2016 (4) TMI 314 - HC - Income Tax

TDS u/s 194I - upfront payment made by an assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years - whether constitute rental income at the hands of the lessor, obliging the lessee to deduct tax at source under Section 194-I of the Act? - assessee in default - Held that - It is crystal clear that the One Time Non-refundable Upfront Charges paid by the assessee was not (i) under the agreement of lease and (ii) merely for the use of the land. The payment made for a variety of purposes such as (i) becoming a co-developer (ii) developing a Product Specific Special Economic Zone in the Sriperumbudur Hi-Tech Special Economic Zone (iii) for putting up an industry in the land. The lessor as well as the lessee intended to treat the lease virtually as a deemed sale giving no scope for any confusion. In such circumstances, we are of the considered view that the upfront payment made by the assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor, obliging the lessor to deduct tax at source under Section 194-I. Hence, the first substantial question of law is answered in favour of the appellant/assessee. Once the first substantial question of law is answered in favour of the appellant/assessee, by holding that the assessee was not under an obligation to deduct tax at source, it follows as a corollary that the appellant cannot be termed as an assessee in default - Decided in favour of assessee

Issues Involved:
1. Whether the upfront payment made by an assessee for the acquisition of leasehold rights over an immovable property for a long duration constitutes rental income obliging the lessee to deduct tax at source under Section 194-I of the Income Tax Act, 1961.
2. Whether the Tribunal was right in confirming the levy of interest under Section 201(1-A) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Issue 1: Upfront Payment and Rental Income
The primary question was whether the upfront payment made by the assessee for acquiring leasehold rights over an immovable property for 99 years could be considered as rental income, thereby obliging the lessee to deduct tax at source under Section 194-I of the Income Tax Act, 1961.

- Legal Context and Arguments:
- The assessee argued that the upfront payment, termed as "premium," was for acquiring a long-term lease and should not be considered rent. They cited Section 105 of the Transfer of Property Act, 1882, which distinguishes between premium (capital in nature) and rent (revenue in nature).
- The Department contended that the Explanation under Section 194-I is broad enough to include any payment under a lease agreement as rent, regardless of the term used.

- Court's Analysis:
- The court examined Section 105 of the Transfer of Property Act, which defines lease and distinguishes between premium and rent. However, it noted that Section 194-I's definition of "rent" is exhaustive and includes any payment by whatever name called under a lease agreement.
- The court referred to Halsbury's Laws of England, which defines premium as capitalized rent and noted that premium could take various forms, such as security deposits or rental advances, and could be considered part of the rent.
- The court also reviewed several judicial precedents, including Raja Shiva Prasad Singh v. King Emperor, Board of Agricultural Income-tax v. Sindhurani, CIT v. Panbari Tea Co. Ltd., and others, which discussed the distinction between premium and rent.

- Conclusion:
- The court concluded that the substance of the transaction is crucial, and the upfront payment made by the assessee was not merely for the use of the land but for becoming a co-developer and developing a Special Economic Zone. The payment was treated as "deemed sale" by both parties.
- Therefore, the upfront payment could not be considered rental income obliging the lessee to deduct tax at source under Section 194-I.

Issue 2: Levy of Interest Under Section 201(1-A)
Once it was established that the upfront payment did not constitute rental income, the next question was whether the Tribunal was right in confirming the levy of interest under Section 201(1-A) of the Income Tax Act, 1961.

- Legal Context and Arguments:
- The Tribunal had confirmed the levy of interest on the grounds that the assessee was in default for not deducting tax at source.
- The assessee argued that since the upfront payment was not rental income, there was no obligation to deduct tax at source, and thus, no interest could be levied.

- Court's Analysis:
- The court noted that since the upfront payment did not constitute rental income, the assessee was not under any obligation to deduct tax at source.
- Consequently, the assessee could not be considered in default, and there was no basis for the levy of interest under Section 201(1-A).

- Conclusion:
- The court held that the Tribunal was not right in confirming the levy of interest under Section 201(1-A) since the assessee was not obligated to deduct tax at source.

Final Judgment:
The court answered the first substantial question of law in favor of the appellant/assessee, holding that the upfront payment for the acquisition of leasehold rights over an immovable property for 99 years did not constitute rental income, and hence, the lessee was not obliged to deduct tax at source under Section 194-I. Consequently, the appellant could not be termed as an assessee in default, and there was no question of levy of interest under Section 201(1-A).

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