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During the search conducted at the assessee’s premises, it was found that certain employees have claimed the Leave Travel Concession (LTC) facility, wherein travel to places outside India was also involved. Assessment Officer (AO) noted that employees did not travel to Indian destinations by direct and shortest route but by route including foreign trip. Consequently, AO held that the LTC payment should have been included in the income of the employee concerned while deducting taxes at source from the salaries.
On appeal, Mumbai ITAT ruled that a plain reading of Section 10(5) read with rule 2B does not specify any requirement to take the shortest route for travelling to any location in India. It does not put any kind of restriction on the route to be adopted for going to such a destination. However, the statutory provisions do provide for the opportunities of someone taking a route other than the shortest route.
It is implicit in the restriction that only an amount not exceeding the air economy fare of the national carrier by the shortest route to the place of destination is exempted under section 10 (5). There is no specific bar in the travel law, eligible for exemption under Section 10(5), involving a sector of overseas trips.
In the absence of such a bar, assessee couldn’t be faulted for not inferring such a bar. The reimbursement was limited to air fares, on the national carrier, by the shortest route as was the mandate of rule 2B. The employee had already travelled, as part of this composite itinerary involving a foreign sector as well, to the destination in India.The guidance available to the assessee indicates that, in such a situation, the exemption under section 10(5) was available to the employee. Such an exemption shall be available only to the extent of the farthest Indian destination by the shortest route and that was what assessee had allowed.
In the light of this analysis of the legal position and the factual background, whatever may be the position with respect to the taxability of such a leave travel concession in the hands of the employee, the assessee could not be faulted for not deducting tax at source from LTC allowed by it to employees.
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