Delhi HC Sets Aside Non-Speaking Order, Refusing to Allow LDCs to Deduct 0.01% TDS

In its recent order, the Delhi High Court has invalidated a non-speaking order that rejected the grant of a lower deduction of tax certificate (LDC) allowing for a deduction of 0.01% TDS.

The bench, led by Chief Justice Satish Chandra Sharma and Justice Tushar Rao Gedela, noted that the reasons given by the Respondent/department in relation to the Application were founded on broad assumptions about projected revenue and Income tax liability. The court further observed that the order had been issued in a mechanical manner, reflecting a lack of careful deliberation.

The petitioner, engaged in the retail trade of goods through e-commerce platforms, raised questions against a certificate issued by the Deputy Commissioner of Income Tax, TDS Circle 77(1), under Section 197 of the Income Tax Act, 1961. This challenge was accompanied by a letter addressed to the petitioner by the respondent.

Seeking a reduced deduction of tax certificate (LDC) in compliance with Section 197 of the Income Tax Act, the petitioner submitted an application, along with Form 13 of the Income Tax Rules, 1961. The objective was to obtain an LDC that would result in a lower deduction of tax, as opposed to the standard 1% deduction of tax deducted at source (TDS) outlined in Section 194O of the Income Tax Act.

The petitioner requested the issuance of an LDC, expecting a reduced TDS rate of 0.01%. In response, the respondent posed several inquiries, seeking specific information regarding the petitioner’s business activities, previous LDC issuances, financial statements for particular fiscal years, copies of income tax returns (ITRs), details regarding advance tax payments, and any outstanding tax obligations.

The petitioner contended that their projected tax-to-turnover ratio stood at 0.012%, which is lower than the 1% TDS deduction rate.

However, the respondent issued an LDC that permitted a TDS deduction rate of 0.5% instead of the 0.01% sought by the petitioner.

The petitioner argued that the actions taken were done mechanically, disregarding the provision under Rule 28AA of the Income Tax Rules. The petitioner emphasized that the issuance of an LDC is not an automatic entitlement but rather an exception to the regulations stated in Sections 192-195 of the Income Tax Act. The petitioner believed that the burden of justifying the relief under Section 197 of the Income Tax Act had not been met adequately.

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The court determined that the order, along with the accompanying letter, lacked proper consideration and would result in substantial prejudice to the petitioner.

Therefore, the court has set aside the challenged actions and instructed the respondent to conduct a fresh evaluation of the application in accordance with the law in a quick manner.