2017 (2) TMI 1109 - HC - Income Tax

Court interprets Income Tax Act on lease payments to GNOIDA, ruling on TDS, interest exemptions

The court ruled on the interpretation of various sections of the Income Tax Act in a case involving lease payments and interest to GNOIDA. It held that ... TDS u/s 194I - non-payment of TDS required to be deducted from the payments of lease rent/interest/other payments for acquisition of a plot of land on 90 years lease from GNOIDA - entitled to the benefit of Section 10 (20) - Held that:-Industrial townships per se need not be statutory bodies; they can be private entities as well. Jamshedpur in Bihar with a population of a million plus, is maintained by the Jamshedpur Utilities and Services Company Ltd, a private entity. It provides all the essential municipal services; yet the city has no “official” or statutory municipal corporation. Therefore, whenever the nature and characteristics of the services provided by an entity or corporation- irrespective of statutory grant by the state (or lack of profit motive, or even that it has attributes or trappings of state or its power), are such that it is essentially or mainly an industrial township, and its governing structure is not “self-governing”, the power under Article 243Q is exercised. GNOIDA cannot obviously challenge that exercise of power. It follows, therefore, that it is not a municipality. Therefore, its contentions that it is a municipality and entitled to the benefit of Section 10 (20) are without merit. The court is of opinion that clearly these payments are not “rent”. That they are annual payments cannot be doubted. Yet, part of the payment is clearly capital in nature. Clause 1 of the lease deeds entered into in each of the cases, clearly points to the fact that a small percentage of the agreed amounts were paid as part of the lease premium and were towards acquisition of the asset; they fell, consequently in the capital stream and were not “rents”. The balance of such premium payments were spread over a period of 8 to 10 years, in specified annual or bi-annual installments. Here, distinction between a single payment made at the time of the settlement of the demised property and recurring payments made during the period of its enjoyment by the lessee is to be made. This distinction is clearly recognized in Section 105 of the Transfer of Property Act, which defines both premium and rent. Such payments were held to constitute capital and not “rent” or advance rent, in Durga Das Khanna v CIT [1969 (1) TMI 1 - SUPREME Court ] This view is also reinforced by the Income Tax Circular No. 35/2016 dated 13 October, 2016 issued by the Central Board of Direct Taxes (CBDT) which clarified that “lump sum lease payments or one time lease charges, which are not adjustable against long term lease hold charges, which are not adjustable against periodic rent, paid or paid or payable for acquisition of long term leasehold rights over land or any other property are not payments in the nature of rent within the meaning of Section 194-I of the Act Interest on overdue payments or other such amounts are concerned, however, they cannot be called “capital” payments. In the present case, the court holds that since the GNOIDA insisted that its payments not be subjected to TDS, it should ensure that the appropriate amounts are credited, or credit to the extent applicable, is given to the Petitioner/ lessees. A direction to that effect is given to the second respondent, GNOIDA to ensure compliance; the Revenue is consequently directed not to pursue coercive and penal proceedings against the petitioners under Section 201/221 of the Income Tax Act. Whether GNOIDA is an institution of the kind covered by Section 194A (3) (f)? - Held that:- Amounts which are payable towards interest on the payment of lump sum lease premium, in terms of the Lease which are covered by Section 194A are covered by the exemption under Section 194A (3) (f) and therefore, not subjected to TDS - any payment of interest accrued in favour of GNOIDA by any petitioner who is a bank – to the GNOIDA, towards fixed deposits, are also exempt from TDS. Issues Involved:1. Interpretation of Section 194-I of the Income Tax Act regarding TDS on lease payments and interest.2. Classification of GNOIDA as a 'local authority' under Section 10(20) of the Income Tax Act.3. Applicability of TDS on interest payments under Section 194A of the Income Tax Act.Issue-wise Detailed Analysis:1. Interpretation of Section 194-I of the Income Tax Act:The court examined whether the payments made by the petitioners to GNOIDA, under long-term lease agreements, qualify as 'rent' under Section 194-I of the Income Tax Act, which mandates TDS on rent payments. The court concluded that:- Lease Premium Payments: Payments made towards lease premium in scheduled installments are capital payments and not subject to TDS.- Annual Lease Rent: Payments constituting annual lease rent (e.g., 1% of the total premium) are considered rent and are subject to TDS. The court directed GNOIDA to comply with TDS provisions and ensure appropriate reimbursements to the petitioners for any excess TDS payments.2. Classification of GNOIDA as a 'local authority':GNOIDA argued that it is a 'local authority' under Section 10(20) of the Income Tax Act and thus exempt from TDS provisions. The court analyzed:- Legal Framework: GNOIDA is constituted under the Uttar Pradesh Industrial Development Act, 1976, and declared an industrial township, not a municipality.- Municipality Definition: Article 243P and 243Q of the Constitution define municipalities as self-governing institutions with elected members. GNOIDA, being governed by officials nominated by the state government, lacks this characteristic.- Conclusion: GNOIDA does not qualify as a municipality or local authority under Section 10(20) and is not exempt from TDS on rent payments under Section 194-I.3. Applicability of TDS on interest payments under Section 194A:The court addressed whether interest payments to GNOIDA are exempt from TDS under Section 194A(3)(f), which exempts certain institutions notified by the Central Government. The court concluded:- Notification and Legal Precedents: GNOIDA, as a statutory corporation established by a state act, falls under the exemption provided by the Central Government's notification.- Interest on Lease Premium: Interest on overdue lease premium payments is exempt from TDS under Section 194A(3)(f).- Bank Interest Payments: Interest accrued on fixed deposits made by banks to GNOIDA is also exempt from TDS.Judgment Summary:1. Lease Premium Payments: Not subject to TDS as they are capital payments.2. Annual Lease Rent: Subject to TDS, and GNOIDA must ensure compliance and reimburse petitioners for excess TDS payments.3. Interest Payments: Exempt from TDS under Section 194A(3)(f) for both lease premium interest and bank interest payments.4. Reimbursement and Compliance: GNOIDA must reimburse petitioners for excess TDS payments, and the Revenue must not pursue coercive recovery methods once basic liability is satisfied.Conclusion:The court quashed the impugned orders and directed the Revenue to make consequential orders within 12 weeks, ensuring that GNOIDA complies with the judgment and reimburses petitioners for excess TDS payments. The writ petitions were allowed with no costs.