INCOME TAX REVIEW

1. General

   1. Part B of Chapter XVII of the Income-tax Act, 1961 (ITA) deals with provisions of tax deduction at source (TDS). It has 38 sections. Most of them either cast a duty to deduct tax from certain items of payments or credits (23 sections) or cast an administrative duty or provide for consequences for default like levy of interest etc. (13 sections). All these 36 sections impose some burden on the assessee, the remaining two are sections 197 and 197A, which essentially provide for relief or some benefit.

   2. Under section 197 one approaches the assessing officer (AO) to get relief while u/s.197A one gets relief without approaching the AO by just furnishing the declaration to the person who is to deduct tax.
       

2. Section 197

   1. Provisions of section 197 are applicable to all persons, residents or non-residents, whether Individual, HUF, Company or any other person.

   2. It deals with deduction of tax at source (TDS) related to certain items of payments or credits; i.e., each covered under specific sections and not all items of payments covered under 23 sections. It covers 13 such items covered under sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K, 194LA & 195. It excludes other sections such as sections 194B, 194BB, 194E, 196A etc.

      One can say that all widely applicable items have been covered. Hence, the section has extensive application.

   3. Under this section, a person from whose income, tax is required to be deducted and who is of the opinion that in the context of his total income, tax as would get deduced is not justified, he can make an application to the AO in Form 13 under rule 28 and apply for either no deduction (i.e., at Nil rate) or at the rate lower than "the rates in force". The AO, on an application made, shall give to the person such certificate as may be appropriate. For the definition of "the rates in force", refer section 2(37A).

   4. Once the certificate is given, the person responsible for paying the relevant income shall not deduct tax as provided in the relevant section but as certified by A.O. till the certificate remains valid.

   5. Provisions of sub-section (2A) are very interesting. Rarely the law uses the terminology which this sub-section uses. It states that "having regard to the convenience of assessees…….." and the interest of the revenue, the Board is empowered to make rules specifying the cases in which and the circumstances under which an application for the grant of the certificate may be made etc. and all other matters.

   6. Hence, one can test the relevant rules, (rules 28, 28AA, 28AB & 29) whether they provide the convenience to the assessee.
       

3. Relevant Rules

   1. Rule 28 is simple and it states that application u/s.197 (1) shall be made in Form No.13.

   2. Form No.13 is a common comprehensive form for the purposes of application u/s.197 (1) and section 206C (a) (in the context of collection of tax at source). Last amendment to this form was w.e.f. 1-10-2003 by combining forms 13C, 13D & 13E into it. Some interesting observations on the contents of the form and requesting the readers to respond! (At least this will confirm to me that you have read this article!)

      • Why schedules are not in the same serial order as the sections referred to in section 197?; e.g., "Name and address of the employer" in the context of section 192, the first section covered u/s. 197(1) is schedule V instead of schedule I.

      • Why in all schedules, the heading reads "Name and address of …………." except in schedule IX where the heading reads "Full name and address of ………….."?

      • Form No. 13 is recently amended w.e.f.
        30-11-2004 (IT 16th Amendment Rules, 2004). Form now has XII schedules, XIIth added to cover new section 194LA added in section 197: Thus, it has 12 schedules against 13 sections covered u/s. 197, one number missing, Which is it?

       

      1. *Rule 28AA provides for certificate to be issued by A.O. in the context of various items of payments covered u/s.197 except dividends. While section 197(1) states that when the A.O. is satisfied that the total income of the person justifies the deduction at Nil or lower rate, he shall give such certificate. Rule 28AA reads to state that A.O. may issue such certificate. Combined reading of both the section and rule leads to opine that issuing the certificate is mandatory though only if the case justifies it. However, no time frame is provided for it.

      2. Sub-rule (1) provides how the percentage shall be determined. It shall be higher of the following two:

         1. 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 the payment referred to in section 197 for which the application under sub-rule (1) of rule 28 has been made; or

         2. at the average of the average rates of tax paid by the assessee in the last three years;

      3. Sub-rule (2) states that the certificate shall be valid for the assessment year as specified. It also states that an application for a fresh certificate may be made after the expiry of the period of validity of the earlier certificate. However, normally the department does accept and processes applications made while the existing certificate remains valid for little more time, though there has been no instructions/circular from the Board for the same. It may be noted that instructions in the context of rule 29(2) are issued in 1963 which states that the rule did not bar from making an application for a fresh certificate for the succeeding period some time before the expiry of the earlier certificate.

      4. Sub-rule (3) states that the certificate shall be valid only for the person named therein. This sub-rule definitely cannot be termed as "convenient to the assessee". Every time any relevant transaction like Fixed Deposit on which interest in being earned takes place with different companies/banks etc. one would have to apply again and again.

      5. Sub-rule (4) provides that the certificate shall be issued direct to the person responsible for paying the income (under advice to the applicant). Here the department has became practical and tax-payer friendly in handing over the certificate to the applicant.

   3. Rule 28AB

      1. This rule is inserted w.e.f. 1-4-2004. It is applicable to the trust etc. which claims exemption u/s.11 or u/s.12 and the institution as referred to in section 139(4C).

      2. This rules makes exception to the provision as referred to in para 3.3.4 above; i.e., rule 28AA(3). To the trusts etc the A.O. shall grant general certificate valid universally rather than valid only for the person named therein.

      3. Conditions are prescribed for this purpose and they are:

         1. all returns of income due on or before the date on which the application is made are furnished.

         2. the relevant trust etc has been approved for the purpose of exemption from income-tax.

         3. the applicant has to give the list of deductors from whom amounts are to be received without deduction of tax at source every six months along with the names, addresses and the amounts received.

      4. The certificate shall be valid for the financial year specified therein. An application for fresh certificate may be made after the expiry of the period of validity of the earlier certificate.

      5. Rule 29
         This rule provides for certificate of no deduction of tax or deduction of at lower rates from dividends. As all dividends (except some deemed dividend) are exempt there is no importance to this rule and need not be discussed.

4. Section 197A

   1. If there is any section in the IT Act, which predominantly reposes trust in the assessee, it is section 197A. Section empowers the assessee to decide for himself whether tax needs to be deducted from his income and make a declaration and get free from the rigours of tax deduction.

   2. Section 197A covers subject of deduction of tax from only five types of income (1) Dividends u/s.194; (2) Payments in respect of deposits under National Saving Scheme etc.
      u/s.194EE; (3) Interest on securities u/s.193; (4) Interest other than "Interest on securities
      u/s.194A and (5) Income in respect of units
      u/s. 194K .

   3.  

      1. Sub-section (1) covers the first two types of income per above. It applies only in the case of an Individual who is resident in India.

      2. Sub-section enables an Individual to make a declaration (in Form No.15G) and furnish it to the person who is to deduct tax. Declaration is to the effect that the tax on his estimated total income of the previous year in which income referred to in the first two sections per para 4.2 above will be nil. On furnishing such form in duplicate, the person giving such income shall not deduct any tax therefrom.

      3. Frankly speaking, the relief available u/s (1) has not much use as dividends from companies are now exempt u/s. 10(34) and income in the nature of interest in respect of deposits under NSS etc. is normally not of recurring nature. The other serious limitation of the sub-section is being discussed hereunder in para 4.5.

   4.  

      1. Sub-section (1A) covers the last three types of income, referred to in para 4.2 above namely interest on securities, other interest and income in respect of units. Here, out of three, at least one, other interest, prevails widely. Income in respect of units is exempt u/s.10(35). This section applies not only to an individual but to all other persons excluding a company or a firm. Person covered may be resident or non-resident.

      2. What is stated in para 4.32 above mutatis mutandis applies to this sub-section (1A) also.

   5. Provisions of sub-section (1B), inserted with effect from 1-6-2002 severely affects the use or facilities available u/ss(1) & (1A) of section 197A. It provides that besides the limitation as referred to in para 4.32 above, the provisions of said two sub-sections shall not apply if the total income in which such income is to be included exceeds the maximum amount which is not chargeable to income-tax. Following two illustrations bring out the consequences.

      Illustration 1

      Rupees Woman assessee below the age of 65: Total income, which is only of Interest & Capital sum received from NSS amount                                               80,000 Tax on total income                                             5,000 Rebate u/s. 88C                                                  5,000 Tax payable                                                            Nil Illustration 2                                                                       Rupees Gentleman assessee below the age of 65: Total income, which is only of Interest on company-deposits                            150,000 Tax on total income                                            19,000 Rebate u/s. 88: at 20% of investment in infrastructure Bonds of Rs. 95,000                                            19,000 Tax payable                                                            Nil

      Thus, though in both the illustrations but for the application of ss (1B), the individual concerned could have made the declaration in form No.15G on account of limitation provided u/s (1B); i.e., because the total income is above threshold limit, the individual concerned shall not be able to benefit even though tax on his total income is Nil, because of rebates available.

   6.  

      1. Sub-section (1C) applies to senior resident individuals; i.e., who are of the age of sixty five years or more at anytime during the relevant previous year. This sub-section overrides sub-section (1B). It operates same way as sub-section (1) and (1A). The Individual has to make a declaration in form No. 15H to the effect that any tax on his estimated total income, in which income referred to under five sections as referred to in para 4.2 above is included, will be nil, even though the total income could be above the threshold limit.

      2. When the provisions of sub-section (1B) were inserted w.e.f. 1-6-2002 by the Finance Act, 2002, there was an extensive criticism, specially from senior citizens, hence by the next Finance Act; i.e., FA 2003 this sub-section (1C) was inserted w.e.f. 1-6-2003. Thus, at least senior citizens get legitimate relief irrespective of the quantum of total income if tax payable thereon is nil. He then does not suffer tax-deduction. In turn he has not to furnish the return of income to claim refund of tax-deducted at source.

      3. Thus, senior citizen entitled to deduction u/s. 88B, which presently is Rs. 20,000, and who pays no tax till his total income is up to Rs. 153,333 is legitimately saved from tax deduction burden. One hopes that provisions of sub-section (1B) get deleted someday to grant such relief to all citizens at least if not to all other categories of persons. However, it appears that the department wants to burden such persons to furnish the return of income to enable it to keep track of such persons.

   7. Sub-section (2) casts a responsibility on persons who have received such declaration; i.e., form Nos. 15G or 15H from the receiver of the relevant income to furnish one copy thereof to CCIT or CIT on or before the 7th day of the month next following the month in which such declaration is furnished to him. Under section 272A(2)(f) for failure to deliver or cause to be delivered in due time a copy of such declaration, penalty prescribed is Rs. 100 for every day during which the failure continues.
       

5. Rule 29C and form Nos. 15G and 15H

   1. Rule 29C is made for prescribing procedure for furnishing the declaration etc. in form Nos. 15G and 15H.

   2. Before I close, let me draw attention to the verification one is to sign under above two forms. It reads:

      I ,……………., do hereby declare that to the best of my knowledge and belief what is stated above is correct, complete and is truly stated.

      Under section 277 for any false statement in any verification, person signing in punishable

      1. in a case where the amount of tax, which would have been evaded if the statement or account had been accepted as true, exceeds one hundred thousand rupees, with rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine;

      2. in any other case, with rigorous imprisonment for a term which shall not be less than three months but which may extend to three years and with fine.

      I am sure that no one is looking forward for rigorous imprisonment. Hence, one should take proper care before signing such verification.

6. Laws in civilized society have to be citizen-friendly, fair and just. These two sections do meet to some extent these yardsticks though one hopes that sections become more tax-payer friendly than what they are presently.