Tax deduction on external development charges not required where development authority acts as government executing agency.

External Development Charges paid to a State development authority through the concerned government department were treated as payments made to the State Government for development works, with the authority acting only as an executing agency. On that basis, the Haryana clarification that no tax was required to be deducted supported the view that section 194C was not attracted to such payments. As there was no underlying default in tax deduction at source, penalty under section 271C was held to be unsustainable and was cancelled.

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Issues: Whether penalty under section 271C of the Income-tax Act, 1961 was leviable for non-deduction of tax at source on payment of External Development Charges made to the State development authority through the concerned government department.

Analysis: The payment was treated as one made to the State Government for external development works. The clarification issued by the Haryana authorities stated that the development authority functioned only as an executing agency on behalf of the Government and that no tax was required to be deducted from such payments. On the same reasoning, the Tribunal applied the view already taken in earlier coordinate bench decisions that section 194C was not attracted to such payments and that, in the absence of any underlying default in deduction of tax at source, penalty under section 271C could not survive.

Conclusion: The penalty under section 271C was not justified and was cancelled.

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