Income tax - TDS - Does rejection of application u/s 197 amount to an 'Order' maintainable u/s 264

Income tax - TDS - Does rejection of application u/s 197 amount to an 'Order' maintainable u/s 264? - YES, rejection does not lie in absolute discretion of AO - reasons must be indicated: Bombay HC THE issue before the High Court is that whether rejection of an application u/s 197 for lower TDS rate or no TDS certificate amounts to an 'order'. Whether such an 'order' as per Sec 264 is maintainable. And the answer to the first question is that the rejection of an application u/s 197 does amount to an 'Order' u/s 264, and the same is maintainable for revisionary proceedings. Facts of the case Petitioner is a consortium consisting of an Indian company and a Malaysian company - awarded a contract for the design, development, construction, commissioning, operation and maintenance of the Mumbai Monorail Project by MMRDA - petitioner is assessable as an AOP - files an application u/s 197, requesting the Revenue to deduct tax at the rate of 0.11% from the payments made to it under the contract - AO rejects the application on two grounds (i) The calculation mechanism provided in Rule 28AA fails as figures for three previous years are unavailable; and (ii) No eTDS returns were filed by the assessee The Petitioner moves the Commissioner of Income Tax (TDS), in revision under Section 264 - the Commissioner rejected the Revision Application holding that where the AO rejects an application under Section 197, no approval of the Commissioner is necessary. The Commissioner cites two reasons for the rejection. Firstly, if the benefit of a lower rate for withholding tax is not granted under Section 197 to the assessee, no hardship or prejudice would be caused to the assessee as a result of the rejection of the application because, the assessee would be entitled to get a refund of excess tax paid, if any, together with interest. The second reason is that when the Assessing Officer rejects an application under Section 197, he does not pass an ‘order’ as envisaged in Section 264 and consequently, a revision under Section 264 is not maintainable. Having heard the parties the High Court has held that, ++ it would be far fetched to accept the view that the rejection of an application must lie in the absolute discretion of the Assessing Officer or that the Assessing Officer is not bound to indicate reasons or a basis for the rejection of the application. The fact that Parliament has empowered the Board to frame Rules under subsection 2A, having due regard to the convenience of assessees and the interests of the Revenue specifying the cases and circumstances under which an application can be made and the conditions subject to which such a certificate may be granted is sufficient to indicate that the exercise of powers by the Assessing Officer is intended to be structured in accordance with the provisions of Section 197 and the Rules framed by the Board under subsection 2A. ++ The Assessing Officer cannot be heard to urge that though an assessee fulfills all the requirements which are stipulated in Rule 28AA or, as the case may be, in Rule 29B, he possesses an unguided discretion to reject the application; ++ the Assessing Officer when he rejects an application is bound to furnish reasons which would demonstrate an application of mind by him to the circumstances which are mandated both by the Statute and by the Rules to be taken into consideration; ++ the expression “order” for the purposes of Section 264 has a wide connotation. Subsection (1) of Section 264 provides that in the case of any order other than an order to which Section 263 applies, passed by an authority subordinate to him, the Commissioner may either of his own motion or on application by the assessee for revision, call for the record of any proceeding under the Act in which any such order has been passed and after making an enquiry, pass such order thereon not being an order prejudicial to the assessee as he thinks fit. Parliament has used the expression “any order”; ++ hence, any order passed by an authority subordinate to the Commissioner, other than an order to which Section 263 applies, is subject to the revisional jurisdiction under Section 264. A determination on an application under Section 197 requires an order to be passed by the Assessing Officer after application of mind. The Commissioner was, therefore, manifestly in error when he held that there was no order which would be subject to his revisional jurisdiction under Section 264; ++ The Assessing Officer in the present case, was in error in coming to the conclusion that the mechanism that is contemplated under Rule 28AA would break down in the case of the assessee on the ground that the financial statements of the assessee in the previous three years were not available. In this case, sub clause (ii) would not apply and the rate would be computed under subclause (i); ++ The failure of the assessee, if any, to file eTDS returns may result in independent consequences which are provided in law. That however, cannot justify the rejection of the application made by the assessee for the determination of withholding of tax at a lower rate on payments which are to be received by the assessee. ++ The Commissioner has rejected the application of the assessee on the ground that a revision was not maintainable under Section 264. The Commissioner also observed that in the event that the assessee has paid excess tax, it would be entitled to a refund of the tax paid together with interest and hence, no prejudice would be caused to the assessee. The entire approach of the Commissioner is, with respect, specious; ++ The Assessing Officer was required, in the first instance, to apply his mind to the fact that the conditions for the grant of a certificate under Section 197 are duly fulfilled. If those conditions are duly fulfilled, it would be impermissible for the Assessing Officer to reject the application merely on a whim and on caprice and for the Commissioner to hold that no prejudice would be caused to the assessee since tax would be refunded later together with interest. The application filed by the assessee has been rejected in a rather cavalier manner and without application of mind; ++ the Revision Application is restored to the CIT for a fresh determination.

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