In the case of DLF Homes Panchkula (P) Ltd. v. Additional Commissioner of Income Tax (‘CIT’) & Anr. (supra) (DELHI HIGH COURT – SCC OnLine Del 4337) , the Delhi High Court quashed penalty proceedings initiated under s. 271C of the Income Tax Act, 1961 (‘IT Act’) and demand notice issued under s. 156 of the IT Act for failure to deduct tax at source (‘TDS’) on External Development Charge (‘EDC’) paid to the Haryana Urban Development Authority (‘HUDA’).
This decision was grounded in a judgment pronounced by a co-ordinate bench in a nearly identical case. In DLF Homes Panchkula (P) Ltd. v. Joint CIT (OSD)(i), the court ruled in favor of the petitioners, thereby setting aside the orders raising demands under Sections 201(1) and 201(1A) of the IT Act.
BRIEF FACTS
The petitions in question pertained to the financial year 2013-14 and contested the order dated 28.11.2022 issued under Section 271C of the IT Act, which concerns the penalty for non-deduction of TDS. The petitions also challenged the demand notice of the same date issued under Section 156 of the IT Act. The dispute primarily revolved around whether the petitioner could be treated as an assessee-in-default under Sections 201/201(1A) of the IT Act for failing to deduct withholding tax concerning EDC paid to HUDA.
Reference was made to an identical case wherein the petitioners, engaged in real estate development, challenged orders passed under Sections 201(1)/201(1A) of the IT Act regarding TDS on EDC paid to HUDA. The central question in this case was whether the petitioners were obligated to deduct TDS under Section 194-I of the IT Act on EDC payments made to HUDA. The lead petitioner in this case had applied to the Director General, Town & Country Planning for licenses to establish an IT Park and a Group Housing Colony in Haryana.
Pursuant to Rule 11 of the Haryana Development and Regulation of Urban Area Rules ('HDRUA'), the lead petitioner in DLF v. JCIT (supra) entered into an agreement dated 18.10.2011 with the State Government of Haryana, represented by the Director General of Town & Planning. This agreement was for establishing an IT park. Additionally, the petitioner entered into another agreement dated 20.12.2012 for the establishment of a Group Housing Colony.
As per the aforementioned agreements and r. 11 of HDRUA, the petitioner was mandated to pay a proportionate development charge as and when required, and as determined by the Director General of Town and Country Planning.
The JCIT issued four show-cause notices to the lead petitioner, seeking justification as to why the petitioner should not be treated as an "assessee in default" in respect of TDS deductible as per Sections 194C/194J of the IT Act on the amount of EDC paid to HUDA. The lead petitioner argued that EDC payments were statutory obligations not subject to TDS, and Sections 194C/194J of the IT Act were not applicable. However, the Assessing Officer ('AO') held that EDC was akin to 'rent,' and TDS was to be deducted under Section 194-I of the IT Act.
HELD
The Delhi High Court while quashing the penalty order and demand notice, held as below -
The court referred to the decision in DLF v. JCIT (supra) and quashed the penalty order dated 28.11.2022 issued under Section 271C of the IT Act and the demand notice issued under Section 156 of the IT Act. The court ruled in favor of the petitioners and held that the petitioners cannot be treated as an 'assessee in default' under Sections 201/201(1A) of the IT Act due to their failure to deduct TDS on EDC paid to HUDA. The court relied on the decision in DLF v. JCIT (supra), wherein the co-ordinate bench had rejected the contention that merely referring to the wrong section of the IT Act was a curable defect, as it undermined the fundamental reasoning of the AO. It was noted that the AO's determination of the nature of payment was crucial to ascertain TDS liability, and the Revenue's approach, trying to find provisions to support an already concluded obligation, was flawed.
ANALYSIS
The rationale provided in this case for quashing the penalty issued under s. 271A of the IT Act and the demand notice issued under s. 156 of the IT Act is inherently consequential in nature. This is primarily due to the judgment rendered by the co-ordinate bench in the case of DLF v. JCIT* (supra),* which granted relief to the petitioners in a batch of petitions for not deducting TDS on EDC payments made to HUDA.
Furthermore, EDCs are charges payable to the development authority for obtaining the rights to develop a particular area. This transaction involves a quid pro quo element between the developer and the development authority. Thus, without any administrative and legislative direction on whether EDC should be classified as ‘statutory fees’ or ‘rent’ has led to a perplexed scenario about its taxation and never-ending litigation between revenue and the assessee.
*Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion. *
End Notes
*(i) *2023 SC OnLine Del 2026
AUTHORED BY
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