2023 (2) TMI 501 - AT - Income Tax

Tribunal rules builders not liable to deduct tax on EDC payments to HUDA, emphasizing fair process

The Tribunal concluded that the penalty for non-deduction of tax on External Development Charges (EDC) payments to HUDA was not justified. It held that ... Levy of penalty u/s 271C - failure to deduct tax on the payment made for External Development Charges (EDC) to HUDA - HELD THAT:- As decided in M/s Vipul Ltd [2022 (8) TMI 34 - ITAT DELHI] Directorate of Town and Country Planning, Haryana which made it very obvious that receipts on account of EDC are being deposited in the Consolidated Fund of the State, accordingly directions were issued to colonizer like present assessee, to not deduct TDS. Once the fact of receipt of amounts received by HUDA being deposited in Consolidated Fund of State is established, there can be no second opinion that Assessee was rightly directed by DTCP, Haryana to not deduct the TDS. Even otherwise no intentional default is attributed to assessee and the default, if any, was on account of ambiguity which had arisen out of a direction contained in a statutory document, so no penalty can be justified u/s 271C of the Act, which is meant to address contumacious conduct. Ground is allowed in favour of assessee/appellant. Issues Involved:1. Sustaining penalty for non-deduction of tax on payments made for External Development Charges (EDC) to HUDA.2. Applicability of TDS on payments to HUDA under section 196 of the Income Tax Act.3. Evaluation of adverse findings and opportunity of being heard.4. Tax liability of HUDA and its impact on the assessee's TDS obligations.Issue-wise Detailed Analysis:1. Sustaining Penalty for Non-Deduction of Tax on Payments Made for EDC to HUDA:The primary issue is whether the penalty of Rs. 61,38,000/- for non-deduction of tax on payments for EDC to HUDA is justified. The Tribunal examined previous cases, including M/s Vipul Ltd. Vs ACIT and M/s Perfect Constech P. Ltd., where it was established that builders or developers are not required to deduct tax at source when paying EDC to HUDA. The Tribunal noted that HUDA is engaged in acquiring, developing, and disposing of land and that EDC payments are not made under any contract between the assessee and HUDA. Instead, these payments are directed by the Directorate of Town and Country Planning (DTCP), a government department. Consequently, the Tribunal concluded that the penalty under section 271C was not sustainable and directed its deletion.2. Applicability of TDS on Payments to HUDA Under Section 196:The assessee argued that payments to HUDA for EDC are made to a state government entity for urban development and infrastructure creation, and thus, no TDS is required under section 196 of the Income Tax Act. The Tribunal supported this view, referencing multiple cases where it was held that EDC payments are not subject to TDS as they are not made under a contractual obligation but rather as statutory payments to a government department. The Tribunal emphasized that HUDA's role in this context is to execute development works as directed by DTCP, and thus, TDS provisions do not apply.3. Evaluation of Adverse Findings and Opportunity of Being Heard:The assessee contended that the adverse findings by the AO and CIT(A) were perverse, recorded with preconceived notions, and without considering the submissions and evidence provided. The Tribunal acknowledged that the assessee was not given a fair opportunity to present its case, which vitiates the findings. The Tribunal reiterated the importance of due process and fair hearing, leading to the conclusion that the penalty was unjustified.4. Tax Liability of HUDA and Its Impact on the Assessee's TDS Obligations:The assessee argued that if HUDA's income, including EDC payments, is already taxed, then there is no liability for the assessee to deduct TDS. The Tribunal agreed, noting that HUDA deposits EDC receipts into the Consolidated Fund of the State, reinforcing the view that these payments are not subject to TDS. The Tribunal cited clarifications from DTCP and previous judgments confirming that no TDS was required on EDC payments, thereby nullifying the penalty.Conclusion:The Tribunal, considering the established precedents and the specific circumstances of the case, concluded that the penalty for non-deduction of tax on EDC payments to HUDA was not justified. The appeal was allowed, and the penalty was directed to be deleted. The judgment underscores the importance of understanding the nature of payments and the entities involved, as well as ensuring fair and thorough consideration of all evidence and arguments presented.