Income Tax | One-Size-Fits-All Approach Ill-Fits Tax Limitation Cases Involving Non-Residents: Bombay High Court Strikes Down Delayed Orders Under Section 201

“Reasonableness is the antithesis of rigidity. Seven years cannot be the reasonable period for all assessment years” – High Court of Bombay, in a landmark judgment delivered by Justices K.R. Shriram and Neela Gokhale, ruled in favour of Vedanta Limited in Income Tax Appeal proceedings involving disallowances under Section 14A and proceedings under Sections 201(1) and 201(1A) of the Income Tax Act, 1961. The Court struck down tax demands raised against the company for several assessment years, holding that the orders were time-barred and vitiated by procedural irregularities.

The ruling has far-reaching implications on the limitation period applicable to TDS defaults involving payments to non-resident entities and reinforces mandatory safeguards under Section 14A read with Rule 8D, concerning disallowance of exempt income expenditure.

“Invoking Rule 8D Without Satisfaction Is Procedurally Invalid” – Disallowance Under Section 14A Deleted

In the first leg of the judgment, the Bombay High Court set aside a disallowance of ₹5.07 crore made under Section 14A, holding that the Assessing Officer (AO) failed to record any dissatisfaction with Vedanta’s claim that no expenditure was incurred to earn exempt income.

The Court referred to paragraphs 9 to 12 of its judgment and observed:

"The Assessing Officer must record an objective dissatisfaction with the assessee's claim before invoking Rule 8D. A mechanical application of Rule 8D is impermissible and violates the mandate of Section 14A(2)."

Reliance was placed on the Supreme Court’s decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC), where it was categorically held that Rule 8D is not automatic but contingent upon recorded dissatisfaction. The Court further reiterated the ratio in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC) and PCIT v. Reliance Capital Asset Management Ltd. (2021) 432 ITR 1 (Bom).

Accordingly, the Court deleted the disallowance under Section 14A, allowing Vedanta’s appeal in this regard.

“What Is Reasonable Cannot Be Reduced To Rigidity” – Tax Demand for TDS Default on Non-Resident Payments Quashed

In the second leg of the case, the Court dealt with writ appeals filed by Vedanta against final orders passed under Section 201(1) deeming it an assessee in default for non-deduction of TDS on payments made to Vedanta Resources PLC (UK) for management services between FY 2009–10 to 2014–15.

Vedanta had challenged these orders solely on the ground of limitation, arguing that the maximum permissible period was four years, not seven.

While a learned Single Judge of the Madras High Court upheld the seven-year period (applicable to residents), the Division Bench disagreed, stating in paragraph 13:

“Reasonableness is the antithesis of rigidity. When a particular period, whether four years or seven years, is taken as the ceiling for passing an order under Section 201, it ceases to be a ‘reasonable’ period and becomes a rigid prescription.”

The Court found that although seven years was the limitation under the law for residents at the relevant time, that could not automatically apply to non-residents. Instead, the concept of “reasonable time” must be case-specific and fact-dependent.

"One-Size-Fits-All Ill-Fits This Case": High Court Invokes Six-Year Cut-Off Based on Latest Legal Position

Critically, the Court cited the latest statutory amendment (w.e.f. 01.04.2025) which places residents and non-residents on the same footing, prescribing a six-year limitation period under Section 201. The Bench reasoned that this harmonized limit could be used as the benchmark for determining whether the impugned orders were passed within a reasonable time:

“Taking six years which is now the statutorily mandated period can be taken as the reckoning yardstick.”

Applying this test, the Court invalidated all final orders passed after six years from the end of the relevant financial years:

• AY 2010–11: Final order dated 31.03.2017 was within six years → Order quashed
• AY 2011–12: Order passed on last date of limitation → Order upheld
• AYs 2012–13 to 2015–16: Final orders passed beyond six years → Orders quashed

The Court condemned the Department’s delay, noting in para 15: “There is no earthly reason as to why simultaneous action was not initiated for all years in 2017 itself. ‘One-size-fits-all’ approach ill-fits the facts on hand.”

Court Recognizes Evolution of Law on Limitation and Rejects Rigid Application of Retrospective Extensions

The Court carefully traced the legislative history of Section 201 and noted that the period of limitation has evolved:

• Pre-2010: No specific limitation
• 01.04.2010: Introduced 4 years
• 01.04.2012 (retrospective): Extended to 6 years
• 01.10.2014: Further extended to 7 years
• 01.04.2025: Uniform 6 years for both residents and non-residents

While agreeing that limitation laws are procedural and hence retrospective, the Court insisted that procedural changes cannot be used to justify departmental lethargy, especially when facts and parties are identical across years.

Department’s Delay Fatal – Majority of Orders Quashed

In conclusion, the High Court ruled that five out of six impugned orders were passed beyond a reasonable period, even if measured by the extended seven-year yardstick. The “fluid” nature of reasonableness, especially for non-resident TDS cases, demanded a case-sensitive approach, not a blanket period.

Only the order relating to AY 2011–12 was upheld. The Court allowed Vedanta liberty to file an appeal on the merits for that year.

Date of Decision: 29 August 2025