Thursday 17 July 2014

Bombay HC rules on time limit for withholding tax proceedings

This Tax Alert summarizes a recent ruling of the Bombay High Court (HC) in the case of DIT v. Mahindra and Mahindra Ltd. (Taxpayer) on the issue of time limit for the Tax Authority to initiate action against the payer for default in withholding tax.
In absence of specific time limit prescribed under the Indian Tax Laws (ITL), jurisprudence is divided on time limit for initiating withholding tax proceedings. While some High Courts have held that proceedings should be initiated within a reasonable time (viz. four years from the end of relevant tax year), some other High Courts have held that there is no time limit for initiating such proceedings. It needs to be also noted that law has been amended from 1 April 2010 subsequently to provide for specific time limit in respect of payments to residents but no time limit has yet been introduced in respect of payments to nonresidents (NRs).
In the present case, the Bombay HC was concerned with the Tax Authority’s appeal against the ruling of the Special Bench (SB) of Mumbai Tribunal which had held that the withholding tax proceedings should be initiated within a reasonable time viz. within the time limit provided under the ITL for assessment/reassessment of the payee. The Tax Authority’s contention was that there is no such time limit. The HC upheld SB’s ruling on the limited issue that in absence of specific time limit the withholding tax proceedings should be initiated within a reasonable time limit. However, it kept the issue of length of period which may be regarded as “reasonable” open for adjudication in the Taxpayer’s appeal against the same SB ruling.
Amidst the divergent Supreme Court rulings in the context of imputation of reasonable time limit where specific time limit is not provided in statute, if one has to delineate a principle, it may be that a reasonable time limit may be generally imputed barring exceptional cases like where the statute deals with social/labour welfare or where a person wrongfully retains statutory dues payable to the Government.
A case where taxpayer is obliged to withhold tax but has not done so may arguably not fall within the exception unlike a case where taxpayer has withheld tax but not paid to the Government. The present Bombay HC ruling appears to support this line of thinking by holding that proceedings against default of not withholding tax should be initiated within a reasonable time.

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