AO cannot alter the nature of the payment to be subjected to a different TDS provision during the appeals process: HC

DLF Homes Panchkula Pvt Ltd. v. JCIT – [2023]

The assessee was an Indian-incorporated business that specialized in real estate development. The assessee and the State of Haryana entered into an agreement for the establishment of the Group Housing Colony in the Gurgaon District during the pertinent assessment year. According to the agreement, the assessee was obligated to pay Haryana Urban Development Authority (HUDA) External Development Charges (EDC).

The Assessing Officer (AO) proved that the payments were in the type of rent during the proceedings, necessitating the deduction of the tax in accordance with section 194-I. The AO considered the assessee as “assessee-in-default” after being unsatisfied with the assessee’s response and quantified the demand under sections 201(1) and 201(1A).

Angered by the decision, the assessee filed a writ appeal with the Delhi High Court, in which the department’s attorney argued that section 194C, rather than section 194I, should be used to withhold the tax.

According to the High Court, the department counsel freely acknowledged that Section 194-I did not apply and that the payment of EDC cannot be interpreted as rent, which would entail the requirement to withhold TDS at a rate of 10% on the aforementioned payment. He asserts that the AO incorrectly said that TDS was needed to be withheld under Section 194-I as opposed to Section 194C.

One of the difficulties that the AO was compelled to resolve was the subject of the form of EDC payment. As it was in the nature of a contract to utilize land, he had come to the conclusion that the same was “rent.” It is not possible for the revenue to now argue that EDC charges are ‘rent’ under a land use agreement rather than payments made to a contractor under a contract.

Revenue makes no attempt to refute the AO’s determination that the charges are “rent” or have a “rent-like” quality. The foundational justification for the contested order is profoundly faulty.

The revenue seems to be approaching the problem from the complete opposite angle; for some reason, it has come to the conclusion that assessees should deduct tax, and it is now looking for legal provisions to support this position. As a result, the AO’s order may have been overturned.