2024 (2) TMI 1473 - HC - Income Tax

TDS u/s 194C - External Development Charges EDC which were paid by the writ petitioners to HSVP Haryana Shahari Vikas Pradhikaran albeit on the directions of the Director General, Department of Town and Country Planning DTCP, Haryana, a department functioning under the Government of Haryana - HELD THAT - The question which warrants consideration is whether EDC was a payment to the State must necessarily be answered in the negative bearing in mind the undisputed fact that the income was placed in the hands and at the disposal of HSVP. We note that undisputedly at least till 31 March 2017 all EDC payments even as per the DTCP were being made out in favour of HSVP. It is only thereafter that EDC was deposited with the DTCP. This too leads us to the irresistible conclusion that the payments made to HSVP would not fall within Section 196. We also bear in mind the unambiguous legislative command of Section 194C which places the payer under the unshirkable obligation of deducting tax from all payments being made to a contractor. We have already noticed in the preceding parts of this decision that Section 194C of the Act vests no discretion in the payer to examine or contemplate chargeability of that payment to tax. We negative the challenge raised in these writ petitions insofar as the invocation of Section 194C of the Act is concerned and hold that EDC payments would be covered thereunder. For reasons recorded in the body of this judgment, we also turn down the challenge to the Clarification issued by the Central Board of Direct Taxes dated 23 December 2017. We dispose of those writ petitions where final orders under Section 201 may not have been made by according liberty to the respondents to revive the pending show cause notice proceedings and conclude the same in accordance with law bearing in mind the observations appearing hereinabove. The proceedings on the pending show cause notices would be liable to be decided afresh after affording an opportunity of hearing to the writ petitioners and decided in accordance with this judgment.

Summary

Issues Involved:
1. Whether the payment of External Development Charges (EDC) falls within the ambit of Section 194C of the Income Tax Act, 1961.
2. Whether the writ petitioners can be held liable to deduct tax at source on EDC payments.
3. Whether the payments made to Haryana Shahari Vikas Pradhikaran (HSVP) are exempt under Section 196 of the Income Tax Act.
4. The validity of show cause notices issued to the petitioners without specifying the exact provision of the Income Tax Act.
5. The applicability of penalty provisions under Sections 221 and 271C of the Act.

Issue-wise Analysis:

1. Applicability of Section 194C:
- The court examined whether EDC payments made by the petitioners to HSVP fall under Section 194C of the Income Tax Act, which mandates tax deduction at source for payments made to contractors for carrying out work under a contract with a specified person.
- The court noted that HSVP, as a development authority, undertakes external development work on behalf of the Government of Haryana. The arrangement between HSVP and the government qualifies as a contract under Section 194C, even if not formally documented, as evidenced by the conduct and statutory obligations.
- The court concluded that the payments made to HSVP for external development work are indeed covered under Section 194C, and thus, the petitioners were liable to deduct tax at source.

2. Liability to Deduct Tax at Source:
- The court emphasized that Section 194C does not require a direct contractual relationship between the payer and the contractor (HSVP in this case). The obligation to deduct tax arises from the payment being made to a contractor who has a contractual relationship with a specified person (the Government of Haryana).
- The court rejected the argument that the absence of privity of contract between the petitioners and HSVP exempts them from the obligation to deduct tax, affirming that the statutory framework mandates such deduction.

3. Exemption under Section 196:
- The petitioners argued that EDC payments should be exempt from TDS under Section 196, which covers payments to the Government, RBI, or corporations established under a Central Act.
- The court rejected this argument, clarifying that HSVP, being a statutory authority under a State Act, does not qualify as the Government or a corporation under a Central Act. The court distinguished between a statutory corporation and the State, drawing from precedents like Adityapur Industrial Area Development Authority v. Union of India.
- Consequently, the court held that EDC payments to HSVP do not fall under the exemptions of Section 196.

4. Validity of Show Cause Notices:
- The court scrutinized the show cause notices issued to the petitioners, which lacked specific reference to the applicable provision under Chapter XVII-B of the Act, making them vague.
- While acknowledging the deficiency in the notices, the court decided not to quash them solely on this ground due to the extensive proceedings and opportunities provided to the petitioners to contest the applicability of Section 194C.

5. Penalty Provisions:
- The court addressed the applicability of penalties under Sections 221 and 271C, emphasizing that penalties are not automatic and should consider whether the petitioners had reasonable cause for not deducting tax.
- The court referenced the Supreme Court's rulings in CIT v. Eli Lilly & Co. and Singapore Airlines Ltd. v. CIT, highlighting that penalties require a lack of good and sufficient reason for non-compliance.
- The court directed the respondents to verify whether EDC payments were taxed in the hands of HSVP and to consider the petitioners' reasonable cause before imposing penalties.

Conclusion:
The court upheld the applicability of Section 194C to EDC payments, requiring the petitioners to deduct tax at source. It rejected the exemption claim under Section 196 and emphasized the need for specificity in show cause notices. The court also provided guidance on penalty considerations, allowing for proceedings to be revisited in light of its observations.