Commissioner of Income Tax TDS vs Project Director National Highwasys Authority Of India Piu Narsinghpur Shri Ramdas Bhawan

Headnote:(A) Income Tax Act, 1961 - Sections 197 and 201 - Certificate for deduction at lower rate - Validity of certificate issued during the financial year - Whether a certificate issued under Section 197 operates prospectively from the date of issuance or for the entire assessment year - Under Section 197(2) and Rule 28AA(2), a certificate is valid for the assessment year specified in the certificate unless cancelled - As assessment in income tax is always for the entire assessment year, the benefit of the certificate extends to the whole assessment year and not merely prospectively. (Paras 12 and 13)

(B) Income Tax Act, 1961 - Sections 201(1) and 201(1A) - Consequences of failure to deduct or pay - Assessee in default - Where a valid certificate under Section 197 exists for the assessment year, the deductor cannot be held as an assessee in default under Section 201(1) nor be liable for interest under Section 201(1A) for making deductions at the rate specified in the certificate. (Paras 14 and 15)

Facts of the case:
A deductor made payments to a contractor at a lower rate of tax deduction based on a certificate issued under Section 197 of the Income Tax Act for a specific assessment year. Although the certificate was issued on 30.06.2008, payments were made at the lower rate starting from 01.04.2008. The revenue authority treated the deductor as being in default for the period between 01.04.2008 and 30.06.2008, asserting that the certificate was only effective prospectively from the date of issuance.

Findings of Court:
The court held that according to the language of Section 197 and Rule 28AA, the certificate is valid for the specified assessment year. Since tax liabilities and assessments are determined for the entire assessment year, the certificate applies to the whole year. Consequently, the deductor cannot be held in default for applying the lower rate prior to the actual date of issuance within the same assessment year.

Issues: Whether a certificate for lower deduction of tax issued under Section 197 of the Income Tax Act is effective from the date of its issuance or for the entire assessment year, and consequently, whether the deductor is an assessee in default under Section 201 for payments made at the lower rate before the certificate's issuance date within that year.

Ratio Decidendi: A certificate for lower deduction issued under Section 197 is valid for the entire assessment year specified therein. Because income tax assessment is a year-long process, the certificate's validity is not restricted to the period following its issuance but covers the entire assessment year.

Result: The present income tax appeals are dismissed.

Legal Category Hierarchy

1. Liability for tax deduction at source default when certificate for lower deduction under Section 197 issued after part payment. (Para 2 , 3 , 4 )

2. Revenue argued certificate effective only from issuance; assessee argued it covers entire assessment year under Section 197. (Para 9 , 10 )

3. Appeals dismissed; assessee not held in default under Section 201(1) nor liable for interest under Section 201(1A). (Para 15 , 16 )

4. What is the period of validity of a certificate issued under Section 197 of the Income Tax Act for deduction at a lower rate?

The certificate under Section 197 read with Rule 28AA is valid for the entire assessment year specified in the certificate, not merely from the date of issuance. (Para 13 )

5. Does the issuance of a certificate under Section 197 for the entire assessment year absolve the payer from being deemed in default under Section 201(1) and from interest under Section 201(1A) for payments made before the certificate was issued?

Yes, because the certificate covers the entire assessment year, the payer is not in default under Section 201(1) nor liable for interest under Section 201(1A). (Para 14 , 15 )

ORDER :

Vivek Rusia, J.

These bunch of income tax appeals are filed by the Commissioner of Income Tax, (TDS), Bhopal, (M.P.) under Section 260-A of the Income Tax Act, 1961 in respect of assessment years 2008-09 and 2009-10 challenging the orders dated 12.09.2013 and 20.09.2013 passed by the Income Tax Appellate Tribunal, Jabalpur (for short 'Tribunal') in I.T.A. No.70/Jbp/2013, 73/Jbp/2013, 69/Jbp/2013, 72/Jbp/2013, 67/Jbp/2013, 71/Jbp/2013, 68/Jbp/2013, 22/Jbp/2012 and 23/Jbp/2012. As these appeals involve an identical issue, they are heard analogously and are being decided by this common order.

Facts of these cases are being taken from I.T.A. No.32/2014:-

2. M/s Ssangyong Engineering and Construction Company Ltd. (hereinafter referred to as 'deductee company') entered into a contract with the respondent assessee, i.e., the National Highway Authority of India (in short 'NHAI') for the development of national highways. The NHAI, being an assessee, made a payment to the deductee company with TDS as provided under Section 195 of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') at marginal rates after obtaining orders under Section 197(1) from its Assessing Officer, ITO(TDS), Ward 2(1), International Taxation, New Delhi. By virtue of the aforesaid order passed under Section 197, the deductee company was entitled to receive payment from the respondent/assessee at a marginal rate @ of 2.1% for assessment year 2006-07, @ of 2.112% for the assessment year 2007-08, @ of 1% for the assessment year 2008-09 and @ of 0.75% for the assessment year 2009-10 and 2010-11.

3. The respondent/assessee was treated as a person responsible for making payments to the foreign contractor, deducting tax at source and filing a return under Section 206 of the Act. On verification, it was noticed that the respondent/assessee had made payment of a contract worth of Rs.19,61,36,514/- to the deductee company from 01.04.2008 to 30.06.2008 without proper deduction of tax at source. Upon issuance of notice, the respondent/assessee filed an explanation that the payments were made with a lower deduction of tax at source as a consequence of the order issued under Section 195/197 by their A.O., New Delhi, on 30.06.2008 for the F.Y. 2008-09.

4. The Assessing Officer opined that the payments were made by the respondent/assessee for a sum of Rs.19,61,36,513/- for the period from 10.04.2008 to 24.06.2008, when no certificate for non-deduction of tax at source was in force, meaning thereby, at the time of making such payment or crediting such payment, there was no certificate. The certificate dated 30.06.2008 came into effect from the date of its issuance. Therefore, the period prior to 30.06.2008 suffered a lower deduction of tax at source than the rate prescribed under the Act. The Assistant Commissioner of Income Tax (TDS), Jabalpur, being an Assessing Officer, passed an order dated 04.03.2011, assessed Rs.31,03,54,504/- as total default of TDS and imposed the interest and directed for initiation of proceedings for penalty, in total of Rs.41,89,78,580/-.

5. Being aggrieved by the order dated 04.03.2011, the respondent/assessee preferred an appeal before the Commissioner of Income Tax (TDS), Jabalpur. Vide order dated 12.04.2012, the appeal was dismissed. Thereafter, the respondent/NHAI filed an appeal before the Income Tax Appellate Tribunal.

6. Vide order dated 12.09.2013, the learned ITAT has allowed the appeal by holding that it is not a fit case for holding that the assessee deductor is in default under Section 201(1) nor for interest under Section 201(1A) of the Act and set aside the order passed by the Assessing Officer as well as CIT. Hence, these appeals before this Court.

7. Vide order dated 26.06.2014, these appeals were admitted on the following substantial questions of law:-

“1. Whether on the facts and in the circumstances of the case, the ITAT was justified in law in holding that the assessee could not be held to be assessee in default u/s 201(1)

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2026 Supreme(MP) 469

A certificate for lower tax deduction issued under Section 197 of the Income Tax Act is valid for the entire specified assessment year, not just prospectively from the date of issuance; therefore, the deductor is not in default for payments made at the lower rate during that year.

Legal Category Hierarchy

Table of Contents

4. What is the period of validity of a certificate issued under Section 197 of the Income Tax Act for deduction at a lower rate?

5. Does the issuance of a certificate under Section 197 for the entire assessment year absolve the payer from being deemed in default under Section 201(1) and from interest under Section 201(1A) for payments made before the certificate was issued?

Judicial Analysis