JDA payments taxable under section 194IC; leasehold transfers attract TDS and section 201 liability, AO to verify transferee reporting

ITAT MUMBAI - The tribunal held that payments under the JDA fall within section 194IC and the narrower interpretation urged by the assessee is rejected; leasehold transfers under JDA are taxable and the beneficial reading of subsection (5A) does not exclude such transferors. Consequently the requirement to deduct TDS (and associated liability under section 201(1)/(1A)) stands. The assessee's claim that the transferee had offered the receipts as capital gains was unsubstantiated; the matter is remitted to the AO to verify whether the transferee declared the impugned payments in AY 2024-25.

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ISSUES PRESENTED AND CONSIDERED

1. Whether payments made under a development agreement with a person holding leasehold rights (perpetual lease) fall within the ambit of "specified agreement" for purposes of deduction of tax under section 194IC.

2. Whether the payer (deductor) can be deemed an assessee in default under section 201(1) / (1A) for failing to deduct tax at 10% under section 194IC where tax on the same receipts is alleged to have been offered and paid to tax by the payee in a subsequent assessment year, and what evidentiary standard and procedure applies to claim the protection of the proviso to section 201.

3. Relief and procedural consequences where the deductor produces evidence after assessment/appeal that the payee has included the impugned receipts in his return and paid tax - whether remand to the assessing officer for verification and recomputation of interest is appropriate.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Applicability of section 194IC: definition of "specified agreement" and scope vis-à-vis leasehold transferees

Legal framework: The term "specified agreement" is defined by reference to section 45(5A) as a registered agreement where a person owning land or building allows another to develop a real estate project in consideration of a share in the project (with or without monetary consideration). Section 194IC prescribes deduction of tax at 10% where monetary consideration is payable under a "specified agreement". The legislative memorandum introducing subsection (5A) and section 194IC states the policy objective of deferring capital gains taxation to the year of issue of completion certificate to alleviate hardship where execution of a joint development agreement (JDA) otherwise triggers immediate capital gains tax liability.

Precedent treatment: No judicial precedents were cited or relied upon by the authorities or parties in the text; the Court proceeded by statutory interpretation informed by legislative intent.

Interpretation and reasoning: The Tribunal interprets the statutory definition and legislative intent purposively. A narrow interpretation accepting that "owning land" excludes a perpetual leaseholder would produce an anomaly: leasehold transferors who enter JDAs could escape the special regime and its protective timing of taxability, contrary to the remedial purpose of subsection (5A) and its companion provision, section 194IC. The Tribunal therefore reads the definition in light of the memorandum and facts, concluding that where the transferor (here a perpetual leaseholder) holds rights sufficient to give land for development and is entitled to monetary and non-monetary consideration, the arrangement falls within the scope of a "specified agreement" and hence section 194IC applies. The factual matrix (perpetual lease granted in 1938; transferee entitled to give land for development and receive consideration) supports applicability.

Ratio vs. Obiter: The holding that a perpetual leaseholder who, under the JDA, has the right to put the land to development and receive consideration falls within the statutory scheme of "specified agreement" for s.194IC is ratio decidendi for the dispute before the Court. Observations about the potential anomaly of a narrow construction and the purposive approach are integral to the ratio.

Conclusion: Section 194IC is applicable to payments made under the development agreement in the facts before the Tribunal; the payer should have deducted tax at 10% under section 194IC rather than at 1% under section 194IA.

Issue 2 - Liability as assessee in default under section 201(1)/(1A) and the proviso where payee has offered income to tax

Legal framework: Section 201(1) renders the person required to deduct tax liable as an assessee in default where tax is not deducted; section 201(1A) deals with interest for defaults. The proviso to section 201(1) relieves the deductor from being treated as an assessee in default if the payee has offered the relevant sum to tax and paid the tax thereon, subject to satisfaction of conditions and supporting evidence (e.g., inclusion in return and tax paid). Form 26A is a typical evidentiary form used to show inclusion of such amounts in the payee's return.

Precedent treatment: No authorities were cited; the Tribunal evaluated compliance with statutory proviso and evidentiary proof on record.

Interpretation and reasoning: The Tribunal emphasises that the statutory proviso requires proper proof that the payee has offered the impugned receipts to tax and paid the tax. The assessing officer and appellate authority rejected the deductor's alternate plea because the deductor did not produce supporting evidence (Form 26A, computations, certificates) before them. The Tribunal notes that the payee filed an ITR for the subsequent assessment year allegedly including capital gains (completion certificate year), but that no substantiating material was placed before the Tribunal to demonstrate that the impugned payments were indeed offered and taxed in that return. The Tribunal therefore cannot grant protection under the proviso without verification of the payee's return and supporting computations.

Ratio vs. Obiter: The principle that the proviso to section 201(1) can relieve the deductor from default only upon verifiable proof that the payee included and paid tax on the receipts is ratio. Observations on the typical role of Form 26A and procedural expectations are explanatory.

Conclusion: Absent verifiable evidence before the Tribunal demonstrating that the payee offered and paid tax on the impugned receipts, the deductor remains prima facie liable as assessee in default for failure to deduct at the higher rate; however the deductor may substantiate the proviso through proper evidence subject to verification (see Issue 3 remedy below).

Issue 3 - Remedial procedure: remand to AO for verification, acceptance of evidence and recomputation of interest

Legal framework: The assessing officer has the fact-finding and verification role to ascertain whether the payee's return indeed includes the impugned receipts and tax has been paid; interest under section 201(1A) is to be recomputed as per proviso if the proviso applies.

Precedent treatment: Not cited; Tribunal relied on procedural fairness and statutory verification mechanism.

Interpretation and reasoning: Given that material (payee's ITR for a later AY and assertion of inclusion of capital gains) surfaced but was not placed before the AO at the initial stage, and recognizing the factual nature of the enquiry, the Tribunal finds that the proper course is to remit the matter to the AO. The AO is directed to verify the payee's claim (including the ITR, computation showing inclusion of impugned receipts, proof of tax payment, completion certificate or other documentary proof) and to allow the deductor's claim under the proviso if supported by evidence. The Tribunal further directs that the AO should not rigidly deny relief solely because Form 26A was not filed for the assessment years under dispute, given the peculiar facts of the case and the timing of completion certificate and subsequent tax filing. If the proviso is satisfied on verification, the AO must recompute interest under section 201(1A) accordingly for the relevant assessment years.

Ratio vs. Obiter: Directing remand for verification and instructing the AO to accept substantiating evidence (even if Form 26A is not filed) in appropriate circumstances is part of the operative decision and forms part of the ratio as it disposes of the remedies available to the deductor.

Conclusion: The appeals are partly allowed by (a) upholding that section 194IC applies to the arrangement with the perpetual leaseholder; and (b) remitting the matter to the AO to verify whether the payee has offered and paid tax on the impugned receipts and, if so, to allow relief under the proviso to section 201(1) and recompute interest under section 201(1A). The deductor is directed to submit relevant supporting evidence and cooperate with assessment proceedings.

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