Non-Deduction of TDS owing to bonafide belief by Deductor – Judgement/Order

Ms Karnataka Power Transmission Corpn. Ltd. Vs ITO (OSD) (TDS) (ITAT Bangalore)


Karnataka Power Transmission Corporation Ltd. paid cash equivalent of unutilized leave at the time of retirement of their employees, however, they didn’t deducted TDS on the same. As per section 10(10AA), in case of payment towards unutilized leave period, entire payment is exempted in case of Central or State Government employee and payment up to INR 3 Lakhs is exempt in any other case.

Proceeding was initiated against KPTCL u/s 201 and 201(1A) with an allegation that KPTCL was bound to deduct TDS on salaries paid to their employees by including the payment received by an employee in respect of any leave period not availed by the employee. Department contended that KPTCL is not State Government, but is a statutory corporation and therefore are required to deduct TDS above INR 3 Lakhs.

KPTCL submitted that its employees were employees of the State Government and therefore entire payment towards unutilized leave period was exempted.


On the basis of KPTCL formation, KPTCL action in past several years and the manner of exercise of control and affording protection to employee of KPTCL by the State Government, KPTCL bonafidely believed its employees to be State Government employees and likewise assumed that the entire payment towards unutilized leave encashment to be exempt. Such bonafide belief for non-deduction of TDS is admissible in law.

Section 192 uses the word ‘estimate’ and therefore the statutory intention is that it should be an approximation. The liability of the employees for payment of taxes is primary liability and the liability of KPTCL is only vicarious liability and recovery of taxes through TDS is only a mode of collection of taxes. The revenue always has the option and the right to collect taxes from employees concerned.

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