LTC can be claimed only for travel within India as the very purpose of this provision is to familiarise employees with Indian culture.
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Employees cannot avoid Tax Deduction at Source (TDS) in the name of Leave Travel Concession (LTC) if their travel itinerary involves a foreign leg. This rule will apply even if the employee is claiming LTC for the shortest route of travel within India, according to a recent Supreme Court Judgement.
In the SBI vs Assistant Commissioner of Income Tax judgement dated 4 November 2022, the apex court held that LTC can be claimed only for travel within India as the very purpose of this provision is to familiarise employees with Indian culture. Therefore, LTC benefits would not be available if the travel itinerary includes a foreign trip.
The apex court upheld the Delhi High Court’s judgement which agreed with an order passed by the Income Tax Appellate Tribunal (ITAT) dated July 9, 2019. The ITAT had held that the appellant (SBI) as an assessee was in default for the Assessment Year (AY) 2013-14, for not deducting the TDS of its employees.
What Supreme Court said
The SC observed that LTC is a payment made to an employee which is exempted as ‘income’ and hence under normal circumstances, there should be no question of TDS on this payment. It further said that LTC has to be availed by an employee within certain limitations, prescribed by law. These include:
- “Firstly, the travel must be done from one designated place in India to another designated place within India. In other words, LTC is not for foreign travel.”
- “Secondly, LTC is given for the shortest route between these two places.“
What was the case
In the case before SC, SBI employees had done their travel within India as well as abroad. The Revenue asserted that “this was not a travel from a designated place within India to another designated place in India and thus it was in violation of the statutory provisions and hence the payment made to its employees by the Bank could not be exempted, and the Bank ought to have deducted Tax at Source, while making this payment.”
The SC judgement cited the example of an SBI employee who had availed LTC benefit after taking a circuitous route of Delhi- Madurai- ColumboKuala Lampur- Singapore- Columbo- Delhi and his claim was fully reimbursed by SBI without any tax deduction under Section 192 (1).
What SBI said
SBI argued that payment was made only for the shortest route of travel between two designated places within India. Even a foreign leg was in the itinerary of the employees, but no payment was made for the same.
However, SBI’s argument was rejected by the tax department, ITAT and even the High Court. SC also agreed to the previous decisions.
“After examining the matter our considered opinion is that the view taken by the Delhi High Court and the Tribunal and even by the revenue in its initiation of proceedings cannot be faulted. The appellant whom we shall refer to as the ‘assessee employer’ ought to have deducted tax at source,” the apex court said.
As per the facts quoted in SC judgement, many employees of SBI had undertaken travel to Port Blair via Malaysia, Singapore or Port Blair via Bangkok, Malaysia or Rameswaram via Mauritius or Madurai via Dubai, Thailand and Port Blair via Europe etc.
When LTC benefit is available
As per Section 10 (5) of the Income Tax Act, LTC is allowed to travel to any place in India. The employee can also take his family along for the travel. The family includes the spouse, children, dependent parents, brothers and sisters.
“It is very difficult to appreciate as to how the appellant who is the assessee-employer could have failed to take into account this aspect. This was the elephant in the room,” the SC observed.
The apex court also rejected SBI’s argument that there is no specific bar under Section 10(5) for foreign travel and therefore a foreign journey can be availed as long as the starting and destination points remain within India. As per the judgement, these claims are without merits.
“LTC is for travel within India, from one place in India to another place in India. There should be no ambiguity on this,” SC said.
The SC also rejected the argument that payment was made only for the shortest route within India.
“…in view of the provisions of the Act, the moment employees undertake 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,” SC said.
Foreign travel defies the basic purpose of LTC
SC said, “A foreign travel also frustrates the basic purpose of LTC. 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.”
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“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,” it added.
