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TMI Blog2009 (2) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the upfront fee which has been held as rent by the ld CIT(A) was an income in the hands of the payee and therefore, the assessee was required to deduct the tax at source at the time of credit of such an amount. Considering the definition of the rent given in Section 194I and taking into consideration the finding of the ld CIT(A), which has not been challenged by the assessee, it is held that upfront fee is rent on which tax was required to be deducted at source u/s 194I. Liability to Pay tax and Interest - reasonable period for completion of assessment proceedings - Whether there is any limitation for passing order u/s 201/201A ? - In the case before the Hon'ble Kerala High Court in the case of Secretary, Sultan Battery Cooperative Housing Society Ltd. v. CIT[ 2002 (10) TMI 37 - KERALA HIGH COURT] , a plea was raised that order u/s 201(1A) is barred by limitation on the ground of Section 231. The Hon'ble Kerala High Court has not considered the decision of the Hon'ble Apex Court in the case of Bhatinda District Coop. Milk Producers Union Ltd.[ 2007 (10) TMI 300 - SUPREME COURT] . So, according to us the decision of the Hon'ble Delhi High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular that such interest is to be charged up to the date when the deductee has paid the advance. In the case of Union Home Products v. Union of India [ 1995 (2) TMI 52 - KARNATAKA HIGH COURT] held that interest charged u/s 234A, 234B and 234C is compensatory in character. No need of a hearing is to be given to the assessee for charging such interest. Section 271C provides penalty for failure to deduct tax at source - Since a separate provision has been made for imposing penalty for default committed in not deducting tax at source, hence, it is clear that provisions of Section 201(1A) are compensatory. Since the tax stood already paid, therefore, there was no case of charging of interest u/s 201(1A) for the AY 2004-05. For the AY 2005-06 - AO has raised the demand for short deduction of TDS - Since the return for the AY 2005-06 has been filed and licence fee credited in PAL account is the same, which is receivable on the basis of the turnover, hence, there was no case of raising demand in respect of short deduction of tax because the deductee has already satisfied the demand. Hence, the demand in respect of 201 is deleted while the demand in respect of interest u/s 201( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late order on 30th May, 2008. The assessee is in appeal against the order passed Under Section 154 r.w.s. 250 of the IT Act. 3. First we shall take up the appeal for the asst. year 2002-03 filed by the revenue. The revenue has raised 14 grounds of appeal. However, the grievances can be considered as under.- 1. Whether the learned CIT(A) was justified in holding that upfront fee was not income by way of rent and therefore, no tax was deductible at source. 2. Whether the learned CIT(A) was justified in holding that passing an order on the basis of notice issued on 27th November, 2007 for asst. year 2002-03 and 2003-04 are barred by limitation. 3. Whether the learned CIT(A) was justified in deleting the demands raised Under Section 201(1) towards short deduction of tax on licence fee on the ground that the recipient has shown the amount as income in its return for the relevant previous year and the tax has also been paid. 4. Whether the learned CIT(A) has erred in holding that interest Under Section 201(1A) for the asst. years 2003-04 to 2005-06 has been wrongly levied, since the recipient has paid advance tax on the above amount of annual licence fee. Some of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the Assessing Officer, TDS was deductible on this upfront fee because 50% of the licence fee payable for subsequent years was to be adjusted out of this upfront fee. The Assessing Officer therefore raised demand m respect of TDS liability on the upfront amount. The interest calculation Under Section 201(1A) were also made. 3.3 Before the learned CIT(A) it was submitted that the assessee vide lease-cum-management agreement dated 29th November, 2001 was granted the licence to manage and operate the hotel viz. The Grand Ashok Bangalore owned by KKFHPL for a period commencing from the closing date i.e. 29th November, 2001 up to March 31, 2032. In consideration of the lease/licence granted by the lessor to the assessee in respect of the hotel, the amounts were payable by the assessee to the lessor in terms of Article 2.2 of the agreement. The learned CIT(A) has reproduced Article 2.2 and 2.3 of the agreement in his order and these are also reproduced below for ready reference: 2.2 Consideration: In consideration of the lease and license granted hereunder, the Lessee/Licensee agrees to pay the following amounts. (i) Rs.4,11,00,000 (Rupees Four crore Eleven lakhs only) per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of 30 years. The upfront fee representing 50% of the licence fee was computed as per the formula basis provided in the agreement and accordingly, a sum of Rs. 24,90,52,151/- was paid to the lesser on 29th November, 2001. The assessee also paid licence fee of Rs. 1,38,50,137 to the lessor for the period 29th November, 2001 to 31st March, 2032. The assessee has not deducted tax at source in respect of upfront fee of Rs. 24.9 crore and licence fee of Rs. 1.38 crore credited/paid to the lessor during the financial year 2001-02. Tax was not deducted under the bonafide belief that payment to lessor, which was held 100% by Government of India, constituted payment to government and provision of Chapter XVIIB relating to tax deduction at source did not apply to such payments. It was submitted that provision of Section 1941 of the Act has no application in respect of upfront fee paid by the assessee to the lessor during the previous year relevant to the asst. year 2002-03. TDS is required to be deducted in respect of credit/payment of any income by way of rent. Before the learned CIT(A) reliance was placed on the Circular of the Board dated 8th April, 2008 vide which, the CBDT No. 5/08 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1995-96. 3.5 The learned CIT(A) after considering the submission of the assessee held that licence fee payable as per the agreement partly in the form of upfront fee and partly in the form of annual licence fee is in the nature of rent for the purposes of Section 1941 of the Act. Tax is required to be deducted Under Section 1941 provided the payment is income by way of rent. Since the upfront fee was not income by way of rent for the financial year under consideration, therefore, no tax was required to be deducted. The upfront fee was to be adjusted against 50% of the licence fee for the 30 years starting from the previous year 2002-03 relevant to asst. year 2003-04. The learned CIT(A) has also referred to the assessment order of the lessor where the upfront fee has not been taxed for the asst. year 2002-03. It was therefore held that the assessee is not in default Under Section 201(1) for non-deduction of tax at source Under Section 1941 from the amount of upfront fee paid to the lessor. 3.6 The learned CIT(A) recorded another finding that order passed by the Assessing Officer is barred by limitation because the notice for TDS verification was issued on 29th November, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it was held that non-refundable security deposit represent the advance rent and therefore tax was required to be deducted at source on entire security deposit. In that case, agreement provided for reduction of security deposit every six months when the rent becomes due and payable. In that case, monthly rent was Rs. 6,26,000/- while security deposit amounting to Rs. 1,50,24,000/- was paid. The learned DR therefore argued that once the upfront fee is rent and is to be adjusted in subsequent years, then tax was required to be deducted at source as per Section 1941 of the IT Act. The learned DR drew our attention to Circular No. 5 dated 2nd March, 2001. Copy of the circular is available at page 101 and 102 of the paper book filed by the learned DR. In that case, the Board has to deal with the situations where the tax at source is deducted on the advance rent pertaining to one or more financial years. The Board visualized two situations in a case where tax at source is deducted from advance rent. One of the situations is that rent agreement gets terminated/cancelled resulting into refund of balance amount of rent to the tenant. Second situation is that when rented property is trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of credit or at the time of payment, whichever is earlier. Deduction of tax at source will not affect the chargeability of income in the hands of the recipient. The legislature has visualized that the tax may be deducted by the payer in an asst. year but the income on which tax has been deducted cannot be assessable in the hands of the payee in that asst. year. Hence, provisions of Section 199 were made so that credit of tax is given in the year in which income is taxable irrespective of the asst. year in which tax was deducted. 3.12 The Hon'ble jurisdictional High Court in the case of United Breweries Ltd. v. ACIT 211 ITR 256 had an occasion to consider the deduction of tax at source. In that case, entries were made but the amount was remitted subsequently. The amount was to be remitted as per the permission given by the Reserve Bank of India. In the case before the Hon'ble jurisdictional High Court, the payee ceased to be a non-resident under the Act by the time the permission was given by Reserve Bank of India. The Hon'ble jurisdictional High Court held that it will not materially affect the liability arising pursuant to the entries made in the books of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment is made, tax on income shall be payable by deduction or collection at source or by advance payment in accordance with the other provisions. 3.14 Section 1941 which requires deduction of tax at source in respect of payment of any income by way of rent is as under: 194-1 Any person, not being an individual or a Hindu undivided family, who is responsible for paying to (a resident) any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, [deduct income-tax thereon at the rate of- a) fifteen per cent if the payee is an individual or a Hindu undivided family; and b) twenty per cent in other cases:] The above Section requires that a person, who is responsible for paying to a resident any income by way of rent is required to deduct tax at source at the time of credit of such income to the account of the payee. The word 'refer' is paying to any income by way of rent. It does not refer that such income should be income of the previous year which is being paid and the tax should be deducted on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be held that the upfront fee which has been held as rent by the learned CIT(A) was an income in the hands of the payee and therefore, the assessee was required to deduct the tax at source at the time of credit of such an amount. 3.17 Section 4(2) of the IT Act says that in respect of income chargeable under Section 4(1), income tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of the Act. Section 4(1) says that income tax shall be charged for any asst. year at the rate as mentioned in Central Act in respect of income of the previous year. The Hon'ble Apex Court in the case of Kalwa Devadattan v. Union of India 491 ITR 165 held that under the Income Tax Act, liability to pay income tax arises on the accrual of income. Finance Act 2001 vide para 2(6) has mentioned that tax is to be deducted at specified rate as mentioned in Section 1941. Quantification of tax is as per the rates applicable for a particular asst. year but charging Section is that income tax is chargeable at the time of accrual. Hence if income has accrued then tax is to be deducted. 3.18 We have reproduced para 2.2 and para 2.3 of the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction within a reasonable period. The reasonable period depends on the scheme of the Act but in any case, cannot be more than 5 years. 3.22 The Hon'ble Delhi High Court in the case of CIT v. NHK Japan Broadcasting Corporation (Supra) has considered the above-referred decision of the Hon'ble Apex Court and has also considered the decision of the Hon'ble Apex Court in the case of Bharat Steel Tubes Ltd. 70 STC 122. The Hon'ble Delhi High Court held that the decision of Bharat Steel Tubes Ltd. is not relevant as in that case, the question pertained to the completion of proceedings. The decision in the case of Bhatinda District Coop. Milk Producers Union Ltd. refers to the initiation of proceedings. The Hon'ble Delhi High Court observed as under: In so far as the Income- Tax Act is concerned, our attention has been drawn to Section 153(1)(A) thereof which prescribes the time limit for completing the assessment, which is two years from the end of the assessment year in which the income was first assessable. It is well known that the assessment year follows the previous year and, therefore, the time limit would be three years from the end of the financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT 261 ITR 364 has held that demand raised Under Section 201/201(A) is not barred by limitation. In that case, the assessee made the payment on March, 13, 1990 in respect of demands from April 1, 1986 to 31st March, 1990 on which TDS was required to be deducted. Thus, the first previous year was 1986-87 and the assessee paid the demand on 13th March, 1990. The Assessing Officer raised the demand Under Section 201(1A) by order dated August 16, 1991. Thus, in respect of financial year 1987-88 to 1989-90, the demand was raised within the period of 4 years. In the case before the Hon'ble Kerala High Court, a plea was raised that order Under Section 201(1A) is barred by limitation on the ground of Section 231. The Hon'ble Kerala High Court has not considered the decision of the Hon'ble Apex Court in the case of Bhatinda District Coop. Milk Producers Union Ltd. So, according to us the decision of the Hon'ble Delhi High Court is applicable and the Assessing Officer could not have initiated the proceedings after the end of the four years from the relevant financial year. Accordingly, order Under Section 201(1) and 201(1A) for the asst. years 2002-03 and 2003-04 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r finding that the order for the asst. years 2002-03 and 2003-04 are barred by limitation. 3.26 For the asst. year 2003-04, the Assessing Officer has raised demand Under Section 201(1A) in respect of TDS deductible on the licence fee. The learned AR in his paper book has filed copy of the assessment order for the asst. year 2003-04. However, no details have been made available to us in respect of the tax paid in advance or TDS deducted for which claim was made at the time of filing of the return. Therefore, we are not aware as to whether the recipient has paid the tax on licence fee as advance tax or self-assessment tax. As per the finding given for the asst. year 2002-03, the issue of computation of interest Under Section 201(1A) is restored back on the file of the Assessing Officer. The interest should be charged till the date when the recipient has satisfied the tax liability on the licence fee. 3.27 For the asst. year 2004-05, the Assessing Officer has charged interest Under Section 201(1A) in respect of TDS to be deducted on licence fee. The tax payable after taking into credit the lease rent came to Rs. 1,92,74,580/- as per the computation of income available at page 83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computation of total income for the asst. year 2005-06. The assessee has paid a sum of Rs. 12,23,515/- under self-assessment tax. Since the licence fee based oh the turnover was not ascertainable till the end of the accounting period, therefore, it cannot be inferred that the recipient has paid advance tax on the licence fee, which is in excess of the minimum guaranteed amount. Hence, it cannot be visualized that the recipient has paid tax on the difference between the licence fee payable as per the gross turnover minus the minimum guaranteed amount. Since the return for the asst. year 2005-06 has been filed and licence fee credited in PAL account is the same, which is receivable on the basis of the turnover, hence, there was no case of raising demand in respect of short deduction of tax because the deductee has already satisfied the demand. Hence, the demand in respect of 201 is deleted while the demand in respect of interest Under Section 201(1A) is upheld. 3.32 Explanation to Section 191 has been introduced by the Finance Act 2008 with retrospective effect from 1st June, 2003. As per this Explanation, if the deductee fails to pay the tax in respect of income on which the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same are quashed. Therefore, the appellant cannot be held to be assessee in default Under Section 201(1) for this reason too and the TDS and interest charged Under Section 201(1)/201(1A) are hereby deleted. The mistake is that there is no time limit prescribed in the Income-tax Act, beyond which ITO (TDS) cannot reopen proceedings related to TbS matters. The statute does not prescribe any time for passing order Under Section 201 of the Income-tax Act. Since there is a mistake apparent from record this Rectification Application is filed before the CIT(A)-V, Bangalore for his consideration as under. 1. There is no time limit prescribed in the Income-tax Act, beyond which ITO (TDS) cannot reopen proceedings related to TDS matters. Hence, the statute does not prescribe any time for passing any order Under Section 201. There are decisions directly applicable for the current case as under: (i) United Insurance Co. Ltd. v. ITO (TDS), Ward-16(3), Bangalore in ITA Nos. l715/B/05 dated 6.9.2007 (ii) Mittal Steel Ltd., Bangalore v. ACIT (TDS), Bangalore ITA Nos. 983 to 98/Bang/1997 dated 25.2.1998. (iii) Indo Nissin Foods Ltd. v. JCIT (TDS), Bangalore in ITA No. 240 to 246/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We had already discussed this decision. While disposing of the appeal of the revenue, we have held that order of the Assessing Officer for the asst. year 2002-03 was barred by limitation. Moreover, disputable question of fact and law cannot be rectified Under Section 154 of the IT Act. Hence, the learned CIT(A) was not justified in reversing this finding by passing an order Under Section 154 and holding that the order was not barred by limitation. 4.3 The Hon'ble jurisdictional High Court in the case of CIT v. Mcdowell A Co. Ltd. 219 CTR 554 held that application of the principles laid down by superior court to the facts of the case before the Tribunal on erroneous understanding of such principles, recording of an erroneous finding by it based on the facts on record, arriving at conclusion on erroneous application of provisions of law to the facts of the case, cannot be a mistake apparent from the record. In view of the decision of the Hon'ble jurisdictional High Court, the learned CIT(A) was not justified in passing the order Under Section 154 on the basis that he has misread the Circular No. 5 dated 2nd March, 2001 and he has overlooked the provisions of Section 4(1) o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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