TATA TELESERVICES (MAHARASHTRA) LIMITED vs. THE DEPUTY COMMISSIONER OF INCOME TAX (TDS) -2(3) AND 3 ORS

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WP/2701/2017HC Bombay25 January 2018Author: HON'BLE SHRI JUSTICE M.S. SANKLECHA, HON'BLE SHRI JUSTICE R. I. CHAGLA33 pages
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What did the High Court hold?

The High Court quashed and set aside the impugned order dated October 23, 2017, canceling the certificate of nil deduction of tax. The Court found that the cancellation order was not sustainable on two main grounds. Firstly, regarding the petitioner's financial status and accumulated losses, the Court noted that the impugned order did not provide any basis for concluding that future profits would be unrecoverable. In fact, the revenue's own affidavit, referencing newspaper reports and discussions with the CFO, supported the petitioner's claim of substantial carried forward losses and no likelihood of tax becoming payable. The Court reiterated that cancellation of a Section 197 certificate requires valid and cogent reasons supported by material on record, which were absent. Secondly, concerning the outstanding tax demand of Rs. 6.90 Crores, the Court observed that neither Section 197 nor Rule 28AA of the Rules mandates that a nil/lower rate certificate cannot be granted if any demand is outstanding. Rule 28AA(2) requires consideration of various aspects, including estimated tax payable and existing liability. The Court found that the impugned order failed to consider the petitioner's submissions that the demand was covered by a prior Tribunal decision, arose from a TRACES error, or could be adjusted against a refund. Therefore, the order was deemed a non-speaking order, unsustainable in facts and law.

What were the facts?

The petitioner, M/s Tata Teleservices (Maharashtra) Limited, engaged in telecommunication services, applied for a nil deduction of tax certificate under Section 197 of the Income Tax Act, 1961, for Assessment Year 2018-19, citing substantial accumulated losses and a weak financial position. The Deputy Commissioner of Income Tax (TDS) initially issued a certificate on May 4, 2017, allowing nil deduction. However, on October 23, 2017, the Deputy Commissioner canceled this certificate. The petitioner filed a writ petition challenging this cancellation and seeking directions for the disposal of a pending appeal concerning a demand of Rs. 6.68 Crores for Assessment Year 2012-13. The revenue assured the court that the pending appeal would be disposed of by March 1, 2018, and the petitioner did not press this relief.

What were the issues?

1. Whether the cancellation of the certificate of nil deduction of tax under Section 197 of the Income Tax Act, 1961, by the Deputy Commissioner of Income Tax (TDS) on October 23, 2017, was justified, considering the petitioner's financial position and accumulated losses? (Question of law and fact, turning on Section 197 and Rule 28AA of the Income Tax Rules, 1961). Assessee's Contention: The petitioner argued that the cancellation was based on unsubstantiated grounds. They contended that their significant accumulated losses (over Rs. 4900 Crores as of March 31, 2016) meant no assessable profit was likely for AY 2018-19, justifying the nil deduction certificate. They also argued that the outstanding demand of Rs. 6.90 Crores was either covered by a prior Tribunal decision, arose from a TRACES system error, or could be adjusted against a refundable deposit, and thus should not be a basis for cancellation. They relied on the principle that cancellation of a Section 197 certificate requires valid and cogent reasons, citing McKinsey and Company Inc. Vs. U.O.I. 324 ITR 367. Revenue's Contention: The revenue contended that the cancellation was justified due to the outstanding tax demand of Rs. 6.90 Crores and the petitioner's weak financial status, which would make future recovery impossible. They referred to an affidavit mentioning discussions with the company's CFO and newspaper reports regarding the company's financial health.

Which sections of the Income-tax Act were involved?

Section 197,Section 194,Section 194A,Section 194C,Section 194I,Section 194H,Section 194J

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902­WP­2701­17.doc Sharayu Khot & S.R. Joshi. IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 2701 OF 2017 M/s Tata Teleservices (Maharashtra) Limited …Petitioner Versus

1.

The Deputy Commissioner of Income Tax (TDS)­2(3)

2.

The Commissioner of Income Tax (2) TDS

3.

The Commissioner of Income Tax (Appeals)

4.

The Union of India …Respondents ­­­­­­­­­­ Mr. Tarun Gulati, a/w Ms. Ishita Farsaiya a/w Mr. Jas Sanghavi, i/by PDS Legal, for the Petitioner. Mr.   Suresh   Kumar,   a/w   Ms.   Samiksha   Kanani,   for   the Respondents. ­­­­­­­­­­ CORAM : M.S. SANKLECHA   & RIYAZ  I. CHAGLA, JJ.

DATE     : 16 & 25 January 2018 ORAL JUDGMENT : [Per M.S. Sanklecha, J]

1.

At the request of the parties, this Petition is being 1/33 CNR No : HCBM020267242017 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc disposed of finally at the stage of admission.

2.

This Petition under Article 226 of the Constitution of India seeks the following reliefs :­ (a) The order dated 23 October 2017 issued by the Deputy   Commissioner   of   Income   Tax   (TDS), Respondent No. 1, canceling the certificate dated 4 May 2017 of nil deduction of tax for the period 4 May 2017 upto 31 March 2018 (A.Y. 2018­19) issued under Section 197 of the Income Tax Act, 1961 (“the Act” for short), be quashed and set aside; and (b) The   Commissioner   of   Income   Tax   (Appeals) (“CIT[A]”)­   Respondent   No.   3   be   directed   to decide   the   Petitioner's   pending   Appeal   for   the assessment year 2012­13 in respect of a demand of Rs. 6.68 Crores. The hearing of which had taken 2/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc on   15   February   2017,   when   detailed   written submissions were filed, within a time frame;

3.

So far as relief (b) above is concerned, Mr. Suresh Kumar,   learned  Counsel  for the  Revenue,   on  instructions of CIT(A)­Respondent   No.   3   states  that   the   pending  Appeal   in respect of assessment year 2012­13 would be disposed of on or before 1 March 2018. Statement accepted. In view of the above statement, this relief is not being pressed by the Petitioner.

4.

The   relevant   facts   leading   to   the   filing   of   this Petition   are   that   the   Petitioner   is   engaged   in   providing telecommunication   services.   In   the   course   of   its   business, Petitioner earns its revenue from sale of post and prepaid cards, sale/ lease of equipments and providing various value added services.  Petitioner has huge accumulated losses. Its  return of income for the Assessment Years 2014­15 to 2016­17, are loss returns  aggregating  to  Rs.  1330.00   Crores  and  in  which an aggregate claim to a refund of Rs. 121.00 Crores has been made. 3/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc

5.

In   the   course   of   its   business,   Petitioner   receives various payments for services rendered which are subject to tax deduction at source under Chapter XVII of the Act. However, according   to   the   Petitioner   it   would   not   be   liable   to   pay corporate tax in the immediate future in view of the likely loss for the assessment year 2018­19 and the huge carried forward losses.

6.

Therefore, on 27 February 2017, Petitioners applied to   the   Respondent   No.   1   seeking   an   issuance   of   nil/lower withholding taxes under Section 197 of the Act. This was to enable   the   Petitioner   to   receive   its   payments   from   various parties which are subject to tax deduction at source, without deduction at source. In support of the above, the application pointed out that their accumulated losses carried forward as on 1 April 2014 is over Rs. 4000.00 Crores – both as per MAT provisions   and   under   the   normal   provisions.   Further,   the Petitioner had filed loss returns for Assessment Years 2015­16 and 2016­17. It was also submitted that the estimated loss for 4/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc Assessment Year 2017­18 is approx. Rs. 1000.00 Crores.  Thus, there   will   be   no   assessable   profit   under   the   Act   for   the assessment   year   in   2018­19   in   view   of   huge   carry   forward losses. Besides, the application points out that there was an amount of Rs. 101.53 Crores up to 10 February 2017 receivable as refund from the Revenue.  It was also pointed out that the financial health of the Petitioner is such that it has taken long term debts, at huge interest payments.  Therefore, the amounts which   are   blocked   on   account   of   tax   deduction   at   source aggravates   its   financial   hardship   including   cash   crunch. Lastly, it was pointed out that the amount of Rs. 6.68 Crores which is the outstanding tax demand for the assessment year 2012­13   was   on   account   of   an   issue   which   already   stands concluded in its favour by an order of the Tribunal dated 27 May 2016, on identical issues for assessment years 2009­10 to 2012­13 (upto July 2011). This demand of Rs. 6.68 Crores is thus, likely to be set aside by the CIT(A) as he would be bound by the order of the Tribunal. It was pointed out so far as the demand for the balance amount of Rs. 28.00 Lakhs is concerned 5/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc it is on account of wrong/unsustainable demand arising from an incorrect processing of TDS statement on application of TRACES System.

7.

Thereafter,   Respondent   No.   1   called   for   various details from the Petitioner. On the same being submitted, they were examined by Respondent No.

1.

Thereafter, on 4 May 2017, Respondent No. 1 issued a certificate under Section 197 of the Act, directing the deduction of tax at nil rate by the various persons listed in the certificate while making payments to the Petitioner under Sections 194, 194A, 194C, 194I, 194H and 194J of the Act. This would result in a relief of Rs. 238.90 Crores as the same would not be deducted as tax at source. Thus, obviating the need for filing of   refund claim with the Revenue for the assessment year 2018­19. 8. Thereafter, on 16 August 2017, Respondent No. 1 informed   the   Petitioner   that   he   is   reviewing   cases   where certificate under Section 197 of the Act has been issued in cases 6/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc where huge outstanding tax demand is pending. Consequently, the above communication requested the Petitioner to furnish the details of outstanding tax demands. The Petitioner responded to the same by its letter dated 20 August 2017, giving the details of the tax outstanding.   It reiterated its submissions made in the application made on 27 February 2017. Besides pointing out that a further refund of Rs. 34.37 Crores was due to them from the   Revenue   for   tax   deducted   at   source   in   the   subject assessment year, for the period prior to the issue of certificate.

9.

Thereafter, on 30 August 2017, Respondent No. 1 issued a Show Cause Notice to the Petitioner, calling upon it to show cause as to why the certificate dated 4 May 2017 should not be reviewed/ canceled. This was on account of outstanding demand of taxes payable. Besides, relying upon the extract of Central Action Plan 2017­18 issued by CBDT which directs the Officers to follow the instructions/certificate issued by the CBDT and   also   mentions   of   Certificates   being   issued   where   large demands are pending.  The Petitioner responded by letter dated 7/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc 7 September 2017 to the notice dated 30 August 2017 while reiterating   its   reply   dated   20   August   2017   and   called   for withdrawal of the notice.

10.

Thereafter, on 7 September 2017, a personal hearing was  granted and on  23 October 2017, the impugned order was issued.  By the impugned order, the certificate dated 4 May 2017 issued under Section 197 of the Act, was canceled. The   impugned  order   holds   that   while   issuing   the   certificate dated 4 May 2017 the existing demand of Rs. 6.90 Crores was as recorded in the impugned order  “Apparently, the demand was not considered on the basis that this demand was under a covered issue”.   This i.e “covered issue” in  terms of Rule 28AA(2) of the Income   Tax   Rules   1961   (Rules),   cannot   be   a   subject   of consideration while granting the certificate.   Further, it holds that in view of the current financial status, the future liability, if any, which may arise on assessment or otherwise against the company, would be impossible to recover. 8/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

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11.

Before considering the rival submissions urged on   behalf   of   the   respective   parties,   it   would   be   useful   to reproduce Section 197 of the Act and Rule 28AA of the Rules, which arises for our consideration:­ “Section 197 of the Act :­ (1) Subject   to   rules   made   under   sub­section   (2A), where, in the case of any income of any person or sum payable to any person, income­tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under   the   provisions   of   sections   192,   193,   194, 194A,   194C, 194D,   194G, 194H, 194­I, 194J, 194K,   194LA   and   195,   the   Assessing   Officer   is satisfied]   that   the   total   income   of   the   recipient justifies the deduction of income­tax at any lower rates or no deduction of income­tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate. (2)   Where   any   such   certificate   is   given,   the   person responsible for paying the income shall, until such certificate   is   cancelled   by   the   Assessing   Officer, deduct   income­tax   at   the   rates   specified   in   such certificate or deduct no tax, as the case may be. (2A)   The   Board   may,   having   regard   to   the 9/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub­section (1) and the conditions subject to which such certificate may be granted   and   providing   for   all   other   matters connected therewith. Rule 28AA­  Certificate for deduction at lower rates or no deduction of tax from income other than dividends.­ (1) Where the Assessing Officer, on an application made by a person under sub­rule (1) of rule 28 is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub­section (1) of section 197 for deduction of tax at such lower rate or no deduction of tax. (2) The existing and estimated liability referred to in sub­rule (1) shall be determined by the Assessing Officer   after   taking   into   consideration   the following:­ (I) tax payable on estimated income of the previous year relevant to the assessment year; 10/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc (ii) tax payable on the assessed or returned income, as the case may be, of the last three previous years; (iii) existing liability under the Income­tax Act, 1961 and Wealth­tax Act, 1957; (iv)   advance   tax   payment   for   the   assessment   year relevant to the previous year till the date of making application under sub­rule (1) of rule 28; (v)   tax   deducted   at   source   for   the   assessment   year relevant to the previous year till the date of making application under sub­rule (1) of rule 28; and (vi)   tax   collected   at   source   for   the   assessment   year relevant to the previous year till the date of making application under sub­rule (1) of rule 28. (3) The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period. (4) The certificate for no deduction of tax shall be valid only   with   regard   to   the   person   responsible   for deducting the tax and named therein. (5) The certificate referred to in sub­rule (4) shall be issued direct to the person responsible for deducting the tax under advice to the person who made an 11/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc application for issue of such certificate.”

12.

Mr. Tarun Gulati, learned Counsel, in support of the Petition, submits as under:­ (a) The   impugned   order   dated   23   October   2017 cancelling   the   certificate   dated  4   May   2017,   is without jurisdiction as Rule 28AA(3) of the Rules could not be invoked in the present facts; (b) The impugned order is arbitrary as it cancels a valid   certificate   under   Section   197   of   the   Act, ignoring the fact that the existing liability of the Petitioner   would   continue   to   be   nil   on consideration   of   the   factors   as   provided   under Rule 28AA(2) of the Rules; (c) The impugned order completely ignores the test of proportionality.   At the highest, according to the Revenue,   the   unpaid   tax   demand   is   Rs.   6.90 12/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc Crores.  While undisputedly, Petitioner is entitled to refund of Rs. 7.30 Crores (being the deposit made),   consequent   to   the   order   dated   27   May 2016   passed   by   the   Tribunal   in   respect   of Assessment   Years   2009­10   to   2012­13. The aforesaid amount  continues to be retained by the Revenue and it could be easily adjusted against the demand of Rs. 6.90 Crores.  In any event, the relatively meagre amount of Rs. 6.90 Crores of tax demand as against a refund of over Rs. 121.00 Crores would not justify denial of the benefit of about Rs. 238.00 Crores as available under Section 197 of the Act.  ; (d) Lastly, it is submitted that the amount of Rs. 6.68 Crores is on account of an order for Assessment Year 2012­13 which is pending before the CIT(A). This issue to the knowledge of all concerned is concluded   in   favour   of   the   Petitioner   and   kept 13/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc pending deliberately. This, even after the hearing was completed, so far back as in February 2017. 13. On the other hand, Mr. Suresh Kumar, learned Counsel for the Revenue supports the impugned order dated 23 October 2017 and submits as under:­ (a) An equally efficacious alternative remedy under Section 264 of the Act as an by way of a Revision to be Commissioner of Income Tax (CIT), against the   impugned   order   dated   23   October   2017, cancelling   the   certificate   dated   4   May   2017   is available to the Petitioner. Therefore, this Court should not entertain the Petition to exercise its extraordinary jurisdiction; (b) Cancellation of the certificate dated 4 May 2017 became   necessary   in   view   of   the   fact   that   the financial condition of the Petitioner­company has 14/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc further deteriorated. Thus, putting in jeopardy the recovery of any liability, which may arise against the   Petitioner­company   on   account   of   future assessment or otherwise. Therefore, necessitating the   cancellation   of   the   nil   withholding   tax certificate dated 4 May 2017; (c) The   existing   demand  of   Rs.   6.90   Crores   which continued to be pending. This cannot be ignored merely because, according to the Petitioner, the demand is unsustainable and would be set aside in appeal due to the issue being considered in its favour; (d) No prejudice would be caused to the Petitioner in case the nil withholding certificate dated 4 May 2017 is withdrawn. This, for the reason that the amounts so received by the Revenue on account of withholding   tax   would   be   refunded   if   no   tax 15/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc demand is payable in future by the Petitioner.

14.

Before dealing with the rival submissions on merits, we shall first deal with the preliminary objection of the Respondent  to entertain this Petition. The objection is that an effective   efficacious   alternative   remedy   to   challenge   the impugned   order   under   Section   264   of   the   Act,   is   available. Therefore,   this   Petition   should   not   be   entertained.   It   is submitted that a Revision under Section 264 of the Act would lie to the Commissioner of Income Tax (CIT). This is so for the reason that under Section 264 of the Act, Revision lies from any order passed by any authority – subordinate to CIT other than an order which is appealable and from which an appeal has been filed or an order to which   Section 263 of the Act is applicable.   In fact, this Court in  Larsen & Toubro Ltd. & Another v/s. CIT 326 ITR 514  has held that an order passed under Section 197 of the Act, is amenable to Revision under Section 264 of the Act. 16/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

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15.

However,   as   correctly   pointed   out   by   the Petitioner in this case, the impugned order dated 23 October 2017 as recorded therein, has been issued/ decided with the concurrence of the CIT (TDS). This was not so in the case of Larsen & Toubro (supra).  It is also not disputed before us that in this case, the Revision would be before the same authority who   gave   the   concurrence   or   to   an   authority   of   equal rank/designation.

16.

In the above view, the decision of this Court in Larsen & Toubro Ltd., (supra) would not apply to the present facts.  As in this case, the Revision i.e. alternative remedy would in facts be from “Caesar to Caesar.” Therefore, in such a case an alternative remedy would be a futile/empty formality and not an efficacious remedy. (Please see Ram & Shyam Co. v/s. State of Haryana 1985 (3) SCC 267).

17.

In the above circumstances and in the present facts, there is no merit in preliminary objection taken by the 17/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc Revenue. Therefore, we proceed to examine the issue arising herein and decide the same.

18.

Section   197   of   the   Act   permits/   allows   an assessee to make an application to the Assessing Officer, that in its   case,   the   deduction   of   tax   under   the   Sections   specified therein should be at lower rates or at nil rates instead of the normal rate prescribed under the Act.  The Assessing Officer, if satisfied,   with   the   application   made,   bearing   in   mind   the provisions of the Act and the Rules, is obliged to grant the certificate.   Therefore, there is a right given to an assessee to apply for nil/ lower rate of withholding tax under Section 197 of the Act and an obligation upon the Assessing Officer to grant the same, if the conditions specified therein are satisfied. Thus, it is clear that the order passed under Section 197 of the Act is an order which is a quasi judicial order and must be supported by reasons.  The Assessing Officer is also in terms of Section 197(2) of the Act read with Rule 28AA (3) of the Rules empowered to cancel a certificate already granted under Section 197(1) of the 18/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc Act. This power of cancellation which in effect withdraws the earlier  certificate  to  the  prejudice   of the  Assessee  would be required   to   stand   the   tests   applicable   to   a   rejection   of   an application made under Section 197 of the Act. It is undisputed that the cancellation of the earlier certificate will be effective only from the date, the order of cancellation is passed.

19.

The Petitioner's primary grievance is that the impugned   order   dated   23   October   2017,   canceling   the certificate dated 4 May 2017 is completely without jurisdiction. It is not open to the Assessing Officer to even initiate review proceedings   in the absence of any change in circumstances which existed while granting certificate dated 4 May 2017. It is not disputed that   Section 197(2) of the Act   empowers   the Assessing Officer to cancel the certificate issued under Section 197(1) of the Act with regard to lower and/or nil withholding tax   issued   under   Section   197(1)   of   the   Act.   However,   it   is submitted that there is no change in the financial and other circumstances as existing when the certificate dated 4 May 2017 19/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc was issued and when the impugned order canceling the above certificate was passed. Therefore, the impugned order is without jurisdiction.

20.

In the present facts, we note that impugned order dated 23 October 2017 cancels the certificate dated 4 May 2017 on the ground that it was issued by mistake i.e. not having considered   Rule 28AA (2) of the Rules in the context of the pending demands. The Revenue has filed an affidavit in reply dated 11 January 2018 of Respondent No. 1­ Mr. M. Ashok Babu,   Joint   Commissioner   of   Income   Tax,   opposing   the admission and also relies upon it at the   final hearing. We find that the order preceding the grant of the certificate has not been annexed to the affidavit filed by the Revenue.   This Court in Larsen   &   Toubro   Ltd.,   (supra)   has   held   that   an   issue   of certificate   must   necessarily   be   preceded   by   an   order   under Section 197(1) of the Act. In fact the issue of certificate is the result of an order holding that the applicant is entitled to a certificate under Section 197 of the Act. It must of necessity be so,   as   in   the   absence   of   the   reasons   being   recorded,   the 20/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc Certificate under Section 197 of the Act, would not be open to challenge by the Revenue, as it would be impossible to state that it is erroneous and prejudicial to the Revenue. The Revenue would   be   helpless.   Therefore,   the   recording   of   reasons   is necessary as only then it could be subject to Revision by the Commissioner of Income Tax under Section 263 of the Act.

21.

Therefore, it appeared to us while correcting the order which was dictated in Court on 16 January  2017 that the order prior to issuing the certificate dated 4 May 2017 ought to have been communicated to the Petitioner along with the notice, seeking to review the earlier certificate on account of mistake. In the   above circumstances we kept the petition on board for directions on 23 January 2018 as this issue was not addressed by the Revenue at the hearing. In fact the petitioner had contended before us that the Respondent No. 1 had no jurisdiction to cancel the certificate dated 4 May 2017 in the absence   of   any   change   in   the   circumstances.   However,   we wanted to hear and consider the Revenue’s response on the above aspect of jurisdiction. Therefore, on 23 January 2018 we 21/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc expressed  our  prima  faice   view  on  the  issue  to  the  parties, particularly that the absence of the order leading to the grant of the certificate being given to the Petitioner, leads to an adverse inference against the Revenue i.e. all issues including Rule 28AA (2) of the Rules were considered in the order passed leading to the issuing of Certificated dated 4 May 2017. We specifically invited the attention of the Revenue to the specific observation found in para 7 of the decision of this Court in Larsen & Toubro construing the words “without assigning any reasons”  held that it does not do away with the requirement of reasons existing for the decision, it only does away with communicating the same. In fact in this case the Section does not do away with requirement of issuing a reasoned order while issuing a Certificate under Section 197 of the Act.

22.

At the request of the Revenue the petition was posted   for   directions   on   25   January   2018   to   enable   the 22/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc Respondent to respond on the above issue. On 25 January 2018, the Revenue did not make any submission to counter our prima facie  view   including   our   drawing   an   adverse   inference   on account of non furnishing of the order/reasons leading to the issue   of   the   certificate   dated   4   May   2017. Therefore,   we conclude that there would have been reasons recorded in the file before issuing a certificate dated 4 May 2017 and this ought to have been furnished to the party before resting its case in the impugned order on the ground that the aspect of Rule 28 AA of the   Rules   was   not   considered   at   the   time   of   granting   the Certificate. Further if the Revenue seeks to cancel the same on the ground that a particular aspect has not been considered then before taking a decision to cancel the certificate already granted, it must satisfy the requirement of Natural Justice by giving a copy of the same to the parties and hear them on it before taking decision to cancel the certificate. This is particularly so as in the present facts the show cause notices dated 16 August 2017  and  30  August  2017  seeking  to  review the Certificate dated 4 May 2017 did not indicate that the review is being done 23/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc as   the   Certificate   dated   4   May   2017   was   granted   without considering the applicability of Rule 28 AA of the Rules in the context   of   the   petitioner’s   facts.   Therefore,   there   was   no opportunity/occasion for the petitioner to seek a copy of the reasons recorded while issuing a certificate dated 4 May 2017. Moreover,   this  becomes  all  the   more   important  as  we   have found on examination of facts that there is no change in facts as existing on 4 May 2017 and as existing when the impugned order dated 23 October 2017 was passed. Thus, in the present facts, according to us, there is a flaw in the decision making process which vitiates the impugned order dated 23 October 2017. 23. Apart from the above, we shall examine the issue of cancellation of certificate dated 4 May 2017 by the impugned order dated 23 October 2017 and examine whether the same can be sustained on grounds specified therein, de hors the   issue   of   breach   of   natural   justice.   However,   before examining the other issues we must make it clear that we are 24/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc mindful of the fact that the Revenue Officers are best equipped to protect the interest of the Revenue. Therefore, at the time of disposing of an application for grant of nil or lower rate of withholding   tax  certificate,   they  must   ensure   that   Revenue’s interest are protected. However, this protection of Revenue’s interest has as to be examined/weighed against the assessee’s right to nil or lower rate of withholding tax as provided by Parliament in Section 197 of the Act.   Therefore, the grant or refusal to grant the certificate under Section 197 of the Act has to be determined by the parameters laid down  therein and Rule 28 AA of the Rules. It cannot go beyond the said provisions to decide an application. This alone would ensure uniformity of treatment of all applicants seeking the benefit of Section 197 of the Act.

24.

Mr. Suresh Kumar, learned Counsel for the Revenue, states that the impugned order need not be examined at all as   the cancellation of a certificate in the present case would not cause any prejudice to the Petitioner. In case, more 25/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc 26/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc determination during the assessment proceedings.  Therefore, at this stage, before the assessment is completed, it is not open to the Assessee therein to contend that it is not liable to tax till its claim   to   exemption   is   determined   during   assessment proceedings. In the present facts, the carry forward loss of the Petitioner are so huge that even if the Petitioner makes any profits in the subject assessment year, there would be no taxable income for the subject Assessment Year. Thus, the aforesaid decision of the Madras High Court in  Ansaldo Energia SpA. (supra) would have no application to the present facts.

25.

The impugned order dated 23 October 2017 cancels the certificate dated 4 May 2017 on the following two grounds:­ (a) the financial condition of the Petitioner is such that   any   future   tax   payable   may   not   be recoverable from the Petitioner; and 27/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc (b) there is outstanding tax demand of Rs. 6.90 Crores payable by the Petitioner.

26.

So  far  as  ground  (a) above   viz:   the   earlier certificate is cancelled because of the current financial health/ condition of the Petitioner is such that it would be difficult to recover   any   future   liability   raised   against   the   Petitioner­ Company. A mere averment is made to above effect without indicating any basis for the conclusion.

27.

Mr.   Suresh   Kumar,   learned   Counsel   for   the Revenue   places   reliance   upon   the   affidavit   in   reply   of Respondent No. 1 Mr. N. Ashok Babu, Joint Commissioner of Income  Tax,  dated  11  January 2018  – wherein  reference is made to a meeting with the group CFO that the financial health of the Company is very weak and also newspaper reports. It is now well settled that the impugned order would stand or fall by the   reasons   mentioned   therein   and   the   same   cannot   be improved by an affidavit. In any case, in the present case, the 28/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc affidavit relied upon  newspaper items and discussion with the group CFO that the financial health of the company is very weak. This is without giving any particulars. In any case this also   supports   the   stand   of   the   petitioner   that   its   financial condition was very weak both when it made the application on 27 February 2017 for a certificate under Section 197 of the Act – wherein the Petitioner points out that it had carried forward loss of over Rs. 4900.00 Crores as per the return of income filed for the year ending 31 March 2016 and now at the time when the impugned   order   was   passed.   The   impugned   order   dated  23 October 2017 does not indicate, even remotely, what the profits are likely to be in the near future, which the revenue may not be able to recover as it would be more than the carry forward losses. In fact the affidavit if anything supports the case of the petitioner that they have huge carried forward  losses and there is no likelihood of any tax becoming payable in the subject assessment year.

28.

Moreover, it was urged by the petitioner that 29/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc issued/ granted.  However, such a cancellation/ departure from the earlier view has to be made on valid and cogent reasons, i.e. when there is material on record to justify the departure. The impugned   order   does   not   indicate   any   such   material,   nor Revenue is able to show us any such change in circumstances which would warrant canceling certificate dated 4 May 2017. Therefore, the basis/ ground (a) of the impugned order is not 30/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc sustainable in the facts and renders the order bad.

29.

So far as ground (b) above viz. outstanding tax demand of Rs. 6.90 Crores is payable to the revenue by the petitioner.  Therefore, the certificate dated 4 May 2017 cannot be sustained, resulting in its cancellation. We note that neither Section 197 of the Act nor Rule 28AA of the  Rules provide that no   certificate   of   nil/lower   rate   of   withholding   tax     can   be granted if any demand, howsoever minuscule, is outstanding. In fact   Rule   28   AA(2)   of   the   Rules   requires   the   authority   to determine   the   existing/estimated   liability   taking   into consideration   various   aspects   including   the   estimated   tax payable for the subject assessment year and also the existing liability.  The existing and estimated liability would also require taking into account the demands likely to be upheld by the appellate authorities.

30.

In a case like this one where the petitioner states that the issue is concluded by a decision dated 27 May 31/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc 2016 of the Tribunal in its own case, then the assessing officer has to consider the same and give some modicum of reason why it is prima facie not covered by the decision of the Tribunal. This is particularly so in the back ground of the petitioner’s Appeal with respect to the demand of Rs. 6.68 Crores being  heard by the CIT(A)  as far back as in February 2017 and no order being passed   thereon   till   date.   Further,   in   the   present   case   the impugned order does not deal with the petitioner’s contention that the demand of Rs. 28.00 Lakhs is on account of mistake in application   of   TRACE   system   nor   does   it   deal   with   the Petitioner's contention that the entire demand of Rs. 6.90Crores can   be   adjusted   against   the   refundable   deposit   of   Rs.   7.30 Crores,  consequent to  the  order dated  27 May 2016  of the Tribunal in its favour.

31.

Therefore,   the   impugned   order   dated   23 October 2017 seeking to cancel the certificate dated 5 May 2017 is a non speaking order as it does not consider the petitioner’s submissions.  Therefore, the basis/ ground (b) of the impugned 32/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22

902­WP­2701­17.doc order is not sustainable in the above   facts   and renders the order bad.

32.

In the above view the impugned order dated 23 October 2017 is quashed and set aside.

33.

Writ Petition disposed of in the above terms. [RIYAZ I. CHAGLA  J.] [M.S. SANKLECHA, J.] 33/33 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 03:42:22 Powered by TCPDF (www.tcpdf.org)

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