2015 (5) TMI 519 - HC - Income Tax

Exemption certificate for non deduction of TDS under Section 197 rejected - as per assessee interest in question earned on the funds provided by the State Government is not at all the income of the petitioner and not only it has never been taxed but has continuously been given the benefit of exemption certificate under Section 197 - Held that - This Court finds sufficient force in the submission of learned counsel for the petitioner. The impugned order passed in the present matter does not show any application of mind as no reasons have been assigned for rejecting the proposal for issuance of exemption certificate under Section 197 of the Act whereas on a proper consideration of the direction of this Court in a similar writ application, the CIT, (TDS) had passed earlier the order dated 24.4.2010. The said order was a reasoned order after noting the prima facie satisfaction of this Court under its order dated 20.7.2009 and cannot be said to be unlawful by the Income Tax Authorities and further relying upon the decisions of the Delhi High Court and Karnataka High Court, reported in COMMISSIONER OF INCOME-TAX Versus DELHI STATE INDUSTRIAL DEVELOPMENT 2007 (4) TMI 150 - HIGH COURT, DELHI and Commissioner of Income-Tax And Another Versus Karnataka Urban Infrastructure Development And Finance Corporation 2006 (2) TMI 114 - KARNATAKA High Court . Thus, if at all, the respondent-authorities were of the view that they could take a different stand in a fresh assessment order, there being admittedly no question of res judicata in assessment of income for different assessment years, they were still required to do so acting properly in the matter by giving good reasons for disagreeing with the earlier order dated 20.4.2010 which has not been done in the present matter. As a matter of fact, there has been no change in the nature of interest earned on the funds provided by the State Government which have gone in the Bank and it is not open to the Department to come to a different conclusion in view of the overriding effect of the provisions of Article 289 of the Constitution of India. For the aforesaid reasons, the writ application is allowed. The impugned letter communicating the decision of the CIT (TDS) is quashed. The respondents shall issue exemption certificate to the petitioner, accordingly. - Decided in favour of assessee.

Summary

Issues involved:
Quashing of communication rejecting exemption certificate under Section 197 of the Income Tax Act for the financial year 2014-15.

Analysis:
The petitioner, a statutory authority under the Bihar Industrial Area Development Authority Act, receives funds from the Central and State Governments for specific projects. The petitioner's stand is that these funds and the interest accrued on unutilized portions do not constitute its income but belong to the State Government. The petitioner has historically obtained exemption under Section 197 of the Income Tax Act for the interest income. However, in 2015, the Assistant Commissioner of Income Tax rejected the exemption, prompting the petitioner to file a writ application seeking relief.

In a previous similar case in 2009, the High Court had held that interest income over state funds cannot be taxed. The Commissioner had also previously ruled in favor of the petitioner, emphasizing that the interest earned on funds is part of the state's income, not the petitioner's. Despite this, the Income Tax Department rejected the petitioner's claim in 2015, citing various grounds such as changes in PAN number and procedural issues.

The High Court found that the rejection lacked proper reasoning and failed to consider the earlier favorable orders. It emphasized that the interest income on state funds cannot be treated as the petitioner's income and highlighted the constitutional provision of Article 289 protecting state income from taxation. The Court allowed the writ application, quashing the communication and directing the issuance of the exemption certificate. It permitted the authorities to reassess in future years but only after providing a fair opportunity to the petitioner and issuing a reasoned order.

In conclusion, the judgment favored the petitioner, emphasizing the nature of the funds and interest income as state property and highlighting the importance of providing proper reasoning for decisions under the Income Tax Act.