The Delhi High Court has held that an order rejecting an application for a lower or nil rate of tax withholding must be a reasoned and speaking order, passed in compliance with the parameters laid down in Rule 28AA of the Income Tax Rules, 1962. A non-reasoned, one-line rejection based solely on the existence of an outstanding demand, without justifying the departure from a consistent practice of granting such certificates in previous years under similar facts, is arbitrary and liable to be quashed.
Accordingly, the impugned order passed under Section 197 of the Income Tax Act, was set aside, and the matter was remanded back to the Assessing Officer to pass a fresh, reasoned, and speaking order within two weeks, after considering the Court’s conclusions.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar rejected the arguments of the respondents that since the impugned order was passed by the DCIT (TDS), Gurugram, the Delhi High Court lacked territorial jurisdiction, and noted that although the impugned order was issued from Gurugram, it was addressed to the petitioner’s Delhi office. Importantly, the certificates for all previous assessment years and the subsequent rectification orders were issued by the TDS Circle 75(1) in Delhi.
As far as the contention of the respondents that the petitioner should have filed a revision petition under Section 264 of the Income Tax Act, the Bench observed that its jurisdiction under Article 226 of the Constitution of India is not barred from adjudicating a petition against the rejection of an application under Section 197 of the Income Tax Act, implying that the writ petition was maintainable.
The Bench observed that the impugned order rejecting the petitioner’s application was unreasoned and merely stated that there were outstanding demands against the petitioner’s TAN. It failed to consider that for the three immediately preceding financial years, certificates for a lower withholding rate of 0.30% had been issued under similar circumstances. The Bench that the rejection, which effectively mandates deduction at the normal rate, was untenable without proper reasoning, especially when an alternative prayer for a 0.30% rate was made.
On compliance with Rule 28AA, the Bench emphasized that Rule 28AA of the Income Tax Rules, prescribes the formula and parameters for determining the appropriate rate of TDS. It held that an order under Section 197 must be reasoned and cannot arbitrarily fix rates without justification. The impugned order did not reflect any compliance with the considerations mentioned in Rule 28AA.
The Bench took into account that the demand of Rs. 23.80 Crores, which was the sole basis for rejection, was subsequently rectified and reduced to Rs. 14.08 Crores, after the impugned order was passed. This significant reduction was an aspect that the Assessing Officer had not considered.
Briefly, the petitioner, a company engaged in the business of selling travel products and solutions through its web-based portal, was granted certificates for a lower rate of tax withholding under Section 197 of the Income Tax Act, several preceding assessment years, including at a rate of 0.30% for the three financial years immediately preceding the one in question.
In 2025, the petitioner filed an application for a ‘NIL Withholding Tax Certificate’ for the Financial Year (F.Y.) 2025-26, or alternatively, a certificate at the rate of 0.30%, consistent with prior years. The application was based on the ground that due to substantial brought-forward tax losses from previous years, the petitioner’s taxable business income for F.Y. 2025-26 would be ‘Nil’ after set-off.
During the proceedings, the respondents sought clarification on an outstanding tax demand, and the petitioner provided a response. However, the Deputy Commissioner of Income Tax (TDS), Gurugram, rejected the application through a one-line order, stating that there was a pending demand of Rs. 23.80 Crores against the petitioner’s Tax Deduction and Collection Account Number (TAN) for which no stay had been granted.
The petitioner contended that a substantial portion of this demand was disputed and under appeal or pending rectification. It was also submitted that the petitioner was entitled to tax refunds of approximately Rs. 84 crores from the Revenue. Subsequent to the filing of the writ petition, the TDS Officer passed rectification orders, which substantially reduced the demand that formed the basis of the rejection, bringing the total outstanding demand down to Rs. 14.08 Crores.
Cases Distinguished:
Dalip Singh v. State of Uttar Pradesh – (2010) 2 SCC 114
National Petroleum Construction Co. v. DCIT – 421 ITR 24
Coforge Solutions (P.) Ltd. v. Deputy Commissioner of Income-tax (TDS) – [2024] 158 taxmann.com 160 (Punjab & Haryana)
OPJ Trading (P.) Ltd. v. Income-tax Officer, TDS-2 – [2018] 98 taxmann.com 117 (Gujarat)
CIT v. Chhabil Dass Agarwal – (2014) 1 SCC 603
Ramjas Foundation and another v. Union of India – (2010) 14 SCC 38
SIS Live v. ITO – (2011) 333 ITR 13
Appearances:
Advocates Salil Kapoor, Soumya Singh, Sumit Lalchandani and Ananya Kapoor, for the Petitioner/ Taxpayer
Advocate Siddhartha Sinha, for the Respondent/ Revenue
