Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: ACCOUNTING STANDARDS :: ACCOUNTING STANDARD :: due date for vat payment :: TDS :: VAT RATES :: Central Excise rule to resale the machines to a new company :: TAX RATES - GOODS TAXABLE @ 4% :: form 3cd :: articles on VAT and GST in India :: list of goods taxed at 4% :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: ARTICLES ON INPUT TAX CREDIT IN VAT :: cpt :: VAT Audit :: empanelment
 
 
ę News Headlines »
 Directions under section 119 of the Income-tax Act, 1961
 Securities excluded from GST ambit in revised Bill
 GST dilemma: Hope fades for new tax regime
 5nance.com launches tax investment platform
 Is government tapping your phone?
 Income tax department to use analytics to look for discrepancies in bank accounts
 GST Council fails to break deadlock over indirect tax regime, next meet on Dec 11 and 12 to hammer out differences
 Invoking Writ Jurisdiction For Income Tax Matters
 How to file income-tax returns online
 How Income Tax Returns Are Scrutinised
 All About New Income Disclosure Scheme to make Demonetisation successful

Rent, security deposit, its all TDS
July, 21st 2007

Mere nomenclature used in the lease agreement, such as security deposit or advance deposit, will not be conclusive of the nature of the payment. The reality of the transaction will have to be looked into.


Tax law seeks to safeguard the interests of the Revenue by providing for tax deduction at source on payment of rent. Section 194I of the Income-Tax Act, 1961, came into the statute book with effect from June 1, 1994. Wherever the rent payable exceeds Rs10,000 per month, tax is to be deducted at 15 per cent if the payee is an individual or HUF and at 20 per cent in other cases.

Rent was defined in the section to mean any payment by whatever name called for the use of land or any building together with furniture and fittings.

The definition was expanded by the Taxation Laws (Amendment) Act 2006, with effect from July 13, 2006, so as to include lease of plant and machinery, equipment, furniture and fittings.

The rate of TDS for machinery, plant and equipment has been fixed at 10 per cent by the Finance Act, 2007.

Is there any way of avoiding this TDS when the amounts involved are sizeable?

The Reebok case

In this case (291 ITR 455), Reebok India entered into an agreement with ABCO Footwear Care to take on lease certain premises in New Delhi at a monthly rent of Rs 6,26,000. The lease agreement also provided for payment of security deposit of Rs 1,50,24,000. This was to be reduced every six months when rent became payable.

TDS was made under Section 194 I on the monthly rent of Rs 6,26,000. No TDS was made on the security deposit. The assessing officer (AO) passed an order holding that the security deposit was only an advance rent and should suffer TDS.

He followed up this order with levy of interest for non-payment of interest. The first two appellate authorities cancelled the levy of interest. The Revenue took up the matter in appeal before the Delhi High Court.

It was argued for the Department before the Delhi High Court that the deposit made was non-refundable and therefore represented advance consideration for use of land and building. It fell within the definition of rent given in Explanation (i) to Section 194I. Tax ought to have been deducted at source.

On behalf of the assessee, it was argued that clause 14 of the rental agreement provided for refund of the unadjusted portion of the security deposit and as such tax was not deductible unless rent became due to the landlord.

The Delhi High Court considered the matter in some detail. It pointed out that the definition of the nomenclature rent, as expounded in Explanation of Section 194I, amply reveals that the same is projected as a generic term which includes within the ambit of payment made on whatsoever account for occupation of a tenanted portion.

As per the Act, rent appears to be a composite concept and is not capable of being fragmented.

The moment any attempt is made to have the germane term fragmented by splitting up the amount covered by the rent, it will cease to be rent and the same will not satisfy the test of the definition.

The court ruling

The High Court extracted the various clauses in the lease agreement and pointed out that the Rs 1,50,24,000 was only in the nature of advance rent and not a security deposit.

The agreement laid down that the security deposit shall stand reduced every six months when the rent becomes due and payable. If it had been the security amount, then firstly, it would have been in the nature of refundable amount at the time of the termination of the lease.

Secondly, there would have been no reduction in the security amount, after every six months.

Thirdly, as per the agreement, the lessor is obliged to refund the unadjusted portion, if any, of advance/security deposit.

This clearly showed that the amount was adjustable against rent. It was in fact so adjusted. This amount was only in the nature of advance rent. There was an obligation to deduct tax at source from the payment of such advance rent. The Revenues appeal was accepted and the orders of the two lower appellate authorities set aside.

This case shows that great care will have to be taken while drafting lease agreements. Security deposit refundable on the termination of a lease will not be subject to TDS. Also, mere nomenclature used in the lease agreement, such as security deposit or advance deposit, will not be conclusive of the nature of the payment. The reality of the transaction will have to be looked into.

The Amending Act of 2006 has brought in payments for the use of plant and machinery, equipment, furniture and fittings, apart from payment for land and buildings.

It is possible to visualise different owners for building and for plant/machinery and they may have to contend with a composite lease agreement.

T. C. A. Ramnuajam
(The author is a former Chief Commissioner of Income-Tax.)

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Company Overview

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions