2026 (3) TMI 70 - HC - Income Tax

Withholding tax certificate under Section 197 reduced to 2% as interim relief due to lack of recorded reasons and prima facie non-taxability.

A withholding-tax certificate issued without recorded reasons was held inadequate because it failed to address the nature of transactions and petitioner's ... Withholding certificate at the rate of 4% u/s 197 - mandation to record reasons for withholding certificate - certificate for deduction at lower rate - nature of transaction during assessment proceedings. HELD THAT:- We find that the Competent Authority has not given any sustainable reason. He was required to dilate upon the nature of transaction and record his prima-facie opinion and also deal with petitioner’s contention and the judgments relied upon. Since almost 85% of the period is already over and the payments made to the petitioner have been subjected to 4% tax, though the transactions prima-facie looks to be not exigible to tax, we are of the view that it would be just and proper if a certificate of deduction at 2% is issued to the petitioner so that the concern of the Revenue that the petitioner can be subjected to scrutiny assessment can be addressed and some respite can be given to the petitioner as a substantial amount is otherwise being withheld by the respondents. [Paras 9, 10, 12] Respondent directed to issue a tax withholding certificate requiring deduction of tax at 2% for the petitioner's application relating to AY 2026- 27 within 10 days. Final Conclusion: The petition is partly allowed: the Competent Authority's failure to record reasons warranted intervention; respondent is directed to issue a withholding certificate requiring deduction at 2% for AY 2026-27 (FY 2025-26) within 10 days. Issues: Whether the Competent Authority validly issued a tax withholding certificate at the rate of 4% under Section 197 of the Income Tax Act, 1961 for AY 2026-27, and if not, what relief should be granted to the petitioner.Analysis: The Competent Authority issued the certificate without recording reasons or addressing the nature of the transactions and the petitioner's reliance on relevant authorities; the transactions prima facie appear not to be exigible to tax and the petitioner may still be subject to assessment proceedings where tax liability can be determined and refund claimed if appropriate. Considering the large portion of the assessment year elapsed and substantial amounts already withheld, a reduction in the withholding rate would address the Revenue's concern of possible future scrutiny while providing interim relief to the petitioner.Conclusion: The issued certificate at 4% is not sustained; a tax withholding certificate requiring deduction of tax at 2% is to be issued for AY 2026-27.