TDS on External Development Charges and assessee-in-default relief turned on section 194I and the first proviso to section 201(1).

External Development Charges paid in real estate development were held not to attract TDS under section 194I for AY 2017-18, so the default demand could not be sustained on that footing. For AYs 2018-19 to 2021-22, the Tribunal did not finally uphold liability under sections 201(1) and 201(1A) and remanded the matter for verification of the first proviso to section 201(1), namely whether the payee had filed its return, included the sum in income, and paid the tax due. If those conditions are satisfied, the payer cannot be treated as an assessee in default.

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Issues: (i) Whether TDS was deductible under section 194I of the Income-tax Act, 1961 on External Development Charges for assessment year 2017-18. (ii) Whether the impugned orders for assessment years 2018-19 to 2021-22 required interference and remand for verification of the conditions in the first proviso to section 201(1) of the Income-tax Act, 1961.

Issue (i): Whether TDS was deductible under section 194I of the Income-tax Act, 1961 on External Development Charges for assessment year 2017-18.

Analysis: The demand for this year was founded on treatment of the payment as rent-like liability under section 194I, although the charge related to External Development Charges paid in the course of real estate development. The Tribunal followed the binding view that section 194I was not the correct provision for such payments and that the assessee could not be fastened with default on that basis.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the impugned orders for assessment years 2018-19 to 2021-22 required interference and remand for verification of the conditions in the first proviso to section 201(1) of the Income-tax Act, 1961.

Analysis: For these years, the controversy centred on deduction of tax under section 194C and the consequent liability under sections 201(1) and 201(1A). The Tribunal did not finally affirm the tax liability on merits. Instead, it applied the principle that a payer cannot be treated as an assessee in default if the payee has filed its return, included the sum in income, and paid due tax, and therefore considered verification of those statutory conditions necessary before any liability could survive.

Conclusion: The impugned orders were set aside and the matters were remanded to the Assessing Officer for verification of the statutory conditions; liability under sections 201(1) and 201(1A) would not survive if those conditions are fulfilled.

Final Conclusion: The assessee obtained relief for one year on the correctness of the invoked withholding provision, while the remaining years were sent back for factual verification under the deeming-default safeguard in section 201(1).

Ratio Decidendi: A payer cannot be treated as an assessee in default under section 201(1) where the payee has filed its return, included the relevant sum in taxable income, and discharged the tax due, and where the invoked withholding provision is itself not applicable the demand cannot stand.

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