When assesee did not deduct TDS on account of interim stay of High Court, it can’t be regarded as assessee in default under section 201(1) of the Income Tax Act.
In a recent judgment, Hon’ble Kerala High Court has held that when assessee did not deduct TDS on account of interim stay granted by the High Court, the assessee could not be regarded as assessee in default within the meaning of Section 201(1) of the Income Tax Act.
ABCAUS Case Law Citation:
4903 (2025) (12) abcaus.in HC
In the instant case, the appellant assessee, a Nationalised Bank had challenged the order of the Income Tax Appellate Tribunal (ITAT) Cochin Bench upholding the steps initiated against it under Section 201(1) and (1A) of the Income Tax Act, 1961 (the Act) with respect to the assessment year 2016-17.
The appellant bank had been providing reimbursement of Leave Travel Concession (LTC) to its employees. Pursuant to a circular dated 15.04.2014 issued by the bank, LTC as regards overseas travel facility to the employees stood withdrawn.
The said circular was challenged before the Madras High Court at the instance of the association of the employees of the bank. The Madras High Court stayed the operation of the circular.
Later, the stay order was sought to be modified/clarified at the instance of the Association complaining that the bank was taking steps to deduct tax at source (TDS), treating the payments to the employees on the basis of the interim order as income of the employees.
The Madras High Court, therefore, issued another interim order clarifying that any amount paid to the employees towards LTC or re-imbursement of LTC pursuant to the impugned order would not amount to income so as to enable the Bank to deduct tax at source. It is however made clear that if the writ petition came to be dismissed, the employees shall liable to pay tax on the amount paid by Bank.
In view of the interim order, the appellant bank did not deduct tax while making payment to the employees during the financial year 2015-16
The said Writ Petition ultimately came to be dismissed by the Madras High Court. The matter reached the Hon’ble Supreme Court which interdicted the bank from making recoveries from employees during the pendency of the matter.
It was the contention of the appellant bank that despite bringing the fact that deduction could not be carried out from the employees on such payment by virtue of the stay orders, its explanation was brushed aside, and the appellant was treated as an ‘assessee in default’ demanding tax under Section 201(1) and interest under Section 201(1A) of the Act.
The first appellate authority having confirmed the afore assessment, the appellant was before the Income Tax Appellate Tribunal which rejected the appeal.
The Hon’ble High Court observed that the question to be answered was as to whether in the facts and circumstances of the case; when the assessee bank, by the interim order of the High Court of Madras, was under an obligation not to deduct tax at source, could be held to be an assesseein-default for non-deduction of tax at source on LTC payments at all as the non-compliance of the orders would have tantamounted to contempt of court?
The Hon’ble High Court observed that there was no dispute that the appellant bank could not have made any deduction in view of the interim orders. It is only when the appellant-assessee, after having a liability to deduct tax, fails to do so, the question of invoking Section 201 of the Act and treating it as an ‘assessee in default’ arises. Since the Madras High Court had found, prima facie, that the amount paid would not be the income of a payee so as to deduct tax. Therefore, the provisions of Section 201(1) of the Act were not attracted to the case at hand.
The Hon’ble High Court observed that a similar issue was dealt with by the Madras High Court wherein the appellant were tenants who were found guilty of contempt of court for disobeying its orders. In the contempt proceedings, the appellants undertook to pay a sum of rupees ten lakhs to the owner. The Income Tax Department issued a notice to the appellant for not deducting TDS on rent payment under section 194I of the Act. The appellant in such circumstances approached the High Court seeking permission to deduct 20% of the amount already paid. The High Court observed that appellants were required to pay the amount under the teeth of punishment imposed in the contempt proceedings. The order did not give any scope or option to the appellants in the contempt appeal to deduct 20 per cent, of the amount payable to the respondents at source. In such a situation, the proviso to section 201 of the Act is attracted as it specifically empowers the concerned Assessing Officer to extend the benefit to such an assessee and not to treat him as the assessee in default in respect of the tax.
In the light of the above decision, in the instant case the Hon’ble High Court opined that as the appellant bank, having complied with the orders of the High Court, it cannot be treated as an ‘assessee in default’ under the provisions of Section 201 of the Act.
The Hon’ble High Court also noted that considering the effect of an interim order granted by the Court, once the main matter itself is disposed of, the Hon’ble Supreme Court had observed that imposition of a stay on the operation of an order means that the order which has been stayed would not be operative from the date of passing of the stay order. In such a situation, it is the duty of the Court to put the parties in the same position they would have been but for the interim order of the court, unless the order granting interim stay or final order dismissing the proceedings specifies otherwise. On the dismissal of the proceedings or vacation of the interim order, the beneficiary of the interim order shall have to pay interest on the amount withheld or not paid by virtue of the interim order.
The Hon’ble High Court opined that in view of the observation of the Hon’ble Supreme Court, even though the main writ petition/writ appeal has been later disposed of insofar as the interim order had directed the treatment of the amount paid without deduction of tax in the manner laid down therein, the appellant bank could not be treated as an assessee in default.
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