LEGAL ISSUE: Whether Leave Travel Concession (LTC) availed by employees, involving a foreign leg in the travel itinerary, is exempt from tax under Section 10(5) of the Income Tax Act, 1961, and whether the employer is liable to deduct tax at source (TDS) on such payments.
CASE TYPE: Income Tax
Case Name: State Bank of India vs. Assistant Commissioner of Income Tax
[Judgment Date]: November 4, 2022
Introduction
Date of the Judgment: November 4, 2022
Citation: Civil Appeal No. 8181 of 2022 (Arising out of SLP (C) No. 9876 of 2020)
Judges: Uday Umesh Lalit, CJI., S. Ravindra Bhat, J., Sudhanshu Dhulia, J.
Can an employer be held liable for not deducting tax at source (TDS) when employees claim Leave Travel Concession (LTC) for journeys that include a foreign leg, even if the reimbursement is limited to the cost of travel within India? The Supreme Court of India addressed this question in a recent judgment, clarifying the scope of tax exemptions on LTC under the Income Tax Act, 1961. This case examines whether the State Bank of India (SBI) was correct in not deducting TDS on LTC reimbursements to its employees who traveled to foreign locations as part of their travel itinerary. The bench comprised of Chief Justice Uday Umesh Lalit, Justice S. Ravindra Bhat, and Justice Sudhanshu Dhulia, with the opinion authored by Justice Sudhanshu Dhulia.
Case Background
The case arose when the Income Tax Department initiated a spot verification under Section 133A of the Income Tax Act, 1961, and discovered that some employees of the State Bank of India (SBI) had claimed Leave Travel Concession (LTC) for journeys that included a foreign leg. Although the employees claimed reimbursement for travel between two points within India, their actual travel itineraries included a foreign country, taking a circuitous route. For instance, one employee traveled from Delhi to Madurai, then to Colombo, Kuala Lumpur, Singapore, and back to Colombo and Delhi. The bank reimbursed the employee for the shortest route between Delhi and Madurai, but did not deduct tax at source. The Income Tax Department argued that since the travel involved a foreign leg, it violated the conditions for LTC exemption under Section 10(5) of the Income Tax Act, 1961, and Rule 2B of the Income Tax Rules, 1962.
Timeline:
| Date | Event |
|---|---|
| Spot Verification | The Income Tax Department conducted a spot verification under Section 133A, discovering employees of SBI claiming LTC for travel involving foreign legs. |
| Assessment Year 2013-14 | The assessment year in question for which the tax was not deducted by the State Bank of India. |
| Assessing Officer’s Order | The Assessing Officer concluded that the LTC claims were not exempt due to the foreign travel component and held SBI in default for not deducting TDS. |
| CIT(A) Decision | The Commissioner of Income Tax (Appeals) upheld the Assessing Officer’s order. |
| ITAT Decision | The Income Tax Appellate Tribunal (ITAT) also upheld the decision against SBI. |
| 13.01.2020 | The Delhi High Court dismissed SBI’s appeal, affirming the ITAT’s order. |
| 04.11.2022 | The Supreme Court dismissed SBI’s appeal, upholding the High Court’s decision. |
Course of Proceedings
The Assessing Officer initially held that the LTC claims were not exempt under Section 10(5) of the Income Tax Act, 1961, because the employees had traveled to foreign countries, and that the employer was in default for not deducting TDS. The Commissioner of Income Tax (Appeals) upheld this order, and the Income Tax Appellate Tribunal (ITAT) also dismissed the bank’s appeal. The Delhi High Court further dismissed the bank’s appeal on January 13, 2020, stating that no substantial question of law was involved. The High Court held that the LTC claims were not exempt as the employees had visited foreign countries, which is not permissible under the law.
Legal Framework
The core legal provisions in this case are Section 192(1), Section 201, and Section 10(5) of the Income Tax Act, 1961, along with Rule 2B of the Income Tax Rules, 1962.
Section 192(1) of the Income Tax Act, 1961, mandates that any person responsible for paying any income chargeable under the head “Salaries” must deduct income tax at the time of payment. It states:
“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.”
Section 201 of the Income Tax Act, 1961, outlines the consequences of failing to deduct or pay tax, stating that such a person shall be deemed an assessee in default. It reads:
“201. (1) Where any person, including the principal officer of a company,— (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax”
Section 10(5) of the Income Tax Act, 1961, provides an exemption for the value of any travel concession or assistance received by an individual from their employer for travel within India. It specifies:
“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included — … (5) in the case of an individual, the value of any travel concession or assistance received by, or due to him,— (a) from his employer for himself and his family, in connection with his proceeding on leave to any place in India ; (b) from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement from service or after the termination of his service, subject to such conditions as may be prescribed including conditions as to number of journeys and the amount which shall be exempt per head having regard to the travel concession or assistance granted to the employees of the Central Government”
Rule 2B of the Income Tax Rules, 1962, further defines the conditions for claiming this exemption, specifying that the amount exempted should not exceed the air economy fare of the national carrier by the shortest route to the place of destination within India. It states:
“2B. (1) The amount exempted under clause (5) of section 10 in respect of the value of travel concession or assistance received by or due to the individual from his employer or former employer for 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 after the termination of his service, shall be the amount actually incurred on the performance of such travel subject to the following conditions, namely :— [(i) where the journey is performed on or after the 1st day of October, 1997, by air, an amount not exceeding the air economy fare of the national carrier by the shortest route to the place of destination ; (ii) where places of origin of journey and destination are connected by rail and the journey is performed on or after the 1st day of October, 1997, by any mode of transport other than by air, an amount not exceeding the air-conditioned first class rail fare by the shortest route to the place of destination; and (iii) where the places of origin of journey and destination or part thereof are not connected by rail and the journey is performed on or after the 1st day of October, 1997, between such places, the amount eligible for exemption shall be :— (A)where a recognised public transport system exists, an amount not exceeding the 1st class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination; and (B)where no recognised public transport system exists, an amount equivalent to the air-conditioned first class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail.]”
Arguments
The State Bank of India (SBI) argued that even though its employees’ travel itineraries included a foreign leg and were not the shortest routes, the payments made to the employees were only for the shortest route between two designated places within India. SBI contended that no payment was made for the foreign travel component, and therefore, the LTC should be exempt. The bank’s counsel, Shri K.V. Vishwanathan, argued that Section 10(5) does not specifically bar foreign travel, and as long as the origin and destination points are within India, the exemption should apply.
The Income Tax Department argued that the LTC exemption under Section 10(5) of the Income Tax Act, 1961, read with Rule 2B of the Income Tax Rules, 1962, is strictly for travel within India. It contended that any travel involving a foreign leg is a violation of these provisions, regardless of whether the reimbursement was limited to the cost of travel within India. The department also argued that the purpose of the LTC scheme was to promote tourism within India and encourage employees to explore the country, which is defeated if foreign travel is allowed under the guise of LTC.
The Revenue further argued that the obligation to deduct tax is distinct from the payment of tax. It pointed out that the employer had all the necessary facts about the employees’ travel plans at the time of settling LTC bills and should have calculated the ‘estimated income’ of its employees accurately. The Revenue also stated that the intention of the legislature was not to allow employees to travel abroad under the guise of LTC.
Submissions of the Parties
| Main Submission | Sub-Submissions (State Bank of India) | Sub-Submissions (Income Tax Department) |
|---|---|---|
| LTC Exemption | ✓ Employees traveled from one designated place in India to another designated place in India. ✓ Payments were made only for the shortest route between two designated places within India. ✓ No specific bar under Section 10(5) for a foreign travel. |
✓ LTC is strictly for travel within India. ✓ Any travel involving a foreign leg is a violation of Section 10(5) and Rule 2B. ✓ The purpose of LTC is to promote tourism within India, not foreign travel. |
| TDS Obligation | ✓ There may be a bonafide mistake by the assessee-employer in calculating the ‘estimated income’. | ✓ Obligation to deduct tax is distinct from payment of tax. ✓ Employer had all facts about travel plans and should have calculated ‘estimated income’ accurately. ✓ The intention of the legislature was not to allow employees to travel abroad under the guise of LTC. |
| Travel Route | ✓ The payments made to these employees were of the shortest route of their actual travel. | ✓ The moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act. |
Issues Framed by the Supreme Court
The Supreme Court considered the following issue:
✓ Whether the appellant was in default for not deducting tax at source while releasing payments to its employees as Leave Travel Concession (LTC).
Treatment of the Issue by the Court
| Issue | How the Court Dealt with It |
|---|---|
| Whether the appellant was in default for not deducting tax at source while releasing payments to its employees as Leave Travel Concession (LTC). | The Court held that the appellant was in default. The Court reasoned that the LTC exemption is only for travel within India, and any travel involving a foreign leg is not covered under Section 10(5) of the Income Tax Act, 1961, read with Rule 2B of the Income Tax Rules, 1962. The Court also emphasized that the employer had all the facts about the employees’ travel plans, and thus, should have deducted TDS. |
Authorities
The Court considered the following legal provisions:
- Section 192(1) of the Income Tax Act, 1961: This section imposes a statutory duty on the employer to deduct tax at source from the salary of its employee.
- Section 201 of the Income Tax Act, 1961: This section specifies the consequences of failure to deduct or pay tax at source, deeming the person in default.
- Section 10(5) of the Income Tax Act, 1961: This section provides an exemption for the value of any travel concession or assistance received by an individual from their employer for travel within India.
- Rule 2B of the Income Tax Rules, 1962: This rule specifies the conditions for claiming exemption under Section 10(5), including the requirement that the travel must be within India and by the shortest route.
Authorities Considered by the Court
| Authority | How the Court Viewed It |
|---|---|
| Section 192(1) of the Income Tax Act, 1961 | The Court emphasized that this section casts a statutory duty on the employer to deduct Tax at source from the salary of its employee. |
| Section 201 of the Income Tax Act, 1961 | The Court noted that this section specifies the consequences of failure to deduct or pay tax at source, deeming the person in default. |
| Section 10(5) of the Income Tax Act, 1961 | The Court interpreted this section strictly, stating that the exemption is only for travel within India. |
| Rule 2B of the Income Tax Rules, 1962 | The Court used this rule to clarify that the travel must be within India and by the shortest route to be eligible for exemption under Section 10(5). |
Judgment
Treatment of Submissions by the Court
| Submission | How the Court Treated It |
|---|---|
| SBI’s argument that payments were only for the shortest route within India. | The Court rejected this argument, stating that the moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act. |
| SBI’s argument that Section 10(5) does not specifically bar foreign travel. | The Court rejected this argument, clarifying that LTC is for travel within India, from one place in India to another place in India, and there should be no ambiguity on this. |
| SBI’s argument that there may be a bonafide mistake by the assessee-employer in calculating the ‘estimated income’. | The Court rejected this argument, stating that all the relevant documents and material were before the assessee-employer at the relevant time, and the assessee employer therefore ought to have applied his mind and deducted tax at source as it was his statutory duty, under Section 192(1) of the Act. |
| Revenue’s argument that LTC is for travel within India. | The Court accepted this argument, stating that LTC is for travel within India, from one place in India to another place in India. |
| Revenue’s argument that the employer had all facts about travel plans and should have calculated ‘estimated income’ accurately. | The Court accepted this argument, stating that the employer cannot claim ignorance about the travel plans of its employees as during settlement of LTC Bills the complete facts are available before the assessee about the details of their employees’ travels. |
How each authority was viewed by the Court
✓ Section 192(1) of the Income Tax Act, 1961: The Court emphasized the statutory duty of the employer to deduct tax at source.
✓ Section 201 of the Income Tax Act, 1961: The Court highlighted the consequences of failing to deduct or pay tax, which results in the employer being deemed an assessee in default.
✓ Section 10(5) of the Income Tax Act, 1961: The Court interpreted this section strictly, stating that the exemption is only for travel within India.
✓ Rule 2B of the Income Tax Rules, 1962: The Court used this rule to clarify that the travel must be within India and by the shortest route to qualify for the exemption under Section 10(5).
What weighed in the mind of the Court?
The Supreme Court’s reasoning was primarily driven by a strict interpretation of the relevant legal provisions and the underlying purpose of the LTC scheme. The Court emphasized that the LTC exemption is specifically for travel within India and that any deviation, such as including a foreign leg in the travel itinerary, would disqualify the claim for exemption. The Court also noted that the employer had all the necessary information about the employees’ travel plans and should have deducted tax at source. The Court’s reasoning also reflected a concern that the purpose of the LTC scheme, which is to promote domestic tourism and encourage employees to explore India, should not be undermined by allowing foreign travel under the guise of LTC.
Sentiment Analysis of Reasons
| Reason | Percentage |
|---|---|
| Strict Interpretation of Law | 40% |
| Purpose of LTC Scheme | 30% |
| Employer’s Responsibility | 30% |
Fact:Law Ratio
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning
Key Takeaways
✓ LTC exemptions under Section 10(5) of the Income Tax Act, 1961, are strictly for travel within India.
✓ Any travel itinerary involving a foreign leg, even if the reimbursement is limited to the cost of travel within India, is not eligible for exemption.
✓ Employers are responsible for deducting TDS on LTC payments that do not meet the conditions for exemption.
✓ The purpose of the LTC scheme is to promote domestic tourism and encourage employees to explore India.
Directions
No specific directions were given by the Supreme Court in this case. The Court dismissed the appeal of the State Bank of India, upholding the decision of the Delhi High Court.
Development of Law
The ratio decidendi of this case is that the Leave Travel Concession (LTC) exemption under Section 10(5) of the Income Tax Act, 1961, is strictly for travel within India, and any travel involving a foreign leg, even if the reimbursement is limited to the cost of travel within India, does not qualify for the exemption. This judgment reinforces the strict interpretation of tax exemptions and clarifies the employer’s responsibility to deduct TDS on LTC payments that do not meet the statutory requirements. There is no change in the previous position of law, but the judgment clarifies the existing law.
Conclusion
The Supreme Court dismissed the appeal of the State Bank of India, affirming that LTC claims involving foreign travel are not exempt from tax. The Court held that the employer was in default for not deducting TDS on such payments. This judgment clarifies that the LTC exemption is only for travel within India and that employers must ensure compliance with the statutory provisions to avoid being deemed an assessee in default.