In tax year 2013-14, some employees of State Bank of India (Taxpayer)[1] had undertaken journeys to designated places in India via foreign countries. In other words, they traveled within India by taking a circuitous route involving a foreign leg as well. For instance, one such travel route was Delhi-Madurai-Colombo-Kuala Lumpur-Singapore-Colombo-Delhi. The Taxpayer fully reimbursed the claim of leave travel concession (LTC) of such employees without withholding tax under Section (S.) 192 of the Income Tax Act, 1961 (ITA) on the basis that such travel qualified for LTC exemption under S.10(5) of the ITA[2] for leave travel to any place in India. The tax authority challenged this position by treating such travel as not falling under the exemption provided under S.10(5) since the travel involved foreign places as well. Hence, the tax authority treated the Taxpayer as “assessee-in-default” (AID) for withholding tax default.
On appeal, the Taxpayer claimed that it had properly considered LTC as exempt under S.10(5), on the following grounds:
- Employees did travel from one designated place in India to another place within India, although in their travel itinerary a foreign country was also involved.
- No payment was made for foreign travel although a foreign leg was a part of the itinerary. Payments made by the Taxpayer to these employees were for the shortest route of their travel between two designated places within India.
The first appellate authority, Tribunal[3] and Delhi High Court[4] , upheld the tax authority’s action of treating Taxpayer as AID.
The Taxpayer appealed before the Supreme Court (SC). The SC ruled in favor of the tax authority and dismissed the Taxpayer’s appeal on the following grounds:
- LTC is for travel within India, from one place in India to another place in India
As per the provisions of the ITA, LTC exemption is given for air fare between two places within India for the shortest route between these two places. The argument that there is no specific bar under S.10(5) for a foreign travel and, hence, a foreign journey can be availed off as long as the starting and destination points remain within India is with no merit. The moment employees undertake travel with a foreign leg, it is not travel within India and hence, not covered under the exemption provided by S.10(5) of the ITA.
Furthermore, employees had not undertaken the shortest possible route between the two destinations. The SC rejected the Taxpayer’s defense that the employees had not claimed LTC exemption for the foreign leg by observing that it is difficult to accept that a person will avail a foreign tour without paying any price for it. However, the SC declined to go into further specifics of dynamics of air fare to evaluate the validity of Taxpayer’s defense.
- Basic objective of the LTC scheme
Foreign travel frustrates the basic purpose of LTC. LTC was introduced to motivate employees towards tourism in India to understand its culture. There was no intention of the legislature to allow employees to travel abroad in the garb of the LTC available under S.10(5).
For the same reason, the Sixth Pay Commission also rejected the demand for paying cash compensation in lieu of LTC and rejected the demand of foreign travel.
- It is not a bona fide mistake
Withholding obligation is distinct from payment of one own’s tax liability. The Taxpayer cannot claim ignorance about the travel plans of its employees as, during settlement of LTC bills, complete facts of the travel details were available, and the Taxpayer was fully in a position to calculate the estimated income.
Records show that many of the employees had undertaken travel to foreign countries. It is very difficult to appreciate as to how the Taxpayer failed to take this into account and, therefore, the same may not be considered as a ”bona fide mistake” for computing estimate income of an employee.
