Case Law Details
Court: Bombay High Court
Citation: Larsen & Toubro Ltd. & Anr. Vs. ACIT [2010-TIOL-304-HC-MUM-IT]
Brief : The Bombay High Court held that expression “order” for the purposes of section 264 of the Income Tax Act, 1961 (the Act) has a wide connotation. The words used under section 264(1) of the Act are ‘any order other than order under section 263’. Hence, the rejection of an application by the Assessing Officer (AO) for lower withholding rate under section 197 (See Note-1 Below) of the act is an ‘order’ eligible for revision by the Commissioner of Income-tax (CIT) under section 264 of the Act.
Further, the compliance of Rule 28AA (See Note-2 Below) of the Income-tax rules, 1962 (the Rules) is not an eligibility criteria for making an application under section 197 of the Act. The High Court observed that if the financial statements of the taxpayer in the previous three years were not available, the lower withholding rate had to be computed as per Rules 28AA(i) of the Rules.
Facts of the case
• The taxpayer, a consortium consisting of an Indian company and Malaysian company, was asses sable as an Association of Person (AOP) with the profit sharing ratio being 60:40. It was awarded a contract for the design, development, construction, commissioning, operation and maintenance of the Mumbai Monorail Project by Mumbai Metropolitan Region Development Authority (MMRDA) for a consideration of INR 2,460 crores. The taxpayer filed an application under section 197(1) of the Act to the AO to issue a certificate authorizing MMRDA to deduct tax at the rate of 0.11 percent from the payments made by it to the taxpayer.
• The AO observed that the calculation mechanism provided in Rule 28AA of the Rules failed as the figures for three previous years were not available and the taxpayer did not file e-TDS return on the date of application. Accordingly, the AO did not grant the certificate under section 197 of the Act to the taxpayer.
• The Commissioner of Income-tax (TDS), while rejecting the revision application of the taxpayer under section 264 of the Act, observed that no hardship would be caused to the taxpayer if the benefit of a lower rate for withholding tax is not granted under section 197 of the Act as the taxpayer would be entitled to get a refund of excess tax paid, if any, together with interest. Further, under section 264 of the Act, the CIT can revise the ‘order’ passed by the lower authority. However, the rejection by the AO under section 197 of the Act does not amount to an ‘order’. Accordingly, such action of AO cannot be revised under section 264 of the Act..
• Aggrieved by the order of the CIT, taxpayer filed a writ petition in the High Court.
High Court’s Ruling
• The AO cannot be heard to urge that though the taxpayer fulfills all the requirements which are stipulated in Rule 28AA of the Rules he possesses an unguided discretion to reject the application. Consequently, the AO is bound to furnish reasons at the time of rejecting an application which would demonstrate an application of mind by him to the circumstances which are mandated both by the Statute and by the Rules. Hence, it would be impossible to accept the view that the rejection of an application under Section 197 does not result in an order.
• Rule 28AA of the Rules is not an eligibility criteria for making an application under section 197 of the Act. The High Court observed that the AO was in error in coming to the conclusion that the mechanism that is contemplated under Rule 28AA would break down in case of the taxpayer on the ground that the financial statements of the taxpayer in the previous three years were not available. In this case, sub clause (ii) would not apply and the rate would be computed under sub clause (i) of the Rules 28AA.
• The failure to file e-TDS returns has independent consequences including penalty which are provided under the provisions of the Act and that can not justify AO rejecting the application for withholding of tax at lower rate on the payments received by taxpayer.
• The expression “order” for the purposes of section 264 of the Act has a wide connotation. The words used under section 264(1) of the Act are ‘any order other than order under section 263’. Hence, any order passed by an authority subordinate to the CIT, other than an order under section 263 of the Act, is subject to the revisional jurisdiction under section 264 of the Act. Hence, the CIT made an error when he held that there was no order which would be subject to his revisional jurisdiction under section 264 of the Act.
• Accordingly, the High Court held that the application filed by the taxpayer has been rejected in a rather cavalier manner and without application of mind to circumstances which are germane to the statute and directed the CIT to restore the revision application made by the taxpayer under section 264 of the Act.
Our Comments
This is an important ruling by the Bombay High Court where it has been held that the rejection of an application by the AO for lower withholding rate under section 197 of the Act is an ‘order’ eligible for revision by CIT under section 264 of the Act. Further, the compliance of Rule 28AA of the Rules is not an eligibility criteria for making an application under section 197 of the Act. The High Court observed that if the financial statements of the taxpayer in the previous three years were not available, the lower withholding rate had to be computed as per sub clause (i) of the Rules 28AA. Accordingly, even if one of the modes of computing the lower withholding rate is not workable, the application filed by the taxpayer under section 197 of the Act cannot be rejected by the AO.
See Note- 1
As per section 197(1) of the Act, if the total income of the recipient justifies the deduction of tax at lower or nil rate, the AO on an application made by the taxpayer in this behalf, may grant a certificate to that effect to the recipient of income.
See Note- 2
As per Rule 28AA of the rules the AO is required to grant a certificate under section 197 of the Act on higher of the following two rates:
• At average rate of tax as determined by the total tax payable on estimated income, as reduced by the advance tax already paid and tax already deducted at source
• At the average of the average rates of tax paid by the taxpayer in the last three years
