The main legal point established in the judgment is that the employer has a statutory duty to deduct tax at source from payments made to employees as per the provisions of the Income Tax Act, 1961, and failure to do so can result in being deemed as an assessee in default.

ORDER :

1. Leave granted. The appellant (State Bank of India) has challenged the judgment dated 13.01.2020 passed by a Division Bench of the Delhi High Court in ITA No. 05/2020 which has dismissed the appeal filed by the appellant and upheld the order passed by the Income Tax Appellate Tribunal (ITAT) dated 09.07.2019, holding the appellant as an assessee in default for the Assessment Year (AY) 2013-14, for not deducting TDS of its employees.

2. The question which has fallen for our consideration is whether the appellant was in default for not deducting tax at source while releasing payments 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 no question of TDS on this payment. All the same, LTC has to be availed by an employee within certain limitations, prescribed by the law. Firstly, the travel must be done from one designated place in India to another designated place within India. In other words, LTC is not for a foreign travel. Secondly, LTC is given for the shortest route between these two places. Admittedly, the employees of SBI in the present case, had done their travel not just within India but their journey involved a foreign leg as well. It was also not the shortest route, consequently, according to the Revenue this was not a travel from a designated place within India to another designated place in India and thus it was in violation of the statutory provisions and hence the payment made to its employees by the Bank could not be exempted, and the Bank ought to have deducted Tax at source, while making this payment. To give an example of one of the employees of the appellant who availed LTC taking a circuitous route of Delhi-Madurai-Columbo-Kuala Lampur-Singapore-Columbo-Delhi and his claim was fully reimbursed by the appellant and no tax was deducted under Section 192(1) for the same.

4. The appellant on the other hand through its counsel senior advocate Shri K.V. Vishwanathan, would argue that though the travel made by its employees under LTC did involve a foreign leg and admittedly a circuitous route as opposed to the shortest route was taken, yet two things go in the favour of the employees. Firstly, the employees of the appellant did travel from one designated place in India to another place within India (though in their travel itinerary a foreign country was also involved), and secondly the payments which were actually made to these employees was for the shortest route of their travel between two designated places within India. In other words, no payment was made for foreign travel though a foreign leg was a part of the itinerary undertaken by these employees.

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

6. Let us first go through some of the relevant provisions of the Income 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 which casts a statutory duty on the employer to deduct Tax at source from the salary of its employee:

“192(1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.”

The consequences of failure to deduct tax at source when it is due, is given in Sectio