The Division Bench of Madras High Court recently delivered a landmark judgment in M/s.Foxconn India Developer (P) Ltd v. ITO, Chennai held that, TDS cannot be levied from onetime non-refundable upfront payment for the acquisition of leasehold rights over an immovable property.
One of the major issue raised before the Court was that 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 for the purpose of TDS.
The Counsel for the petitioners Senior Advocate Arvind Datar Contended that a definite distinction between the price paid for the acquisition of the transfer of a right to enjoy a property, normally called premium and the rent paid periodically is recognized under Section 105 of the Transfer of Property Act, 1882, that if a premium is paid for the acquisition of a right to have a long 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 of the Income Tax Act, 1961 would not get attracted.
The appellants, on the other hand, contended that the Explanation under Section 194-I is so wide that it includes any and whatever payment. In the instant case, 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.
Further it was contended 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
The Court analysed provision 105 of the of the Transfer of Property Act, 1882 and opined that the first part of Section 105 makes a distinction between two types of consideration, for acquiring the transfer of a right to enjoy an immovable property. The first type of consideration is described in the first part of Section 105 as “price”. The second type of consideration is indicated by the use of the expressions “money”, “share of crops”, “service” or “any other 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 suchas “money”, “a share of crops”, “service” or “any other thing of value”.
Therefore it was concluded 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.
The bench comprising of Justices V.Ramasubramanian and N.Kirubakaran held that, it is crystal clear that 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 codeveloper (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.
The Court also observed 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 under Section 194-I of the Income Tax Act, 1961.
Read the full text of the judgment below.
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