Section 197 Certificate Covers Entire Assessment Year, Not Just From Date of Issuance: MP High Court Rescues NHAI From Rs. 41 Crore TDS Default Demand

"Assessment in Income Tax is Always For The Entire Assessment Year — Every Provision of The Income Tax Act is Liable to Be Applied For a Particular Assessment Year", Madhya Pradesh High Court has delivered a significant ruling that will have far-reaching consequences for deductors who obtain lower TDS certificates under Section 197 of the Income Tax Act mid-way through a financial year. The Division Bench of Justice Vivek Rusia and Justice Pradeep Mittal held that a certificate issued under Section 197 is valid and operative for the entire assessment year for which it is granted — and not merely from the date on which it is physically issued.

The ruling came as a major relief to the National Highways Authority of India (NHAI), which was staring at a colossal demand of Rs. 41,89,78,580/- raised by the Assessing Officer for alleged short deduction of tax at source on payments made to a foreign contractor before the Section 197 certificate was formally received on 30th June 2008.

NHAI had entered into a contract with M/s Ssangyong Engineering and Construction Company Ltd., a foreign entity, for development of national highways. Being the deductor under Section 195 of the Income Tax Act, NHAI was required to deduct tax at source on payments made to this foreign contractor. For Assessment Year 2008-09, the NHAI's Assessing Officer — ITO (TDS), Ward 2(1), International Taxation, New Delhi — eventually issued a certificate under Section 197(1) on 30th June 2008, permitting deduction at the lower rate of 1% for that assessment year.

The problem arose because NHAI had already made payments totalling Rs. 19,61,36,514/- to the foreign contractor between 10th April 2008 and 24th June 2008 — i.e., before the certificate was formally issued — and had applied the lower rate of 1% even for these payments. The Assessing Officer took the view that since no certificate was "in force" on the dates those payments were made, NHAI had failed to deduct tax at the applicable rates and was therefore an "assessee in default" under Section 201(1). A demand of Rs. 41,89,78,580/- was accordingly raised, including interest under Section 201(1A).

NHAI's appeal to the Commissioner of Income Tax (TDS), Jabalpur was dismissed. The Income Tax Appellate Tribunal (ITAT), Jabalpur, however, reversed the authorities below and ruled in NHAI's favour by order dated 12th September 2013, holding that NHAI could not be treated as an assessee in default. The Revenue carried the matter to the High Court, raising two substantial questions of law.

The Revenue's central argument, advanced by Shri Siddharth Sharma, was that the Section 197 certificate came into existence only on 30th June 2008 and could therefore operate only prospectively from that date. In the absence of any valid certificate on the dates of payment, the deductor was legally obligated to deduct tax at the full applicable rate. Any departure from this, the Revenue contended, rendered NHAI in default for the pre-certificate period.

The High Court undertook a close textual reading of Section 197 and Rule 28AA and arrived at a conclusion that is both legally precise and practically significant for countless deductors across the country.

The Court began by noting the clear statutory mandate in Section 197(2): "Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be." The Court emphasised that the statute does not say the certificate operates only from the date of issuance — it operates until it is cancelled.

Turning to Rule 28AA(2) of the Income Tax Rules, the Court noted that the rule is unambiguous: the certificate is valid for the assessment year specified in the certificate, unless cancelled at any time before the expiry of the specified period. In other words, the certificate's validity is co-extensive with the assessment year — not with the date it is signed.

The Court then articulated the key principle that resolves the controversy:

"The assessment in income tax is always for the entire assessment year. Every provision of the Income Tax Act is liable to be applied for a particular assessment year. Even the tax liabilities are fixed on the assessee for the entire assessment year."

This observation captures the essence of the ruling. The income tax framework operates on the concept of an assessment year as a unified, indivisible unit. A certificate issued under Section 197 for AY 2008-09 is, by its very nature, a certificate for that entire year. To hold that it operates only from 30th June 2008 would be to impose an artificial sub-division of the assessment year that has no statutory basis whatsoever.

The Court accordingly answered Question of Law No. 1 against the Revenue, holding that NHAI cannot be treated as an assessee in default under Section 201 of the Act. Since NHAI held a valid Section 197 certificate for the entire AY 2008-09, no default can be fastened upon it merely because the physical document came to be issued on 30th June 2008 rather than 1st April 2008.

On Question of Law No. 2, the Court upheld the ITAT's deletion of interest under Section 201(1A), reasoning that once the principal default is negated — because a valid Section 197 certificate existed for the entire assessment year — the interest demand which flows from that default also falls away automatically. As the Court noted, the ITAT "was justified in deleting the interest levied under Section 201(1A) of the Act because the assessee had certificate under Section 197 for an entire assessment year."

The Court also made reference to Section 201's proviso, which provides that a person shall not be deemed to be an assessee in default if the relevant certificate from an accountant is furnished, further reinforcing that the legislative intent is to protect bona fide deductors who act in accordance with certificates and orders of the Assessing Officer.

All nine Income Tax Appeals (ITA Nos. 32 to 40 of 2014) filed by the Commissioner of Income Tax (TDS) were accordingly dismissed, and the ITAT's orders dated 12th September 2013 and 20th September 2013 were upheld.

The Madhya Pradesh High Court's ruling settles an important and recurring controversy in TDS litigation: a Section 197 certificate does not spring into life only from the date stamped on it. It breathes validity into the entire assessment year it covers. Deductors who obtain lower TDS certificates — even late in a financial year — cannot be penalised for the period before physical issuance, so long as the certificate was eventually granted for that very assessment year. Revenue authorities seeking to bifurcate an assessment year into pre-certificate and post-certificate periods — and to levy default and interest for the former — will find no support in the statute, the rules, or now, the High Court's binding ruling.

Date of Decision: 06th March 2026