2025 (9) TMI 1017 - AT - Income Tax

Appeal allowed: Revenue wrongly applied s.194A instead of s.194C; s.40(a)(ia) disallowance confined to invoked provision

ITAT (DELHI-AT) allowed the assessee's appeal, holding the AO erred by invoking s.194A instead of s.194C and the CIT(A) erred in effectively changing the ... Disallowance u/s 40(a)(ia) - TDS u/s 194C OR 194A - EDC payments made to HUDA - HELD THAT:- Applicability of Section 194C of the Act to impugned payments seems to be not at all disputed but the issue is error committed by AO in invoking provisions of Section 194A of the Act. It appears that before the CIT(A) this error was not pointed out in the form of any grounds or by way of any submissions. Assessee was infact contesting on merits alone by relying certain decision of Tribunal in favour of assessee, which were there when appeal was filed before the CIT(A). But subsequently the said decision of Puri Constructions (P.) Ltd [2024 (2) TMI 756 - DELHI HIGH COURT] has settled the issue against the assessee and same was relied by CIT(A) to sustain the disallowance. This wrong invocation of charging section by AO seems to have escaped the attention of CIT(A) also which now seems to become fatal as CIT(A) can exercise the powers as enumerated u/s 251 (1)(a) of the Act i.e. the CIT (A) can confirm, reduce, enhance or annul the assessment but he cannot change the substance of the addition by changing the head of charging provisions, in any case certainly not without putting assessee to notice. It is not a case of mere error in mentioning of incorrect provision of law of making a disallowance but as the disallowance is one for non-deduction of TDS in view of provisions of Section 40(a)(ia) of the Act or non- payment of TDS deducted to the govt. exchequer which are deeming provision and which creates a legal fiction. The legal fiction created by Section 40(a)(ia) cannot be general and should be specific so the disallowance made by AO cannot be extended beyond the deeming provision specifically invoked. Hon'ble Supreme Court in CIT v. Mother India Refrigeration Pvt. Ltd [1985 (8) TMI 2 - SUPREME COURT] has held that legal fictions are created only for some definite purpose and they must be limited to that purpose and should not be extended beyond that legitimate field. Bharani Pictures [1979 (2) TMI 12 - MADRAS HIGH COURT] it is held that legal fictions are for a definite purpose and are limited to the purpose for which they are created and should not be extended beyond its legitimate field. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments made as External Development Charges (EDC) to a local authority/urban development agency pursuant to directions of a state planning authority are in the nature of 'interest' attracting deduction of tax at source under Section 194A. 2. Whether such EDC payments fall within the scope of contract payments under Section 194C (and therefore TDS under Section 194C is attracted), and the consequence for the assessee where TDS was not deducted. 3. Whether, having not deducted TDS, the assessing officer could disallow 30% of the EDC payment under Section 40(a)(ia) as income deemed taxable in the hands of the assessee. 4. Whether the first appellate authority (CIT(A)) was competent to sustain the disallowance by treating the impugned payments as liable to TDS under Section 194C when the assessing officer had based the addition on Section 194A (i.e., whether an appellate authority can change the head/charging provision without putting the assessee on notice and without jurisdiction to change the substance of the addition under powers available on appeal). 5. Ancillary: Whether the characterisation of EDC as statutory/government dues prevents application of TDS provisions, and whether recipient taxation (recording of revenue by recipient) precludes action against the payer. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 194A (interest) to EDC payments Legal framework: Section 194A requires TDS on 'interest' (other than interest on securities) paid to certain persons. Section 40(a)(ia) disallows expenses where tax is deductible at source but was not deducted. Precedent treatment: The assessing officer treated the EDC as interest for purposes of Section 194A. The lower authorities referenced assorted tribunal decisions relied on by the assessee; however the CIT(A) did not accept the assessee's contention. Interpretation and reasoning: The Court/Tribunal records the assessee's contention that EDC are statutory development charges payable under licence/direction of the state planning authority and are not in the nature of interest. The Tribunal observes that the AO's invocation of Section 194A is legally unsustainable on the facts because EDC are not 'interest.' The AO's classification as interest is thus a mischaracterisation of the nature of the payment. Ratio vs. Obiter: The finding that EDC cannot be treated as interest for Section 194A purposes is ratio in the facts of this case (the AO's addition rested on that misclassification). Conclusion: Section 194A is inapplicable where the payment is a statutory/external development charge paid under directions of the competent planning authority; AO's invocation of Section 194A was erroneous. Issue 2 - Applicability of Section 194C (contractual payments) to EDC payments Legal framework: Section 194C mandates TDS on payments to contractors for execution of works/supply of labor under contractual arrangements; Section 40(a)(ia) consequences follow non-deduction. Precedent treatment: The CIT(A) relied on the jurisdictional High Court decision holding that EDC payments would be covered under Section 194C. The assessee did not originally contest before CIT(A) that Section 194C might apply; its primary defence was that payments were statutory dues to the government/planning authority. Interpretation and reasoning: The Tribunal notes the CIT(A)'s adoption of the High Court view that EDC could be regarded as payments attractable to Section 194C, and therefore the disallowance under Section 40(a)(ia) could be sustained if non-deduction under Section 194C is established. The Tribunal recognises that the applicability of Section 194C was not in dispute before it, but emphasises that the assessing officer had not invoked Section 194C and had proceeded only under Section 194A. Ratio vs. Obiter: The observation that the High Court ruled Section 194C can apply to EDC payments is recorded as binding precedent for the jurisdictional appellate authority; whether Section 194C actually applies to these payments in the specific factual matrix is treated as relevant but is ultimately not the basis on which the AO made the addition. Conclusion: While Section 194C may in principle cover EDC payments per higher-court authority, the AO did not invoke Section 194C; therefore reliance on Section 194C by the CIT(A) to uphold an addition originally made under Section 194A raises jurisdictional and procedural issues (see Issue 4). Issue 3 - Validity of disallowance under Section 40(a)(ia) where TDS was not deducted Legal framework: Section 40(a)(ia) operates as a deeming/disallowance provision where expenses attracting withholding were not subject to TDS; legal fiction must be confined to the purpose for which it is created. Precedent treatment: The Tribunal cites authority that legal fictions embodied in deeming provisions are limited to their intended scope and should not be extended beyond the specific provision invoked. Interpretation and reasoning: The Tribunal emphasises that disallowance under Section 40(a)(ia) must be based on the specific withholding provision actually invoked by the assessing officer; an assessing officer's wrong identification of the charging head (e.g., Section 194A instead of Section 194C) limits the legitimate scope of the deeming fiction invoked. The Tribunal reasons that Section 40(a)(ia) cannot be extended beyond the precise deeming provision relied upon by the assessing officer. Ratio vs. Obiter: The principle limiting the extension of legal fictions is treated as ratio for assessing the validity of the impugned disallowance in the present facts. Conclusion: Disallowance under Section 40(a)(ia) predicated on a wrong charging provision (Section 194A) is inchoate; the legal fiction cannot be expanded to sustain an addition under a different provision without proper exercise of appellate powers and notice to the assessee. Issue 4 - Competence of the appellate authority to alter the charging provision without notice (limits of powers under Section 251(1)(a)) Legal framework: On appeal, the appellate authority may confirm, reduce, enhance or annul an assessment, but cannot change the substance of an addition by switching the legal provision invoked without jurisdiction or without putting the assessee on notice; principles of natural justice require that a party be informed if the basis of a charge is to be altered. Precedent treatment: The Tribunal relies on coordinate-bench decisions holding that CIT(A) cannot change the applicable provision of law qua the item for which assessment is made; Supreme Court and other precedents are cited to the effect that legal fictions are limited in purpose. Interpretation and reasoning: The Tribunal finds that the AO made the addition on the basis of Section 194A. The CIT(A) effectively upheld the disallowance by treating the payments as falling under Section 194C (relying on High Court precedent), thereby changing the charging provision without the assessing officer having made such a finding and without giving the assessee an opportunity to meet such a change. The Tribunal reasons that such alteration of the basis of addition is impermissible on appeal absent notice and competence to change the substance of the addition. Ratio vs. Obiter: The holding that an appellate authority cannot change the head of charging provision as a substantive change without notice is ratio in the circumstances of this case. Conclusion: The CIT(A)'s sustaining of the disallowance by effectively recasting the AO's Section 194A-based addition into a Section 194C-based disallowance, without putting the assessee on notice and without jurisdiction to change the substance of the addition, is impermissible and vitiates the appellate order. Issue 5 - Ancillary contentions: statutory character of EDC and recipient taxation Legal framework: Statutory dues payable to government/local authorities may have different tax consequences; recordal of receipt as revenue by recipient is material but does not automatically absolve the payer of withholding obligations if the withholding provision (properly invoked) applies. Precedent treatment: Assessee relied on decisions favourable to it and argued that HUDA being a government/local authority precludes TDS; however, the tribunal records that the AO did not found his addition on such a premise. Interpretation and reasoning: The Tribunal notes the assessee's submission that EDC are statutory dues and not contractual payments; however, because the assessing officer's charge was under Section 194A (erroneous) and the appellate authority attempted to sustain the disallowance by invoking Section 194C, these factual/characterisation disputes could not properly be resolved by changing the charge provision on appeal without notice. The Tribunal does not finally adjudicate all factual nuances of whether HUDA/recipient status precludes TDS, because the impugned orders were quashed on procedural and jurisdictional grounds. Ratio vs. Obiter: Observations on statutory character and recipient taxation are largely obiter within the Tribunal's ultimate decision to quash for procedural infirmity, though the Tribunal affirms the general proposition that statutory character is relevant to classification. Conclusion: The ancillary contentions highlight factual questions relevant to which withholding provision (if any) applies; but resolution of those questions required proper determination under the correct charging provision and notice - which did not occur. Final Disposition The Tribunal concluded that the assessing officer's invocation of Section 194A was erroneous and that the CIT(A) erred in sustaining the disallowance by effectively treating the payments as falling under Section 194C without the AO having made such a finding and without putting the assessee on notice. Relying on the limits of appellate powers and the restricted scope of legal fictions, the Tribunal held the impugned orders to be inchoate and vitiated, quashed the orders, and allowed the appeal.