ITO(TDS), AJMER vs. DIVISIONL FOREST OFFICER, AJMER

Feeling dissatisfied revenue has preferred the present appeal challenging the finding of the ld. CIT(A) on the grounds as reiterated here in above. All the grounds raised by the revenue are interconnected and are in relating to the levy of TDS on the payment made to the EDCs are liable for TDS u/s. 194C of the Act or not. In support of the grounds so raised the ld. DR raised vehemently argued that the revenue has made the spot verification on the issue that has been raised in the assessment order and the based on the verification and after considering all the arguments of the assessee deductor the liability is determined. The statement of the authorized officer was recorded. The assessee after the The ld. AO categorically stated that the EDCs/VFPMCs does not fall into category of state government or local authority as per section 10(20) or section 10(46) of the Act or any sub-section 10 of section10 comes to the relief. The EDCs/VFPMCs are also not registered as per provision of section 11 and 12 or that as co- operative society so as to claim the provision of section 80P of the Act. Thus, there is no means by which the payee are exempted from tax. The ld. CIT(A) has granted the relief to the assessee based on the circular of state government and the decision of the apex court is not applicable to the present set of facts. The provision of the Central Act cannot be exempted by the state government notification. The CBDT circular no. 502 dated 27.01.1988 is not applicable as the scheme referred in that circular and the payment are for the different scheme. Thus, considering the provision of section 194C of the Act the appeal of the assessee has been allowed without considering the findings of the ld. AO recorded in his order and the arguments presented herein above.

Per contra, the ld. AR of the assessee supported the detailed finding of the ld. CIT(A). The ld. AR of the assessee filed a detailed written submission in support of the order passed by the ld. CIT(A) and contention raised there upon based on that aspect of the matter the appeal of the assessee is allowed by the ld. CIT(A). The written submission filed by the assessee is reproduced here in below :

BRIEF OF FACTSOF CASE ARE AS UNDER:- (a) That the deductor assessee is an office of state government of Rajasthan who works as forest department of state of Rajasthan & it’s work include conservation of forest and increasing the forest area through re-foresting in Ajmer Region of state. (b) It has been observed by A.O. during spot verification; that assessee is regularly paying large sum of money to AOPS, called Eco Development Committee (EDC’S) or Van Suraksha and Prabandh Samiti (VFPMC). (c) The work of these VFPMC so called AOP include supplying of labour and carrying of any such work which include defence of forest in their assigned zone etc. thus these are schemes of the state government for planning, coordination, supervision, monitoring and implementation of the programme is the responsibility of district rural agencies and in such implementation the panchayati raj is actively involved as well as such voluntary organization are also involved and under these scheme there is specific ban on employment of contractors for the execution of the work under the programme and thus it is clear that such programmes / works are executed with the participation of the people, panchayati raj and state government in conformity with the central government and there is no contract between the village committee, voluntary agencies and the state

LEGAL ASPECTS:- (1) According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. (2) According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organizations are also involved in such implementation. The wages under this programme are paid partly in food grains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme. (3) According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organizations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in food grains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organizations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work. (4) Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of con tractors/middlemen for the execution of the work undertaken under these schemes. (5) In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes. Accordingly in terms of circular no. 502 (F.No. 385/49/86-ITC dated 27.01.1988) of Government of India, Income Tax department it has been clarified / explained that provisions of section 194C are not applicable in case of afore captioned situation. Since Dy. Conservator Forest Department Bhilwara (Raj.) is a wing of Rajasthan State Government, Jaipur & works for forest department of State of Rajasthan for conservation of forest & increasing the forest area through re-foresting under the same schemes. Even Hon’ble Supreme Court in case of Gujrat State & Others v/s Pratam Singh Parmar J.T. 2001(3) SC 326 in the bench of G.B. Patnaik & Shri V.N. Agarwal order dated 31.01.2001 has decided that State Government & Forest Department is not an “INDUSTRY” but there act are “UNIVERSAL”. Few work order under NREGA (Mahatama Gandhi National Rural Employment Gurantee Assurance Programme) & other government flagship schemes are also there to justify the facts & non applicability of provisions of section 194C of Income Tax Act, 1961 & circular No. 502 dated 27.01.1988 of Board is clearly applicable. (6) ALTERNATIVELY; in terms of section 206AA read with section 139A of Act and Article 14 of The Constitution of India 1950 the facts are to be examined that whether the DEDUCTION OF TAX AT SOURCE REQUIREMENT TO FURNISH PAN, is must (UNCONSTITUTIONAL) in view of statute in case of person whose income is below taxable limit. Refer High Court of Karnataka (2012) 208 Taxman 208 / 22 Taxmann.com 157 Karnatka in case of Smt. A Kowsalya Bai V/s Union of India where the Hon;ble High Court has decided that “section 139A which is introduced way back in April’ 1991 is in vogue & this provision stands the scrutiny of Article 14 of the constitution for reasonableness. But, section 206AA which is contrary to section 139A appears to be discriminatory as it is overriding section 139A introduced earlier. Though the intention of the legislature is to bring the maximum persons under the net of Income Tax when necessarily it provided for exemption upto taxable limit. It may not insist such persons whose income is below the taxable limit to compulsorily go for pan. If any mischief of avoiding of tax or any other act of concealing the income is detected that could be taken care of by penal provisions. Accordingly the case was decided in favour of petitioner (Assessee) thus the question of obtaining pan from such societies who has no income or below taxable income does not arise & even section 197A subsection 1B states as under;- Section 197A(IB) (1B) The provisions of this section shall not apply where the amount of any income of the nature referred to in sub-section(1) or sub- section(1A) as the case may be, or the aggregate of the amounts of such incomes credited or paid or likely to be credited or paid during the previous year in which such income is to be included exceeds the maximum amount which is not chargeable to income tax. Thus when such societies are not having “TAXABLE INCOME” in terms of section 139 of Act; no return is to filed by them; nor are required to get pan. Section 197A(IB) also prohibits to them for apply “LOWER DEDUCTION” or to file any form. Thus asessee is “NOT IN DEFAULT” & no liability u/sec. 201(1) & 201(1A) can be determined. ALTERNATIVELY in view of provisions in section 201 / 201(1A) w.e.f. 01.07.2012 (Finance Act, 2012) it has been clearly stated as under:- Provided that in case any person, including the principal officer of a company fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident but is not deemed to be an assessee in default under the first proviso to sub-section (1), the interest under clause (i) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident Thus the assessee cannot be considered as “ASSESSEE IN DEFAULT” since each eco development committee (EDC”S) or Van Surakasha and Prabandh Samiti (VFPMC) as defined above has no taxable income. There audited accounts for each financial year is as enclosed and Income Tax Department has not issued them any notice u/sec. 148 / 143(2) / 142(1) of Act so far since no income taxable. Thus when there is no taxable income of any such institution (Samitis) than the provisions of section 201 and section 201(1A) are applicable & “ASSESSEE IS NOT IN DEFAULT” . Section 4 of Income Tax Chapter II / States “BASIS OF CHARGE” Thus “MUTUAL CONCERNS”, where the members of the assesse association are contributors to a common fund and had the right to participate in surplus, the surplus would not be assessable as the assessee’s income on the ground of mutuality – CIT V/s Cement Allocation & Co.-ordinating Org. (1999) 236 ITR 553 (Bom.) Section “4” of Act further defines what is “CONSORTIUM MEMBER” what is AOP & features of consortium arrangement & what is not AOP etc. (Refer circular no. 7/2016 dated 07.03.2016) copy as enclosed. (Page 1) Thus till it is not established that such VAN SURAKSHA AND PRABHANDAN SAMITI (VFPMC) are AOP or not or are only “MUTUAL CONCERNS” & thus has basic charge to Income Tax u/sec. 4 of Act. The A.O. without verifying this test has straightway considered such VFPMC as AOP liable to tax & thus instead considering such “MUTUAL CONCERNS” for no profit object has considered them AOP & has levied TDS liability. Thus a person cannot make a taxable profit out of transaction with himself DUBLIN CORPORATION V/S H ADAM 2TC 387 Further the payments by Rajasthan State Government (through it’s forest department wing) to such VFPMC & Rajasthan State Forest Department are thus covered by article 289(1) of the constitution, where the property or income of a state is not liable for union taxation. Further held that such arrangement must be of a non – trading character:- “Arrangement must be of non – trading character – it is settled that in the case of mutual society or concern (including a members club), there must be complete identity between the class of contributors and the class of participators. The particular label of form by which the mutual association is known, is of no consequence. In substance, the arrangement or relationship between the club and its members should be of a non – trading character. At what point does the relationship of mutuality ends and that of trading begins is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. Whether or not the persons dealing with each other constitute a mutual club or are carrying on a trading activity or an adventure in the nature of trade, is largely a question of facts – CIT v. Bankipur Club Ltd. (1997) 92 Taxman 278 (SC).” Similar view has further held in case of Chelmsford Club V/s CIT(2000) 243 ITR 89 (SC). “Principle of mutuality will extend to property income also – Where the assesse – club provides recreational facilities to its members and their guests and to no one else, and is run on no profit no loss basis, in that the members pay for all their expenses and are not entitled to any share in the profits and surplus, if any, is used for maintenance and development of the club, the notional income from house property in respect of the club building is not assessable to tax, on the principle of mutuality which will extend to such deemed income also on the facts of the case – Chelmsford Club V. CIT(2000) 243 ITR 89(SC).” “Activities should not be commercial or profit – motivated – Where the facilities extended by the clubs to their members are as a part of usual privileges, advantages and conveniences attached to the members of the club, the said activity cannot be said to be trading activity. On the other hand, if the activities disclose profit – earning motive and are tainted with commerciality and what is being offered are usual privileges, advantages and conveniences, that would attract the principle of mutuality. Such a finding and consequent applicability of the principle cannot be interfered with unless the revenue from the record points out that the findings are totally perverse – CIT v. Willingdon Sports Club (2008) 302 ITR 279 (Bom).” Thus from above facts & discussions it is clear that such VFPMC are not AOP’S (An independent entity for levy of tax, basis of charge – section 4 of Income Tax Act, 1961) but are only MUTUAL CONCERNS & thus no tax liability, existence (Separate) proved. Further as held at ITAT Mumbai Bench in case of ICICI Securities Ltd. V/s ITO International Taxation order dated 09.11.2022 it has been held that “Liability to deduct TDS u/sec. 201 of Income Tax Act, is a VICARIOUS LIABILITY; which ends with discharge of principal liability of recipient of income. Thus when “RECEIPIENT OF INCOME” such society’s VAN SURAKSHA AND PRABHANDAN SAMITI (VFPMC) are mutual concern of Rajasthan State Forest Department than there is no tax liability of such concerns in terms of article 289(1) of Indian Constitution. (f) Thus these VFPMC are incorporated as “SELF WORKING GROUP” for joint work as per direction of government & to preserve the forest & to grow them more. Even the clause 8.8 of Government of Rajasthan Notification S.No. F7(39) VAN/90 dated 17.08.99 it has been clarified that “MORE & MORE SUCH VAN SURAKSHA SAMITI” would be inspired under this “JANTA VAN YOJNA” for tree plantation & forestry. Such samitis shall not be in category of “THEKEDAR” (Contractor) rather this is work done under the Government Public Participation under the Government scheme of NREP(National Rural Employment programme) & RLEGP (Rural Landless Employment Guarantee Programme); since as

11. The ld. AR in addition to the submission so made before ld. CIT(A) also relied upon the CBDT circular No. 502 dated 27.01.1988. The ld. AR of the assessee also submitted that the liability of TDS has been fixed upon the assessee @ 20% considering that EDC’s are having any PAN. That information is already on record as the assessee started compliance to avoid unnecessary litigation. The ld. AR of the assessee submitted that in almost all cases there are available PAN. Therefore, even if on merit are not considered then the liability fasten in assessee cannot be @ 20%. Therefore, even if this plea is considered the and mostly importantly even if these details are placed on record non of these EDCs case is re-opened or assessed considering the income paid by the assessee as chargeable to tax this itself proves that the revenue has accepted the fact that the income of the payee are not chargeable to tax and thus the TDS liability fastened on the assessee has rightly been deleted by the ld. CIT(A).

In the rejoinder the ld. DR relied upon the finding of the lower authorities and vehemently argued that the subsequent action of the assessee taking PAN making compliance of TDS itself demonstrate that the assessee for the year under consideration is liable for TDS liability. Based on this aspect of the matter he supported the order of lower authority.

We have heard the rival contentions and perused the material placed on record. The brief facts of the case are that the appellant is an office of State Government of Rajasthan working on conservation and reforestation of forest area in the state of Rajasthan. ITO, TDS made a spot verification cum survey on the office premises of the assessee on 03.01.2019 u/s 133(2A) of the making payments of large sum to certain groups for executing the various work. The payments were made to Eco Development Committee (EDCs) and Van Suraksha and Prabandhan Samiti (VFPMC). These groups were constituted as Self Working Group jointly with the Government for preservation of forest and other such programme as a part of implementation of Panchayati Raj.

Ld. DR for the Revenue by relying upon the Office Memorandum F.No.370133/37/2017-TPL dated 23.12.2017 issued by the Central Board of Direct Taxes (CBDT) contended that there is no ambiguity that HUDA is a taxpayer entity under the Income tax Act and as � such, TDS provisions would be applicable on EDC payable by developer to HUDA.

When we examine aforesaid contention raised by the ld.DR for the Revenue in the light of the facts and circumstances of the case in which EDC have been paid to HUDA for Financial Years 2013-14, 2014-15, 2015-16 & 2016-17 (upto December 2016) as mentioned by the ld. CIT (A) in para 2.1 of his order, it goes to prove that prior to 23.12.2017, the date of CBDT circular, there was no clarity whatsoever as to the deduction of tax on EDC. When there was no clarity with the assessee prior to 23.12.2017, if TDS was to be deducted by the assessee on payment of EDC, it provided a “reasonable cause” u/s 273B of the Act that TDS was not required to be deducted. 12. Ld. AR for the assessee contended that DTCP had issued a clarification dated 29.06.2018 to the effect that no TDS was/is required to be deducted in respect of payment of EDC and relied upon the order passed by the coordinate Bench of the Tribunal in case of RPS Infrastructure Ltd. vs. ACTI in 5806, 5349/Del/2019 order dated 23.07.2019 wherein it is held that, “on the basis of letter supra issued by DTCP that the letter covers both past and future transactions and TDS was not required to be deducted.” We have perused the order passed by the Tribunal in case of RPS Infrastructure Ltd. (supra) in which letter (supra) has been examined, it is clear that TDS was/is not required to be deducted in respect of deduction of EDC. So, in view of the matter, we are of the considered view that when DTCP, a Department of Government of Haryana, has itself clarified not to deduct the TDS, no penalty is leviable u/s 271C on the assessee. 13. Even otherwise, for argument sake, even if it is assumed that tax is required to be deducted on EDC but not deducted under bonafide belief that the provisions contained u/s 271C are not attracted, no penalty can be levied. 14. Hon’ble Supreme Court in the case of CIT vs. Bank of Nova Scotia 380 ITR 550 upheld the findings returned by the tribunal that, “if there is no contumacious conduct of the assessee, penalty u/s 271C cannot be levied.” Operative part of the judgment supra is extracted for ready perusal as under :- "2. The matter was pursued by the Revenue before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal vide order dated 31.03.2006 entered the following findings: "11. We have carefully considered the rival submissions. In the instant case we are not dealing with collection of tax u/s 201(1) or compensatory interest u/s 201(1A). The case of the assessee is that these amounts have already been paid so as to end dispute with Revenue. In the present appeals we are concerned with levy of penalty u/s 271-C for which it is necessary to establish that there was contumacious conduct on the part of the assessee. We find that on similar facts Hon'ble Delhi High Court have deleted levy of penalty u/s 271-C in the case of Itochu Corporation 268 ITR 172 (Del) and in the case of CIT v. Mitsui & Company Ltd. 272 ITR 545. Respectfully following the aforesaid judgments of Hon'ble Delhi High Court and the decision of the ITAT, Delhi in the case of Television Eighteen India Ltd., we allow the assessee's appeal and cancel the penalty as levied u/s 271C."

Being aggrieved, the Revenue took up the matter before the High Court of Delhi against the order of the Income Tax Appellate Tribunal. The High Court rejected the appeal only on the ground that no substantial question of law arises in the matter.

On facts, we are convinced that there is no substantial question of law, the facts and law having properly and correctly been assessed and approached by the Commissioner of Income 9 ITA No.6844/Del./2014 Tax (Appeals) as well as by the Income Tax Appellate Tribunal. Thus, we see no merits in the appeal and it is accordingly dismissed."

Furthermore, coordinate Bench of the Tribunal in case of DCIT (TDS), ACIT (TDS) and JCIT (TDS), Dehradun vs. The Joint Secretary Organizing Committee for Winter Games also decided the identical issue by relying upon the decision rendered by Hon’ble Supreme Court in case of CIT vs. Bank of Nova Scotia (supra) and deleted the penalty u/s 271C by returning following findings :- "31. We have carefully considered the rival contentions and perused the orders of the lower authorities. On looking to the facts of the case as discussed by us in appeal of the assessee and revenue in 201(1) and 201(1A) proceedings above, we find that the belief of the assessee is bonafide and failure to deduct tax at source u/s 194C of the Act is for a reasonable cause. The ld Assessing Officer could not show any contemptuous conduct on part of the assessee for non-deduction of tax at source. There could also not be any reason for non-deduction as assessee has made most of the payments to the public sector undertaking. The Hon'ble Supreme Court in the case of CIT Vs. Bank of Nova Scotia in 380 ITR 550 has approved the decision of the Hon'ble Delhi High Court wherein, it has been held that it is necessary to establish 'contumacious conduct' on the part of the assessee for failure to deduct tax at source for levy of penalty u/s 271C of the act. In the present case, all the recipients have also furnished a certificate that they have received the payment. In view of this, we reverse the order of the ld CIT (A) confirming the levy of the penalty of � 1152461/- u/s 271C of the Act in absence of any finding to show contumacious conduct on the part of the assessee. Ld OA id directed to delete the penalty-levied u/s 271C of the act. Accordingly, appeal of the assessee in for AY 2010-11 is allowed."

In view of what has been discussed above, we are of the considered view that firstly, the assessee was not required to deduct TDS as the payment of EDC was not made out of any statutory and 10 ITA No.6844/Del./2014 contractual liability to HUDA with whom the assessee has no privity of contract; secondly, the assessee has reasonable cause for non-deduction of tax at source by the assessee company; thirdly it is not the case of the Revenue authorities that the assessee has intentionally avoided the deduction of TDS by bringing on record contumacious conduct of the assessee; and fourthly, with continuous clarifications by the CBDT and DTCP discussed in the preceding paras, the issue became debatable if the TDS is to be deducted or not on the EDC providing reasonable cause to the assessee not to deduct the TDS. Consequently, penalty levied by the AO and confirmed by the ld. CIT (A) is not sustainable in the eyes of law, hence ordered to be deleted. So, the appeal filed by the assessee is allowed. In the light of the discussion made and respectfully following the similar view taken by the coordinate bench of Delhi we do not find any infirmity in the order of the ld. CIT(A). Based on these observation the appeal filed by the revenue stands dismissed.