Friday, 24 February 2017

Amounts paid as part of lease premium towards acquisition of leasehold rights, were not 'rents' warranting obligation u/s 194-I

 THE ISSUE IS - Whether amounts paid as part of lease premium in terms of the time-schedules to the Lease Deeds executed between a builder and an industrial township, can be subjected to TDS being capital payments. No is the verdict.


Facts of the case:
The assessees are engaged in developing, constructing and selling residential units, plots and flats. Each of them entered into a long-term 90 years lease with the Greater Noida Industrial Development Authority (GNOIDA) for development and sale of land in various housing colonies. 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. Along with the lease premium, each lease deed contained stipulation that interest payments would also be made to the lessor/authority. In all these cases, the assessees 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. The Revenue was prima facie of the opinion that these interest amounts resulted in income in the hands of the authority which was facially taxable and that the failure of the assessees, in deducting amounts mandated under Section 194-I was without legal foundation. The assessees were served with notices by the income tax authorities u/s 201 /201 (1A) for such 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. Later, the AO issued further notice of demands for other periods u/s 221(1). In these circumstances, assessees approached this court for appropriate relief, contending that the GNOIDA's position on this issue was that amounts payable to it could not be subjected to tax deduction, since it was a "local authority".
On appeal, the HC held that,
++ in the present case, the Governor of Uttar Pradesh notified GNOIDA as an industrial township by notification dated Dec 24, 2001. This notification supports the Revenue's contention that the GNOIDA is not a municipality and therefore, did not fall within the description of a municipality u/s 10(20) to exempt it from the provisions of Section 194-I. Article 243P clearly states that municipalities are units of self-governance; they are defined under Article 243Q. As to what is meant by self governance is not left to the imagination. Thus, 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 "each Municipal area shall be divided into territorial constituencies to be known as ward." In the case of GNOIDA, this essential characteristic is absent. 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. 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. 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 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." 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 lessees. A direction to that effect is given to the GNOIDA to ensure compliance; the Revenue is consequently directed not to pursue coercive and penal proceedings against assessees u/s 201/221 of Income Tax Act;
++ so far as the other issue, pertaining to TDS in respect of interest payments received by GNOIDA is concerned, the provision in question is Section 194A of the Income Tax Act. The question here is whether GNOIDA is an institution of the kind covered by Section 194A(3)(f). GNOIDA relies on the notification issued by the Central Government, which specifies that "Any Corporation established by a Central, State or Provincial Act" would be entitled to exemption. Section 3 (i) of the UPIDA states that "The State Government may, by notification, constitute for the purpose of this Act, an Authority to be called, industrial development authority, for any industrial development area." The UP Government established various industrial development authorities with the name of the area, such as, GNOIDA Authority, and others in connection with different cities. The notification and the provision (Section 194A (3)) had been interpreted by the Income Tax Appellate Tribunal in the context of payments made by a Bank to the Ghaziabad Development Authority. In the said judgment of Canara Bank v Department of Income Tax, the ITAT held that: "....the payment of interest by banks to the State Industrial Development Authorities does not require any deduction of tax at source in terms of section 194A (3) (iii) (f) and, hence, the failure to deduct tax at source on such interest cannot lead to the banks being treated as assessee in default....". 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 that: (1) 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; (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 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 is satisfied.

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