On 17 September 2021, in the DIT vs Mitsubishi Corporation case, the Supreme Court ruled that a taxpayer should not liable for interest on late tax advances prior to fiscal 2012/2013 if the income payer failed to deduct the tax at source.

The case involved Mitsubishi Corporation, a non-resident company incorporated in Japan, is engaged in carrying out trading activities in carbon crude oil, LPG, ferrous products, industrial machinery, mineral, non-ferrous metal and products, textiles, automobiles etc. through its liaison offices in India.

In 2006, an assessment officer issued an assessment notice, in which the income attributable to Mitsubishi’s Indian operations and the advance income tax due for the assessment years 1998-99 to 2004-05 as well as interest on arrears were determined. Interest on arrears at 1% per month on advance tax is generally provided under Section 234B of the Income Tax Act 1961. The interest was challenged by Mitsubishi on the grounds that late payment interest should not be charged as tax should be deducted by the payer at source even though the tax was not deducted.

However, the appeal was dismissed by the Commissioner of Income Tax (Appeals), which held that because the tax had not actually been deducted at source, Mitsubishi was liable for the advance tax with interest. This was then appealed to the Income Tax Appellate Tribunal (ITAT), which referred to earlier decisions in which it was found that where income is subject to tax deductible at source, the taxpayer cannot be held liable to pay interest under Section 234B for the default of a company to deduct tax at source while making payments to the taxpayer. The case then went to the High Court, which retained the ITAT position.

In its ruling, the Supreme Court also upheld the position of the ITAT and the High Court, stating that Mitsubishi could not be required to pay interest under Section 234B for the years in question because Mitsubishi was allowed to pay prior to fiscal 2012/2013 its pre-tax liability in order to reduce the tax-deductible amount or amount that can be collected at source and cannot be in arrears with the payment of his advance tax liability.