2000 (3) TMI 1039 - AT - Income Tax

Summary

Issues Involved:
1. Liability of the assessee to deduct tax u/s 194-I.
2. Nature of payments as rent or conducting arrangement.
3. Applicability of section 201(1A) for interest on non-deduction of tax.

Summary:

1. Liability of the assessee to deduct tax u/s 194-I:
The assessee, engaged in the hoteliering and catering business, entered into agreements with Madhu Fantasy Land Pvt. Ltd. (MF) and Pan Indian Paryatan Ltd. (PIP) to run food outlets in their amusement parks. The Assessing Officer treated the assessee as an assessee in default u/s 201 for failing to deduct tax from payments made to MF and PIP, which were considered as rent u/s 194-I. The CIT(A) upheld this view, stating that the payments were rent within the meaning of Explanation (i) below section 194-I.

2. Nature of payments as rent or conducting arrangement:
The Tribunal examined the agreements in detail and concluded that the dominant intention of the parties was to grant a conducting license to the assessee to manage and conduct the catering business, not to let out the premises. The agreements embodied a composite arrangement for the conduct of the business, with the use of premises being incidental. The payments, termed as royalty or commission, were linked to sales and varied widely, which is inconsistent with the concept of rent. The Tribunal referred to the judgments of the Privy Council and the Lahore High Court, which held that fluctuating payments cannot be treated as rent.

3. Applicability of section 201(1A) for interest on non-deduction of tax:
Since the Tribunal held that the assessee was not liable to deduct tax u/s 194-I, it followed that the assessee could not be treated as an assessee in default and was not liable to pay interest u/s 201(1A). The Tribunal did not find it necessary to examine the subsidiary contentions regarding the actual payment by the assessee and the tax paid by the payee companies.

Conclusion:
The appeals were allowed, and the assessee was not held liable to deduct tax from the royalty/commission payments or to pay interest u/s 201(1A).