Employees LTC LFC claims for foreign travel not exempt u/s 10(5). Employer rightly treated assessee in default for non deduction of TDS – ITAT

Employees LTC LFC claims for foreign travel not exempt u/s 10(5). Employer rightly treated assessee in default u/s 201(1) and u/s 201(1A) for non deduction of TDS – ITAT

ABCAUS Case Law Citation:
ABCAUS 1206 (2017) (04) ITAT

The Grievance:
The assessee was aggrieved by order passed by the CIT(A) in confirming the demands raised by the Assessing officer (‘AO’) u/s 201(1) and u/s 201(1A) of the Income Tax Act, 1961 (‘the Act’) by concluding that the employees of the assessee was not eligible exemption u/s 10(5) for expenditure incurred for reimbursement of LTC/LFC claims.

Assessment Year : 2011-12
Date/Month of Pronouncement: April, 2017

Important Case Laws Cited/relied upon:
Om Parkash Gupta v. ITO
SBI vs. DCIT (TDS)
CIT v. HCL Info systems Ltd.
CIT v. Nestle India Ltd. (supra)

Brief Facts of the Case:
The appellant assessee was a nationalized bank. A survey u/s 133A of the Act was conducted in the business premises of the assessee by the Assistant Commissioner of Income-tax (ACIT)-TDS to verify the compliance of provisions related to tax deduction at source (TDS) by the assessee in the case of salary and perquisite payments made to its employees.

The AO found that LFC exemption u/s 10(5) allowed by the bank to its employees was erroneous since the travels also included a leg outside India and travel by long circuitous route which was not in accordance with the provisions of section 10(5) of the Act read with Rule 2B of Income-tax Rules, 1962 (‘the Rules’).

After considering the explanation offered by the assessee and analyzing the provisions of Rule 2B and section 10(5) and following the decision of the ITAT in the case of Om Parkash Gupta, the AO held the deductor (the assessee-Bank) as an ‘assessee in default’ u/s 201(1) for making short-deduction u/s 192 and liable to pay the defaulted amount.

Aggrieved, the assessee-Bank carried the dispute to the CIT(A) who confirmed the demand raised by the A.O u/s. 201 and 201(1A) of the Act for all the assessment years under considerations.

Aggrieved by the order of CIT(A), the assessee-Bank went to the Tribunal (ITAT) and filed 49 appeals for all the assessment year concerned.

Contentions of the Appellant:
It was submitted that the assessee bank had reimbursed the LFC only in respect of journey the destination of which was in India. Further, the quantum was restricted to the air fare by economy class through the shortest route.  As such, the assessee-Bank had not defaulted in complying with the TDS provisions of the Act.

It was contended that the CIT(A) erred in holding that the travel should be within India. Also that the demand was confirmed without bringing on record that the employees had not paid the taxes. It was further submitted that the assessee-Bank need not establish the eligibility of the employees to claim deduction u/s 10(5) of the Act. It was also contended that the assessee-Bank was under bona-fide belief that the payments were exempt in the hands of the employees.

Contention of the Respondent Revenue:
It was submitted that as per the provisions of section 10(5) of the Act, only the reimbursement of expenses which were incurred on travel of employees and his family to any place in India subject to certain conditions are exempt. It was, further, submitted that since the employees of the assessee-Bank had travelled to foreign countries, the benefit of exemption available u/s 10(5) of the Act could not be extended. It was argued that at the time of advancement of LTC amount, the employer may not have been aware of it, but, at the time of settlement of bills of LTC/LFC, complete details were obtained by the employer and were available on record. Once it was noticed that the employee had visited foreign countries and he was not entitled for exemption of reimbursement of LTC u/s 10(5) of the Act, it was contended that the employer (assessee-Bank) ought to have deducted tax at source treating the amount as not exempt and as being part of the employee’s total salary. It was therefore, submitted that since the assessee Bank had intentionally not deducted tax at source on a payment to which the employee was not entitled for any exemption, the AO(TDS) had rightly held that the assessee-Bank to be in default and raised the demands u/s 201(1) and 201(1A) of the Act.

It was argued that the assessee-Bank had relied upon a number of case laws to demonstrate that where belief was bonafide, it could not be held to be in default. But, the bank had made no effort to show how the belief was formed to exclude such allowance from salary of the employee. Neither had it adduced any evidence to support its claim that it acted in a bona-fide manner nor was that there any basis for forming the belief that such allowance exempt u/s 10(5) of the Act.

Thus, it was submitted that the provisions of section 10(5) of the Act provide that reimbursement of travel concession or assistance to an employee was exempt which was incurred for travel of the individual employee or his family members to any place in India. Nowhere in this clause, has it been stated that even if the employee travels to foreign countries, exemption would be limited to the expenditure incurred to the last destination in India. It was, therefore, pleaded that the stand of the authorities below requires to be sustained.

Observations made by the Tribunal:
The Tribunal observed that the assessee-Bank contended that it was under the bona-fide belief that the amount paid was exempt u/s 10(5). On the contrary, it was explicit that the assessee bank had not applied its mind while applying the provisions of section 10(5) of the Act with letter and spirit and allowed exemption in a mechanical way.

The Tribunal opined that since the employees of the assessee-Bank had travelled to foreign countries, the benefit of exemption available u/s 10(5) of the Act should not have been granted. Though the assessee-Bank might not have been aware of the details of the employees’ places or destination of visits at the time of advancement of LTC/LFC amounts. However, at the final settlement of the claims of the employees under LTC/LFC, the assessee-Bank should have obtained all the relevant details.

The ITAT was of the view that when the assessee-Bank became aware of the fact that its employees had visited foreign countries by availing LTC/LFC concession and so they were not entitled for exemption of reimbursement of LTC u/s 10(5) of the Act, the assessee-Bank was under obligation to deduct tax at source treating such an amount as not exempt. Since the assessee-Bank had failed to enforce its duty to deduct tax at source as envisaged in section s.192 of the Act, it was tantamount that the assessee-Bank was an ‘assessee in default’ u/s 201(1) of the Act and the AO (TDS) was within her domain to hold so.

The Tribunal observed that it was not the case of the assessee-Bank that its employees had included the LTC/LFC in their taxable salary and paid tax on the same. Moreover, the national carrier, i.e., Air India/Indian Airlines had also been offering LTC package to various destinations in India and allowing passengers to visit the foreign countries at the full fare chargeable to the final destination in India and it was clearly mentioned in Air India website that the value of LTC was chargeable to Income Tax.

The Tribunal opined that as rightly pointed out by ITAT Lucknow, provisions of section 10(5) was introduced in order to motivate the employees and also to encourage tourism in India and, therefore, the reimbursement of LTC/LFC was exempted, but, there was no intention of the Legislature to allow the employees to travel abroad under the garb of benefit of LTC available by virtue of section 10(5) of the Act.

The ITAT placed reliance on the judgment of the ITAT Lucknow and ITAT Chandigarh on identical set of facts. Regarding various case laws relied by the assessee-bank, the ITAT found them distinguishable.

The Tribunal observed that the assessee-bank had relied on various case laws for the proposition that its belief was bona fide and it could not be held to be an ‘assessee in default’ u/s 201(1) of the Act. However, the contention of the assessee was considered as without any legal basis, since the assessee had made no effort to prove how its belief was formed that such foreign travel expenses would come within the ambit of section 10(5) of the Act.

Held:
The Tribunal uupheld the order of AO-TDS in holding the assessee-bank assessee in default as above and the appeal of the assessee-Bank was dismissed.

LTC LFC claims for foreign travel

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