Delhi High Court
Sun Pharmaceutical Industries Ltd. vs Income Tax Officer & Anr. on 31 January, 2025
Author: Yashwant Varma
Bench: Yashwant Varma
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment reserved on: 21 October 2024
Judgment pronounced on 31 January 2025
+ W.P.(C) 8444/2018
SUN PHARMACEUTICAL INDUSTRIES
LTD. .....Petitioner
Through: Mr. Ajay Vohra, Sr. Adv. with
Mr. Rohit Jain, Mr. Aniket D.
Agrawal and Mr. Abhishek
Singhvi, Advs.
versus
INCOME TAX OFFICER & ANR. .....Respondent
Through: Mr. Vipul Agrawal and Mr.
Sanjay Kumar, SSC with Mr.
Gibran Naushad and Ms. Sakshi
Sherwal, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE RAVINDER DUDEJA
JUDGMENT
YASHWANT VARMA, J.
1. The writ petitioner impugns the order dated 27 March 2018 in
terms of which the respondent has come to reject applications filed by it
seeking refund of excess tax wrongly deducted and deposited under
Section 195 of the Income Tax Act, 19611. The applications
themselves pertained to Financial Years2 2010-11 to 2012-13. Since
the respondent has also held against the petitioner for a perceived delay
in the filing of those applications, the petitioners also mount a challenge
to Circular No. 07/2007 dated 23 October 2007 issued by the Central
1
Act
2
FY
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Board of Direct Taxes3 and which had introduced a prescription of
limitation for the institution of such refund applications. The
respondent has held against the writ petitioner not only on the ground
that the applications were barred by time but also on the basis of those
applications not being liable to be granted on merits. In consequence to
the challenge as raised, the petitioners also seek an appropriate
direction for refund of the excess tax that had come to be deposited.
2. The respondent, while dealing with those applications has firstly
alluded to Circular No. 07/2007, and which according to it, had
constructed a period of limitation of two years within which an
application for excess tax deposited could have been preferred. It has
thus held that the applications would be barred by paragraph 9 of the
aforesaid circular. It has also questioned the assertion of the tax having
been deducted in excess on the ground that the remittance made would
not fall within the ambit of the exception which is carved out by clause
(b) of Section 9(1)(v) of the Act holding that the same would not fall
within the scope of interest paid on monies borrowed and used for the
purposes of a business carried on outside India nor fall under the
expression ―for the purposes of making of earning any income from any
source outside India‖.
3. In order to appreciate the challenge which stands raised, we
deem it apposite to take note of the following essential facts.
4. Ranbaxy Laboratories4 was a company which was incorporated
under the Companies Act, 1956 and was engaged in the business of
research, manufacture and trading of drugs and pharmaceuticals. RLL
issued an Offering Circular on 13 March 2006, inviting investment in
3
CBDT
4
RLL
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Foreign Currency Convertible Bonds5 to the tune of USD 440
Million. The bonds were stated to be convertible at any time on or after
27 April 2006 and the conversion itself envisaged to result in the
holders acquiring fully paid-up equity shares at a par value of INR 5/-
each in RLL. As per the stipulations contained in the Offering
Document, the shares were to be represented by Global Depository
Shares6 representing one share at a conversion price of INR 716.32/-
per share at a fixed rate of exchange rate of INR 44.15/- per USD. The
aforenoted zero coupon FCCBs’ were floated by RLL for the purposes
of equity infusion in its wholly owned subsidiary, Ranbaxy
Netherlands BV7 and for expansion of its global business operations.
5. It becomes pertinent to note that RNBV acted as the holding
company of Terapia, SA, a company based in Romania and whose
equity share capital was majorly held by RNBV. For the purposes of
funding its global business aspirations, it is also stated to have availed
of loan facilities extended to it by DBS Bank Limited in 2007 as well as
a further facility from the Mizuho Corporate Bank Ltd. It is also stated
to have availed of a further loan facility agreement with the Bank of
Tokyo-Mitsubishi UFJ Ltd. taken in 2010 in furtherance of the
aforesaid objectives as well as an additional loan from the Australia and
New Zealand Banking Group Limited.
6. According to RLL, acting in terms of the Offering Document as
well as the stipulations contained in the various loan facility
agreements, it had paid premium/ interest to various bond holders and
banks during FY 2010-11 to 2012-13 without making any deductions
5
FCCBs’
6
GDS
7
RNBV
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towards tax. It also claims to have deposited the entire premium and
interest after grossing up under Section 195 and to have thus borne the
burden of taxes withheld. From the disclosures which are made in this
respect in paragraph 10 of the impugned order, it would appear that
although the remittances to bond holders and banks were not subjected
to any deduction at source, RLL, out of abundant caution, deposited the
TDS on the entire premium and interest paid in purported discharge of
its perceived obligations under Section 195 of the Act.
7. In the revised TDS returns that RLL came to file for FY’s 2010-
11 to 2012-13 on 29 March 2014, it claimed a refund of tax deposited
on the aforenoted payments of premium and interest on the bonds as
well as the External Commercial Borrowings8 that it had obtained.
This was followed by the filing of a formal application on 31 March
2014 with the Assessing Officer9 seeking refund of the excess tax so
deposited.
8. On 24 March 2015, RLL merged with the petitioner in terms of a
Scheme of Arrangement with an effective date of 01 April 2014. The
petitioner before us, acting as the successor-in-interest of RLL, is
thereafter stated to have addressed various reminders in respect of the
applications for refund which were pending. Those refund applications
have ultimately come to be rejected in terms of the order dated 27
March 2018 which is impugned before us.
9. Mr. Vohra, learned senior counsel appearing for the writ
petitioner, firstly assailed the findings rendered by the respondent of the
applications for refund being barred by limitation and submitted that
the Act itself stipulates no period or terminal point within which a
8
ECB
9
AO
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claim for refund of excess TDS may be instituted. In view of the
aforesaid, it was his contention that Circular No. 07/2007 is clearly
ultra vires and creates a condition absent any statutory backing.
According to Mr. Vohra, the CBDT could not have, by way of an
administrative circular, created or introduced a condition of ineligibility
insofar as a claim for refund of excess TDS was concerned.
10. Mr. Vohra also took us through the various circulars which had
come to be issued by the CBDT from time to time and which had
preceded the issuance of Circular No. 07/2007. According to Mr.
Vohra, even if one were to go by the spirit and intent of Circular No.
07/2007, it would become apparent that the respondent has manifestly
erred in rejecting the applications for refund. According to learned
senior counsel, as is manifest from a reading of paragraph 4 of Circular
No. 07/2007, the same was occasioned by the various representations
which had been received by the Government and pertained to claims for
refund of excess tax that may have been deducted and deposited. Mr.
Vohra submitted that the CBDT, being cognizant of the genuine
hardship that was faced by such deductors, formulated a procedure for
the refund of taxes which had been wrongly or incorrectly deducted. It
is these facts, which, according to learned senior counsel, informed the
principled stand taken by the CBDT itself that tax which may have
come to be deposited in respect of income which had neither accrued or
on which no tax was payable or even where tax was due at a lesser rate,
those excess payments were not liable to be construed as ―tax‖ at all.
11. Our attention was also drawn to the various other clauses of
Circular No. 07/2007, which according to Mr. Vohra, embody the basic
intent of the Board being to facilitate the refund of all amounts which
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did not represent tax. Since the submissions proceeded principally on
the various provisions comprised in the aforenoted circular, the same is
extracted in its entirety hereinbelow: –
―CIRCULAR NO.7/2007 DATED 23-10-2007
Procedure for refund of tax deducted at source under section
195 to the person deducting the tax- section 239 of the Income
Tax 1961- Refunds
The Board had issued Circular No. 790 dated 20th April, 2000,
laying down the procedure for refund of tax deducted under section
195, in certain situations to the person deducting the tax at source
from the payment to the non-resident. Representations have been
received in the Board from taxpayers requesting that the said
Circular may be amended to take into account situations where
genuine claim for refund arises to the person deducting the tax at
source from payment to the non-resident and it does not fall in the
purview of the said Circular.
2. The cases which are being referred to the Board mainly relate to
circumstances where, after the deposit into Government account of
the tax deducted at source under section 195,
a) the contract is cancelled and no remittance is made to the non-
resident;
b) the remittance is duly made to the non-resident, but the contract
is cancelled. In such cases, the remitted amount has been
returned to the person responsible for deducting tax at source;
c) the contract is cancelled after partial execution and no
remittance is made to the non-resident for the non-executed part;
d) the contract is cancelled after partial execution and remittance
related to non-executed part is made to the non-resident. In such
cases, the remitted amount has been returned to the person
responsible for deducting the tax at source or no remittance is
made but tax was deducted and deposited when the amount was
credited to the account of the non-resident;
e) there occurs exemption of the remitted amount from tax either
by amendment in law or by notification under the provisions of
Income-tax Act, 1961;
f) an order is passed under section 154 or 248 or 264 of the
Income-tax Act, 1961 reducing the tax deduction liability of a
deductor under section 195;
g) there occurs deduction of tax twice from the same income by
mistake;
h) there occurs payment of tax on account of grossing up which
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was not required under the provisions of the Income-tax Act,
1961;
i) there occurs payment of tax at a higher rate under the domestic
law while a lower rate is prescribed in there levant double
taxation avoidance treaty entered into by India.
2.1 In the cases mentioned above, income does not either accrue to
the non-resident or it accrues but the excess amount in respect of
which refund is claimed, is borne by the deductor. The amount
deducted as tax under section.195 and paid to the credit of the
Government therefore belongs to the deductor. At present, a refund
is given only on a claim being made by the non-resident with whom
the transaction was intended or in terms of Circular No. 790 dated
20th April, 2000.
3. In the type of cases referred to in sub-paragraph (a) of paragraph 2
the non-resident not having received any payment would not apply
for a refund. For cases covered by sub-paragraph (b)to (i) of
paragraph 2, no claim may be made by the non-resident where he
has no further dealings with the resident deductor of tax or the tax is
to be borne by the resident deductor. This resident deductor is
therefore put to genuine hardship as he would not be able to recover
the amount deducted and deposited as tax.
4. The matter has been considered by the Board. In the type of cases
referred to above, where no income has accrued to the non-resident
due to cancellation of contract or where income has accrued but no
tax is due on that income or tax is due at a lesser rate, the amount
deposited to the credit of Government to that 6 extent under section
195, cannot be said to be ―tax‖.
4.1 It has been decided that, this amount can be refunded, with prior
approval of the Chief Commissioner of Income-tax or the Director
General of Income-tax concerned, to the person who deducted it
from the payment to the non-resident, under section 195.
5. Refund to the person making payment under section 195 is being
allowed as income does not accrue to the non-resident or if the
income is accruing no tax is due or tax is due at a lesser rate. The
amount paid into the Government account in such cases to that
extent, is no longer “tax”. In view of this, no interest under section
244A is admissible on refunds to be granted in accordance with this
circular or on the refunds already granted in accordance with
Circular No. 769 or Circular No. 790.
6. In case of refund being made to the person who made the payment
under section 195, the Assessing Officer may, after giving
intimation to the deductor, adjust it against any existing tax liability
of the deductor under the Income-tax Act, 1961, Wealth-tax Act,
1957 or any other direct tax law. The balance amount, if any, should
be refunded to the person who made such payment under section
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195. A separate refund voucher to the extent of such liability under
each of the direct taxes should be prepared by the Income-tax
Officer or the Assessing Officer in favour of the “Income-tax
Department” and sent to the bank along with the challan of the
appropriate type. The amount adjusted and the balance, if any,
refunded would be debitable under the major head “020-Corporation
Tax” or the major head “021-Taxes on incomes other than
Corporation tax” depending upon whether the payment was
originally credited to the major head “020-Corporation tax” or to the
major head “021-Taxes on Income other than Corporation tax”.
7. A refund in terms of this circular should be granted only after
obtaining an undertaking that no certificate under section 203 of the
Income-tax Act has been issued to the non-resident. In cases where
such a certificate has been issued, the person making the refund
claim under this circular should either obtain it or should indemnify
the Income-tax Department from any possible loss on account of any
separate claim of refund for the same amount by the non-resident. A
refund in terms of this circular should be granted only if the
deductee has not filed return of income and the time for filing of
return of income has expired.
8. The refund as per this circular is, inter alia, permitted in respect of
transactions with non-residents, which have either not materialized
or have been cancelled subsequently. It, therefore, needs to be
ensured by the Assessing Officer that they disallow corresponding
transaction amount, if claimed, as an expense in the case of the
person, being the deductor making refund claim. Besides, in all
cases, the Assessing Officer should also ensure that in the case of a
deductor making the claim of refund, the corresponding
disallowance of expense amount representing TDS refunded is
made.
9. The limitation for making a claim of refund under this circular
shall be two years from the end of the financial year in which tax is
deducted at source. However, ail cases for claim of refund under
items (c) to (i) of paragraph 2 which were pending before the issue
of this circular and where the claim for refund was made after the
issuance of Circular No. 790 may also be considered.
10. It has been represented to the CBDT that in CircularNo.769
dated 6th August,1998, there was no time limit for making a claim
for refund. A time limit of two years, for making a refund claim, was
stipulated vide Circular No. 790 dated 20th April, 2000.Some cases
covered by Circular No. 769, which were also covered by Circular
No. 790, now listed in item (a) and (b) of paragraph 2 of this
Circular, and filed before the issue of Circular No. 790, became
time-barred because of the specification of time limit in Circular No.
790. It is hereby clarified that such cases may also be considered for
refund.
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11. This Circular is issued in supersession of the Circular
No.790/2000 dated 20th April, 2000.
12. The contents of this Circular may be brought to the notice of all
officers in your region.‖
12. Mr. Vohra further submitted that although the Board chose to
create a time frame of two years, and which was described to be a
period of limitation, the same clearly would not sustain absent any
prescription of limitation or outer time limit having been statutorily
engrafted in the Act. It was in the aforesaid light that learned senior
counsel submitted that paragraph 9 of the aforenoted Circular is clearly
ultra vires the Act itself.
13. While addressing submissions along those lines, Mr. Vohra also
took us through Sections 200, 237 as also Section 239 of the Act to
buttress his contention that the statute itself never contemplated a
period of limitation within which an application for refund of TDS was
liable to be submitted.
14. Section 200 as it exists in the statute book today is reproduced
hereinbelow: –
―Duty of person deducting tax:-
200. [(1)] Any person deducting any sum in accordance with [the
foregoing provisions of this Chapter] shall pay within the prescribed
time, the sum so deducted to the credit of the Central Government or
as the Board directs.
[(2) Any person being an employer, referred to in sub-section (1A)
of section 192 shall pay, within the prescribed time, the tax to the
credit of the Central Government or as the Board directs.]
[(2A) In case of an office of the Government, where the sum
deducted in accordance with the foregoing provisions of this Chapter
or tax referred to in sub-section (1A) of section 192 has been paid to
the credit of the Central Government without the production of a
challan, the Pay and Accounts Officer or the Treasury Officer or the
Cheque Drawing and Disbursing Officer or any other person, by
whatever name called, who is responsible for crediting such sum or
tax to the credit of the Central Government, shall deliver or cause to
be delivered to the prescribed income-tax authority, or to the person
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authorised by such authority, a statement in such form, verified in
such manner, setting forth such particulars and within such time as
may be prescribed.]
[(3) Any person deducting any sum on or after the 1st day of April,
2005 in accordance with the foregoing provisions of this Chapter or,
as the case may be, any person being an employer referred to in sub-
section (1A) of section 192 shall, after paying the tax deducted to the
credit of the Central Government within the prescribed time, prepare
such statements for such period as may be prescribed and deliver or
cause to be delivered to the prescribed income-tax authority or the
person authorised by such authority such statement in such form and
verified in such manner and setting forth such particulars and within
such time as may be prescribed:]
[Provided that the person may also deliver to the prescribed
authority a correction statement for rectification of any mistake or to
add, delete or update the information furnished in the statement
delivered under this sub-section in such form and verified in such
manner as may be specified by the authority.]
[Following second proviso shall be inserted after the existing
proviso to sub-section (3) of section 200 by the Finance (No. 2)
Act, 2024, w.e.f. 1-4-2025:
Provided further that no correction statement shall be delivered
after the expiry of six years from the end of the financial year in
which the statement referred to in sub-section (3) is required to be
delivered]‖
15. It becomes pertinent to note that the First Proviso to Section 200
enables a person to deliver to the prescribed authority the correction
statement for purposes of rectification of any mistake or even to add,
delete or update information that may be contained in a statement
submitted by a deductor. Of equal significance is the Second Proviso
which came to be inserted in Section 200(3) by Finance (No.2) Act of
2024, with effect from 01 April 2025, and which now stipulates that no
correction statement would be entertained if tendered after the expiry of
six years from the end of the FY in which the principal statement may
have been delivered. This we do note since in the facts of the present
case, the correction statement was filed with due promptitude on 29
March 2014.
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16. Section 237, which deals with the subject of refunds, reads thus:-
―Refunds.
237. If any person satisfies the [Assessing] Officer that the amount
of tax paid by him or on his behalf or treated as paid by him or on
his behalf for any assessment year exceeds the amount with which
he is properly chargeable under this Act for that year, he shall be
entitled to a refund of the excess.‖
As is evident from a perusal of that provision, any person who
asserts that the amount of tax paid exceeds the liability which could
have been validly foisted upon it under the Act, could petition for
refund and claim the return of monies deposited in excess subject to it
satisfying the AO of its claim.
17. Section 239 then provides for the manner in which a claim for
refund may be lodged and stipulates that the same would have to be in
accordance with the provisions contained in Section 139 with the latter
regulating the procedure for submission of returns generally. Section
239 reads as follows: –
―Form of claim for refund and limitation.
239. (1) Every claim for refund under this Chapter shall be made
[by furnishing return in accordance with the provisions of section
139]
(2) [***]‖
18. Of equal significance is sub-section (2) as it existed in Section
239 and which came to be omitted by Finance (No. 2) Act, 2019 with
effect from 01 September 2019. Sub-section (2) prior thereto had
incorporated the following provisions: –
―(2) No such claim shall be allowed, unless it is made within the
period specified hereunder, namely: —
(a) where the claim is in respect of income which is assessable
for any assessment year commencing on or before the 1st day
of April, 1967, four years from the last day of such
assessment year;
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(b) where the claim is in respect of income which is assessable
for the assessment year commencing on the first day of
April, 1968, three years from the last day of the assessment
year;
(c) where the claim is in respect of income which is assessable
for any other assessment year, [one year] from the last day of
such assessment year;]
(d) where the claim is in respect of fringe benefits which are
assessable for any assessment year commencing on or after
the first day of April, 2006, one year from the last day of
such assessment year.‖It is in the aforesaid backdrop that Mr. Vohra submitted that the
period of limitation which came to be introduced by the CBDT is
clearly illegal and beyond jurisdiction.
19. Our attention was also drawn to the provisions comprised in
Circular Nos. 769/1998 and 790/2000 and on the basis of which Mr.
Vohra sought to underscore the fact that even those had never
introduced any provision of limitation. Circular No. 769/1998 which
was issued on 06 August 1998 was concerned with applications for
refund in respect of excess or erroneous deduction of tax. The said
Circular is reproduced hereinbelow: –
―1167. Procedure for refund of tax deducted at source under
section 195
1. The Board has received a number of representations for granting
approval for refund of excess deduction or erroneous deduction of
tax at source under section 195 of the Income-tax Act. The cases
referred to the Board mainly relate to circumstances where:–
(i) after the deposit of tax deducted at source under section 195,
(a) the contract is cancelled and no remittance is required to be
made to the foreign collaborator;
(b) the remittance is duly made to the foreign collaborator, but
the contract is cancelled and the foreign collaborator returns
the remitted amount to the person responsible for deducting
tax at source;
(c) the tax deducted at source is found to be in excess of tax
deductible for any other reason;
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(ii) the tax is deducted at source under section 195 and paid in one
assessment year and remittance to the foreign collaborator is made
and/ or returned to the Indian company following cancellation of the
contract in another assessment year.
In all the cases mentioned above, where either the income does not
accrue to the non-resident or excess tax has been deducted thereby
resulting in a refund being due to the Indian enterprise which
deposited the tax, at present a refund can be issued only if valid
claim is made by filing a return.
2. In the absence of any statutory provision empowering the
Assessing Officers to refund the tax deducted at source to the person
who has deducted tax at source, the Assessing Officers insist on
filing of the return by the person in whose case deduction was made
at source. Even adjustments of the excess tax or the tax erroneously
deducted under section 195 is not allowed. This has led to a lot of
hardship as the non-resident in whose case, the deduction has been
made is either not present in the country or has no further dealings
with the Indian enterprise, thus, making it difficult for a return to be
filed by the non-resident.
3. The matter has been considered by the Board. It has been decided
that in the type of cases referred to above, a refund may be made
independent of the provisions of the Income-tax Act,1961 to the
person responsible for deducting the tax at source from payments to
the non-resident, after taking the prior approval of the Chief
Commissioner concerned.
4. The excess tax deducted would be the difference between the
actual payment made by the deduct or and the lax deducted at source
or that deductible. This amount should be adjusted against the
existing tax liability under any of the Direct Tax Acts. After meeting
such liability, the balance amount, if any, should be refunded to the
person responsible for deduction of tax at source.
5. Where the tax is deducted at source and paid by the branch office
of the person responsible for deduction of tax at source and the
quarterly statement/annual return of tax deduction at source is filed
by the branch, each branch office would be treated as a separate unit
independent of the head office. After meeting any existing tax
liability of such a branch, which would normally be in relation to the
deduction of tax at source, the balance amount may be refunded to
the said branch office.
6. The adjustment of refund against the existing tax liability should
be made in accordance with the present procedure on the subject. A
separate refund voucher to the extent of such liability under each of
the direct taxes should be prepared by the Income-tax Officer in
favour of the ―Income-tax Department‖ and sent to the bank along
with the challan of the appropriate type. The amount adjusted and
the balance, if any, refunded would be debitable under the sub-head
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―Other refunds‖ below the minor head ―Income-tax on companies‖
major head ―020 – Corporation Tax‖ or below the minor head
―Income-tax other than Union Emoluments‖ major head ―021-Taxes
on Incomes other than Corporation Tax‖, depending upon whether
the payment was originally credited to the major head ―020 –
Corporation Tax‖ or to the major head ―021- Taxes on Income other
than Corporation Tax‖.
7. Since the adjustment/refund of the amount paid in excess would
arise in relation to the deduction of tax at source, the recording of the
particulars of adjustment/refund should be done in the quarterly
statement of TDS/annual return under the signature of the ITO at the
end of the statement, i.e., below the signature of the person
furnishing the statement.
Circular: No. 769, dated 6-8-1998.‖
20. Similar provisions were made by the CBDT in Circular No.
790/2000 which came to be issued on 20 April 2000, and in paragraph
10 whereof a prescription with respect to limitation appears for the first
time. That Circular is quoted hereunder: –
―SECTION 195 OF THE INCOME-TAX ACT, 1961-
DEDUCTION AT SOURCE – OTHER SUMS -PROCEDURE
FOR REFUND OF TAX DEDUCTED AT SOURCE UNDER
SECTION 195 TO PERSON DEDUCTING TAX
CIRCULAR NO.790, DATED 20-4-2000
[SUPERSEDED BY CIRCULAR N0.7/2007, DATED 23-10-
2007]
1. The Board has issued Circular No. 769, dated 6-8-1998, laying
down procedure for refund of tax deducted under section 195, in
certain situations to the person deducting the tax at source from the
payment to the non-resident. After reconsideration, Circular No. 769
is revoked with immediate effect and refund to the person deducting
tax at source under section 195 shall be allowed in accordance with
the provisions of this Circular.
2. The Board had received representations for approving grant of
refund to the persons deducting tax at source under section 195 of
the Income-tax Act, 1961. The cases referred to the Board mainly
related to circumstances whereafter the deposit into Government
account of tax deducted at source under section 195,–
(a) the contract is cancelled and no remittance is made to the non-
resident;
(b) the remittance is duly made to the non-resident, but the contract
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is cancelled. In such cases, the remitted amount may have been
returned to the person responsible for deducting tax at source.
In the cases mentioned above, income does not accrue to the non-
resident. The amount deducted as tax under section 195 and paid to
credit of Government, therefore, belongs to the deductor. At present,
a refund is given only, on a claim being made by the non-resident
with whom the transaction was intended.
3. In the type of cases referred to in sub-paragraph (a) of paragraph
2, the non-resident not having received any payment would not
apply for a refund. For cases covered by sub-paragraph (b) of
paragraph 2. no claim may be made by the non-resident where he
has no further dealings with the resident deductor of tax.This
resident deductor is, therefore, put to genuine hardship as he would
not be able to recover the amount deducted and deposited as tax.
4. The matter has been considered by the Board. In the type of cases
referred to above, where no income has accrued to the non-resident
due to cancellation of contract, the amount deposited to the credit of
Government under section 195 cannot be said to be ‘tax’. It has been
decided that this amount can be refunded, with prior approval of
Chief Commissioner concerned to the person who deducted it from
the payment to the non-resident under section 195.
5. The refund being made to the person who made the payment
under section 195, the Assessing Officer may after giving intimation
to the deductor, adjust it against any existing tax liability of the
deductor under the Income-tax Act, 1961, Wealth-tax Act, 1957 or
any other direct tax law. The balance amount, if any, should be
refunded to the person who made such payment under section 195.
A separate refund voucher to the extent of such liability under each
of the direct taxes should be prepared by the Income- tax Officer or
the Assessing Officer in favour of the “Income-tax Department” and
sent to the bank along with the challan of the appropriate type. The
amount adjusted and the balance, if any. refunded would be
debitable under the sub-head “Other refunds” below the minor head
“Income-tax on Companies”– major head “020–Corporation Tax”
or below the minor head “Income-tax other than Union
Emoluments” major head “021–Taxes on Incomes other than
Corporation Tax” depending upon whether the payment was
originally credited to the major head “020–Corporation Tax” or to
the major head “021 –Taxes on Income other than Corporation
Tax”. Since the adjustment/refund of the amount paid would arise in
relation to the deduction of tax at source, the recording of the
particulars of adjustment/refund, should be done in the quarterly
statement of TDS/annual return under the signature of the Income-
tax Officer or the Assessing Officer at the end of the statement, i.e..
below the signature of the person furnishing the statement.
6. Refund to the person making payment under section 195 is being
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allowed as income does not accrue to the non-resident. The amount
paid into the Government account in such cases, is no longer ‘tax’. In
view of this, no interest under section 244A is admissible on refunds
to be granted in accordance with this Circular or on the refunds
already granted in accordance with Circular No.769.
7. A refund in terms of this Circular should be granted only after
obtaining an undertaking that no certificate under section 203 of the
Income-tax Act has been issued to the non-resident. In cases where
such a certificate has been issued, the person making the refund
claim under this Circular should either obtain it or should indemnify
the Income-tax Department from any possible loss on account of any
separate claim of refund for the same amount by the non-resident.
8. The refund as per this Circular is permitted only in respect of
transactions with non-residents, which have either notmaterialised or
have been cancelled subsequently. It, therefore, needs to be ensured
by the Assessing Officer that they disallow corresponding
transaction amount, if claimed as an expense in the case of person
making refund claim.
9. It is hereby clarified that refund shall not be issued to the deductor
of tax in the cases referred to in clause(i)(c) of paragraph 1 of
Circular No. 769, dated 6-8-1998.
10. The limitation for making a claim of refund under this Circular
shall be two years from the end of the financial year in which tax is
deducted at source.‖
21. Proceeding further, Mr. Vohra also questioned the correctness of
the view expressed by the respondent based on the exception carved out
by Section 9(1)(v) and submitted that the view as expressed by the
respondents was wholly unsustainable for reasons recorded hereinafter.
Mr. Vohra submitted that the funds which were generated by the
issuance of bonds as well as the ECBs which were taken by RLL were
exclusively intended to aid the global business operations of that entity.
22. It was his submission that no part of the investments made
leading up to the placement of funds in the hands of RLL or for that
matter the ECBs’ were either routed to India or utilized in connection
with the operations of RLL in this country. It was thus submitted that
the interest was clearly one which had been paid by RLL for the
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purposes of a business undertaken outside India as well as for the
purposes of making or earning income from a source outside India.
Since those funds and investments, according to Mr. Vohra, were
primarily utilized to shore up the financials of Terapia, SA, the payment
of interest clearly fell within the scope of the exception which clause
(b) carves out from the principal part of Section 9(1)(v).
23. Mr. Vohra also assailed the view taken by the respondent that
those investments and utilization of funds was not liable to be
acknowledged to be for the purposes of business carried on by RLL
since the same was made as in connection with the affairs of Terapia,
SA. According to learned senior counsel, since Terapia, SA was a
wholly owned subsidiary, the respondent was clearly unjustified in
disallowing that expense taking an extremely pedantic view that the
same was not concerned with or relatable to the business of the
petitioner. Learned senior counsel submitted that the investment and
infusion of funds in Terapia SA was unquestionably connected with the
business which RLL undertook overseas in the expectation of deriving
income in the shape of dividend or profits from those ventures.
24. Mr. Vohra also sought to distinguish the opinion formed by the
respondent based on the decision in Commissioner of Income-tax v.
Havells India Ltd.10 and submitted that the same was clearly
distinguishable on facts. In order to appreciate the aforenoted
submission, we deem it apposite to extract the following passages from
that decision: –
―14. Section 9(1)(vii)(b) contemplates a source located outside India.
It is difficult to conceptualise the place/situs of the person who make
payment for the export sales as the source located outside India from10
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which assessee earned profits. The export contracts obviously are
concluded in India and the assessee’s products are sent outside India
under such contracts. The manufacturing activity is located in India.
The source of income is created at the moment when the export
contracts are concluded in India. Thereafter, the goods are exported
in pursuance of the contract and the export proceeds are sent by the
importer and are received in India. The importer of the assessee’s
products is no doubt situated outside India, but he cannot be
regarded as a source of income. The receipt of the sale proceeds
emanate from him from outside India. He is, therefore, only the
source of the monies received. The income component of the monies
or the export receipts is located or situated only in India. We are
making a distinction between the source of the income and the
source of the receipt of the monies. In order to fall within the second
exception provided in section 9(1)(vii)(b) of the Act, the source of
the income, and not the receipt, should be situated outside India.
That condition is not satisfied in the present case. The Tribunal, with
respect, does not appear to have examined the case from this aspect.
Its conclusion that the technical services were not utilised for the
assessee’s business activity of production in India does not bring the
assessee’s case within the second exception in section 9(1)(vii)(b) of
the Act. It does not bring the case under the first exception either,
because in order to get the benefit of the first exception it is not
sufficient for the assessee to prove that the technical services were
not utilised for its business activities of production in India, but it is
further necessary for the assessee to show that the technical services
were utilised in a business carried on outside India. Therefore, we
cannot also approve of the Tribunal’s conclusion in paragraph 29 of
its order to the extent it seems to suggest that the assessee satisfies
the condition necessary for bringing its case under the first
exception. Be that as it may, as we have already pointed out, since
the source of income from the export sales cannot be said to be
located or situated outside India, the case of the assessee cannot be
brought under the second exception provided in the section.
15. Mr. Vohra, learned counsel for the assessee, however, contended
that income arose not only from the manufacturing activity but also
arose because of the sales of the products and if necessary a
bifurcation of the income should be made on this basis and that
portion of the income which is attributable to the export sales should
qualify for the second exception. This argument is only a limb of the
main contention that the income arises from the export sales and the
source of the income is located outside India. We have already
expressed our difficulty in accepting that argument. It is true that the
profits arise both from the manufacturing activity and from the sale.
There are several authorities dealing with this question in the context
of cases where an assessee had its manufacturing facility in British
India but sold the goods outside British India. In such cases, it has
been held that the profits arose both from manufacture and the sales
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and that part of the profit which arises from sales outside British
India would be exempt from tax: See Anglo-French Textiles Co.
Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC) and CIT v. Ahmedbhai
Umarbhai and Co. [1950] 18 ITR 472 (SC). But these cases are not
of any assistance to the assessee in the present case since the
contention here is that the source of income is the export sales and
the export sales are located outside India.
16. For these reasons we are unable to hold that the assessees case
falls under the second exception provided in section 9(1)(vii)(b) of
the Act. In other words, we are unable to accept that the fees for
technical services were paid by the assessee to the US company for
the purpose of making or earning any income from any source
outside India.
****
27. It is well settled that expenditure incurred in connection with the
issue of debentures or obtaining loan is revenue expenditure.
Reference in this connection may be made to the leading judgment
of the Supreme Court in India Cements Ltd. v. CIT (1966) 60 ITR
52 (SC). The question before us, however, is whether it is a
debenture issue or an issue of share capital involving the
strengthening of the capital base of the company. Though it prima
facie appears that there are sufficient facts to indicate that what was
contemplated was an issue of shares to the Mauritius company under
the investor agreement which would result in strengthening of the
assessee’s capital base, having regard to the judgments cited on
behalf of the assessee, in which it has been held that despite
indications to the effect that the debentures are to be converted in the
near future into equity shares, the expenditure incurred should be
allowed as revenue expenditure on the basis of the factual position
obtaining at the time of the debenture issue, we are not inclined to
take a different view. The following cases have been cited on behalf
of the assessee in support of the view that even in such a situation
the expenditure is allowable as revenue expenditure:
(i) CIT v. East India Hotels Ltd. (2001) 252 ITR 860 (Cal) ;
(ii) CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 (Karn) ;
(iii) CIT v. South India Corporation (Agencies) Ltd. [2007]
290 ITR 217 (Mad) ; and
(iv) CIT v. First Leasing Co. of India Ltd. (2008) 304 ITR 67
(Mad).
28. In addition to the above judgments, we also have the judgment of
the Rajasthan High Court CIT v. Secure Meters Ltd. (2010) 321 ITR
611 (Raj) against which the special leave petition filed by the
Revenue was dismissed. Having regard to the predominant view
taken in the above judgments, in which the judgment of the Supreme
Court in India Cements Ltd. (1966) 60 ITR 52 (SC) has been
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noticed, we are inclined to uphold the view taken by the Tribunal
that the expenditure is revenue in nature. Accordingly, we answer
the substantial question of law in favour of the assessee and against
the Revenue.‖
25. Mr. Vohra lastly placed reliance on the decision rendered by the
Gujarat High Court in Multibase India Limited v. Income Tax
Officer & 111 and where the powers of the CBDT in the context of
Circular 7/2007 came to be lucidly explained. Mr. Vohra principally
relied upon the following passages from that decision:
―8. Quite apart from the fact whether the authority itself under the
scheme had power to condone the delay, section 119 of the Act
clearly empowers the CBDT to do so. Sub-section (1) of section 119
gives a power to the CBDT to issue such orders and instructions and
directions to the income tax authorities as it may deem fit for proper
administration of the Act and the authorities would observe and
follow such orders and instructions of the Board. Sub-section (2) of
section 119 further provides inter-alia that without prejudice to the
generality of the provisions contained in sub-section (1), the Board
may, if it considers it necessary or expedient so to do for avoiding
genuine hardships by general or special orders authorizing the
income tax authority or the Commissioner (Appeals) to admit an
application or claim for any exemption, deduction, refund or any
other relief under the Act after the expiry of period prescribed under
the Act by or under the Act for making such application or claim and
deal with the same on merits in accordance with law.
9. Thus, CBDT undoubtedly has powers to condone the delay even
if we assume the Commissioner does not have such powers. We
would have ordinarily requested the CBDT to examine the issue and
consider exercising such powers on the petition already filed by the
petitioner. However, in the present case, the dispute is lingering
since quite some time. In any case, the delay is not gross and the
repercussion in law is not widespread. We may recall the last date
for filing refund claim under the scheme was 31.03.2008. The
petitioner upon coming to realize that excess deduction has been
made and deposited with the Government, approached the
appropriate authority under letter dated 15.12.2008.
10. Under the circumstances, we propose to condone the delay here
itself and then require the competent authority before whom the
petitioner’s application for refund is pending to decide the same on
merits. We order accordingly. The competent authority shall11
2018 SCC OnLine Guj 336
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consider the petitioner’s application for refund‖
26. Our attention was then drawn to the significant observations
which appear in the decision of the Supreme Court in Commissioner of
Income Tax, Bhopal v. Shelly Products and Another12:-
―33. Having considered the authorities on the subject, we find
ourselves in agreement with the view of the Gujarat High Court in
Saurashtra Cement and Chemical Industries Ltd. The question that
falls for our consideration in these appeals is whether on the failure
or inability of the authorities to frame a regular assessment after the
earlier assessment is set aside or nullified, the tax deposited by an
assessee by way of advance tax or self-assessment tax, or tax
deducted at source is liable to be refunded to the assessee, since its
retention by the Revenue would result in breach of Article 265 of the
Constitution which prohibits the levy or collection of any tax except
by authority of law. The Revenue does not dispute the position that
if an assessment is framed, which is later nullified in appeal or
revision or other proceedings, any amount paid by way of income
tax pursuant to the order of assessment, over and above the advance
tax and self-assessment tax is undoubtedly refundable under Section
240 of the Act. The only dispute is with regard to the refund of the
advance tax and self-assessment tax which is paid by the assessee on
his own assessment of his liability and is based on the return of
income filed by him. According to the Revenue, the tax so paid
represents the admitted liability of the assessee, and failure or
inability to frame another assessment after the earlier assessment is
set aside or nullified in appropriate proceedings, does not entitle the
assessee to claim refund because to this extent the assessee has
admitted his liability to pay tax in accordance with law. The tax
liability is computed on the basis of the relevant Finance Act laying
down the rate or rates at which the tax is payable and provides for
other matters relevant to the computation of tax. Thus the tax is
required to be paid in advance by the assessee, even before
assessment is made, and he himself is required to compute his
liability having regard to the rates and exemptions applicable. Thus,
both the levy and collection of tax is in accordance with law.
34. We find considerable force in the submission of the Revenue and
it must be upheld. We have earlier noticed the scheme of the Act.
Section 4 of the Act creates the charge and provides inter alia for
payment of tax in advance or deduction of tax at source. The Act
provides for the manner in which advance tax is to be paid and
penalises any assessee who makes a default or delays payment
thereof. Similarly the deduction of tax at source is also provided for
12
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in the Act and failure to comply with the provisions attracts the
penal provisions against the person responsible for making the
payment. It is, therefore, quite apparent that the Act itself provides
for payment of tax in this manner by the assessee. The Act also
enjoins upon the assessee the duty to file a return of income
disclosing his true income. On the basis of the income so disclosed,
the assessee is required to make a self-assessment and to compute
the tax payable on such income and to pay the same in the manner
provided by the Act. Thus the filing of return and the payment of tax
thereon computed at the prescribed rates amounts to an admission of
tax liability which the assessee admits to have incurred in
accordance with the provisions of the Finance Act and the Income
Tax Act. Both the quantum of tax payable and its mode of recovery
are authorized by law. The liability to pay income tax chargeable
under Section 4(1) of the Act thus, does not depend on the
assessment being made. As soon as the Finance Act prescribes the
rate or rates for any assessment year, the liability to pay the tax
arises. The assessee is himself required to compute his total income
and pay the income tax thereon which involves a process of self-
assessment. Since all this is done under authority of law, there is no
scope for contending that Article 265 is violated.
****
36. We cannot lose sight of the fact that the failure or inability of the
Revenue to frame a fresh assessment should not place the assessee in
a more disadvantageous position than in what he would have been if
a fresh assessment was made. In a case where an assessee chooses to
deposit by way of abundant caution advance tax or self- assessment
tax which is in excess of his liability on the basis of return furnished
or there is any arithmetical error or inaccuracy, it is open to him to
claim refund of the excess tax paid in the course of assessment
proceeding. He can certainly make such a claim also before the
authority concerned calculating the refund. Similarly, if he has by
mistake or inadvertence or on account of ignorance, included in his
income any amount which is exempted from payment of income tax,
or is not income within the contemplation of law, he may likewise
bring this to the notice of the Assessing Authority, which if satisfied,
may grant him relief and refund the tax paid in excess, if any. Such
matters can be brought to the notice of the authority concerned in a
case when refund is due and payable, and the authority concerned,
on being satisfied, shall grant appropriate relief. In cases governed
by Section 240 of the Act, an obligation is cast upon the Revenue to
refund the amount to the assessee without his having to make any
claim in that behalf. In appropriate cases therefore, it is open to the
assessee to bring facts to the notice of the authority concerned on the
basis of the return furnished, which may have a bearing on the
quantum of the refund, such as those the assessee could have urged
under Section 237 of the Act. The authority concerned, for the
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limited purpose of calculating the amount to be refunded under
Section 240 of the Act, may take all such facts into consideration
and calculate the amount to be refunded. So viewed, an assessee will
not be placed in a more disadvantageous position than what he
would have been, had an assessment been made in accordance with
law.
****
40. The respondents contend that the circular of the Board is binding
upon the authorities of the Income Tax Department and, therefore,
so far as the Income Tax Authorities are concerned, they must give
to the amendment brought about in Section 240 only prospective
operation.
41. We find that para 13.2 of the circular does not advance the case
of the respondents. The circular only states that some of the judicial
pronouncements did not permit a retention of even the tax due on the
basis of the returned income and directed the refund of tax deducted
at source or advance tax. To overcome this difficulty and to make
the position clear, the proviso to Section 240 was inserted. A plain
reading of the circular also indicates that the Board also took the
view that the amendment was clarificatory and that it had become
necessary to get over the difficulties posed by the judicial
pronouncements directing refund of the entire tax including the
advance tax and tax deducted at source, which were payable on the
basis of income declared in the return by the assessee himself. It is,
therefore, not necessary for us to consider the larger question as to
the extent to which such circulars are binding upon the Department.
In any event, as submitted by counsel for the appellant, the relevant
part of the circular contains only a statement of fact. There is no
instruction, direction or order to the authorities to act in a particular
manner. As rightly submitted by him, the statutory provision has to
be examined for its true effect and the circular, in the instant case, is
not relevant.‖
27. Mr. Vohra then drew our attention to a judgment rendered by this
Court in Vijay Gupta v. Commissioner of Income-tax and Another13
and where we had laid emphasis on an assessee not being liable to be
denied a refund in respect of taxes erroneously deposited or mistakenly
paid. It would be appropriate to reproduce the following passages from
Vijay Gupta hereunder:
―35. From the various judicial pronouncements, it is settled that the
13
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powers conferred under section 264 of the Act are very wide. The
Commissioner is bound to apply his mind to the question whether
the petitioner was taxable on that income. Since section 264 uses the
expression “any order”, it would imply that the section does not limit
the power to correct errors committed by the subordinate authorities
but could even be exercised where errors are committed by
assessees. It would even cover situations where the assessee because
of an error has not put forth a legitimate claim at the time of filing
the return and the error is subsequently discovered and is raised for
the first time in an application under section 264.
36. An assessee is liable to tax only upon such receipt as can be
included in his total income and is assessable under the Income-tax
Act. There is nothing in section 264, which places any restriction on
the Commissioner’s revisional power to give relief to the assessee in
a case where the assessee detracts mistakes because of which he was
over-assessed after the assessment was completed. Once it is found
that there was a mistake in making an assessment, the Commissioner
had power to correct it under section 264(1). When the substantive
law confers a benefit on the assessee under a statute, it cannot be
taken away by the adjudicatory authority on mere technicalities. It is
settled proposition of law that no tax can be levied or recovered
without authority of law. Article 265 of the Constitution of India and
section 114 of the State Constitution imposes an embargo on
imposition and collection of tax if the same is without authority of
law.
37. The Commissioner further erred in rejecting the application
under section 264 holding that intimation under section 143(1) could
not be regarded as an order and was thus not amenable to revisionary
jurisdiction under section 264 of the Act. The Intimation under
section 143(1) is regarded as an order for the purposes of section 264
of the Act*. He failed to appreciate that the petitioner was not only
impugning the intimation under section 143(1) but also the rejection
of the application under section 154 of the Act.
38. In the present case, as per the petitioner, in his return of income,
he has erroneously offered to tax gains arising on sale of shares as
short-term capital gains instead of same being long-term capital
gains exempt from tax. Subsequently, the petitioner on January 14,
2011 filed the application under section 154 of the Act. The
Assessing Officer on February 21, 2011 partly rectified the
intimation and computed the tax on capital gains at 10 per cent. as
against 30 per cent. computed in the intimation issued under section
143(1) of the Act. The Assessing Officer, however refused to accept
the application under section 154 filed by the petitioner. When the
Assessing Officer could rectify the intimation on February 21, 2011,
he could also consider the prayer of the petitioner made in the
rectification application under section 154 of the Act, which was
already pending before him on that date.
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39. When the Commissioner was called upon to examine the
revision application under section 264 of the Act, all the relevant
material was already available on the record of the Assessing
Officer. The Commissioner instead of merely examining whether the
intimation was correct based on the material then available should
have examined the material in the light of the Circular No. 14(XL-
35) of 1955, dated April 11, 1955 and article 265 of the Constitution
of India. The Commissioner has erred in not doing so and in failing
to exercise the jurisdiction vested in him on mere technical
grounds.‖
28. Proceeding then to explain the meaning liable to be ascribed to
the expression ―for the purposes of business‖ as it appears in Section
9(1)(v), Mr. Vohra submitted that the respondent has grossly erred in
seeking to perceive a distinction which the law would countenance in
respect of investments made by an entity in itself and those pertaining
to related or sister concerns. Mr. Vohra submitted that the Supreme
Court has consistently held that the expression ―for the purposes of
business‖ as occurring in the Act is liable to be answered on the anvil
of ―commercial expediency‖ and thus recognizing the indelible interest
that a holding entity may have in a subsidiary. Our attention was drawn
to the lucid enunciation of the legal position in this respect which
appears in S.A. Builders Ltd. v. Commissioner of Income Tax
(Appeals) Chandigarh and Another14:-
―20. We have considered the submission of the respective parties.
The question involved in this case is only about the allowability of
the interest on borrowed funds and hence we are dealing only with
that question. In our opinion, the approach of the High Court as well
as the authorities below on the aforesaid question was not correct.
21. In this connection we may refer to Section 36(l)(iii) of the
Income Tax Act, 1961 (hereinafter referred to as “the Act”) which
states that “the amount of the interest paid in respect of capital
borrowed for the purposes of the business or profession” has to be
allowed as a deduction in computing the income tax under Section
28 of the Act.
14
(2007) 1 SCC 781
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22. In Madhav Prasad Jatia v. CIT this Court held that the
expression “for the purpose of business” occurring under the
provision is wider in scope than the expression “for the purpose of
earning income, profits or gains”, and this has been the consistent
view of this Court.
23. In our opinion, the High Court in the impugned judgment, as
well as the Tribunal and the Income Tax Authorities have
approached the matter from an erroneous angle. In the present case,
the assessee borrowed the fund from the bank and lent some of it to
its sister concern (a subsidiary) on interest-free loan. The test, in our
opinion, in such a case is really whether this was done as a measure
of commercial expediency.
24. In our opinion, the decisions relating to Section 37 of the Act
will also be applicable to Section 36(l)(iii) because in Section 37
also the expression used is “for the purpose of business”. It has been
consistently held in decisions relating to Section 37 that the
expression “for the purpose of business” includes expenditure
voluntarily incurred for commercial expediency, and it is immaterial
if a third party also benefits thereby.
25. Thus in Atherton v. British Insulated & Helsby Cables Ltd. it
was held by the House of Lords that in order to claim a deduction, it
is enough to show that the money is expended, not of necessity and
with a view to direct and immediate benefit, but voluntarily and on
grounds of commercial expediency and in order to indirectly
facilitate the carrying on of the business. The above test in Atherton
case has been approved by this Court in several decisions e.g.
Eastern Investments Ltd. v. CIT, CIT v. Chandulal Keshavlal & Co.,
etc.
26. In our opinion, the High Court as well as the Tribunal and other
Income Tax Authorities should have approached the question of
allowability of interest on the borrowed funds from the above angle.
In other words, the High Court and other authorities should have
enquired as to whether the interest-free loan was given to the sister
company (which is a subsidiary of the assessee) as a measure of
commercial expediency, and if it was, it should have been allowed.
27. The expression “commercial expediency” is an expression of
wide import and includes such expenditure as a prudent businessman
incurs for the purpose of business. The expenditure may not have
been incurred under any legal obligation, but yet it is allowable as a
business expenditure if it was incurred on grounds of commercial
expediency.
28. No doubt, as held in Madhav Prasad Jatia v. CIT if the borrowed
amount was donated for some sentimental or personal reasons and
not on the ground of commercial expediency, the interest thereon
could not have been allowed under Section 36(l)(iii) of the Act. In
Madhav Prasad case the borrowed amount was donated to a college
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with a view to commemorate the memory of the assessee’s deceased
husband after whom the college was to be named. It was held by this
Court that the interest on the borrowed fund in such a case could not
be allowed, as it could not be said that it was for commercial
expediency.
29. Thus, the ratio of Madhav Prasad Jatia case is that the borrowed
fund advanced to a third party should be for commercial expediency
if it is sought to be allowed under Section 36(l)(iii) of the Act. a
30. In the present case, neither the High Court nor the Tribunal nor
other authorities have examined whether the amount advanced to the
sister concern was by way of commercial expediency.
31. It has been repeatedly held by this Court that the expression ―for
the purpose of business‖ is wider in scope than the expression ―for
the purpose of earning profits‖ vide CIT v. Malayalam Plantations
Ltd. 5, CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., etc.
****
36. We agree with the view taken by the Delhi High Court in CIT v.
Dalmia Cement (B) Ltd. that once it is established that there was
nexus between the expenditure and the purpose of the business
(which need not necessarily be the business of the assessee itself),
the Revenue cannot justifiably claim to put itself in the armchair of
the businessman or in the position of the Board of Directors and
assume the role to decide how much is reasonable expenditure
having regard to the circumstances of the case. No businessman can
be compelled to maximise its profit. The Income Tax Authorities
must put themselves in the shoes of the assessee and see how a
prudent businessman would act. The authorities must not look at the
matter from their own viewpoint but that of a prudent businessman.
As already stated above, we have to see the transfer of the borrowed
funds to a sister concern from the point of view of commercial
expediency and not from the point of view whether the amount was
advanced for earning profits.
37. We wish to make it clear that it is not our opinion that in every
case interest on borrowed loan has to be allowed if the assessee
advances it to a sister concern. It all depends on the facts and
circumstances of the respective case. For instance, if the Directors of
the sister concern utilise the amount advanced to it by the assessee
for their personal benefit, obviously it cannot be said that such
money was advanced as a measure of commercial expediency.
However, money can be said to be advanced to a sister concern for
commercial expediency in many other circumstances (which need
not be enumerated here). However, it is obvious that a holding
company has a deep interest in its subsidiary, and hence if the
holding company advances borrowed money to a subsidiary and the
same is used by the subsidiary for some business purposes, the
assessee would, in our opinion, ordinarily be entitled to deduction of
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interest on its borrowed loans.‖
29. As is evident from the aforesaid extracts, the Supreme Court
while propounding the test of commercial expediency had
unambiguously held that although the borrowed amount may not have
been utilized by the assessee in its own business and may have been
advanced as an interest free loan to a sister concern, the same would
clearly not be determinative since what would be significant would be
whether that amount as offered to the sister concern was as a measure
of commercial expediency.
30. It is this view as expressed in SA Builders which has been
consistently followed by the Supreme Court as well as various High
Courts including our own. In Hero Cycles (Private) Limited v.
Commissioner of Income Tax (Central), Ludhiana15, Mr. Vohra
submitted, the Supreme Court, while reiterating the foundational
principles propounded by the Supreme Court in SA Builders had held as
under:-
―11. Insofar as loans to the sister concern/subsidiary company are
concerned, the law in this behalf is recapitulated by this Court in
S.A. Builders Ltd. v. CIT3. After taking note of and discussing on
the scope of commercial expediency, the Court summed up the legal
position in the following manner: (SCC pp. 787-88, paras 27-31)
―27. The expression “commercial expediency” is an
expression of wide import and includes such expenditure as
a prudent businessman incurs for the purpose of business.
The expenditure may not have been incurred under any
legal obligation, but yet it is allowable as a business
expenditure if it was incurred on grounds of commercial
expediency.
28. No doubt, as held in Madhav Prasad Jatia v. CIT if the
borrowed amount was donated for some sentimental or
personal reasons and not on the ground of commercial
expediency, the interest thereon could not have been
allowed under Section 36(l)(iii) of the Act. In Madhav
15
(2015) 16 SCC 359
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Prasad case the borrowed amount was donated to a college
with a view to commemorate the memory of the assessee’s
deceased husband after whom the college was to be named.
It was held by this Court that the interest on the borrowed
fund in such a case could not be allowed, as it could not be
said that it was for commercial expediency.
29. Thus, the ratio of Madhav Prasad Jatia case is that the
borrowed fund advanced to a third party should be for
commercial expediency if it is sought to be allowed under
Section 36(l)(iii) of the Act. a
30. In the present case, neither the High Court nor the
Tribunal nor other authorities have examined whether the
amount advanced to the sister concern was by way of
commercial expediency.
31. It has been repeatedly held by this Court that the
expression ―for the purpose of business‖ is wider in scope
than the expression ―for the purpose of earning profits‖ vide
CIT v. Malayalam Plantations Ltd. 5, CIT v. Birla Cotton
Spg. & Wvg. Mills Ltd., etc.‖
12. In the process, the Court also agreed that the view taken by the
Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. wherein the
High Court had held that (SCC OnLine Del para 8) once it is
established that there is nexus between the expenditure and the
purpose of business (which need not necessarily be the business of
the assessee itself), the Revenue cannot justifiably claim to put itself
in the arm-chair of the businessman or in the position of the Board
of Directors and assume the role to decide how much is reasonable
expenditure having regard to the circumstances of the case. It further
held that no businessman can be compelled to maximise his profit
and that the Income Tax Authorities must put themselves in the
shoes of the assessee and see how a prudent businessman would act.
The authorities must not look at the matter from their own viewpoint
but that of a prudent businessman.
13. Applying the aforesaid ratio to the facts of this case as already
noted above, it is manifest that the advance to M/s Hero Fibres Ltd.
became imperative as a business expediency in view of the
undertaking given to the financial institutions by the assessee to the
effect that it would provide additional margin to M/s Hero Fibres
Ltd. to meet the working capital for meeting any cash losses.
14. It would also be significant to mention at this stage that,
subsequently, the assessee company had off-loaded its shareholding
in the said M/s Hero Fibres Ltd. to various companies of Oswal
Group and at that time, the assessee company not only refunded
back the entire loan given to M/s Hero Fibres Ltd. by the assessee
but this was refunded with interest. In the year in which the
aforesaid interest was received, same was shown as income and
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offered for tax.
15. Insofar as the loans to Directors are concerned, it could not be
disputed by the Revenue that the assessee had a credit balance in the
bank account when the said advance of Rs 34 lakhs was given.
Remarkably, as observed by CIT (Appeals) in his order, the
company had reserve/surplus to the tune of almost Rs 15 crores and,
therefore, the assessee company could in any case, utilise those
funds for giving advance to its Directors.
16. On the basis of the aforesaid discussion, the present appeal is
allowed, thereby setting aside the order of the High Court and
restoring that of the Income Tax Appellate Tribunal.‖
31. The judgment of the Supreme Court in SA Builders also came to
be noticed by a Division Bench of our own Court in Commissioner of
Income-tax v. Tulip Star Hotels16. We deem it apposite to reproduce
the following parts of that judgment:
―2. A perusal of the orders passed by the Tribunal would reveal that
it is noted by the Income-tax Appellate Tribunal that the assessee is
in the business of owning, running and managing hotels. For the
effective control of new hotels acquired by the assessee under its
management it had invested in a wholly owned subsidiary, namely,
M/s. Tulip Star Hospitality Services Ltd. On this ground, relying
upon the judgment of the Supreme Court in the case of S. A.
Builders v. CIT (Appeals) (2007) 288 ITR 1 (SC) the Tribunal has
held that the assessee was entitled to the deduction of interest on the
borrowed funds. The observations made bv the Supreme Court in S.
A. Builders‘ case (2007) 288 ITR 1 (SC) were quoted by the
Tribunal as under (page 10):
―…where it is obvious that a holding company has a deep
interest in its subsidiary, and hence if the holding company
advances borrowed money to a subsidiary and the same is
used by the subsidiary for some business purposes, the
assessee would, in our opinion, ordinarily be entitled to
deduction of interest on its borrowed loans‖
3. In these circumstances holding it to be expenditure incurred for
business the same was allowed under section 36(1)(iii) of the
Income-tax Act by the Tribunal. The Tribunal has also held that this
expenditure would be allowed even under section 57(iii) of the Act.
Though there may be some controversy as to whether the aforesaid
expenditure is allowable under section 57(iii) of the Act or not, we
have no doubt, in our mind, that the expenditure incurred under the
16
2011 SCC OnLine Del 5634
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aforesaid circumstances would be treated as expenditure incurred for
business purposes and was thus allowable under section 36 of the
Act. Mr. O. S. Bajpai, learned senior advocate appearing for the
assessee, has produced a copy of the memorandum of association of
the assessee which, inter alia, specifies the following objects:
―To own, purchase, construct, acquire, equip, operate,
manage, conduct or in any other manner and in all its
aspects deal in hotels, motels, resorts, inns, guest houses,
apartments, food courts, shopping plazas, commercial
complexes, casinos, entertainment parks, water parks,
amusement centres, gaming centres, bowling alleys, wild
life parks, restaurants, cafes, refreshment rooms, lodging
houses of every kind and sort including all the
conveniences, amenities and facilities adjunct thereto, in
India or in any other part of the world and to act as
consultants, advisors, experts, technical collaborators,
valuers, surveyors, inventory analysts in all matters,
pertaining to setting up of hotels, resorts, all form of
lodging, touristic and leisure projects.‖
4. We are, thus, of the opinion that no question of law arises. These
appeals are accordingly dismissed.‖
32. A similar view had been expressed in a previous decision
rendered by this Court in Commissioner of Income-tax v. Bharti
Televenture Ltd.17, where after noticing the decision in SA Builders,
our Court had observed: –
―11. The hon’ble Supreme Court further held that though, the
borrowed amount was not utilized by the assessee in its own
business and had been advanced as an interest-free loan to the sister
concern, but that is not relevant. What is relevant is whether the
assessee advanced such amount to its sister concern as a measure of
commercial expediency? The law laid down by the Bombay High
Court in Phaltan Sugar Works Ltd. v. CIT (1995) 215 ITR 582 was
overruled whereas that of the Delhi High Court in CIT v. Dalmia
Cement (B.) Ltd. (2002) 254 ITR 377 was approved. It was further
held that it all depends on the facts and circumstance of the case as
to whether the directors of the sister concern utilized the amount
advanced to it by the assessee for their personal benefit, which
obviously could not be said to be an advance as a measure of
commercial expediency.
12. In the instant case, from the order of the Commissioner of
Income-tax (Appeals) and that of the Income-tax Appellate Tribunal,17
2011 SCC OnLine Del 10
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as reproduced above, in paragraphs 3 and 6, we note that the
assessee was maintaining a bank account with mixed common funds
in which all the deposits and withdrawals were made. There was no
specific instance noted by the Assessing Officer in respect of any
direct nexus between the borrowed fund and the said advances made
to the subsidiaries. The Assessing Officer had made general
observations without going into the depth of the matter and without
pointing out any specific instance where an interest bearing
borrowing was advanced to the subsidiaries or establishing that the
borrowings made by the appellant were not for business purposes.
Both appellate authorities below were of the view that the assessee
had explained the sources of the advances and investments made to
the subsidiaries, which could not be linked to the borrowed funds
and that the advances were made out of the assessee’s own capital.
At the relevant time the assessee was found to be having an adequate
non-interest bearing fund by way of share capital and reserves. Even
otherwise, the advances were found to be made to the subsidiaries
for business considerations which is nothing but the commercial
expediency of the assessee. That being the factual position reflected
from the record of the assessee, the onus that laid on it stood
discharged.
13. We are in entire agreement with the findings recorded by the
Commissioner of Income-tax (Appeals) as also by the Income-tax
Appellate Tribunal in all the three cases and do not find any ground
to interfere with those findings.‖
33. Of equal significance is the judgment of this Court in Principal
Commissioner of Income-tax v. Reebok India Company18 and where
the Court speaking through Sanjiv Khanna, J. [as his Lordship then
was] had held that it would be wholly immaterial if a third party
benefited from an expenditure incurred as long as the same was
voluntarily expended and met the test of ―commercial expediency‖.
We deem it appropriate to extract the following paragraphs from the
decision of the Court in Reebok India Company: –
―6. We have examined the reasoning given by the Tribunal which is
primarily factual. The factum that the loans amounting to Rs. 502.69
crores were outstanding, was undisputed. Payment of interest was
also disputed. The Tribunal was of the view that the respondent-
assessee had paid interest on capital borrowed for business purpose
and in the absence of any allegation and finding that the respondent-
18
2018 SCC OnLine Del 11724
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assessee had diverted unsecured loans for non-business purpose no
disallowance could be made. As per section 36(1)(iii) of the Act
interest paid for capital borrowed for purpose of business has to be
allowed as a deduction.
7. The Supreme Court in S. A. Builders Ltd. v. CIT (Appeals)
[2007] 288 ITR 1 (SC) ; (2007) 1 sec 781, had interpreted section
36(l)(iii) of the Act to observe that interest paid on capital borrowed
for the purpose of business is to be allowed as a deduction in
computing taxable income. The expression ―for purposes of business
or profession‖ occurring in section 36(1)(iii) of the Act is wider in
scope than the expression ―for the purpose of earning income, profits
or gains‖. Accordingly, expenditure voluntarily incurred and
meeting the ―commercial expediency‖ test is to be allowed as a
deduction. It is immaterial if a third party also benefits by the said
expenditure. The expression ―commercial expediency‖ is again of
wide import and is satisfied once it is established that there was a
connection and nexus between the interest paid claimed as
expenditure and the business of the assessee. Purpose of business
need not be the business of the assessee, for deduction under section
36(1)(iii) of the Act to be allowed. Further, the Revenue cannot
assume the role and occupy the armchair of a businessman to decide
whether expenditure was reasonable. The Revenue cannot look at
the matter from its own standpoint, but opinion and decision of a
businessman on “business expediency” matters. Money borrowed
even when advanced to a subsidiary for some business purpose
would qualify for deduction of interest. However, if the money
borrowed is utilised by the assessee for personal benefit and not for
business purpose, interest paid on that money would not satisfy the
test of ―commercial expediency‖. In the context of the present case
the unsecured loans were not used for personal purpose. Merely
because non-interest bearing advances were given to third parties,
would not justify a finding that the test of ―commercial expediency‖
was not satisfied. Interest-free advances were preferred to the parties
connected with the business of the respondent-assessee. Money
taken on loan was not diverted for non-business purpose. The
findings of the Tribunal are in accordance with the law.‖
34. The last of the decisions that may merit notice is of the Bombay
High Court in Commissioner of Income Tax-7 v. Reliance
Communications Infrastructure Ltd.19 and which too was a decision
rendered in the context of investments made in wholly owned
subsidiaries and whether the same could be validly claimed as a
19
2012 SCC OnLine Bom 472
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deduction under Section 36(1)(iii). The Bombay High Court upon
noticing the principles laid down by the Supreme Court in SA Builders,
held: –
―11. In S.A. Builders, the Assessing Officer had observed that the
assessee had transferred a certain amount to its subsidiary out of a
cash credit account in which there was a debit balance. The
Assessing Officer found that the assessee had diverted its borrowed
funds to a sister concern without charging any interest and that
consequently, a proportionate part of the interest relating to that
amount, out of the total interest paid by the assessee to the Bank, had
to be disallowed. The CIT(A) had observed that out of the total
amount advanced by the assessee to its subsidiary, only an amount
of Rs. 18 lakhs had a nexus with borrowed funds and he had directed
the Assessing Officer accordingly to calculate the disallowance. The
Tribunal allowed the appeal by the Revenue and dismissed the
appeal of the assessee. The order was confirmed by the High Court.
The Supreme Court observed that the Income Tax authorities, the
Tribunal as well as the High Court had approached the matter from
an erroneous perspective. The Supreme Court held that where the
assessee had borrowed funds from a Bank and lent some of them to
a subsidiary as an interest free loan, the test to be applied is whether
this was a matter of commercial expediency. The expression
―commercial expediency‖, held the Supreme Court, is an expression
of wide import and includes such expenditure as a prudent
businessman incurs for the purpose of business. An expenditure,
which is commercially expedient, may not be incurred under a legal
obligation, but so long as it meets the requirement of commercial
expediency, it has to be allowed. However, the Supreme Court held
that it is not in every case that interest on borrowed loans would
have to be allowed if the assessee advanced the money to a sister
concern. Where the amount is advanced to a sister concern, for the
personal benefit of its directors, for instance, it would not qualify to
be regarded as commercial expediency. However, noted the
Supreme Court, where a holding company ―has a deep interest in its
subsidiary advances borrowed money to a subsidiary and the same is
used by the subsidiary for some business purposes, the assessee
would. ordinarily be entitled to deduction of interest on its borrowed
loans.‖ The Supreme Court accordingly set aside all the orders
passed by the authorities below including the judgment of the
Tribunal and of the High Court and remanded the matter for a fresh
decision.
12. In the present case, there is a finding of fact by the CIT(A) and
by the Tribunal that as a matter of fact, borrowed funds were not
used by the assessee for the purposes of investment in the shares of
its wholly owned subsidiary Reliance Infocomm Ltd. or for making
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advances to Reliance Industries Ltd. But independent of that, in view
of the decision of the Supreme Court in S.A. Builders what is
significant is as to whether the investment and the advances made
were commercially expedient and for the purpose of business. In this
regard, the assessee had pointed out before the CIT(A) that it is
engaged in the business of providing telecommunication
infrastructure which mainly consists of a Pan India Fibre Optic
Network. Reliance Infocomm Ltd. is a wholly owned subsidiary of
the assessee which is engaged in the business of providing
telecommunication services. The assessee made investments in the
equity shares of its subsidiary and claimed that this was with a view
to provide integrated telecommunication services. The case of the
assessee was that those investments were to ensure the utilization of
the telecommunications infrastructure of the subsidiary and was a
strategic investment for furthering business prospects in the area of
providing telecommunication services. As regards the advance
which was made by the assessee to Reliance Industries Ltd. (RIL)
the assessee pointed out to the CIT (A) that it was required to import
equipment under the EPCG Scheme. The obligations under the
EPCG Scheme were required to be backed by bank guarantees
which in turn demanded security for the issuance of guarantees. The
assessee entered into an arrangement with RIL to which it advanced
a sum of Rs. 476 crores against which RIL provided counter
guarantees to financial institutions equivalent to three times the
amount of the margin kept by the assessee with RIL
13. Now, having regard to this factual background, both the CIT(A)
and the Tribunal held that the investments made in the wholly
owned subsidiary and the money advanced to RIL were for
furthering the business of the assessee. The findings of both the
CIT(A) and of the Tribunal are consistent with the judgment of the
Supreme Court in S.A. Builders. Where the assessee, as in the
present case, has significant interest in the business of the subsidiary
and utilizes even borrowed money for furthering its business
connection, there is no reason or justification to make a disallowance
in respect of the deduction which is otherwise available under
Section 36(1)(iii). Counsel appearing on behalf of the Revenue
submits that there is a distinction between an advance, which is a
payment handed over to some one as a loan and an investment which
is money placed into financial schemes, shares or property with the
expectation of making a profit. We are unable to accept that such a
distinction will have any legal consequence in so far as the
entitlement of the assessee to claim a deduction under Section
36(1)(iii) is concerned. In the present case, when the assessee
advanced an amount to RIL that was with a view to furthering the
business of the assessee. RIL in turn was to execute counter
guarantees in favour of financial institutions for the benefit of the
discharge of the EPCG obligations by the assessee. That was a
security for the guarantees which those institutions were required to
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execute under the EPCG Scheme. The funds which were invested in
the wholly owned subsidiary were again for the purposes of the
business of the assessee. There is evidently a significant interest of
the assessee in the business of its subsidiary since both the assessee
and the subsidiary are engaged in providing telecommunication
services. Consequently, we are not inclined to interfere with the
order of the Tribunal. There is a finding of fact that interest free
funds borrowed are not utilised for the purposes of both the
transactions. But quite apart from that, the finding is that the funds
were deployed as a matter of commercial expediency and to further
the business of the assessee. The latter finding is independent of
whether borrowed funds were or were not utilized, for in view of the
judgment of the Supreme Court held, the fact that borrowed funds
were utilized for making investments or, as the case may be, for
making advances would not disentitle the assessee to the deduction
so long as business expediency exists.‖
35. Appearing for the respondent, Mr. Agrawal, learned counsel,
submitted that the applications were rightly rejected since they clearly
fell afoul of the limitation prescriptions as embodied in the Circulars
issued by the CBDT. It was further submitted that the investments
which the petitioner is stated to have made cannot possibly be
construed as those made in connection with or in furtherance of its
business. This, according to Mr. Agrarwal, is evident from the fact that
RLL was engaged in the business of manufacturing and trading of
drugs and pharmaceuticals and was not an investment company. It was
Mr. Agrawal’s submission that the debt taken by RLL, thus, cannot
possibly be viewed as one which could be said to be for the purpose of
a business which RLL was engaged in outside India. According to
learned counsel, the interest payment would consequently not fall
within the scope of the exclusion found in clause (b) of Section 9(1)(v).
36. Having noticed the rival submissions which were addressed, we
propose to firstly deal with the challenge to Circular No. 07/2007 and in
terms of which the Board had stipulated that the limitation for
preferring a claim of refund would be two years from the end of the FY
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in which the tax was deducted at source. In order to appreciate the
nature and extent of the power which the Act envisages as being
exercisable by the Board, it would be appropriate to firstly advert to
Section 119 of the Act and which reads as follows:-
―Instructions to subordinate authorities.
119. (1) The Board may, from time to time, issue such orders,
instructions and directions to other income-tax authorities as it may
deem fit for the proper administration of this Act, and such
authorities and all other persons employed in the execution of this
Act shall observe and follow such orders, instructions and directions
of the Board:
Provided that no such orders, instructions or directions shall be
issued–
(a) so as to require any income-tax authority to make a particular
assessment or to dispose of a particular case in a particular
manner; or
(b) so as to interfere with the discretion of the [the Joint
Commissioner (Appeals) or] the exercise of his appellate
functions.
(c) so as to interfere with the discretion of the 1***
2[Commissioner (Appeals)] in the exercise of his appellate
functions.
(2) Without prejudice to the generality of the foregoing power,–
(a) the Board may, if it considers it necessary or expedient so to do,
for the purpose of proper and efficient management of the work
of assessment and collection of revenue, issue, from time to time
(whether by way of relaxation of any of the provisions of
sections 3[115P, 115S, 115WD, 115WE, 115WF, 115WG,
115WH, 115WJ, 115WK,] 4[139,] 143, 144, 147, 148, 154, 155
5[, 158BFA], 6[sub-section (1A) of section 201, sections 210,
211, 234A, 234B, 234C 7[, 234E]], 8[270A,] 271 9[, 271C,
271CA] and 273 or otherwise), general or special orders in
respect of 10[any class of incomes or fringe benefits] or class of
cases, setting forth directions or instructions (not being
prejudicial to assessees) as to the guidelines, principles or
procedures to be followed by other income- tax authorities in the
work relating to assessment or collection of revenue or the
initiation of proceedings for the imposition of penalties and any
such order may, if the Board is of opinion that it is necessary inSignature Not Verified
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the public interest so to do, be published and circulated in the
prescribed manner for general information;
(b) the Board may, if it considers it desirable or expedient so to do
for avoiding genuine hardship in any case or class of cases, by
general or special order, authorise 11[any income-tax authority, not
being a 12*** Commissioner (Appeals)] to admit an application or
claim for any exemption, deduction, refund or any other relief under
this Act after the expiry of the period specified by or under this Act
for making such application or claim and deal with the same on
merits in accordance with law;
[(c) the Board may, if it considers it desirable or expedient so to do
for avoiding genuine hardship in any case or class of cases, by
general or special order for reasons to be specified therein, relax any
requirement contained in any of the provisions of Chapter IV or
Chapter VI-A, where the assessee has failed to comply with any
requirement specified in such provision for claiming deduction
thereunder, subject to the following conditions, namely:-
(i) the default in complying with such requirement was due to
circumstances beyond the control of the assessee; and
(ii) the assessee has complied with such requirement before the
completion of assessment in relation to the previous year in which
such deduction is claimed:
Provided that the Central Government shall cause every order
issued under this clause to be laid before each House of Parliament.](3) [***]‖
37. Sub-section (1) of Section 119 incorporates a broad and general
power which the statute confers on the CBDT to issue such instructions
or directions for the benefit of Income Tax authorities as it may deem
fit for the proper administration of the Act. That power is hedged by
two caveats which are spelt out in the Proviso appended thereto.
However, and since we are not concerned with the Proviso, we desist
from rendering any further observations in that respect.
38. Sub-section (2) thereafter proceeds to broadly delineate the
powers which the Board could exercise in various contingencies. The
powers which are spoken of in clauses (a), (b) and (c) are obviously not
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exhaustive since that provision itself is prefaced by the usage of the
expression ―without prejudice to the generality of the foregoing
power‖. The broad power which thus stands conferred upon the Board
is with respect to a proper administration of the Act.
39. However, and as we examine clauses (a), (b) and (c) of Section
119(2), the following position emerges. Clause (a) enables the Board,
for the purposes of proper and efficient management of the work of
assessment and collection of revenue, to issue, from time to time, such
directions, instructions or guidelines that may be followed by Income
Tax authorities in connection with the aforesaid. Of significance is
clause (a) which envisages the Board in that context also relaxing the
rigor of some of the provisions which are specified therein. Clause (b)
proceeds then to enable the Board, in cases of genuine hardship and
where it be considered desirable or expedient, by a general or special
order to authorize any Income Tax authority to admit an application or
claim for exemption, deduction, refund, or any other relief after the
expiry of the period specified under the Act.
40. As is apparent from a bare reading of clause (b), that provision
essentially enables the Board to expand or enlarge the period of
limitation that may be applicable in respect of a claim for exemption
deduction, refund or any other relief. Similar is the power which stands
conferred upon the Board by virtue of clause (c). Clause (c) speaks of a
power which the Board could exercise, by way of a general or special
order, to relax a requirement prescribed by any of the provisions
contained in Chapters IV and VI-A of the Act.
41. The trinity clauses which stand comprised in Section 119(2) are
thus clearly intended to enable the Board to relax or enlarge a period
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otherwise specified under the Act or to relax a requirement placed in
terms thereof. The language in which Section 119 stands couched
assumes significance since it is demonstrative of the statute conferring
a power upon the Board to relax a prescription or enlarge a period of
limitation as opposed to imposing or introducing a restriction or for that
matter constricting a period within which a right may be exercised
under the Act.
42. Turning then to the specific provisions pertaining to deduction of
tax and claims arising therefrom, we note that Section 203, while
speaking of the issuance of a certificate in evidence of tax having been
deducted within time as prescribed, the aforenoted provision clearly
does not spell out a particular time frame within which compliance may
be effected. Those time frames are ultimately introduced under the
Income Tax Rules, 196220 and are found in Rule 31 of the Rules.
Similar is the position which comes to the fore from a reading of
Section 200 and which now by virtue of Finance Act (No. 2) of 2024
for the first time introduces a provision in terms of which a prohibition
has come to be introduced to the effect that a correction statement
would not be entertained at all after the expiry of six years. The
aforesaid Proviso, however, would clearly have no application to the
present case having been introduced only by Finance Act (No. 2) of
2024.
43. We then turn our gaze upon Chapter XIX which deals
specifically with the subject of refunds. As was noticed in the preceding
parts of this decision, neither Section 237 nor Section 239, as they stand
today, incorporate a limitation period within which an application for
20
Rules
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refund may be presented. Of equal import is the deletion of sub-section
(2) which existed and formed part of Section 239 and which came to be
omitted by virtue of Finance Act (No. 2) of 2019. It was Section 239(2)
which alone had enacted time lines within which claims for refund were
liable to be instituted albeit with respect to income assessable. It is in
the aforesaid statutory backdrop that we would have to evaluate
whether paragraph 9 of Circular 7/2007 would sustain.
44. In fairness, it may only be noted that since the aforenoted circular
was issued way back in 2007, the said direction was perhaps influenced
by Section 239(2). However, the question which arises for our
consideration is whether the stipulations comprised in paragraph 9
would prevail notwithstanding Section 239(2) having stopped short of
creating a period of limitation governing claims like the present.
45. In aid of our analysis of the impact of prescriptions of limitation
in taxing statutes insofar as claims for refund are concerned, this would
constitute an appropriate juncture to notice some of the relevant
provisions in other fiscal statutes. Section 54 of the Central Goods and
Services Tax Act, 201721, which pertains to claims made for refund of
tax, reads as follows: –
―54. Refund of tax
(1) Any person claiming refund of any tax and interest, if
any, paid on such tax or any other amount paid by him, may make an
application before the expiry of two years from the relevant date in
such form and manner as may be prescribed:
PROVIDED that a registered person, claiming refund of any
balance in the electronic cash ledger in accordance with the
provisions of sub-section (6) of section 49, may claim such refund in
[such from and] manner as may be prescribed.
(2) A specialised agency of the United Nations Organisation or any
Multilateral Financial Institution and Organisation notified under the21
CGST Act
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United Nations (Privileges and Immunities) Act, 1947 (46 of 1947),
Consulate or Embassy of foreign countries or any other person or
class of persons, as notified under section 55, entitled to a refund of
tax paid by it on inward supplies of goods or services or both, may
make an application for such refund, in such form and manner as
may be prescribed, before the expiry of [two years] from the last day
of the quarter in which such supply was received.
****
Explanation: For the purposes of this section,–
(1) ―refund‖ includes refund of tax paid on zero-rated supplies of
goods or services or both or on inputs or input services used in
making such zero-rated supplies, or refund of tax on the supply of
goods regarded as deemed exports, or refund of unutilised input tax
credit as provided under subsection (3).
(2) ―relevant date‖ means–
(a) in the case of goods exported out of India where a refund of
tax paid is available in respect of goods themselves or, as the
case may be, the inputs or input services used in such goods,–
(i) if the goods are exported by sea or air, the date on which
the ship or the aircraft in which such goods are loaded,
leaves India; or
(ii) if the goods are exported by land, the date on which such
goods pass the frontier; or
(iii) if the goods are exported by post, the date of despatch of
goods by the Post Office concerned to a place outside
India;
(b) in the case of supply of goods regarded as deemed exports
where a refund of tax paid is available in respect of the goods,
the date on which the return relating to such deemed exports is
furnished;
[(ba) in case of zero-rated supply of goods or services or both
to a Special Economic Zone developer or a Special Economic
Zone unit where a refund of tax paid is available in respect of
such supplies themselves, or as the case may be, the inputs or
input services used in such supplies, the due date for
furnishing of return under section 39 in respect of such
supplies;]
(c) in the case of services exported out of India where a refund
of tax paid is available in respect of services themselves or, as
the case may be, the inputs or input services used in such
services, the date of–
(i) receipt of payment in convertible foreign exchange, [or in
Indian rupees wherever permitted by the Reserve Bank of
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India] where the supply of services had been completed
prior to the receipt of such payment; or
(ii) issue of invoice, where payment for the services had been
received in advance prior to the date of issue of the invoice;
(d) in case where the tax becomes refundable as a consequence of
judgment, decree, order or direction of the Appellate
Authority, Appellate Tribunal or any court, the date of
communication of such judgment, decree, order or direction;
[(e) in the case of refund of unutilised input tax credit under
clause (ii) of the first proviso to sub-section (3), the due date
for furnishing of return under section 39 for the period in
which such claim for refund arises;]
(f) in the case where tax is paid provisionally under this Act or the
rules made thereunder, the date of adjustment of tax after the
final assessment thereof;
(g) in the case of a person, other than the supplier, the date of
receipt of goods or services or both by such person; and
(h) in any other case, the date of payment of tax‖
46. A reading of sub-section (1) of Section 54 reveals that a person
seeking refund of tax or interest paid is required to make an application
prior to the expiry of two years from the relevant date so applicable in
light of sub-section (2) to the Explanation to Section 54. The Proviso to
sub-section (1) comes with the caveat that the person seeking refund
would have to additionally comply with Section 49(6). In a similar
vein, sub-section (2) of Section 54 also requires that applications for
refund being made by entities before the expiry of two years from the
last day of the quarter in which inward supplies of goods or services or
both may have been received.
47. It would also be apposite in this context to note sub-sections (1)
and (2) of Section 54 of the Delhi Goods and Services Tax Act,
201722 which is pari materia to Section 54 of the CGST Act.
Furthermore, Section 20 of the Integrated Goods and Services Tax
22
DGST Act
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Act, 201723 stipulates that the provisions of the CGST Act would apply
mutatis mutandis in relation to integrated tax as would be applicable to
central tax including in respect of matters of refund as per sub-clause
(xiii) to Section 20 of the said enactment.
48. Turning our attention then to Section 11B of the Central Excise
Act, 194424, which pertained to claims for refund of duty and interest, it
becomes apparent that sub-section (1) of the said provision statutorily
engrafted a limitation period thereby requiring claims for refund of any
duty of excise and any interest payments made on such duty to be made
prior to the expiry of one year from the relevant date as applicable in
terms of sub-clause (2) of the Explanation to that provision.
49. The relevant parts of Section 11B are reproduced hereinbelow:-
―11B. Claim for refund of [duty and interest, if any, paid on such
duty].–
(1) Any person claiming refund of any [duty of excise and interest, if
any, paid on such duty] may make an application for refund of such
[duty and interest, if any, paid on such duty] to the [Assistant
Commissioner of Central Excise or Deputy Commissioner of
Central Excise] before the expiry of [one year] [from the relevant
date] [in such form and manner] as may be prescribed and the
application shall be accompanied by such documentary or other
evidence (including the documents referred to in section 12A) as the
applicant may furnish to establish that the amount of [duty of excise
and interest, if any, paid on such duty] in relation to which such
refund is claimed was collected from, or paid by, him and the
incidence of such [duty and interest, if any, paid on such duty] had
not been passed on by him to any other person:
Provided that where an application for refund has been made before
the commencement of the Central Excises and Customs Laws
(Amendment) Act, 1991, such application shall be deemed to have
been made under this sub-section as amended by the said Act and
the same shall be dealt with in accordance with the provisions of
sub-section (2) as substituted by that Act:]
[Provided further that] the limitation of [one year] shall not apply
where any [duty and interest, if any, paid on such duty] has been23
IGST Act
24
Central Excise Act
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paid under protest.
[* * *]
****
[Explanation.– For the purposes of this section,–
(A) ―refund‖ includes rebate of duty of excise on excisable
goods exported out of India or on excisable materials used in the
manufacture of goods which are exported out of India;
(B) ―relevant date‖ means,–
(a) in the case of goods exported out of India where a
refund of excise duty paid is available in respect of the
goods themselves or, as the case may be, the excisable
materials used in the manufacture of such goods,–
(i) if the goods are exported by sea or air, the date on
which the ship or the aircraft in which such goods are
loaded, leaves India, or
(ii) if the goods are exported by land, the date on which
such goods pass the frontier, or
(iii) if the goods are exported by post, the date of
despatch of goods by the Post Office concerned to a
place outside India;
(b) in the case of goods returned for being remade, refined,
reconditioned, or subjected to any other similar process, in
any factory, the date of entry into the factory for the
purposes aforesaid;
(c) in the case of goods to which banderols are required to
be affixed if removed for home consumption but not so
required when exported outside India, if returned to a
factory after having been removed from such factory for
export out of India, the date of entry into the factory;
(d) in a case where a manufacturer is required to pay a sum,
for a certain period, on the basis of the rate fixed by the
Central Government by notification in the Official Gazette
in full discharge of his liability for the duty leviable on his
production of certain goods, if after the manufacturer has
made the payment on the basis of such rate for any period
but before the expiry of that period such rate is reduced, the
date of such reduction;
[(e) in the case of a person, other than the manufacturer, the
date of purchase of the goods by such person;]
[(ea) in the case of goods which are exempt from payment
of duty by a special order issued under sub-section (2) of
Section 5-A, the date of issue of such order;]
[(eb) in case where duty of excise is paid provisionally
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under this Act or the rules made thereunder, the date of
adjustment of duty after the final assessment thereof;]
[(ec) in case where the duty becomes refundable as a
consequence of judgment, decree, order or direction of
appellate authority, Appellate Tribunal or any court, the
date of such judgment, decree, order or direction;]
(f) in any other case, the date of payment of duty.]‖
50. As is manifest from the above, the aforementioned statutes
mandate that refund applications must be made within the timeline so
prescribed, failing which such claims would be rendered time barred.
This is liable to be viewed and appreciated in juxtaposition with the
provisions of the Income Tax Act which does not envisage any
limitation period within which such claims may be preferred and leads
us to the inevitable conclusion that the Act did not seek to place
delineated fetters on the time period within which an assessee may file
an application for refund. This, of course, subject to what was
postulated by Section 239(2) as it stood at the relevant time.
51. More significant is the omission of sub-section (2) of Section 239
which sought to invalidate refund claims made beyond the time periods
specified in that provision and thus demonstrative of the legislative
intent to eliminate strictures of limitation periods within which an
assessee may prefer refund applications in the context of income tax
proceedings. This we observe, notwithstanding the principal question
which arises before us and stands restricted to whether the CBDT could
have introduced such a disqualification
52. The Supreme Court in its decision of Union of India and others
v. Rajeev Bansal (and other appeals)25, in the context of reassessment
notices has penned the following illuminating passages elucidating the
manner in which taxation statutes ought to be interpreted:-
25
2024 SCC OnLine SC 2693
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“34. Taxing statutes are interpreted by following the principles of
strict interpretation. While interpreting a taxing statute, there is no
room for any intendment (Cape Brandy Syndicate v. Inland Revenue
Commissioners). A taxing statute must be construed by having
regard to the strict letter of the law (A. V. Fernandez v. State of
Kerala). In a taxing statute, it is not possible to assume any intention
or governing purpose more than what is stated in the plain language.
A taxing statute can successfully impose liability on persons or
property only if it frames appropriate provisions to that end. The
courts cannot plug in a loophole in a taxing statute ―by a strained
construction in reference to the supposed intention of the
Legislature.‖ (*Murarila/ Mahabir Prasad v. B.R. Vad) Further, the
considerations of equity or justice are not relevant in interpreting a
taxing statute. (ITO v. T.S. Devinath Nada)
35. It is a well-accepted rule of construction that in situations where
the interpretation of taxing legislation is ambiguous or leads to two
possible interpretations, the interpretation most beneficial to the
subject of the tax should be adopted (Central India Spinning and
Weaving and Manufacturing Company Ltd. v. Municipal Committee;
CIT v. Shahzada Nand and Sons; ITO v. T.S. Devinath Nada/N;
Valtas Ltd. v. State of Gujarat). It would not be an unjust result if a
taxpayer escapes the tax net on account of the legislature’s failure to
express itself clearly. (CIT v. Jargaon Electric Supply Co. Ltd.; State
of West Bena/ v. Kesoram Industries Ltd.) ‖
53. To summarise, sub-section (2) to Section 239 was a provision
ascribing a period of limitation for instituting claims for refund. The
same came to be omitted with effect from 01 September 2019. This
legislative act is demonstrative of the clear legislative intent to avoid
prescribing strict limitation periods within which refund applications
may be preferred and may be considered as having been validly
instituted. This more so in light of the stand of the CBDT itself which
in its numerous circulars spoke of tax erroneously deducted not being
liable to be viewed as a legitimate collection of an impost sanctioned by
law.
54. On a more fundamental plane, it becomes pertinent to note that
the prescription of a period of limitation is essentially legislative in
character. The interplay between a prescription of limitation and its
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impact on rights was lucidly explained by the Supreme Court in M/s
Bharat Barrel and Drum MFG. Co. Ltd. And Another v. The
Employees State Insurance Corporation26. That judgment was
concerned with a limitation prescription which came to be introduced
by the State Government in Rule 17 of the Employees’ State
Insurance (Central) Rules, 195027. The question which arose for
consideration was whether the same could be recognized as being in
valid exercise of the rule making power which stood conferred upon the
Government by Section 96 of the Employees’ State Insurance Act,
194828. The Supreme Court firstly took into consideration the language
of Section 96 and which enabled the State Government to prescribe the
procedure to be followed in proceedings before court. Proceeding then
to elucidate the basic attributes of a law of limitation, the Supreme
Court pertinently observed:-
―7. The manner of this approach may be open to the criticism of
having over simplified the distinction, but nonetheless this will
enable us to grasp the essential requisites of each of the concepts
which at any rate ―has been found to be workable concept to point
out the real and valid difference between the rules in which stability
is of prime importance and those in which flexibility is a more
important value. Keeping these basic assumptions in view it will be
appropriate to examine whether the topic of limitation belongs to the
Branch of procedural law or is outside it. If it is a part of the
procedure whether the entire topic is covered by it or only a part of it
and if so what part of it and the tests for ascertaining them. The law
of limitation appertains to remedies because the rule is that claims in
respect of rights cannot be entertained if not commenced within the
time prescribed by the statute in respect of that right. Apart from
Legislative action prescribing the time, there is no period of
limitation recognised under the general law and therefore any time
fixed by the statute is necessarily to be arbitrary. A statute
prescribing limitation however does not confer a right of action no
speaking generally does not confer on a person a right to relief
which has been barred by efflux of time prescribed by the law. The26
[(1971) 2 SCC 360]
27
Employees’ Rules
28
Employees Act
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necessity for enacting periods of limitation is to ensure that actions
are commenced within a particular period, firstly to assure the
availability of evidence documentary as well as oral to enable the
defendant to contest the claim against him; secondly to give effect to
the principle that law does not assist a person who is inactive and
sleeps over his rights by allowing them when challenged or disputed
to remain dormant without asserting them in a Court of law. The
principle which forms the basis of this rule is expressed in the
maximum vigilantibus, non dermientibus, jura subveniunt (the laws
give help to those who are watchful and Rot to those who sleep).
Therefore the object of the statutes of limitations is to compel a
person to exercise his right of action within a reasonable time as also
to discourage and suppress stale, fake or fraudulent claims. While
this is so there are two aspects of the statutes of limitation the one
concerns the extinguishment of the right if a claim or action is not
commenced with a particular time and the other merely bare the
claim without affecting the right which tither remains merely as a
moral obligation or can be availed of to furnish the consideration for
a fresh enforceable obligation. Where a statute prescribing the
limitation extinguishes the right, it affects substantive rights while
that which purely pertains to the commencement of action without
touching the right is said to be procedural. According to Salmond the
law of procedure is that branch of the law of actions which governs
the process of litigation, both Civil and Criminal. ―All ‗the residue‖
he says ―is substantive law, and relation not to the process of
litigation but to its purposes and subject-matter‖………………It
does not therefore appear that the statement that substantive law
determines rights and procedural law deals with remedies is wholly
valid, for neither the entire law of remedies belongs to procedure nor
are rights merely confined to substantive law, because as already
noticed rights are hidden even in the interstices of procedure‖. There
is therefore no clear-cut division between the two.
8. A large number of decisions have been referred before us both
English and Indian some of antiquity, in support of the proposition
that the law prescribing the time within which an action can be
commenced is purely procedural and therefore when a statute
empowers the Government to make rules in respect of procedure it
confers upon it also the right to prescribe limitation…………….
****
10. ………..The present tendency is that where a question of
limitation arises, the distinction between so-called substantive and
procedural statutes of limitation may not prove ·to be a determining
factor but what has to be considered is whether the statute
extinguishes merely the remedy or extinguishes the substantive right
as well as the remedy. Instead of generalising on a principal the
safest course would be to examine each case on its own facts and
circumstances and determine for instance whether it affects
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substantive rights and extinguishes them or whether it merely
concerns a procedural rule only dealing with remedies, or whether
the intendment to prescribe limitation is discernible from the scheme
of the Act or is inconsistent with the rule-making power, etc.
11. Apart from the implications inherent in the term procedure
appearing in Section 96(l)(b) the power to prescribe by rules any
matter falling within the ambit of the term must be the “procedure to
be followed in proceedings before such Court”. The word ‘in’,
emphasised by us, furnishes a clue to the controversy that the
procedure must be in relation to proceedings in Court after it has
taken seisen of the matter, which obviously it take when moved by
an application presented before it. If such be the meaning the
application by which the Court is asked to adjudicate on a matter
covered by Section 75(2) is outside the scope of the rule-making
power conferred on the Government.
12. In the East and West Steamship Company, George Town,
Madras v. S. K. Ramalingam Chettiar, one of the questions that was
considered by this Court was whether the clause that provides for a
suit to be brought within one year after the delivery of the goods or
the date when the goods should have been delivered, only prescribes
a rule of limitation or does it also provide for the extinction of the
right to compensation after certain period of time. It was observed
by Das Gupta, J., at page 836:
13. What we have to consider is, apart from the question that the
Government on the terms of Section 96( 1 )(b) is not empowered to
fix periods of limitation for filing applications under Section 75(2) to
move the Court, whether on an examination of the Scheme of the
Act, Rule 17 affects substantive rights by extinguishing the claim of
the Corporation to enforce the liability for contributions payable by
the appellant.‖
55. It ultimately came to record the following conclusions:-
―14. ……………………… It is clear therefore that the right of the
Corporation to recover these amounts by coercive process is not
restricted by any limitation nor could the Government by recourse to
the rule-making power prescribe a period in the teeth of Section 68.
What Section 75(2) is empowering is not necessarily the recovery of
the amounts due to the .Corporation from the employer by recourse
to the Insurance Court but also the settlement of the dispute of a
claim by the Corporation against the principal employer which
implies that the principal employer also can, where he disputes the
claim made and action is proposed to be taken against him by the
Corporation under Section 68 to recover the amounts said to be due
from him. While this is so there is also no impediment for the
Corporation itself to apply to the Insurance Court to determine a
dispute against an employer where it is satisfied that such a dispute
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exists………………………………….Be that as it may in our view
the omission to provide a period of limitation in any of these
provisions while providing for a limitation of a claim by an
employee for the payment of any benefit under the regulations,
shows clearly that the legislature did not intend to fetter the claim
under Section 75(2)(d). It appears to us that where the Legislature
clearly intends to provide specifically the period of limitation in
respect of claims arising thereunder it cannot be considered to have
left such matters in respect of claims under some similar provisions
to be provided for by the rules to be made by the Government under
its delegated powers to prescribe the procedure to be followed in
proceedings before such Court. What is sought to be conferred is the
power to make rules for regulating the procedure before the
Insurance Court after an application has been .tiled and when it is
seized of the matter. That apart the nature of the rule · bars the claim
itself and extinguishes the right which is not within the pale of
procedure. Rule 17 is of such a nature and is similar in terms of
Section 80. There is no gain-saying the fact that if an employee does
not tile an application before the Insurance Court within 12 months
after the claim has become due or he is unable to satisfy the
Insurance Court that there was a reasonable excuse for him in not
doing so, his right to receive payment of any benefit conferred by
the Act is lost…………………….. By this amendment the claim
under clause (d), as well as the one under clause (f) of sub-section
{2) of Section 75, which provide for the adjudication of a claim by
the Insurance Court for the recovery of any benefit admissible under
the Act for which a separate limitation was fixed under Section 80,
is now to be made within three years from the date of the accrual of
the cause of action. This amendment also confirms the view taken by
this Court that the power under Section 96(l)(b) does not empower
the Government to prescribe by rules a period of limitation for
claims under Section 75. In the result this appeal is dismissed with
costs.‖
56. Speaking on the law of limitation as would generally apply, the
Supreme Court explained the operation of such a law as pertaining to
claims which could not be entertained if not commenced within the
time prescribed. It was further pertinently observed that unless the
statute itself were to fix a period within which an action may be
initiated or instituted, there is no general law which governs the issue of
limitation. It proceeded further to observe that a statute of limitation
intends to compel a person to exercise a right or institute an action
within a reasonable time and thus discourage stale claims.
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57. Speaking of the two basic facets of a rule of limitation, the
Supreme Court explained that while one is concerned with the
extinguishment of a right to institute a claim or commence an action,
the other merely bars the remedy without impacting or affecting the
right itself. It was thus held that where a statute prescribes a limitation
and which results in the extinguishment of a right itself, it is clearly
substantive in character and not merely procedural. However, it was
also pertinently observed that the distinction between substantive and
procedural aspects of a statute of limitation may not really be
determinative and it would thus be prudent to determine the same in
individual instances by pausing the question whether it was intended to
affect a substantive right in the sense of extinguishing the same or
whether it was intended to be merely procedural and confined to
impacting remedies that may be pursued. Proceeding further to rule
upon the validity of Rule 17, it took note of the fact that the principal
enactment had not adopted any provision of limitation insofar as claims
were concerned. It thus held that Rule 17 was clearly ultra vires Section
96.
58. Tested on the aforesaid principles, it becomes apparent that
paragraph 9 of the Circular No. 07/2007 essentially results in
deprivation of a right to petition for refund and thus seeks to extinguish
the claim itself. This the CBDT has chosen to do, not in amplification
of a provision contained in the Act, but in purported exercise of powers
conferred by Section 119. That provision, as was noticed hereinabove,
is clearly couched in permissive language and cannot possibly be
construed as empowering the Board to extinguish a right or the remedy
which otherwise existed in the statute.
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59. The family of provisions which deal with claims of refund,
except to the limited extent of what is provided in Rule 31A of the
Rules and which pertains to statement of deduction of tax under sub-
section (3) to Section 200, do not even attempt to disentitle an assessee
from petitioning for refund after the expiry of a particular period of
time. In fact, and to the contrary, the various provisions comprised in
Chapter XIX of the Act desist from introducing a prescription of
limitation. It becomes pertinent to note that even Rule 41 which
pertains to refund claims made under Chapter XIX of the Act does not
prescribe any period of limitation.
60. While we had referred to the time when Circular No. 07/2007
came to be issued and when sub-section (2) of Section 239 had existed
on the statute book, we find that the prescription of two years would not
sustain even when viewed in the backdrop of that provision as it existed
at the relevant time. The outer limit which came to be constructed by
CBDT could have at best been shored by Section 119. However and
was noticed in the preceding parts of this decision, the same is confined
to relaxation, incorporating a power to condone or to relieve a person
from the rigours of the statute. That provision surely cannot be
construed as contemplating the CBDT extinguishing a claim or a right.
61. We are thus of the firm opinion that given the scope of the power
conferred upon the Board, it is evident that a circular made in exercise
of powers conferred by Section 119 could have neither curtailed nor
erased a right to petition for refund or extinguish a claim for refund of
tax erroneously deposited and that too by prescribing periods of
limitation when none existed in the statute.
62. Our Court, as far back as 1998 in the decision of Dr. K.
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Jagadeesan v. Central Board of Direct Taxes and Others29, while
examining the powers of the Board under Section 119, in the context of
Section 279(2), had categorically observed that the CBDT does not
have the power to issue instructions, circulars or orders which
contravene provisions of the statute. This becomes apparent from the
following observations rendered therein:-
―10. The background in which the Explanation above said came to
be appended to section 279 is not clear. However, the very language
employed in Explanation reveals that the amendment is clarificatory
and declaratory in nature. Some doubts must have been expressed if
the power of the Board to issue orders, instructions or direction
under the Act (obviously referable to section 119(1) of the Act),
included the power to issue instructions or directions for the proper
composition of offences under section 279. The doubts have been
removed by declaring that such power was so included and thereby
setting at rest the doubts, if any. The Explanation is thus in the
nature of a proviso to section 279(2) of the Act as held in Y.P.
Chawla v. M.P. Tiwari, [1992] 195 ITR 607 (SC), and has also to be
read as clarificatory and declaratory of the scope of power of the
Board emanating from section 119.
11. Section 119, as it stands, contemplates orders, instructions and
directions to the income-tax authorities being issued by the Board
for the proper administration of the Act. They are the policy
decisions and thus of general nature which are covered by section
119(1). The proviso makes it clear that the Board does not have
power to circumvent the statutory powers or discretion of an
income-tax authority by reference to a particular assessment or a
particular case. The only cases in which the orders touching any
individual case can be issued are provided by clauses (b) and (c) of
sub-section (2) [as it now stands]. They are for avoiding genuine
hardship occasioned by rigourous application of the rule of
limitation in specified matters and for avoiding genuine hardship in
any case, by relaxing any requirement contained in any of the
provisions of Chapter IV or VIA relating to deduction claimed
thereunder. The categories of such “any case” do not cover the cases
of prosecution and composition.
12. The Explanation to section 279 read with section 119 does not
empower the Board to issue order, instruction or direction to
compound in an individual case. The power can be exercised only
for the purpose of laying down policy or general guidelines.
29
1998 SCC OnLine Del 996
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13. We are, therefore, of the opinion that the petitioner’s effort at
directly approaching the Central Board of Direct Taxes for issuance
of order, instruction or direction so as to compound his prosecution
was entirely misconceived. No fault can be found with the Board
having turned down the petitioner’s such attempt. The petitioner
would have been better advised to approach the Chief Commissioner
or the Director-General as contemplated by section 279(2). Any
communication between any of them and the Board would have
been an internal matter between the two. The petitioner is still at
liberty to approach the Chief Commissioner or the Director-General
which he does not appear to have done so far. Learned counsel for
the petitioner submitted that once the Board has turned down his
petition under section 279, howsoever misconceived it might have
been, no income-tax authority subordinate to the Board would have
power to entertain the petitioner’s prayer for compounding in face of
the order of the Central Board of Direct Taxes and, therefore, the
court may at least quash the order of the Central Board of Direct
Taxes as uncalled for. The contention cannot be entertained even for
a moment for two reasons. Firstly, the petitioner has to thank himself
for having invited the pronouncement of the Central Board of Direct
Taxes. Secondly, the cause of action to the petitioner has arisen only
at Chennai. If the Chief Commissioner or the Director-General
decline the petitioner’s prayer for compounding on the ground of the
order of the Central Board of Direct Taxes, then he may file an
appropriate writ petition in Chennai and therein lay a challenge to
the order of the Central Board of Direct Taxes as well. However we
express no opinion thereon.‖
63. We also take note of a judgement rendered by a Division Bench
of this Court in Vikram Singh v. Union of India and Others30 which
dealt with a challenge to a CBDT Circular dated 23 December 2014
issuing guidelines for the compounding of offences under the Direct
Taxes Law and Practices, 2015. The petitioner therein, in addition to
challenging the compounding charges levied upon it and the rejection
of its compounding application, also sought the quashing of the
aforenoted Circular on the grounds of clause 11(v) of the said Circular
stating that compounding applications may be rejected if the
compounding charge is not deposited within the time frame stipulated
30
2017 SCC OnLine Del 7826
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therein, despite the same not being envisaged under Section 279(2) of
the Act or Clause 12 which prescribed compounding fee. While dealing
with the petitioner’s challenge to the rejection of its compounding
application, the Court had observed as follows:-
―7. The circular dated December 23, 2014 does not stipulate a
limitation period for filing the application for compounding. What
the said circular sets out in para 8 are “Offences generally not to be
compounded”. In this, one of the categories which is mentioned in
subclause (vii) is : “Offences committed by a person for which
complaint was filed with the competent court 12 months prior to
receipt of the application for compounding”.
8. The above clause is not one prescribing a period of limitation for
filing an application for compounding. It gives a discretion to the
competent authority to reject an application for compounding on
certain grounds. Again, it does not mean that every application,
which involves an offence committed by a person, for which the
complaint was filed to the competent court 12 months prior to the
receipt of the application for compounding, will without anything
further, be rejected. In other words, resort cannot be had to para 8 of
the circular to prescribe a period of limitation for filing an
application for compounding. For instance, if there is an application
for compounding, in a case which has been pending trial for, let us
say 5 years, it will still have to be considered by the authority
irrespective of the fact that it may have been filed within ten years
after the complaint was first filed. Understandably, there is no
limitation period for considering the application for compounding.
The grounds on which an application may be considered, should not
be confused with the limitation for filing such an application.
9. This has to be also understood in the context of the object of
providing for compounding of offences. There is an
acknowledgment that the judicial system is not as efficient as it is
intended to be. There are trials, even in non-serious offences, that
have been pending for decades. It is in the public interest, apart from
the interest of the Department itself, that some closure is brought to
such cases which may be pending interminably in our court system.
It is for this reason that some discretion has been vested in the
officers of the Department to compound offences. It provides an
opportunity for some assessees, notwithstanding that their appeals as
regards the assessments may be pending, to come forward to have
their offences compounded. It does subserve both public interest as
well as the interest of the Department itself that on some reasonable
terms such offences, which may not be considered serious, are
compounded. The guidelines have to be understood only in that
context.
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10. The reason given in the impugned order dated November 3, 2016
for rejection of the petitioner’s application does not satisfy the
criteria spelt out in the guidelines issued by the Department by its
Circular dated December 23, 2014. It has proceeded on a ground that
is not available to the Department viz., that the application is
inordinately delayed. Since there is no other reason given for the
rejection of the application, the court is unable to sustain the order
dated November 3, 2016 of the Chief Commissioner of Income-tax
by which the petitioner’s application for compounding was rejected.
The said order is hereby set aside. The petitioner’s application for
compounding will have to be considered afresh by the Chief
Commissioner of Income-tax.‖
64. Adverting then to the principal challenge of the petitioner to the
aforementioned Circular, the Court proceeded to observe as follows:-
―12. Mr. Rahul Kaushik, learned counsel for the Department, in
seeking to justify the levy of the compounding fee in advance,
placed reliance on the decision of the Supreme Court in Y. P.
Chawla v. M. P. Tiwari [1992] 195 !TR 607 (SC) where the
Supreme Court while setting aside the judgment of this court in M.
P. Tiwari v. Y. P. Chawla, ITO (1991) 187 !TR 506 (Delhi) took
note of the insertion of the following Explanation under section 279
of the Act inserted with retrospective effect from April 1, 1962:
13. The Supreme Court reversed the judgment of this court on the
facts of that case and held that the Central Board of Direct Taxes had
the power to issue instruction to the authorities, other than the
Income-tax authorities, in the matter of compounding of offences.
However, that judgment does not answer the principal question that
arises for consideration in the present writ petition, viz., whether on
the strength of the above Explanation to section 279 of the Act the
Central Board of Direct Taxes can issue instructions requiring an
applicant seeking compounding of an offence, to pay upfront the
compounding fee even before the application for compounding can
be considered on the merits? It would appear from para 11(v) of the
impugned circular dated December 23. 2014 of the Central Board of
Direct Taxes that where an applicant seeking compounding of the
offences does not pay the compounding fee upfront, his application
need not be considered at all.
14. The court finds nothing in section 279 of the Act or the
Explanation thereunder to permit the Central Board of Direct Taxes
to prescribe such an onerous and irrational procedure which runs
contrary to the very object of section 279 of the Act. The Central
Board of Direct Taxes cannot arrogate to itself, on the strength of
section 279 of the Act or the Explanation thereunder, the power to
insist on a ―predeposit‖ of sorts of the compounding fee even
without considering the application for compounding. Indeed Mr.
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Kaushik was unable to deny the possibility, even if theoretical, of
the application for compounding being rejected despite the
compounding fee being deposited in advance. If that is the
understanding of para 11(v) of the above circular by the Department,
then certainly it is undoubtedly ultra vires section 279 of the Act.
The court, accordingly, clarifies that the Department cannot on the
strength of para 11(v) of the circular dated December 23, 2014, of
the Central Board of Direct Taxes reject an application for
compounding either on the ground of limitation or on the ground
that such application was not accompanied by the compounding fee
or that the compounding fee was not paid prior to the application
being considered on the merits.
15. The question of payment of the compounding fee, if any, would
arise, only if upon considering the application on the merits, the
Department is of the view that the prayer should be allowed subject
to the terms that are reasonable and subserve the object of section
279 of the Act.
16. The further and larger question that remains to be answered is
whether in the garb of a circular the Central Board of Direct Taxes
can prescribe the compounding fee in the absence of such fee being
provided for either in the statute or prescribed under the rules.
However, at this stage when the petitioner’s application is yet to be
decided afresh, the said question may be academic. The court,
accordingly, while directing the Chief Commissioner of Income-tax
to consider afresh the petitioner’s application for compounding of
offence under section 279 of the Act and communicate to the
petitioner the decision thereon in writing consistent with the present
judgment, within a period of six weeks from today, leaves it open to
the petitioner to urge the larger question which has not been decided
in this writ petition in the event that the petitioner is aggrieved by
the fresh order passed by the Chief Commissioner of Income-tax.‖
65. The decision of the Court in Vikram Singh is of significant
import insofar as the powers of the CBDT are concerned in light of the
Court holding that the Board does not have the power to prescribe
mandates or instructions that run afoul of the contours of the statutory
provision concerned.
66. Applying the said principles in the context of the present case, it
becomes evident that paragraph 9 of Circular No. 07/2007 cannot be
sustained absent a specific provision in the Act disentitling a person
from claiming refund of tax erroneously withheld. The prescription so
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introduced by the CBDT is clearly ultra vires and beyond the power
which Section 119 sought to confer upon that entity.
67. Close on the heels of the Vikram Singh decision, the Bombay
High Court has, in the decision of Sofitel Realty LLP and Others v.
Income Tax officer (TDS) and Others31 following Vikram Singh as
well as another decision of the Bombay High Court in Footcandles
Film Private Limited and Others v. Income Tax Officer-TDS-1 and
Others32 held that CBDT Circulars cannot curtail the statutory
provisions by prescribing limitation periods in the event that none is
prescribed in the Act. The observations made in Sofitel Realty are
reproduced hereinbelow:-
―9. We have to observe, in view of the comment made by the
Income-tax Officer in the affidavit-in-reply, that sub-section (2) of
section 279 of the Act provides for compounding of any offence by
the authorised officer either before or after the institution of the
proceedings. There is no limitation provided under sub-section (2) of
section 279 of the Act for submission or consideration of the
compounding application. What is relied upon by the Income-tax
Officer is the Guidelines issued by respondent No. 4, Central Board
of Direct Taxes (CBDT). The Central Board of Direct Taxes by the
Guidelines cannot provide for limitation nor can it restrict the
operation of sub-section (2) of section 279 of the Act. Mr. Suresh
Kumar submitted that the Guidelines were issued under second
Explanation appended to section 279 of the Act. The Guidelines is
subordinate to the principal Act or Rules, it cannot override or
restrict the application of specific provision enacted by the
Legislature. The Guidelines cannot travel beyond the scope of the
powers conferred by the Act or the Rules. It cannot contain
instructions or directions curtailing a statutory provision by
prescribing the period of limitation where none is provided by either
the Act or the Rules framed thereunder. Moreover, the Explanation
merely explains the main section and is not meant to carve out a
particular exception to the contents of the main section. Paragraphs 9
to 14 of the judgment of the Allahabad High Court in G. P.
Engineering Works Kachhwa v. Union of India [2022] 446 ITR 563
(All) ; (2022) 139 taxmann.com 130 (All) (page 568 of 446 ITR) :
31
2023 SCC OnLine Bom 1498
32
2022 SCC OnLine Bom 11768
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―From a bare perusal of sub-section (2) of section 279, it is
evident that any offence under Chapter XXII of the Act,
1961 may be compounded by the authorized officer either
before or after the institution of the proceedings. No
limitation for submission or consideration of compounding
application has been provided under sub-section (2) of
section 279 of the Act, 1961. Therefore, the Central Board
of Direct Taxes by a circular can neither provide limitation
for the purposes of sub-section (2) nor can restrict the
operation of sub-section (2) of section 279 of the Act, 1961,
in purported exercise of its power to issue circular under the
second Explanation appended to section 279 of the Act,
1961. It has not been disputed before us by the learned
counsel for the respondent or in the impugned show-cause
notice that the criminal case in question is still pending.
A circular is subordinate to the principal Act or Rules, it
cannot override or restrict the application of specific
provision enacted by Legislature. A circular cannot travel
beyond the scope of the powers conferred by the Act or the
Rules. Circulars containing instructions or directions cannot
curtail a statutory provision as aforesaid by prescribing a
period of limitation where none has been provided by either
the Act, 1961 or the Rules. The authority to issue
instructions or directions by the Board stems from the
second Explanation appended to section 279 of the Act,
1961. It is well settled that the Explanation merely explains
the main section and is not meant to carve out a particular
exception to the contents of the main section (Sonia Bhatia
v. State of U. P. (1981) 2 SCC 585 at page 597). The object
of an Explanation to a statutory provision was elaborated by
the Supreme Court in S. Sundaram Pillai v. V. R.
Pattabiraman (1985) 1 SCC 591, in which it was held as
follows :
―53. Thus, from a conspectus of the authorities
referred to above, it is manifest that the object of an
Explanation to a statutory provision is–
―(a) to explain the meaning and intendment of
the Act itself,
(b) where there is any obscurity or vagueness in
the main enactment, to clarify the same so as to
make it consistent with the dominant object
which it seems to subserve,
(c) to provide an additional support to the
dominant object of the Act in order to make it
meaningful and purposeful,
(d) an Explanation cannot in any way interfere
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with or change the enactment or any part thereof
but where some gap is left which is relevant for
the purpose of the Explanation, in order to
suppress the mischief and advance the object of
the Act it can help or assist the court in
interpreting the true purport and intendment of
the enactment, and
(e) it cannot, however, take away a statutory
right with which any person under a statute has
been clothed or set at naught the working of an
Act by becoming an hindrance in the
interpretation of the same‖.
By means of para 7(ii) of the compounding guidelines
circulated by F. No. 285/08/2014-IT (Inv.V)/147 dated June
14, 2019, that has been quoted in the impugned notice dated
November 16, 2021 the period for filing an application for
compounding has been restricted to 12 months from the end
of the month in which the prosecution complaint has been
filed in the court of law. Given the interpretation of the
Supreme Court regarding the object of an Explanation to a
statutory provision, the Board has sought to introduce the
provision of limitation by means of a circular that is not
contemplated by the second Explanation.
In the case of Vikram Singh v. Union of India [2017] 394
ITR 746 (Delhi) ; in W. P. (C) No. 6825 of 2016 decided on
April 11, 2017 by a Division Bench of the Delhi High Court
(enclosed as annexure No. 5 to the writ petition), in
response to the petitioner’s application for compounding of
offences under section 279(2) of the Act, 1961, he was sent
a communication informing him the total compounding
charges payable in his case which he was required to pay
even for his application to be considered. This was
purportedly in terms of a circular dated December 23, 2014
([2015] 371 ITR (St.) 7 ) issued by the Board containing
guidelines for compounding of offence under clause 11(v).
A writ petition was filed seeking quashing of the circular
dated December 23, 2014 particularly the paragraph which
set out the fee for compounding. In the reply filed to the
writ petition, the Department, inter alia, stated that the
compounding application under consideration was filed by
the accused after about 10 years of filing the prosecution
complaint ; that para 8(vii) of the revised guidelines for
compounding dated December 23, 2014 provides that
offences committed by a person for which prosecution
complaint was filed by the Department with the competent
court 12 months prior to receipt of the compounding
application are generally not to be compounded. With that
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reply, the Department had also filed an order dated
November 3, 2016 passed by the Chief Commissioner of
Income-tax on the ground that there was inordinate delay of
nine years in filing of the application for compounding of
offences by the assessee. While referring to para 8(vii) of
the circular dated December 23, 2014, the court observed
that it did not stipulate a limitation period for filing the
application for compounding. It gave a discretion to the
competent authority to reject an application for
compounding on certain grounds. Thus, the court held that
resort cannot be had to para 8 of the circular to prescribe a
period of limitation for filing an application for
compounding. The court accordingly held as follows (page
751 of 394 ITR):
―The court finds nothing in section 279 of the Act or
the Explanation thereunder to permit the Central
Board of Direct Taxes to prescribe such an onerous
and irrational procedure which runs contrary to the
very object of section 279 of the Act. The Central
Board of Direct Taxes cannot arrogate to itself, on the
strength of section 279 of the Act or the Explanation
thereunder, the power to insist on a “pre- deposit” of
sorts of the compounding fee even without
considering the application for compounding. Indeed
Mr. Kaushik was unable to deny the possibility, even
if theoretical, of the application for compounding
being rejected despite the compounding fee being
deposited in advance. If that is the understanding of
para 11(v) of the above circular by the Department,
then certainly it is undoubtedly ultra vires section 279
of the Act. The court, accordingly, clarifies that the
Department cannot on the strength of para 11(v) of the
circular dated December 23, 2014 of the Central
Board of Direct Taxes reject an application for
compounding either on the ground of limitation or on
the ground that such application was not accompanied
by the compounding fee or that the compounding fee
was not paid prior to the application being considered
on merits.’
However, in the present case a specific limitation has
been provided by para 7(ii) of the compounding guidelines
contained in the circular dated June 14, 2019 in purported
exercise of power under the second Explanation to section
279(2) of the Act, 1961. The second Explanation merely
enables the Board to issue instructions or directions to other
Income-tax authorities for the proper composition of
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directions may prescribe the methodology and manner of
composition of offences to clarify any obscurity or
vagueness in the main provisions to make it consistent with
the dominant object of bringing closure to such cases which
may be pending interminably in our court system. Such
instructions or directions that are prescribed by the
Explanation cannot take away a statutory right with which
an assessee has been clothed, or set at naught the working of
the provision of compounding of offences.
Considering the facts and circumstances of the case and
the provisions of sub-section (2) of section 279 of the Act,
1961, the writ petition is allowed to the extent that
compounding application of the petitioner cannot be
rejected by the Income-tax authority concerned on the
ground of delay in filing the application. Accordingly, we
also direct that compounding application of the petitioner
shall be considered by the Income-tax authority concerned
in accordance with law. (emphasis supplied)‖
10. It will also be useful to reproduce paragraph 33 of the
judgment of this court in Footcandles Film (P.) Ltd. v. ITO
[2023] 453 ITR 402 (Bom) ; (2023) 146 taxmann.com 304
(Bom) which reads as under (page 415 of 453 ITR) :
“Under these circumstances, we are of the view that the
findings arrived at by respondent No. 3 in the impugned
order dated June 1, 2021, that the application for
compounding of offence, under section 279 of the Income-
tax Act, was filed beyond twelve months, as prescribed
under the Central Board of Direct Taxes Guidelines dated
June 14, 2019, are contrary to the provisions of sub-section
(2) of section 279. Respondent No. 3 has failed to exercise
jurisdiction vested in it while deciding the application on
merits and consideration of the grounds set out when the
application for compounding of offence was filed before it.
On this count, the impugned order dated June 1, 2021 needs
to be quashed and set aside. Accordingly, we pass the
following order :
(i) The impugned order dated June 1, 2021 passed by
respondent No. 3-Chief Commissioner of Income-tax
(TDS), Mumbai, on the application filed by the petitioners
for compounding of an offence, is quashed and set aside.
(ii) Consequently, we remand the application, under the
provisions of section 279(2) of the Income-tax Act, of the
petitioners back to respondent No. 3 to consider afresh on
its own merits.
(iii) Respondent No. 3 shall dispose of the application of
the petitioners preferably within a period of thirty days
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from the date of receipt of this judgment.
(iv) Until disposal of the application of the petitioners for
compounding of offence, under sub-section (2) of section
279 of the Income-tax Act, 1961, by respondent No. 3, the
proceedings, being Criminal Appeal No. 127 of 2020,
along with Criminal Miscellaneous Application No. 407 of
2020, pending before the City Sessions Court, Greater
Mumbai, shall remain stayed.
(v) The challenge to the validity of clause 7(ii) contained
in Guidelines F. No. 285/08/2014-IT(INV.V)/147 dated
June 14, 2019, as raised in the present petition, is left open
in the event the petitioners are aggrieved by a fresh order
to be passed by respondent No. 3.” (emphasis supplied)
It will also be useful to reproduce paragraph 6 of the
judgment of the Delhi High Court in Sports Infratech (P.)
Ltd. v. Dy. CIT [2017] 391 ITR 98 (Delhi) ; (2017) 78
taxmann.com 44 (Delhi), which reads as under (page 102
of 391 ITR) :
“The learned counsel for the Revenue urges that the
binding nature of the Board’s instructions and
guidelines is apparent from Explanation to section
279(3) which clarifies that the power to grant or
refuse compounding is essentially discretionary and
actually administrative. Therefore, the guidelines
framed for its exercise under section 279 are binding
upon all Revenue authorities including the Chief
Commissioner. Learned counsel relied upon the
Supreme Court decision in Asst. Commissioner,
Assessment II v. Velliappa Textiles Ltd. [2003] 263
ITR 550 (SC) ; 132 Taxman 165 (SC) to highlight
that compounding application cannot be concluded
to as a matter of right but rather is subject to exercise
of discretion. There is no quarrel with the
proposition that power to accept a plea for
compounding or refusal is essentially discretionary.
The exercise, however, in each case is dependent
upon the authority who has to apply his or her mind
judiciously to the circumstances of each case. The
rejection of the petitioner’s application in this case is
entirely routed on the Chief Commissioner’s
understanding of the conditions of ineligibility of
para 8(v) apply. In this court’s opinion, that view
was based upon an erroneous understanding of law.
Whilst guidelines no doubt are to be kept in mind
specially while exercising jurisdiction, they cannot
blind the authority from considering the objective
facts before it. In the present case the petitioner’s
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failure to deposit the amount collected was beyond
its control and was on account of seizure of books of
account and documents, etc. But for such seizure,
the petitioner would quite reasonably be expected to
deposit the amount within the time prescribed or at
least within the reasonable time. Instead of
considering these factors on their merits and
examining whether indeed they were true or not, the
Chief Commissioner felt compelled by the text of
para 8(v). That condition, no doubt is important and
has to be kept in mind, cannot be only determining.
In the present case, the material on record in the
form of a letter by the Superintendent of CBI also
shows that a closure report was in fact filed before
the competent court. Having regard to all these facts,
this court is of the opinion that the refusal to
consider and accept the petitioner’s application under
section 279(2) cannot be sustained. The impugned
order is hereby set aside.” (emphasis supplied)
***
12. It will also be appropriate to reproduce paragraphs 12 to 15 of
the judgment of the Delhi High Court in Vikram Singh v. Union of
India [2017] 394 ITR 746 (Delhi) which read as under (page 751 of
394 ITR) :
“Mr. Rahul Kaushik, learned counsel for the Department, in
seeking to justify the levy of the compounding fee in
advance, placed reliance on the decision of the Supreme
Court in Y. P. Chawla v. M. P. Tiwari [1992] 195 ITR 607
(SC) where the Supreme Court while setting aside the
judgment of this court in M. P. Tiwari v. Y. P. Chawla, ITO
[1991] 187 ITR 506 (Delhi) took note of the insertion of the
following Explanation under section 279 of the Act inserted
with retrospective effect from April 1, 1962 :
‘Explanation.–For the removal of doubts, it is hereby
declared that the power of the Board to issue orders,
instructions or directions under this Act shall include
and shall be deemed always to have included the power
to issue instructions or directions (including
instructions or directions to obtain the previous
approval of the Board) to other Income-tax authorities
for the proper composition of offences under this
section.’
The Supreme Court reversed the judgment of this court on
the facts of that case and held that the Central Board of
Direct Taxes had the power to issue instruction to the
authorities, other than the Income-tax authorities, in the
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matter of compounding of offences. However, that
judgment does not answer the principal question that arises
for consideration in the present writ petition, viz., whether
on the strength of the above Explanation to section 279 of
the Act the Central Board of Direct Taxes can issue
instructions requiring an applicant seeking compounding of
an offence, to pay upfront the compounding fee even before
the application for compounding can be considered on the
merits? It would appear from para 11(v) of the impugned
circular dated December 23, 2014 ([2015] 371 ITR (St.) 7)
of the Central Board of Direct Taxes that where an applicant
seeking compounding of the offences does not pay the
compounding fee upfront, his application need not be
considered at all.
The court finds nothing in section 279 of the Act or the
Explanation thereunder to permit the Central Board of
Direct Taxes to prescribe such an onerous and irrational
procedure which runs contrary to the very object of section
279 of the Act. The Central Board of Direct Taxes cannot
arrogate to itself, on the strength of section 279 of the Act
or the Explanation thereunder, the power to insist on a ‘pre-
deposit’ of sorts of the compounding fee even without
considering the application for compounding. Indeed Mr.
Kaushik was unable to deny the possibility, even if
theoretical, of the application for compounding being
rejected despite the compounding fee being deposited in
advance. If that is the understanding of para 11(v) of the
above circular by the Department, then certainly it is
undoubtedly ultra vires section 279 of the Act. The court,
accordingly, clarifies that the Department cannot on the
strength of para 11(v) of the circular dated December 23,
2014, of the Central Board of Direct Taxes reject an
application for compounding either on the ground of
limitation or on the ground that such application was not
accompanied by the compounding fee or that the
compounding fee was not paid prior to the application being
considered on the merits.
The question of payment of the compounding fee, if any,
would arise, only if upon considering the application on the
merits, the Department is of the view that the prayer should
be allowed subject to the terms that are reasonable and
subserve the object of section 279 of the Act.”
13. Therefore, we make it clear to respondent No. 3 that the
compounding application cannot be rejected on the ground of delay
in filing the application. Moreover, there is no restriction also on the
number of applications that could be filed. The only requirement
under sub-section (2) of section 279 of the Act is that the complaint
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filed should be still pending which Mr. Suresh Kumar concurs with
Mr. Waive, is still pending.‖
In light of the aforesaid, we are of the considered opinion that the
limitation period as prescribed in paragraph 9 could not have imposed
impediments upon the sustainability of the petitioners’ application for
refund.
68. We also and in this regard bear in consideration, the undisputed
fact of the applications for refund having been originally made way
back in 2014. Those applications ultimately came to be rejected after a
lapse of more than three years on 27 March 2018. Viewed in that light,
it is manifest that the stand as taken by the respondents is clearly
rendered unjust and arbitrary.
69. We then proceed further to examine the view as expressed by the
respondents based on Section 9(1)(v)(b). The respondent has taken the
view that the interest burden which was borne by the petitioner could
not be said to be one incurred for the purposes of a business carried on
outside India or for earning income from a source outside India. The
view so taken is rendered wholly unsustainable when tested on the
salient principles which had come to be propounded by the Supreme
Court in S.A. Builders.
70. To recall, in S.A. Builders, the Supreme Court had enunciated the
precept of commercial expediency and thus any expenditure that may
be incurred by a person as a prudent businessmen qualifying for
deduction. It was thus observed that for the purposes of claiming it as a
deduction, the assessee would not be obliged to establish that it was
incurred under a legal obligation which applied. It was further held that
even if a third party benefited from such an expense, the same would
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not warrant the expenditure being disallowed.
71. S.A. Builders was a case where the money borrowed had been
advanced as an interest free loan to the sister concern of the appellant
before the Supreme Court. This too, as the Supreme Court held, was
irrelevant since the advance so made was clearly entitled to be viewed
as a measure adopted and motivated by commercial expediency. It is
the view so expressed in S.A. Builders which has been consistently
reiterated by the Supreme Court including in some of the decisions
which were cited for our consideration by Mr. Vohra and which
included Hero Cycles, as noticed by us in the preceding parts of this
decision.
72. A holding entity would undeniably have an enduring interest in
the business prospects and performance of a related entity. Any
advances made or liabilities taken over would thus clearly qualify the
test of commercial expediency unless it be found to be a case of an
illegal diversion or funnelling of funds. Undisputedly, the revenues
generated from the issuance of FCCBs as well as the ECBs were
utilized exclusively for the benefits of RNBV which, to recall, was the
holding company of Terapia, S.A. The liability so taken over by the
petitioner thus clearly fell within the ambit of a debt incurred as well as
moneys borrowed and used for the purposes of making or earning
income from a source outside India. The expected source of income and
which was envisaged to accrue would clearly arise from the activities
undertaken by Terapia, S.A. The investment was thus clearly motivated
by the expectation of making or earning income from a source outside
India.
73. Accordingly and for all the aforesaid reasons, we find ourselves
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unable to sustain the order impugned before us.
74. We consequently allow the instant writ petition. We declare
paragraph 9 of the CBDT Circular No. 07/2007 dated 23 October 2007
to be ultra vires the Act and hold that the applications for refund were
wrongly rejected as being barred by time.
75. We, in light of the above, quash the impugned order dated 27
March 2018 and consequently declare the petitioner eligible for refund
of excess taxes deposited by it under Section 195 for FY 2010-11 to
2012-13.
76. The respondents shall thus release consequential refund to the
petitioner along with statutory interest.
YASHWANT VARMA, J.
RAVINDER DUDEJA, J.
JANUARY 31, 2025/neha/DR
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