Facts of the Case

The petitioner, Cloudtail India Private Limited, filed a writ petition challenging the order dated 28 April 2021 passed by the Income Tax Officer (TDS), rejecting its application (Form 13) for issuance of a Nil/lower withholding tax certificate under Section 197(1) for AY 2021–22.

The petitioner contended that it created provisions for slow and ageing inventory based on scientific estimates, which were reversed in subsequent financial years, making the process revenue neutral.

It was also argued that such provisions were not claimed as deductions under Section 37 and were duly adjusted in taxable income.

Further, deduction of tax under Section 194O at 1% would result in excessive tax deduction and large refunds, causing financial hardship.

Issues Involved

  1. Whether rejection of the petitioner’s application for Nil/lower TDS certificate under Section 197(1) was valid in law.
  2. Whether the Assessing Officer (AO) followed the procedure prescribed under Rule 28AA while rejecting the application.
  3. Whether the petitioner’s accounting treatment of inventory justified issuance of a Nil TDS certificate.

Petitioner’s Arguments

  • Provision for slow and ageing inventory is a standard and accepted accounting practice aligned with Accounting Standard-2.
  • Such provisions are reversed in subsequent years, ensuring no double deduction and maintaining revenue neutrality.
  • Disallowances under Section 37 were voluntarily added back while computing taxable income.
  • AO failed to follow mandatory guidelines under Rule 28AA and CBDT SOP while rejecting Form 13.
  • Even if disputed deductions are disallowed, no tax liability arises and substantial refunds would still be due.
  • Reliance was placed on precedents where similar rejections were set aside.

Respondent’s Arguments

  • The AO had provided reasons for rejecting the application.
  • Earlier assessment (AY 2018–19) was under limited scrutiny and did not examine inventory provisions.
  • Upon clarification by the petitioner that no deduction was claimed, the matter could be reconsidered by the AO.

Court’s Findings / Order

  • The Delhi High Court noted that the matter required reconsideration in light of the petitioner’s clarification.
  • The impugned order rejecting the Nil/lower TDS certificate was set aside.
  • The case was remanded back to the Assessing Officer for fresh adjudication.
  • AO was directed to pass a reasoned order after granting opportunity of hearing within four weeks.

Important Clarification

  • The Court emphasized that applications under Section 197 must be decided in accordance with prescribed procedures and proper reasoning.
  • Where factual clarification materially impacts tax liability, rejection without adequate examination is unsustainable.
  • The decision reinforces procedural fairness in TDS certification matters.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:2401-DB/MMH09082021CW80412021_074321.pdf

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