New Delhi, Nov 5.
The Supreme Court has said that LTC (Leave Travel Concession) paid to government employees must not involve any foreign travel and must be paid for the shortest route possible between two places in India, otherwise the employer will have to pay tax on such income.
LTC is a payment made to an employee which is exempted as “income” and hence under normal circumstances, there should be no question of deducting TDS on this payment, a top court bench, led by outgoing CJI Uday Umesh Lalit said.
But in this specific case, two employees of State Bank of India had gone on a longer, circuitous route between two Indian cities involving some foreign cities as well and their LTC bills was cleared by the employer.
In such a case, the employer will have to pay tax deducted at source, the court said. This was the view taken by the Delhi High Court as well.
The Delhi High Court had upheld an order to this effect passed by the Income Tax Appellate Tribunal (ITAT) on July 9, 2019, holding SBI as an assessee in default for the Assessment Year (AY) 2013-14, for not deducting TDS of its employees.
SBI challenged the Jan 13, 2020, High Court judgement dismissing its appeal. LTC is for travel within India, from one place in India to another place in India. There should be no ambiguity on this, a top court bench, also including Justices S. Ravindra Bhatt and Sudhanshu Dhulia, said.
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.
A foreign travel also frustrates the basic purpose of LTC, the court noted. The basic objective of the LTC scheme was to familiarise a civil servant or a government employee to gain some perspective of Indian culture by traveling in this vast country, it said.
It is for this reason that the 6th Pay Commission rejected the demand of paying cash compensation in lieu of LTC and also rejected the demand of foreign travel.
The court said there was no merit in SBI’s contention that there is no specific bar under Section 10(5) for a foreign travel and therefore a foreign journey can be availed as long as the starting and destination points remain within India.
The revenue had argued that the travel by the SBI employees through a few foreign cities was not travel from a designated place within India to another designated place in India and thus it was in violation of the statutory provisions.
Hence the payments 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, the revenue had argued.
For example, one employee travelled Delhi- Madurai- Columbo-Kuala Lumpur-Singapore-Columbo- Delhi, and his claim was fully reimbursed by SBI and no tax was deducted under Section 192(1).
SBI through senior advocate K.V. Vishwanathan said that though travel by employees under LTC did involve a foreign leg and a circuitous route taken, two things were in favour of the employees.
Firstly, the employees 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. These reasons given by the bank, however, did not find favour either with the Assistant Commissioner of Income Tax or with the Commissioner of Income Tax (Appeals) or the High Court.
The top court said that it agreed with the view taken by the Delhi High Court and the Tribunal. The revenue cannot be faulted for initiation of the tax proceedings. The bank or the “assessee employer” ought to have deducted tax at source.
The court said that the CIT(A) has rightly held that the obligation of deducting tax is distinct from payment of tax. The bank cannot claim ignorance about the travel plans of its employees as during settlement of LTC bills the complete facts are available before it.
Therefore, it cannot be a case of bona fide mistake as the bank knew the whole facts and was in a position to calculate the “estimated income” of its employees. The bank ought to have applied his mind and deducted tax at source as it was its statutory duty.
