Facts of the Case

The petitioners, comprising various real estate developers, were required under Haryana development regulations to pay External Development Charges (EDC) to the Haryana Shahari Vikas Pradhikaran (HSVP), formerly HUDA, as directed by the Department of Town and Country Planning, Haryana.

The Income Tax Department alleged that the petitioners failed to deduct Tax Deducted at Source (TDS) on these payments under Section 194C of the Income Tax Act, treating the payments as contractual payments for work. Consequently, proceedings were initiated under Sections 201 and 271C for default and penalty.

Issues Involved

  1. Whether payment of External Development Charges to HSVP/State authorities constitutes payment to a contractor under Section 194C.
  2. Whether such payments attract TDS liability.
  3. Whether failure to deduct TDS on EDC can trigger proceedings under Sections 201 and 271C.
  4. Whether EDC payments amount to income chargeable to tax in the hands of the State authority.

Petitioner’s Arguments

  • EDC is a statutory levy, not consideration for any contractual work.
  • Payments are made pursuant to government regulations, not under a private contract.
  • HSVP acts as an instrumentality of the State; the funds are utilized for public infrastructure.
  • No contractor–contractee relationship exists between developers and HSVP.
  • Therefore, Section 194C is inapplicable and no TDS obligation arises.
  • Initiation of proceedings under Sections 201 and 271C is arbitrary and unlawful.

Respondent’s Arguments

  • EDC payments relate to development activities undertaken by HSVP, which amount to execution of “work.”
  • Hence, payments fall within the scope of Section 194C.
  • Failure to deduct TDS constitutes default, making petitioners liable under Sections 201 and 271C.
  • Notices issued by the department were lawful and justified.

Court Findings / Order

  • EDC is a statutory charge imposed by the State, not a contractual payment for services.
  • There is no privity of contract between developers and HSVP for execution of work.
  • HSVP performs statutory functions as a governmental authority, not as a contractor.
  • Payments made pursuant to statutory obligations cannot be equated with payments under a contract for work.
  • Therefore, Section 194C does not apply to EDC payments.
  • Consequently, the basis for proceedings under Sections 201 and 271C fails.

Important Clarification by the Court

  • The Court confined its decision to the primary legal question regarding applicability of Section 194C.
  • It clarified that consequential proceedings may continue only in accordance with the findings of the judgment.
  • Statutory payments to State instrumentalities for public purposes do not automatically attract TDS provisions applicable to contractual payments.

Link to download the order - https://delhihighcourt.nic.in/app/showFileJudgment/YVA13022024CW94832019_190341.pdf

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