THE issue before the Bench is - Whether any TDS liability
arises on payments made towards leasehold rights acquired by the SEZ developer
for further sale and not for its own use. And the answer goes against the
Revenue.
AO stated that no deduction of TDS had been made by assessee for any of such payments as lease premium fell within the ambit of section 194-I of the Act.
Assessee contended that pre-dominant objective for the payment of lease premium under lease deed(s) was acquisition of leasehold rights in the said land and not for the use of the land. That lease premium was the consideration for purchase of larger interest in the said leasehold land which comprised of a bundle of rights including but not limited to right of possession, right of long term enjoyment, right of development by way of construction of building thereon, right to sale constructed premises on ownership basis, right to collect and appropriate the sale proceeds etc. Rent as defined in section 194-I of the Act, envisaged such payments only for use of land or building, without there being any corresponding acquisition of larger rights in the said leasehold plots. Hence, the lease premium paid to CIDCO Ltd. for acquisition of leasehold land was clearly distinct from rent. The premium for transfer of land under lease will be taxable in the form of capital gain u/s 45 of the Act in the hands of the lessor.
AO did not agree with the submissions of assessee and stated that definition of “rent” creates a legal fiction, whereby almost anything and everything payment in relation to the property under lease transactions qualify for rent for the purposes of Section 194-I of the Act. There were various restrictive clauses in the lease agreement which negated the assessee’s contention that it had acquired rights in the land and not merely the rights to use the land. Therefore, the assessee had committed default within the meaning of section 201(1) and was also liable to pay interest u/s 201(1A) of the Act.
Before CIT (A) assessee further contended that under the provisions of the Income Tax Act, 1961, different treatment cannot be given to same payment under different sections of the Income- tax Act, 1961 i. e. in the hands of lessor as consideration taxable under the head Capital Gains u/s. 45, in the hands of lessee as Rent for the purpose of deduction of tax u/s 194-I. The basic motive for making payment of Lease Premium under the Lease Deed was towards transfer of larger interest/ right (leasehold right) by CIDCO to us in the said leasehold plots arid not just for its use as envisaged u/s 194-I. Assessee also referred clauses (v) and (vi) of sub-section (47) of section 2 and section 269UA(d) and stated that lease of land is considered as an immovable property and the lease premium paid to CIDCO was consideration for transfer of immovable property which is taxable u/s 45.
CIT (A) asked for a remand report from AO in reply to which assessee contended that the amended definition of “rent” contained in section 194-I of the Act w.e.f. 13.7.2007 is very wide and comprehensive and covers “any payment by whatever name called under any lease, sub-lease, tenancy or other agreement or arrangement” and leaves no scope for any interpretation. That all the payments under the lease by whatever name called are rent within the meaning of section 194-I. One has to look at substance and not the form of the transaction while considering the provision of law. It is not necessary that capital expenditure in the hands of one party is also a capital receipt in the hands of other party. The lease agreement signed by CIDCO with the assessee contains various restrictive covenants which do not give any absolute right to the land but reduced it to a rental arrangement for use of the land.
CIT (A) observed that CIDCO was required to undertake all the development work, provide necessary infrastructure on behalf of the government and dispose-off the land, residential, commercial arid social structures and collect service charges etc. As per a resolution CIDCO was appointed the nodal agency for setting up a Special Economic Zone. The appellant company has been jointly promoted as a Special Purpose Vehicle (SPV) by CIDCO and Dronaqiri 'Infrastructure Pvt Limited (DIPL) to develop and operate SEZ. As per Development Agreement, the appellant is required to make payment of lease premium in respect of the land which is being acquired by CIDCO. Appellant is authorized to develop and market the NMSEZ. By virtue of the said lease deed(s), the appellant has acquired leasehold right in the land for the purpose of developing, designing, planning, financing, marketing, developing necessary infrastructure, providing necessary services, operating and maintaining the infrastructure, administering and managing the SEZ. The appellant also has acquired the rights to determine, levy, collect. retain and utilize the user charges, fees for provision of services and / or tariffs in accordance with the terms land conditions provided in the Development Agreement and the lease deed(s). Appellant is also entitled to grant sub-leases. The lease deed(s) also grant the appellant power to assign its rights, title or interest or create a security interest in respect of its rights, either fully or in parts thereof in favour of the lenders including granting of step-in rights in the event of default.
CIT (A) held that section 194I requires that a person who is responsible for paying to a resident come by way of rent" "for the use of" land etc. shall at the time of credit or payment of such income deduct tax at source at required rate. Although this meaning is very wide so as to include all types of transactions which fall in this category, still the legislature has intentionally included the words "for the use of' so that the meaning of the rent" is not interpreted beyond its meaning in common parlance. The word "use" here is therefore of utmost importance in any transaction where the consideration paid for the property would be termed as 'rent'. If the word 'use' was also meant to include exploitation of Property by changing its identity/ shape and then selling it off, there would be no difference between a sale transaction and a transaction akin to the transaction between a landlord and a tenant so far as above TDS provisions of section 194-I, are concerned. Although the meaning of term 'rent' used in the above section is very wide, still cannot be applied to all and any of the transactions out of context indiscriminately. If the tenant/ lessee/ licensee of the property uses the property for his own purpose or employs it for his own benefit, the consideration paid would be 'rent'. However, if the property is exploited in a manner that its identity does not remain the same and thereafter it is sold for a profit, I'm afraid, it would not be called 'use' of property by the tenant; rather it would be exploitation of the property by virtue of certain rights, which would be over and above the rights of a tenant. The amount charged by the CIDCO as lease premium has no connection with the rental value of land. Thus, the whole transaction towards grant of leasehold rights to the appellant is nothing but a transaction of transfer of property. Section 105 of the Transfer of Property Act defines the term lease as "A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who, accepts the transfer on such terms. The distinction between a price paid for a transfer of right to enjoy the property and the rent to be paid periodically to the lessor When the interest of the lessor is parted with for a price, the price paid is premium or salami. If the lease premium was in the nature of advance rent, then, if for any reason the lease is terminated earlier than the prescribed period, the advance rent would have to ble refunded. However, in the case of appellant, the lease deed does not prove for any refund of lease premium. Various clauses of lease agreement are standard regulatory clauses which do not affect leasehold right of the assessee in any manner. They are only regulatory in nature and are meant for the purpose of proper development of the area. Hence the amount paid by the assessee is lease premium for acquiring leasehold rights in respect of lease land and the same is not in the nature of rent as contemplated u/s 194-I of the Act.
After hearing both the parties, the ITAT held that,
++ the development agreement have assigned to the assessee leasehold right which includes bundle of rights. The Assessee has paid the premium for lease deed(s) for the demised land to acquire entire rights of the land for a period of 60 years. Therefore, we are of the considered view that the said payment of lease premium is a payment for acquisition of leasehold land and not merely for use of land. The assessee has made payment for entering into lease agreements to acquire lease hold rights in the land for a period of 60 years and not under a lease;
++ the assessee has paid lease premium to acquire the demised leasehold land and there is no material on record that the said lease premium paid by the assessee is refundable to the assessee and/or is in the nature of advance rent or merely for use of land. The term “rent” though has been defined in section 194-I of the Act, but other terms like, lease, lease premium, lessor and lessee etc have not been defined under the Income Tax Act. CIT(A) has rightly stated in the impugned order that the meaning of these terms as provided in the Transfer of Property Act, 1882 have to be considered. The term lease is defined under section 105 of Transfer of Property Act, 1882 as "A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who , accepts the transfer on such terms. In the case of lease price is called the premium, and the money, share, service or any other thing to be rendered is called the rent; the transferor is called lessor and the transferee is called lessee;
++ When the interest of the Lessor is parted with for a price, the price paid is called lease premium or salami. But the periodical payments made for the continuous enjoyment of the benefit under the lease are in the nature of rent. In the case of assessee, there is a transfer of substantive interest of lessor for the leasehold land in favour of the assessee. That there is a conferment of right on the lessee by acquiring leasehold land and the premium has been paid in lieu thereof and not for the purpose of use of land. The lease premium paid by the assessee to CIDCO for acquiring leasehold land is capital expenditure to acquire capital asset and not for the use of land. Thus, it is held that the lease premium paid by the assessee for acquiring leasehold land with a right to develop and market, NMSEZ, cannot be said to be an advance payment of rent. Accordingly, premium paid by the assessee for acquiring leasehold land under the lease deed(s) entered into, although with restrictive covenants is a capital expenditure, and it does not fall within the ambit of rent under section 194-I of the Act. Hence, the provisions of section 194I to deduct TDS on the lease premium paid by the assessee is not attracted and CIT (A) has rightly deleted the demand raised by the AO u/s 201(1) and 201(1A).
Facts of the
case
Assessee
paid lease premium to CIDCO in order to acquire
various lands lying at Navi Mumbai on lease basis. By virtue of said lease
deed(s), assessee had acquired leasehold rights in the land for the purpose of
developing, designing, planning, financing, marketing, developing necessary
infrastructure, providing necessary services, operating and maintaining
infrastructure administering and managing “SEZ”. Assessee had also acquired the
rights to determine, levy, collect, retain, utilize user charges fee for
provision of services and /or tariffs in accordance with terms and conditions
provided in the Development Agreement and the lease deed (s). Assessee had also
acquired sole rights for marketing of the NMSEZ and the Assessee
AO stated that no deduction of TDS had been made by assessee for any of such payments as lease premium fell within the ambit of section 194-I of the Act.
Assessee contended that pre-dominant objective for the payment of lease premium under lease deed(s) was acquisition of leasehold rights in the said land and not for the use of the land. That lease premium was the consideration for purchase of larger interest in the said leasehold land which comprised of a bundle of rights including but not limited to right of possession, right of long term enjoyment, right of development by way of construction of building thereon, right to sale constructed premises on ownership basis, right to collect and appropriate the sale proceeds etc. Rent as defined in section 194-I of the Act, envisaged such payments only for use of land or building, without there being any corresponding acquisition of larger rights in the said leasehold plots. Hence, the lease premium paid to CIDCO Ltd. for acquisition of leasehold land was clearly distinct from rent. The premium for transfer of land under lease will be taxable in the form of capital gain u/s 45 of the Act in the hands of the lessor.
AO did not agree with the submissions of assessee and stated that definition of “rent” creates a legal fiction, whereby almost anything and everything payment in relation to the property under lease transactions qualify for rent for the purposes of Section 194-I of the Act. There were various restrictive clauses in the lease agreement which negated the assessee’s contention that it had acquired rights in the land and not merely the rights to use the land. Therefore, the assessee had committed default within the meaning of section 201(1) and was also liable to pay interest u/s 201(1A) of the Act.
Before CIT (A) assessee further contended that under the provisions of the Income Tax Act, 1961, different treatment cannot be given to same payment under different sections of the Income- tax Act, 1961 i. e. in the hands of lessor as consideration taxable under the head Capital Gains u/s. 45, in the hands of lessee as Rent for the purpose of deduction of tax u/s 194-I. The basic motive for making payment of Lease Premium under the Lease Deed was towards transfer of larger interest/ right (leasehold right) by CIDCO to us in the said leasehold plots arid not just for its use as envisaged u/s 194-I. Assessee also referred clauses (v) and (vi) of sub-section (47) of section 2 and section 269UA(d) and stated that lease of land is considered as an immovable property and the lease premium paid to CIDCO was consideration for transfer of immovable property which is taxable u/s 45.
CIT (A) asked for a remand report from AO in reply to which assessee contended that the amended definition of “rent” contained in section 194-I of the Act w.e.f. 13.7.2007 is very wide and comprehensive and covers “any payment by whatever name called under any lease, sub-lease, tenancy or other agreement or arrangement” and leaves no scope for any interpretation. That all the payments under the lease by whatever name called are rent within the meaning of section 194-I. One has to look at substance and not the form of the transaction while considering the provision of law. It is not necessary that capital expenditure in the hands of one party is also a capital receipt in the hands of other party. The lease agreement signed by CIDCO with the assessee contains various restrictive covenants which do not give any absolute right to the land but reduced it to a rental arrangement for use of the land.
CIT (A) observed that CIDCO was required to undertake all the development work, provide necessary infrastructure on behalf of the government and dispose-off the land, residential, commercial arid social structures and collect service charges etc. As per a resolution CIDCO was appointed the nodal agency for setting up a Special Economic Zone. The appellant company has been jointly promoted as a Special Purpose Vehicle (SPV) by CIDCO and Dronaqiri 'Infrastructure Pvt Limited (DIPL) to develop and operate SEZ. As per Development Agreement, the appellant is required to make payment of lease premium in respect of the land which is being acquired by CIDCO. Appellant is authorized to develop and market the NMSEZ. By virtue of the said lease deed(s), the appellant has acquired leasehold right in the land for the purpose of developing, designing, planning, financing, marketing, developing necessary infrastructure, providing necessary services, operating and maintaining the infrastructure, administering and managing the SEZ. The appellant also has acquired the rights to determine, levy, collect. retain and utilize the user charges, fees for provision of services and / or tariffs in accordance with the terms land conditions provided in the Development Agreement and the lease deed(s). Appellant is also entitled to grant sub-leases. The lease deed(s) also grant the appellant power to assign its rights, title or interest or create a security interest in respect of its rights, either fully or in parts thereof in favour of the lenders including granting of step-in rights in the event of default.
CIT (A) held that section 194I requires that a person who is responsible for paying to a resident come by way of rent" "for the use of" land etc. shall at the time of credit or payment of such income deduct tax at source at required rate. Although this meaning is very wide so as to include all types of transactions which fall in this category, still the legislature has intentionally included the words "for the use of' so that the meaning of the rent" is not interpreted beyond its meaning in common parlance. The word "use" here is therefore of utmost importance in any transaction where the consideration paid for the property would be termed as 'rent'. If the word 'use' was also meant to include exploitation of Property by changing its identity/ shape and then selling it off, there would be no difference between a sale transaction and a transaction akin to the transaction between a landlord and a tenant so far as above TDS provisions of section 194-I, are concerned. Although the meaning of term 'rent' used in the above section is very wide, still cannot be applied to all and any of the transactions out of context indiscriminately. If the tenant/ lessee/ licensee of the property uses the property for his own purpose or employs it for his own benefit, the consideration paid would be 'rent'. However, if the property is exploited in a manner that its identity does not remain the same and thereafter it is sold for a profit, I'm afraid, it would not be called 'use' of property by the tenant; rather it would be exploitation of the property by virtue of certain rights, which would be over and above the rights of a tenant. The amount charged by the CIDCO as lease premium has no connection with the rental value of land. Thus, the whole transaction towards grant of leasehold rights to the appellant is nothing but a transaction of transfer of property. Section 105 of the Transfer of Property Act defines the term lease as "A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who, accepts the transfer on such terms. The distinction between a price paid for a transfer of right to enjoy the property and the rent to be paid periodically to the lessor When the interest of the lessor is parted with for a price, the price paid is premium or salami. If the lease premium was in the nature of advance rent, then, if for any reason the lease is terminated earlier than the prescribed period, the advance rent would have to ble refunded. However, in the case of appellant, the lease deed does not prove for any refund of lease premium. Various clauses of lease agreement are standard regulatory clauses which do not affect leasehold right of the assessee in any manner. They are only regulatory in nature and are meant for the purpose of proper development of the area. Hence the amount paid by the assessee is lease premium for acquiring leasehold rights in respect of lease land and the same is not in the nature of rent as contemplated u/s 194-I of the Act.
After hearing both the parties, the ITAT held that,
++ the development agreement have assigned to the assessee leasehold right which includes bundle of rights. The Assessee has paid the premium for lease deed(s) for the demised land to acquire entire rights of the land for a period of 60 years. Therefore, we are of the considered view that the said payment of lease premium is a payment for acquisition of leasehold land and not merely for use of land. The assessee has made payment for entering into lease agreements to acquire lease hold rights in the land for a period of 60 years and not under a lease;
++ the assessee has paid lease premium to acquire the demised leasehold land and there is no material on record that the said lease premium paid by the assessee is refundable to the assessee and/or is in the nature of advance rent or merely for use of land. The term “rent” though has been defined in section 194-I of the Act, but other terms like, lease, lease premium, lessor and lessee etc have not been defined under the Income Tax Act. CIT(A) has rightly stated in the impugned order that the meaning of these terms as provided in the Transfer of Property Act, 1882 have to be considered. The term lease is defined under section 105 of Transfer of Property Act, 1882 as "A lease of immoveable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who , accepts the transfer on such terms. In the case of lease price is called the premium, and the money, share, service or any other thing to be rendered is called the rent; the transferor is called lessor and the transferee is called lessee;
++ When the interest of the Lessor is parted with for a price, the price paid is called lease premium or salami. But the periodical payments made for the continuous enjoyment of the benefit under the lease are in the nature of rent. In the case of assessee, there is a transfer of substantive interest of lessor for the leasehold land in favour of the assessee. That there is a conferment of right on the lessee by acquiring leasehold land and the premium has been paid in lieu thereof and not for the purpose of use of land. The lease premium paid by the assessee to CIDCO for acquiring leasehold land is capital expenditure to acquire capital asset and not for the use of land. Thus, it is held that the lease premium paid by the assessee for acquiring leasehold land with a right to develop and market, NMSEZ, cannot be said to be an advance payment of rent. Accordingly, premium paid by the assessee for acquiring leasehold land under the lease deed(s) entered into, although with restrictive covenants is a capital expenditure, and it does not fall within the ambit of rent under section 194-I of the Act. Hence, the provisions of section 194I to deduct TDS on the lease premium paid by the assessee is not attracted and CIT (A) has rightly deleted the demand raised by the AO u/s 201(1) and 201(1A).
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