2018 (10) TMI 611 - HC - Income Tax

Certificate of exemption from TDS u/s 197 - AO allowed TDS @1% at concessional rate as against 10% - Assessee incurs huge loss and sought full exemption - Department has allowed for lower deduction of tax for last two years - Held that - Under subsection (1) of Section 197 it is an Assessing Officer who can entertain and decide an application of an assessee for either total exemption or permission for reduced tax deduction at source. The statute has used the language that if the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of incometax at any low rates or no deduction of incometax, as the case may be, the Assessing Officer shall on application made by the assessee in this behalf give to him such certificate as may be appropriate. Necessarily, therefore, the satisfaction of the Assessing Officer at that stage about the total income of the recipient justifying reduced collection of tax at source would be prima facie in nature. Two things emerge from the said provisions; firstly, that such consideration cannot be devoid of exercise of sound discretionary powers and based on mere ipse dixit of the Assessing Officer. Secondly, that the power vests with the Assessing Officer. No provision or rule is brought to our notice which would enable the higher authority to govern such discretion of the Assessing Officer statutorily vested in him under subsection (1) of Section 197 of the Act. We do not accept the contention of the petitioner that the notes put up by the Assessing Officer suggesting collection of tax at reduced rate of 1% was expression of his final decision. The Assessing Officer, therefore, not having expressed his final decision his opinion would not be binding to the Department. Petition dismissed - Decided against the assessee.

Issues Involved:
1. Challenge to the order rejecting the application for exemption from deduction of tax at source under Section 197 of the Income Tax Act, 1961.
2. Authority and discretion of the Assessing Officer versus higher authorities in issuing such certificates.
3. Prima facie assessment of tax liability and genuineness of projected losses.
4. Legal precedents on the exercise of discretion under Section 197.

Detailed Analysis:

1. Challenge to the Order Rejecting the Application for Exemption:
The petitioner, a company engaged in trading and financing activities, challenged the order dated 31.3.2018 by the Income Tax Officer rejecting its application for a certificate of exemption from deduction of tax at source under Section 197 of the Income Tax Act, 1961. The petitioner had applied on 7.3.2018, projecting a negative income of ?47.96 crores for the assessment year 2018-19. The rejection was communicated without detailed reasons, merely stating that the application was filed after approval of higher authorities.

2. Authority and Discretion of the Assessing Officer:
The court noted that under Section 197(1) of the Act, it is the Assessing Officer who has the statutory power to entertain and decide applications for reduced or no deduction of tax at source. The statute mandates that if the Assessing Officer is satisfied that the total income of the recipient justifies such a deduction, he shall issue the appropriate certificate. The court emphasized that this discretion cannot be governed by higher authorities, as no provision or rule allows higher authorities to influence the Assessing Officer's decision.

3. Prima Facie Assessment of Tax Liability and Genuineness of Projected Losses:
The Assessing Officer initially suggested a reduced tax deduction rate of 1% after considering the petitioner's revised projections, which indicated a loss of ?26.57 crores. However, the Chief Commissioner of Income Tax (TDS) expressed doubts about the genuineness of the projected losses, noting that the petitioner’s business involved obtaining loans from outside parties and advancing loans to group companies at marginally higher rates. The Commissioner recommended rejecting the application, questioning the rationality of the huge losses projected by the petitioner.

4. Legal Precedents on the Exercise of Discretion under Section 197:
The petitioner relied on precedents such as the Patna High Court's decision in Bihar Industrial Area Development Authority vs. Assistant Commissioner of Income Tax (TDS) and the Bombay High Court's decision in Larsen & Toubro Ltd. vs. Assistant Commissioner of Income Tax (TDS), which emphasized that applications under Section 197 cannot be rejected arbitrarily. The respondent, however, cited cases such as Sarika Estate and Investments Pvt. Ltd. vs. Assistant Commissioner of Income Tax and Essar Oil Ltd. vs. Income Tax Officer, which highlighted that the final tax liability can only be determined during assessment proceedings and not at the stage of deciding applications under Section 197.

Conclusion:
The court concluded that the Assessing Officer's discretion under Section 197(1) is prima facie in nature and must be exercised independently. However, given the procedural and practical complications of revisiting the issue at a late stage, the court dismissed the petition, suggesting that the petitioner can claim a refund if excess tax is ultimately found to have been deducted. The court emphasized that the Assessing Officer's initial recommendation was not final and binding, and higher authorities' input was valid in questioning the genuineness of the projected losses.

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