Purchasing an immovable property comes with complex taxation rules, but the key rules for property purchase may become more complicated for a common taxpayer when the property is purchased from a Non-Resident Indian (NRI).
A case of an Indore-based taxpayer highlights why checking the seller’s residential status and, most importantly, verifying correct TDS details before finalizing the transaction can be important.
The case also raises an important question for ordinary taxpayers: Can a TDS deduction under the wrong section in a property transaction trigger a penalty when the taxpayer corrects the error and pays the additional tax and interest?
Here’s what happened with the taxpayer and why the ITAT ruling is important for taxpayers, especially for those who are buying property from an NRI.
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The case
In Jitendra Sharma & Others v. JCIT (International Taxation), Ahmedabad [ITA Nos. 500–502/Ind/2018, AY 2015-16], the Indore ITAT considered whether three individual property buyers should face a penalty under section 271C for initially deducting TDS at 1% under section 194-IA instead of deducting tax under section 195, since the seller was subsequently treated as a non-resident.
The Tribunal accepted that the buyers had no apparent intention to evade tax and ultimately deleted the penalty of Rs. 5.15 lakh imposed on each of them after they proved a reasonable cause of the TDS mistake.
The three taxpayers, i.e., Jitendra Sharma, Bharat Sharma and Shatrughan Sharma, jointly purchased an immovable property for Rs. 75 lakh through a broker. Each buyer contributed Rs. 25 lakh. The sale deed mentioned the seller’s local address in Uttar Pradesh as well as his then address in Colorado, USA.
The buyers had the seller’s PAN, but according to the facts accepted by the Tribunal, they did not have any other document clearly establishing his residential status for income-tax purposes. Considering the total property value to be above Rs. 50 lakh, the buyers deducted TDS at 1% under section 194-IA and deposited it with the Government.
The Income-tax Department later examined the transaction and took the position that the seller was a non-resident. Accordingly, the Department held that the buyers should have deducted tax under section 195 rather than section 194-IA. Once the issue came to their attention, each buyer deposited the balance TDS calculated at 20.6%, together with interest for the delay.
Each buyer deposited Rs. 5.15 lakh towards TDS and Rs. 1.03 lakh towards interest before the proceedings under sections 201(1) and 201(1A) concluded. Consequently, no further TDS demand remained payable.
Despite this corrective action, the Assessing Officer initiated penalty proceedings under section 271C and imposed a penalty of Rs. 5.15 lakh on each buyer for the short deduction of tax. The CIT(A) did not accept the buyers’ explanation of a bona fide mistake and upheld the penalties. The three buyers therefore approached the ITAT.
Before the Tribunal, the buyers explained that they did not personally know the seller and had completed the transaction through a broker. They argued that a foreign address in the sale deed did not, by itself, conclusively establish that the seller was a non-resident under the Income-tax Act.
They had therefore proceeded on the understanding that section 194-IA applied. More importantly, as soon as the Department pointed out the applicable TDS requirement, they corrected the position by depositing the balance tax together with interest.
The ITAT accepted this explanation and applied the protection available under section 273B. That provision protects a taxpayer from specified penalties, including section 271C, where the taxpayer can establish a reasonable cause for the failure.
The Tribunal found no indication that the buyers deliberately deducted tax at a lower rate to avoid tax. In fact, the TDS ultimately had to come out of the amount payable to the seller, so the buyers themselves had no apparent financial benefit from deducting tax at 1% instead of the higher applicable amount.
The Tribunal also relied on the Mumbai ITAT ruling in DCIT v. SMS India Ltd., where a bona fide belief followed by prompt payment of the short-deducted tax and interest was accepted as reasonable cause.
The Tribunal considered the conduct of the three buyers similar: once they became aware of the mistake, they acted promptly and completed the required compliance rather than continuing with the incorrect position.
Thus, an incorrect or short deduction may result in a requirement to deposit the balance tax and interest, but penalty under section 271C need not automatically follow. Where the taxpayer can demonstrate a genuine and reasonable cause for the mistake, section 273B may provide protection from penalty.
Accordingly, the taxpayers succeeded because the ITAT regarded their initial application of section 194-IA as a bona fide mistake rather than a deliberate TDS default, and their prompt payment of the balance TDS and interest supported their explanation. The Tribunal therefore set aside the CIT(A)’s finding and deleted the Rs. 5.15 lakh penalty in each of the three cases.
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TDS paid with interest: Can buyers avoid penalty?
No. Subsequent payment of correct TDS along with interest does not automatically protect a buyer from penalty. Though payment of the differential TDS and interest is important evidence of bona fides, it is, however, not a statutory amnesty by itself.
“Section 271C of the Income Tax Act, 1961 (or section 448 of the Income Tax Act 2025) provides for levy of penalty on failure to deduct whole or part of any TDS required to be deducted at source. However, respite against the levy of certain penalties (including penalties under section 271C) is provided under section 273B of the Income Tax Act, 1961 (or section 470 of the Income Tax Act 2025), wherein, if the taxpayer is able to prove that there was reasonable cause for the failure,” said Amit Ganatra, Partner at Khaitan & Co.
“On the face of it, neither section 271C nor section 273B provide an automatic protection to taxpayers from levy of penalty in cases of short-deduction or non-deduction of taxes. On a combined reading of section 271C and section 273B, relief from penalty may be granted by tax officers or appellate authorities if the taxpayers establish a bona fide intent behind their actions and a reasonable cause for their failure,” Ganatra added.
Reference in this regard is invited to the case decision of Jitendra Sharma vs JCIT (International Taxation). In the said decision, the ITAT did not merely say, “tax and interest were later paid, therefore no penalty.”
It relied cumulatively on facts including that the purchasers had initially deducted tax rather than ignored TDS altogether; the seller had not furnished documentary evidence establishing non-resident status; only a PAN/local information was available; the buyers corrected the withholding when the issue was pointed out; and the differential tax plus interest was paid before conclusion of the proceedings. On those facts, the Tribunal accepted a bona fide belief and reasonable cause.
Reference is also invited to the Delhi High Court decision in the case of Woodward Governor India P. Ltd. v. CIT, Delhi HC, 253 ITR 745. It holds that penalty under Section 271C (1961 Act) / 448 (2025 Act) is not automatic. The assessee must initially establish reasonable cause, meaning essentially an honest belief founded on reasonable grounds such that an ordinarily prudent person in the same circumstances could have acted similarly.
How can buyers establish reasonable cause for TDS errors?
The purchaser should be able to reconstruct the position as it existed when consideration was paid, rather than manufacture an explanation after the TDS notice. According to Ganatra, strong evidence would ordinarily include:
- written enquiry to the seller concerning Indian tax residential status before the first payment;
- seller’s written declaration of residential status for the relevant tax period, together with the factual basis supporting it;
- PAN copy and Indian/foreign address information;
- copies of passport and relevant immigration/travel information where residence is genuinely uncertain;
- correspondence with the broker, seller, lawyer or tax adviser showing what information the purchaser was given;
- written professional advice obtained before payment, particularly where the seller lives abroad;
- sale agreement/deed clearly recording the seller’s address/status and a covenant requiring disclosure of any change or incorrect representation;
- evidence that, immediately upon learning that the original withholding treatment was incorrect, the buyer recalculated, deducted/recovered where possible, deposited the shortfall and interest, and corrected the reporting trail.
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NRI seller? Documents buyers need before deducting TDS
A buyer should not treat PAN, citizenship, NRI nomenclature or a foreign address as conclusive of tax residence. Residence is determined under the Income-tax Act by the statutory residence tests. Accordingly, citizenship and tax residence are different concepts.
As per Ganatra, for a high-value property acquisition, it would be recommended to obtain the following details:
- a signed tax-residential-status declaration for the relevant tax year/FY, expressly stating resident/non-resident status under Indian income-tax law;
- PAN and identification details;
- passport copies and a travel/day-count statement where necessary to substantiate Section 6 residence;
- foreign residence/tax residence documentation where available, such as a TRC if relevant;
- seller’s declaration that the information is complete and that the buyer may rely upon it for Indian withholding;
- where non-resident: seller’s computation/certificate supporting any claimed lower withholding amount and, where applicable, an order/certificate obtained from the tax authority determining the appropriate withholding;
- purchase agreement clauses allowing the purchaser to withhold the legally required amount and requiring the seller to indemnify/reimburse consequences arising from materially incorrect residence information.
Buying property? Why does the seller’s residential status matter?
A buyer should not determine the seller’s residential status merely from the address stated in the sale deed, PAN or the fact that the seller maintains an Indian address.
Residential status for income-tax purposes is determined under the applicable statutory residence tests, principally based on the seller’s period of stay in India during the relevant tax year and preceding tax years, subject to special rules applicable to Indian citizens and persons of Indian origin.
Accordingly, where the seller has both an Indian and a foreign address, the buyer should, as a practical safeguard, obtain a written declaration of the seller’s residential status for the relevant year and may seek supporting information such as passport/travel details showing the number of days spent in India, overseas visa or employment/residency documents and, where relevant, foreign tax-residency documentation. PAN should also be verified, but PAN by itself does not establish that the seller is resident in India.
This verification is important because the TDS obligation changes depending on the seller’s residential status.
“Under the Income-tax Act, 1961, Section 194-IA applies to payment for immovable property made to a resident transferor, whereas payment to a non-resident seller is governed by Section 195. The Income-tax Department also specifically states that where the seller is non-resident, TDS on the property transaction is required under Section 195,” said CA (Dr.) Suresh Surana.
TDS mistake on NRI property deal: Tax and penalty explained
If the seller is subsequently found to be a non-resident, Section 195 would apply instead of Section 194-IA.
“Accordingly, the 1% rate and Rs. 50 lakh threshold applicable under Section 194-IA do not govern a payment to a non-resident seller and the buyer may be treated as having short-deducted tax and can be required to deposit the balance TDS along with applicable interest under Section 201(1A),” stated Surana.
“Interest under Section 201(1A) is generally payable at 1% per month or part thereof from the date on which tax was deductible until it is actually deducted; where tax is deducted but deposited late, interest is generally 1.5% per month or part thereof until payment,” Surana further added.
Further, the buyer may be treated as an assessee in default under Section 201(1) for the shortfall. However, where the non-resident seller has filed the return of income, included the relevant income, paid the tax due and the prescribed accountant’s certificate is furnished, the buyer may not be treated as an assessee in default for the tax amount. However, interest under Section 201(1A) can still remain payable for the relevant period
A penalty under Section 271C, generally equal to the amount of tax not deducted, may also be initiated. However, such a penalty is not automatic. Where the buyer can establish reasonable cause under Section 273B, such as a bona fide belief regarding the seller’s residential status followed by prompt payment of the shortfall and interest, the penalty may be deleted.
The buyer may also need to regularise the TDS compliances, such as filing the correct TDS return forms for non-residents, etc.
Buying property from NRI? Avoid these TDS compliance mistakes
The main lesson from Jitendra Sharma is not that mistakes can safely be corrected later. It is that a defensible mistake requires a contemporaneous factual foundation.
The tax administrators often operate on the legal principle that ignorance of law is not an excuse and therefore reasonable diligence is expected of a taxpayer in all compliance matters.
Accordingly, before making any advance, instalment or final payment to an overseas-based seller, determine the seller’s Indian tax residence, record the evidence supporting that conclusion, identify the correct withholding provision, obtain professional advice if residence is unclear, and consider the statutory mechanism for determining/lowering withholding rather than unilaterally adopting a lower amount. The current Act continues to distinguish payments to residents and non-residents within Section 393.
Having said this, it would be important to know that effective October 1, 2026, resident individual / HUF buyers purchasing property from non-residents no longer need a Tax Deduction Account Number (TAN) and can deduct and deposit TDS using their Permanent Account Number (PAN) instead.
Disclaimer: This article is based on the Indore ITAT order in Jitendra Sharma & Others v. JCIT (International Taxation), Ahmedabad [ITA Nos. 500–502/Ind/2018, AY 2015-16], order dated 14.10.2020. The observations and relief granted by the Tribunal are based on the facts, evidence and circumstances of that particular case and should not be construed as a general exemption from tax scrutiny of share transactions. Taxpayers should seek professional advice based on the facts of their individual cases.
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