Issue of Lower Deduction of Tax Certificate u/s 197, satisfaction of AO must be based on four tests under Rule 28AA(2) – High Court
In a recent judgment, Hon’ble High Court of Madhya Pradesh has held that for issuance of a Lower Deduction of Tax Certificate u/s 197, satisfaction of AO In determining existing and estimated tax liability must be based on four tests under Rule 28AA(2) of the Income Tax Act, 1961 (the Act).
ABCAUS Case Law Citation:
ABCAUS 4042 (2024) (05) HC
In the instant case, the Petitioner/ assessee had challenged the order passed by the Income Tax Officer (TDS) rejecting his application for grant of a certificate for lower deduction of tax under Section 197 of the Act.
The assessee had preferred an application under Section 197 of the Act for issuance of a Lower Deduction of Tax Certificate. In response to the queries raised, the assessee tried to online file a document. However, the document could not be uploaded due to its large size and as a result, the assessee preferred a communication in the Traces Portal.
Before the Hon’ble High Court the assessee submitted that while passing the impugned order, it was mentioned that the applicant had not submitted any explanation regarding queries raised whereas the document was loaded on Traces Portal. Thus, the impugned order was passed without application of mind.
The petitioner further submitted that its application was rejected by holding that the applicant declared very low net profit ratio, which is not at par with similar business. It was argued that the Authority was competent only to examine the aspect of TDS and had no authority, jurisdiction and competence to look into the aspect of net profit which is within the province of jurisdictional Assessing Officer.
In his support, the assessee placed reliance on two Division Bench judgments of Delhi High Court and argued that decision taken by the Authority was in complete ignorance of Rule 28-AA of the Income Tax Rule and the necessary factors mentioned in Rule 28-AA of the said Rule have not been considered.
On the contrary, the Revenue contended that it is the satisfaction of the Assessing Officer whether said certificate is to be issued or not. In order to arrive at a satisfaction, one such important factor is veracity of existing and estimated tax liability of an applicant which is net profit ratio. Thus, net profit ratio was rightly taken into account while passing the impugned order and, therefore, no fault can be found in the impugned order.
The Hon’ble High Court observed that Rule 28AA provides satisfaction of the AO that existing and estimated tax liability of a person justifies the deduction of tax at lower rate. Further, for determination of existing and estimated tax liability, sub rule 2 provides four factors to be taken into taken into consideration, i.e. (i) tax payable on estimated income of the previous year relevant to the assessment year ; (ii) tax payable on the assessed or returned or estimated income, as the case may be, of last four previous years (iii) existing liability under the Income-tax Act, 1961 and Wealth- tax Act, 1957 ; (iv) advance tax payment tax deducted at source and tax collected at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28.
The Hon’ble High Court observed that the Delhi High Court had opined that Rule 28 AA is a statutory and mandatory provision. The revenue is under a statutory obligation to act in accordance with the mandate of Rule 28 AA. Even otherwise, this is trite that if a statute prescribes a thing to be done in a particular manner, it has to be done in the same manner and other methods are forbidden.
The Hon’ble High Court stated that a plain reading of Rule 28 AA makes it clear that the ‘satisfaction’ needs to be recorded/determined by A.O. after taking In the instant appeal, the assessee had challenged the order of CIT(A) in confirming consideration the four factors mentioned in sub-rule (2) of Rule 28-AA. Thus, it is not the subjective satisfaction of A.O., but an objective satisfaction which must be based on Clauses (i), (ii), (iii) and (iv) of sub-rule (2) of Rule 28 AA.
The Hon’ble High Court observed that the impugned order showed that all those four factors had not been taken into account. Since impugned order was passed in clear violation of Rule 28 AA, the Hon’ble High Court held that decision making process adopted runs contrary to the requirement of law, i.e. Rule 28AA.
Accordingly, the impugned order was set aside. the matter was remitted back to Assessing Officer (TDS) to consider the claim of petitioner in accordance with law and pass a fresh detailed/speaking order.
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