2025 (5) TMI 2136 - HC - Income Tax

TDS u/s 194C OR 194I - Short deduction of TDS - CAM charges -HELD THAT - CAM charges are essentially maintenance charges paid by a unit for proper maintenance of the common area. The said charges are contributed towards expenditure ON cleanliness utilities and maintenance. These charges are shared expenses for common works and utilities. The said charges cannot by any stretch be construed as payment of rent for occupying the premises in question. The fundamental premise that CAM charges are by their nature lease rentals or license charges is erroneous. Thus the orders passed by the CIT(A) and the AO have rightly been set aside by the ITAT.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Court was whether Common Area Maintenance (CAM) charges paid by tenants/licensees to mall owners constitute "rent" under Section 194-I of the Income Tax Act, 1961, thereby mandating tax deduction at source (TDS) at 10%, or whether such payments fall within the ambit of "work" under Section 194-C of the Act, attracting TDS at 2%. Specifically, the Court examined the correctness of the Income Tax Appellate Tribunal's (ITAT) order deleting the demand raised by the Assessing Officer (AO) for short deduction of TDS under Section 194-I and the consequential interest under Section 201(1A). The issue arose in the context of CAM charges deducted and deposited at 2% TDS under Section 194-C, while the AO contended that the correct TDS rate should have been 10% under Section 194-I.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Whether CAM charges are "rent" under Section 194-I or payments for "work" under Section 194-C of the Income Tax Act, 1961.

Relevant Legal Framework and Precedents: Section 194-I mandates TDS on payments by way of rent, defined to include payments for the use of land, building, machinery, plant, or equipment. Section 194-C requires TDS on payments to contractors for carrying out any work, including supply of labor. The distinction between these provisions is critical as the TDS rates differ substantially (10% under 194-I versus 2% under 194-C).

Precedentially, a coordinate Bench of the ITAT in ITA No. 504/Del/2020 had considered an identical issue involving CAM charges paid to Ambience Group malls. The Tribunal held that CAM charges are not rent but payments for maintenance services, thus falling within the scope of "work" under Section 194-C. This view was supported by the ITAT's decision in Kapoor Watch Company P. Ltd. vs. ACIT (ITA No. 889/Del/2020), where it was observed that CAM charges are contractual payments for services related to common area maintenance and not for use of premises.

Court's Interpretation and Reasoning: The Court analyzed the nature of CAM charges, emphasizing that these are payments made by tenants/licensees towards maintenance of common areas, including cleanliness, utilities, and upkeep. These charges are shared expenses for common services and facilities and do not represent payments for the use or occupation of premises. The Court found the AO's premise-that CAM charges constitute lease rentals or license fees-"erroneous."

The Court concurred with the ITAT's reasoning that the CAM charges are "completely dependent and separate from rental payments" and "fundamentally for availing common area maintenance services which may be provided by the landlord or any other agency." Consequently, these charges cannot be construed as "rent" as defined in Section 194-I.

The Court further noted the ITAT's view that CAM charges are payments "made for carrying out the work for maintenance of the common area/facilities that are available along with the lease premises," thus squarely falling within the definition of "work" under Section 194-C. The Court observed that the ITAT's decision was consistent with the facts and legal principles and that the AO's demand for TDS at 10% was therefore unsustainable.

Key Evidence and Findings: The factual matrix established that the Assessee deducted TDS at 2% on CAM charges and deposited the same. The AO's contrary view was based on the characterization of CAM charges as rent, leading to a demand for additional TDS at 10% and interest. The ITAT's detailed examination of the nature of CAM charges and reliance on earlier coordinate Bench decisions formed the factual and legal basis for deleting the demand.

Application of Law to Facts: The Court applied the definitions and scope of Sections 194-I and 194-C to the facts, concluding that the CAM charges do not constitute rent but are payments for work/services. Therefore, the TDS deducted at 2% under Section 194-C was appropriate, and the demand for higher TDS under Section 194-I was invalid.

Treatment of Competing Arguments: The Revenue's argument that CAM charges are part of rental activities and thus liable for TDS under Section 194-I was considered and rejected. The Court found the Revenue's contention to be based on a flawed premise, as CAM charges are distinct from rent and represent payment for maintenance services. The Court gave due weight to the ITAT's reasoning and precedent, which had carefully distinguished the nature of CAM charges from rent.

Conclusions: The Court upheld the ITAT's order deleting the demand for short deduction of TDS under Section 194-I and interest under Section 201(1A). It held that CAM charges are payments for work/services under Section 194-C and not rent under Section 194-I. Consequently, no further tax demand arose.

3. SIGNIFICANT HOLDINGS

The Court preserved the ITAT's legal reasoning verbatim, stating:

"In sum and substance, only the payments for use of premises/equipment is covered by Section 194-I of the Act. In our considered view, as the CAM charges are completely dependent and separate from rental payments, and are fundamentally for availing common area maintenance services which may be provided by the landlord or any other agency, therefore, the same cannot be brought within the scope and gamut of the definition of terminology 'rent'. On the other hand, we are of the considered view, that as the CAM charges are in the nature of a contractual payment made to a person for carrying out the work in lieu of a contract, therefore, the same would clearly fall within the meaning of 'work' as defined in Section 194C of the Act."

The Court established the core principle that payments made towards maintenance of common areas, which are shared expenses for services and utilities, do not constitute rent and are liable to TDS under Section 194-C, not Section 194-I.

Final determinations on the issue were that the AO's demand for additional TDS at 10% on CAM charges and interest was unsustainable, and the ITAT's deletion of such demand was upheld. The appeal by the Revenue was dismissed, and no substantial question of law remained for consideration.