2025 (1) TMI 173 - AT - Income Tax

ITAT sets aside PCIT revision order u/s 263 on TDS liability for external development charges to HUDA

M/s. IREO Private Limited, M/s. IREO Waterfront Private Limited, M/s. IREO Hospitality Company Pvt. Limited, M/s. IREO Grace Tealtech Pvt. Limited, M/s. IREO Residences Company Pvt. Limited Versus CIT (TDS) -1, Delhi.

ITAT Delhi set aside PCIT's revision order u/s 263 regarding TDS liability on external development charges paid to HUDA. The tribunal held that AO's ... Revision u/s 263 - TDS u/s 194I or 194C - Payment in nature of external/infrastructure development charges to HUDA - liability u/s 201/201(1A) - HELD THAT:- The issue under consideration is already pending before ld. CIT(A) and the issue under consideration is not settled considering the fact that Hon’ble Supreme Court has stayed the operation of Hon’ble Delhi High Court decision in the case of Puri Construction (P.) Ltd. [2024 (2) TMI 756 - DELHI HIGH COURT] The issue under consideration is payment of EDC to HUDA which is pending before first appellate authority where the provisions of section 194I or 194C can also be the point of adjudication. PCIT found that it is against the law and also observed that it is against the interest of Revenue. After careful consideration, we are of the view that the slab at which the AO calculated liability u/s 201/201(1A) is at 10% considering the same as rental payment. However, ld. PCIT has cancelled the relevant assessment order following the provisions of section 194C for which slab of 2% is applicable. It is not against the interest of Revenue. We observed that the order passed by the AO is not erroneous when the same was passed and also this is a debatable issue not settled considering the fact that the issue was pending before CIT (A) and also PCIT should not have proceeded to initiate proceedings u/s 263 when the same was pending before the ld. CIT (A). Let alone the fact that there is no prejudicial to the interest of Revenue in this case. Therefore, we are inclined to set aside the order passed u/s 263. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions addressed in this judgment are:Whether the payment of External Development Charges (EDC) to Haryana Urban Development Authority (HUDA) falls under the provisions of section 194I or section 194C of the Income-tax Act, 1961.Whether the invocation of section 263 by the Principal Commissioner of Income Tax (PCIT) was justified, considering the order passed by the Assessing Officer (AO) was allegedly erroneous and prejudicial to the interests of the Revenue.Whether the subsequent legal developments, including the decision of the Delhi High Court in the case of Puri Construction (P.) Ltd. and the subsequent stay by the Supreme Court, affect the applicability of section 263.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Applicability of Section 194I vs. Section 194CRelevant legal framework and precedents: The Income-tax Act, 1961, sections 194I and 194C, govern the deduction of tax at source for rental payments and payments to contractors, respectively. The Delhi High Court's decision in Puri Construction (P.) Ltd. held that EDC payments fall under section 194C.Court's interpretation and reasoning: The Tribunal noted that the AO initially treated EDC payments as rental payments under section 194I, resulting in a higher tax deduction rate. However, the PCIT, relying on the Delhi High Court's decision, viewed these payments as falling under section 194C.Key evidence and findings: The AO's assessment was based on the prevailing legal interpretation at the time, which considered EDC payments as rental payments. The PCIT's revision was based on subsequent legal developments.Application of law to facts: The Tribunal found that the AO's initial assessment was not erroneous based on the legal context at the time of the decision. The subsequent legal developments should not retroactively affect the AO's decision.Treatment of competing arguments: The Tribunal considered the arguments from both the assessee and the Revenue, noting that the issue was still under judicial consideration due to the Supreme Court's stay on the Delhi High Court's decision.Conclusions: The Tribunal concluded that the AO's order was not erroneous or prejudicial to the Revenue's interests at the time it was made.Issue 2: Invocation of Section 263Relevant legal framework and precedents: Section 263 of the Income-tax Act allows the PCIT to revise an order if it is erroneous and prejudicial to the interests of the Revenue.Court's interpretation and reasoning: The Tribunal emphasized that for section 263 to apply, both conditions of being erroneous and prejudicial must be satisfied. The Tribunal found that these conditions were not met in this case.Key evidence and findings: The Tribunal noted that the AO had applied a higher TDS rate under section 194I, which was not prejudicial to the Revenue.Application of law to facts: The Tribunal determined that the AO's decision was based on a plausible interpretation of the law at the time, and the PCIT's reliance on a subsequent court decision was not justified.Treatment of competing arguments: The Tribunal considered the assessee's argument that the law applicable at the time of the AO's decision should prevail and that the PCIT's revision was based on a later legal development.Conclusions: The Tribunal quashed the PCIT's order under section 263, finding no error or prejudice to the Revenue in the AO's original order.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'The order passed by the AO is not erroneous when the same was passed and also this is a debatable issue not settled considering the fact that the issue was pending before ld. CIT (A) and also ld. PCIT should not have proceeded to initiate proceedings u/s 263 of the Act when the same was pending before the ld. CIT (A).'Core principles established: The Tribunal reinforced the principle that section 263 cannot be invoked based on subsequent legal developments that were not available at the time of the original assessment.Final determinations on each issue: The Tribunal allowed the appeals, setting aside the PCIT's order under section 263, and upheld the AO's original assessment as not erroneous or prejudicial to the Revenue.In conclusion, the Tribunal's decision underscores the importance of evaluating the correctness of tax assessments based on the legal context at the time of the decision, rather than subsequent developments. The judgment also highlights the procedural safeguards under section 263, ensuring that revisions are justified by both error and prejudice to the Revenue.