DEDUCTION OF TDS ON RENT ONLY

[Dr. Sanjiv Agarwal]

In respect of  payment of rentals against property, there is often a confusion as to whether the land lord can deduct TDS (income tax) on both, rent amount and service tax or only on rent amount net of TDS. Here is an attempt to clarify this issue.

Vide sub-rule (4C) in rule (6) of Service Tax Rules,1994 videNotification No.28/2007-ST dated 22.5.2007, it has been provided that where service tax has been paid in excess of the amount required to be paid due to non-deduction of property tax, as exempted under Notification No.24/2007-ST dated22.5.2007, the same may be adjusted within a period of one year of such deposit by the assessee, subject to the conditions stipulated.

On whether TDS (income tax) shall be deducted on rental amount or gross amount inclusive of service tax thereon, CBDT has clarified vide Circular No. 4/2008 dated 28.4.2008 that tax deducted at source on rentals paid to landlord shall be on the amount as reduced by service tax paid thereon. For example - if a taxpayer pays Rs. 100 as rent, he is liable to pay service tax @ 12 percent plus education cess, taking a total out go to Rs.112.36, it has been clarified that service tax would be deducted on Rs. 100 only and not on Rs. 112. (the present rate of  service tax is 10 percent ).  The Circular states as under -

"As per the provisions of 194-I, tax is deductible at source on income by way rent paid to any resident. Further rent has been defined in section 194-I of the Income Tax Act as follows -

'Rent' means any payment, by whatever name called, under any lease, sub­lease, 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;

Service tax paid by the tenant doesn't partake the nature of "income" of the landlord. The landlord only acts as a collecting agency for Government for collection of Service Tax. Therefore, it has been decided that tax deduction at source (TDS) under sections 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax."

This circular is clarificatory in nature as TDS is not a consideration (as rent) or income but is deducted on behalf of deductee for onward remittance to the Government for which the deductee gets a certificate for using against tax liability /refund of such TDS.

Accordingly , no tax is required to be deducted at source on the service tax component of rental income or receipts under section194-I of the Income Tax Act, 1961. This indicates that service tax does not partake of the nature of income as the person collecting it would be doing so only as a collecting agent for the Union Government. It also needs to be appreciated that TDS is deductible only in respect of income and not in relation to any tax component comprised in the receipt.

In CIT v SE, Upper Sileru (1985) 152 ITR 753 (AP),it was held that as per the scheme of tax deduction at source, tax is to be deducted at source only on that portion of the amount payable which represent any income or profit . In Transmission Corporation of AP Ltd v CIT (1999) 239 ITR 587 (SC),apex court held that obligation of the respondent assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable to income tax under the Income Tax Act, 1961.

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