2025 (2) TMI 127 - HC - Income Tax

CBDT Circular 07/2007 para 9 ultra vires; refund under Section 195 allowed despite limitation; interest deductible

HC held that paragraph 9 of CBDT Circular No. 07/2007 is ultra vires the Act, as CBDT cannot curtail statutory refund rights in the absence of an express ... Rejection of refund of excess tax wrongly deducted and deposited u/s 195 - Whether applications were barred by time? - HELD THAT:- The decision of the Court in Vikram Singh [2017 (4) TMI 621 - DELHI HIGH COURT] 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. 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 CBDT is clearly ultra vires and beyond the power which Section 119 sought to confer upon that entity. Limitation period as prescribed could not have imposed impediments upon the sustainability of the petitioners’ 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 We also and in this regard bear in consideration, the undisputed fact of the applications for refund having been originally made way back in 2014.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 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. 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. 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. We find ourselves unable to sustain the order impugned before us. 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. We, quash the impugned order and consequently declare the petitioner eligible for refund of excess taxes deposited by it under Section 195 for FY 2010-11 to 2012-13. 1. The core legal issues considered in this judgment were:- The validity of the rejection of refund applications by the respondent on the grounds of limitation as prescribed by Circular No. 07/2007 issued by the CBDT.- Whether the interest payments made by the petitioner could be considered as incurred for the purpose of a business carried on outside India or for earning income from a source outside India under Section 9 (1) (v) (b) of the Income Tax Act, 1961.2. Issue-wise Detailed Analysis:Validity of Rejection of Refund Applications:- Legal Framework and Precedents: The petitioner challenged the rejection of refund applications based on the limitation period introduced by Circular No. 07/2007. The petitioner argued that the Income Tax Act, 1961, does not prescribe a period of limitation for refund applications, making the circular ultra vires. The Court examined Sections 200, 237, and 239 of the Act, noting the absence of a statutory limitation period for refund claims.- Court's Interpretation and Reasoning: The Court held that the power conferred upon the CBDT under Section 119 of the Act was not intended to impose a limitation period for refund claims. The Court referenced various judgments, including M/s Bharat Barrel and Drum MFG. Co. Ltd. and Vikram Singh, to elucidate the legislative intent and the nature of limitation laws.- Key Evidence and Findings: The Court found that the statutory framework of the Income Tax Act did not envisage a limitation period for refund claims, particularly after the omission of Section 239(2) by the Finance Act (No. 2) of 2019.- Application of Law to Facts: The Court concluded that the CBDT's imposition of a limitation period through Circular No. 07/2007 was beyond its statutory authority, rendering the circular ultra vires.- Treatment of Competing Arguments: The respondent's argument that the applications were time-barred was rejected. The Court emphasized that the absence of a statutory limitation period in the Act precluded the CBDT from prescribing one through a circular.- Conclusions: The Court declared paragraph 9 of Circular No. 07/2007 ultra vires and held that the refund applications were wrongly rejected as time-barred.Interest Payments and Section 9 (1) (v) (b):- Legal Framework and Precedents: The petitioner argued that the interest payments were for the purpose of a business carried on outside India, thus falling within the exception in Section 9 (1) (v) (b). The Court examined the principles of commercial expediency as elucidated in S.A. Builders and other relevant judgments.- Court's Interpretation and Reasoning: The Court applied the principle of commercial expediency, noting that a holding company has a legitimate interest in the business of its subsidiaries. It held that the interest payments were made for the purpose of earning income from a source outside India.- Key Evidence and Findings: The Court found that the funds generated from FCCBs and ECBs were used exclusively for the benefit of the petitioner's subsidiary, Terapia, S.A., thus meeting the criteria of commercial expediency.- Application of Law to Facts: The Court concluded that the interest payments qualified for the exception under Section 9 (1) (v) (b), as they were incurred for the purpose of earning income from a source outside India.- Treatment of Competing Arguments: The respondent's argument that the interest payments did not fall within the exception was rejected. The Court emphasized the broader interpretation of 'for the purposes of business' as encompassing commercial expediency.- Conclusions: The Court held that the interest payments were deductible under Section 9 (1) (v) (b), as they were incurred for a business carried on outside India.3. Significant Holdings:- The Court declared paragraph 9 of Circular No. 07/2007 ultra vires, emphasizing that the CBDT could not impose a limitation period for refund claims absent statutory backing.- The Court reiterated the principle of commercial expediency, holding that interest payments made for the benefit of a subsidiary qualify for deduction under Section 9 (1) (v) (b).- The Court quashed the impugned order dated 27 March 2018, declaring the petitioner eligible for a refund of excess taxes deposited under Section 195 for FY 2010-11 to 2012-13.- The Court directed the respondents to release the consequential refund to the petitioner along with statutory interest.