Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2016 (4) TMI 314 - MADRAS HIGH COURT

2016 (4) TMI 314 - MADRAS HIGH COURT - TMI - TDS u/s 194I - upfront payment made by an assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years - whether constitute rental income at the hands of the lessor, obliging the lessee to deduct tax at source under Section 194-I of the Act? - assessee in default - Held that:- It is crystal clear that the One Time Non-refundable Upfront Charges paid by the assessee was not (i) under the agreement .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

essee 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. Hence, the first substantial question of law is answered in favour of the appellant/assessee.

Once the first substantial question of law is answered in favour of the appellant/assessee, by holding that the assessee was not under an obl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ssessee, raises the following substantial questions of law: (i) Whether the upfront payment made by an assessee, under whatever name including premium, for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years, could be taken to constitute rental income at the hands of the lessor, obliging the lessee to deduct tax at source under Section 194-I of the Act? (ii) Whether in the facts and circumstances of the case and in law, the Tribunal was right i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Act, 1956, as a Government of Tamil Nadu Undertaking, acquired a vast extent of land measuring about 2469 acres, in various villages of Sriperumbudur Taluk, Kancheepuram District, for the purpose of developing the same as an Industrial Park. (ii) After developing the said land, SIPCOT laid out the said land into various plots, after setting apart the lands for the purpose of laying roads, drains and other common works for the benefit of the allottees of the plots. (iii) Thereafter, by G.O.Ms.No .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ral facilities to include electronic hardware manufacturing and supporting services facilities. (v) Thereafter, the assessee signed another Memorandum of Understanding on 11.1.2007 with SIPCOT, agreeing to be a co-developer along with SIPCOT, for the development of the aforesaid project namely "Product Specific SEZ". (vi) In continuation of the above, the assessee made an application on 25.9.2006. On the basis of the said application, SIPCOT issued two orders of allotment, one on 11.1. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tment stipulated that the amount indicated therein was to be paid as Non-refundable One Time Upfront charges and that a lease deed would be executed only after payment of 100% of the Upfront charges. (ix) Therefore, the assessee paid the upfront charges, as per the conditions stipulated in the order of allotment. After the payment was so made, the SIPCOT executed two lease deeds both dated 30.4.2008, granting a lease of the land of an extent of 100 acres and 51.85 acres respectively. (x) Under b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

99th year should be paid in advance. (xii) Since the non-refundable one time upfront charges was considered by both SIPCOT as well as the assessee, not to be part of the rent, the assessee did not deduct tax at source. (xiii) This was found out in the course of an inspection conducted on 19.2.2006. Therefore, the Assessing Officer passed an order on 16.3.2009 holding that the upfront charges constituted rent on which tax should have been deducted at source under Section 194-I and that since the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ce. However, taking note of the fact that SIPCOT had already included these upfront charges in their income and also paid the tax thereon, the Appellate Commissioner held that no TDS can be recovered from the assessee. But the demand for interest was sustained. The demand for interest was directed to be calculated from the date of payment of the upfront charges by the assessee to SIPCOT, up to the date of payment of advance tax by SIPCOT. Thus, the appeal of the assessee stood partly allowed. (x .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng term lease of immovable property, the same cannot be treated as part of rent, as it is for the acquisition of an enduring benefit for a long duration of time and (ii) that since the payment of premium is capital in nature while payment of rent is revenue in nature, even the Explanation under Section 194-I would not get attracted. 5. In support of the above contentions, the learned senior counsel for the appellant/assessee relied upon the following decisions: (1) Raja Shiva Prasad Singh v. Kin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t includes any and whatever payment; (ii) that the payment of upfront charges by the assessee was made under the lease agreement and hence it is not open to the assessee to describe the payment by any other term than what is stated in the lease deed; (iii) that as per the Halsbury's Laws of England, premium is nothing but capitalised rent and hence a payment made for the use of a land, will surely be treated as rent; and (iv) that the assessee cannot take advantage of Section 105 of the Tran .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed back to the Assessing Officer. 8. We have carefully considered the rival submissions. Section 105 of the Transfer of Property Act: 9. Let us first take for consideration, the argument revolving around Section 105 of the Transfer of Property Act. It reads as follows:- "105. Lease defined- A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

operty is. To constitute a lease of immovable property, Section 105 lays down the following conditions: (i) there must be a transfer of a right to enjoy immovable property; (ii) such enjoyment may be for a certain duration of time or any perpetuity; (iii) such transfer should be for consideration paid or promised; (iv) the consideration could be of money or a share of crops or service or any other thing of value; and (v) such consideration should be rendered periodically or on specified occasion .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r thing of value". In the first instance, the words "in consideration" appearing in the first part of Section 105 go along with the word "price". In the second instance, the words "in consideration" go along with a series of expressions such as "money", "a share of crops", "service" or "any other thing of value". If properly read, the relevant portion of Section 105 would read as follows: "In consideration- of a pric .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

expressions such as "money, a share of crops, service or any other thing of value" as "rent". 13. Therefore, it is clear that the consideration payable for the acquisition of a lease of an immovable property can take different forms. One such form is termed as the price or premium and the other termed as rent. Hence, we do not think that a distinction can really be made between premium and rent, solely on the basis of Section 105 of the Transfer of Property Act, as sought to .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

r 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;]" 15. Thus, the definition of the expression "rent" appears to be quit .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of Section 194-I. 16. Therefore, what is indicated by the word "price" or "premium" in Section 105 of the Transfer of Property Act, would certainly constitute rent within the meaning of Section 194-I, by virtue of the exhaustive definition contained in Clause (i) of the Explanation. 17. As rightly contended by Mr.J.Narayanaswamy, learned Standing Counsel for the Department, premium, in many cases could take different forms such as "security deposit", "rental a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

8. In the case of normal lease of a property, one can conceive of any number of situations, where premium paid at the inception of the lease, could be part of the rent. For instance, there may be cases where a premium is collected at the inception of the tenancy, as a refundable security deposit or as refundable rental advance. There may also be cases where such premium is collected as advance that could be adjusted towards the last few months of the lease. Many times, the amount of the premium .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

premium is adjustable towards the last few months. Therefore, we cannot go so far as to accept the contention of Mr.Arvind P.Datar, learned senior counsel for the appellant that a premium is different from rent and that therefore, no tax is to be deducted at source from the premium, under Section 194-I. Citations 20. In Raja Shiva Prasad Singh, the Division Bench of the Patna High Court was concerned with the payment of "salami" or premium for the grant of leases of mineral rights on a .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ty such as land, building, plant, machinery etc. would stand on a different footing than the lease of mineral rights. When someone takes a land on lease, he merely uses the land. But when someone takes the lease of mineral rights, he excavates the land, carries out mining operations and takes away the minerals so mined. 22. The decision of the Supreme Court in Board of Agricultural Income Tax Act, has also to be understood in the context of the facts out of which the case arose. As seen from par .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Panbari, was as follows: "By a registered lease deed dt.31st March, 1950, the assessee-company, respondent herein, leased out two tea estates named "Panbari Tea Estate" and "Barchola Tea Estate", along with machinery and buildings owned and held by it, in Darrang, in the State of Assam, to a firm named M/s Hiralal Ramdas for a period of 10 years commencing from 1st Jan., 1950. The lease was executed in consideration of a sum of ₹ 2,25,000 as and by way of premium .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

12,000 per year, and the balance of ₹ 42,000 on or before 31st December of each year." 24. On the basis of the above facts, the Supreme Court pointed out the distinction between premium and rent, in paragraph 9 of its decision, to the following effect: "Under s.105, of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promise .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called pr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at we have pointed out in paragraphs 17 and 18, are indicated, to some extent in paragraph 9 of the decision of the Supreme Court in Panbari. 26. Moreover, the decision of the Supreme Court in Panbari should not be applied blindfold to the case on hand. The only question that arose before the Supreme Court in Panbari was whether the amount described as premium in the lease deed was really rent and therefore a revenue receipt or not. The question that arises in the case on hand is not about the n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ri. 27. In R.K.Palshikar (HUF), the Supreme Court considered a lease for a period of 99 years to be the parting of an asset of an enduring nature. Therefore, the grant of lease was held to tantamount to transfer of capital asset. Interestingly, the Assessing Officer took a stand in Palshikar that the assessee was liable to pay capital gains tax on the amount of salami or premium received. In the facts and circumstances of the case, the Supreme Court held in Palshikar that the grant of those leas .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n the admitted position that the grant of a lease would constitute transfer of asset. But it was sought to be projected in A.R.Krishnamurthy that since there was a right to mine minerals, inherent in the leasthold right of land, a distinction had to be made between the cost of acquisition of the land and the cost of acquisition of the mining rights. 30. But fortunately the case on hand, the leasehold right of land does not include any other benefit such as the right of mine minerals. Therefore, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the interpretation is sought to be given. 32. In Bharat Steel Tubes Limited, the Delhi High Court formulated the indicia of salami to be (i) simple non-recurring character; and (ii) payment prior to creation of tenancy. After extracting the broad principles summarised by the Calcutta High Court on the question of salami, the Delhi High Court made it clear that the question whether a particular receipt like salami can be regarded as revenue or capital, cannot be decided in the abstract and that e .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

69-UA, the Act made a distinction between cases where the consideration for the transfer of immovable property by way of lease consisted only of premium or consisted only of rent or consisted of both premium and rent. 34. But despite the fact that Clause(b) of Section 269-UA uses both the expressions "premium" and "rent", Chapter XX-C did not make a distinction between both. For the purpose of determining what is apparent consideration in relation to the transfer of any immov .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

5. Having seen (a) the legal contentions revolving around (i) Section 105 of the Transfer of Property Act, (ii) the Explanation under Section 194-I (iii) the decisions making a distinction between the salami and rent and (iv) the indicators available in Chapter XX-C, let us now turn our attention to the questions of law arising for consideration. 36. The first question of law that we have formulated in paragraph 1 of the decision is: Whether the upfront payment made by an assessee, under whateve .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ack to the facts of the case. 38. As we have indicated in paragraph 3 above, SIPCOT acquired a vast extent of land measuring about 2469 acres. The purpose of the acquisition was to develop the area into an industrial park. The requisitioning body namely the SIPCOT thus became a developer. The assessee was chosen as the co-developer under G.O.Ms.No.27 (Industries) dated 1.3.2006 and the Memorandum of Understanding that they entered into with the Government of Tamil Nadu dated 3.3.2006, for establ .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nts were made that two lease deeds were executed on 30.4.2008. 39. Keeping the above facts in mind, if we have a look at a letter dated 9.3.2009, issued by SIPCOT to the assessee, it can be seen as to how the parties wanted the payment of upfront charges to be treated. In paragraph 1 of the letter dated 9.3.2009, SIPCOT stated the following: "i. The upfront charges paid by your Company has been treated as 'Deemed Sale' and accounted as 'Income from Area Development Activity' .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is one indicator for arriving at the answer to the substantial question of law. 41. There is also intrinsic evidence in the two deeds of lease themselves to suggest that the assessee was chosen not merely as a lessee of the land, but as a co-developer along with SIPCOT to establish a project in the "Product Specific Special Economic Zone". The relevant portion of the preamble to the lease deeds is extracted as follows:- "WHEREAS the Government of Tamil Nadu issued G.O.Ms.No.27 Ind .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

March 2006 [hereinafter referred to as "TN MOU"] regarding the possibility of establishing several manufacturing bases with all infrastructure facilities to include electronic hardware manufacturing and supporting services facility in the State of Tamil Nadu. The said TNMOU has offered the related concessions and incentives to the party of the second part. WHEREAS the party of the second part as "Developer" signed a Memorandum of Understanding with the party of the first part .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

tion of the letter of approval dated 13.2.2007 issued by the Government of India reads as follows:- "With reference to your above mentioned application, Government of India is pleased to approve your proposal as Co-Developer for providing infrastructure facilities in the SIPCOT Hi tech SEZ for electronics/telecom hardware and support services, including trading and logistics activities at Sriperumbudur, Tamil Nadu, as per the details given below: (1) Name of the Co-Developer - Foxconn India .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version