Madhya Pradesh High Court Clarifies Scope of Section 197 Certificate in TDS Deduction Case

The Madhya Pradesh High Court has dismissed a batch of appeals filed by the Income Tax Department, holding that the National Highways Authority of India (NHAI) cannot be treated as an “assessee in default” for tax deducted at source (TDS) where a valid certificate under Section 197 of the Income Tax Act permitted deduction of tax at a lower rate.

The court upheld the order of the Income Tax Appellate Tribunal (ITAT), which had granted relief to NHAI and set aside the demand raised by the department.

A Division Bench comprising Justice Vivek Rusia and Justice Pradeep Mittal was hearing several income tax appeals filed by the Commissioner of Income Tax (TDS), Bhopal, under Section 260A of the Income Tax Act. The appeals challenged orders passed by the ITAT, Jabalpur in relation to assessment years 2008–09 and 2009–10.

The central issue before the court was whether a certificate issued under Section 197 permitting deduction of tax at a lower rate operates only prospectively from the date of issuance or for the entire assessment year.

The dispute arose from a contract between NHAI and Ssangyong Engineering and Construction Company Ltd. for development of national highways. Payments were made by NHAI to the foreign contractor after deducting TDS at reduced rates pursuant to a certificate issued by the Assessing Officer under Section 197.

During verification, however, the department alleged that certain payments made between April and June 2008 were subjected to lower deduction of tax even though the certificate permitting such deduction was issued only on June 30, 2008. According to the department, the certificate could operate only from the date of issuance and therefore could not apply to payments made earlier.

On this basis, the Assessing Officer treated NHAI as being in default for failure to deduct TDS at the prescribed rate during the earlier period. An order was passed assessing a large TDS default along with interest and initiation of penalty proceedings. The Commissioner of Income Tax (Appeals) also upheld the departmental action, following which NHAI approached the Income Tax Appellate Tribunal.

The ITAT allowed the appeal and held that the case did not warrant treating the assessee as a defaulter under Section 201 of the Act. It set aside the orders of the Assessing Officer and the appellate authority, concluding that the certificate issued under Section 197 applied for the relevant assessment year and therefore protected the assessee from being treated as in default.

Challenging the tribunal’s decision, the department argued before the High court that the ITAT had committed an error in law. Appearing for the appellant, Advocate Siddharth Sharma submitted that in the absence of a valid certificate on the date of payment, the deductor was obligated to deduct tax at the rate prescribed under the Act.

Opposing the appeals, Senior Advocate Sumit Nema, appearing for NHAI along with Advocates Abhijeet Shrivastava and Ayush Gupta, contended that the statutory scheme of Section 197 indicates that the certificate relates to the entire assessment year. He also relied on judicial precedents to support the interpretation that once such a certificate is issued and remains in force, the payer cannot be treated as being in default.

After examining the statutory provisions and the rival submissions, the High court agreed with the interpretation adopted by the ITAT. The bench observed that Section 197 empowers the Assessing Officer to issue a certificate permitting deduction of tax at a lower rate where the income of the recipient justifies such relief.

The court noted that once such a certificate is issued, the person responsible for paying the income is required to deduct tax at the rate specified in the certificate unless it is cancelled by the Assessing Officer. It further emphasised that tax assessments under the Income Tax Act are made for the entire assessment year.

Answering the substantial questions of law against the revenue, the bench held that the respondent could not be treated as an assessee in default under Sections 201(1) and 201(1A) of the Act. It also upheld the ITAT’s decision deleting the interest levied by the department.

Accordingly, the High court dismissed all the income tax appeals filed by the department and affirmed the relief granted to NHAI.

Case Title: Commissioner of Income Tax TDS v. Project Director National Highways Authority of India PIU Narsinghpur Shri Ramdas Bhawan and connected matters

Date of Order: March 6, 2026

Bench: Justice Vivek Rusia and Justice Pradeep Mittal