SBI) could not be penalized for non-deduction of tax at source (TDS) on Leave Travel Concession (LTC) payments during a period when it was bound by interim directions from the Madras High Court, which explicitly prohibited such deductions.
Background & Facts
The Dispute
The appeals before the ITAT Ahmedabad arose from orders passed by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] under Section 201(1) and 201(1A) of the Income Tax Act, 1961, treating State Bank of India (SBI) as an 'assessee in default' for failing to deduct TDS on LTC payments made to its employees. The dispute centered on whether SBI could be held liable for non-deduction of TDS during a period when it was complying with interim orders from the Madras High Court.
Key Facts
- 15.04.2014: SBI issued Circular No. CDO/P&HRD-PM/7/2014-15, restricting LTC benefits for overseas travel.
- 25.04.2014: The All India State Bank Officers Federation challenged the Circular before the Madras High Court via Writ Petition No. 11991 of 2014. The High Court granted an interim stay on the Circular.
- 16.02.2015: The Madras High Court passed an interim order clarifying that LTC payments would not amount to income, and no TDS was to be deducted. The Court further stated that if the writ petition was dismissed, employees would be liable to pay tax on the LTC amounts.
- 04.11.2022: The Supreme Court, in Civil Appeal No. 8181 of 2022, held that LTC involving foreign travel does not qualify for exemption under Section 10(5) of the Income Tax Act, and employers must deduct TDS under Section 192(1).
- 21.03.2024: The AO passed an order under Section 201(1)/(1A) treating SBI as an 'assessee in default' for non-deduction of TDS on LTC payments of INR 3,55,197 and raised a demand of INR 2,08,856 (including interest).
- 09.03.2026: The CIT(A) dismissed SBI's appeal against the AO's order.
Procedural History
The appeals before the ITAT involved multiple branches of SBI across different assessment years:
- ITA No. 1338/AHD/2026 (AY 2017-18): Appeal against the AO's order dated 21.03.2024 and CIT(A)'s order dated 09.03.2026.
- ITA No. 1339/AHD/2026 (AY 2017-18): Appeal against penalty order dated 10.01.2025 under Section 271C and CIT(A)'s order dated 24.03.2026.
- ITA No. 1392/AHD/2026 (AY 2016-17): Appeal against the AO's order dated 31.03.2023 and CIT(A)'s order dated 31.11.2025. The appeal was filed with an 83-day delay, which was condoned by the Tribunal.
- ITA No. 1498/AHD/2026 (AY 2017-18): Appeal against the AO's order dated 15.09.2023 and CIT(A)'s order dated 27.02.2026.
Relief Sought
SBI sought the following reliefs in its appeals:
- Quashing of the orders passed by the AO and CIT(A) treating it as an 'assessee in default' under Section 201(1).
- Deletion of the demand of INR 2,08,856 (ITA No. 1338), INR 2,09,466 (ITA No. 1392), and INR 46,672 (ITA No. 1498).
- Deletion of the penalty of INR 1,06,560 levied under Section 271C (ITA No. 1339).
- Recognition that SBI acted in compliance with judicial orders and could not have deducted TDS during the relevant period.
The Legal Issue
The central question before the ITAT was whether an employer (SBI) could be treated as an 'assessee in default' under Section 201(1) of the Income Tax Act for non-deduction of TDS on LTC payments during a period when it was bound by interim directions from the Madras High Court prohibiting such deductions.
Arguments Presented
For the Appellant (SBI)
- SBI contended that it was bound by the interim orders of the Madras High Court, which explicitly prohibited the deduction of TDS on LTC payments. Non-compliance with these orders would have amounted to contempt of court.
- The Madras High Court's order dated 16.02.2015 clarified that LTC payments would not amount to income, and if the writ petition was dismissed, the employees would be liable to pay tax. Thus, SBI had no legal obligation to deduct TDS during the interim period.
- SBI relied on the judgment of the Kerala High Court in State Bank of India v. CIT (ITA No. 45 of 2025), which held that the employer was justified in not deducting TDS in view of the Madras High Court's interim directions.
- SBI argued that the legal obligation to deduct TDS under Section 192 was eclipsed by the binding judicial orders, and thus, the provisions of Section 201(1) could not be invoked.
- Without prejudice, SBI also argued that it could not be deemed an 'assessee in default' if the employees had declared the LTC amounts in their income tax returns and paid the due tax.
For the Respondent (Department)
- The Department argued that the Supreme Court's judgment dated 04.11.2022 settled the legal position on merits, holding that LTC involving foreign travel does not qualify for exemption under Section 10(5) and that TDS must be deducted under Section 192(1).
- The Department contended that the legal obligation to deduct TDS was reinstated once the interim orders of the Madras High Court were vacated, and SBI's failure to deduct TDS during the relevant period amounted to a default under Section 201(1).
- The Department relied on the AO's findings that SBI had failed to discharge its statutory obligation, and thus, the demand raised under Section 201(1)/(1A) was justified.
The Court's Analysis
The ITAT Ahmedabad conducted a detailed analysis of the legal principles and precedents governing the case:
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Binding Nature of Judicial Orders: The Tribunal emphasized that SBI was bound by the interim orders of the Madras High Court during the relevant period. The High Court's order dated 16.02.2015 explicitly prohibited SBI from deducting TDS on LTC payments, and any non-compliance would have exposed SBI to contempt proceedings. The Tribunal held that the obligation under Section 192 to deduct TDS must yield to binding judicial orders.
"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."
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Precedents and Coordinate Bench Decisions: The Tribunal relied on the decision of a Coordinate Bench in State Bank of India, Bhavnagar v. ITO (ITA Nos. 453 & 454/AHD/2026), which deleted the demand under Section 201(1)/(1A) in identical facts. The Tribunal also noted the judgment of the Kerala High Court in State Bank of India v. CIT (ITA No. 45 of 2025), which held that the employer could not be treated as an 'assessee in default' where it was restrained by judicial orders from deducting TDS.
"The Hon'ble Kerala 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."
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Retrospective Liability: The Tribunal rejected the Department's argument that the Supreme Court's judgment could retrospectively fasten liability under Section 201(1). It held that SBI's actions during the relevant period were in compliance with judicial orders, and thus, no default could be attributed to it.
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Penalty Under Section 271C: The Tribunal noted that since the demand under Section 201(1) was deleted, the consequential penalty levied under Section 271C could not be sustained. It held that SBI's conduct was under judicial sanction and devoid of any revenue-evasive intent, thus satisfying the reasonable cause requirement under Section 273B.
The Verdict
The ITAT Ahmedabad allowed all four appeals filed by SBI. The Tribunal held that SBI could not be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS on LTC payments during the relevant period, as it was complying with binding interim orders from the Madras High Court. The Tribunal directed the deletion of the following demands:
- ITA No. 1338/AHD/2026 (AY 2017-18): Demand of INR 2,08,856 (INR 1,06,559 + INR 1,02,297) deleted.
- ITA No. 1339/AHD/2026 (AY 2017-18): Penalty of INR 1,06,560 under Section 271C deleted.
- ITA No. 1392/AHD/2026 (AY 2016-17): Demand of INR 2,09,466 (INR 1,12,014 + INR 97,452) deleted.
- ITA No. 1498/AHD/2026 (AY 2017-18): Demand of INR 46,672 (INR 24,564 + INR 22,108) deleted.
Grounds 1 to 7 in all appeals were allowed, while Ground 8, raising an alternative contention, was dismissed.
What This Means For Similar Cases
Compliance With Judicial Orders Exempts Default Liability
- Binding Judicial Directions Prevail: Employers or assessees who act in compliance with interim orders from constitutional courts (High Courts or Supreme Court) cannot be treated as 'assessees in default' under Section 201(1) for non-deduction of TDS. The obligation to deduct TDS under Section 192 must yield to binding judicial directions.
- No Retrospective Liability: The Tribunal clarified that subsequent judgments, even from the Supreme Court, cannot retrospectively fasten liability for periods during which the assessee was complying with judicial orders. The legal position during the relevant period is determined by the binding orders in force at that time.
Penalty Under Section 271C Cannot Survive Without Default
- Reasonable Cause Under Section 273B: Where an assessee acts in compliance with judicial orders, it satisfies the 'reasonable cause' requirement under Section 273B, and no penalty under Section 271C can be levied. The Tribunal emphasized that such conduct is devoid of any revenue-evasive intent.
- Consequential Nature of Penalty: The penalty under Section 271C is consequential to the default under Section 201(1). Once the default is deleted, the penalty cannot survive.
Precedential Value of Coordinate Bench Decisions
- Consistency in Adjudication: The Tribunal's reliance on the decision of a Coordinate Bench in State Bank of India, Bhavnagar v. ITO underscores the importance of consistency in adjudication. Assessees can rely on such decisions to argue similar cases before the ITAT.
- High Court Judgments as Persuasive Authority: The Tribunal also relied on the judgment of the Kerala High Court, which held that compliance with judicial orders exempts the assessee from default liability. Such judgments serve as persuasive authority for similar cases across jurisdictions.
