2025 (7) TMI 426 - AT - Income Tax

TDS u/s 194I - Addition u/s 40(a)(ia) - payments to the slum dwellers for enabling them to meet the expenditure incurred towards rent for the alternate accommodation since the slum dwellers have to vacate the property for the purpose of development - CIT(A) deleted addition - HELD THAT - Co-ordinate Bench has been consistently holding in various cases including assessee s own case that the payments made towards alternate accommodation is not liable for TDS u/s 194I. As decided in Sarfaraz S Furniturewala Vs. Afshan Sharfali Ashok Kumar Ors. 2024 (5) TMI 163 - BOMBAY HIGH COURT the transit rent which is paid to the tenant who suffers hardship due to dispossession does not fall within the definition rent u/s 194I. As already stated in assessee s case the payment is made towards compensation for handing over the vacant possession of the property and towards rent if any payable by the tenants in the alternate accommodation until the completion of the re-development. Therefore applying the ratio of the decision of the Hon ble High Court we hold that the payment made by the assessee towards Alternate accommodation charges / rent is not liable for tax deduction under section 194I and accordingly we see no reason to interfere with the decision of the CIT(A) in deleting the disallowance made by the AO under section 40(a)(ia). Disallowance towards delayed payments of PF/ESI is settled in the case of Checkmate Services Pvt. Ltd. 2022 (10) TMI 617 - SUPREME COURT (LB) . Respectfully following the judicial precedents as laid down by the Hon ble Supreme Court we see no reason to interfere with the decision of the CIT(A) in confirming the disallowance made by the AO.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether payments made by the developer/assessee to slum dwellers under the Slum Rehabilitation Authority (SRA) scheme towards alternate accommodation or compensation for vacating slum premises constitute "rent" within the meaning of section 194I of the Income Tax Act, 1961, thereby attracting tax deduction at source (TDS) obligations.
• Whether the Assessing Officer (AO) was justified in disallowing expenses under section 40(a)(ia) of the Act for failure to deduct TDS on such payments.
• Whether the payments made to slum dwellers for alternate accommodation are taxable receipts in their hands and liable to TDS deduction by the developer.
• Whether delayed payment of Employees' Provident Fund (PF) and Employees' State Insurance Corporation (ESI) contributions by the assessee entitles the Revenue to disallow the deduction claimed under section 36(1)(va) of the Act.
• The applicability of judicial precedents, including decisions of the Hon'ble Supreme Court and the Jurisdictional High Court, on the issues of TDS applicability on transit rent and disallowance of delayed PF/ESI payments.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Nature of Payments to Slum Dwellers and TDS Liability under Section 194I

Relevant Legal Framework and Precedents: Section 194I mandates deduction of tax at source on payments of rent, which includes payments for use of any land or building. Explanation 1 to section 194I clarifies that rent includes payment for use of land or building. Section 40(a)(ia) disallows expenses if TDS is not deducted as required. The Hon'ble Jurisdictional High Court's decision in Sarfaraz S Furniturewala vs. Afshan Sharfali Ashok Kumar & Ors. (W.P. No. 4958 of 2024) held that "transit rent" paid as hardship or rehabilitation allowance is not revenue receipt and not liable to tax or TDS deduction.

Court's Interpretation and Reasoning: The AO initially held that payments to slum dwellers were in the nature of rent since the dwellers have rights in the slum property, which they surrender to the developer, who uses the land for construction and sale. The AO reasoned that even if no explicit agreement existed, a deemed agreement arises under the SRA scheme, creating a lessor-lessee relationship, thereby attracting TDS under section 194I. The AO disallowed 30% of such payments under section 40(a)(ia) for failure to deduct TDS.

The assessee contended that the payments were compensation or hardship allowances, not rent, and no landlord-tenant relationship existed. The CIT(A) accepted the assessee's contention relying on the Co-ordinate Bench's decision for AY 2012-13, which followed the Hon'ble High Court's ruling that transit rent or hardship allowance paid to tenants displaced by redevelopment is not taxable income and not subject to TDS under section 194I.

The Tribunal, after hearing parties and reviewing the material, concurred with the CIT(A) and the Co-ordinate Bench, holding that payments for alternate accommodation or compensation to slum dwellers do not constitute rent under section 194I. The Tribunal emphasized that the payment is made to meet expenditure incurred by the slum dwellers for alternate accommodation during redevelopment, which is akin to hardship or rehabilitation allowance. The Tribunal distinguished these payments from rent payable for use of property under a lease or tenancy agreement.

Key Evidence and Findings: The AO's survey under section 133A and verification from SRA confirmed no consideration was paid for redevelopment but only for sale of Transferable Development Rights (TDR). The payments to slum dwellers were for alternate accommodation expenses. The Hon'ble High Court's decision was pivotal in guiding the Tribunal's conclusion.

Application of Law to Facts: Applying the ratio of the Hon'ble High Court, the Tribunal concluded that such payments are not rent and hence not liable for TDS deduction under section 194I. Consequently, the disallowance under section 40(a)(ia) was rightly deleted by the CIT(A) and upheld by the Tribunal.

Treatment of Competing Arguments: The AO's argument of deemed tenancy and rent was rejected based on judicial precedents and the nature of payments. The Tribunal gave precedence to the authoritative High Court ruling over the AO's interpretation.

Conclusion: Payments to slum dwellers towards alternate accommodation or compensation under SRA scheme are not rent within section 194I, and no TDS deduction is required. Disallowance under section 40(a)(ia) on this ground is unsustainable.

Issue 3: Disallowance of Delayed Payment of PF/ESI Contributions under Section 36(1)(va)

Relevant Legal Framework and Precedents: Section 36(1)(va) disallows deduction of employees' contribution to PF/ESI unless deposited on or before the due date prescribed under the relevant Act. Section 43B allows certain deductions if payments are made before filing the return. The Hon'ble Supreme Court in Checkmate Services Pvt. Ltd. vs. CIT clarified the distinction between employer's contribution and employees' contribution and held that the latter must be deposited on or before the due date to claim deduction.

Court's Interpretation and Reasoning: The AO disallowed deduction of Rs. 10,72,180/- for delayed payment of employees' PF/ESI contributions relying on the Supreme Court's decision. The assessee argued for allowance under section 43B citing other judicial decisions. The CIT(A) upheld the AO's disallowance, relying on the Supreme Court ruling in Checkmate Services Pvt. Ltd.

The Tribunal agreed with the CIT(A), emphasizing the Supreme Court's reasoning that employees' contributions are amounts held in trust by the employer and must be deposited within statutory deadlines to qualify for deduction. The non-obstante clause in section 43B does not override this condition.

Key Evidence and Findings: The tax audit report revealed delayed payments of employees' PF and ESI contributions. The Supreme Court's authoritative ruling was determinative.

Application of Law to Facts: Since the payments were delayed beyond the due date prescribed by law, the deduction under section 36(1)(va) was not allowable.

Treatment of Competing Arguments: The Tribunal rejected the assessee's reliance on other High Court decisions and section 43B's general provisions in light of the binding Supreme Court precedent.

Conclusion: Disallowance of deduction for delayed PF/ESI payments under section 36(1)(va) is justified and upheld.

3. SIGNIFICANT HOLDINGS

On the issue of TDS on payments to slum dwellers, the Tribunal preserved the following crucial legal reasoning from the Hon'ble Jurisdictional High Court:

"10. The ordinary meaning of Rent would be an amount which the Tenant/Licensee pays to the Landlord/Licensor. In the present proceedings the term used is "Transit Rent", which is commonly referred as Hardship Allowance/Rehabilitation Allowance / Displacement Allowance, which is paid by the Developer/Landlord to the tenant who suffers hardship due to dispossession. Hence, in my opinion 'Transit Rent' is not to be considered as revenue receipt and is not liable to be tax, as a result there will be no question of deduction of T.D.S. from the amount payable by the Developer to the tenant."

Core principles established include that payments made as compensation or alternate accommodation charges under SRA schemes do not create a lessor-lessee relationship and do not constitute rent liable to TDS under section 194I.

On the issue of delayed PF/ESI payments, the Tribunal relied on the Supreme Court's detailed reasoning:

"53. The distinction between an employer's contribution which is its primary liability under law - in terms of section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va) is, thus crucial... They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction... If such interpretation were to be adopted, the non-obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee's contribution on or before the due date as a condition for deduction."

Final determinations:

• The Revenue's appeal against deletion of disallowance under section 40(a)(ia) on TDS non-deduction for payments to slum dwellers was dismissed.
• The assessee's appeal against disallowance of deduction for delayed PF/ESI payments under section 36(1)(va) was dismissed, confirming the disallowance.