Rajasthan Urban Development Fund Vs ITO (ITAT Jaipur)
HUDCO Paid the Tax, So Deductor Cannot Be Asked to Pay It Again: ITAT Applies Proviso to Section 201(1), Subject to Revised Form 26A
Interest of ₹10.25 Crore Paid to HUDCO
Rajasthan Urban Development Fund was an authority created by the Rajasthan Government to financially support urban local bodies in implementing projects sanctioned under various schemes. Its management was controlled by the Executive Director of RUIFDCO.
During survey proceedings conducted in the case of Housing and Urban Development Corporation Ltd. (HUDCO), Jaipur, the TDS Wing noticed that certain parties had not deducted tax from interest paid to HUDCO before the issuance of Gazette Notification No.26/2019 dated 20.03.2019.
Information concerning such payments was forwarded to the respective jurisdictional TDS officers.
The assessee-authority had paid interest of ₹10,25,88,043 to HUDCO on loans obtained for financing urban local bodies. No tax was deducted u/s 194A from the payment.
AO Proposes TDS Demand of ₹1.02 Crore
The AO issued a show-cause notice u/s 201(1) & 201(1A), proposing to treat the assessee as an assessee in default.
According to the AO, tax of ₹1,02,58,804, representing 10% of the interest payment, should have been deducted u/s 194A.
The assessee furnished written submissions & relied upon Form No.26A, certified by a Chartered Accountant. The certificate stated that HUDCO had taken the interest receipts into account while computing its taxable income & paid the tax due on the income declared.
However, the assessee did not furnish HUDCO’s return acknowledgement for AY 2019-20. Form No.26A had also not been electronically furnished to the DGIT (Systems) or the authorised authority in accordance with Rule 31ACB & the prescribed procedure.
The AO therefore declined to grant the benefit of the first proviso to Section 201(1), treated the assessee as a defaulter & created liability u/ss 201(1) & 201(1A).
CIT(A) Confirms the Demand
The assessee challenged the order before the JCIT(A), contending that HUDCO was covered by the exemption from deduction u/s 194A & that, in any event, Form No.26A demonstrated payment of tax by the recipient.
It was also alleged that appellate notices had been sent to an incorrect address & no effective opportunity of hearing was provided.
The JCIT(A), however, dismissed the appeal on merits as well as for the assessee’s non-appearance.
Competing Notifications Considered
Before the Tribunal, the parties referred to the Central Government’s general Notification No.S.O.3489 dated 22.10.1970, which covered, among others, a company whose entire shareholding was held by the Government, RBI or a corporation owned by RBI.
The assessee believed that HUDCO, being a wholly Government-owned company, was already outside the rigours of Section 194A under the earlier notification.
HUDCO was later specifically notified through Notification No.26/2019 dated 20.03.2019 for the relevant statutory purpose.
The Tribunal noted that the failure to deduct tax arose from a bona fide understanding of the applicable legal position concerning payments to a wholly Government-owned company. Nevertheless, its ultimate decision did not rest solely upon the exemption claim. The decisive factor was the recipient’s payment of tax & the protection available under the proviso to Section 201(1).
Form 26A Confirms Tax Paid by Recipient
It was undisputed that the Chartered Accountant’s certificate in Form No.26A recorded that HUDCO had included the interest received from the assessee in its taxable income & paid the corresponding tax.
The AO rejected the assessee’s claim principally because HUDCO’s return acknowledgement was not furnished & Form No.26A had not been filed through the prescribed electronic mechanism.
The Tribunal held that once the recipient had taken the interest into account & paid tax, the payer could not be treated as an assessee in default, subject to compliance with the statutory verification procedure.
The first proviso to Section 201(1) prevents recovery of the same tax again from the deductor where the resident payee has filed its return, considered the relevant receipt in computing income, paid the tax due & the deductor furnishes the prescribed accountant’s certificate.
Relief Subject to Revised Form 26A
The ITAT concluded that since HUDCO had already included the interest payment in its taxable income & discharged the tax, Rajasthan Urban Development Fund could not be declared an assessee in default u/s 201(1).
However, the relief was made expressly subject to verification of a revised Form No.26A to be furnished by the assessee before the AO.
Thus, the decision was not an unconditional acceptance of an incomplete or procedurally defective certificate. The assessee must regularise the Form No.26A compliance & enable the AO to verify the statutory conditions.
Subject to such verification, the appeal was allowed.
Important Distinction Regarding Interest u/s 201(1A)
The order principally rules that the assessee cannot be treated as a defaulter for the principal TDS amount once HUDCO’s inclusion of income & payment of tax are verified.
The first proviso to Section 201(1) removes the principal default, but interest consequences u/s 201(1A) are ordinarily governed separately by the statute. The order does not contain a detailed independent computation or categorical discussion of the period for which such interest may remain payable.
Therefore, the final giving-effect exercise should carefully distinguish between the principal TDS demand u/s 201(1) & any statutory interest that may survive until the date on which the payee discharged its tax liability.
Author’s Comments
This decision reinforces the anti-double-recovery principle embedded in the proviso to Section 201(1). TDS is a collection mechanism; it should not become a second recovery of tax already paid by the recipient on the same income.
At the same time, payment of tax by the payee does not dispense with documentation. The deductor must furnish a valid Form No.26A in the prescribed manner & establish every statutory condition.
The assessee succeeded because HUDCO had already offered the interest to tax, but the relief remains tied to verification.
In short, once HUDCO has paid the tax, the Fund cannot be made to fund it again—though Form No.26A must still complete the paperwork.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, JAIPUR BENCH
1. The Appellant, Rajasthan Urban Development Fund and authority created by Rajasthan State Government to financially support the urban local bodies in execution of the projects sanctioned under various schemes and its managing control lies with Executive Director RUIFDCO, by filing the present appeal, sought to set aside the impugned order dated 22.09.2025 passed by the Additional/Joint Commissioner of Income Tax (Appeal)-2, Coimbatore [hereinafter referred to as the ‘JCIT(A)’] qua assessment year 2019-20, on the grounds inter-alia that:-
“1. The Ld. A.O. and Ld. CIT(A) has erred in law as well as in facts in considering the appellant as assessee in default under section 201(1) and 201(1A), even when the appellant was not required to deduct tax under section 194A of the I.T. Act, 1961 being HUDCO notified vide Gazette Notification No. 26/2019 dated 20.03.2019.
2. The Ld. A.O. and Ld. CIT(A) has erred in law as well as in facts in not considering Form-26A for the A.Y. 2019-20, hence, violating the proviso to section 201(1) and 201(1A) of the I.T. Act, 1961.
3. The Ld. CIT(A) had not given the proper opportunity of being heard to the appellant as the notices were served to an incorrect address and the order was passed without any effective hearing taking place.
4. That the appellant craves leave to add, amend OR alter any of the grounds of this petition and further request to allow to submit written submissions at the time of hearing of the appeal.
5. That any other appropriate relief be given to which the appellant is entitled in the facts and circumstances of the case.”
2. Briefly stated, facts necessary for consideration and adjudication of the issued at hand are : During survey proceedings carried out in case of Housing and Urban Development Corporation (HUDCO), Jaipur, it was found that tax was not deducted at source by the parties from whom interest was received by HUDCO prior to Gazette Notification No. 26/2019 dated 20.03.2019, which is prospective in nature. As per gazette notification (supra) tax deduction at source was to be made on the interest payment to HUDCO from even date as HUDCO has been notified u/s 194A(3)(iii)(f) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) w.e.f. 20.03.2019. Information was forwarded to concerned ITO for taking suitable action. During proceedings it has come on record that assessee authority has made interest payment to the tune of Rs. 10,25,88,043/- to HUDCO on account of loan taken for providing funds to support Unban Local Bodies, but no tax was deducted at sources u/s 194A of the Act. Show cause notice was issued u/s 201(1)/201(1A) of the Act, which is extracted as under for ready perusal:-
“Sir/Madam,
Subject: Show cause notice u/s 201(1)/201(1A) of the I.T. Act, 1961 for F.Y. 2018-19-Regarding.
Please refer to the subject cited above.
2. On the basis of information available with the Department, a Survey u/s 133A(2A) of the Income-tax Act, 1961 was carried out upon Housing and Urban Development Corporation (HUDCO), Jaipur by the Department TDS Wing, Jaipur on 10-04-2019. During the course of survey proceedings, it was found that tax was not deducted at source by the Parties from whom interest was received by HUDCO prior to Gazette Notification No.26/2019 dated 20-03-2019. As per Gazette Notification dated 20-3-2019 which is prospective in nature, tax deduction at source is not to be made on the interest payment to the HUDCO from even date as HUDCO has been notified u/s 194A(3)(ii)(f) of the Income-tax Act, 1961 w.e.f. 20-03-2019.
3. In response for calling of information u/s 133(6) vide DIN number RJN/WT/13/2/21022020/00279 dated 21-02-2020 regarding interest expenses incurred in the case of M/s Rajasthan Urban Development Fund (RUDF)(Now Rajasthan Urban Infrastructure and Development Corporation Ltd. (RUIFDCO)), Jaipur, the A/R’s reply dated 03-03-2020 and stating therein that the assessee has made payments to HUDCO amounting to Rs. 10,25,88,043/- and was required to deduct tax at source of Rs. 1,02,58,804/- (i.e. 10% of the interest amount of Rs. 10,25,88,043/-) on the said interest payments u/s 194A of the Income-tax Act, 1961 but the deductor assessee has failed to deduct tax at source on the said interest payment to HUDCO. Further the submission of Form No. 26A by the deductor assessee also substantiates the fact that the deductor assessee was required to deduct tax ot source u/s 194A of the Income-tax Act, 1961 on the interest payment to HUDCO.
4. However, on perusal of Form No. 26A submitted by the deductor assessee reveals that Chartered Accountant has certified that HUDCO has taken into account the interest payments received from the deductor assessee for computing its taxable income, and has paid the tax due on the income declared but not filed copy of its ITR for A.Y. 2018-19 for verification in this office which was mandatory for calculation of interest u/s 201(1A) of the Income-tax Act. Further, as per Income-tax Rule 31ACB(1) the certificate from an accountant under the first provisio to sub-section(1) of section 201 shall be furnished in Form 26A to the Director General of Income-tax (Systems) or the person authorized by the Director General of Income-tax (System) in accordance with the procedures, formats and standards specified under sub-rule (2), and verified in accordance with the procedures, formats and standards specified under sub-rule(2), and verified in accordance with the procedures, formats and standards specified under sub-rule(2).
(2) The Director General of Income-tax (systems) shall specify the procedures, formats and standards for the purposes of furnishing and verification of the form 26A and be responsible for the day-to-day administration in relation to furnishing and verification of the Form 26A in the manner so specified.)
5. In view of the above, the deductor assessee is treated as assessee in default as per the first provisio to section 201(1) of the Income-tax Act, 1961 for non deduction of tax at source on the interest payment of Rs. 10,25,88,043/- made to the HUDCO. In this connection, you are once again given a final opportunity to show caused as why not an order u/s 201(1)/201(1A) of the Income tax act 1961 are passed in your case treating you as an assessee in default for the payment of taxes and interest thereon for F.Y. 2018-19 on the above mentioned amounts. Your case is fixed for hearing on 06-03-2020. Please note that if you fail to represent your case, it will presumed that you have nothing to say in this regard and you have no objection to pass the order u/s 201(1)/201(1A) of the Income tax act.”
3. In response to the aforesaid notice, assessee filed written submissions. However assessee has failed to furnish acknowledgement of ITR filed by HUDCO for A.Y, 2019-20 and also the assessee has not furnished Form 26A to the Director General of Income Tax (System). AO proceeded to hold that the assessee authority has made interest payment of Rs. 10,25,88,043/- to HUDCO on which it was required to deduct tax at source to the tune of Rs. 1,02,58,804/- i.e. 10% of the interest amount, but the assessee authority has failed to deduct tax at source and as such treated assessee in default as per first proviso to section 201(1) of the Act. Consequently, interest liability of assessee authority is created u/s 201(1)/201(1A) of the Act for A.Y. 2019-20.
4. Assessee carried the matter before the Ld. CIT(A) by way of filing appeal, who has dismissed them on merits and also for non appearance of assessee authority. Feeling aggrieved with the impugned order passed by the Ld. CIT(A), assessee has come up before the Tribunal by way of filing the present appeal.
5. We have heard Ld. ARs for the assessee and Ld. DR for the Revenue and perused the record available on file.
6. Undisputedly, the assessee authority has made payment on account of interest to the tune of Rs. 10,25,88,043/- to HUDCO on which it was required deducted tax at source @ 10%. It is also not in dispute that Form 26A submitted by the assessee authority shows that its Chartered Accountant has certified that HUDCO has taken into account interest payment received from the assessee for computing its taxable income and has paid tax thereon, but not filed copy of ITR for A.Y. 2019-20 for verification of his office. It is also not in dispute that the assessee authority has also not furnished Form 26A to the Director General of Income Tax (System) in accordance with the procedure laid down. It is also not in dispute that prior to Gazette Notification No. 26/2019 dated 20.03.2019, the assessee authority was not required to deduct tax at source at 10% u/s 194A of the Act on the interest payment made to HUDCO for the loan taken to carry out their objects.
7. In the back drop of the aforesaid facts and circumstances of the case, we are of the considered view that it is a case of misconception of law and facts that HUDCO being a wholly owned government of India company was exempted from rigour of Section 194A f the Act.
8. No doubt, it is not in dispute that Central Government has issued a general Notification No. S.O. 3489 (No. 170) dated 22.10.1970 [F. No. 12/164/68-ITCC/ITJ], notifying, inter alia, “any company in which all the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank” as exempt from the rigour of section 194A. So by applying this notification HUDCO being 100% Government company was exempt from rigour of section 194A.
9. So far as question having notification no. 26/2019 dated 20.03.2019 applied by the AO is concerned, no doubt HUDCO was specifically notified, but the assessee authority being under bonafide belief has not deducted tax at source. No doubt as per Notification No. 26/2019 (supra) assessee being a public company is not entitled for exemption for A.Y. 2019-20, but in this case when it is proved on record that as per Form 26A certified by C.A. placed before the Assessing Officer during assessment proceedings HUDCO has taken into account the interest payment received from the assessee authority for computing its taxable income and has already paid the tax due on the income declared. However Assessing Officer has not admitted this contention because the assessee authority has failed to file copy of its ITR for the year under consideration.
10. Since HUDCO has already taken into account interest payment received from assessee authority and paid tax thereon for the year under consideration, the assessee authority cannot be declared in default as per first proviso to Section 201(1) of the Act. However our findings are subject to the verification of revised Form 26A to be filed by the assessee before the Assessing Officer.
11. Resultantly, the appeal filed by the assessee is allowed
Order pronounced in the open court on 03-09-2026.
