ITAT Ahmedabad quashes TDS demand and penalty on SBI over LFC payments, citing compliance with Madras High Court orders.

June 12, 2026 : The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has provided significant relief to the State Bank of India (SBI) by quashing tax demands and penalties imposed for non-deduction of Tax Deducted at Source (TDS) on Leave Fare Concession (LFC) payments made to employees. The Tribunal held that SBI could not be treated as an “assessee in default” because it had acted in compliance with binding interim directions issued by the Madras High Court, which had specifically directed that no tax be deducted on such payments during the pendency of litigation.

The dispute arose from LFC reimbursements paid by SBI to employees who undertook journeys involving foreign destinations as part of their travel itinerary. Under Section 10(5) of the Income Tax Act, 1961, tax exemption is available only for travel within India. The controversy intensified after the Supreme Court, in its November 2022 judgment concerning LTC/LFC claims involving foreign travel, ruled that journeys including a foreign leg do not qualify for exemption under Section 10(5), and employers are obligated under Section 192 to deduct TDS on such payments.

Following the Supreme Court verdict, the Income Tax Department initiated proceedings against several SBI branches under Sections 201(1) and 201(1A) of the Income Tax Act for allegedly failing to deduct TDS on LFC reimbursements. The Assessing Officers treated the bank branches as assessees in default and raised tax and interest demands. In one of the appeals, a demand exceeding ₹2 lakh was raised, while separate demands were imposed in the other connected matters. The department also levied penalties under Section 271C for the alleged failure to deduct tax at source.

SBI challenged the demands by relying on a series of interim orders passed by the Madras High Court in a writ petition filed by the All India State Bank Officers Federation. The bank argued that after it issued a circular restricting overseas travel under the LFC scheme, the circular was challenged before the High Court, which granted interim protection. Subsequently, in an order dated February 16, 2015, the High Court clarified that LFC reimbursements would not be treated as taxable income for the purpose of TDS and directed that tax should not be deducted. The Court further observed that if the writ petition ultimately failed, the employees themselves would be liable to pay the tax.

Accepting SBI’s submissions, the Tribunal emphasized that an employer cannot be penalized for obeying a binding judicial order. The Bench observed that the obligation to deduct tax under Section 192 cannot be viewed in isolation and must give way to judicial directions issued by a competent constitutional court. The Tribunal noted that during the relevant assessment years, the interim orders of the Madras High Court remained operative and SBI was legally bound to comply with them. It therefore could not be accused of default for not deducting tax from LFC payments.

Quoting earlier rulings that dealt with identical issues, the Tribunal observed, “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.” It further held that “the failure to deduct tax in such circumstances cannot be equated with a default contemplated under section 201(1) of the Act.”

The Bench also relied heavily on a 2025 judgment of the Kerala High Court, which had examined the same controversy involving SBI and held that when an assessee is restrained by judicial orders from deducting tax at source, the provisions of Section 201 cannot be invoked. Referring to that decision, the Tribunal reiterated that “the appellant-Assessee was under an obligation not to deduct tax at source and therefore, the Assessee could not be held to be Assessee in-default for non-deduction of tax at source on impugned LFC payments.”

The Tribunal further clarified that although the Supreme Court later settled the substantive legal issue against taxpayers by ruling that foreign-leg journeys do not qualify for exemption, that decision could not retrospectively impose liability on SBI for a period when it was acting under the protection of valid court orders. According to the Bench, Section 201 applies only where there is a failure to deduct tax despite a legal obligation to do so. In SBI’s case, that obligation stood suspended by the interim directions of the Madras High Court.

As a result, the ITAT deleted all tax and interest demands raised under Sections 201(1) and 201(1A) against the concerned SBI branches. The Tribunal also set aside the penalty imposed under Section 271C, holding that once the underlying TDS demand itself was unsustainable, the consequential penalty could not survive. In one appeal, the Tribunal additionally condoned an 83-day delay in filing after accepting SBI’s explanation that administrative changes and issues relating to transfer of litigation records and digital authorizations caused the delay.

The ruling is significant for banks, public sector institutions, and other employers that acted in accordance with court orders during the prolonged litigation over LFC taxability. It reinforces the principle that taxpayers and employers cannot be penalized for complying with judicial directions, even if the legal position is later settled differently by a higher court. The decision also provides important guidance on the scope of Sections 192, 201, 201(1A), 271C, and 273B of the Income Tax Act, particularly in situations where statutory obligations intersect with binding court orders.

Case Reference: State Bank of India v. Income Tax Officer & Connected Matters, ITA Nos. 1338, 1339, 1392 & 1498/AHD/2026