Management Committee Vs ITO (Orissa High Court)
Revenue Cannot Benefit From Its Own Delay in Section 197 Processing: Orissa HC Directs Certificate and Inquiry
Summary: The Orissa High Court criticised the Income Tax Department for delaying a charitable organisation’s application for a no-deduction certificate under Section 197 and subsequently rejecting it because the relevant financial year had expired. The Court held that the Department could not take advantage of its own inaction and lapses.
Directing issuance of the certificate effective for the financial year concerned, the Court also required the Chief Commissioner of Income Tax to inquire into the matter. It directed appropriate action or proceedings against responsible officers if lapses were found.
Charitable Organisation’s Application Remained Pending
The petitioner managed the engagement of labourers and disbursement of wages at Paradeep Port, along with welfare measures. Its formation followed recommendations of a committee chaired by former Supreme Court judge Justice H.R. Khanna.
It was registered as a charitable organisation under Section 12AA with effect from April 1, 1998. Assessments for successive years had treated its income as exempt, and no-deduction certificates had been issued in earlier years.
For financial year 2009-10, the petitioner applied in Form 13 on June 22, 2009. It supplied audited accounts and an assessment order on September 4, 2009. According to the petitioner, the original application was misplaced in the office, requiring resubmission with enclosures on February 25, 2010.
Rejection Followed an Earlier Writ Direction
When the application remained undecided, the petitioner approached the High Court. On July 9, 2010, the Court directed consideration and disposal of the application in accordance with law within four weeks.
The Department subsequently rejected the application on August 13, 2010, stating that the financial year had already expired and a certificate could therefore not be issued.
The petitioner challenged this approach, pointing out that it had applied about nine months before the financial year ended. It complained that the delay had caused TDS deductions by some principals and complications concerning payments made without deduction by others.
Outstanding Demand Defence Found Incorrect
In its counter affidavit, the Department relied on alleged outstanding demands of ₹27,36,625 for assessment year 2004-05 and ₹4,62,13,909 for assessment year 2005-06. It contended that the certificate could not be issued until those arrears were paid.
The Court found that this explanation was factually incorrect. The Tribunal had nullified those demands by its order dated February 11, 2010, before the Assessing Officer’s communication of March 2010 reporting them as outstanding.
The Bench therefore concluded that the certificate could have been issued during financial year 2009-10. It found inordinate delay and serious laches, with no explanation for taking up the application only towards the financial year’s end.
Fresh Reasons Cannot Validate an Order
The rejection order mentioned only the expiry of the financial year. It did not cite outstanding tax demands as a reason for refusal.
Relying on Mohinder Singh Gill v. Chief Election Commissioner, the Court reiterated that the validity of a statutory order must be judged by the reasons recorded in that order. Fresh explanations supplied through affidavits or oral submissions cannot improve its validity.
The outstanding-demand argument was thus both a new reason and an incorrect reason. The Court held that the Department could not sustain the rejection on that basis.
Department’s Conduct Attracted Strong Criticism
The Court also found the rejection inconsistent with its earlier direction. The financial year had already ended when the previous writ petition was heard, yet the Department had assured consideration of the application without raising that objection.
The Bench described the Department’s conduct as not bona fide and stated that mala fides were apparent from the introduction of fresh grounds in the counter affidavit.
It referred to the CBDT’s letter dated July 28, 1967, requiring prompt issuance of relevant Section 197 certificates to charitable trusts. Delayed processing, the Court observed, had forced unnecessary deductions and the prospect of further refund proceedings.
Certificate Directed; Inquiry Into Officers’ Lapses
The Court held that the Department could not benefit from its own inaction by relying on the financial year’s expiry. In the peculiar circumstances, it directed the ITO(TDS) to issue the necessary certificate effective for financial year 2009-10.
It further directed an inquiry by the concerned Chief Commissioner, with appropriate action or proceedings if responsible officers were found at fault. The judgment did not itself impose a personal penalty or record a contempt conviction.
Disposing of the writ petition, the Court expected greater care from the Department to avoid circumstances creating an impression of taxpayer harassment rather than assistance.
Cases Discussed
1. Paradip Port Trust Vs Paradip Dock & Mazdoor Union (Supreme Court); Civil Appeal No. 1422 of 1990; Order Date: 15.03.1990. The Supreme Court’s directions led to the committee underlying the petitioner’s formation.
2. Mohinder Singh Gill & Anr. Vs Chief Election Commissioner, New Delhi & Ors. (Supreme Court); AIR 1978 SC 851. Statutory orders must stand or fall on their stated reasons; subsequent affidavits cannot supply new reasons.
3. Commissioner of Police, Bombay Vs Gordhandas Bhanji (Supreme Court); AIR 1952 SC 16. Discussed within the Supreme Court passage quoted in Mohinder Singh Gill on the objective interpretation of public orders.
4. M/s. Dabur India Ltd. and Another Vs State of Uttar Pradesh and Others (Supreme Court); AIR 1990 SC 1814. Government should not adopt extra-legal coercive measures against citizens.
FULL TEXT OF THE JUDGMENT OF ORISSA HIGH COURT
B.N. Mahapatra, J. The petitioner has filed this writ petition claiming several reliefs. However, Mr. Saswat Acharya, learned counsel appearing for the petitioner confined those to following reliefs:
(i) To quash order dated 13.08.2010 (Annexure-1) passed by opposite party No.1-Income Tax Officer (TDS), Cuttack rejecting the petitioner’s application dated 04.09.2009 (Annexure-5) made in Form 13 for issuance of No-Deduction certificate under Section 197 of the Income Tax Act, 1961 (for short, “Act, 1961”) to different persons for the financial year 2009- 2010.
(ii) To declare the action of the opposite parties, particularly, opposite party no.1 and opposite party No.3 in sitting over the petitioner’s application for issue of No-Deduction Certificate filed on 22.06.2009 followed by two reminders dated 04.09.2009 and 25.02.2010 for 14 months and pushing it to beyond the financial years 2009-10 and ultimately rejecting the same on 13.08.2010 in spite of the direction of this Court in its order dated 09.07.2010 to issue No- Deduction Certificate under Section 197 of the Act, 1961 within a period of four weeks from the date of the order as deliberate and illegal.
2. Petitioner’s case in a nutshell is that it is a non-profit making organization, involved in the general public utility to ensure payment of wages of the labourers as well as their welfare, without involvement in any activity of trade, commerce or business. Petitioner’s Trust was created under the recommendation of Justice H.R. Khanna, Former Judge, Supreme Court of India to smoothen the process of payment to labourers engaged by stevedores. Stevedores under the Paradeep Port for cargo handling were engaging group of labourers, on their own choice, on pick and choose basis, for which few group of labourers, were getting constant engagement and other were remaining completely unemployed. That apart, stevedores having their business interest were negotiating with labour leaders to get their work done at reduced rate. This led to fierce infighting between different groups of labourers and ultimately ended up in loss of life and property. In the year 1984, it took such an ugly turn that the Inspector-in-Charge of Paradeep Police Station and his associates together with four labourers lost their lives. Therefore, to solve this problem the Government intervened and the matter came up before the Hon’ble Supreme Court of India in Paradip Port Trust vs. Paradip Dock & Mazdoor Union, Civil Appeal No.1422 of 1990. The Hon’ble Supreme Court vide order dated 15.03.1990, directed to constitute a High Powered Committee under Chairmanship of Mr. H.R. Khana, Former Judge, Supreme Court of India with two members nominated by the Ministry of Surface Transport, one of whom is a representative of that Ministry and another is an expert in Port Management. The High Powered Committee had to decide the question of listing the unlisted labourers and their welfare measures at Paradeep Port Trust. As per recommendation of the Hon’ble Former Justice Mr. H.R. Khanna, Supreme Court of India, a body was formed in the name of petitioner-Management Committee (CFH) Scheme. The petitioner- Committee comprises all “Stevedores”, “Senior Officials of Paradeep Port Trust” and “Labour Representatives from different labour Unions” to manage uniform engagement of labourers and disbursement of wages ensuring their welfare, health, housing and retirement benefit etc., so as to ensure that no labour of the pool is exploited by any of the Stevedores. Thus, the power of disbursement of wage was withdrawn from the stevedores and was entrusted to the pool constituted by the petitioner- Management Committee (CFH) Scheme. With this backdrop, the petitioner-charitable organization registered under Section 12AA of the Act, 1961.
3. The petitioner has filed its returns and assessment have been completed for past years by treating the petitioner as a Charitable organization, income whereof is exempted under Section 11 of the Act, 1961. Throughout its existence for more than a decade no tax has been paid by it for any one of the assessment years except assessment year 2004-05 and 2005-06, where a suo-motu revision was being initiated by the Commissioner of Income Tax, which has been subsequently quashed by the learned Income Tax Appellate Tribunal, Cuttack Bench, Cuttack that resulted in NIL demand for both the years. For the year in question, petitioner’s application for grant of No-Deduction Certificate under Section 197 was processed and in response to the further query made by opposite party No.1, the petitioner filed the copies of last two years audited accounts and copy of the last assessment order on 04.09.2009. After receipt of the compliance, the concerned section lost the original application somewhere in the office, as a result of which the petitioner again had to file another copy along with all the enclosures on 25.02.2010 accompanied with a request to dispose of the application of the petitioner at an early date. Since no-deduction certificate was not issued in terms of Section 197(1) of the Act, 1961, an informal complaint was filed before the Commissioner of Income Tax but the same did not yield any result. In sheer, desperation, the petitioner was forced to invoke the extra ordinary jurisdiction of this Court by filing W.P.(C) No.5458 of 2010 praying inter alia for issuance of No-Deduction Certificate under the Statutory provision of the Act. The said writ petition was disposed of on 09.07.2010 with a direction to the opposite parties to consider the application of the petitioner for grant of no-deduction certificate in accordance with law and dispose of the same within four weeks from the date of the order. Thereafter, the petitioner approached opposite party No.1 for issuance of no-deduction certificate in terms of the order of this Court dated 09.07.2010 passed in W.P.(C) No.5458 of 2010 and the same was disposed of only on 13.08.2010 rejecting the application of the petitioner on the plea that since the financial year had already lapsed, certificate under Section 197 of the Act, for the financial year 2009-10 cannot be issued. Hence, the present writ petition.
4. Mr. S.K. Acharya, learned counsel appearing for the petitioner submitted that due to dilatory tactics of opposite party nos.1 to 3 and particularly, the action of opposite party No.1 for non-compliance of the order of this Court, the petitioner is now falling within the mischief of the penal and prejudicial proceedings under Section 40 (a)(ia) of the Act, 1961. Since, No-Deduction Certificate had not been issued to the petitioner in time, some principals who engage the services of the labourers through the petitioner trust, made payments to the petitioner deducting TDS from such payments, whereas other principals have not deducted TDS considering the fact that the petitioner has been getting the No-Deduction Certificate in the past. Consequently, the petitioner faces a double edged sword in the manner of wrongful collection of taxes form the payments made by principals after deducting TDS and disallowances under Section 40(a)(ia) for payments made by principals without deducting TDS. Even though for the immediately preceding year i.e. the financial year 2008-09, no-deduction certificate was issued to the petitioner under Section 197 of the Act, but the same was not considered by opposite party Nos.1 to 3 while rejecting the application of the petitioner for issuance of no-deduction certificate under Section 197 of the Act for the financial year 2009-10.
5. Mr. Acharya, further submitted that the CBDT vide its Circular No.F.No.20/23/67 IT(A-I) had laid down that applications made by trusts for the issue of certificate for deduction of tax at lower rates or without deduction of tax, should be expeditiously dealt with so that the trust could collect interest and dividend income without delay. The certificates issued by the Income-tax officers could be reviewed by them once in three years.
6. The petitioner has made application for issuance of no- deduction certificate 9 months prior to expiry of the financial year 2009- 10 i.e. on 22.06.2009. The ground of opposite party No.1 that no- deduction certificate can not be issued due to lapse of time is the deliberate action and delay on the part of opposite party Nos.1 to 3 who did not dispose of the application within a reasonable time. When an assessee files an application for issuance of No-Deduction Certificate, statutory duty is cast upon the I.T. Department to issue the certificate within a reasonable period/statutory limitation period which has not been done in the case of the petitioner. The action of the opposite parties in sitting over the matter is tainted with ulterior intention of the opposite parties as a whole and opposite party No.1 in particular, in defrauding the present petitioner by denying the statutory benefits permissible to him under the Act. The opposite parties with mala fide intention denied to statutory benefits to the petitioner which is nothing but gross dereliction of duties imposed on them by the Act. Such delaying tactics, not only causes injustice and harassment, but also breeds corruption. This is a matter of serious concern, and if this trend continues unabated it will create anarchy and chaos in Income Tax administration in the country. Placing reliance upon various judgment of the Hon’ble Supreme Court as well as this Court, Mr. Acharya, learned counsel for the petitioner severely criticized the action of the Public Authorities who are discharging public duties, for their negligence and highhandedness.
7. Mr. A. Mohapatra, learned Standing Counsel appearing on behalf of the I.T. Department submitted that the present writ petition filed by the petitioner is not maintainable at the threshold for suppression of facts particularly about the hefty demand that was outstanding against the assessee for which certificate of lower/no- deduction could not be issued and the assessee was aware that only after payment of such arrears of tax the certificate could have been issued. The petitioner filed an application in Form No.13 for issuance of lower deduction certificate under Section 197 of the Act on 22.06.2009. On 25.03.2010 the Assessing Officer by his letter dated 22nd/25.03.2010 reported to the I.T.O.(TDS) that as per the demand notices an amount of Rs.27,36,625/- for the assessment year 2004-05 and Rs.4,62,13,909/- for the assessment year 2005-06 was outstanding against the assessee. Accordingly short deduction/No-Deduction certificate was not issued to the assessee. As per order sheet dated 25.03.2010, it was intimated to the Advocate for the Assessee that certificate of lower/no deduction will be issued only after payment of the arrear tax due by the assessee. On 05.08.2010 order of this Court was received to consider the application of the petitioner-Management Committee (CFH Scheme) in accordance with law and to dispose of the same within four weeks of the date of order dated 09.07.2010. On 13.08.2010, assessee was intimated that as the financial year for which the certificate was sought had lapsed in the meantime no certificate under Section 197 of the Act, 1961 could be issued as per law. It was submitted that there had not been any defiance as alleged to the direction dated 09.07.2010 passed by this Court in W.P. (C) No.5458 of 2010. Since the petitioner had not made payment of the arrear tax which was due for payment, the allegation of the petitioner that there is deliberate inaction on the part of the opposite parties is not correct. The petitioner is not affected in case any legal action is taken against the principal of the petitioner. Since huge demand was outstanding against the assessee, no short/no deduction certificate could be issued to the assessee and the petitioner had not taken any steps for payment of the arrears outstanding. Therefore, the application for short/no deduction certificate could be issued to the assessee.
8. On the rival, legal and factual contentions advanced by the parties, the following questions fall for consideration by this Court :-
(i) Whether order dated 13.08.2010 (Annexure-1) passed by opposite party no.1-ITO (TDS) rejecting the application of the petitioner made in Form 13 of the I.T. Rules on 22.06.2009 for issuance of certificate under Section 197 of the Act for the financial year 2009-10 is sustainable in law ?
(ii) Whether validity of the impugned order can be justified by assigning fresh reasons by way of counter affidavit other than that is mentioned in the impugned order ?
9. Since, both the questions are interlinked, they are dealt with together.
Undisputed facts are that the petitioner is an assessee under the Act, 1961. It has been registered under Section 12AA of the Act, w.e.f. 01.04.1998 as a Charitable Organization. Returns have been filed and assessments have been completed for successive years by treating the petitioner as a charitable organization. In preceding years its income has been determined as Nil. In the past years, the petitioner was issued with certificate of no-deduction under Section 197 of the Act,. The petitioner filed his application on 22.06.2009 for issuance of certificate under Section 197 of the Act, for the financial year 2009-10 to different persons but the said application was rejected by the impugned order dated 13.08.2010 (Annexure-1) on the ground that the relevant financial year in question was over. In the impugned order only one ground i.e. lapse of financial year in question has been indicated for rejection of application of the petitioner for issuance of no-deduction certificate under Section 197 of the I.T. Act. However, in paragraph-4 of the counter affidavit, the Income Tax Department has taken a stand that on 25.03.2010, the Assessing Officer by his letter No.ACIT/Cir- 1(2)/CTC/Misc/2009-10/13543 dated 22nd/ 25.03.2010 reported that as per the demand notices an amount of Rs.27,36,625/- for the assessment year 2004-05 and Rs.4,62,13,909/- for the assessment year 2005-06 was outstanding against the assessee. Accordingly, short deduction/no deduction certificate was not issued to the assessee. It is unfortunate that such a reason was neither indicated in the impugned order of rejection dated 13.08.2010 passed under Annexure-1 nor taken by the Income Tax Department before this Court while the earlier writ petition bearing W.P.(C) No.5458 of 2009 was taken up for hearing on 09.07.2010. On the contrary, on the date of hearing on 09.07.2010, Mr. Mohapatra, learned Standing Counsel appearing for the Income Tax Department submitted that steps will be taken for consideration of the application of the petitioner for issuance of no-deduction certificate at an early date.
On the basis of above submission of Mr. Mohapatra, this Court directed the opposite parties to consider the application of the petitioner for grant of no-deduction certificate in accordance with law and dispose of the same within a period of four weeks from the date of receipt of copy of the order. On the date of hearing on 09.07.2010 the Department has not taken any ground that there was any outstanding dues against the assessee-petitioner for the financial year 2009-10 for which no certificate under Section 197 could be issued for that assessment year.
10. Thus, one of the reasons for not issuing the short deduction/no deduction certificate under section 197 of the Act to the petitioner was that there was letter of the Assessing Officer dated 25.03.2010 reporting opposite party No.1-ITO(TDS) that an amount of Rs.27,36,625/- for the assessment year 2004-05 and Rs.4,62,13,909/- for the year 2005-06 was outstanding against the assessee. Unfortunately, such a reason is not at all correct because as on 25.03.2010 no dues 4was outstanding against the petitioner-assessee. The demand raised for the assessment years 2004-05 and 2005-06 was nullified by the Tribunal vide its order dated 11th February, 2010 passed in I.T.A. No.191 & 192/CTK/2009 i.e. much before issuance of letter dated 22nd/25.03.2010. Copy of the Tribunal order was produced before this Court in course of hearing.
11. In view of the above, the Assessing Officer could have issued short deduction/no-deduction certificate under section 197 of the Act, 1961 during the financial year 2009-10.
12. We also find that there is inordinate delay and serious laches on the part of opposite party-authorities in dealing with the petitioner’s application for grant of no deduction certificate under Section 197 of the Act. There is also no explanation from the Department as to why the petitioner’s application submitted on 22.06.2009 for issuance of no- deduction certificate under Section 197 of the Act was taken up for the first time for consideration towards fag end of the financial year 2009-10 and that too on a wrong ground of non-payment of outstanding dues, no- deduction certificate was not issued to the petitioner-assessee during financial year 2009-10.
13. At this juncture, it is relevant to mention the circular of the CBDT bearing Circular No.F.No.20/23/67 IT(A-I) to expeditiously dealt with the application filed by the Charitable trust for issuance of certificate for deduction of tax at lower rate or without deduction of tax. The said Circular of the CBDT is extracted below:-
“Letter F. No.20/23/67-IT(A), DT. 28-7-1967
Issue of certificate under s. 197 to charitable trusts whose income is exempt under s.11
A number of cases have come to the notice of the CBDT, where charitable trusts, whose income is exempt under s.11 are filing applications for refund every year to claim refund in respect of tax deducted at source under s. 193 or s. 195. The CBDT desires that in such cases the ITOs should be instructed to bring to the notice of the trusts, the provisions of s. 197, under which the trust can ask the ITO to issue a certificate in its favour directing that either no tax should be deducted at source or the deduction should be made at a lower rate. These certificates should be promptly issued by the ITOs so that the trusts can collect their interest and dividend income without deduction of tax at source. The certificates issued by the ITOs can be reviewed by them once in three years.”
14. Apart from the above, we notice that the impugned order of rejection of the petitioner’s application for issuance of short deduction/no-deduction certificate under Section 197 of the Act, 1961 is in violation of the order of this Court dated 09.07.2010 passed in W.P.(C) No.5458 of 2009. As stated above, the said writ petition was taken up for hearing on 09.07.2010 i.e. after closure of the financial year 2009-10. On that date, learned Standing Counsel appearing on behalf of the Department could have taken a stand that no certificate under Section 197 of the Act could be issued after closure of the financial year in question. It appears that such a stand was not taken by learned Standing Counsel appearing for the Department on 09.07.2010. On the contrary, the Department has agreed before this Court to issue certificate on previous occasions, but by the impugned order, the Department refused to issue the certificate on the ground that the financial year in question is over. If that be the cause, it is not understood why the Department agreed before this Court to consider the petitioner’s application made under Section 197 for grant of no-deduction certificate under Section 197 of the Act. Obviously the action of the Department are not bona fide and does not speak well of its attitude.
15. The mala fides are writ large because new grounds supporting the rejection order taken in the counter affidavit. The rejection order passed under Annexure-1 cannot be supported by any other grounds or reasons other than what is mentioned in the order.
16. Law is also well settled that validity of an order is to be judged by the reasons mentioned therein and it cannot be developed either by oral submission or by filing affidavit.
The Hon’ble Supreme Court, in Mohinder Singh Gill & Anr. Vs. The Chief Election Commissioner, New Delhi & Ors., AIR 1978 SC 851, held as follows:-
“The second equally relevant matter is that when a statutory functionary makes an order based on certain grounds, its validity must be judged by the reasons so mentioned and cannot be supplemented by fresh reasons in the shape of affidavit or otherwise. Otherwise, an order bad in the beginning may, by the time it comes to court on account of a challenge, get validated by additional grounds later brought out. We may here draw attention to the observations of Bose J. in Gordhandas Bhanji (AIR 1952 SC 16) (at p. 18):
Public orders publicly made, in exercise of a statutory authority cannot be construed in the light of explanations subsequently given by the officer making the order of what he meant, or of what was in his mind, or what he intended to do. Public orders made by public authorities are meant to have public effect and are intended to affect the acting and conduct of those to whom they are addressed and must be construed objectively with reference to the language used in the order itself.
Orders are not like old wine becoming better as they grow older.”
17. Admittedly, the impugned order of rejection of the petitioner’s application does not state that because of outstanding dues, short deduction/no-deduction certificate under Section 197 of the Act was not issued. This is a fresh reason stated in the counter affidavit that too an incorrect reason which contention on behalf of the Revenue is wholly untenable in law.
18. In view of the above, a certificate ought to have been given to the petitioner during the financial year 2009-10 and the Department cannot take advantage of its own inaction and lapses by taking a stand that the financial year is over. Such action of the opposite parties as rightly apprehended by the petitioner would lead to unnecessary complication and unavoidable and inappropriate proceedings. Had the certificate been given in time as was done in the previous year there would not have been any necessity for making any deduction of tax by some of the principals from the payments made to the petitioner and the ultimate consequence, because of Departmental inaction, the Assessee- petitioner has to again go through the process of seeking refund in its assessment.
19. The Hon’ble Supreme Court in M/s. Dabur India Ltd. and another v. State of Uttar Pradesh and others. AIR 1990 SC 1814, observed that Government, Central or State, cannot be permitted to play dirty games with the citizens of this country to coerce them in making payments which the citizens were not legally obliged to make. If any money is due to the Government, the Government should take appropriate steps, but it should not take extra legal steps or adopt the course of manoeuvring. Because of the above discontentment expressed at the Bar, it has become necessary to provide guidelines for just exercise of the power of Revenue authorities. To prevent the abuse of power and to see that it does not become a new despotism, courts are gradually evolving the principles to be observed by the authorities while exercising such power. New problems call for new solutions.
20. It is expected that the Department shall be careful in future not to indulge in any such avoidable circumstances thereby creates an impression that the intention of the Department is not to help the assessee but to harass them.
21. In the peculiar circumstances, we direct the opposite party No.1 to issue necessary certificate making it effective for the financial year in question.
22. Before parting with the case, we want to observe that this matter needs to be inquired into by the concerned Chief Commissioner of Income Tax. Needless to say that if any lapses are found on the part of the responsible officers, appropriate action/ proceedings shall be initiated against the erring officer (s).
23. With the aforesaid observation and direction the writ petition is disposed of.
