Facts of the Case

The petitioners, Hero Wind Energy Private Limited and Hero Solar Wind Energy Private Limited, filed writ petitions challenging an order dated 18 June 2021 passed by the Deputy Commissioner of Income Tax (TDS), whereby their applications seeking Nil rate TDS certificates under Section 197 were rejected.

The petitioners were earning interest income from group companies, which attracted TDS under Section 194A. They contended that since they were loss-making entities, deduction of TDS at the standard rate of 10% would exceed their actual tax liability.

Earlier, TDS was being deducted at 0.5%, but due to the impugned order, it would increase to 10%, causing financial hardship.

The applications were rejected allegedly on the ground that the petitioners had not provided adequate details regarding borrowing rates, though the petitioners claimed that all requisite information had been submitted.

Issues Involved

  1. Whether rejection of application under Section 197 without proper reasoning is valid in law.
  2. Whether the Assessing Officer can ignore the mandate of Rule 28AA while deciding TDS certificate applications.
  3. Whether failure to provide detailed reasoning renders the order arbitrary and unsustainable.

Petitioner’s Arguments

  • The petitioners are loss-making companies, and TDS at 10% is excessive compared to actual tax liability.
  • They had submitted all necessary information, including financial details.
  • The rejection was based on incorrect assumption of non-submission of data.
  • The impugned order is non-speaking and arbitrary, violating legal principles governing Section 197 applications.

Respondent’s Arguments

  • The respondent contended that the information submitted by the petitioners was incorrect and erroneous.
  • The rejection was justified based on inadequate or unreliable data provided by the petitioners.

Court’s Findings / Order

The Delhi High Court held:

  • The impugned order was cryptic and lacked reasons, making it unsustainable in law.
  • There was no clear finding in the order that the information submitted by the petitioners was incorrect.
  • The Assessing Officer is bound to follow Rule 28AA, and deviation renders the action invalid.

Final Order

  • The impugned orders were set aside.
  • The matter was remanded back for fresh (de novo) consideration.
  • The Assessing Officer was directed to pass a reasoned order within four weeks.

Important Clarifications by Court

  • Orders under Section 197 must be reasoned and speaking orders.
  • Authorities cannot ignore statutory rules such as Rule 28AA.
  • Administrative decisions affecting taxpayers must adhere to principles of natural justice.

Sections Involved

  • Section 197 of the Income Tax Act, 1961
  • Section 194A of the Income Tax Act, 1961
  • Rule 28AA of the Income Tax Rules

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:2012-DB/MMH09072021CW61842021_092642.pdf


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