Kerala High Court Rules in Favor of SBI on LTC Tax Deduction Dispute

SBI not liable as 'assessee in default' for non-deduction of tax on LTC payments under interim court orders.

In a significant decision, the Kerala High Court has ruled that the State Bank of India (SBI) is not liable as an 'assessee in default' for not deducting tax at source on Leave Travel Concession (LTC) payments to its employees, as per interim orders issued by the Madras High Court. The judgment dated November 18, 2025, delivered by Justices A. Muhamed Mustaque and Harisankar V. Menon, provides a detailed analysis of the legal obligations of the bank under the Income Tax Act, 1961, in light of judicial directions.

The case arose when SBI was deemed an 'assessee in default' under Sections 201(1) and 201(1A) of the Income Tax Act for the assessment year 2016-17. The bank had followed an interim order from the Madras High Court, which had prohibited the deduction of tax at source on LTC payments. The interim order was issued in response to a challenge by SBI employees against a circular that withdrew overseas travel facilities under LTC.

The Kerala High Court, while setting aside the orders of the Income Tax Appellate Tribunal, Cochin Bench, held that SBI complied with the interim judicial directions, and hence could not be penalized as an 'assessee in default'. The court emphasized the binding nature of judicial orders, even if issued by a court outside the state, underlining the all-India applicability of the Income Tax Act.

The court also noted that the interim orders clearly stated that the amount paid to employees under LTC would not be treated as income for tax deduction purposes, and any tax liability would fall on the employees if the writ petition was ultimately dismissed.

This judgment provides significant relief to SBI and sets a precedent on the interplay between interim court orders and statutory tax deduction obligations. It underscores the importance of complying with judicial directions and clarifies the legal position for similar cases in the future.

Bottom Line:

Income Tax - Deduction of tax at source - Bank not liable as assessee in default for non-deduction of tax on Leave Travel Concession (LTC) payments under interim order of Madras High Court, which directed payment without tax deduction - Interim orders bind the appellant bank under the circumstances.

Statutory provision(s): Sections 192, 201(1), 201(1A) of the Income Tax Act, 1961

State Bank of India v. Commissioner of Income Tax, (Kerala)(DB) : Law Finder Doc Id # 2814155