2023 (11) TMI 705 - HC - Income Tax

Certificate of deduction of lower tax u/s 197(1) - mandation of recording satisfaction determining the existing and estimated liability of an Assessee - Claim rejected on the ground that the petitioner has not filed Returns for the four years preceding the subject financial year i.e., 2023-24 - Whether the respondent s rejection of the petitioner s application by the impugned order is based on satisfaction that is contemplated under Section 197(1) of the IT Act ? - HELD THAT - The provisions of Section 197(1) of the IT Act stipulate that where tax at the rates in force under the different provisions mentioned therein on the income of any person , or a sum payable to any person , is required to be deducted at the time of credit or at the time of payment as the case may be, the Assessing Officer, on an application made by an Assessee, shall give a Certificate, as may be appropriate, if satisfied that the total income of a recipient justifies no deduction of income tax or the deduction of income tax at any lower rate. Assessing Officer, in view of the provisions of Rule 28AA (1) of the IT Rules, must record satisfaction as contemplated under Section 197(1) of the IT Act determining the existing and estimated liability of an Assessee taking into consideration a tax payable or estimated income of the previous year relevant to the assessment year, b tax payable on the assessed or returned or estimated income as the case may be for the four previous years, c the existing liability under the IT Act or Wealth Tax Act 1957, and advanced tax payment, and d tax deducted at source and tax collected at source for the assessment year relevant to the previous year till the date of making an application. AO u/s 197(1) of the IT Act will have to be satisfied objectively that the total income of a recipient justifies either deduction at a rate lower than the rates mentioned in the provisions of Section 197(1) of the IT Act or that no deduction is necessary. This objective satisfaction must be based on the determination of the existing and the estimated liability, and the estimated liability and income will have to be determined considering the details mentioned in Rule 28AA (2) of the IT Rules. AO must also be satisfied that issuance of Certificate while convenient to the Assessee will not adversely affect the Revenue s interest. If the Assessing Officer, only upon examination of the circumstances mentioned in Rules 28AA of the IT Rules, is satisfied based on the estimated income and liability justifies a Certificate for either deduction of income tax at a rate lower than the prescribed rate or no deduction of the income tax, the Certificate must be issued. This would be the true import of the expression that the Assessing Officer shall on an application give such Certificate as may be appropriate and therefore, the liability of another entity, even if it is the sister concern, would be extraneous. This Court is of the considered view that, without expressing any opinion on whether the petitioner s explanation must prevail resulting in a Certificate under Section 197 of the IT Act, the petition must be disposed of quashing the impugned order dated 28.02.2023 restoring the application for reconsideration within a time frame. The petition is allowed in part and the respondent s impugned order is quashed restoring the petitioner s application to the respondent for reconsideration.

Summary

Issues Involved:
1. Whether the petitioner could have been denied a Certificate under Section 197(1) of the IT Act for not filing returns for the preceding four years.
2. Whether the respondent's rejection of the petitioner's application was based on the "satisfaction" required under Section 197(1) of the IT Act.

Summary:

Issue 1: Denial of Certificate for Not Filing Returns for Four Years
The petitioner, a company incorporated in March 2021, challenged the respondent's order dated 28.02.2023, which rejected its application for a Certificate under Section 197 of the Income Tax Act, 1961, for nil deduction of tax for the financial year 2023-24. The petitioner argued that the provisions of Section 197 do not envisage classification among Assessees based on the number of years for which returns have been filed. The court held that the provisions of Rule 28AA of the IT Rules cannot be read as stipulating that an assessee must have filed returns for the previous four years to be eligible to make an application under Section 197(1). The court emphasized that the details mentioned in Rule 28AA (2) should be considered in conjunction with other circumstances to determine the existing and estimated income, but failure to file returns for four years does not create an ineligibility to apply.

Issue 2: Satisfaction Required Under Section 197(1)
The court examined whether the respondent's rejection of the petitioner's application was based on the "satisfaction" contemplated under Section 197(1) of the IT Act. The court noted that the Assessing Officer must objectively determine the existing and estimated liability and income, considering the details mentioned in Rule 28AA (2) of the IT Rules. The court found that the reasons assigned by the respondent, including ambiguity in transactions with a related entity and potential liabilities under Section 201 of the IT Act, were extraneous to the merits of the petitioner's application. The court highlighted that the liability of another entity, even if related, should not affect the issuance of the Certificate to the petitioner.

Conclusion:
The court quashed the respondent's impugned order dated 28.02.2023 and restored the petitioner's application for reconsideration. The respondent was directed to reconsider the application, providing the petitioner an opportunity to justify its business, and to complete the consideration and communicate the decision by 13.12.2023.