No Leave travel concession u/s 10(5) for journey outside India : ITAT

Smt. Neelam Ashok, CA for the Appellant. Prem Prakash Meena, JCIT for the Respondent.

ORDER

Vikram Singh Yadav, Accountant Member – These are two appeals filed by the assessee against the order of the Ld. CIT(A)-5, Jaipur dated 11.11.2016 for A.Y. 2013-14 & 2014-15 respectively. The assessee has also filed two stay petitions in respect of demand raised by the Assessing Officer of Rs.7,76,365/- for A.Y. 2013-14 & Rs.12,10,074/- for A.Y. 2014-15. Since common issues are involved in these appeals and stay petitions, the same were heard together and disposed off by this consolidated order. For the purpose of discussion, we take up the appeal for A.Y. 2013-14 wherein the following grounds of appeal have been taken:

2. All these grounds primarily relates to the benefit of leave travel concession granted by the assessee bank to its employees and non-deduction of TDS on the payment of leave travel concession by the assessee to its employees and the corresponding interest thereon.

3. Briefly the facts of the case are that the assessee bank provides the benefit of leave travel concession (LTC) to its employees. On 19.02.2014 & 22.03.2014, a spot verification was conducted by the Asst. Commissioner of Income-tax (TDS) Jaipur at the Zonal Office of the bank in Jaipur. In this connection, a show cause notice dated 16.12.2014 and then another show-cause dated 08.01.2015 was served upon the Assessee to provide details of amounts used to travel out of India. In response to the Show Cause Notice, the Bank filed its reply on 02.02.2015 as under:

4. On perusal of the details submitted during the TDS assessment proceedings, the ACIT was of the view that LTC benefit under section 10(5) is not available as foreign destination is involved i.e, the places of travel are not situated in India, it cannot be termed as the shortest route to the designation in India, and the National carrier is not involved/used for purposes of the air travel. Thereafter, ACIT passed an order dated 19.02.2015 under section 201(1) read with section 201(1A) treating the entire LTC payments made to employees of corporate office during financial year 2012-13 and 2013-14 as taxable and has treated the assessee bank as an assessee in default for purpose of section 201 and raised the following demand:

5. Being aggrieved, an appeal was filed before the ld CIT(A), Jaipur which was dismissed and hence, the present appeal before us.

6. Before we advert to the ld AR’s contentions, it would be relevant to refer to the findings of the ld CIT(A) which are under challenge before us:

“3.3 I have considered the facts of the case, the assessment order and the submissions of the appellant. The brief facts of the case are that the AO observed that the appellant had not deducted TDS on the amount of reimbursement of Leave Travel Concession (LTX)/Leave Fare Concession (LFC) given to the employees even in the cases where a foreign destination was included in the itinerary of their journey. Section 10(5) of the Income Tax Act, 1961 clearly stipulates that exemption under section 10(5) of the Act is available only for travel to any place in India and restricted to the amount of expenses actually incurred for the purpose of such travel read with conditions as per rule 2B of the Income Tax Rule, 1962. The Assessing Officer accordingly issued notice under section 201(1)/(201(1A) of the Act to the assessee requiring to explain as to why TDS was not deducted on the amount of reimbursement of LFC. Since the said amount cannot be treated as exempt under section 10(5) of the Act, as a foreign destination was included in the journey, the assessee was treated as assessee in default for not deducting TDS on the said amount of LFC reimbursement. Interest under section 201(1A) of the Act was also charged. The appellant has contended that there is no bar u/s 10(5) or Rule 2B on travel outside India as long as there is a designated place of travel within India. It is contended that Rule 2B refers to grant of exemption for travel by shortest route and envisages that a person can travel by a circuitous route to the designated place in India. However, in such cases the exemption u/s 10(5) is restricted to travel within India. It is further contended that conditions of travel by economy class, air fare of the national carrier, restriction of exemption to the amount actually incurred etc. are also complied with. Moreover, the assessee has claimed that it was under bonafide belief that TDS is not deductible on the impugned payments. The assessee has also cited the interim order of Hon’ble Madras High Court dated 16-02-2015 directing the assessee not to deduct TDS on LFC payments till final decision of Writ Petition.

3.4 I have carefully considered the arguments put forth by the appellant. Regarding the argument of the assessee that exemption u/s 10(5) is not limited to travel only within India and is applicable to a case involving foreign leg in the tour, it is seen that section 10(5) read with Rule 2B is very clear in intent that the said provisions are applicable in connection with proceeding on leave to any place in India. The appellant has in fact bent the interpretation of the said provisions in such a way which goes totally against the intent and spirit of these provisions. In all the cases involving foreign travel, one designated place in India is just covered for namesake, otherwise almost entire journey is a foreign travel for all practical purposes. In these circumstances, exemption u/s 10(5) would not be available. This view finds support from the decision of Hon’ble ITAT, Chandigarh Bench in the case of Sh. Om Prakash Gupta v. ITO in ITA No.938/Chd/2011 dated 29-04-2013.

3.5 As far as the claim of bonafide belief is concerned, no doubt, the assessee may not be aware with the ultimate plan of travel of its employees, but at the time of settlement of LTC/LFC bills, complete facts are available before the assessee as to where the employees have travelled, for which he has raised a claim; meaning thereby that the assessee was aware of the fact that its employees have travelled in foreign countries for which he is not entitled to exemption u/s 10(5). In fact, the way the reimbursements have been made, indicates the complicity of the assessee. For example, in the case of Sh. Navin Khanna, who has travelled from Jaipur to Delhi to Port Blair via Singapore and Malaysia in the month of June, 2012 and has raised a claim of Rs.3,90,163, an amount of Rs.3,76,131 (almost equal claim in most of the cases) has been calculated as his eligibility by taking notional to & fro air-fare of Air India from Delhi to Port Blair at Rs.1,04,341 per head, which is much in excess of actual fares as reflected in the Air India website, which shows maximum air fare of Rs.8,840/- for the same sector for the said month. In fact, from the claim papers of another employee, Sh. Narendra Kumar, submitted during appellate proceedings, it is seen that the air fare shown by him for Delhi-Portblair sector on 24-06-2012 is Rs.6,131 per head. It is thus inferred that the notional airfare adopted by the assessee is inflated and is far in excess of that shown for the same destinations and same month in the website of Air India. The inescapable conclusion is that the assessee has acted in complicity of such fraudulent claims made by its employees, which was also widely reported in the media. The further plea of the assessee regarding interim order of Hon’ble Madras High Court dated 16-02-2015 directing non-deduction of tax is also of no avail, since it applies to TDS deduction after 16-02-2015 and the cases under consideration pertain to F.Y. 2012-13 and 2013-14. Thus the directions of the said court were not available at the relevant time and the assessee was duty bound to deduct TDS on the impugned payments. This view is supported by the decision in the case of State Bank of India, Kanpur v. DCIT in ITA No.138 to 140/LKW/2015 dated 04-03-2016 of ITAT, Lucknow Bench.

3.6 Respectfully following the above judgments of ITAT, Lucknow Bench and ITAT, Chandigarh Bench, it is held that there is no exemption available u/s 10(5) in case of travel outside India, and consequently the assessee is in default for not deducting TDS on LTC/LFC payments. Ground nos. 2 to 7 are accordingly dismissed.”

7. We now refer to the contentions raised by the ld AR. The ld. AR of the assessee has submitted as under:-

7.1 The provisions of LTC are governed by the industry level settlement viz. ‘joint Notes’, signed by the Indian Banks’ Association [IBA] on behalf of the member banks and the representatives of Officers’ Organizations after industry level settlement.

7.2 Administrative and operating guidelines, issued by the Bank, are based on the clarifications issued by the Indian Banks’ Association i.e. IBA letter Nos.PLI/Set/25 dated 18 September 1982 and CIR/HR&R/2012-13/665/F/6245 dated 12 July 2012.

7.3 The Bank reimburses the LTC claim made by the employees only where the employee’s designated place is anywhere in India and he actually visits the place as designated. In case an employee travels outside India during the course of his visit to a place in India, reimbursement is made to him for his entire journey by the circuitous route provided the reimbursement made to him is limited to the actual fare/hire charges for the entire journey or the cost of fare to his home town/designated place, by the shortest route, by the entitled class whichever is lower. The Bank has issued Circular No.ADM/037239 dated 20 August 1981 in this regard.

7.4 An employee undertaking journey under LTC is eligible for reimbursement of travelling expenses i.e. air/rail/steamer/road fare by the entitled class for the permissible distance, or the actual cost of travelling for the entire journey, whichever is lower. Further, only travel expenses are reimbursable. The Bank has issued Circular No.CDO/P&HRD-PM/41/2013-14 dated 29 October 2013 in this regard. For example, where there is a single itinerary for India and overseas travel is also involved, say, Mumbai-Kolkata-Singapore-Mumbai, and where the designated place in India is Kolkata, the economy class fare by national carrier for journey within India (i.e. Mumbai-Kolkata and Kolkata-Mumbai) is considered as exempt, for the purpose of section 10(5) by the Bank, within the monetary ceiling to which the employee is eligible.

7.5 It is submitted that the Bank’s framework for provision of LTC benefit to employees and the administrative and operating guidelines issued by the IBA are framed taking into account the provisions of the Income-tax Act, 1961 and the Income-tax Rules, 1962.

7.6 Section 10(5) requires that the exemption is available for proceeding on leave to any place in India. In this connection, the Bank has granted the benefit of exemption under section 10(5) to the employees only in cases where the designated place of travel of the employee has been a place in India. In other words, the Bank in no case has granted the benefit of exemption under section 10(5) to employees where the designated place of travel is outside India. Similarly, the benefit is granted only when the employee actually visits the designated place in India.

7.7 It was further submitted that Section 10(5) does not place a bar on travel to a foreign destination during the course of travel to a place in India. Similarly, detailed guidelines have been framed for the purpose of grant of exemption in terms of rule 2B – these guidelines do not restrict overseas travel while proceeding on leave to a place in India. In other words, if the intention of the legislature or the Central Board of Direct Taxes was to not allow exemption under section 10(5) in case a foreign leg was involved in the journey, it would have explicitly provided so.

7.8 Rule 2B(1) of the Income-tax Rules, 1962 which deals with LTC are reproduced below for ready reference.

“(1) The amount exempted under clause (5) of section 10 in respect of the value of travel concession or assistance received by or due to the individual from his employer or former employer for himself and his family, in connection with his proceeding,-

Shall be the amount actually incurred on the performance of such travel subject to the following conditions, namely:-

7.9 It was submitted that at various places in the rules, as highlighted above, there is a reference to the fact that the benefit of exemption under section 10(5) is restricted to expenditure by the shortest route from the place of origin to the destination. This clearly means that Rule 2B envisages that a person can travel by a circuitous route to the designated place in India. In other words, Rule 2B supports the stand that an employee can travel to various places during the course of his travel to his ultimate destination in India. As discussed earlier, there is no requirement that such places travelled should be within India i.e. they can be outside India as well.

7.10 The annual Circular on TDS from salaries for financial year 2013-14 (CBDT Circular No.8/2013 dated 10 October 2013) clarifies that where the journey is performed in a circuitous route, the exemption is limited to what is admissible by the shortest route. Likewise, where the journey is performed in a circular form touching different places, the exemption is limited to what is admissible for the journey from the place of origin to the farthest point reached in India, by the shortest route. This also appears to indicate that circuitous travel involving a foreign destination is permissible.

7.11 It may be noted that even in cases where the employee travels outside India during the course of his travel to a place in India, the exemption under section 10(5) is restricted for travel within India. In other words, where the designated place in India is Kolkata and the travel itinerary is Mumbai-Kolkata-Singapore-Kolkata-Mumbai, exemption is granted only for travel between Mumbai and Kolkata. In terms of the requirements of rule 2B, the following other conditions are also satisfied:

7.12 It was accordingly submitted that the Bank provides the LTC exemption only where the employee’s designated place is in India and he actually visits the place as designated. There is no bar under section 10(5) or rule 2B on travel outside India if designated place is in India. Rule 2B refers to grant of exemption for travel by the shortest route and envisages that a person can travel by a circuitous route to the designated place in India. Even in cases where the employee travels outside India during the course of his travel to a place in India, the exemption under section 10(5) is restricted for travel within India. The conditions of travel by economy class, air fare of the national carrier, restriction of exemption to the amount actually incurred, etc. are also complied with. In other words, where the employee has designated a place of travel in India and travels to such a place in India, the benefit of exemption under section 10(5) cannot be denied merely on the ground that a foreign leg is also involved. In view of the above, the Bank is of the view that it has correctly granted exemption under section 10(5) to its employees at the time of deduction of tax at source.

7.13 In respect of findings of the ld CIT(A) that Rule 2B is very clear in intent that that the said provisions are applicable in connection with proceeding on leave to any place in India and the appellant has in fact bent the interpretation of the said provisions in such a way which goes totally against the intent and spirit of these provisions. In this regard, it was submitted that had the intention of law been to disallow exemption in LTC Rules in case of foreign travel the same should have been specifically mentioned, but that is not so, nowhere in the entire section any such proviso/point appears. Also, it would be wrong to say that they have bent the interpretation intentionally against the intent and spirit of these provisions as:

We would like to submit that in fact the intent of law has been misinterpreted and the department is unduly denying the benefit of LTC to bona fide employees who are in fact complying with the law with true spirit and intent.

7.14 It was further submitted that the payments of LTC Bills are made by the bank after rigorous checking of Bills at three levels. The payment is made on reimbursement basis after submission of original bills supporting and claim forms. The bills are paid only when the Employee visits the destination points and in none of the case the payment has been made by treating the notional expenses on shortest route in India even though the employees did not travel there at all. This statement of the Ld. CIT (Appeals) is totally untrue and not based on true facts. The Bank reimburses the LTC claim made by the employees only where the employee’s designated place is anywhere in India and he actually visits the place as designated.

7.15 Without prejudice to the position that the Bank has correctly granted exemption under section 10(5) to its employees at the time of deduction of tax at source, it was further submitted that the Bank is under a bona fide belief that even where the journey undertaken by an employee involves a foreign leg, the employee is entitled to exemption under section 10(5) when the employee’s designated place is in India and he actually visits the place as designated. The Bank’s view is based on, inter alia, the following:

7.16 It was further submitted that Section 192(1) of the Income-tax Act, 1961 provides that any person responsible for paying any income chargeable as salaries shall at the time of payment, deduct income-tax at the rates in force on the estimated income of the assessee. The Bank had honestly and fairly formed an opinion and arrived at the estimated income of the employees. As discussed above, the Bank was under the bona fide belief that LTC claim for travel within India cannot be denied just because the journey also includes visit outside India. Accordingly, without prejudice to the position adopted by the Bank that the Bank has correctly granted exemption under section 10(5) to its employees at the time of deduction of tax at source, it is submitted that in the present circumstances and facts of the case, the Bank cannot be treated as an assessee in default in terms of section 201.

7.17 There are a large number of decisions of various Courts, wherein it has been held that where the employer makes a bona fide estimate of the income of the employee and deducts tax at thereon, he cannot be held to be an assessee in default under section 201.In this regard, the Bank relies on, inter alia, the following judicial precedents:

7.18 The Bank also places reliance on the following judicial precedents which have upheld that where the employer has made a bona fide estimate regarding deduction of tax at source, it cannot be regarded as an assessee in default in terms of section 201:

7.19 It was reiterated that it was the bona fide belief of the Bank that it was not liable to deduct tax at source in respect of LTC provided to employees. In other words, the Bank had deducted appropriate tax at source on the basis of the prevalent law and there was no default on the part of the Bank in deducting tax at source. Accordingly, the Bank cannot be held to be an assessee in default within the meaning of section 201.

7.20 Without prejudice to the above, it was submitted that if at all the LTC payments involving a foreign leg are to be held as taxable, the employee is entitled for exemption under section 10(5) to the extent of expenses incurred for travel in India where the employee’s designated place is in India and he actually visits the place as designated.

7.21 Without prejudice to the above, the Bank submits that if at all the LTC payments are to be held as taxable, the TDS liability of the bank should be computed by applying the actual income-tax rate applicable in case of each employee and not at a flat rate of 30% as considered by the leaned ACIT.

7.22 Without prejudice to the above, it was submitted that if at all the LTC payments are to be held as taxable and TDS liability is to be computed, the interest on the same should be computed on the basis of actual date of payment of LTC to the employees and not for entire period of 35 months (i.e. from 1 April 2011 to 28 February 2014) as done by the learned ACIT.

8. The ld DR is heard who has vehemently argued the matter and submitted that the matter is squarely covered by the decisions of the Tribunal as referred in the ld CIT(A)’s order.

9. We have heard the rival submissions and perused the material available on record. The facts of the case are pari-materia with the decision of the Coordinate Bench in case of SBI v. DCIT, TDS, Kanpur (supra) wherein the relevant findings are as under:

“8. Having carefully examined the orders of the lower authorities in the light of the rival submissions and the documents placed on record, we find that as per provisions of section 10(5) of the Act, only that reimbursement of travel concession or assistance to an employee is exempted which was incurred for travel of the individual employee or his family members to any place in India. Nowhere in this clause it has 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. For the sake of reference, we extract the provisions of section 10(5) of the Act as under:—

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

[(5) in the case of an individual, the value of any travel concession or assistance received by, or due to, him,—

subject to such conditions as may be prescribed (including conditions as to number of journeys and the amount which shall be exempt per head) having regard to the travel concession or assistance granted to the employees of the Central Government:

9. On perusal of this section, we are of the view that this provision 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. Undisputedly, in the instant case the employees of the assessee have travelled outside India in different foreign countries and raised claim of their expenditure incurred therein. No doubt, the assessee may not be aware with the ultimate plan of travel of its employees, but at the time of settlement of the LTC/LFC bills, complete facts are available before the assessee as to where the employees have travelled, for which he has raised the claim; meaning thereby the assessee was aware of the fact that its employees have travelled in foreign countries, for which he is not entitled for exemption under section 10(5) of the Act. Thus, the payment made to its employees is chargeable to tax and in that situation, the assessee is under obligation to deduct TDS on such payment, but the assessee did not do so for the reasons best known to it. We have also carefully examined the Circular placed by the ld. counsel for the assessee during the course of hearing, in which a reference was made to the interim order of the Hon’ble Madras High Court dated 16.2.2015. Through the interim order, the Hon’ble Madras High Court has permitted the bankers not to deduct TDS on or after 16.2.2015 on the amount paid/reimbursed to the employees of the bank in respect of LTC/HTC availed where the employee has visited a foreign city/country, irrespective of the fact whether the LFC bills were submitted and paid prior to 16.2.2015; meaning thereby this Circular was passed consequent to the interim order of the Hon’ble Madras High Court. But in the present case, the journey was undertaken in the year 2012 and the bills were settled during that year; meaning thereby at the relevant point of time when the bills were settled, there was no order of the Hon’ble Madras High Court and the assessee was under obligation to deduct TDS on the reimbursement of expenditure incurred by the assessee on foreign travel. In the light of these facts, we are of the considered opinion that the Revenue has rightly held the assessee to be in default, as the assessee has not deducted TDS intentionally on the reimbursement of expenditure incurred on LTC/LFC. Moreover, the ld. CIT(A) has directed the Assessing Officer to recalculate the liability of TDS at 10%. We, therefore, find no infirmity in the order of the ld. CIT(A) and we confirm the same.”

10. Similarly, the decision of the Coordinate Bench in case of Om Prakash Gupta v. ITO (supra) also supports the case of the Revenue wherein the Coordinate Bench has held as under:

“12. The said sub-section provides that where an individual had received travel concession or assistance from his employer for proceeding on leave to any place in India, both for himself and his family, then such concession received by the employee is not taxable in the hands of the employee. Similar exemption is allowed to an employee proceeding to any place in India after retirement of service or after the termination of his service. The provisions of the Act are in relation to the travel concession/assistance given for proceeding on leave to any place in India and the said concession is thus exempt only where the employee has utilized the travel concession for travel within India. Further under Rule 2B of the Income Tax Rules the condition for allowing exemption under section 10(5) of the Act are laid down. The conditions are in respect of various modes of transport. However, the basic condition is that the employee is to utilize the travel concession in connection with his proceeding to leave to any place within India, either during the course of employment or even after retirement of service or after termination of service. Reading of section 10(5) of the Act and Rule 2B of the Rules in conjunction lays down the guidelines for claiming exemption in relations to the travel concession received by an employee from his employer or former employer, for proceeding on leave to any place in India. The person is to undertake the journey to any place in India and thereafter return to the place of employment and is entitled to reimbursement of expenditure on such travel between the place of employment and destination in India. Rule 2B of the Rules further lays down the conditions that the amount to be allowed as concession is not to exceed the air economy fair of the National Carrier by the shortest route to the destination in India. The said condition in no way provides that the assessee is at liberty to claim exemption out of his total ticket package spent on his overseas travel and part of the journey being within India. We find no merit in the claim of the assessee in the present case and we are in conformity with the observation of the CIT (Appeals) in this regard, which has been reproduced by us in the paras hereinabove. In view thereof, we reject the claim of the assessee of exemption under section 10(5) of the Act. The ground of appeal No. 3 raised by the assessee is thus dismissed.”

11. No contrary authority has been brought to the notice of the Bench. We, therefore, donot see any reason to deviate from the said view taken by the Coordinate Benches. In the result, the grounds no. 1-6 of the assessee’s appeal are dismissed.

12. Regarding ground no. 7, it is noted that the ld CIT(A) has already held that flat rate of 30% applied by AO in each case for computation of TDS liabilityis not in accordance with the provisions of section 192 and the AO has been directed to compute TDS in case of each employee according to the tax slab in which each employee falls. This ground is thus infructuous and is hereby dismissed.

13. Regarding ground no. 8, the ld CIT(A) has already the AO to compute interest u/s 201(1A) with reference to the actual date of payment of LTC in each case. This ground is thus infructuous and is hereby dismissed.

14. In the result, we confirm the findings of the ld CIT(A) and the appeal of the assessee is dismissed.

The facts of the case are pari-materia with the facts as noted in ITA No. 145/JP/17 and our findings contained therein shall mutatis-mutandis in this appeal as well. In the result, the appeal of the assessee is dismissed.

In terms of quantum of tax demand raised in both the years under considerations, we direct the AO to give effect to the directions as contained in the ld CIT(A) order, if its not done already, regarding applying the correct rate of tax for determining the TDS liability as well as the period for which interest is payable on such TDS liability and recompute the tax and interest demand for both the years under consideration and serve the revised demand notice to the assessee for both the years under consideration. In the interim, no coercive steps shall be undertaken by the Department. With above directions, the stay petitions are disposed off.

In the result the appeals filed by the assessee for the both the years are dismissed and the stay petitions are disposed off with above directions.