Whereas a part of a composite itinerary, the employee of the assessee employer availing LTC has travelled to a foreign sector along with destination in India, the assessee employer cannot be faulted for not deducting tax at source from LTC allowed to employee, given that such amount was no longer exempt to the employee u/s 10(5)

Whereas a part of a composite itinerary, the employee of the assessee employer availing LTC has travelled to a foreign sector along with destination in India, the assessee employer cannot be faulted for not deducting tax at source from LTC allowed to employee, given that such amount was no longer exempt to the employee u/s 10(5)

 

FACTS

During the course of a survey u/s 133A it was found that certain employees of the assessee have claimed LTC (Leave Travel Concession) facility wherein ‘travel to places outside India was involved’. It was noted that some of the employees had taken a very circuitous route, involving travel abroad to one or more domestic destinations. The A.O. noted that the admissible LTC in these cases was treated as tax-exempt u/s 10(5) and that such exemption was not available in cases where the employee travels out of India. The A.O. contended that to that extent, the assessee was in error in not deducting tax at source in respect of such payment of the LTC facility. The A.O. also noted that ‘the employees travelled to the Indian destinations not by the direct and shortest route but by a circuitous route, including a foreign journey. Thus, the A.O. held that the LTC payment should have been included in the income of the employees concerned while deducting tax at source from the salaries, and the assessee is required to be treated as an assessee in default for not deducting the related tax at source. The assessee carried the matter in appeal before the CIT(A) who upheld the A.O.’s contention.

Aggrieved, the assessee preferred an appeal before the Tribunal.

HELD

There is no specific bar in the law on travel eligible for exemption u/s 10(5), involving a sector of overseas travel, and in the absence of such a bar the assessee employer cannot be faulted for not inferring such a bar. The reimbursement is restricted to airfare, on the national carrier, by the shortest route as is the mandate of rule 2B. The employee has travelled, as a part of that composite itinerary involving a foreign sector as well, to the destination in India. The guidance available to the assessee employer indicates that in such a situation the exemption u/s 10(5) is available to the employee, though to the extent of farthest Indian destination by the shortest route, and that is what the assessee employer has allowed.

Due to the position with respect to taxability of such LTC in the hands of the employee, the assessee employer cannot be faulted for not deducting tax at source from the LTC facility allowed by him to the employees. Once the estimation of income in the hands of the employee under the head ‘income from salaries’ by the employer was bona fide and reasonable, the assessee employer cannot be held to be in default.

The appeal of the assessee employer was allowed.