28 Dec 2022
Supreme Court holds employer to be in default for failure to withhold taxes on leave travel concession paid to employees for circuitous journeys involving foreign travel
On 4 November 2022, the Supreme Court in the case of State Bank of India v ACIT rejected the assessee-employer’s plea that it had made a ‘bonafide mistake’ in not withholding income tax on the leave travel concession (LTC) paid to its employees for circuitous journeys that involved travel to foreign countries as well.
Under the provisions of (Indian) Income Tax Act, 1961 (ITA), LTC received by an employee is tax exempt up to certain prescribed limits, so long as it is availed for travel to any place within India. During the year under consideration, employees of the assessee had raised several claims of travel expenses. While the expenses pertained to journeys within India, certain employees had also travelled to foreign countries before arriving at their ultimate destination in India (for example, Delhi-Madurai-Colombo-Singapore-Colombo-Delhi).
The tax authorities held that such circuitous journeys would not qualify for an LTC exemption since the employees had travelled to foreign destinations. LTC is only tax exempt in case of travel within India. Accordingly, the tax authorities passed orders holding the assessee-employer liable for its failure to withhold tax on the LTC paid to the individuals concerned.
On the other hand, the assessee-employer contended that the ITA does not specifically bar foreign travel so long as the journey begins and ends in India, and the employees are only reimbursed for the shortest route of travel between two places in India.
On reference, the Supreme Court upheld the orders of the High Court of Delhi as well as the Income Tax Appellate Tribunal (ITAT) and ruled in favour of the tax authorities. The Supreme Court held that LTC must be availed by an employee within the limitations prescribed under the ITA to qualify as ‘exempt income’. The limitations prescribed are two-fold:
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