2022 (8) TMI 34 - AT - Income Tax

Penalty u/s 271C - Non deduction of TDS on receipt of amounts received by HUDA being deposited in Consolidated Fund of State - HELD THAT - As in case of TDI Infrastructure Ltd 2022 (7) TMI 388 - ITAT DELHI to which one of us was in quorum, had taken into consideration a clarification memo issued by the Directorate of Town and Country Planning, Haryana which made it very obvious that receipts on account of EDC are being deposited in the Consolidated Fund of the State, accordingly directions were issued to colonizer like present assessee, to not deduct TDS. Once the fact of receipt of amounts received by HUDA being deposited in Consolidated Fund of State is established, there can be no second opinion that Assessee was rightly directed by DTCP, Haryana to not deduct the TDS. Even otherwise no intentional default is attributed to assessee and the default, if any, was on account of ambiguity which had arisen out of a direction contained in a statutory document, so no penalty can be justified u/s 271C of the Act, which is meant to address contumacious conduct. Ground is allowed in favour of assessee/appellant. Receipt of subscription fee to Clubs - The nature of business activity of the assessee company is such that for procurement of business the Managing Director may have to attend the clients and entertain them occasionally at clubs. However, the four clubs to which the payments have been made are all Golf Clubs and how only their membership would benefit the company is not ascertainable. Thus, there is every possibility that the expenditure incurred on subscription or food and beverage, with these Golf Clubs, have traits of personal benefits to the Managing Director, as well. Thus, there is justification to restrict, the disallowance proportionally to Rs. 50,000/-on total disallowance of Rs. 1,90,529/-. Accordingly the ground is decided partly in favour of the assessee/appellant.

Summary

Issues Involved:
1. Disallowance of External Development Charges (EDC) due to non-deduction of TDS.
2. Disallowance of club expenses as personal expenses.

Issue-wise Detailed Analysis:

1. Disallowance of External Development Charges (EDC) due to non-deduction of TDS:

The primary issue in this case revolves around the disallowance of EDC paid to HUDA on the grounds of non-deduction of TDS. The assessee argued that these payments were made to comply with the terms of an agreement with the Governor of Haryana, acting through the Director of Town and Country Planning (DTCP), and thus, TDS provisions were not applicable. The Ld. AO had added 30% of Rs. 4,95,24,157/- back to the income of the assessee, contending that HUDA is a taxable entity and not exempt under section 196 of the Income Tax Act.

The Tribunal referred to several judgments from Co-ordinate Benches, including M/s. Perfect Constech P. Ltd. and RPS Infrastructure Ltd., which clarified that builders or developers are not required to deduct TDS when paying EDC to HUDA. The Tribunal noted that the payment of EDC is made to HUDA through DTCP, a government department, and is not pursuant to any contract between the assessee and HUDA. The Tribunal emphasized that the payment was for external development works carried out by HUDA, and thus, the assessee was not required to deduct TDS. Consequently, the Tribunal allowed the ground in favor of the assessee, stating that the disallowance made under section 40(a)(ia) of the Act was unjustified.

2. Disallowance of club expenses as personal expenses:

The second issue pertained to the disallowance of Rs. 1,90,529/- incurred on club services and facilities, which the Ld. AO considered personal expenses. The assessee contended that these expenses were incurred for promoting the business and conducting meetings, with no personal benefit derived by the Managing Director.

The Tribunal acknowledged the nature of the assessee's business, which might require the Managing Director to entertain clients at clubs. However, it was noted that the payments were made to four Golf Clubs, raising questions about their exclusive business utility. The Tribunal found it reasonable to assume that these expenses could have personal benefits for the Managing Director. Therefore, the Tribunal decided to restrict the disallowance proportionally to Rs. 50,000/- out of the total disallowance of Rs. 1,90,529/-, thereby partly allowing the ground in favor of the assessee.

Conclusion:

The appeal was decided in favor of the assessee with consequential effects to be given by the Ld. AO. The Tribunal pronounced the order on 29th July 2022, allowing the appeal concerning the disallowance of EDC and partially allowing the appeal concerning the disallowance of club expenses.