Facts of the Case

The assessee, M/s Tej Quebcor Printing Ltd., was engaged in the business of printing and binding telephone directories. For business purposes, it imported machinery from Quebecor Printing Ltd., Canada under deferred credit financing.

The foreign supplier’s credit amounted to Canadian Dollars 25,74,536.79 for financing capital goods. The assessee obtained approval from the Department of Economic Affairs, Ministry of Finance, approving the loan amount, interest rate, and repayment terms.

Subsequently, Reserve Bank of India also granted approval for foreign exchange remittance under applicable foreign exchange regulations.

The assessee claimed deduction of interest in its return under Section 10(15)(iv)(c). However, the Assessing Officer disallowed the same under Section 40(a)(i) on the ground that tax was deductible under Section 195 and had not been deducted.

The CIT(A) allowed relief to the assessee, but the ITAT reversed the relief, resulting in the present appeal before the Delhi High Court.

 Issues Involved

  1. Whether provisions of Section 40(a)(i) were applicable to disallow interest payment made on foreign supplier’s credit?
  2. Whether approval granted by the Department of Economic Affairs, Ministry of Finance, constituted valid approval of the Central Government under Section 10(15)(iv)(c)?
  3. Whether subsequent approval from the Department of Revenue was mandatory for claiming exemption under Section 10(15)(iv)(c)?

 Petitioner’s Arguments (Assessee’s Contentions)

  • Section 10(15)(iv)(c) only requires approval of the Central Government regarding the rate of interest.
  • The Department of Economic Affairs is part of the Central Government and its approval satisfies statutory requirements.
  • RBI approval was obtained for foreign exchange remittance, completing procedural compliance.
  • The statute does not specifically prescribe that approval must be obtained only from the Department of Revenue.
  • Therefore, the deduction could not be denied and Section 40(a)(i) was wrongly invoked.

 Respondent’s Arguments (Revenue’s Contentions)

  • The term “Central Government” under Section 10(15)(iv)(c) must be interpreted to mean the competent department dealing with tax matters, namely the Department of Revenue.
  • The assessee approached the Department of Revenue only after filing the return and after substantial delay.
  • Since tax under Section 195 was deductible and not deducted, disallowance under Section 40(a)(i) was justified.
  • Approval obtained from another department could not substitute the approval required under tax law.

 Court Findings / Court Order

The Delhi High Court held in favour of the assessee and against the Revenue.

The Court observed that Section 10(15)(iv)(c) requires approval of the Central Government only in relation to the rate of interest and repayment terms, and not for the entire transaction.

The Court held that the Department of Economic Affairs, being a department of the Central Government, was fully competent to grant such approval.

It was further held that in absence of any statutory notification specifying that only the Department of Revenue could grant such approval, the approval granted by the Department of Economic Affairs could not be disregarded.

The Court found the Revenue’s objections unsustainable and held that merely because the assessee availed a lesser loan amount than sanctioned did not invalidate the approval.

Accordingly:

  • ITAT’s order was set aside
  • Assessee was held entitled to deduction of interest
  • Questions of law were answered in favour of the assessee
  • Appeal was allowed

 Important Clarification by the Court

The Court clarified that where a statutory provision merely refers to approval of the “Central Government” without specifying a designated authority or department, approval by any competent department of the Central Government fulfilling the statutory purpose is legally valid.

This judgment establishes that procedural interpretation should not defeat substantive tax benefits where statutory compliance exists in substance.

 Sections Involved

  • Section 10(15)(iv)(c), Income-tax Act, 1961
  • Section 40(a)(i), Income-tax Act, 1961
  • Section 195, Income-tax Act, 1961

Link to download the order -  https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:732-DB/NAW07022017ITA3852004.pdf

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