Sec 197 – Certificate for Lower Deduction- Non availability of financial statements of the past 3 years cannot result in failure of the mechanism under Rule 28AA

Larsen & Toubro Ltd. v ACIT (326 ITR 514)


• The assessee is a consortium consisting of Larsen and Toubro Ltd (L&T), an Indian entity and Scomi Engineering, a Malaysian entity

• It has been awarded a contract by MMRDA

• The profit sharing ratio between the two members is 60 (L&T):40 (Scomi) taxable at the rate of 33.99% and 42.23% respectively

• It filed an application under section 197 requesting revenue to issue a certificate authorizing MMRDA to deduct tax at the rate of 0.11%

• The Revenue rejected the application by holding that the calculation mechanism under Rule 28AA failed since past three years‟ profit figures were not available and because the assessee had not filed e-TDS returns

• The assessee moved the Commissioner of Income-tax (TDS) (“CIT”)for revision u/s 264.

• The CIT(A) rejected the plea on the grounds that when an AO rejects an application u/s 197, he does not pass an “order” as envisaged u/s 264 and hence a revision of the same is not maintainable


•        If the profits of the past 3 years are not available, will the mechanism under Rule 28AA fail? Can an application u/s 197 rejected by the AO never be revised? Does non filing of e-TDS returns result in rejection of an application u/s 197?


•        The CIT was in error in holding that the rejection of an application by the AO did not result in an order.

•        The AO was in error in coming to the conclusion that the mechanism contemplated under Rule 28AA would break down in the case of the assessee since financials of the past three years were not available

•        Sub clause (i) of Rule 28AA (1) refers to the average rate of tax as determined by the total tax payable on estimated income as reduced by advance tax and TDS as a % of the payment referred to in section 197 for which application has been made. Sub clause (ii) refers to the average of the average rates of tax paid by the assessee in the last 3 years. Hence in the present case sub clause (ii) will not apply and sub clause (i) will apply

•        Failure of assessee to file e-TDS return may result in independent consequence in law including penal consequences under section 271 but does not justify rejection of an application filed for lower deduction of tax under sec 197.

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June 2021