Whether Application for LDC can be rejected and alternate remedy available?
Introduction
Under the provisions of the Income-tax Act, 1961 ('the Act'), there is no minimum threshold exemption for
application of Tax Deducted at Source (TDS) provisions for Corporate Assessees' including start-ups. Depending
on the nature of receipt, TDS will be applicable to the corporates at the rates prescribed u/s 193 to 195 of
the Act. At times, the companies come across situations where their tax liability for the year on their
aggregate income is much less than their tax being deducted at source thus leading to blockage of funds for
potential working capital needs thus increasing their cost of working capital. Further, these funds lie idle
with the government without earning interest and thereby impeding the company to earn returns by investing the
excess funds in higher return paying avenues. In such scenarios, the companies including start-ups can opt for
applying for a Lower Tax Deduction Certificate (LDC) so as to ensure free flow of funds for meeting the
working capital needs and also earn higher returns on surplus funds invested.
When can Corporates Assessees' apply for an LDC?
- When the business is eligible tax holidays
- Where the business is eligible for claiming specific deductions such as u/s 80IAC, 80IB, 80IAB of Act,
etc.
- Where the business is loss making
- Where the business is profit making but has huge carried forward losses that can be set off during the
current year / year of application
- Receipt by a company which does not have Permanent Establishment (PE) in India.
In addition to the above, a Non-Resident Indian intending to sell immovable property in India can also apply
for an LDC where the tax on potential capital gains on sale of property would be substantially less than the
tax that would be deducted at the prescribed rate. For NRI the prescribed effective rate of TDS on sale of
immovable property is 20% (plus applicable surcharge + cess) on gross sale proceeds.
The question that arises is whether an application made for LDC can be rejected by the Officer? If Yes, on
what grounds. What are the alternate remedies available with the Assessee. This article aims to answer the
moot question whether or not the Officer is authorized to reject the application filed for LDC and what are
the alternate remedies available.
The Applicant needs to apply for an LDC online vide form 13 through the traces portal along with the
documents prescribed such as Copies of form 26AS for the current year and previous 3 years, Copies of audited
financials along with computation for 3 preceding previous years, Computation of income for the current year,
Projected financials / estimated income for the ongoing year and subsequent years as may be required by the
officer, Tax Deduction Numbers (TAN) and KYC of all the parties responsible for making the payment along with
copies of contract or agreements entered into / MOUs, KYC of both the Corporate applicant and the persons
responsible for making TDS and any other documents as the Officer concerned deems fit for issuance of the
certificate
Issue of certificate
The officer disposing off the application for LDC is bound by rule 28AA of the Income-tax Rules, 1962. The
Assessing officer, before issuance of LDC u/s 197(1) of the Act is required to satisfy himself as provided in
sub rule (2) of rule 28AA which required that AO must determine the existing and estimated tax liability
taking into consideration, the tax payable on estimated income for the previous AY, tax payable or assessed or
returned or estimated income for 3 years preceding the previous year for which application has been made, the
advance tax liability/ payments, TDS made till date etc. The Assessing officer therefore may call for
additional documents as may be required for determination of tax liability pursuant to rule 28AA of the Act.
As the rule requires the AO to satisfy himself as to the existing and estimated tax liability, the AO may
therefore reject the application for LDC filed by the Company / applicant in case -
- he is not satisfied with tax liability determined vis a vis the lower tax rate applied by the Applicant
company / Assessee
- Where the required documents are not made available to him
- Where the Assessee has failed to discharge his liability of income tax for any one or more of the previous
years
- Where the Assessee has failed file return of income for any one or more of the preceding years where
he/it was liable to file a return u/s 139(1) of the Act
- Failed to get the books audited as provided or required by the provisions of income tax portraying lack
of good faith / disobedience to laws laid down and also minimizing the reliability on the financial
statements provided, etc
In any case, the order rejecting the application has to be passed vide speaking order after providing
the
Applicant reasonable opportunity of being heard and present his case following the principles of natural
justice.
In a recent case, Coforge Solutions (P.) Ltd., the Assessing officer the application for LDC filed by
the
Applicant as the company has defaulted in filing return of income for the last 4 years to analyze the tax
payable on assessed or returned income. Further on account of absence of audited financial statements,
undermined the reliability of the financial statements. On a writ being filed, the Hon'ble P&H HC dismissed
the same on account of alternate efficacious remedies being available to the Assessee.
Remedies Available
Where the Applicants application was rejected for non-bonafide reasons, the Assessee may prefer an
appeal
before the CIT(A), apply for revision u/s 264 before the CIT challenging the order passed by the Assessing
Officer on various grounds. However, it may be borne in mind that the order passed by the CIT in exercise of
powers u/s 264 is not appealable before the ITAT. In such cases, the Appeal would lie directly to the High
Court.
Further, if the Applicant can demonstrate grave loss / injustice that it may have to suffer during the time
lost to exhaust the above two options considering the time line for disposal the same, the Applicant may also
file a Writ petition before the High Court highlighting injustice / loss being suffered and the timeline for
disposal of appeal with the CIT.
It may however be noted that where the Assessee cannot adequately outline the serious losses that it may have
to suffer, the Assessee's application for writ would not be entertained by the HC due to the existence of
alternate efficacious remedy available in the form of Appeal to CIT(A). A direct application of writ without
exhausting the alternate remedy available would only be entertained in exceptional circumstances where the
Applicant can reasonably outline the injustice / loss that it may have to suffer in the absence of immediate
directions by the HC to the Assessing officer to issue an LDC appropriately. This position of law of with
regards to admission of a writ has been adequately outlined various case laws such Coforge Solutions (P.)
Ltd.
v DCIT (TDS), (supra), CIT v Chhabil Dass Agarwal [2013] 36 taxmann.com 36 (SC), Sis Live v ITO [2011] 15
taxmann.com 131 (Delhi, etc to name a few).
Judicial Precedents in favour of the Assessee
- Larsen & Toubro Ltd v ACIT (TDS) 2(1), [2010] 190 Taxman 373 (Bombay), the Hon'ble HC upheld the
revisionary powers u/s 264 to lie to the CIT where the Assessing Officer passed in order rejecting the
application without application of mind, which is germane to u/s 197 and the rules framed thereunder. The
Hon'ble HC therefore held that the CIT erred in rejecting the revision application made by the Assessee on
the ground that rejection of an application under section 197 by Assessing Officer does not result in an
order which would be subject to his revisional jurisdiction under section 264.
This case therefore outlines the jurisdiction of the CIT to exercise the revisionary powers where the
Assessee makes a bonafide application u/s 264.
- Manpowergroup Services India (P.) Ltd. v CIT (TDS)-1, New Delhi, [2021] 123 taxmann.com 290 (Delhi)
-
the Hon'ble HC remanded back the case for disposal afresh, where the revenue arbitrarily prescribed a higher
rate of TDS where the Assessee applied for a NIL rate of TDS. It was observed that the officer in charge is
bound to determine yearly TDS rates in accordance with the four parameters prescribed u/r 28AA. It was
further that where the officer neither uploaded the computation was supplied nor any reasonable explanation
was provided as to why such computation requirements were not complied with, it was observed that the order
rejecting the application inherently suffered from arbitrariness and therefore ought to be set aside.
- Tata Teleservices (Maharashtra) Ltd. v DCIT (TDS)-2(3) [2018] 90 taxmann.com 1 (Bombay), it was
observed that where the Applicant was issued LDC at NIL rate, subsequent revocation of the same without
valid grounds was not justified
Additional case references -
- Bently Nevada LLC v Income Tax Officer, Ward-1(1)(2), International Taxation [2019] 107 taxmann.com
440 (Delhi)
- National Petroleum Construction Co. v DCIT, Circle-2(2)(2), International Taxation, New Delhi
[2019] 112 taxmann.com 364 (Delhi)
- McKinsey & Co. Inc. v Union of India [2010] 193 Taxman 47 (Bombay)
In case of any queries or assistance required, feel free to reach out to me at cavishalshethiya@gmail.com