Shailesh Veljibhai Paladiya Vs ITO (ITAT Surat)
Summary: The ITAT Surat allowed the assessee’s appeal against the demand raised under sections 201(1) and 201(1A) for alleged short deduction of TDS under section 194-IA read with section 206AA on the purchase of land. The Tribunal observed that section 194-IA applies only to transfers of immovable property other than agricultural land and found that the registered sale deed consistently described the property as agricultural land. It also noted that the Revenue had not produced any material to show otherwise. The Tribunal held that section 206AA does not create an independent liability to deduct tax and can operate only where tax is otherwise deductible under section 194-IA. It further recorded that the sale deed was subsequently cancelled by the Civil Court due to title disputes and that the cheques issued towards the consideration were never presented for encashment. Holding that there was no legal obligation to deduct tax under section 194-IA, the Tribunal concluded that the assessee could not be treated as an assessee in default under section 201(1), and consequently deleted both the demand and the interest levied under section 201(1A).
Ratio. Section 206AA does not create an independent liability to deduct tax at source. It merely prescribes a higher rate where tax is otherwise deductible. Therefore, if section 194-IA itself is inapplicable because the property transferred is agricultural land, the purchaser cannot be treated as an assessee in default under section 201 for alleged short deduction at the enhanced rate under section 206AA.
Facts. The assessee, along with co-purchasers, purchased land for ₹4.73 crore under a registered sale deed dated 07.04.2016 and deducted TDS at 1% under section 194-IA. Since the sellers did not possess PAN, the Assessing Officer invoked section 206AA and held that tax ought to have been deducted at 20%, raising a demand of ₹44.96 lakh under section 201(1) and interest of ₹42.26 lakh under section 201(1A). The assessee contended that the property was agricultural land, outside the ambit of section 194-IA, the sale deed was subsequently cancelled by the Civil Court due to title disputes, and the cheques issued towards consideration were never encashed. The CIT(A) upheld the demand holding that the obligation to deduct tax arose on issuance of the cheques irrespective of subsequent cancellation.
Held. Allowing the appeal, the ITAT held that the applicability of section 206AA depends upon the existence of a valid obligation to deduct tax under the substantive TDS provision. Section 194-IA applies only to transfer of immovable property other than agricultural land. The registered sale deed consistently described the property as agricultural land and the Revenue failed to produce any material establishing that it fell within the statutory exclusion from agricultural land. Consequently, section 194-IA itself was inapplicable.
The Tribunal reiterated that TDS machinery provisions cannot operate unless the charging provision first applies. Section 206AA merely prescribes a higher deduction rate where tax is otherwise deductible and the deductee has not furnished PAN. It cannot independently create a liability to deduct tax. Therefore, where section 194-IA does not apply, invocation of section 206AA is legally impermissible.
The Tribunal further observed that the subsequent cancellation of the sale deed by the Civil Court and the undisputed fact that the cheques remained unencashed reinforced the conclusion that the impugned demand was unsustainable, though the decisive factor was the inapplicability of section 194-IA itself. The CIT(A)’s reasoning that liability crystallised merely on issuance of cheques was rejected, since the stage of deduction becomes relevant only after establishing that the transaction falls within section 194-IA.
The ITAT also held that jurisdiction under section 201 can be exercised only where a person is legally obliged to deduct tax and fails to do so. In the absence of any statutory obligation under section 194-IA, the assessee could not be treated as an assessee in default under section 201(1). Consequently, the interest levied under section 201(1A) also could not survive.
Final Conclusion. The appeal was allowed. The demand raised under section 201(1) for alleged short deduction of tax under section 194-IA read with section 206AA, along with consequential interest under section 201(1A), was deleted. The Tribunal affirmed that section 206AA cannot be invoked independently where the substantive TDS provision itself is inapplicable.
FULL TEXT OF THE ORDER OF ITAT SURAT
This appeal is filed by the assessee as against the appellate order dated 29.11.2024 passed by the Additional/Joint Commissioner of Income Tax (Appeals)-5 Mumbai arising out of the order passed under sections 201(1) and 201(1A) of the Income Tax Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2017-18.
2. Brief facts of the case are, the assessee is an individual who has filed his return of income for the Assessment Year 2017-18 on 23.08.2018 declaring total income of Rs. 42,00,380/-. The Assessing Officer got the information that the assessee along with two co-owners purchased an immovable property namely Agricultural land situated in Vesu, Old R.S. no. 536 for a total consideration of Rs.4,73,22,000/-vide Sale Deed dated 07.04.2016, wherein the assessee’s share was 50% namely Rs.2,36,61,000/-. Further, it was observed that the Sellers of the land namely Smt.Laxmiben Chhaganlal and Smt. Champaben Chhaganlal did not hold Permanent Account Numbers [PANs] which attracts applicable TDS rate of 20% as per the provisions of section 206AA(1)(iii) of the Act. Whereas the assessee has deducted TDS at the rate of 1% instead of 20% which are resulted in default under sections 201(1) and 201(1A) of the Act and therefore a show cause notice dated 11.03.2024 was issued to the assessee. In reply, the assessee stated that the Sale Deed No. 366 of 2016 dated 07.04.2016 was cancelled by Surat Civil Court vide judgment dated 18.06.2019 due to the dispute of double sales of the same property by the Sellers to the assessee and others. Further, the assessee has not made payments to the Sellers and also enclosed the bank statement from Kotak Mahindra Bank that the cheques given to the Sellers were not cleared by the assessee. Thus, the assessee pleaded the provisions of section 194IA and also section 206AA of the Act are not applicable, therefore, requested to drop the proceedings. This plea was not accepted by the Assessing Officer and invoked the provisions of section 201(1) of the Act and demanded Rs.44,95,590/- on account of short deduction of TDS. The AO also charged interest u/s.201(1A) of Rs. 42,25,854/- from the assessee.
3. Aggrieved against the order, the assessee filed appeal before ld. CIT(A) who has also confirmed the additions made by the Assessing Officer by observing as follows:-
“Thus, the combined reading of section 194IA with section 206AA provides for deduction of tax @ 20% on transfer of an immovable property at the time of issue of cheque if the PAN of the seller is not furnished. It is seen from the record that the sale deed, for transfer of subject immovable property, was registered on 07.04.2016 on which the appellant had paid the stamp duty of Rs.23,19,000/-. Thus, the consideration was paid by the appellant towards transfer of property. It is further seen that the appellant had admitted his liability to deduct the TDS u/s 194IA on such transfer as he had deducted and deposited the TDS @1% of transfer amount.
The claim of the appellant that cheque was not presented by the seller for encashment has no relevance as section 194IA specifically provides for deduction of tax at the time of issue of cheque. As the appellant had issued the cheques on 2nd, 4th, 5th and 6th May 2016, he was required to deduct and deposit the due TDS in accordance with provision of section 194IA r.w.s. 206AA of the Act. As the seller of the property was not having the PAN, the appellant was required to deduct the TDS @ 20% u/s 194IA r.w.s. 206AA of the Act.
The cancellation of deed subsequently by the Hon’ble Civil Court, Surat vide order dated 18.06.2019 will not absolve the appellant from the liability of deducting the due TDS at the time of issue of cheque. This cancellation of deed was a subsequent contingent event which could not be foreseen at the time of registration of sale deed and issue of cheque. Therefore, there is no merit in the claim of the appellant that he was not required to deduct the TDS at the time of issue of cheques as the purchase deed was subsequently cancelled, more so, when the appellant himself had deducted the tax at source @1%.
The contention of the appellant regarding lack of clarity about the provision and the manner of receiving the subsequent refund of TDS on cancellation of sale deed has no relevance to this appeal. Whether the appellant is claiming the refund of 1% of TDS (which he deducted) or 20% of the TDS( which he was required to deduct), the manner and the procedure of claiming remains the same.
In view of above and considering the fact that the liability to deduct the TDS @ 20% arose at the time of issue of cheque in accordance with provisions of section 194IA r.w.s 206AA of the Act, this ground of appeal against levy of demand u/s 201(1) of the Act is dismissed.
4.2 Ground No.2. This ground relates to charging of interest u/s 201(1A) on short deduction of tax of Rs. 44,95,590/-, As this ground is consequential in nature, and the demand raised on account of short deduction u/s 201(1) is confirmed in earlier paragraph, the AO was correct in charging the interest charged u/s 201(1A). This ground of appeal is hence dismissed.”
4. Aggrieved against the appellate order, the assessee is in appeal before us, raising the following Grounds of Appeal:-
1. On the facts and circumstances of the case as well as law on the subject, the learned AADL/JCIT (Appeal) has erred in confirming the action of the assessing officer in raising a demand of Rs. 44,95,590/-on account of alleged short deduction of Tax Deduction at Source (TDS) u/s 201(1) of the I. T. Act, 1961.
2. On the facts and circumstances of the case as well as law on the subject, the learned AADL/JCIT (Appeal) has erred in confirming the action of assessing officer in levying interest of Rs.42,25,854/- u/s. 201(1A) of the I.T. Act, 1961.
3. It is therefore prayed that the above addition made by assessing officer and confirmed by the learned AADL/JCIT, Appeals, may please be deleted.
4. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.
5. We have heard the rival submissions, perused the orders of the lower authorities and carefully examined the materials placed on record. The short controversy before us is whether the assessee could be treated as an assessee in default u/s. 201(1) of the Act for alleged short deduction of tax under section 194-IA read with section 206AA in respect of purchase of an immovable property. The ld AO proceeded on the premise that the assessee, being Purchaser of an immovable property for a consideration exceeding the monetary threshold prescribed under section 194-IA, was under an obligation to deduct tax at source at the rate of 20% since the transferors/Sellers had not furnished their respective Permanent Account Numbers (PAN). According to the AO, deduction of tax at 1% by the assessee amounted to short deduction, thereby attracting the provisions of sections 201(1) and 201(1A) of the Act. The ld CIT(A) affirmed the action of the AO by holding that the liability to deduct tax crystallized on the date of issuance of the cheques and that the subsequent cancellation of the Sale Deed by the Civil Court would not absolve the assessee from the statutory obligation.
5.1. Before examining the applicability of section 206AA, it is necessary to determine whether the primary charging provision contained in section 194-IA itself is attracted in the facts of the present case. Section 194-IA casts an obligation upon the transferee to deduct tax at source from consideration paid for transfer of any immovable property, other than agricultural land. Therefore, the very applicability of section 194-IA depends upon the nature of the property transferred.
5.2. A careful examination of the registered Sale Deed dated 07.04.2016, which forms part of the paper book, shows that the property transferred has throughout been described as agricultural land. Clause 8 of the Sale Deed specifically records that the vendors were joint owners and possessors of the agricultural land and agreed to transfer the same to the purchasers for the agreed consideration. Clause 8 of the Sale Deed is reproduced for ready reference as follows:
“… (8) We, the party of the Second Part are the joint co-owners and possessors of the said agriculture land and we, the party of the Second Part in lieu of a consideration of Rs.4,73,22,000/- (Rupees Four Crores, Seventy Three Lakhs, Twenty Two Thousand Only) have sold the under mentioned agriculture land to the party of the First part along with all the rights and possession. The said consideration has been paid by the Party of the First Part to the party of the Second Part as per details given herein below.”
5.3. The Revenue has not brought any material on record to demonstrate that the property was anything other than agricultural land or that it fell within the category of land excluded from the expression “agricultural land” for the purpose of section 194-IA. The entire case of the Ld AO proceeds merely on the basis of the value of the transaction without first establishing that the property was covered by section 194-IA of the Act.
5.4. It is a settled principle that the machinery provisions relating to tax deduction at source cannot operate unless the substantive provision creating the obligation is first attracted. Section 206AA merely prescribes a higher rate of deduction where tax is otherwise deductible and the deductee fails to furnish his PAN. It does not create an independent liability to deduct tax. Therefore, unless the transaction is one falling within the ambit of section 194-IA, the provisions of section 206AA cannot be invoked independently. In other words, where section 194-IA itself has no application, the question of applying the enhanced rate under section 206AA does not arise.
5.5. We further notice that the registered Sale Deed dated 07.04.2016 subsequently came to be cancelled pursuant to the judgment and decree dated 18.06.2019 passed by the competent Civil Court, Surat owing to disputes relating to the title of the property. The assessee has also produced a certificate issued by Kotak Mahindra Bank dated 23.01.2023 confirming that the cheques issued towards the alleged sale consideration were never presented for encashment and remained unpaid. These factual circumstances have not been disputed by the Revenue. Although the subsequent cancellation of the transaction by itself may not determine the liability under the TDS provisions, the said circumstances clearly establish that the transaction never attained finality and no payment was ultimately received by the vendors. These facts further reinforce the conclusion that the impugned demand under sections 201(1) and 201(1A) are unsustainable in the peculiar facts of the present case.
5.6. The ld CIT(A) has observed that the obligation to deduct tax arose on the date of issuance of the cheques and, therefore, the subsequent cancellation of the sale deed is irrelevant. We are unable to subscribe to this reasoning. The question regarding the stage at which deduction is to be made arises only after it is first established that the transaction falls within the ambit of section 194-IA. Since we have already held that the subject matter of transfer was agricultural land and consequently outside the scope of section 194-IA, the question whether tax was deductible at the time of issuance of cheques or at any other stage becomes wholly academic. The foundation of the demand itself, therefore, fails.
5.7. In our considered view, the jurisdiction under section 201 can be invoked only where a person who is statutorily liable to deduct tax has either failed to deduct or after deduction, failed to pay such tax to the credit of the Central Government. In the absence of any legal obligation to deduct tax u/s.194-IA of the Act, the assessee could not have been treated as an assessee in default under section 201(1). Once the principal demand under section 201(1) is held to be unsustainable, the consequential levy of interest under section 201(1A) also cannot survive.
6. In view of the foregoing discussion, we hold that the authorities below were not justified in invoking the provisions of sections 201(1) and 201(1A) of the Act. The impugned demand raised on account of alleged short deduction of tax under section 194-IA read with section 206AA is directed to be deleted. Consequently, the interest charged under section 201(1A) is also liable to be deleted. Thus the grounds raised by the assessee are accordingly allowed.
7. In the result, the appeal filed by the assessee is allowed.
Order is pronounced under provision of Rule 34 of ITAT Rules, 1963 on 30-07-2026
