2026 (3) TMI 338 - HC - Income Tax

Certificate under income-tax law applies for the assessment year and shields the deductor from default and interest on covered payments.

Whether a certificate under income-tax law is effective for the entire assessment year and whether it shields the deductor from being treated as an ... Effective date of Certificate u/s 197 - whether the certificate will be treated as effective from the date of issuance or for the entire assessment year - HELD THAT: - The Court construed Section 197(1)-(2) and Rule 28AA(2) to hold that a certificate granted by the Assessing Officer is valid for the assessment year specified in the certificate unless cancelled earlier. The assessment framework and tax liabilities operate on an assessment year basis; consequently a certificate issued for an assessment year is to be given effect throughout that assessment year and not only prospectively from the date of issuance. [Paras 11, 13] The certificate under Section 197 is effective for the entire assessment year specified in the certificate. Assessee in default under Section 201(1) - Whether the deductor can be held an assessee in default u/s 201 and liable to interest under Section 201(1A) where payments were made prior to issuance of a Section 197 certificate but the certificate is granted for the assessment year? - HELD THAT: - Applying the conclusion that the Section 197 certificate operates for the entire assessment year, the Court held that the deductor could not be deemed an assessee in default under Section 201(1) for lower deduction where the certificate in force covered that assessment year. Consequently, interest under Section 201(1A) that had been levied was not sustainable because the deductor was entitled to rely on the certificate unless it had been cancelled by the AO [Paras 15] The respondent cannot be held an assessee in default under Section 201(1) and the interest under Section 201(1A) is not leviable where a valid Section 197 certificate exists for the assessment year. Final Conclusion: The appeals are dismissed - Section 197 certificate is effective for the whole assessment year and, on that basis, the deductor cannot be held an assessee in default nor charged interest u/s 201(1A) for the payments covered by the certificate. Issues: (i) Whether a certificate issued under Section 197 of the Income-tax Act, 1961 is effective for the entire assessment year or only from the date of issuance; (ii) Whether the deductor can be held an assessee in default under Section 201 and liable to interest under Section 201(1A) where payments were made prior to issuance of a Section 197 certificate but the certificate is granted for the assessment year.Issue (i): Whether a certificate under Section 197 is effective for the entire assessment year or only from the date of issuance.Analysis: Section 197(1) authorises the Assessing Officer to grant a certificate if satisfied that the recipient's total income justifies deduction at a lower rate or no deduction. Section 197(2) provides that where such certificate is given, the person responsible for paying shall deduct tax at the rates specified in the certificate until it is cancelled by the Assessing Officer. Rule 28AA(2) treats the certificate as valid for the assessment year specified in the certificate unless cancelled earlier. The assessment and tax liabilities are determined for the assessment year as a whole.Conclusion: The certificate issued under Section 197 is effective for the entire assessment year specified in the certificate.Issue (ii): Whether the deductor can be held an assessee in default under Section 201 and liable to interest under Section 201(1A) where payments were made prior to issuance of a Section 197 certificate but the certificate is granted for the assessment year.Analysis: Section 201(1) and provisos set out when a person is deemed an assessee in default and exceptions where specified certificates or accountant's certifications apply. Section 201(1A) prescribes interest for failure to deduct. Where a valid Section 197 certificate applies for the assessment year, the proviso to Section 201 protects the person responsible for payment from being deemed an assessee in default for amounts covered by the certificate unless cancelled. Deletion of interest under Section 201(1A) follows if the certificate covers the assessment year and no cancellation or other disqualifying event is shown.Conclusion: The deductor cannot be held an assessee in default under Section 201 or be made liable to interest under Section 201(1A) in respect of payments covered by a Section 197 certificate valid for the assessment year; deletion of interest is justified.Final Conclusion: The appeals filed by the revenue are without merit and are dismissed, confirming that a Section 197 certificate valid for an assessment year governs the deductor's obligation for that assessment year and shields the deductor from being treated as an assessee in default and from interest under Section 201(1A) in respect of amounts so covered.Ratio Decidendi: A certificate granted under Section 197 of the Income-tax Act, 1961 applies for the assessment year specified and, unless cancelled, prevents the person responsible for payment from being deemed an assessee in default under Section 201 and from liability to interest under Section 201(1A) in respect of payments covered by that certificate.