Domestic and Direct Tax Updates

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Direct Tax – Domestic Tax Updates

Domestic Tax Rulings

Delhi HC: Parked project interest is non-taxable

In the instant case, the Delhi High Court has held that interest earned on funds temporarily parked in bank deposits during the project implementation stage in a business is a capital receipt and not taxable as “Income from Other Sources”, where such funds are inextricably linked to the setting up of the business.

The taxpayer had raised funds from its directors for acquiring technical know-how, purchasing land, and making advance payments for plant and machinery. Pending their deployment towards these committed project obligations, the unutilized funds were temporarily deposited with banks, resulting in interest income. The Court observed that the deposits did not represent surplus funds invested with an independent profit-making motive but were merely a prudent financial arrangement until the funds were required for project execution. The Court relied on Supreme Court’s earlier rulings, which recognize that receipts intrinsically connected with the establishment of a project assume the character of capital receipts. Accordingly, the Court held that the interest income should be capitalized and adjusted against pre-operative/project expenditure rather than assessed separately as taxable income.

Delhi HC deletes ad hoc car/phone disallowance

In this case, the Delhi High Court held that ad hoc disallowance of 1/6th of telephone and car expenses incurred by a company on the ground of alleged personal use is not sustainable under section 37(1) of the Income-tax Act 1961 (‘ITA’). The Court observed that although a company is regarded as a separate legal person, it cannot incur “personal” expenses in the same manner as an individual. Expenditure incurred by a company for providing facilities such as cars and telephones to its employees or directors forms part of the overall business package or cost-to-company (CTC) and retains its business character unless the Assessing Officer establishes that the expenditure has no nexus with the company’s business. The Court further held that the absence of logbooks or complete telephone records, by itself, does not justify an arbitrary disallowance.

Accordingly, the High Court set aside the Tribunal’s order and deleted the disallowance, holding that expenses can be disallowed under section 37(1) of ITA only where they are proved to be personal in nature and unconnected with the business of the company.

Bombay HC: Short TDS doesn’t warrant disallowance

In the instant case, the taxpayer who was engaged in the business of telecasting programmes, deducted TDS under Section 194C of the ITA at the rate of 2% on payments made towards channel placement fees, uplinking charges and bandwidth charges. During the assessment proceedings, the Revenue contended that these payments were in the nature of royalty for the use of a “process”and therefore were liable to TDS under Section 194J of the ITA at the rate of 10%. On the ground that tax had not been deducted under the appropriate provision and at the applicable rate, the Assessing Officer disallowed the entire expenditure under Section 40(a)(ia) of the ITA. The Commissioner (Appeals) and the Income Tax Appellate Tribunal (‘ITAT’) deleted the disallowance, holding that the case involved only a short deduction of TDS and not a complete failure to deduct tax.

The Bombay High Court upheld the Tribunal’s order and held that Section 40(a)(ia) applies only in cases where tax has not been deducted or, after deduction, has not been deposited, and not where there is merely a short deduction arising from a bona fide dispute regarding the applicable TDS provision or rate. The Court relied on the consistent judicial view adopted by the Calcutta, Karnataka, Delhi and Uttarakhand High Courts, as well as its own earlier decision while respectfully declining to follow the contrary view of the Kerala High Court. The Court further observed that Section 40(a)(ia) of the ITA, being deterrent and penal in nature, warrants strict interpretation and reiterated that, where divergent judicial views exist, the interpretation favorable to the taxpayer should prevail. Accordingly, the Revenue’s appeal was dismissed while the question regarding the correct characterization of the payments and the applicable TDS provision was kept open for adjudication in an appropriate case.

Bombay HC: Delays can’t deny IT refund interest

In the instant case, the taxpayer’s income tax refund was determined pursuant to processing of the Return of Income (‘ROI’) filed, under Section 143(1) and subsequently reaffirmed in the assessment order under Section 143(3) of the ITA. Despite the refund being determined, the amount was not released for a prolonged period due to repeated failures in processing the refund through the Centralized Processing Centre (‘CPC’) system. The taxpayer continuously pursued the matter by updating bank account details, validating alternate bank accounts, and filing multiple grievances. The refund was ultimately released much later; however, the Revenue denied interest under Section 244A of the ITA for the delayed period, alleging that the delay was attributable to incorrect bank account details furnished by the taxpayer.

The Bombay High Court allowed the writ petition and held that the taxpayer was entitled to interest under Section 244A of the ITA up to the actual date of payment of the refund. While arriving at its conclusion, the Court relied upon the principles laid down in certain earlier Court rulings, and reiterated that interest under Section 244A of the ITA is compensatory in nature and continues until the refund is actually granted, unless the Revenue establishes that the delay in the proceedings resulting in the refund is attributable to the taxpayer. The Court further held that Section 244A(2) of the ITA is an exception to the general rule and cannot be invoked in cases of administrative or systemic delays occurring after the refund has been determined. It also observed that the Assessing Officer lacks jurisdiction to exclude any period under Section 244A(2) of the ITA, as such determination is statutorily vested in the prescribed higher authority. Accordingly, the Court concluded that technical glitches or deficiencies in the Department’s automated systems cannot defeat a taxpayer’s statutory right to interest on delayed refunds.

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