Applicability of LTC provisions on Foreign Travel

Facts of the Case:

• State Bank of India (herein after referred as “Appellant”) paid salary to its employees, which included compensation for travelling i.e., Leave Travel Concession (‘LTC’) on which no was tax was withheld as per the provisions of Section 192 of the Income Tax Act, 1961 (herein after referred as “the Act”) as the same was exempt in hands on employees u/s 10(5) of the Act.
• However, during the assessment proceedings, the assessing officer (‘AO’) found that some employees of the Appellant were claiming LTC even for foreign travel, however the beginning and end points of their journey were in India. Therefore, the whole journey included a foreign leg as well, for which such employees were claiming exemption.
• Therefore, AO held the Appellant as an ‘Assessee in default’ as per the provisions of Section 201 of the Act, for not deducting TDS u/s 192 of the Act on the LTC portion as it should not be exempt u/s 10(5) of the Act. The order of AO was challenged before CIT(A) which was dismissed and so was the appeal before ITAT.
• The Delhi High Court also dismissed the appeal of the Appellant holding that there was no question of law. The question of law raised before the Hon’ble Supreme Court was whether the Appellant was in default for not deducting tax at source while releasing payments to its employees as LTC.

Findings of Hon’ble Supreme Court:
Observation And Conclusion:

• As per the provisions of the Act, the person responsible for paying any income chargeable under the head “Salaries” shall withhold the tax amount u/s 192, failing which, such person shall be deemed to be an ‘Assessee in Default’ as per the provisions of Section 201 of the Act.
• Section 10(5) read with Rule 2B of the Income Tax Rules, 1962 (herein after referred as “the Rules”), exempts an amount received as LTC by an individual from his employer for himself and his family for leave to any place in India and LTC shall be exempt to the value of the shortest route to the place of destination.
• However, in the present case, journey of employees of the Appellant also included a foreign leg (e.g. Delhi-Madurai- Columbo-Kuala Lumpur-Singapore- Columbo-Delhi) even though the origin and destination point of the journey were located in India. LTC is for travel within India and thus the contention of the Appellant that as long as the starting and destination points remain within India, exemption under section 10(5) shall be available, was held to be without merit.
• Also, it was held the second contention of the Appellant that only that portion of travelling expense was reimbursed for the shortest route between two places in India i.e., origin and destination couldn’t be accepted, as the moment employees undertake travel with a foreign leg, it is not a travel within India and hence not covered u/s 10(5) of the Act.
• Further, the basic objective of the LTC scheme was to familiarise a civil servant or a government employee to gain some perspective of Indian culture by traveling in this vast country. It is for this reason that the 6th Pay Commission rejected the demand of paying cash compensation in lieu of LTC and also rejected the demand of foreign travel.
• Furthermore, it cannot be a case of bonafide mistake, as all the relevant facts (LTC bills during the claim settlement which shows the travel plans) were before the Appellant and it was therefore fully in a position to calculate the ‘estimated income’ of its employees and withhold the appropriate amount of tax. Hence, Hon’ble Supreme Court dismissed appeal.

Supreme Court of India
State Bank of India vs. ACIT

SW Point of View:

LTC u/s 10(5) read with Rule 2B is for travel of employees within India, from one place in India to another place in India. Thus, the contention of the Appellant that there is no specific bar as per the  provision u/s 10(5) for a foreign travel and accordingly a foreign journey can be availed as long as the starting and destination points remain within India was held to be inadequate. In view of the provisions of the Act, the moment an employee undertakes travel with a foreign leg, it is not a travel within India and hence not covered under the provisions of Section 10(5) of the Act.

Lakshay Prakash Jonwal, Direct Tax Associate, SW India