Hyper technical attempt to defeat a provision and its object will be to invite the elephant in the room. Case of SBI about TDS from salary – issue LTC exemption.

[DEV KUMAR KOTHARI]

Payment of LTC or  contract in this regard is different, for computing taxable income , tax and amount to be deducted, provisions ae to be seen carefully by tax deductor.

Related provisions for thorough study:

Income taxable under head ‘Salaries’ vide sections S.14(A) and 15-17 and TDS u.s S 192  Survey U.S.133A, other related with TDS  S.200, 201, 221

Exemption u.s. 10.5 for LTC read with Rule 2B of IT Rules.

Recent judgment:

STATE BANK OF INDIA VERSUS ASSISTANT COMMISSIONER OF INCOME TAX - 2022 (11) TMI 426 - SUPREME COURT

STATE BANK OF INDIA VERSUS ACIT, CIRCLE-77 (1) , LAXMI NAGAR, DELHI - 2020 (1) TMI 628 - DELHI HIGH COURT

STATE BANK OF INDIA VERSUS ACIT, CIRCLE-77 (1) , DELHI - 2019 (7) TMI 1562 - ITAT DELHI

Dictum or idiom used in the judgment “the elephant in the room”

Meaning and usages of this dictum

https://dictionary.cambridge.org/dictionary/english/elephant-in-the-room

If you say there is an elephant in the room, you mean that there is an obvious problem or difficult situation that people do not want to talk about.

Difficult situations and unpleasant experiences

Leave Travel Concession (LTC):

As per provisions LTC is exempt subject to some restrictions and limitations as provided in provisions of IT Act, and IT Rules mentioned above. There have been some changes from time to time, therefore, one need to refer to the provisions applicable in particular year.

Contract for LTC to employees is one aspect, employer can provide more liberal LTC to employees as an incentive. However, how much is exempt and subject to compliance of conditions provided in exemption provision is a different aspect. An employer may agree to provide for foreign travel but exemption is not dependent on such terms and conditions. For amount exempt and taxable a separate exercise is to be made by employer when computing amount of taxable income and tax deductible.

The issue before the Supreme Court:

The issue before the Supreme Court ( starting and in sequence from assessment stage , CIT(A), Tribunal , High Court ) was not about assessment of income of any assessee who claimed  exemption in respect of LTC. The issue arose in relation to tax deduction at source in respect of taxable salary of  employees of State Bank of India (SBI). The issue arose because of a survey carried by the income tax department at office of SBI when it was noticed that exemption for LTC was wrongly considered and taxable LTC was not considered while making tax deduction at source.

Thus it was not case of employees who earned salary including LTC but the employer SBI who was required to deduction tax at source on salaries and perquisites as per law.

For claiming higher amount of LTC some of employees used practice of travelling staring from a place in India and also ending in a place within India but in between they used to travel to some foreign countries also.   But claimed that travel begun in India and terminated in India, therefore, entire expenses including travelling expenses for travel to foreign country was eligible for consideration subject to other restrictions and limitation.

SBI accepted such contentions and claims of employees and accordingly considered exempt amount of LTC wrongly and excessively and therefore, there was shortfall in amount of tax deducted at source.

Such short fall was claimed from SBI, as employer  tax deductor -  person liable to deduct tax at source correctly. Therefore, for short deduction of tax, SBI was considered as assessee in default, and accordingly demands were raised for short amount of tax deducted and interest for delay in payment  or deposit of TDS. 

SBI challenged assessment order passed for TDS , no relief was allowed by first appellate authority /CIT(A) , second appellate authority The ITAT, and appeal before High Court as well. Therefore, SBI preferred appeal before the Supreme Court. 

Duty and liability of tax deductions is onerous:

LTC amount may not always be fully exempt – taxable amount is to be considered for TDS:

As per employment contracts an employer can pay higher amount of LTC as an incentive to employees for retaining capable employees and avoid or reduce  attrition of employees. Therefore, it is duty of the employer to ascertain amount of LTC which is eligible for exemption and the taxable amount. The amount which is taxable, is to be considered as taxable income from salaries and employer is required to deduct tax at source accordingly

This is important for the reason that in case of salaried people from income from salary is to be subject to TDS. Besides many employees have practice to disclose other income under heads like income from house property and income from other sources and to get tax deducted suitably.

There are very few cases of salary earners which are selected for scrutiny by the Assessing Officers.

Therefore, unless proper amount of tax is deducted by the employer and other tax deductors, it is likely that in many cases such income on which tax has not been deducted or short deducted will not be taxed  and will remain escaped.

Why appeal was filed by SBI against order of Tribunal and then judgment of High Court:

From the related order of ITAT dated 09.07.2019 in conclusions Tribunal held as follows:

10. Facts being similar, we find it difficult to take a different view from the view taken by a coordinate Bench of this Tribunal in assessee’s own case for Assessment Year 2012-13, having considered the decisions of the Tribunal in the case of Aligarh Muslim University (supra) and Branch Manager, Allahabad Bank (supra). While respectfully following the same, we set aside the impugned order and remand the issue to the file of the Ld. AO with a direction to re-adjudicate the issue afresh after affording an opportunity of being heard to the assessee in the light of our above observations and at the same time directing the assessee to place all relevant information required under law before the Ld. AO.

11. In the result, appeal of the assessee is, accordingly, allowed for statistical purpose.

From judgment of Delhi High Court  dt. 13.01.2020

8. Obviously, such journeys did not qualify towards LTC claim, since under the LTC scheme, the journeys have to be undertaken within India and by the shortest route. The amounts received by the employees of the appellant-assessee towards reimbursement of LTC claims are therefore not liable to exemption and, consequently, the appellant is liable to deduct tax at source in respect of payments made by it to its employees. Since the appellant had not deducted tax on the entire amount paid and deducted tax only in respect of part of the amount paid as per its own understanding, the finding that the appellant was an assessee in default, in our view, is completely justified. The Tribunal was also correct in its view that it was the primary obligation of the appellant being the deductor, to establish that the recipients had disclosed the amounts received by them towards LTC claims as part of their taxable income and paid tax thereon. The appellant has been afforded the opportunity to make good their claims premised upon the proviso to Section 201(1) of the Act.

9. We are therefore of the view that no substantial question of law arises for consideration.

10. The appeal is dismissed.

Unquote per author:

As can be seen from the order of ITAT ,Tribunal has allowed appeal for statistical purposes and restored the matter to the  Ld. AO to reexamine the  issue after affording assesse to establish that recipient of LTC who are employees of SBI has included impugned amount in their income and paid tax. The High Court also observed the same and then held no substantial question of law arise and appeal is dismissed.

As per understanding of the author, it was not necessary for SBI to prefer appeal before High Court and then the Supreme Court because the matter was restored to the AO. After proceeding pursuant to remand, if there was need, SBI could have taken remedy in second round of appeal.

May be SBI found it not feasible to establish that employees have filed their return of income and paid tax on taxable element of TCS. And had hope that Courts may held that there is no taxable LTC. For this reason appeals were filed before the High Court and then before the Supreme Court.

Analysis of ruling of the Supreme Court:

The provisions of law  prescribe that  :

a. the air fare between the two points, within India will be given

b.   the exemption of  LTC which will be given will be of the shortest route between these two places, which have to be within India.

c. a conjoint reading of the provisions with the facts of this case cannot sustain the argument of the appellant that the travel of its employees was within India and no payments were made for any foreign leg involved.

d. it is difficult to accept that a person will avail foreign tour without paying any price (sic. Tax per author) .

e.  from the records it is seen  that many of the employees of the appellants had undertaken travel to Port Blair via Malaysia, Singapore or Port Blair via Bangkok, Malaysia or Rameswaram via Mauritius or Madurai via Dubai, Thailand and Port Blair via Europe etc.

f.  It is very difficult to appreciate as to how the appellant who is the assessee-employer could have failed to take into account this aspect. This was the elephant in the room.

g.  Exemption for LTC is for travel within India, from one place in India to another place in India. There is no ambiguity on this.    Therefore, contention that there is no bar for a leg of travel to be out of India , so long travel starts and ends in India has no merit.

h. The obligation of deducting tax is distinct from payment of tax. The appellant 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. Therefore, it cannot be a case of bonafide mistake, as all the relevant facts were before the Assessee employer and he was therefore fully in a position to calculate the ‘estimated income’ of its employees.

i. The contention  that there may be a bonafide mistake by the assessee-employer in calculating the ‘estimated income’ cannot be accepted since 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, u/s 192(1).