2016 (4) TMI 674 - HC - Income Tax

TDS u/s 194I - whether the amount of more than about ₹ 1400 Crores paid by the Joint Venture Company to TIDCO constituted rent or not? - Held that - Though the amount of ₹ 1412 Crores was paid actually by the lessee to the lessor, it was not paid merely for the purpose of retaining the lease for a period of 99 years. The amount paid was actually determined in an open competitive bidding that took place even before the Joint Venture Company was born. Tata Realty and Infrastructure Limited, which was the Joint Venture Partner, offered this amount for getting the benefit of entering into a Joint Venture Agreement with TIDCO, the benefit of which will spill over to joint venture company in the form of a 99 years lease. Therefore, the mistake of the Department lies in treating the transaction as having commenced from the date of the lease, namely 13.8.2008. The date on which the amount was quantified, the manner in which the amount was quantified and the method of selection of the Joint Venture Partner are the crucial determining factors in this case to understand that the said amount could never constitute rent. To put it differently, a premium or rent irrespective of how they are treated, could be decided only after an agreement for lease is finalised. If an amount has to be determined even before an agreement for lease is finalised, the same would never form part of the rental income. It is this distinction that has been lost sight of by all the authorities. Therefore, question of law has to be answered in favour of the assessee. Whether the payment, which has eventually gone to the coffers of the Government, could be taken to be a payment made to somebody else, for the purpose of attracting the provisions of Section 194-I or not? - Held that - On facts, there is no dispute that even at the time when the alienation was made by the Government, the amount determined by the parties was agreed to paid to the Government. We have extracted paragraph 5 of G.O.Ms.No.103 earlier. The method of determination of the amount and the method of choosing the lessee alone were left to TIDCO. But, TIDCO was obliged to retain only a sum of ₹ 50/- per sq.ft. and pass on the balance amount to the Government. Therefore, the amount liable to be passed on to the Government cannot be a consideration paid to TIDCO, which is the lessor. It was a consideration paid to the Government. Once it is understood to be a consideration paid to the Government, the question of deducting tax at source does not arise. Therefore, this question of law is also to be answered in favour of the appellant/assessee.

Issues Involved:
1. Commencement of the period of limitation under Section 201(3) of the Act.
2. Classification of an upfront payment for a long-term lease as rent liable for TDS under Section 194-I.
3. Liability to withhold tax on payment made to the Government under Section 196 of the Act.

Issue-wise Detailed Analysis:

1. Commencement of the period of limitation under Section 201(3) of the Act:
The court did not delve into this issue, as it became redundant after resolving the other two issues in favor of the appellant. The court stated, "Once we have found on merits that the amount paid by the appellant to TIDCO just for the purpose of passing on to the Government, could not be treated as rent, the question as to whether proceedings were initiated within the period of limitation or not, need not be gone into."

2. Classification of an upfront payment for a long-term lease as rent liable for TDS under Section 194-I:
The court examined whether the amount of Rs. 1400 Crores paid by the Joint Venture Company to TIDCO constituted rent. Section 194-I imposes an obligation to deduct tax at source on any income by way of rent. The explanation to Section 194-I defines "rent" as any payment under a lease, sub-lease, tenancy, or any other agreement for the use of land or building.

The court noted that the payment was not for taking the land on lease but was a consideration paid to make TIDCO accept a company as its Joint Venture Partner. The court stated, "The amount of more than Rs. 1400 Crores, which was actually quoted in the form of per sq.ft. rate at Rs. 12,050/- per sq.ft. was not actually for taking the land on lease, but was a consideration paid to make TIDCO accept a company as its Joint Venture Partner."

The court further clarified that the payment was made before the Joint Venture Company was born, and thus, it was a consideration for bagging the contract to have a joint venture and for getting the right of 99 years lease conferred upon the Joint Venture Company. The court concluded, "Therefore, the second question of law has to be answered in favour of the assessee."

3. Liability to withhold tax on payment made to the Government under Section 196 of the Act:
The court examined whether the payment of Rs. 1412 Crores, representing the market value of land collected by TIDCO and paid to the Government, was a payment to the Government and thus exempt from withholding tax under Section 196.

The court observed that TIDCO was obliged to retain only a sum of Rs. 50/- per sq.ft. and pass on the balance amount to the Government. The court stated, "Therefore, the amount liable to be passed on to the Government cannot be a consideration paid to TIDCO, which is the lessor. It was a consideration paid to the Government."

The court concluded that since the payment was essentially made to the Government, the question of deducting tax at source did not arise. The court stated, "Once it is understood to be a consideration paid to the Government, the question of deducting tax at source does not arise. Therefore, the third question of law is also to be answered in favour of the appellant/assessee."

Conclusion:
The appeal was allowed, and questions of law 2 and 3 were answered in favor of the appellant. The court did not address the first question of law due to the resolution of the other issues. The court concluded, "The appeal is allowed answering questions of law 2 and 3 in favour of the appellant. No costs. Consequently, M.P.No.1 of 2015 is closed."

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