AI Structured Summary
Not yet generated for this judgment
Judgment
SHRI M. BALAGANESH, ACCOUNTANT MEMBER
The appeals in ITA No.6198 & 6199/Del/2026 for AYs 2020-21 and 2021-22, arises out of the order of the Id Pr. Commissioner of Income Tax-1, Delhi [hereinafter referred to as 'Id. PCIT', in short] dated 27.03.2026 against the order of assessment passed u/s 143(3) r.w.s. 144C(3) r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') dated 28.11.2023 and 07.02.2024 by the Assessing Officer, Assessment Unit, Income Tax Department (hereinafter referred to as 'Id. AO'). Identical issues are involved in all these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience.
With the consent of both the parties, the facts pertaining to assessment year 2020-21 are taken up for adjudication and the decision rendered thereon shall apply mutatis mutandis for assessment year 2021-22 also, except with variance in figures.
Though the assessee has raised several grounds of appeal before us, the effective issue to be decided in this appeal is as to whether the ld PCIT was justified in invoking revision jurisdiction u/s 263 of the Act, both on law as well as on facts in the facts and circumstances of the instant case on account of short deduction of TDS on the transaction of interest paid by the assessee.
We have heard the rival submissions and perused the material available on record. The assessee is a private limited company engaged in the business of generation and sale of solar power through a solar power plant owned, managed and operated by it. The assessee is a subsidiary of Azure Power India Private Limited. For AY 2020-21, the assessee filed its return of income on 03.02.2021 declaring Nil income after set-off of brought forward business losses and unabsorbed depreciation aggregating to Rs. 7,52,77,316/-. The case was selected for complete scrutiny under CASS, inter alia, on the issue of of Money" and "Foreign Outward Remittance". During assessment, the learned AO issued a specific notice dated 05.11.2021 calling for details of all foreign remittances along with TDS deducted thereon, in response to which the assessee furnished complete details, vide submission dated 17.11.2021 of the interest paid to Azure Power Energy Ltd, Mauritius (“APEL”) and the quantum of TDS deducted.
Pursuant to a reference under section 92CA of the Act , the learned Transfer Pricing Officer ("TPO"), vide order dated 06.04.2023, proposed an adjustment of Rs. 5,37,96,330/- out of the interest payable to APEL. The learned AO thereafter passed the assessment order dated 28.11.2023 under section 143(3) read with sections 144C(3) and 144B of the Act making an addition of Rs. 5,37,96,330/- on account of the said transfer pricing adjustment. The assessee has filed an appeal against the said assessment order before the Ld. CIT(A), which is pending adjudication.
Subsequently, an order dated 29.03.2024 was passed under section 201(1)/201(1A) of the Act ("201 Order") by the ITO, Ward Int. Tax 1(1)(1), Delhi ("AO(TDS)"), holding that TDS on the interest paid to APEL ought to have been deducted at the rate of 18.88% (as against 7.5% actually deducted by the assessee by placing reliance on Article 11 of the India-Mauritius DTAA read with the Tax Residency Certificate furnished by APEL), and treating the assessee as "deemed to be an assessee in default" under section 201(1) of the Act. The assessee has filed an appeal against the said order before the Ld. CIT(A), which is pending and has not attained finality.
On 20.11.2025, the learned PCIT issued a show cause notice ("SCN") under section 263 of the Act proposing to revise the assessment order dated 28.11.2023, on the singular ground that, in light of the section 201 order, wherein the assessee has been treated as assessee in default on account of purported short deduction of tax, i.e., @7.5 withheld by the assessee, as against 18.88% determined in section 201 Order, the learned AO ought to have disallowed the interest paid to APEL under section 40(a)(i) of the Act, and that the failure to do so rendered the assessment order erroneous and prejudicial to the interests of the Revenue.
The assessee filed detailed replies dated 03.12.2025, 22.12.2025 and 20.01.2026, objecting to the assumption of jurisdiction under section 263 of the Act as well as on merits, and also sought a personal hearing in case of any adverse view. The Ld. PCIT, vide the impugned order dated 27.03.2026 held the assessment order to be erroneous and prejudicial to the interests of the Revenue by invoking Explanation 2(a) and 2(b) to section 263 of the Act, and, inter alia, directed the learned AO to:
disallow the entire interest of Rs. 18,65,45,217/- under section 40(a)(i) of the Act;
deny carry forward of the interest disallowed under section 94B of the Act;
record "clear findings" in the fresh assessment order regarding the components of the disallowance said to be ineligible for carry forward;
take steps to initiate penalty proceedings under section 271C of the Act for alleged short deduction of TDS amounting to Rs. 2,12,28,845/-; and
verify the quantification of brought forward losses for AY 2016-17 to AY 2019-20.
Being aggrieved, the assessee has preferred the present appeal.
From the above, it could be seen that ld PCIT had invoked revision jurisdiction effectively for effecting disallowance of interest u/s 40a(i) of Act on account of short deduction of tax at source on interest paid to Azure Power Energy Ltd, Mauritius. It is not in dispute that assessee had deducted tax at source @7.5 % on interest paid to the said party. The case of the ld PCIT is TDS should have been done by the assessee @18.88 %. Now, the short question that arises for our consideration is as to whether any disallowance under section 40a(i) of the Act per se could be made for short deduction of tax at source. This issue is no longer res integra in view of the decision of Hon’ble Jurisdictional Delhi High Court in the case of PCIT Vs. Future First Info Services Private Limited reported in 447 ITR 299 (Del). The relevant operative portion of the said judgement is reproduced below:-
“5.Further, this Court is of the opinion that in cases of short deduction of TDS, disallowance under Section 40a(ia) of the Act cannot be made and the correct course of action would have been to invoke Section 201 of the Act. On similar facts, the Calcutta High Court in CIT vs SK Tekriwal [2012 SCC Online CAL 12147] dismissed the Revenue's appeal. The relevant para of the said judgement is reproduced herein below:
"We are satisfied that the order under challenge is a just order. The reasoning appearing at paragraph 6 of the judgment and/or order under challenge reads as follows:
"In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the revenue's contention is that the payments are in the nature of machinery hire charges falling under the head 'rent' and the previous provisions of section 194I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% u/s. 194C(2) of the Act as against the actual deduction to be made at 10% u/s. 194I of the Act, thereby lesser deduction of tax. The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of section 40(a)(ia) of the Act. The Ld. CIT, DR also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition u/s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required u/s.40(a)(ia) of the Act. We are of the view that the conditions laid down u/s.40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s. 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax u/s. 194C(2) of the Act and not u/s. 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, 'on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139'. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act." (emphasis supplied)”
Respectively following the same, we hold that there cannot be any disallowance u/s 40a(i) of the Act on the subject mentioned transaction of payment of interest by the assessee to Azure Power Energy Ltd, Mauritius. The order u/s 201 of the Act has already been passed in the hands of the assessee which is agitated by the assessee before the ld CIT(A). Since, there cannot be any disallowance that could be legally made u/s 40a(i) of the Act by the ld AO for short deduction of tax at source, the order of the ld AO could not be construed as erroneous warranting revision u/s 263 of the Act on merits of the case. Hence, the direction of the ld PCIT to disallow interest u/s 40a(i) of the Act is hereby dismissed.
In view of our aforesaid decision, the other directions of ld PCIT to deny carry forward of interest disallowed u/s 94B of the Act; to record clear findings regarding the components of disallowance said to be ineligible for carry forward; to take steps to initiate penalty proceedings u/s 271C of the Act for alleged short deduction of TDS, would become consequential. Hence, the grounds raised by the assessee for AY 2020-21 are hereby allowed.
In the result, both the appeals of the assessee are allowed.