2012 (7) TMI 217 - AT - Income Tax

Dis-allowance u/s 40(a)(ia) - non-deduction of tax at source on reimbursement of rent by assessee to its holding company - rent for the whole premises paid directly by the holding company to the Lessors and tax deducted u/s 194-I - Revenue contended such arrangement to fall under Explanation (i) of section 194-I - Held that - Assessee is paying rent to the holding company as reimbursement since last many years, which has been accepted by the department all through. The lease deed provides for use of the premises by the subsidiary companies. The actual payments made by the holding company to the lessor and necessary tax was deducted therefrom. The holding company has also not debited the whole of rent to its books of account. It has only debited the rent which pertains to the part of the premises occupied by it. Therefore, there was no lessor and lessee relationship between the holding company and assessee where the provisions of section 194-I are attracted. Deletion of addition made u/s 40(a)(ia) is sustained - Decided against Revenue

Summary

Issues:
Appeal against deletion of addition u/s 40a(ia) of Income-tax Act, 1961 for Assessment Year 2008-09.

Analysis:
The appeal revolves around the deletion of an addition of Rs. 56,23,456/- made under section 40a(ia) of the Income-tax Act, 1961. The case involves a subsidiary company engaged in direct marketing, advertisement, and sales promotion. The primary contention is whether the subsidiary company was liable to deduct tax at source on the rent payment made to the holding company, as per section 194-I. The Assessing Officer disallowed the payment, asserting that TDS should have been deducted by the subsidiary company. However, the CIT (A) deleted the addition, emphasizing that the lease deeds permitted the subsidiary company to use the office premises and that the holding company had already deducted tax at source on the full rent amount.

The Revenue challenged the CIT (A)'s decision, arguing that the subsidiary company was obligated to deduct tax on the rent payment to the holding company as per the definition of rent under section 194-I. The Revenue contended that the subsidiary company's failure to deduct TDS warranted the application of section 40a(ia). The Revenue maintained that the Assessing Officer's decision was justified and sought to set aside the CIT (A)'s order.

On the other hand, the Assessee argued that the payment in question was a reimbursement of rent paid to the holding company for premises in Delhi and Mumbai. The Assessee highlighted clauses in the lease deeds allowing the subsidiary company to use the premises, emphasizing that the holding company bore the rent liability. The Assessee stressed that the holding company did not declare rental income and had consistently treated the payments as reimbursements even before the relevant statutory amendments. The Assessee relied on various judicial precedents to support its position and urged the tribunal to uphold the CIT (A)'s decision.

After considering both arguments, the tribunal found in favor of the Assessee. The tribunal noted that the subsidiary company had been reimbursing the holding company for rent without deducting TDS for several years. The tribunal highlighted that the lease deeds permitted subsidiary companies' use of the premises and that the holding company had deducted tax at source as required. Given the absence of a lessor-lessee relationship between the companies, the tribunal upheld the CIT (A)'s decision to delete the addition under section 40a(ia). Consequently, the tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s order.