2016 (1) TMI 664 - AT - Income Tax

Development charges and lease interest not tax-deductible under Income Tax Act

The Tribunal held that the development charges and interest paid for a 99-year lease were not subject to tax deduction under section 194-I of the Income ... TDS u/s 194-I - development charges paid by the assessee to Rajasthan State Industrial Development and Investment Corporation Limited (RIICO) towards allotment of land on lease of 99 years - whether payment of development charges paid was for acquisition of leasehold rights or for use of land? - Held that:- Lease document has used the 'Development charges' and 'Economic rent' to be payable by the assessee. As the document has used two different phrases to connote different obligation therefore in our view development charges can not be read as rent within the purview of the section 194-I. further lease document has provided the consequences of non-payment of the development charges by the assessee, if the assessee failed to pay the development charges, as mentioned in the agreement, the possession was liable to be taken over by the RIICO, therefore the development charges can not be considered as rent.- Decided in favour of assessee Issues Involved:1. Deduction of tax at source under section 194-I of the Income Tax Act, 1961, on development charges paid to RIICO.2. Deduction of tax at source under section 194-I on interest paid on installment payment of development charges.3. Levy of interest under section 201(1A) from the date of deductibility to the date of furnishing of return of income by the payee.Detailed Analysis:1. Deduction of tax at source under section 194-I on development charges:The primary issue was whether the development charges paid by the assessee to RIICO for allotment of land on a 99-year lease were liable for deduction of tax at source under section 194-I of the Income Tax Act, 1961. The assessee argued that section 194-I covers transactions of renting property in the capacity of a tenant, not as an owner, and that the leasehold allotment was akin to a sale of land for a specific number of years, not a rental agreement. The AO and CIT (A) disagreed, holding that the development charges constituted 'rent' under section 194-I. The Tribunal, however, found that the development charges were paid for acquiring leasehold rights rather than for the use of land. It emphasized the importance of the term 'use' and concluded that the payment was for acquiring rights in the leasehold property, not for renting the land. Thus, section 194-I was not applicable.2. Deduction of tax at source under section 194-I on interest paid on installment payment of development charges:The second issue was whether interest paid on installment payments of development charges was liable for deduction of tax at source under section 194-I. The assessee contended that such interest was not liable for TDS under section 194-I or 194A, as it was compensatory in nature. The CIT (A) held that the interest was part of the lease rent and thus subject to TDS under section 194-I. The Tribunal disagreed, stating that the interest paid was for the acquisition of rights in the leasehold property and not for the use of land. Therefore, it did not fall under section 194-I.3. Levy of interest under section 201(1A):The third issue was the levy of interest under section 201(1A) from the date of deductibility to the date of furnishing of return of income by the payee. The AO calculated the TDS and interest under section 201(1A) for the amounts paid by the assessee to RIICO, treating the development charges and interest as rent. The Tribunal found that since the development charges and interest did not fall under section 194-I, the assessee was not liable for TDS on these amounts, and consequently, the levy of interest under section 201(1A) was not applicable.Conclusion:The Tribunal concluded that the development charges and interest paid by the assessee to RIICO for the allotment of land on a 99-year lease were not liable for deduction of tax at source under section 194-I of the Income Tax Act, 1961. Consequently, the levy of interest under section 201(1A) was also not applicable. The assessee's appeals were allowed.