TDS – Rent – Section 194I – Where One Time Nonrefundable Upfront Charges paid by the assessee was not (i) under the agreement of lease and (ii) merely for the use of the land and the payment was made for a variety of purposes such as (i) becoming a co-developer (ii) developing a Product Specific SEZ(iii) for putting up an industry in the land and both the lessor as well as the lessee intended to treat the lease virtually as a deemed sale, the upfront payment made by the assessee 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 and hence lessee, not obliged to deduct TDS u/s. 194-I

In the appeal filed by the assessee, the following questions were raised before the Madras High Court:

“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 u/s. 194-I ?

ii) Whether in
the facts and circumstances of the case and in law, the Tribunal was
right in confirming the levy of interest u/s. 201(1-A) ?”

The High Court held as under:

“i)
The One Time Non-refundable Upfront Charges paid by the assessee was
not (i) under the agreement of lease and (ii) merely for the use of the
land. The payment made for a variety of purposes, such as (i) becoming a
co-developer (ii) developing a Product Specific Special Economic Zone
in the Sriperumbudur Hi-Tech Special Economic Zone (iii) for putting up
an industry in the land. The lessor as well as the lessee intended to
treat the lease virtually as a deemed sale, giving no scope for any
confusion. In such circumstances, we are of the considered view that the
upfront payment made by the assessee 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 u/s. 194-I.
Hence, the first substantial question of law is answered in favour of
the appellant/assessee.

ii) Once the first substantial question
of law is answered in favour of the appellant/assessee, by holding that
the assessee was not under an obligation to deduct tax at source, it
follows as a corollary that the appellant cannot be termed as an
assessee in default. As a consequence, there is no question of levy of
interest u/s. 201(1-A).

iii) In the result, the appeal is allowed.”