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TMI Blog2025 (2) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... application for refund. We also and in this regard bear in consideration, the undisputed fact of the applications for refund having been originally made way back in 2014.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. It is manifest that the stand as taken by the respondents is clearly rendered unjust and arbitrary. 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 [2006 (12) TMI 82 - SUPREME COURT] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rohit Jain, Mr. Aniket D. Agrawal and Mr. Abhishek Singhvi, Advs. For the Respondent Through: Mr. Vipul Agrawal and Mr. Sanjay Kumar, SSC with Mr. Gibran Naushad and Ms. Sakshi Sherwal, Advs. 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, 1961 [Act]. The applications themselves pertained to Financial Years [FY] 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 Board of Direct Taxes [CBDT] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow 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-barre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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; (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 limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson 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 vouc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 deposi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person who make payment for the export sales as the source located outside India from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, 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 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 man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 erroneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 (1) (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. 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 subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 businessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme 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. CIT. 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 Prasad case the borrowed amount was donated to a college with a view to commemorate the memory of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 2011 SCC OnLine Del 5634. We deem it apposite to reproduce the following parts of that judgment: "2. A perusal of the orders passed by the Tribunal would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sultants, 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. 2011 SCC OnLine Del 10, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aphs 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-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, expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest 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 ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1962 [Rules] 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 with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . **** 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in this context to note sub-sections (1) and (2) of Section 54 of the Delhi Goods and Services Tax Act, 20172 [DGST Act] which is pari materia to Section 54 of the CGST Act. Furthermore, Section 20 of the Integrated Goods and Services Tax Act, 2017 [IGST Act] 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, 1944 [Central Excise Act], 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].-- (a) Any person claiming refund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 under this Act or the rules made thereunder, the date of adjustment of duty after the final assessment thereof;] [(ec) in case where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibed 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. The 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 exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orities 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. 13. We are, therefore, of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not deposited within the time frame stipulated 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 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 !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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided 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 introduced by the CBD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril 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 applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructions or directions to other Income-tax authorities for the proper composition of offences under that section. That is to say the instructions or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rities 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 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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