Payment of one time lease premium to acquire a leasehold land isn't subject to tax deduction under sec. 194-I

Where payment of lease premium was not be made on periodical basis but it was one time payment to acquire land with right to construct a commercial complex thereon, section 194-I had no application on deposit of such lease premium

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[2013] 37 taxmann.com 401 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'H'

Income-tax Officer

v.

Indian Newspapers Society*

J.S. REDDY, ACCOUNTANT MEMBER 
AND CHANDRA MOHAN GARG, JUDICIAL MEMBER

IT APPEAL NOS. 5207 & 5208 (DELHI) OF 2012
[ASSESSMENT YEARS 2007-08 & 2009-10]

JUNE  20, 2013 

Section 194-I, read with section 201, of the Income-tax Act, 1961 - Deduction of tax at source - Rent [Lease premium] - Assessment years 2008-09 and 2010-11 - Mumbai Development Authority leased out land in question to assessee for a period of 80 years for a consideration comprising lease premium of a sum - Assessing Officer held that provisions of section 194-I was applicable on such lease payment - Commissioner (Appeals) having found that such payment was not an advance rent but was a lease payment in nature of capital expenditure, held that such payment did not fall within ambit of section 194-I - Whether since payment of lease premium was not to be made on periodical basis but it was one time payment to acquire land with right to construct a commercial complex thereon, section 194-I was not applicable - Held, yes [Para 13] [In favour of assessee]

FACTS

■		The assessee was offered certain land on lease for a period of 80 years by the Mumbai Development Authority for a consideration comprising lease premium of a sum. Said premium was paid in two instalments. Subsequently the assessee entered into a development agreement with a builder to develop this land.
■		The Assessing Officer held that the assessee was liable to deduct tax at source on lease premium under section 194-I and accordingly treated the assessee as assessee-in-default under section 201.
■		The Commissioner (Appeals) having found that such lease premium was paid once and same was paid prior to date of lease agreement held that such payment being a capital expenditure did not fall with section 194-I, and, consequently, the assessee was not liable to deduct tax at source.
■		On appeal:

HELD

■

The Commissioner (Appeals) has also dealt with other cases pertaining to the land leased by the Mumbai Metropolitan Regional Development Authority in the same or adjoining area and has held that the impugned deposit of lease premium does not constitute advance rent but is a lease premium for acquiring land with the right to construct a commercial building although with certain restrictions, but it is capital expenditure not falling within the ambit of section 194-I. Further payment of lease premium was not to be made on periodical basis but it was one-time payment to acquire the land with right to construct a commercial complex thereon and the lease premium was paid to the Mumbai Metropolitan Regional Development Authority in four instalments, therefore, there was no valid reason to interfere with the findings of the Commissioner (Appeals). [Para 13]

CASES REFERRED TO

Hope Textiles Ltd. v. Union of India [1994] 205 ITR 508/73 Taxman 188 (SC) (para 8), CIT v. Reebok India Co. [2007] 291 ITR 455/163 Taxman 61 (Delhi) (para 11), Krishak Bharati Co-operative Ltd. v. Dy. CIT [2013] 350 ITR 24/[2012] 23 taxmann.com 265/10 Taxman 123 (Delhi)(para 16)

Sanjeev M. Shah and Ramesh Vora for the Appellant. A.K. Mishra for the Respondent.

ORDER

Chandra Mohan Garg, Judicial Member - These appeals have been filed against the order of the Commissioner of Income-tax (Appeals)-XXX, New Delhi, dated July 27, 2012 in Appeal No. 312/2012-13 for the assessment year 2008-09 and Appeal No. 311/12-13 for the assessment year 2010-11, both dated July 27, 2012. It is pertinent to mention that the impugned orders have been passed deciding the appeals of the assessee which were filed against the order of the Assessing Officer under section 201(1)/201(1A) of the Income-tax Act, 1961 (for short, "the Act").

2. The main grounds raised by the Revenue in ITA No. 5207/D/2012 for the assessment year 2008-09 read as under :

"1.		On the facts and in the circumstances of the case as well as in law, the learned Commissioner of Income-tax (Appeals) has erred in treating the order passed under section 201(1)/201(1A) of the Income-tax Act as barred by limitation by ignoring the fact that the same was passed in order to give effect to the order of the hon'ble High Court of Mumbai.
2.		On the facts and in the circumstances of the case as well as in law, the learned Commissioner of Income-tax (Appeals) has erred in not appreciating that payment of Rs. 66,39,56,250 made by the assessee to the Mumbai Metropolitan Regional Development Authority is covered under the definition of 'rent' as per the provisions of section 194-I of the Income-tax Act.
3.		On the facts and in the circumstances of the case as well as in law, the learned Commissioner of Income-tax (Appeals) has erred in not treating the assessee-in-default within the meaning of section 201(1) of the Income-tax Act for non-deduction of TDS on payment of Rs. 66,39,56,250."

3. The main grounds raised by the Revenue in ITA No. 5208/D/2012 for the assessment year 2009-10 read as under :

"1.		On the facts and in the circumstances of the case as well as in law, the learned Commissioner of Income-tax (Appeals) has erred in not appreciating that payment of Rs. 65,80,59,700 made by the assessee to the Mumbai Metropolitan Regional Development Authority is covered under the definition of 'rent' as per the provisions of section 194-I of the Income-tax Act.
2.		On the facts and in the circumstances of the case as well as in law, the learned Commissioner of Income-tax (Appeals) has erred in not treating the assessee-in-default within the meaning of section 201(1) of the Income-tax Act for non deduction of TDS on payment of Rs. 65,80,59,700."

4. Briefly stated, the facts giving rise to these appeals are that the assessee is a non-profit-making company formed and registered under section 25 of the Companies Act, 1956 with the object of functioning as an apex organisation to protect the interest of press in India. The Mumbai Metropolitan Regional Development Authority (MMRDA) offered to the assessee's land situated at Bandra Kurla complex on lease for a period of 80 years to enable construction of office complex by the assessee in order to provide space at subsidised rates to the assessee's members, inter alia, for a consideration comprising lease premium of Rs. 88,52,75,000 which was paid on December 27, 2005 and February 18, 2008. The assessee entered into a development agreement dated February 14, 2008 with Orbit Enterprises to develop this land on the terms and conditions agreed upon in the agreement. Sub-sequently, the assessee executed a lease deed dated April 9, 2008 with the Mumbai Metropolitan Regional Development Authority commencing from April 1, 2008 postulating payment of annual rent of Re. 1 per sq. metre per annum which was calculated at Rs. 10,415 per year. The Mumbai Metropolitan Regional Development Authority subsequently granted floor space Index (FSI) to the assessee by virtue of which the assessee was enabled to build additional built-up area of 20,830 sq. mtr. on the commercial building already sanctioned for the assessee. The Revenue carried out a survey under section 133A of the Act on the premises of the Mumbai Metropolitan Regional Development Authority to verify tax deduction at source compliance.

5. Subsequently, the Income-tax Officer (TDS)-3(4), Mumbai, wrote a letter dated March 16, 2011 to the assessee addressed to the Mumbai address as to why the TDS has not been deducted on the lease premium payments to the Mumbai Metropolitan Regional Development Authority. In response, the assessee, vide its letter dated March 29, 2011 challenged the jurisdiction of the Mumbai TDS Officer and explained that the lease premium cannot be subjected to tax deduction at source under section 194-I of the Act. The Mumbai TDS Officer, vide its order dated March 29, 2011 for the assessment year 2008-09 held that the assessee is in default under section 201(1A) of the Act read with section 194-I of the Act. Subsequently, this order was quashed by the High Court of Bombay and the issue was left open for the appropriate competent authority to initiate TDS proceedings keeping in view the law of limitation. Later, the Income-tax Officer (TDS)- 50(1), Delhi, issued a notice dated February 9, 2012 in respect of proceedings under section 201/201(1A) calling for details and documents in relation to the assessment year 2010-11. In reply, it was argued on behalf of the assessee that it was not exigible to deduct tax at source under section 194-I on the lease premium paid to the Mumbai Metropolitan Regional Development Authority and consequently, the assessee cannot be deemed as assessee-in-default. The TDS Officer vide order dated March 30, 2012 rejected all the contentions of the assessee and proceeded to saddle the demand of Rs. 8,39,81,641 under section 201(1) of the Act, Rs. 6,58,05,970 and under section 201(1A) of Rs. 1,81,75,671, respectively.

6. Being aggrieved by the above order of the Assessing Officer, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) which was partly allowed. Now the Revenue is before this Tribunal with the grounds as mentioned hereinabove.

Ground No. 1 of ITA No. 5207/Del/2012

7. Apropos ground No. 1, the learned Departmental representative submitted that the Commissioner of Income-tax (Appeals) has erred in treating the order passed by the Assessing Officer/TDS Officer under section 201(1)/201(1A) of the Act as barred by limitation by ignoring the fact that the same was passed in order to give effect to the order of the hon'ble High Court of Bombay. Replying to the above, learned counsel for the assessee submitted that the assessee's case falls within the ambit of section 201(3)(i) of the Act which prescribes deadline of two years from the end of the financial year in which the tax at source return was furnished by the assessee. The return for the last quarter ended on March 31, 2008 was filed on June 13, 2008 (paper book pages 287 and 291), i.e., the financial year 2008- 09 and if two years are further calculated from March 31, 2009, the same period would end on March 31, 2011. Counsel further submitted that the impugned order of the TDS Officer was passed on March 29, 2012, hence it was barred by a period of limitation as per the above provisions of the Act which cannot be extended by the courts. In this regard, counsel for the assessee has placed his reliance on the judgment in the case of Hope Textiles Ltd. v. Union of India [1994] 205 ITR 508/73 Taxman 188 (SC).

8. From the impugned order we observe that the Commissioner of Income-tax (Appeals) has decided the issue in favour of the assessee which reads as under :

"I have considered the Assessing Officer's impugned order, arguments of the appellant and the provisions of section 201. It is undisputed that the statement envisaged in section 200 for the last quarter of the financial year 2007-08, i.e., March 31, 2008 was lodged on June 13, 2008 implying the financial year 2008-09 and thus there can be no doubt that clause (i) of section 201(3) would apply to the facts and circumstances of the appellant. In the premises, the period of limitation of two years shall run from April 1, 2009 and end on March 31, 2011, whereas the impugned order has been passed on March 29, 2012 well beyond the cut-off date. Therefore, I have no hesitation in holding that the impugned order is barred by the period of limitation as per in section 201(3)(i). I concur with the submission of the appellant that Bombay High Court's order dated November 9, 2011 cannot be construed as extending the period of limitation inasmuch as the apex court in the pronouncement quoted supra has categorically laid down that the judiciary is not competent to extend the statutory prescribed period of limitation. The Assessing Officer's reliance on clause (ii) of sub-section (3) of section 201 and on clause (ii) of the Explanation to section 153 is of no avail of and cannot assist the Assessing Officer to save the impugned order from the taint of crossing the period of limitation. In the result, I allow the plea of limitation raised by the appellant and therefore, ground Nos. 2 and 3 are allowed."

9. After careful consideration of the contentions and submissions of both parties in this regard, at the outset, we observe that as per facts recorded by the Commissioner of Income-tax (Appeals), the hon'ble High Court of Mumbai quashed the order of the TDS Officer, Mumbai, leaving the issue open for appropriate competent authority to initiate TDS proceedings. The Departmental representative appearing for the Revenue has not disputed the point that the hon'ble High Court of Mumbai left the issue open for the appropriate competent authority to initiate TDS proceedings, keeping in view the law of limitation, meaning thereby that the hon'ble High Court of Mumbai simply quashed the order of the TDS Officer, Mumbai, perhaps on the ground of jurisdiction and the issue was left to be decided by the competent authority but the period of limitation has to be taken from the relevant provisions of the Act which cannot be extended by judicial pronouncements. On careful perusal of the relevant para of the impugned order, we observe that the Commissioner of Income-tax (Appeals) has dealt with the issue of limitation as per the relevant provisions of the Act and rightly held that the order was passed by crossing the period of limitation as prescribed by the Act. Accordingly, ground No. 1 of ITA No. 5207/ D/2012 is dismissed.

Ground No. 2 of ITA No. 5207/D/12 and ground No. 1 of ITA No. 5208/ D/12

10. Apropos these grounds, the Departmental representative submitted that the Commissioner of Income-tax (Appeals) has grossly erred in not appreciating that the payment made by the assessee in the respective assessment years to the Mumbai Metropolitan Regional Development Authority was covered under the definition of "rent" as per the provisions of section 194-I of the Act. The Departmental representative further submitted that the assessee has acquired land rights from the Mumbai Metropolitan Regional Development Authority which provided land to the assessee on lease basis on payment of lease premium. The Departmental representative also contended that the assessee-company was not holding full rights over the land as the agreement entered into between the Mumbai Metropolitan Regional Development Authority and the assessee-company was bearing some restrictive clauses which show that the Mumbai Metropolitan Regional Development Authority did not transfer all perpetual rights to the assessee in the land. The Departmental representative finally contended that in the case of CIT v. Reebok India Co. [2007] 291 ITR 455/163 Taxman 61 (Delhi), it was held that as per the facts and circumstances of the case, even a security deposit under lease agreement can be tantamount to advance rent, hence TDS deduction is required to be made.

11. After careful consideration of the above submissions, contentions and legal propositions of both the parties in the light of factual matrix of present case, we observe that it is argued on behalf of the assessee that the Mumbai Metropolitan Regional Development Authority in its computation of income has not included the lease premium received in computing the total income because it was further payable to the Government of Maharashtra. From the impugned order, we observe that the issue involved in this ground has been decided in favour of the assessee with following observations and findings :

"I have considered the written submission of authorised representative's and gone through various arguments canvassed by learned counsel of the appellant as also taken into account the objections of the Assessing Officer as mentioned in the impugned order.

(i)		It is well-settled that premium and rent have distinct and separate connotations in law as enshrined in section 105 of the Transfer of Property Act, 1882. The essence of premium lies in that fact it is paid prior to the creation of the landlord and tenant relationship, that is, before the commencement of the tenancy and constitutes the very superstructure of the existence of that relationship. Its another vital characteristic is that it is a one-time non-recurring payment for transferring and purchasing the right to enjoy the benefits granted by the lessor resulting in conveyance of some of the rights, title and interest in the property out of such a bundle of rights.
(ii)		In the appellant's case, the premium of Rs. 88,52,75,000 has been paid in two instalments on December 27, 2005 (Rs.22,13,18,750) and February 18, 2008 (Rs. 66,39,56,250) to the Mumbai Metropolitan Regional Development Authority in respect of the Bandra land and as per the lease agreement dated April 9, 2008 read with the possession receipt dated April 10, 2008 issued by the Mumbai Metropolitan Regional Development Authority the lease starts from April 9, 2008 and hence the payment of Rs. 88,52,75,000 is before the initiation of the tenancy relationship between the appellant and the Mumbai Metropolitan Regional Development Authority and consequently, a cardinal ingredient of premium as advocated in the case law cited supra is satisfied.
(iii)		Moreover, the payment Rs. 88,52,75,000 is made only once for all by the appellant since there is no other further payment apart from Rs. 88,52,75,000 which can be attributed to bringing into existence the foregoing landlord and tenant relationship between the appellant and the Mumbai Metropolitan Regional Development Authority.
(iv)		Furthermore, the receipts dated December 27, 2005 and February 18, 2008 pertaining to the payment of Rs. 88,52,75,000 contain the description that the payment is on account of lease premium and not rent and there is no provision either in lease agreement dated April 9, 2008 or any other document for adjustment of the aforementioned premium amount against the annual rent Rs. 10,415 payable by the appellant to the Mumbai Metropolitan Regional Development Authority de hors the premium.
(v)		The development agreement dated February 14, 2008 entered into by the appellant with Orbit Enterprises transfers development rights to the latter on the terms and conditions set out therein which would not have been possible, but for the substantive rights, interest and title enjoyed by the appellant in the Bandra land in consideration of Rs. 88,52,75,000 disbursed to the Mumbai Metropolitan Regional Development Authority.
(vi)		In addition, clause 1 of the operative portion of the lease agreement dated April 9, 2008 read with the recitals thereof unequivocally covenants that in consideration of the payment of Rs.88,52,75,000 by the appellant, the Mumbai Metropolitan Regional Development Authority, the lessor, demises the Bandra plot to the appellant together with all the rights, easements and appurtenances and the like for 80 years commencing from April 9, 2008. In light of the above discussion read with the lease agreement dated April 9, 2008, the conclusion is irresistible that the appellant by tendering the amount Rs. 88,52,75,000 acquired the right, title and interest in the Bandra land demised by the Mumbai Metropolitan Regional Development Authority, the lessor.

In the result, I hold that all the yardsticks as judicially held in the foregoing rulings relied upon by learned counsel for terming the sum of Rs. 88,52,75,000 as lease premium are fulfilled in the appellant's case.

Moreover, in A.R. Krishnamurthy v. CIT [1989] 176 ITR 417 (SC), the transfer of leasehold rights even for temporary period of 10 years has been held to give rise to chargeable capital gains where the apex court followed its earlier decision in R.K. Palshikar(HUF) v. CIT [1988] 172 ITR 311 (SC) where the lease for 99 years was concluded to be of an enduring nature. Similar view has been upheld in Joint CIT v. Mukund Ltd. [2007] 291 ITR (AT) 249 (Mum) [SB], CIT v. International Housing Complex (Ker) bearing ITA No. 770 of 2009 which was converse case where the assessee offered the lease premium received for 99 years as rental income in each year, but the Revenue assessed the same as capital gains which was ratified by the High Court. The abovementioned view has been approved by the jurisdictional Delhi High Court in Krishak Bharati Co-operative Ltd. v. Dy. CIT [2013] 350 ITR 24 (Delhi) decided on July 12, 2012 to which my attention was drawn by learned counsel vide letter dated July 23, 2012 enclosing the copy of the same. Thus in conformity with the consistent stand of the judiciary including the latest pronouncement of the jurisdictional High Court, in my view, undoubtedly premium in relation to leased land is a payment on capital account not liable to be classified as revenue outgoing and I hold accordingly. On the facts and circumstances of the present case, even the Revenue in its affidavit in reply dated September 14, 2011 filed in the Bombay High Court in Writ Petition No. 1504 of 2011 (Indian Newspaper Society v. ITO (TDS) [2011] 339 ITR 365 (Bom.) instituted by the appellant has accepted that the Mumbai Metropolitan Regional Development Authority has construed the receipt of premium as a capital receipt not exigible to tax and the Assessing Officer (TDS), Delhi cannot now approbate and reprobate, on the above issue.

In Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC), the Supreme Court held that the onus is on the Revenue to demonstrate that premium has been camouflaged as advance rent and the Assessing Officer, in the instant case has not brought on record any material to indicate that the rent has been suppressed and the premium has been inflated. In my opinion, to prove such a factual case of measly rent and enlarged premium where an arm of the Government is a party (Mumbai Metropolitan Regional Development Authority) to the lease agreement, the burden would be very heavy and onerous. Such a state of affairs cannot be presumed without cogent evidence and the Assessing Officer has made no attempt to lead any such evidence whatsoever, much less to substantiate the same.

In that view of the matter, I hold that the impugned sum does not constitute advance rent, but lease premium for capital expenditure not falling within the operative realm of section 194-I of the Act. I am strengthened in my view by the orders passed by the Commissioner of Income-tax (Appeals)-14, Mumbai in favour of the assessee in the cases listed on page 9 above, copies of which are placed on record by the appellant wherein facts are identical and all the seven cases pertain to the land leased by the Mumbai Metropolitan Regional Development Authority in the same or adjoining area which is fortified by the plan appearing at pages 44 and 59 of the lease deed dated April 9, 2008 (G block-page 43 of the factual paper book.)"

12. In view of the above observations, we clearly observe that the Commissioner of Income-tax (Appeals) has also dealt with other cases pertaining to the land leased by the Mumbai Metropolitan Regional Development Authority in the same or adjoining area and has held that the impugned deposit of lease premium does not constitute advance rent but is a lease premium for acquiring land with the right to construct a commercial building although with certain restrictions, but it is capital expenditure not falling within the ambit of section 194-I of the Act. We also observe that the payment of lease premium was not to be made on periodical basis but it was one-time payment to acquire the land with right to construct a commercial complex thereon and the lease premium was paid to the Mumbai Metropolitan Regional Development Authority in four instalments, therefore, we are unable to see any perversity, infirmity or any other valid reason to interfere with the findings of the Commissioner of Income-tax (Appeals). Accordingly, this issue is decided in favour of the assessee by disposing ground No. 2 of ITA No. 5207/D/12 and ground No. 1 of ITA No.5208/D/12.

Ground No. 3 of ITA No. 5207/D/12 and ground No. 2 of ITA No. 5208/ D/12

13. Apropos these grounds, the Departmental representative submitted that the Commissioner of Income-tax (Appeals) has erred in not treating the assessee as an assessee-in-default within the meaning of section 201(1) of the Act for non-payment of TDS on payment made to the Mumbai Metropolitan Regional Development Authority. The Departmental representative further contended that as per section 201 of the Act where any person including the principal officer of a company who is required to deduct any sum in accordance with the provisions of this Act or referred to sub-section (1A) of section 192 of the Act being an employer does not deduct or does not pay or after deduction fails to pay the whole or in part of the tax as required by the Act, then such person shall, without prejudice to any other sections which he may incur, be deemed to be an assessee-in-default in respect of such taxes.

14. Replying to the above, counsel for the assessee submitted that the payment of lease premium was payment of capital expenditure and the payment was not liable for tax deduction at source by the payee, therefore, the assessee had no occasion to deduct tax at source and in this situation, the Assessing Officer/the TDS Officer wrongly held that the assessee was liable to deduct tax at source on payment of lease premium to the Mumbai Metropolitan Regional Development Authority. Counsel of the assessee vehemently submitted that when TDS was not required to be made, how can the assessee be held liable for default in not deducting TDS from the payment of lease rent paid to the Mumbai Metropolitan Regional Development Authority.

15. On a careful consideration of the rival submissions, we observe that as per section 194-I of the Act, any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate prescribed therein. Since in the present case, we have held that the lease premium paid by the assessee was capital in nature and was not rent, therefore, we are unable to approve the findings of the TDS Officer/the Assessing Officer that the assessee was liable to deduct TDS on payment of lease premium paid to the Mumbai Metropolitan Regional Development Authority. At this point, we place reliance on the judgment of the hon'ble jurisdictional High Court of Delhi in the case of Krishak Bharati Co-operative Ltd. v. Dy. CIT [2013] 350 ITR 24/[2012] 23 taxmann.com 265/10 Taxman 123, wherein their Lordships held that for premium on acquisition of leasehold rights in the land, lease for 90 years with substantial interest in the land, then lease premium constituted capital expenditure.

16. In view of the discussions made hereinabove, we are not in agreement with the findings of the Assessing Officer and we decline to hold that the Commissioner of Income-tax (Appeals) has erred in not treating the assessee as an assessee-in-default within the meaning of section 201(1) of the Income-tax Act for non-deduction of TDS on payment of lease premium to the Mumbai Metropolitan Regional Development Authority. At the cost of repetition, it is worthwhile to mention that for invoking the provisions of section 201(1) of the Act, it is a pre-condition that the person should be required to deduct any sum in accordance with the provisions of this Act and he does not deduct, or does not pay or after deduction fails to pay the whole or in part of the tax as required under the provisions of the Act, only then such person shall be deemed to be an assessee-in-default in respect of payment of such tax. In the case in hand, the assessee was not liable to deduct any tax on payment of lease premium to the Mumbai Metropolitan Regional Development Authority because it was capital expenditure to acquire land on lease with substantial right to construct a commercial building complex.

17. To sum up, we finally hold that the assessee was not liable to deduct tax at source from the payment made to the Mumbai Metropolitan Regional Development Authority as lease premium, therefore, the Commissioner of Income-tax (Appeals) rightly decided this issue in favour of the assessee and we have no reason to interfere with the findings of the Commissioner of Income-tax (Appeals) in this regard. Accordingly, ground No. 3 of ITA No. 5207/D/12 and ground No. 2 of ITA No. 5208/D/12 being devoid of merits are dismissed.

18. In the result, both the appeals of the Revenue are dismissed.