In a recent ruling, the Delhi High Court held that the Central Board of Direct Taxes (CBDT) cannot impose arbitrary time limits to deny taxpayers their right to claim refunds under the Income Tax Act and ruled CBDT Circular No. 07/2007 which set a two-year deadline for refund applications is ultra vires.
Sun Pharmaceutical Industries Ltd. filed a writ petition challenging the Income Tax Department’s rejection of its refund applications for excess tax deducted at source (TDS) under Section 195 of the Income Tax Act, 1961.
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The petitioner’s counsel argued that the Income Tax Act does not prescribe a limitation period for such claims, and the rejection based on the CBDT circular was unlawful. The Income Tax Department’s counsel argued that the petitioner’s refund application was time-barred under the circular.
They also argued that the interest paid on Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs) was not exempt under Section 9(1)(v)(b) of the Income Tax Act, as the borrowed funds were not used for business purposes outside India.
The petitioner’s counsel countered that the funds were exclusively used for the global expansion of Ranbaxy Netherlands BV (RNBV) and Terapia S.A., its overseas subsidiaries, making the interest payments eligible for exemption.
The petitioner’s counsel also challenged the validity of the CBDT circular stating that an administrative circular cannot override the statutory rights conferred by the Act.
A division bench of Justice Yashwant Varma and Justice Ravinder Dudeja observed that the CBDT cannot create a limitation period that is not prescribed in the Income Tax Act. The court also held that the interest payments on FCCBs and ECBs fell within the statutory exemption since the borrowed funds were used for business outside India.
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The court quashed the rejection order and directed the Income Tax Department to process the refund. The court clarified that CBDT’s attempt to restrict taxpayers’ refund rights through an arbitrary limitation period was unlawful and that taxpayers cannot be denied legitimate refunds based on procedural barriers that lack legal authority. The writ petition was allowed.
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