2018 (2) TMI 192 - HC - Income Tax

Rejection of an application made u/s 197 - empowerment to the AO to cancel the certificate issued under Section 197(1) with regard to lower and/or nil withholding tax - Held that - This Court had occasion in Mckinsey and Company Inc. Vs. U.O.I. 2010 (4) TMI 235 - BOMBAY HIGH COURT to consider the exercise of powers under Section 197(2) of the Act by the Assessing Officer i.e. to cancel the certificate granted earlier. This Court had observed that AO can exercise power under Section 197(2) for canceling the certificate which has been earlier issued/ granted. However, such a cancellation/ departure from the earlier view has to be made on valid and cogent reasons, i.e. when there is material on record to justify the departure. The impugned order does not indicate any such material, nor Revenue is able to show us any such change in circumstances which would warrant canceling certificate dated 4 May 2017. The basis/ ground (a) of the impugned order is not sustainable in the facts and renders the order bad. Outstanding tax demand payable to the revenue by the petitioner - Held that - Where the petitioner states that the issue is concluded by a decision dated 27 May 2016 of the Tribunal in its own case, then the assessing officer has to consider the same and give some modicum of reason why it is prima facie not covered by the decision of the Tribunal. This is particularly so in the back ground of the petitioner s Appeal with respect to the demand of ₹ 6.68 Crores being heard by the CIT(A) as far back as in February 2017 and no order being passed thereon till date. Further, in the present case the impugned order does not deal with the petitioner s contention that the demand of ₹ 28.00 Lakhs is on account of mistake in application of TRACE system nor does it deal with the Petitioner s contention that the entire demand of ₹ 6.90Crores can be adjusted against the refundable deposit of ₹ 7.30 Crores, consequent to the order dated 27 May 2016 of the Tribunal in its favour. Therefore, the impugned order dated 23 October 2017 seeking to cancel the certificate dated 5 May 2017 is a non-speaking order as it does not consider the petitioner s submissions.

Issues Involved:
1. Jurisdiction of the Assessing Officer to cancel the certificate issued under Section 197 of the Income Tax Act.
2. Compliance with the principles of natural justice in the cancellation process.
3. Financial condition of the petitioner and its impact on the decision to cancel the certificate.
4. Outstanding tax demand and its relevance to the issuance of the certificate.

Detailed Analysis:

1. Jurisdiction of the Assessing Officer to Cancel the Certificate:
The petitioner argued that the impugned order dated 23 October 2017, canceling the certificate dated 4 May 2017, was without jurisdiction as Rule 28AA(3) of the Rules could not be invoked in the present facts. The court noted that Section 197(2) of the Income Tax Act does empower the Assessing Officer to cancel a certificate issued under Section 197(1) of the Act. However, the court found that there was no change in the financial and other circumstances between the issuance of the certificate and its cancellation, making the cancellation without jurisdiction.

2. Compliance with the Principles of Natural Justice:
The court observed that the impugned order dated 23 October 2017 did not provide the petitioner with the reasons for the cancellation of the certificate, violating the principles of natural justice. The court emphasized that the cancellation of the certificate must be preceded by a reasoned order, and the petitioner must be given an opportunity to respond. The lack of such an order and the failure to communicate the reasons for the cancellation rendered the process flawed and the order invalid.

3. Financial Condition of the Petitioner:
The impugned order cited the deteriorating financial condition of the petitioner as a reason for the cancellation of the certificate. However, the court found that the financial condition of the petitioner was already weak when the certificate was issued, and there was no new material to justify the cancellation. The court highlighted that the petitioner had significant carried forward losses, making it unlikely that any tax liability would arise in the subject assessment year. The court concluded that the cancellation on this ground was not sustainable.

4. Outstanding Tax Demand:
The impugned order also cited an outstanding tax demand of ?6.90 Crores as a reason for the cancellation. The court noted that neither Section 197 of the Act nor Rule 28AA of the Rules prohibits the issuance of a certificate if there is an outstanding demand. The court found that the impugned order did not address the petitioner’s contention that the demand was covered by a favorable Tribunal decision and could be adjusted against refundable deposits. The court deemed the order a non-speaking one, as it did not consider the petitioner’s submissions, rendering the cancellation invalid.

Conclusion:
The court quashed and set aside the impugned order dated 23 October 2017, canceling the certificate dated 4 May 2017. The writ petition was disposed of in these terms, emphasizing the need for adherence to jurisdictional limits, natural justice, and proper consideration of financial conditions and outstanding demands in such decisions.

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