2016 (4) TMI 316 - HC - Income Tax

Qualification for exemption under Section 10(15)(iv)(c) - CBDT rejecting the prayer of the Petitioner for refund being the excess tax withheld at source on the penal interest paid by the Petitioner to Sanwa International Finance Limited (SIFL), Hong Kong - whether the payment by the Petitioner of penal interest and other charges would fall within the definition of Interest under Section 2(28A)? - Held that - It must be noticed that its claim for refund was actually never rejected on merits since the order of the CIT(A), which substituted the order of rejection by the ITO advised the Petitioner to approach the CBDT. In fact, even the CIT advised the Petitioner likewise. It was pursuant to both these orders, the Petitioner approached the CBDT. At the time of making of the application to the CBDT on 21st August, 1998, the circular dated 6th August, 1998 had been issued. The whole idea was to provide a remedy for excessive or wrongful deduction of TDS, the refund of which was sought. This circular was beneficial to the person who had deducted TDS and was seeking refund. Therefore, there was no question of the CBDT not considering the applicability of the said circular as far as the Petitioner was concerned. These decisions, therefore, do not come to the aid of the Revenue to justify its rejection of the application made by the Petitioner. There is only one ground on which the CBDT rejected the Petitioner s application for refund. This was that the penal interest was paid by the Petitioner as a result of violation/transgression of the Agreement and was, therefore, not exempt under Section 10(15)(iv)(c) of the Act. This is factually incorrect since Clause 27 of the Agreement itself provides for waiver, in the event of default, by SIFL subject to certain conditions. The penal interest was imposed as part of the conditions of the Agreement itself. Therefore, the payment of penal interest cannot be said to be for breach of the terms of the conditions but in terms of the conditions imposed for condoning such breach. The impugned order of the CBDT, therefore, proceeds on an erroneous interpretation of the clauses of the Agreement. The order of the CBDT does not state that the Petitioner otherwise does not satisfy the conditions contained in the CBDT s circular dated 6th August, 1998. It also does not state that the said circular would not apply to the Petitioner s application for refund. This is yet another reason why the Court is not prepared to entertain the plea of the Revenue to the above effect because that was not the ground on which the CBDT rejected the Petitioner s application. In the considered view of the Court, therefore, the impugned order dated 8th December 1998 of the CBDT rejecting the Petitioner s application for refund is unsustainable in law. Since it is not the case of the Revenue that the Petitioners prayer for refund of the sum of ₹ 64,53,214 is not admissible in terms of Circular No. 769 dated 6th August, 1998 of the CBDT, a direction is issued to the DCIT to pass appropriate orders granting refund to the Petitioner for the said sum together with whatever interest is admissible in accordance with law within a period of four weeks from today. - Decided in favour of assessee

Summary

Issues Involved:
1. Refund of excess tax withheld at source.
2. Interpretation of 'interest' under Section 2(28A) of the Income Tax Act.
3. Validity of the CBDT's rejection of the refund application.
4. Applicability of CBDT Circular No.769 dated 6th August 1998.
5. Procedural and jurisdictional objections.

Issue-wise Detailed Analysis:

1. Refund of Excess Tax Withheld at Source:
The Petitioner challenged the rejection of its application for a refund of ?64,53,214/- by the CBDT and the DCIT. The refund was sought on the grounds that the penal interest paid to Sanwa International Finance Limited (SIFL) was exempt under Section 10(15)(iv)(c) of the Income Tax Act, 1961. The Petitioner argued that the penal interest qualified as 'interest' under Section 2(28A) of the Act and was thus eligible for exemption.

2. Interpretation of 'Interest' under Section 2(28A) of the Income Tax Act:
The Court examined whether the penal interest paid by the Petitioner fell within the definition of 'interest' under Section 2(28A) of the Act. The definition includes "interest payable in any manner in respect of any moneys borrowed or debt incurred" and encompasses "any service fee or other charge in respect of the moneys borrowed or debt incurred." The Court concluded that the penal interest was indeed in the nature of interest and covered by the inclusive definition under Section 2(28A).

3. Validity of the CBDT's Rejection of the Refund Application:
The CBDT's rejection was based on the assertion that the penal interest did not qualify for exemption as it was paid due to a breach of the loan agreement. The Court found this reasoning factually incorrect, noting that the penal interest was imposed as part of the conditions for condoning the breach, not as a penalty for the breach itself. The Court held that the CBDT's interpretation of the agreement clauses was erroneous and that the penal interest should be considered as part of the interest on the loan.

4. Applicability of CBDT Circular No.769 dated 6th August 1998:
The Petitioner argued that the refund should be granted in light of CBDT Circular No.769, which allows for refunds in cases of excess TDS. The Court noted that the circular was issued to address hardships faced due to excess TDS and should be applied to the Petitioner's case. The Court rejected the Revenue's argument that the circular could not be applied retrospectively, emphasizing that the circular was beneficial and aimed at providing relief in cases of wrongful TDS.

5. Procedural and Jurisdictional Objections:
The Revenue raised objections regarding the procedural aspects and territorial jurisdiction. The Court dismissed these objections, noting that the Petitioner had followed the appropriate administrative channels and that part of the cause of action arose within the Court's jurisdiction. The Court also highlighted that the CBDT did not provide the Petitioner an opportunity to be heard before rejecting the refund application, which was procedurally unfair.

Conclusion:
The Court quashed the CBDT's order dated 8th December 1998 and the DCIT's letter dated 16th February 1999, directing the DCIT to grant the refund of ?64,53,214/- along with applicable interest within four weeks. The writ petition was allowed, with no orders as to costs.