2023 (4) TMI 399 - HC - Income Tax

TDS u/s 194I OR 194C - External Development Charges ( EDC ) paid to Haryana Urban Development Authority ( HUDA ) - whether merely mentioning an incorrect provision is a curable defect; it does not affect the substratum of the impugned order or renders it vulnerable to challenge? - as contented AO has erroneously mentioned that TDS was required to be deducted u/s 194-I of the Act instead of Section 194C - HELD THAT - We do not find any merit in the contention that the substratum of the impugned order is correct, and the AO has merely referred to a wrong provision of law. The question as to the nature of EDC payment was squarely one of the issues that was required to be addressed by the AO. As concluded that the same was rent as it was in nature of an arrangement to use land. It is not open for the respondents to now contend that EDC charges are payment made to a contractor under a contract and not rent under an arrangement to use land. As noted above, it was specifically contended on behalf of the petitioner that provisions of Sections 194C/194J of the Act did not apply. AO did not allude to the said provisions, which requires a resident person paying any amount to a contractor to deduct TDS; according to the AO, the nature of the EDC is rent - AO has reasoned that the agreement between the petitioner and the State Government of Haryana (license under the HDRUA Act and the HDRUA Rules made thereunder) would be covered under the expression, any other agreement or arrangement for use of land . As conceded by the learned counsel appearing for the respondents that the view of the AO is patently erroneous. In the present case, the Revenue does not seek to support the decision of the AO that EDC are rent or in the nature of rent . Thus, concededly, the fundamental reasoning on which the impugned order rests is fundamentally flawed. The contention that the AO has merely referred to a wrong Section of the Act and therefore, the said reference may be ignored is also without merit. As noticed above, the AO has not only held that TDS was liable to be deducted under Section 194-I of the Act, he has also proceeded to analyse the said Section and hold that EDC are in the nature of rent. He has, in addition, also applied the rate of TDS at the rate of 10% for assessing the petitioner s liability. The reasoning of the AO for finding that the petitioner was obliged to deduct TDS is important. The determination of the nature of payment is vital for ascertaining whether there was any obligation on the part of the petitioner to deduct and deposit TDS on EDC. The Revenue appears to be approaching the issue from quite the reverse direction; it has for an inexplicable reason, concluded that assessees ought to deduct TDS from EDC and now seeks to find provisions of law to sustain the said conclusion. In BPTP s case 2020 (1) TMI 56 - DELHI HIGH COURT AO had initiated reassessment proceedings on the ground that assessee was required to deduct TDS under Section 194 of the Act; apparently, on the premise that EDC is dividend. Before the court, it was argued on behalf of the Revenue that EDC is rent and therefore TDS was required to be deducted from payment of EDC. In the present case, the AO has proceeded on the basis that EDC is rent but the Revenue contends that it is a payment to contractor attracting the provisions of TDS under Section 194C of the Act. It is apparent from the above, that the approach of the Revenue is flawed. We reject the contention that the findings of the AO regarding the nature of EDC charges as well at the provisions referred by him for determining the petitioner s liability are not material. Petitioners in these petitions were required to deduct TDS from EDC under Section 194-I Accordingly, for the reasons stated above, the order impugned is set aside and the said petition is allowed.

Summary

Issues Involved:
1. Whether the petitioners were required to deduct TDS under Section 194-I of the Income Tax Act on External Development Charges (EDC) paid to HUDA.
2. Whether the EDC payments can be classified as 'rent' under the Income Tax Act.
3. Whether the AO's order, which classified EDC payments as 'rent' and applied Section 194-I, was valid.

Summary:

Issue 1: Requirement to Deduct TDS under Section 194-I on EDC Payments
The petitioners challenged the orders passed under Section 201(1)/201(1A) of the Income Tax Act, 1961, where demands of Tax Deducted at Source (TDS) were raised by the Assessing Officer (AO) on the premise that the petitioners were liable to withhold tax on External Development Charges (EDC) paid to Haryana Urban Development Authority (HUDA). The AO held that the petitioners were required to deduct tax at the rate of 10% per annum on EDC under Section 194-I of the Act.

Issue 2: Classification of EDC Payments as 'Rent'
The principal question was whether the petitioners were required to deduct TDS under Section 194-I of the Act on EDC paid to HUDA. The AO concluded that EDC payments were in the nature of 'rent' and thus, TDS was liable to be deducted under Section 194-I at the rate of 10%. The AO's reasoning was based on the finding that EDC payments were an arrangement for the use of land, which falls under the definition of 'rent' as per Section 194-I.

Issue 3: Validity of AO's Order
The learned counsel for the respondents admitted that Section 194-I of the Act is not applicable and the payment of EDC cannot be construed as rent. They contended that the AO had jurisdiction to determine whether TDS is payable or not, and the impugned order should be set aside and remanded to the AO. The court found no merit in the contention that the AO had merely referred to a wrong provision of law. The AO's conclusion that EDC payments were 'rent' was patently erroneous.

Judgment:
The court referred to the decision in BPTP Ltd. v. Principal Commissioner of Income Tax, which held that EDC payments were statutory fees and not subject to withholding tax under Section 194-I. The court found that the AO's reasoning was fundamentally flawed and rejected the contention that the AO had merely referred to a wrong section. The court set aside the impugned orders and allowed the petitions, concluding that the orders raising a demand under Section 201(1) and Section 201(1A) of the Act were invalid. Consequently, all pending applications were also disposed of.