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DTC/2009-10/Rep-3
27th June, 2009
Shri. S.S.N.Moorthy
Chairman
Central Board of Direct Taxes
Ministry of Finance
Government of India
North Block
Delhi-110 001
Respected Sir,
Re:   Request to consider genuine hardships and practical difficulties faced in getting a Certificate for lower deduction or non-deduction of tax at source.
This has reference to section 197 which authorizes the Assessing Officer to grant certificate of lower or non deduction of tax at source on an application made by the assessee in the prescribed form i.e. Form No.13. Rule 28AA specifies the manner for calculating the rate or rates for lower deduction of tax at source.
Rule 28AA reads as under:
“Certificate for no deduction of tax or deduction at lower rates from income other than dividends
(1)   The Assessing Officer on application made by a person under sub-rule(1) of Rule 28, may issue a certificate in accordance with the provisions of sub-section (1) of section 197 for deduction of tax at source at the rate or rates calculated in the manner specified below:

  (i)  at such average rate of tax as determined by the total tax payable on estimated income, as reduced by the sum of advance tax already paid and tax already deducted at source , as a percentage of payments referred to in section 197 for which the application under sub-rule(1) of rule 28 has been made; or

  (ii)  at the average of the average rates of tax paid by the assessee in the last three years.
whichever is higher.
(2)   The Certificate shall be valid for the assessment year to be specified in the certificate, unless it is cancelled by him at any time before the expiry of the specified period. An application for a fresh certificate may be made, if required, after the expiry of the period of validity of the earlier certificate.
(3)   The certificate shall be valid only for the person named therein.
(4)   The certificate shall be issued directly to the person responsible for paying the income under advice to the applicant.”

Various representations have been received from the members all over the country explaining the difficulties/inconvenience caused to the assessees in getting the certificate of lower or non-deduction of tax at source under section 197(1) from the Assessing Officers. In this regard we would like to submit:

As per Rule 28AA(1)(i) the average rate of tax is to be computed on the basis of gross receipts i.e. payments referred to in section 197. However as per clause (ii) of sub-rule (1) of Rule 28AA, the basis is the average rate of tax paid by the assessee in the last three years, which is computed on the basis of net income. The higher of the rates determined under clause (i) and (ii) is the rate at which the certificate for lower deduction of tax at source is to be issued.
It is submitted that the comparison made in sub-rule (1) is between two totally different items. Invariably and more particularly in case of a company/ firm, the average rate of tax paid by the assessee is 30%. Therefore, the result under clause (ii) will be 30% whereas the result under clause (i) would be lower than 30%. This is contrary to the legislative intent and clearly defeats the provisions of section 197 of the Income-tax Act, 1961.

The hardship faced by the Company/firm assessee is illustrated by the way of following example:

Interest received on loans advanced Rs. 10,00,000
Less: Interest paid to banks on loans borrowed directly attributable to the interest received as mentioned above Rs. 9,50,000
Net income from Interest Rs. 50,000
Assuming that there is no other income, the tax payable on total income would be : (50,000 X 30%) Rs. 15,000
Average rate of tax determined as per clause (i) of sub-rule (1) of rule 28AA 15,000/10,00,000 X100 = 1.5%
Average rate of tax determined as per clause (ii) of sub-rule (1) of rule 28AA 30%
Higher among (i) and (ii) 30%

Thus, in the above case the assessee would not be able to get the benefit of lower deduction of tax at source which is contrary to legislative intent as mentioned under section 197 of the Income-tax Act, 1961.
It is further submitted that Form No.13 does not provide for the computation of average rate of tax as per clause (i) of sub-rule (1) of Rule 28AA. Under Para 2 in clause (vii) the average rate of tax is computed is determined as tax payable on estimated income as a percentage of estimated total income whereas it should be tax payable on total income as a percentage of payment referred to under section 197 of the Income-tax Act,1961.

Therefore, a new clause in Para 2 of Form No.13 should be inserted to provide for the amount of payments referred to in section 197.

It is suggested that Rule 28AA and Form No.13 may be suitably amended to give effect to the legislative intent of the provisions of section 197 of the Income-tax Act,1961.

Warm Regards
CA. UTTAM PRAKASH AGARWAL

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