Compliance With Judicial Order Precludes Assessee in Default Treatment Despite Later Ruling

1. Core Facts & Background

• The assessee disbursed leave fare concession reimbursements to its employees where travel involved an overseas leg.
• During the relevant period, an operative interim order passed by a constitutional court explicitly stated that such reimbursements would not amount to income enabling tax deduction at source.
• The interim order clarified that employees would remain liable to pay tax directly if their legal challenge failed.
• A subsequent ruling by the apex court ultimately clarified the substantive statutory interpretation, holding such foreign travel reimbursements to be taxable.

2. Revenue / Department’s Action

• The department initiated proceedings against the assessee for failing to deduct tax at source on the travel reimbursements.
• The Assessing Officer passed an order treating the assessee as an assessee in default under section 201(1) of the Act.
• Revenue levied consequential statutory interest under section 201(1A) of the Act.
• The first appellate authority upheld the order of the Assessing Officer based on the subsequent apex court ruling.

3. Assessee’s Defense & Arguments

• The assessee submitted that it acted in strict obedience to a binding judicial direction in force at the time of payment.
• The assessee argued that the substantive taxability of an item is distinct from the statutory liability of a deductor under section 201.
• The assessee argued that a subsequent legal interpretation cannot retrospectively convert an act done under court orders into a default.
• The assessee submitted that it could not be penalized for complying with an explicit judicial directive restraining deduction.

4. Final Ruling & Outcome

• The appellate tribunal held that a subsequent declaration of substantive law cannot retrospectively convert acts performed under a binding court order into a statutory default.
• The tribunal ruled that the assessee cannot be treated as an assessee in default under section 201(1) of the Act.
• Consequently, the tribunal held that the interest levied under section 201(1A) does not survive and must be deleted.