Whether upfront payment made for acquisition of leasehold rights over an immovable property for 99 years can be treated as rental income and assessee is liable to TDS u/s 194I – NO: HC

THE issue is – Whether upfront payment made for acquisition of leasehold rights over an immovable property for 99 years can be treated as rental income and assessee is liable to TDS u/s 194I. NO is the answer.

Facts of the case
The State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT), a Government of Tamil Nadu Undertaking, acquired a vast extent of landfor the purpose of developing the same as an Industrial Park. 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. Assessee was selected as a “Developer” to establish a project known as “Product-Specific Special Economic Zone” in partnership with SIPCOT. Assessee signed a Memorandum of Understanding with the Government of Tamil Nadu regarding the possibility of establishing several manufacturing bases with all infrastructural facilities to include electronic hardware manufacturing and supporting services facilities. Thereafter, the assessee signed another Memorandum of Understanding with SIPCOT, agreeing to be a co-developer along with SIPCOT, for the development of the aforesaid project namely “Product Specific SEZ”. SIPCOT issued two orders of allotment, one for allotment of land to an extent of 100 acres and the second order was for the allotment of 51.85 acres. Under the first order of allotment, the assessee was required to pay an amount of Rs.10.50 crores at the rate of Rs.10.50 lakhs per acre towards upfront lease rent. Under the second order of allotment, the assessee was liable to pay Rs.17,59,20,000/- at the rate of Rs.32 lakhs per acre. The order of allotment 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. Assessee made the payment and lease deeds were executed under which the assessee was entitled to enjoy the land for a period of 99 years, upon payment of annual lease rent of Re.1/- per year for 98 years and Rs.2/- per year for the 99th year. 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. Assessing Officer passed an order holding that the upfront charges constituted rent on which tax should have been deducted at source under Section 194-I and that since the assessee did not do so, demand was made under Section 201(1) and Section 201(1-A). CIT(A) 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.
Having heard the parties, the court held that,
++ the definition of the expression “rent” appears to be quite exhaustive. It includes “any payment by whatever name called”. But two conditions are to be satisfied. They are:
(1) the payment should be under any lease, sub-lease, tenancy or any other agreement or arrangement and (2) the payment should be for the use of one or more of certain things such as land, building, machinery etc. Even if the person to whom the payment is made, does not happen to be the owner of what is allowed to be used, the payment could still be rent within the meaning of Section 194-I.
++ 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.
++ the lessor as well as the lessee intended to treat the transaction as “deemed sale”.
++ 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 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, 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 under Section 194-I.