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Director of Income Tax, New Delhi v. M/s. Mitsubishi Corporation

Civil Appeal · 2021 INSC 495Decided 17 Sept 2021
Civil Appeal No. 1262 of 2016
Justice L. Nageswara Rao · Justice Aniruddha Bose

Background

The core question in this batch of connected appeals was whether a non-resident assessee (a Japanese company with Indian operations, and similarly placed companies like Alcatel Lucent) could be made liable to pay interest under Section 234B of the Income-tax Act for short payment of advance tax, where the shortfall arose because the Indian payers had failed to deduct tax at source on payments made to the assessee. The Income Tax Appellate Tribunal and the High Courts had taken divergent views, and the Revenue appealed the rulings favourable to the assessees.

Decision Breakdown

The Supreme Court held that, for the period before the financial year 2012-13, an assessee is entitled to reduce the tax deductible or collectible at source while computing its own advance tax liability under Section 209 of the Act. Since the shortfall arose from the payer's default in deducting tax at source and not the assessee's own default, the assessee could not be treated as having defaulted in paying advance tax, and therefore was not liable to interest under Section 234B for that period. The Court noted the law changed prospectively from 2012-13 with an amendment to Section 209(1)(d). It clarified that the Revenue is not remediless, as it can proceed separately against the defaulting payer. The Revenue's appeals were accordingly dismissed, and a connected batch of similarly-placed appeals was allowed in the assessees' favour.

Lesson Learnt

A taxpayer cannot be penalised with interest for an advance-tax shortfall that was actually caused by someone else's failure (such as a payer not deducting tax at source): the tax authorities must pursue the defaulting party directly instead.

Official source (sci.gov.in)View Judgment (PDF)

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