[A case note on State Bank of India v. Commissioner of Income Tax (ITA No.45 of 2025, decided on 18 November 2025]
Introduction
In a significant judgment addressing the intersection of judicial directions and statutory tax deduction obligations, the Kerala High Court has held that the State Bank of India (SBI) cannot be treated as an “assessee in default” under Section 201 of the Income Tax Act, 1961 for not deducting tax at source on Leave Travel Concession (LTC) payments made to its employees during FY 2015–16.
The Court emphasised that when a High Court has expressly interdicted the employer from deducting tax, compliance with such a judicial order cannot invite penal consequences under the Income Tax Act.
Background Facts
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SBI had withdrawn the benefit of overseas LTC/LFC for employees through a circular dated 15.04.2014.
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The circular was challenged before the Madras High Court, which initially stayed its operation.
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On 16.02.2015, the Madras High Court passed a specific interim order clarifying that:
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LTC reimbursements paid pursuant to the stay order would not constitute “income”, and
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No TDS was to be deducted by SBI.
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These payments were made during FY 2015–16 (AY 2016–17).
Later, in 2023, the Income Tax Department initiated proceedings under Sections 201(1) and 201(1A), alleging SBI had failed to deduct tax at source and should be treated as an assessee-in-default.
Both the first appellate authority and the Income Tax Appellate Tribunal (ITAT), Cochin Bench, confirmed the demand. SBI appealed to the Kerala High Court.
Issues Considered
The High Court reframed and examined two key questions:
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Can SBI be treated as an assessee-in-default under Section 201 for non-deduction of TDS on LTC payments during the period covered by the Madras High Court’s interim orders?
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Would non-deduction of TDS—when expressly prohibited by the High Court—amount to contempt if the Bank had acted otherwise?
Court’s Analysis
1. Effect of the Madras High Court’s Interim Order
The Kerala High Court underscored that paragraphs 5 and 6 of the Madras High Court’s order clearly held:
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LTC payments during the pendency of the writ petition were not “income” for TDS purposes.
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SBI was prohibited from deducting tax at source.
Thus, SBI had no statutory or legal ability to deduct TDS during that period.
The Court held:
“There cannot be any dispute that the appellant-assessee could not have made any deduction in view of the interim order… Therefore, Section 201(1) is not attracted.”
2. Interaction Between Court Orders and Section 192 (TDS on salaries)
Section 192 mandates tax deduction “at the time of payment”.
At the time of payment (FY 2015–16), SBI was under a judicial direction not to deduct tax.
Hence, no default could arise later when the writ petition was finally dismissed years later.
The Court noted that the burden, if any, falls on the employees—not the employer—once the litigation concludes.
3. Protection under the First Proviso to Section 201(1)
The Court highlighted that the Act itself protects a deductor where:
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the payee has filed returns,
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included the income, and
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paid due tax.
This proviso, according to the Court, squarely applies to situations like the present case.
4. Support from Precedents
The Court relied on:
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Leema Resorts Pvt. Ltd. v. C.G. Suryakant (1995) 215 ITR 618 (Mad.)
→ Held that where court orders mandate payment without TDS, the payer cannot be treated as an assessee-in-default. -
State of U.P. v. Prem Chopra (2022) 2 SCR 990
→ Explained how interim orders operate and what happens when main proceedings are disposed of.
Both decisions reinforced the conclusion that SBI cannot be penalised for obeying judicial directions.
5. Argument on Territorial Jurisdiction
The revenue contended that the Madras High Court’s interim order does not bind authorities in Kerala.
The Court rejected this outright:
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The Income Tax Act is an all-India statute.
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The circular challenged in Madras affected all employees nationwide.
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SBI was party to those proceedings.
Thus, compliance with the Madras High Court’s order was mandatory, irrespective of where the TDS proceedings were initiated.
6. Supreme Court’s Earlier Decision Not Applicable
The revenue relied on a Supreme Court judgment holding SBI liable for TDS on similar LTC payments for AY 2013–14.
The High Court distinguished the decision:
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The Supreme Court ruling related to years without court directions.
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For AY 2016–17, the interim orders governed the field.
Judgment
The Kerala High Court allowed SBI’s appeal and held:
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SBI cannot be treated as an assessee-in-default under Section 201(1).
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Consequently, interest under Section 201(1A) is also not leviable.
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The Tribunal’s order and departmental proceedings were set aside.
Conclusion
This decision is a strong reiteration of the principle that compliance with a judicial order cannot invite statutory penalty.
The ruling provides significant relief to employers who act in accordance with interim court directions, particularly where such directions alter or suspend statutory obligations such as TDS deduction.
It also reinforces the protective framework under Section 201 and clarifies the interplay between TDS provisions and court-imposed restraints.
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