Application Under Companies Act Against Order Rejecting Waiver Of Interest; Dispute Falls Within Scope Of VSV Act: Delhi High Court

The Bench consisting of Justices Mukta Gupta and Anish Dayal ruled that the VSV Act is not a taxing statute but one which provides a dispute resolution scheme for tax disputes and hence, it would be amenable to a purposive construction. The Court held that it was the intent of the legislature to include all sorts of disputes under the VSV Act, even if they were pending before the Commissioner of Income Tax or the courts.

Before a winding up order was passed against the petitioner/ assessee - Kapri International Pvt. Ltd. by the Delhi High Court, the assessee was assessed for the relevant assessment year. The High Court directed the liquidator to release the amounts in favour of the revenue department with respect to the outstanding tax liability of the assessee under the Income Tax Act, 1961 and the Wealth Tax Act, 1957, while granting liberty to the assessee to approach the authorities to seek waiver of interest. The application of the assessee seeking waiver of interest was rejected by the Commissioner of Income Tax (CIT), against which the assessee filed a company application before the Delhi High Court.

Subsequently, the assessee applied under the Direct Tax Vivad Se Vishwas Act, 2020 (VSV Act), for resolution of the disputed interest liability. The assessee filed the declarations and provided the details of the amount payable under the VSV Act against the disputed interest liability. However, the said declarations were rejected by the Principal Commissioner of Income Tax (PCIT). Against this, the assessee filed a writ petition before the Delhi High Court.

The revenue department submitted before the High Court that the company application filed by the assessee against the order of the CIT, rejecting the assessee's application for waiver of interest, was primarily a petition under the Companies Act and thus, it was not an "appeal" within the meaning of the VSV Act.

The department averred that as per the Central Board of Direct Taxes (CBDT) Circular No.9/2020 issued under the VSV Act, only the disputes relating to Income Tax Act are covered under the VSV Act and that the interest waiver applications are not "appeals" under the VSV Act.

The assessee Kapri International contended that the interest computed by the revenue authorities under Section 220 (2) of the Income Tax Act was contrary to Rule 156 of the Companies (Court) Rules, 1959, and hence the assessee filed an application for waiver of interest, which was rejected by the CIT. The assessee submitted that the company application filed by it before the Delhi High Court, against the order of the CIT, comes within the purview of "disputed interest" as defined in Section 2 (1) (h) of VSV Act.

The Court rejected the contention of the revenue department that the company application filed by the assessee was not an "appeal" and therefore, was not within the scope of the VSV Act.

Ruling that there is no definition of "appeal" in the VSV Act, the Court held that the term "dispute" as defined in Rule 2 (b) of the Direct Tax Vivad se Vishwas Rules, 2020 includes an appeal, writ, special leave petition, arbitration, conciliation and mediation. The Court ruled that any proceeding challenging a decision by the revenue department in respect of tax, interest, penalty or fee would come within the purview of a "dispute", and thus the party would be eligible to approach the revenue department for resolution under the VSV Act.

"The definition of dispute in Rules does not deviate or is ultra vires the scope and intent of the VSV Act itself since the preamble to the VSV Act itself provides for resolution of disputed tax and most importantly for "matters connected therewith and incidental thereto". It is therefore obvious that the intent of the VSV Act was to provide resolution of all nature of disputes relating to tax, penalty, interest, fee as determined under provisions of the VSV Act. The restrictive scope that the CIT is providing for definition of "dispute" or even of an "appeal" is not in synchronicity with the letter and spirit of the VSV Act that propounds an ameliorative scheme for resolution.", the Court said.

The Bench rejected the contention of the revenue department that Section 2 (1) (h) of the VSV Act, which defines "disputed interest", relates to disputed interest on a disputed tax liability only and that the assessee was not eligible since there was only a disputed interest and no disputed tax liability involved.

The Court ruled that Section 2 (1) (o) of the VSV Act, which defines "tax arrears", includes distinct categories of arrears which are not cumulative but are in the alternative, i.e., disputed tax, disputed interest, disputed fee and disputed penalty.

"Provisions have to read purposively and in harmony with the scheme of the VSV Act and its intent. It is a well settled principle of law that a statute should be given a purposive construction in order to give effect to its legislative purpose. This, not being a taxing statute but one which propounds a dispute resolution scheme for tax disputes would be amenable to a purposive construction.", the Court said.

The Bench held that it was the intent of the legislature to include all sorts of disputes under the VSV Act, even if they were pending before the Commissioner of Income Tax or the courts. The Court added that it is the intent of the legislature to have an expansive inclusion rather than a restrictive exclusion.

Further, the Court noted that there is a huge statutory benefit given to companies in liquidation, in view of the fact that the interest demanded under Section 220 (2) of the Income Tax Act is 1% for every month of the period of delay, as opposed to Rule 156 of the Companies (Court) Rules which provides for an interest ceiling at the rate of 4% for companies in liquidation.

Holding that the attempt of the revenue department to exclude the case of the assessee from a possible settlement under the VSV Act was extremely hyper-technical, the Court allowed the writ petition and set aside the order passed by the PCIT rejecting the declarations filed by the assessee under the VSV Act. The Court directed the PCIT to re-examine and reassess the declaration filed by the assessee and decide the matter on merits.

Case Title: Kapri International Pvt. Ltd. versus Commissioner of Income Tax

Citation: 2022 LiveLaw (Del) 796

Dated: 05.08.2022 (Delhi High Court)

Counsel for the Petitioner: Mr. Rajesh Jain and Mr. V. Tiwari, Advocates

Counsel for the Respondent: Mr. Kunal Sharma, Sr. Standing Counsel with Ms. Zehra Khan, Mr. S. Bhattacharyya, Advocates

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