Assessee not liable for TDS on EDC payments to government authority

The Tribunal held that the assessee was not obligated to deduct Tax Deducted at Source (TDS) on External Development Charges (EDC) payments to Haryana Urban Development Authority (HUDA) as they were statutory payments directed by a government department and deposited in the Consolidated Fund of the State. Consequently, the penalty under Section 271C for non-deduction of TDS was deemed unjustified. The appeals were allowed, and the impugned orders were set aside.

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Issues Involved:
1. Whether the payment of External Development Charges (EDC) to Haryana Urban Development Authority (HUDA) is subject to Tax Deducted at Source (TDS) under Section 194C of the Income Tax Act, 1961.
2. Whether the penalty under Section 271C for non-deduction of TDS on EDC payments is justified.

Issue-wise Detailed Analysis:

1. Applicability of TDS on EDC Payments:

The core issue revolves around whether the payments made by the assessee to HUDA for External Development Charges (EDC) are subject to TDS under Section 194C of the Income Tax Act, 1961. The Assessing Officer (AO) initiated a penalty under Section 271C after determining that TDS was not deducted on EDC payments. The AO's stance was based on the interpretation that HUDA, being a taxable entity, receives EDC for rendering services related to external development works, thereby making the payments liable for TDS as per Circular No. 681 of CBDT dated 08/03/1994.

The assessee contended that EDC payments were made to the Government of Haryana through HUDA, which acts as an executing agency. The assessee argued that payments to the government are exempt from TDS under Section 196 and relied on a clarification dated 19.06.2018 from the Town and Country Planning, Government of Haryana, which directed that no TDS should be deducted on EDC payments.

The Tribunal reviewed the facts and found that EDC payments were deposited in the Consolidated Fund of the State, and HUDA was merely an executing agency for the government. The Tribunal also referred to previous judgments, including ITA No. 6907/Del/2019 (M/s. Perfect Constech (P) Ltd. vs. Additional Commissioner of Income Tax) and ITA No. 5805, 5806, 5349/Del/2019 (RPS Infrastructure Ltd. vs. ACIT), which held that payments made to HUDA for EDC were not subject to TDS as they were not made under a contractual obligation but as statutory payments directed by a government department.

2. Justification of Penalty under Section 271C:

The second issue concerns the imposition of a penalty under Section 271C for non-deduction of TDS on EDC payments. The AO imposed the penalty, asserting that there was no reasonable cause for the non-deduction of TDS. The assessee challenged this, arguing that the payments were made under a bonafide belief that TDS was not required, supported by the clarification from the Town and Country Planning, Government of Haryana.

The Tribunal considered the clarification dated 19.06.2018, which explicitly stated that no TDS should be deducted on EDC payments. The Tribunal also noted that similar cases had been decided in favor of the assessee, where penalties under Section 271C were not upheld due to the bonafide belief and lack of contumacious conduct on the part of the assessee.

The Tribunal cited the Supreme Court's judgment in the case of Commissioner of Income Tax vs. Bank of Nova Scotia, 380 ITR 550, which emphasized that penalties under Section 271C should not be imposed if the non-deduction of TDS was due to a bonafide belief and not due to contumacious conduct.

Conclusion:

The Tribunal concluded that the assessee was not required to deduct TDS on EDC payments made to HUDA, as these payments were deposited in the Consolidated Fund of the State and directed by a government department. Consequently, the penalty under Section 271C for non-deduction of TDS was not sustainable. The appeals were allowed, and the impugned orders were set aside.

Order Pronounced:

The order was pronounced in the open court on 6th July, 2022.

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