Issuance of TDR Certificates Not Taxable as Payment in Kind Under Sections 194C and 194LA: Bombay High Court Stays Demand Notice - 2026-06-03

Taxing the Intangible: Bombay High Court Intervenes in TDR Dispute

In a significant development for tax jurisprudence regarding non-monetary transactions, the Bombay High Court has stayed a demand notice issued to the Pune Municipal Corporation (PMC). The municipal body had been declared an "Assessee in default" by the Income Tax Department for failing to deduct Tax Deducted at Source (TDS) while issuing Transferrable Development Rights (TDR) certificates.

A division bench comprising Justice B. P. Colabawalla and Justice Firdosh P. Pooniwalla found prima facie merit in the argument that the issuance of TDR certificates does not constitute a "payment" triggering TDS obligations under Sections 194C and 194LA of the Income Tax Act, 1961.

The Origin of the Conflict

The dispute arose after the Income Tax Department initiated proceedings under Sections 201 and 201(1A) of the IT Act, alleging that the PMC failed to deduct TDS on TDR provided to developers. This TDR was granted under instructions from the Slum Rehabilitation Authority for implementing slum schemes and as compensation for land acquisition under the Maharashtra Regional Town Planning (MRTP) Act, 1966.

The IT authorities argued that the PMC was liable to deduct tax at source as the TDR served as consideration for services or land, thereby falling under the ambit of Sections 194C (payments to contractors) and 194LA (compensation on acquisition of immovable property).

PMC’s Arguments: The "In-Kind" Defense

The PMC challenged the demand, asserting that TDS provisions are strictly applicable to monetary payments. They argued that the phrase "or by any other mode" within Sections 194C and 194LA must be interpreted ejusdem generis —meaning it should be limited to the categories of payment previously mentioned in the sections, namely, "cash, cheque, or draft."

Counsel for the petitioner highlighted that when the legislature intends for TDS to apply to payments "in kind," it explicitly includes such provisions, as seen in Section 194B (winnings from games) and Section 194R. The absence of such specific mandates in Sections 194C and 194LA, the PMC argued, implies that the legislature did not intend for TDR certificates, which represent rights rather than cash, to be subject to TDS at the time of issuance.

Key Observations from the Bench

The High Court’s preliminary view indicates a potential paradigm shift in how revenue authorities perceive in-kind compensation. The bench noted:

> "At least, prima facie, we find substance in the argument canvassed by the Petitioner that the words 'or by any other mode' appearing in Section 194C would have to be read ejusdem generis to the words 'payment thereof in cash or by issue of a cheque or draft'."

Regarding the silence of the law on specific modes of payment, the Court observed:

> "Those provisions are conspicuously absent in Section 194C as well as Section 194LA of the Income Tax Act."

The bench further underscored the distinction between monetary and non-monetary triggers, stating:

> "At least, prima facie, we are of the view that Section 194C and Section 194LA would not apply when TDR Certificates are issued in lieu of compensation."

The Road Ahead

Following the hearing, the High Court directed an interim stay on the operation of the impugned orders and the related penalty notices. The Income Tax Department has been ordered to file their formal reply by August 25, 2025.

This case holds substantial weight for public corporations and real estate developers alike. If the High Court finalizes its view, it would clarify that government authorities cannot unilaterally expand the scope of TDS to non-monetary instruments, providing much-needed relief to entities relying on TDR as a tool for urban development and land acquisition. The proceedings highlight a growing judicial concern regarding the overreach of tax collection mechanisms into areas where clear legal definitions of "payment" remain disputed.