TDS penalty on external development charges fails where payment is treated as made to the State Government through its executing agency.

External development charges paid through HUDA were treated as payment to the State Government through its executing agency, so section 194C was held inapplicable to those payments. As the alleged non-deduction of tax at source could not be founded on section 194C, the basis for penalty under section 271C also failed. The penalty was therefore not sustainable and was directed to be deleted.

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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 external development charges paid to HUDA.

Analysis: The penalty arose from alleged default under section 194C on payments made towards external development charges. The Tribunal noted that the same issue had already been decided by coordinate benches, which had held that payments of external development charges made through HUDA, in substance, represented payment to the State Government through its executing agency. In that view, section 194C was held inapplicable to such payments and, consequently, the foundation for penalty under section 271C did not survive.

Conclusion: Penalty under section 271C was not justified and was directed to be deleted.

Ratio Decidendi: Where the payment of external development charges is treated as payment to the State Government through its executing agency, section 194C does not apply and penalty under section 271C for non-deduction of tax at source cannot be sustained.

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