2025 (3) TMI 43 - AT - Income Tax

Tribunal Upholds Deletion of Penalties Under Sections 271(1)(c) and 270A Due to TDS Confusion on Development Charges.

The Appellate Tribunal dismissed the Revenue's appeals against the deletion of penalties under sections 271(1)(c) and 270A of the Income Tax Act for ... Penalty u/s 271(1)(c) and 270A - assessee has not deducted TDS on EDC [External Development Charges] charges paid by the assessee to HUDA - CIT(A) deleted the penalty - HELD THAT:- We find as far as disallowance of the EDC payment u/s 40(a)(ia), it is stated that the assessee has not contested the disallowance made. However, with respect to penalty, we find that the assessee has given reasonable plausible explanation before us that at that point of time, there was confusion and difference of opinion on this issue. We therefore hold that the explanation that the issue of TDS being deducted on EDC payment was not having legal clarity and there was a difference of opinion on this issue which needed clarification from the CBDT, is a valid explanation. No evidence on record that payment of EDC charges is non-genuine or that the assessment order has demonstrated that there is any concealment of income or there is any inaccurate particulars of the income. Mere noncompliance with the TDS provisions do not imply concealment or furnishing of inaccurate particulars to encompass the assessee with the mischief of section 271(1)(c)/270A.We are of the considered view that by making an incorrect claim in law, would not tantamount to furnishing of inaccurate particulars. In such a scenario, following the ratio in the case of Reliance Petroproducts [2010 (3) TMI 80 - SUPREME COURT] we hold that the learned CIT(A) has correctly deleted the penalty u/s 271(1)(c) Also order of CIT(A) deleting the penalty u/s 270A of the Act needs no interference. Appeal decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether omission to deduct TDS on External Development Charges (EDC) paid to a statutory urban development authority constitutes concealment of income or furnishing of inaccurate particulars attracting penalty under section 271(1)(c) of the Income Tax Act. 2. Whether omission to deduct TDS on EDC paid to a statutory urban development authority warrants imposition of penalty under section 270A (addition/penalty for misreporting) of the Income Tax Act, having regard to contemporaneous legal uncertainty and administrative clarifications. 3. Whether contemporaneous confusion regarding the taxability/status of the recipient (state body v. taxable entity) and subsequent administrative clarifications justify relief from penal consequences for failure to deduct TDS. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legal framework for penal liability for failure to deduct/withhold tax (sections 271(1)(c) and 270A) Legal framework: Sections 194C (TDS on contractual payments) read with penal provisions under section 271(1)(c) (penalty for concealment/furnishing inaccurate particulars) and section 270A (penalty for under-reporting/misreporting) set the statutory scheme. Penalty under section 271(1)(c) requires concealment of income or furnishing inaccurate particulars; section 270A penalises misreporting/under-reporting as defined. Precedent treatment: The Court relied on higher-court authority establishing that an incorrect claim in law, made bona fide amid a debatable legal position, does not necessarily amount to concealment or furnishing inaccurate particulars. That authority is applied as guiding precedent (followed). Interpretation and reasoning: The Tribunal examined whether failure to deduct TDS was a mere non-compliance or amounted to concealment/inaccuracy. It assessed contemporaneous facts: (a) genuine dispute existed about applicability of TDS to EDC paid to the Authority; (b) administrative confusion and subsequent Office Memorandum from the central tax administration clarified status only after the relevant period; (c) litigation on the issue was pending in higher courts. The Tribunal found absence of evidence of fraudulent or non-genuine transactions and no demonstration of deliberate concealment of income or intentional misstatement in assessment records. Ratio vs. Obiter: Ratio - Where a taxpayer, in a genuinely debatable legal position supported by contemporaneous administrative uncertainty and pending litigation, fails to deduct TDS, such non-deduction does not ipso facto constitute concealment or furnishing inaccurate particulars for purposes of section 271(1)(c). Obiter - Observations on administrative steps for obtaining exemptions under section 194 and policy considerations are additional commentary. Conclusion: Penalty under section 271(1)(c) is not sustainable on facts showing bona fide legal confusion and absence of concealment or inaccurate particulars; cancellation of the penalty is justified. Issue 2 - Applicability of section 270A in context of disputed legal position on TDS applicability Legal framework: Section 270A penalises under-reporting and misreporting of income as defined; penalties require establishment of under-reporting/misreporting beyond mere non-compliance with withholding obligations, and assessment must show inaccurate particulars or under-reported income attributable to the misreporting. Precedent treatment: The Tribunal relied on the same higher-court jurisprudence (followed) that an incorrect claim in law does not automatically equate to misreporting/under-reporting punishable by penalty where there is plausible bona fide belief and contested legal position. Interpretation and reasoning: Given that the assessee did not contest disallowance under section 40(a)(ia) but provided a plausible explanation that TDS obligation on EDC was not free from doubt during the years in issue, the Tribunal examined whether the factual matrix established misreporting. The Tribunal found no evidence of fabricated transactions, concealment, or inaccurate particulars; the factual position indicated bona fide legal contest and administrative advice subsequently clarifying taxability. Thus, penal consequences under section 270A were not warranted. Ratio vs. Obiter: Ratio - Where a taxpayer's failure to deduct TDS arises from bona fide, reasonably arguable legal doubt and is not accompanied by concealment or fabricated particulars, penalty under section 270A for misreporting/under-reporting should not be imposed. Obiter - The Tribunal's remark that noncompliance is distinguishable from misreporting is explanatory. Conclusion: Deletion of penalty under section 270A is proper in the circumstances; revenue grounds to sustain such penalty are dismissed. Issue 3 - Relevance of contemporaneous administrative clarification and pending litigation in assessing penal culpability Legal framework: Administrative circulars/Office Memoranda and contemporaneous communications from tax authorities bear on the taxpayer's state of mind and reasonableness of conduct; bona fide reliance on unresolved legal positions can negate the mental element required for penal provisions premised on concealment or misreporting. Precedent treatment: The Tribunal invoked precedent holding that bona fide legal belief, supported by contemporaneous administrative ambiguities and pending judicial adjudication, is material in deciding penal liability (followed and applied). Interpretation and reasoning: The Tribunal placed weight on: (a) documented administrative confusion regarding whether the urban development authority constituted a government body or a taxable entity; (b) a later Office Memorandum clarifying taxability only after the relevant years; and (c) active litigation before higher courts. These factors together rendered the assessee's omission to deduct TDS a reasonably arguable legal position rather than deliberate evasion. Absence of material contradicting bona fide belief (no forged documents or evidence of concealment) reinforced that penal provisions should not be invoked. Ratio vs. Obiter: Ratio - Administrative clarification post-dating the tax period and pending judicial adjudication are relevant indicia of bona fide legal doubt and may absolve a taxpayer from penal consequences for non-deduction of TDS when no concealment or inaccuracy is shown. Obiter - Suggestions on administrative avenues for seeking exemption under the relevant TDS provisions do not form part of the decision's core ratio. Conclusion: Contemporaneous administrative uncertainty and ongoing litigation materially support the assessee's plausible explanation and justify deletion of penalties. Consolidated conclusion and directive On the facts where EDC payment to the urban development authority was made amid genuine uncertainty over the recipient's tax status, where administrative clarification was issued only subsequently, and where there was no evidence of non-genuineness, concealment, or inaccurate particulars, the Tribunal upholds the appellate authority's deletion of penalties under sections 271(1)(c) and 270A. Revenue's appeals are dismissed and penalty orders are directed to be deleted.