Loading judgment…
Facts
The assessee paid Extra Development Charges (EDC) to HUDA. The AO disallowed 30% of this payment under Section 40(a)(ia) for non-deduction of TDS, treating it as interest payment under Section 194A. The CIT(A) sustained the disallowance, relying on a High Court judgment that EDC payments are covered under Section 194C.
Held
The Tribunal held that the AO erred in invoking Section 194A for EDC payments, as they are statutory dues and not 'interest'. The CIT(A) also erred in sustaining the addition by changing the charging provision, which is beyond their powers under Section 251(1)(a). The invocation of Section 40(a)(ia) was also deemed incorrect.
Key Issues
Whether the AO and CIT(A) correctly invoked Section 194A and Section 40(a)(ia) for disallowance of EDC payments, and whether the CIT(A) exceeded their jurisdiction by changing the charging provision.
Sections Cited
143(3), 40(a)(ia), 196, 194A, 194C, 251(1)(a), 69, 56(2)(vii)(b)(ii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES: A : NEW DELHI
Before: SHRI S. RIFAUR RAHMAN & SHRI ANUBHAV SHARMA
Assessment Year: 2017-18 Sternal Buildcon Private Ltd., Vs DCIT, 13th Floor, Circle-24(2), Dr. Gopal Das Bhawan, Delhi. 28, Barakhamba Road, New Delhi – 110 001. PAN: AAOCS0457N (Appellant) (Respondent) Assessee by : Smt. Ananya Kapoor, Shri Shivam Yadav & Ms Sakshi Rastogi, Advocate Revenue by : Shri Ajay Kumar Arora, Sr. DR Date of Hearing : 02.09.2025 Date of Pronouncement : 10.09.2025 ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the assessee against the order dated 04.11.2024 of the Commissioner of Income-tax (Appeals)-2, Mumbai (hereinafter referred to as the ld. First Appellate Authority or ‘the Ld. FAA’ for short) in Appeal No.CIT(A), Delhi-8/10285/2019-20 arising out of the appeal before it against the order dated 17.12.2019 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Circle-24(2), Delhi (hereinafter referred to as the Ld. AO).
Heard and perused the record. The Assessee company is engaged in the construction of affordable houses and filed the Return of Income (ROI) for the A.Y. 2017-18 on 27.10.2017 declaring loss of Rs.2,01,38,312/-. During the year under consideration, the Assessee had paid Extra Development Charges (EDC) amounting to Rs. 99,80,000/- to Haryana Urban Development Authority (HUDA) on the basis of the License issued by the Directorate of Town and Country Planning Haryana a wing of Haryana Government (DTCP). The Assessee was granted license under the Haryana Development and Regulation of Urban Areas Act, 1975 for development of affordable group housing colony over an area measuring 9.775 acres in Sector-36, Sohna District, Gurgaon and as per the said license the Assessee was required to pay EDC to the DTCP and accordingly a sum of Rs. 99,80,000/- was paid by the Assessee Company to HUDA as per the direction of DTCP and pursuant to the contract between the Assessee and DTCP. However, the AO took the view since the EDC was paid to HUDA, the assessee was liable to deduct Tax at Source (TDS) on the EDC paid. The Assessee however contends that the same was paid pursuant to the directions of DTCP and was paid to HUDA only for administrative purposes as the Assessee only had a contract with DTCP and thus, DTCP being covered under Section 196, no TDS is required to be deducted. The AO however, disallowed 30% of EDC paid u/s 40(a)(ia) of the Act and made an addition of Rs. 29,94,000/-. As assessee challenged the same before the CIT(A), the disallowance was sustained for which assessee is in appeal raising following grounds:- “1) That the addition of Rs.29,94,000/- is illegal, bad in law and without jurisdiction. The CIT (Appeal) has also grossly erred in law in upholding the addition. The addition of Rs.29,94,000/- is liable to be deleted. 2) That the AO and CIT (Appeal) have grossly misunderstood and wrongly interpreted the provisions of law and the factual situation and the addition of Rs.29,94,000/- is illegal and bad in law. Section 40(a)(ia) is not applicable to the facts and circumstances of the case. The addition of Rs.29,94,000/- is liable to be deleted. 3) That the interpretation adopted by Hon’ble Delhi High Court in the case of M/s Puri Construction is illegal and bad in law and the same should not be followed as many vital aspects have been ignored. 4) That the EDC charges paid to HUDA are further paid to Haryana Government and on such facts and circumstances Section 40(a)(ia) are not applicable. 5) That without prejudice the lower authorities have failed to appreciate the fact that HUDA is also a government authority on which no tax can be charged. 6) That without prejudice the lower authorities have failed to consider the fact that EDC charges paid by the assessee/appellant have been recorded as revenues in the hands of the recipient and hence no action can be taken against the assessee/appellant. 7) That the vital aspects of the case are grossly ignored and the interpretation adopted by the lower authorities is totally illegal, bad in law and without jurisdiction. 8) That the submissions, explanations and evidences filed before the lower authorities have not been examined and interpreted judiciously. 9) That the order of the lower authorities are based on guesswork, surmises and conjectures. 10) That the lower authorities have passed the order in undue haste and without affording a proper opportunity to the assessee to be heard. The orders are passed in gross violation of principles of natural justice.
11) That the addition of Rs.29,94,000/- should be deleted and the return of income filed by the appellant should be accepted.”
Ld. Counsel appearing for assessee contended that assessee has made payment to HUDA on the directions of DTCP. There was no contract between the Assessee and HUDA and the payment is on account of EDC only. Therefore, the contractual obligation has been entered into with DTCP and not with HUDA. However, not appreciating the same, the AO passes an order and states that the Assessee is liable to deduct TDS in view of Section 194A of the Act. It is submitted that payment to HUDA pursuant to the directions of DTCP are statutory dues/external development charges. These are charges payable under law by the developers to the Government/local authority. Hence, liability to deduct TDS under Section 194A can never arise as this payment cannot by any stretch of imagination by termed as “interest” for invoking Section 194A of the Act. It was contended that EDC is a statutory obligation upon the owner/applicant to pay the proportionate development charges if its external development work is to be carried out by the Government or any other local authority. Thus the nature of EDC being statutory dues cannot be doubted and hence the AO has grossly erred in referring to it as “interest”.
It comes up that while concluding para number 5.1 the AO has concluded as follows; “Therefore, in view of section 194A, as explained above, any amount paid or credited to an NBFC, by way of interest other than interest on securities, are liable for deduction of tax at source at prescribed rates” 4
5. However, CIT(A) vide its impugned order has somehow taken a different view and given different colour to the payments relies on the judgment of the Hon;ble Delhi High Court in the case of Puri Constructions (P.) Ltd. v. Additional Commissioner of Income Tax 2024 462 ITR 326(Del), where in Hon’ble High Court has settled the issue about deductibility of TDS and has held that the EDC payments would be covered under section 194C of the Act. The finding of the CIT(A) is reproduced here in below for convenient reference: “In view of the findings given by the Jurisdictional High Court, the Appellant was required to deduct the TDS u/s 194C on EDC payments made to HUDA. As the Appellant has not deducted the TDS, the AO was correct in making disallowance as per the provisions of Section 40(a)(ia) of the Act. ”
Thus it is the case of assessee that the AO has treated the EDC payment as interest payment under Section 194A and it is not the case of the AO that the payment is covered in view of Section 194C. The case of the AO is only limited to Section 194A which cannot be applied on the facts of the given case as external development charges cannot be in the nature of interest. It submitted by ld. Counsel that in the case of Puri Constructions (P.) Ltd.(Supra) Hon’ble High Court has only adjudicated on the applicability of Section 194C and not on any other provision of law.
Now as with regard to applicability of Section 194C of the Act to impugned payments seems to be not at all disputed but the issue is error committed by AO in invoking provisions of Section 194A of the Act. It appears that before the CIT(A) this error was not pointed out in the form of any grounds or by way of any submissions. Assessee was infact contesting on merits alone by relying certain decision of Tribunal in favour of assessee, which were there when appeal was filed before the CIT(A). But subsequently the said decision of Hon’ble High Court in Puri Constructions (P.) Ltd.(Supra) has settled the issue against the assessee and same was relied by CIT(A) to sustain the disallowance.
However, this wrong invocation of charging section by AO seems to have escaped the attention of CIT(A) also which now seems to become fatal as CIT(A) can exercise the powers as enumerated u/s 251 (1 )(a) of the Act i.e. the CIT (A) can confirm, reduce, enhance or annul the assessment but he cannot change the substance of the addition by changing the head of charging provisions, in any case certainly not without putting assessee to notice. Reliance for this proposition of law, is rightly placed by ld. Counsel on the decision of co-ordinate bench in the case of Bimla, where the bench has held as follows; “2. ......Since the Assessing Officer was not convinced with different versions of sources and justification submitted by the assessee, he rejected various submissions of the assessee and proceeded to make the addition u/s 69 of the Act. Further he added stamp duty of Rs. 6,54,050/-.
Ld. CIT (A) observed the purchase amount at Rs. 1,63,50,103/- on the basis of circle rate on which stamp duty was paid in the light of section 56(2)(vii)(b)(ii) of the Act and directed the difference of amount between circle rate and actual amount paid by the assessee to be treated as Income from Other Sources. Since the difference amount is exceeding Rs.50,000/-, he sustained the addition u/s 56(2)(vii)(b)(ii) of the Act and not u/s 69 of the Act.
Further he submitted that where appeal lies before Commissioner of Income Tax (A) against an order of assessment, he can exercise the powers as enumerated u/s 251(l)(a) of the Act i.e. the Id. CIT (A) can confirm, reduce, enhance or annul the assessment but he cannot change the substance of addition. He further submitted that it is pertinent to note that addition of Rs. 1,63,50,103 has been made by Assessing Officer invoking provisions of section 69 of the Act, of which addition to the extent of Rs. 70,00,000/- was deleted by first appellate authority (Although issued direction for assessment in different year), further the addition of Rs.93,50,103/- (Rs.1,63,50,103 - Rs. 70,00,000) is made by first appellate authority invoking section 56(2)(yii)(b )(ii) of the Act. Ld. AR relied on the order of ITAT Delhi 'SMC Bench in the case of M/s Toffee Agricultural Farms Ltd in 1TA no. 4903/Del/2019 dated 18.04.2022 (Page 34- 41 of paper book) wherein it has been held that the CIT(A) could not change the provision of law qua the item of which assessment is made, relevant portion from the order is extracted hereunder:-
It is not a case of mere error in mentioning of incorrect provision of law of making a disallowance but as the disallowance is one for non-deduction of TDS in view of provisions of Section 40(a)(ia) of the Act or non- payment of TDS deducted to the govt. exchequer which are deeming provision and which creates a legal fiction. The legal fiction created by Section 40(a)(ia) cannot be general and should be specific so the disallowance made by AO cannot be extended beyond the deeming provision specifically invoked. Hon'ble Supreme Court in CIT v. Mother India Refrigeration Pvt. Ltd. (1985) 155 ITGR 711 (SC) has held that legal fictions are created only for some definite purpose and they must be limited to that purpose and should not be extended beyond that legitimate field. In CIT v, Bharani Pictures (1981) 129 ITR 244 (Mad,) it is held that legal fictions are for a definite purpose and are limited to the purpose for which they are created and should not be extended beyond its legitimate field.