2014 (4) TMI 885 - AT - Income Tax

Tribunal rules lease premium not rent, exempts from TDS.

ITO (TDS) LTU Versus Reliance Industries Ltd.

The Tribunal dismissed the AO's appeal, ruling that the lease premium paid to MMRDA was a capital expenditure, not rent. Consequently, Section 194I did ... Premium paid for the leasehold rights – liability to deduct TDS u/s 194I of the Act – Held that:- The decision in The ITO (TDS) 3 (5), Versus M/s. Wadhwa & Associates Realtors Pvt. Ltd. [2013 (9) TMI 261 - ITAT MUMBAI] followed - the premium is not paid under a lease but is paid as a price for obtaining the lease, it proceeds the grant of lease - it cannot be equated with the rent which is paid periodically - the payment made to MMRD is also for additional built up are and also for grating free of FSI area, such payment cannot be equated to rent - the word Rent does not include premium paid for additional FSI or lease hold rights - payments were made to MMRDA for additional build up area and lease hold rights - such payments cannot be termed Rent and therefore provisions of section 194 I are not applicable – thus, the order of the FAA upheld – Decided against Revenue. Applicability of section 201 and 201(1A) of the Act – Held that:- The letter dated 04.05.2007 MMRDA had informed the assessee that it had approved the proposal of offer of allotment of the plot of land for construction of two level underground car park with ground above - Lease was offered for a periods of 80 years - the transaction has to be held a lease and that provisions of section 201(1) and 201(1A) are not attracted for non-deduction of tax at source – thus, the order of the FAA set aside – Decided in favour of Assessee. Issues Involved:1. Nature of lease premium paid to MMRDA.2. Applicability of Section 194I of the Income Tax Act, 1961.3. Requirement to deduct tax at source (TDS) on lease premium.4. Interpretation of the term 'rent' under Section 194I.5. Classification of lease premium as capital expenditure or rent.6. Implications of non-deduction of TDS under Sections 201(1) and 201(1A).Issue-wise Detailed Analysis:1. Nature of Lease Premium Paid to MMRDA:The primary issue revolves around whether the lease premium paid by the assessee to MMRDA constitutes rent under Section 194I of the Income Tax Act, 1961. The Assessing Officer (AO) contended that the lease premium should be classified as rent, necessitating TDS deduction. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal held that the lease premium was a capital expenditure for acquiring leasehold rights, not rent.2. Applicability of Section 194I of the Income Tax Act, 1961:The AO argued that the lease premium fell within the ambit of Section 194I, which defines rent comprehensively. The CIT(A) disagreed, stating that the payment was not for the use of land in the conventional sense but was a one-time premium for acquiring leasehold rights. The Tribunal upheld this view, citing precedents where similar payments were treated as capital expenditures.3. Requirement to Deduct Tax at Source (TDS) on Lease Premium:The AO's position was that the assessee should have deducted TDS on the lease premium under Section 194I. The CIT(A) and Tribunal, however, concluded that since the premium was not rent, the provisions of Section 194I did not apply, and thus, there was no requirement for TDS deduction.4. Interpretation of the Term 'Rent' Under Section 194I:The AO interpreted 'rent' broadly, including any payment for the use of land. The CIT(A) and Tribunal took a narrower view, emphasizing that the lease premium was a capital payment for acquiring leasehold rights, not periodic rent. The Tribunal referenced judicial decisions supporting this interpretation, including the case of Wadhwa & Associates Realtors Pvt. Ltd., which distinguished between lease premiums and rent.5. Classification of Lease Premium as Capital Expenditure or Rent:The Tribunal affirmed the CIT(A)'s finding that the lease premium was a capital expenditure. This classification was based on the nature of the payment, which was made to acquire a bundle of rights associated with the land for a long duration (80 years), rather than for periodic use of the land.6. Implications of Non-Deduction of TDS Under Sections 201(1) and 201(1A):The AO raised demands under Sections 201(1) and 201(1A) for non-deduction of TDS on the lease premium. The CIT(A) and Tribunal ruled that since the lease premium was not rent, the assessee could not be treated as an 'assessee in default' under these sections. Consequently, the demands raised by the AO were invalid.Conclusion:The Tribunal dismissed the AO's appeal and allowed the assessee's appeal, holding that the lease premium paid to MMRDA was a capital expenditure and not rent. Therefore, the provisions of Section 194I did not apply, and the assessee was not required to deduct TDS on the lease premium. The Tribunal's decision was consistent with prior judicial rulings, reinforcing the distinction between lease premiums and rent.