CBDT Cannot Impose Limitations To Extinguish Rights Granted Under Income Tax Act: Delhi High Court

Recently, the Delhi High Court held that Central Board of Direct Taxes (CBDT) cannot impose limitations to extinguish rights granted under Income Tax Act, 1961. The Court held that the wide powers granted to the CBDT are not for extinguishing a right that is conferred by the Act. Accordingly, the Court Circular No. 07/2007 dated 23 October 2007 issued by the CBDT to the be ultra vires the Income Tax Act.

Circular No. 07/2007 dated 23 October 2007 issued by the Central Board of Direct Taxes introduced a limitation of 2 years for the applications seeking a refund of excess deposit of tax.

Section 119 of the Income Tax Act empowers the Board to issue orders, instructions and directions to other income-tax authorities as it may deem fit for the proper administration of the Act. Sub-section (2) of Section 119 provides certain situations in which the Board can pass orders.

The bench of Justice Yashwant Varma and Justice Ravinder Dudeja held

“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.”

Factual Background

Ranbaxy Laboratories had made payments to various bondholders for the FY 2010-11 to 2012-13 as per loan agreements without making tax deductions. However, out of abundant caution ,the company had deposited the TDS on the premium and interest paid for discharging supposed obligations under Section 195 of the Income Tax Act, 1961.

Section 195 of the Income Tax Act, of 1961 provides deduction of income tax at the source where any person is paying interest, other than salary, to a non-resident or a foreign company. Subs-Section (2) of Section 195 provides that where the person making such payment is of the opinion that tax is not leviable on the entire sum being transferred, then he shall make an application, as prescribed, to determine the sum on which tax is leviable and tax shall be chargeable on the same.

In 2014, when Ranbaxy filed its revised TDS returns for FY 2010-11 to 2012-13, it made an application to the Assessing Officer seeking a refund of the excess tax deposited in the form of premium and interest on the bond. In 2015, Ranbaxy merged with Sun Pharmaceutical Industries Ltd, the petitioner. After various reminders by the petitioner, the applications for refund were rejected in 2018 being time-barred by Circular No. 07/2007 dated 23 October 2007 issued by CBDT.

In addition to the order rejecting the refund applications, the petitioner also challenged Circular No. 07/2007 dated 23 October 2007 issued by CBDT.

High Court Verdict

The Court observed that the Provisos to Section 200 of the Act 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 after 6 years from the expiry of the FY in which original principal statement may have been delivered. It held that the limitation of 6 years being introduced by the Act of 2024 was not applicable to the case of the petitioner.

Further, a note was taken of Section 237 which provides for refunds of excess tax deposited subject to the satisfaction of the Assessing Officer and Section 239 which provides that form for claiming a refund in respect of income which is assessable for any assessment year other than assessment year prior to 1969, is one day from the last day of the assessment year.

Perusing Section 119 of the Act, the Court held that the expression “without prejudice to the generality of the foregoing power” in sub-section (2) conferred wider powers on the Board and did not limit the same to the actions mentioned under the provision. It observed that Section 119(2) empowered the Board (CBDT) to relax or enlarge periods of limitations prescribed under the Act.

“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.”

Looking at the limitations provided under the Central Goods and Service Tax Act, 2017, Integrated Goods and Service Tax Act, 2017 and the Central Excise Act, the Court held that

“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.”

It held that the omission of Section 239(2) which placed limitations was done deliberately to eliminate rigid timeline in context of refunds under the Income Tax Act. It was observed that though the CBDT preached that the tax erroneously deducted was not to be considered as legitimate collection of tax, imposed restrictions on refunds.

The Court relied on M/s Bharat Barrel and Drum MFG. Co. Ltd. And Another v. The Employees State Insurance Corporation, where the Supreme Court while dealing with the Employees' State Insurance Act, 1948 and the Rules thereunder, elucidated on the interplay between rights and limitation. It differentiated between effects on substantive and procedural rights of a person/ entity due to operation of limitation in a specific field. It was held that limitation which resulted in extinguishing a right was substantive in nature.

The bench headed by Justice Varma held that the Board did not have the power under Section 119 to take away the rights or remedies available under the Act by way of a Circular. The Court held that the provisions under the Income Tax Act relating to refund “desist” from adding limitations to the exercise of such rights.

“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.”

The Court noted the decision of its coordinate bench in Vikram Singh v. Union of India and Others wherein it was held that the CBDT cannot issue instructions beyond the corners of the Income Tax Act.

Accordingly, the Court declared Circular No. 07/2007 dated 23 October 2007 issued by Central Board of Direct Taxes ultra vires the Income Tax Act and declared the petitioner eligible for refund.

Case Title: Sun Pharmaceutical Industries Ltd. v. Income Tax Officer and Anr.

Citation: 2025 LiveLaw (Del) 233

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