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2019 (9) TMI 39 - AT - Income TaxPenalty u/s 271C - non-deduction of tax under section 194C/194I - reasonable cause - assessee company has made payment to HUDA on directions of DTCP - HELD THAT - Payments have been made by the assessee to HUDA which is an authority of Haryana Government created by enactment of Legislature for carrying out developmental activities in the state of Haryana. Such Authorities admittedly are not in the category of local authority or Government. These payments were made during the year 2013-2016 and during this period, that is, prior to issue of CBDT Circular dated 23.12.2017, there was no clarity as regard the deduction of tax on these payments. We are of the view that the assesse was under a bonafide belief that no tax is required to be deducted at source on such payments, firstly, for the reason that agreement was between DTCP, who is Governmental authority and licence was granted by the Government and EDC charges was directed to be paid to HUDA, therefore, this could led to reasonable cause that TDS was not required to be deducted; Secondly, DTCP had issued a clarification dated 29.06.2018 to the effect that no TDS was/is required to be deducted in respect of payments of EDC and this clarification issued by DTCP, covers both past and future as the words used are was/is. This shows that Governmental authority itself has demanded not to deduct TDS. In case even if tax was required to be deducted on such payment but not deducted under a bonafide belief then no penalty shall be leviable under section 271 C of the Act as there was no contumacious conduct by the assessee. - Decided in favour of assessee.
Issues Involved:
1. Validity of Penalty under Section 271C for non-deduction of tax at source (TDS). 2. Applicability of TDS on payments made to Haryana Urban Development Authority (HUDA). 3. Whether the payments made were to the Government of Haryana through Director, Town and Country Planning (DTCP) and thus exempt from TDS. 4. Whether the penalty notice was valid without specifying the section under which TDS should have been deducted. 5. Existence of reasonable cause for non-deduction of TDS. Detailed Analysis: 1. Validity of Penalty under Section 271C for Non-Deduction of TDS The assessee challenged the penalty levied under Section 271C for non-deduction of TDS on payments made to HUDA. The AO issued a show-cause notice for the levy of penalty, which was confirmed by the CIT(A). The ITAT noted that the penalty under Section 271C requires a finding of contumacious conduct or deliberate avoidance of TDS provisions. Citing the Supreme Court's judgment in Commissioner of Income Tax vs. Bank of Nova Scotia, the ITAT held that the absence of contumacious conduct on the part of the assessee invalidated the penalty. 2. Applicability of TDS on Payments Made to HUDA The AO argued that HUDA is neither a Government department nor a local authority, and thus payments made to it were liable for TDS under Section 194C. The assessee contended that the payments were made to DTCP, a Government authority, through HUDA, which acted merely as a collecting/executing agency. The ITAT found that the payments were directed by DTCP and were part of a statutory obligation for obtaining a license. Therefore, the payments were not for any specific work contract with HUDA, making Section 194C inapplicable. 3. Payments to Government of Haryana through DTCP The assessee argued that the payments were made to the Government of Haryana through DTCP, which is exempt from TDS under Section 196. The ITAT noted that the agreements and bank guarantees were with the Governor of Haryana, acting through DTCP, and not directly with HUDA. The payments were made as part of the statutory requirement for obtaining a license, and DTCP had control over the EDC charges. The ITAT concluded that the payments were effectively made to a Government authority, supporting the assessee's claim of exemption from TDS. 4. Validity of Penalty Notice The assessee argued that the penalty notice was invalid as it did not specify whether the non-deduction of TDS was under Section 194C or 194-I. The ITAT agreed, citing the requirement for a precise charge in penalty notices to allow the assessee to present a proper defense. The lack of specificity in the notice rendered the penalty proceedings invalid. 5. Reasonable Cause for Non-Deduction of TDS The ITAT considered whether there was a reasonable cause for the assessee's failure to deduct TDS. The assessee believed that no TDS was required as the payments were made to a Government authority. The ITAT noted that there was no clarity on the requirement to deduct TDS on such payments during the relevant period (2013-2016). The DTCP's subsequent clarification in 2018 that no TDS was required further supported the assessee's belief. The ITAT held that the assessee had a reasonable cause for non-deduction of TDS, and thus, no penalty was leviable under Section 271C. Conclusion: The ITAT allowed the appeals, holding that the penalty under Section 271C was not sustainable due to the absence of contumacious conduct, the payments being effectively made to a Government authority, the invalidity of the penalty notice, and the existence of a reasonable cause for non-deduction of TDS. The AO was directed to delete the penalty for all the three assessment years.
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