Case Digest: TDS from Rent under Section 194-I of the Income Tax Act

Section 194-I of the Income Tax Act deals with TDS from rent. Under this Section any person not being an individual or a Hindu Undivided family who is paying or who is responsible to pay any income by rent to a resident, have to deduct Tax Deducted at Source ( TDS )-

•  at the time of credit of such income to the account of the payee or
• At the time of payment in cash or by issue of cheque or draft or any other

Whichever is earlier at the given rate, that is: -

1.  two per cent for the use of any machinery or plant or equipment and
2. ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:

Exception:  no deduction shall be made where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed one hundred and eighty thousand rupees.

Individual or a Hindu undivided family, liable to deduct TDS

It is also provided that an individual or a Hindu undivided family shall be liable to deduct income tax , if their  total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid.

Exception:  if the income by way of rent has been credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust, no deduction shall be made.

Explanation

(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,

(a) land; or

(b) building (including factory building); or

(c) land appurtenant to a building (including factory building); or

(d) machinery; or

(e) plant; or

(f) equipment; or

(g) furniture; or

(h) fittings,

whether or not any or all of the above are owned by the payee;

(ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

Here are some important case laws on Section 194-I,

Payment of Lease Rentals on Annual basis would attract TDS u/s 194-I of Income Tax Act: ITAT-M/s. Ajnara India Ltd vs ITO CITATION: 2023 TAXSCAN (ITAT) 137

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the payment of lease rentals on an annual basis would attract TDS under section 194-I of the Income Tax Act, 1961.

A Coram comprising Shri N K Billaiya, Accountant Member and Ms Astha Chandra, Judicial Member viewed that the said payments attracted TDS liability under section 194-I of the Act and upheld the order of the CIT(A). The ITAT held that the assessee is liable for interest under section 201(1A) of the Income Tax Act and dismissed the appeal of the assessee.

Retainer Fee to Doctors not subject to TDS: Rajasthan HC-Commissioner Of Income Tax TDS vs Mewar Hospital Pvt Ltd- 2022 TAXSCAN (HC) 834

The Rajasthan High Court, while holding in favour of the assessee hospital, held that the retainer fee paid to the doctors, being not a professional service, shall not be subject to TDS under the provisions of section 194-I of the Income Tax Act, 1961.

Allowing the appeal of the assessee, Justice Sandeep Mehta and Justice Kuldeep Mathur observed that “Again same question came up for consideration in other decision of Karnataka High Court where after considering the judgement in Elbit Medical Diagnostics Ltd., the Court has come to the conclusion that retainer in service are professional service and issue was answered in favour of the assessee.”

ITAT upholds Disallowance due to Non-Payment of TDS on Hire Charges paid for Leasing Equipment-ThoughtWorks Technologies (India) Private Limited vs The Deputy Commissioner of Income-tax -2022 TAXSCAN (ITAT) 308

The Income Tax Appellate Tribunal (ITAT), Bangalore bench has confirmed the disallowance on ground of non-payment of TDS on hire charges paid for the leasing of equipment.

Aggrieved, the assessee preferred an appeal before the first appellate authority. The CIT(A) following his order for assessment year 2007-2008 in assessee’s own case, directed the Assessing Officer to verify whether there was violation of TDS provisions under section 194-I of the Income Tax Act and to make necessary disallowance under section 40(a)(ia) of the Income Tax Act.

 The Tribunal bench comprising Accountant Member Chandra Poojari and Judicial Member George George K found that the on perusal of the agreement between the assessee and First Leasing, it is clear that the actual owner of the leased asset is the lessor and First Leasing, the lessor, is entitled to claim depreciation.

No TDS applicable on Lease Financial Amount: Karnataka HC allows relief to Lease Financial Company-THE COMMISSIONER OF INCOME-TAX vs TEXAS INSTRUMENTS INDIA PVT. LTD-2021 TAXSCAN (HC) 394

The Karnataka High Court ruled that no deduction is required to be made in respect of the payments to lease financial companies on the lease financial amounts.

The Division Bench of Justices Satish Chandra Sharma and Suraj Govindaraj held that olding that there is no deduction required to be made either under Section 194-C or under Section 194-I of the Act in respect of the payments made to the lease financial company on the lease financial amounts paid to such company by the assessee. Therefore, there is no violation of the said provisions and Section 40(a)(i)/(ia) is not attracted to the present case.

Common Area Maintenance Charges not forming part of Actual Rent not Taxable as ‘House Property Income’: ITAT Kapoor Watch Company Pvt. Ltd. vs ACIT-CITATION: 2021 TAXSCAN (ITAT) 588

The Income Tax Appellate Tribunal (ITAT), Delhi Bench held that Common Area Maintenance Charges not forming part of Actual Rent not Taxable as ‘House Property Income’.

The dispute arose by revenue was that the assessee company should deduct TDS on payment made directly to operation/maintenance services providers under section 194I of the Act instead of Section 194C of the Act.

The coram consists of O.P. Kant and Suchitra Kamable, while allowing the appeal noted that the common area maintenance charges were not forming the part of the actual rent paid to the owner by the assessee company.

Payment for Acquisition of Leasehold Rights over an Immovable Property is not Rental Income, No TDS applicable: Madras High Court-M/s. Nagarjuna Oil Corporation Ltd. vs The Assistant Commissioner of Income Tax-CITATION:   2020 TAXSCAN (HC) 272

The Madras High Court while following its earlier decision held that the payment for the acquisition of leasehold rights over immovable property is not rental income, hence not liable for deduction of tax at source under Section 194-I of the Income Tax Act.

The Division Bench of Justice Vineet Kothari and Justice M.S. Ramesh while following its earlier decision allowed the appeal of the assessee and held that lump sum lease premium or one-time upfront lease charges, which are not adjustable against periodic rent, 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. Therefore, such payments are not liable for TDS under section 194-I of the Act.

No TDS on Rent If Accommodation Services were taken on Casual Basis: ITAT-Dadiba kali Pundole vs The Asst. Commissioner of Income Tax -CITATION:   2020 TAXSCAN (ITAT) 117

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that TDS cannot be deducted on the rent if the accommodation services were taken on a casual basis. The assessee, Dadiba kali Pundole Esplanade House is engaged in the business of auctioning fine and decorative arts, promoting, publishing, documenting, executing, and selling arts.

Therefore, the tribunal while setting aside the order passed by CIT(A) held that the Circular has very clearly mentioned that the provision of section 194(I) is applicable where the accommodation is taken on a regular basis, which means that a specific accommodation is earmarked to be let out for the specific period but in the present case the facts are different.

TDS u/s 194I must be Deducted by Tenant before remitting Rent: Allahabad High Court-The Commissioner Of Income Tax(Tds) vs Jaypee Sports International Ltd. CITATION: 2019 TAXSCAN (HC) 110

A two-judge bench of the Allahabad High Court has held that the TDS under Section 194I of the Income Tax Act, 1961 must be deducted by the tenant before remitting such rent.

The bench further noted the Apex Court decision in the case of New Okhla Industrial Development Authority (No.2) Versus Commissioner Of Income Tax (Appeals) And Others wherein it was held that the word ‘rent’ means any payment by whatever name called under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land and came to the conclusion that lease money or annual rent is rent within the meaning of section 194-I.

Payment of Wharfage Charges not subject to TDS: ITAT-M/s. Angre Port (P) Ltd. vs The Income Tax Officer-CITATION: 2019 TAXSCAN (ITAT) 107

The Pune bench of the Income Tax Appellate Tribunal (ITAT) has held that the payment of wharfage charges are not subject to TDS under section 196 of the Income Tax Act, 1961.

Before the Tribunal, the assessee claimed that the provisions of TDS would not be attracted in the case. The Revenue, on the other hand, contended that it is ‘rent’ as described in section 194-I of the Act.

“Wharfage charges are charged from the assessee and in such case, we hold that there is no use of land but even if it was held that there is any use of land, then the same was incidental but such payments could not be treated as ‘rent’ and the assessee be liable to deduct tax at source under section 194-I of the Income Act. The Wharfage charges paid by the assessee are to be allowed as a deduction under section 37(1) of the Act. The ground of appeal No.2.2 raised by the assessee is thus allowed,” the Tribunal said.

One-Time Non-Refundable Upfront Charges paid for Acquisition of Leasehold Right not subject to TDS: ITAT follows CBDT Circular-Paramount Villas Pvt. Ltd. vs ITO CITATION: 2018 TAXSCAN (ITAT) 108

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the one-time non-refundable upfront charges paid for the acquisition of the leasehold rights are not ‘rent’ for the purpose of TDS under Section 194I of the Income Tax Act, 1961.

The Tribunal further noted that the CBDT Circular No.35 of 2016 said that one-time non-refundable upfront charges paid by the assessee for acquisition of leasehold rights over an immovable property cannot be constituted as rental income and assessee is not obliged to deduct tax at source under section 194I.

No TDS on Premium paid for a limited period for Acquisition of Leasehold Rights: SC-M/S. NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY vs COMMISSIONER OF INCOME -CITATION:   2018 TAXSCAN (SC) 103

The Supreme Court last week held that the amounts paid as part of the lease premium or biannual or annual payments for a limited/specific period towards the acquisition of leasehold rights are not subject to TDS, as the same amount to capital payments.

Upholding the Delhi High Court order, the bench said that “the very basis of the circular has been knocked out by the amendments made by Finance Act, 2002. Thus, the Circular cannot be relied on by Noida/Greater Noida to contend that there is no requirement of deduction of tax at source under Section 194-I. Thus, deduction at source is on payment of rent under Section 194I, which is clearly the statutory liability of the respondent-company.”

‘Charges for Facilities provided’ to be considered to determine Rent, Not ‘Payment for Use of Land’: Uttarakhand HC-Commissioner of Income Tax vs M/s Indian Oil Corporation Ltd-CITATION: 2018 TAXSCAN (HC) 114

The Uttarakhand High Court while holding in favour of the assessee upheld the order of the Appellate Court to hold that in order to determine whether a payment is made towards ‘ Rent ’ or towards ‘carrying out any work’, the charges for facilities provided by the assessee and not the payment for use of land is to take into consideration.

The primary issue before the Court was that whether the assessee was liable to deduct TDS U/s 194-C (Payment made to Contractor) or U/s 194-I (Rent) of the Income Tax Act, 1961(IT Act) on the payment made by it to the carrier under the contracts for transporting the petroleum products in the respondent’s business and whether the ITAT was legally correct to hold that the assessee was liable to deduct TDS U/s 194-C and not U/s 194-I of the IT act.

Adjudicating in favour of the assessee, the Hon’ble Court held that the contracts in question read as a whole would fall within the four corners of Section 194-C.

Expenses in respect of Service Tax paid out of Rental Income is deductible from the Business Income: ITAT-The DCIT vs M/s. Chadha Builders & Properties CITATION: 2017 TAXSCAN (ITAT) 105

The Income Tax Appellate Tribunal (ITAT) recently ruled that the expenses in respect of service tax paid out of rental income is deductible under the head ‘Profit and Gains of Business or profession’ under the Income Tax Act, 1961 since the same was a genuine expense incurred by the assessee.

The bench considered the fact that the assessee has paid service tax as it was not recovered from the tenant and filed service tax return with the Central Government. “Therefore, it is a genuine expense and must be allowed as a deduction.”

No TDS when Assessee waived Deduction on Expenditure & has made suo motu disallowance u/s 40(a)(ia): Mumbai ITAT -Destimoney Enterprises Limited vs Income Tax Officer-TDS-CITATION: 2017 TAXSCAN (ITAT) 106

The Mumbai Income Tax Appellate Tribunal, in an appeal filed by M/s Destimoney Enterprises Limited, has held that the provisions relating to tax deduction at source is not applicable when the assessee itself has not claimed deduction on expenditure and and has suo moto made disallowance under Section 40(a)(ia) of the Income Tax Act, 1961.

Allowing the appeal, the bench observed that “in our considered view the provision of TDS are not applicable where there is no claim of expenditure made by the assessee and assessee has made suo motu disallowance under Section 40(a)(ia) of the Income Tax Act. We find merit in the contentions of the assessee that the assessee has already made suo motto disallowance under Section 40(a)(ia) of the Act at the time of filing the return of income and paid income tax accordingly without claiming any expenditure of lease rental on the ground that the provisions were of contingent nature and were never ever paid. We therefore are inclined to set aside the order of the FAA and hold that the provisions of section 194-I of the Act are not applicable where the assessee has not claimed the deduction of the expenses by suo motu making the disallowance u/s 40(a)(ia) of the Income Tax Act.”

Payment by ITC Ltd to Airport Authority of India for Use of Lounge Premises is ‘Rent’: Delhi HC-COMMISSIONER OF INCOME TAX vs I.T.C. LIMITED CITATION:   2018 TAXSCAN (HC) 105

A division bench of the Delhi High Court in CIT v. ITC Ltd, held that the payment of royalty made by the Assessee to the Airport Authority of India (AAI) for the use of lounge premises under the Licence Agreement would constitute ‘rent’ within the meaning of Section 194-I of the Income Tax Act and therefore, assessee is liable to deduct tax at source.

The bench relied on the decision in the case of Japan Airlines Co. Limited v. CIT and noted that in the present case, the payment for the use of space is inseparable from the payment of royalty for the right to operate the lounge. It therefore concluded that the payment of the sum by the Assessee to the AAI under the LA falls within the expanded definition of ‘rent’ under Section 194-I of the Act. “The certificate issued by the AAI stating that the payment of licence fee for the space is different from the payment of royalty will not make a difference to the legal position as regards Section 194 I of the Act”, it said.

Supreme Court puts on hold Income Tax dept’s move to apply TDS provisions on ‘Hotel Rent’-FEDERATION OF HOTEL AND RESTAURANT ASSOCIATION OF INDIA & ORS. vs UNION OF INDIA & ORS. CITATION:   2016 TAXSCAN (SC) 102

The Supreme Court, today stayed the Income Tax Department’s decision to levy 20% Tax on Hotel room tariffs as per 1995 and 2002 circulars. The circular in 1995 was amended by the Department in the year 2002 to include clarifications regarding the applicability of TDS provisions on hotel rent paid by the customers. The action was taken by the Apex Court in an appeal preferred by the Federation of Hotel and Restaurant Association of India.

Earlier, the Delhi High Court and the Madras High Court dismissed the petition filed by different hotel associations on the same issue. The Delhi High Court, in a petition filed by the Federation of Indian Hotel, observed that the services provided by the hoteliers including room charges, are subject to TDS provisions since the same falls within the definition of the term “rent” under section 194-I of the Income Tax Act, 1961. As pointed out by the Court, TDS provisions are applicable to every hoteliers and the burden to prove that they are outside the ambit of section 194-I, will be on the concerned hotel. The present appeal is against the same order contending that the room charges paid by the Customers are not subject to TDS since it is not covered under section 194-I of the Act.

Rent paid to Charitable Trust registered u/s 12AA is not liable to TDS: ITAT Kolkata-Martin Burn Limited vs Income Tax Officer CITATION:   2016 TAXSCAN (ITAT) 101

In a recent ruling, the Kolkata bench of Income Tax Appellate Tribunal opined that the amount of rent paid to a charitable trust which is duly registered under s. 12AA of the Income Tax Act, 1961 is not deductible at source since it cannot be included in the total income of the Trust. The Tribunal was deciding an appeal filed by the assessee by challenging the disallowance of Rs.37,98,048/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 40(a)(ia) on account of assessee’s failure to deduct tax at source from the rent paid to Calcutta Port Trust.

The Tribunal, by applying the ration of the above decision in the present case held that the disallowance made by the Assessing Officer under section 40(a)(ia) and confirmed by the ld. CIT(Appeals) on account of rent paid to Calcutta Port Trust Is liable to be deleted.

No TDS for lease premium to acquire leasehold rights; ITAT Mumbai-Income Tax Officer vs Mr. Vikram Singh Shah Counsel for Appellant:   Shri Mukundraj M Chate Counsel for Respondent:   Shri Devendra Jain CITATION:   2016 TAXSCAN (ITAT) 102

The Mumbai bench of Income Tax Appellate Tribunal has held that TDS is not mandatory for lease premium paid by the assessee to CIDCO to acquire leasehold rights for 60 years under the lease deed. The respondent/assessee has paid lease premium to the City and Industrial Development Corporation of Maharashtra Ltd. (CIDCO) but no tax was deducted at source u/s 194I of the Act on payment of lease premium to CIDCO by the assessee.

Citing bunch of decisions, the Tribunal has also observed that, the assessee cannot be held as an assessee in default u/s 201/201(1A) of the Income Tax Act and dismissed the appeal filed by the revenue.

TDS cannot levy from one time non-refundable upfront payment; Madras High Court

The Division Bench of Madras High Court recently delivered a landmark judgement in M/s.Foxconn India Developer (P) Ltd v. ITO, Chennai held that, TDS cannot be levied from one time non-refundable upfront payment for the acquisition of leasehold rights over an immovable property.

The Court also observed that, the upfront payment made by the assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor, obliging the lessor to deduct tax at source under Section 194-I of the Income Tax Act, 1961.

Delhi HC brings “Hotel Industries” under the ambit of S. 194-I of the Income Tax Act, 1961

The High Court of Delhi, in a path-breaking judgement, held that S. 194-I of the Income Tax Act applies to hotel industries also. The Bench consists of S. Muralidhar .J and Vibhu Bakhru .J expressed a view that the charges for a room in a hotel is “rent” according to the provision and therefore, section 194-I covers the rent received by the hotel industries.

The Court further upheld the validity of the Circulars which were challenged by the petitioners since these notifications helps to clarify the scope and ambit of section 194-I. it was further opined by the Court that the question whether the payment made by the customers to the hotel includes any payment that can be said to be outside the ambit of ‘rent’ as defined under Section 194-I of the Act is very much depends on the facts and circumstances of the case.

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