Recently a circular was laid with TDS provisions of section 194-I of the Income-tax Act, 1961. According to that circular, Lump Sum lease premium or One time non-refundable upfront lease charges which can’t be adjusted against the predetermined rent payable on periodic interval for acquisition of land or any other tangible property on long-term leasehold basis can not be regarded as the payments in nature of rent within the meaning of section 194I of the act. Therefore, according to the circular TDS under Section 194I of the Act will not be applicable on such payments.
The brief definition of the circular is given belowThe circular came into force after CBDT examined whether or not TDS under section 194-I of the Income Tax Act is applicable on ‘lump sum lease premium’ or ‘one-time upfront lease charges” paid by an individual for acquiring land or any other form of property in the form of long-term leasehold rights.
The Section 194-I of Income Tax Act 1961 dealt with Tax Deduction at Source (TDS) in case of Rent or similar kind of perspective. It requires that TDS be deducted at the prescribed rates from payment of any income by the means of rent or any rental acquisition. Moreover, the term “rent” has been referred here as any kind of payment, by whatever name may be called, under any lease, sub-lease, tenancy or any other similar type of agreement or arrangement for the use of physical and tangible substances such as any land or building or machinery or plant or equipment or furniture or fittings.
But in this Section, it was not clarified whether TDS on a lump sum lease premium or one-time upfront lease charges will be applicable or not. For this understanding, a detailed examination was required by the Central Board of Direct Taxes authority.
For this examination purpose, CBDT took the facts of two cases in consideration.
Primarily, the case of The Indian Newspaper Society (ITA No. 918 & 920/2015) in which the Hon’ble Delhi High Court stated in its judgment that the lease premium paid by the society for acquiring a land on a long-term settlement of 80 years lease was considered in the form of capital expense. The court further ruled that this capital expense doesn’t come under Section 194-I of the IT Act.
The court explained this judgement as “since all the rights easements and appurtenances in respect of the said land were in effect transferred to the lessee for 80 years and since there was no provision in lease agreement for adjustment of premium amount paid against annual rent payable, the payment of lease premium was a capital expense not requiring deduction of tax at source under section 194-I of the Act.”Secondly, CBDT considered the case of Foxconn India Developer Limited (Tax Case Appeal No. 801/2013) in which the Hon’ble Chennai High Court ruled out that the prescribed payable non-refunadable amount considered as a one-time upfront lease charge for the acquisition of an immovable property for a long term of 99 years in the form of leasehold rights can’t be accepted as in any form of a payment of rent.
Secondly, CBDT considered the case of Foxconn India Developer Limited (Tax Case Appeal No. 801/2013 in which the Hon’ble Chennai High Court ruled out that the prescribed payable non-refundable amount considered as a one-time upfront lease charge for the acquisition of an immovable property for a long term of 99 years in the form of leasehold rights can’t be accepted as in any form of a payment of rent.
The court said that this one-time upfront lease charges ”could not be taken to constitute rental income in the hands of the lessor, obliging the lessee to deduct tax at source under section 194-I of the Act and that in such a situation the lease assumes the character of deemed sale”.The Hon’ble Chennai High Court has also professed a similar kind of judgment in another case related to Lease Premium issue.In the case of Tril Infopark Limited (Tax Case Appeal No. 882/2015) ruled out any possibility of TDS being deductible on payments of a lump sum amount as lease premium for acquiring a long-term lease of precisely 99 years.
The Hon’ble Chennai High Court has also professed a similar kind of judgment in another case related to Lease Premium issue.In the case of Tril Infopark Limited (Tax Case Appeal No. 882/2015) ruled out any possibility of TDS being deductible on payments of a lump sum amount as lease premium for acquiring a long-term lease of precisely 99 years.
So, considering all the above mentioned cases, where CBDT has accepted the judgements of the High Court authorities and also denied to file any further Special Leave Petition, it was made clear with the Circular No.35/2016 by latest on October 13th, 2016 that No TDS will be applicable on Lump Sum Lease Premium or One-time upfront lease charge paid for Acquisition of a long term lease of any property or any of the above listed substances.
