2015 (5) TMI 864 - AT - Income Tax

TDS u/s 194I - Premium for acquiring leasehold rights for the leased plot - whether falls within the purview of sub clause (i) of explanation to sec. 194I which specifies the meaning of the term rent ? - whether payment of premium was for acquisition of leasehold rights or for use of land? - Held that - Commissioner of Income Tax(A) has also dealt with other cases pertaining to the land leased by MMRDA in the same or adjoining area and has held that the impugned deposit of lease premium does not constitute advance rent but it is a lease premium for acquiring land with right to construct a commercial building although with certain restrictions, but it is a capital expenditure not falling within the ambit of section 194- 1 of the Act. We also observe that the payment of lease premium was not to be made on periodical basis but it was one time payment to acquire the land with right to construct a commercial complex thereon and the lease premium was paid to MMRDA in four instalments, therefore, we are unable to see any perversity, infirmity or any other valid reason to interfere with the findings of the Commissioner of Income Tax(A). See CIT vs Vegetable products 1973 (1) TMI 1 - SUPREME Court - Decided in favour of the assessee . In the case of ITO vs Indian Newspaper Society (2013 (9) TMI 158 - ITAT DELHI) held that in case the lease premium paid by the assessee is held to be capital in nature and the assessee is not liable to deduct TDS on payment of lease premium to MMRDA. The issue is therefore decided against the revenue. As regards the lease deed contained restrictive clauses therefore the payment of the assessee is in the nature of rent. A bare perusal of the clauses referred to by the revenue shows that they are only regulatory in nature for the uniform development of the area of land leased out to the assessee. Regulatory clauses are also present in the cases of development of freehold land owned by a person. Such regulatory clauses cannot convert the lease premium into tenancy as per section 194 I of the Act. Accordingly the issue is decided against the revenue.

Summary

Issues Involved:
1. Whether the lease premium paid for acquiring leasehold rights constitutes "rent" under Section 194-I of the Income Tax Act, 1961.
2. Whether the payment made by the assessee was for the use of the land and thus subject to TDS under Section 194-I.
3. The impact of restrictive clauses in the lease deed on the characterization of the payment as rent.

Analysis:

Issue 1: Lease Premium as Rent under Section 194-I
The primary issue revolves around whether the lease premium paid by the assessee constitutes "rent" under Section 194-I of the Income Tax Act, 1961. The Revenue argued that the lease premium of Rs. 1041.42 crores was an advance rent and thus subject to TDS under Section 194-I. However, the CIT(A) and the Tribunal concluded that the lease premium was not for the "use" of the land but for acquiring leasehold rights. The Tribunal referred to the definition of "rent" under Section 194-I, which includes payment for the use of land or building. The Tribunal emphasized that the payment of Rs. 1041.42 crores was for the acquisition of rights in the leasehold property rather than for its use, thus falling outside the purview of Section 194-I.

Issue 2: Payment for Use of Land
The Tribunal examined whether the payment made by the assessee was for the use of the land. The Revenue contended that the lease premium was in the nature of advance rent for 80 years, and the definition of "rent" under Section 194-I was broad enough to include such payments. The Tribunal, however, noted that the lease premium was a one-time payment made before the execution of the lease deed and was not connected to the market rent of the property. The Tribunal distinguished between lease premium and rent, stating that the lease premium is paid as a price for obtaining the lease, not as periodic rent for the use of the land. The Tribunal cited several judicial pronouncements, including the Supreme Court's decision in CIT vs. Panbari Tea Company Ltd., to support the distinction between lease premium and rent.

Issue 3: Impact of Restrictive Clauses in Lease Deed
The Revenue argued that the restrictive clauses in the lease deed indicated that the payment was for the use of the land, thus characterizing it as rent under Section 194-I. The Tribunal, however, found that these clauses were regulatory in nature and did not amount to an absolute transfer of land or extinguishment of the lessor's rights. The Tribunal held that such regulatory clauses are common in lease agreements and do not convert the lease premium into rent. The Tribunal further noted that the lease deed allowed the assessee to sell, mortgage, assign, underlet, or sublet the property with the lessor's consent, indicating that the payment was for acquiring substantial rights in the property.

Conclusion:
The Tribunal concluded that the lease premium paid by the assessee was for acquiring leasehold rights and not for the use of the land, thus not falling within the ambit of Section 194-I of the Income Tax Act. The appeal of the Revenue was dismissed, and the order of the CIT(A) was upheld. The Tribunal emphasized the distinction between lease premium and rent, supported by various judicial pronouncements, and held that the payment made by the assessee was a capital expenditure for acquiring leasehold rights, not subject to TDS under Section 194-I.