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Friday, 24 February 2017 15:02

Payment towards Acquisition of Lease Hold Rights for Limited/Specific Period is Capital Payment and Not Subject to TDS - Delhi High Court Featured

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TDS under section 194-I - Delhi High Court TDS under section 194-I - Delhi High Court Taxpundit.org

Is Amount payable towards Interest on the payment of lump sum Lease Premium subject to TDS - Held No

 

Amounts paid as part of the lease premium in terms of the time schedule(s) to the Lease Deeds executed between the petitioners and GNOIDA, or bi-annual or annual payments for a limited/specific period towards acquisition of lease hold rights are not subject to TDS, being capital payments

Amounts which are payable towards interest on the payment of lump sum lease premium, in terms of the Lease which are covered by Section 194- A are covered by the exemption under Section 194A (3) (f) and therefore, not subjected to TDS.

Facts

Reference u/s 55A1. The petitioners are engaged in developing, constructing and selling residential units, plots and flats

2. Each of them entered into a long-term 90 years lease with the Greater Noida Industrial Development Authority (GNOIDA) [hereafter referred to as “the authority” or “the lessor”]

3. In terms of the lease deed entered into with the lessor, the petitioner paid upfront consideration and the balance was payable in terms of annual installments according to the terms and conditions of the lease deed

4. Along with the lease premium, each lease deed contained stipulation that interest payments would also be made to the lessor/authority

5. In all these cases, the assessee/petitioners received notice from the income tax authorities, alleging that they were assessed in default inasmuch as they had failed to deduct income tax from the interest component paid to the lessor/authority

6. The Revenue was prima facie of the opinion that these interest amounts resulted in income in the hands of the authority which is facially taxable and that the failure of the assessees, in deducting amounts mandated under Section 194-I is without legal foundation

7.  The petitioners were served with notices by the income tax authorities under Sections 201 /201 (lA) of the Income Tax Act, 1961 for the F.Y. 2010- 11 to 2012-13 for non-deduction and 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 NOIDA for the periods mentioned

8. The petitioners, who justified non-deduction of TDS for payments made as lease rental and interest to GNOIDA, duly replied to these notices

9.  Furthermore, all details of deductions and deposit of TDS were also given. In regard to the query of the Assessing Officer (“AO”) pertaining to the non-deduction and non-payment of tax at source on account of lease rent /charges paid to Noida Authority the petitioner explained its case on merits. The Petitioner submitted that:

(i) They had been allotted, on lease basis, lands for development for 90 years by the Noida Authority;

(ii) Noida Development Authority has directed the assessee company not to deduct TDS from the lease rent as it has been constituted as an authority under Section 3 of the Uttar Pradesh Industrial Development Act, 1976.

(iii) Noida Development Authority is a notified institution under section 194A(3) (iii) (f) of the Act by the Central Board of Direct Taxes

Therefore, provisions of Section 194-I of the Act are inapplicable to Noida Authority

10. The income tax authorities ignored the explanations provided and issued notices of demand under Section 156 of the Income Tax Act treating the petitioner company as assessee-in-default for non-deduction and deposit of TDS in respect of the payments made to NOIDA Authority and has also levied the interest thereon

11. The assessee/petitioners preferred appeals to the Commissioner (Appeals) in some cases. Later, the AO issued further notice of demands for other periods under Section 221(1), which were duly replied to

12. In these circumstances, they have approached to Delhi High Court for appropriate relief, contending that the GNOIDA’s position on this issue is that amounts payable to it cannot be subjected to tax deduction, since it is a “local authority”

Arguments by Writ Petitioner

The Petitioners submit that the demands made in pursuance of the passing of the assessment order under Sections 201/201 (A) of the Act is arbitrary and fictitious. It is not the case of the income tax authorities that the Petitioners made a short payment of tax and / or not deposited the same in the government treasury after deducting the amount. On the contrary, the Petitioners made the full payment to the payee and cannot be forced to again make the payment. The income tax authorities have all the rights and powers to charge and recover the tax if any due from the NOIDA authorities as the payments were made under the instructions of NOIDA Authority, which is a public authority. Non-compliance with the directions of the said Authority would have been visited by penal interest and even cancellation of the petitioners’ lease deeds. If the stand of the income tax authorities is correct, they should have initiated assessment proceedings against the lessors as they would have shown the income in their return of income or the same must have been assessed in their hands by the income tax office. However, the repeat issue of notices and raising of demands causing serious concern, threat to the business, operations and existence of the Petitioner companies.

The GNOIDA further argues that in the explanation to Section 10(20) of the Income Tax Act, 1961, a "Municipality as referred to in clause (e) of Article 243P of the Constitution" falls under the ambit of a “local authority”. Reliance is placed on Article 243P clause (e) of the Constitution of India, which states that ―Municipality means an institution of self government constituted under Article 243Q‖. Further reliance is placed on Section 3 of the Uttar Pradesh Industrial Development Act, 1976 (hereinafter to as "the UPIDA") under which GNOIDA is constituted. It is submitted that the Government of Uttar Pradesh by Notification No. 4157 HIjXVIII-11 dated 17.04.1976 notified the GNOIDA as the authority constituted under Section 3 of the UPIDA. The GNOIDA points out that the statement of objects of the UPIDA states:-

'an act to provide for the constitution of an Authority for the development of certain areas in the State into industrial and urban township and for matter connected therewith.'

This clarifies that GNOIDA was constituted for the purpose of planning, development or improvement of cities, towns and villages. In this regard, it is further submitted that the Noida Industrial Development Authority has been declared as an "Industrial Township" with effect from 24th December, 2001 by the Governor of Uttar Pradesh in exercise of the powers under the proviso to clause (1) of Article 243Q of the Constitution of India.

Interpretation of Section 194-I by Delhi High Court

GNOIDA therefore argues that, it is evident and apparent that the Noida Industrial Development Authority falls squarely under the meaning of a 'Municipality' and this is a 'local authority' under Section 10(20) of Income Tax Act 1961, read with Article 243P and Article 243Q of the Constitution of India. It is also urged that GNOIDA discharges its statutory sovereign function, as an arm of the State Government through its officers. It is empowered under section 6 of the Act to carry out all the municipal functions. It is respectfully submitted that in terms of section 6 of the said Act, one of the functions of answering to the Respondent is to allocate and transfer by way of lease, plots of land for industrial, commercial or residential purposes. It is further submitted that the lease rent levied by GNOIDA is in the nature of local taxes, and not out of proceeds arising from any business or trade. In this regard, it is relevant to note that firstly, it works as a local authority of the area, and secondly since there is no separate municipality in operation in the area and all the functions of municipality are performed by the authority. It is submitted that the lease rent is levied in terms of provisions of the Act.

Arguments by Income Tax Authorities

The income tax authorities argue that they are following the mandate of law. Since Section 194-I is decisive and forthright that all amounts constituting rent and other payments towards the use of the land and property are to be subjected to tax deduction, there can be no exception save what is provided by law. The Revenue contrasts this provision with section 194A which contains exceptions. The Revenue also disputes that GNOIDA performs any sovereign functions and reiterates that the amounts paid by the petitioners are rent, no more, no less and therefore, subjected to tax deduction. The Revenue also relies on the judgment of the Allahabad High Court in New Okhla Industrial Development Authority v. Chief Commissioner of Income Tax, Meerut Camp & Ors., decided on 28.02.2011 (in Writ- Tax No. 1338 of 2005) which states how NOIDA is not a local authority and is therefore not exempt from TDS provisions of the Act.

The Revenue argues that in view of the general tenor of the above provision, all payments made by way of rents are subject to TDS. The first kind of payment, which this court has to deal with are lease amounts. Do they qualify the description “rent” in view of the explanation to section 194-I i.e ―any payment by whatever name called‖? The second is whether the interest amounts paid towards overdue lease amounts are also liable to TDS. As to both GNOIDA asserts that since it is a municipality, it stands covered by Section 10 (20A) of the Income Tax Act and amounts payable to it are exempt from the description of ―income‖. It follows up this with the submission that GNOIDA is constituted under the UPIDA and was declared an industrial township under a notification issued for the purpose in 1976; that establishes that it is a municipality and that amounts collected are towards services by way of “sovereign” functions.

Also Read : Assessee-in-Default - Section 201(1), 201(1A) - Assessee Cannot be Penalised for Non Payment of Taxes - Ruling in Goldman Sachs

Adjudication

The prerequisite for characterization of a unit or body as a municipality is that it should be self-governing and its members ―shall be filled by persons chosen by direct election from the territorial constituencies in the Municipal area‖ and for such purpose (i.e. election) ―each Municipal area shall be divided into territorial constituencies to be known as ward.‖ In the case of GNOIDA, this essential characteristic is absent. Section 3, which constitutes it, lists 6 officials and specifies the ranks and departments (of the UP Government) who are to man the body; 5 are to be nominated by the State Government. Therefore, the possibility of a reasonable argument that GNOIDA is a municipality, notwithstanding its constitution as an industrial township, is ruled out.

As to the other submissions of GNOIDA that its collections – towards lease deed are by way of tax and other payments are extractions by use of sovereign power, are equally untenable. Article 243P specifies that municipalities – as defined by Article 243Q are to be treated as such. The proviso to Article 243Q carves out an exception that certain units which provide municipal services and are industrial townships may be declared as such. Now this is recognition of the fact 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.

That brings the court to the next question, which is as to the nature of the payments made towards lease. Do they constitute rent so as to attract Section 194-I? 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 (72) ITR 796 as well as other decisions, such as Assam Bengal Cement Co. Ltd. v Commissioner of Income Tax, West Bengal [1955] 27 ITR 34 (SC) and Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802 (SC). However, in respect of amounts clearly reserved as rent (generally 1% of the total consideration, payable annually) the payments are clearly rent and not capital. In respect of such amounts too, the petitioners were liable to deduct TDS from the payments made to GNOIDA. 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."

Ruling by Delhi High Court

As far as 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.

This court affirms and upholds the reasoning of the ITAT. GNOIDA is one such institution established by a state act. As pointed out by the ITAT, the UPIDA is an enabling enactment, which facilitates the setting up of development authorities like GNOIDA. Consequently, payments made by banks towards interest accruing on deposits, etc. are not deductible.

In view of the above analysis, the court hereby concludes as follows:

(1) Amounts paid as part of the lease premium in terms of the timeschedule(s) to the Lease Deeds executed between the petitioners and GNOIDA, or bi-annual or annual payments for a limited/specific period towards acquisition of lease hold rights are not subject to TDS, being capital payments;

(2) Amounts constituting annual lease rent, expressed in terms of percentage (e.g. 1%) of the total premium for the duration of the lease, are rent, and therefore subject to TDS. Since the petitioners could not make the deductions due to the insistence of GNOIDA, a direction is issued to the said authority (GNOIDA) to comply with the provisions of law and make all payments, which would have been otherwise part of the deductions, for the periods, in question, till end of the date of this judgment. All payments to be made to it, henceforth, shall be subject to TDS.

(3) Amounts which are payable towards interest on the payment of lump sum lease premium, in terms of the Lease which are covered by Section 194- A are covered by the exemption under Section 194A (3) (f) and therefore, not subjected to TDS.

(4) For the reason mentioned in (3) above, 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.

In view of the above conclusions, it is hereby directed that wherever amounts have been paid by the petitioners, towards TDS as a result of the coercive process used by the Revenue, the GNOIDA shall make appropriate orders to credit/reimburse such payments. In case payments are made through deposit, over and above the rental amounts paid to the GNOIDA, without TDS, the income tax authorities shall not pursue any coercive proceedings; GNOIDA shall duly reimburse the petitioners for such amounts. Any amounts deposited in the court or with the Revenue, shall, to the extent of TDS liability only be appropriated for such purpose. It is clarified that GNOIDA shall ensure that reimbursement is made to compensate the petitioners’ excess payments; the income tax authorities shall not pursue any coercive methods for recovery of the amounts, or penalty, once the basic liability (with interest, to be paid by GNOIDA) is satisfied. The impugned orders are quashed; the Revenue shall make consequential orders, to give effect to this judgment, after duly hearing the petitioners and those likely to be affected, within 12 weeks from today.

Cases Referred to

1. Durga Das Khanna v CIT 1969 (72) ITR 796

2. Assam Bengal Cement Co. Ltd. v Commissioner of Income Tax, West Bengal [1955] 27 ITR 34 (SC)

3. Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 225 ITR 802 (SC)

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Read 3307 times Last modified on Wednesday, 08 March 2017 14:42
Deepak Kumar

A Post Graduate and Chartered Accountant Deepak Sinha is a member of Taxpundit's core team. An analytical, result oriented professional with more than 10 years of combined experience in industry and consultancy.

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