The Patna High Court has ruled that a pending income tax demand cannot be used by the Assessing Officer (AO) as the sole basis to summarily reject an application for lower or nil deduction of tax at source ( TDS ) under Section 197 of the Income Tax Act, 1961.
Chief Justice K. Vinod Chandran and Partha Sarthy “provision under Section 197 only clothes the Assessing Officer with the power to satisfy himself that the total income of the recipient justifies the deduction of Income Tax at any lower rates or at a NIL rate. Hence, a demand pending against the assessee would not clothe the Assessing Officer with the power to summarily reject an application under Section 197. The satisfaction to be recorded under Section 197 is clearly with respect to the total income of the recipient for the subject assessment year, where the deduction is claimed at a NIL rate for the interest income earned from the fixed deposits in banks.”
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Infrastructure Development Authority, a Government of Bihar undertaking constituted under the Bihar State Infrastructure Development Enabling Act, 2006 filed a case in response to the rejection of the petitioner’s TDS applications, dated May 14, 2023, and January 30, 2024, which were dismissed by the AO on the grounds of an outstanding tax demand for the Assessment Year 2018-19.
The petitioner had sought a nil TDS deduction on interest income earned from bank deposits, arguing that their total income justified the relief under Section 197 of the Income Tax Act.
The petitioner’s counsel contended that the tax demand for 2018-19 had been stayed by the Principal Commissioner of Income Tax pending the disposal of a First Appeal, and therefore, the rejection was unjustified.
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The Court clarified that Section 197 granted the AO the authority to determine whether the total income of the assessee justifies a lower or nil TDS deduction. However, the existence of a pending tax demand does not provide sufficient grounds to summarily reject the application. The AO’s decision must be based on the total income of the assessee for the relevant assessment year, not extraneous factors like unresolved tax disputes.
The High Court set aside the impugned orders and restored the petitioner’s application before the AO, directing the officer to reconsider the matter.
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