2025 (11) TMI 44 - AT - Income Tax

No TDS under Section 194I on lease rentals paid to statutory development authority before 16/02/2017; assessment orders set aside

Celebrity Realcon (P) Ltd. Versus ITO Ward 49 (3), Delhi

ITAT DELHI - AT held that TDS under s.194I was not required to be deducted on lease rentals paid to a statutory development authority prior to 16/02/2017, ... TDS u/s 194IA - lease rental to NOIDA authorities - As per assessee Assessee paid a total lease rental to NOIDA authorities without deducting the TDS @ 10% u/s 194IA as the NOIDA Authority has not accepted the payment after TDS deduction as the said Authority claimed to be exempted and TDS need not be deducted HELD THAT:- The issue as to whether the deduction of tax at source under Section 194-I of the Act should be made or not while making the payment to NOIDA Authority, has been dealt in the case Rajesh Projects (India) [2017 (2) TMI 1109 - DELHI HIGH COURT] as held that the payment made up to the date of the Judgment i.e. 16/02/2017, requires no deduction of TDS from the end of the payee to the NOIDA authority and only after 16/02/2017, the payment made to the authority shall be subject to TDS. Further, the Hon'ble Supreme Court in the case of M/s New Okhla Industrial Development Authority, Greater Noida Industrial Development Authority [2018 (8) TMI 1374 - SUPREME COURT] affirmed the above said direction/observation of the Hon'ble High Court of Delhi in so far as prospective effect of application of provision of Section 194I. The payments were made by the Assessee during F.Y 2011-12 relevant to Assessment Year 2012-13, we are of the opinion that the authorities below have committed error in declaring the appellant as ‘assessee in default’. Accordingly, the order passed u/s 201(1)/201(1A) and impugned order of the Ld. CIT(A) are hereby set aside. Appeal of the Assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether tax is required to be deducted at source under Section 194-I of the Income Tax Act on lease rent/lease premium payments made to a State industrial development authority for payments made prior to 16/02/2017. 2. Whether amounts characterized as capital payments (lease premium paid according to time schedule) are subject to TDS under Section 194-I or fall outside its scope. 3. Whether amounts constituting interest on lump-sum lease premium or interest on deposits paid to the Authority are subject to TDS under Section 194A, or exempt under Section 194A(3)(iii)(f). 4. Whether a payer (deductor) can be treated as an 'assessee in default' under Sections 201(1)/201(1A) for failure to deduct TDS in respect of payments to the Authority made prior to the date from which the Court applied Section 194-I prospectively. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Section 194-I to payments made to State industrial development authority prior to 16/02/2017 Legal framework: Section 194-I requires deduction of tax at source on payment of rent; the question involves temporal applicability and whether earlier circulars or administrative practice could justify non-deduction. Precedent treatment: The Tribunal considered and followed the substantive reasoning of the High Court decision which analyzed the statutory scheme and relevant notifications, and noted that the High Court's decision was affirmed by the Supreme Court with directions and prospective application of Section 194-I from 16/02/2017. Interpretation and reasoning: The Court accepted the High Court's classification that certain payments to the Authority are either capital or rent and that, as a matter of law and equity, the High Court limited the obligation to deduct TDS under Section 194-I prospectively from 16/02/2017. The Tribunal relied on the High Court's analytical division of payments and on the Supreme Court's affirmation which preserved the High Court's remedial directions regarding temporal effect. Ratio vs. Obiter: The holding that Section 194-I applies only prospectively (from 16/02/2017) to payments to the Authority, as applied to the facts in question, is treated as ratio relied upon to decide the instant assessment-year payments; ancillary observations about administrative circulars are explanatory/observational but not essential to the Tribunal's disposition. Conclusion: Payments made to the Authority during the relevant financial year (FY 2011-12) do not attract a liability to deduct TDS under Section 194-I in light of the High Court's ruling given prospective effect and the Supreme Court's affirmation; therefore the payer cannot be held as assessee in default for failure to deduct TDS for those earlier payments. Issue 2 - Characterization of lease premium/time-schedule payments as capital (non-TDS) versus rent (TDS) Legal framework: Distinction between capital payments (e.g., lease premium for acquisition of leasehold rights) and recurring rent (liable to TDS under Section 194-I) is determinative of withholding obligations. Precedent treatment: The High Court's analysis (adopted by the Tribunal) explicitly treated amounts paid as part of the lease premium in terms of the time schedule as capital payments not subject to TDS, while separately treating percentage-based recurring lease rent as rent liable to TDS. Interpretation and reasoning: The Court accepted the High Court's categorical classification: scheduled premium installments for acquisition of leasehold rights are capital in nature and not within Section 194-I; amounts expressed as an annual percentage of premium are rent in substance and thus would attract TDS from the effective date specified by the High Court. Ratio vs. Obiter: The classification of scheduled lease premium as capital (non-TDS) and percentage-based annual payments as rent (TDS) is treated as operative ratio insofar as it determines the nature of payments and corresponding TDS obligations. Conclusion: Scheduled lease premium payments made in the relevant year are capital and not subject to TDS; percentage-based annual lease rent is rent and liable to TDS, but the obligation to withhold in respect of such rent was held to operate only prospectively from 16/02/2017. Issue 3 - Applicability of Section 194A to interest payments to the Authority and exemption under Section 194A(3)(iii)(f) Legal framework: Section 194A requires deduction of tax on interest payments, but Section 194A(3)(iii)(f) exempts specified institutions/bodies notified by the Central Government; the question is whether a State industrial development authority falls within that exemption. Precedent treatment: The Tribunal relied on earlier ITAT decisions (e.g., bank payments to development authorities) and the High Court's adoption of those decisions to conclude that Authorities constituted under the State industrial area development Act qualify for exemption; the Supreme Court affirmed the High Court's conclusions on related matters. Interpretation and reasoning: The Court followed the reasoning that the enabling statute (UPIDA) and the central notification together lead to the conclusion that the Authority is a kind of institution exempt under Section 194A(3)(iii)(f). Decisions of various Benches of the Tribunal treating payments of interest by banks to State development authorities as excludable from TDS were found persuasive and unreversed. Ratio vs. Obiter: The determination that interest payments to such State Authorities are exempt under Section 194A(3)(iii)(f) is treated as ratio relied upon to relieve payers of withholding obligations on interest and to negate default assessments for those amounts. Conclusion: Interest amounts payable to the Authority are exempt from TDS under Section 194A(3)(iii)(f); payers are not to be treated as assessee in default for non-deduction of TDS on such interest payments for the periods in question. Issue 4 - Liability under Sections 201(1)/201(1A) for failure to deduct TDS and consequential relief Legal framework: Sections 201(1)/201(1A) treat a person as an assessee in default for failure to deduct/collect tax at source; where legal obligation to deduct is absent or applies only prospectively, such liability should not be imposed. Precedent treatment: The Tribunal applied the High Court's and Supreme Court's findings that TDS obligations in respect of certain payments to the Authority do not arise for periods prior to 16/02/2017 and that interest payments are exempt; earlier ITAT precedents holding banks not in default for non-deduction to State Authorities were also followed. Interpretation and reasoning: Because the applicable authoritative rulings established either exemption or prospective operation of withholding obligations, the Tribunal concluded that the lower authorities erred in declaring the payer an assessee in default for the impugned assessment year; equitable directions in the higher court judgments (regarding reimbursement and non-pursuit of coercive recovery) informed the remedial outcome. Ratio vs. Obiter: The determination that the payer is not an assessee in default for the relevant period is ratio; ancillary remedial observations in the High Court/Supreme Court regarding reimbursement and prevention of coercive recovery are relied upon but the Tribunal's primary conclusion is the quashing of the default assessment. Conclusion: The orders treating the payer as assessee in default under Sections 201(1)/201(1A) for the impugned payments are set aside; consequential directions follow the higher courts' approach to restitution/reimbursement where applicable, and the appeal is allowed. Cross-references Refer to Issue 1 for the temporal (prospective) limitation on Section 194-I's operation; refer to Issue 3 for the exemption analysis under Section 194A(3)(iii)(f) which intersects with the default liability analysis in Issue 4.