Section 194I TDS on Rent – Analysis

1) What is the meaning of ‘rent’ according to Section 194-I of Income Tax Act, 1961?

• ‘Rent’ means any payment, by whatever 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.

• Sub-letting is also covered.
• No TDS on ‘Refundable Deposits’. However, ‘Non- Refundable Deposits’ shall attract TDS under this section. Moreover, where any such rent is credited to ‘suspense account’ or to any other account shall also be liable to deduct tax at source.
• For invoking the provisions of Section 194-I, element of control and possession is necessary–Chhattisgarh State Electricity Board vs. ITO (Mumbai ITAT) [2012] 50 SOT 33 (Mumbai)

2) What Payment is Covered u/s 194I?

Rent includes service charges: – Service charges payable to business Centre’s are covered under the definition of rent, as they cover payments by whatever named called.

TDS requirement where rent not payable on monthly basis: – Sec. 194I does not mandate that the tax deduction should be made on a month-to-month basis. Therefore, if the crediting of the rent is done on a quarterly basis, the deduction at source will have to be made on a quarterly basis only. Where the rent is paid on a yearly basis, deduction also will have to be made once a year on the basis of the actual payment or credit.

Charges regarding cold storage facility: – In the case of cold storage where milk, ice cream, and vegetables, are stored, the payment may be styled as charges for use of plant and not for use of the building. The arrangement between customer & cold storage owners is contractual in nature, as the contract includes provision of cooling facilities, security services and other miscellaneous utilities. Therefore TDS is to be deducted u/s 194C, and not u/s 194I. [CBDT Circular No. 1/ 2008 .]

Hall rent paid by an association for use of it:- Since the association is assessed as an association of persons and not as an individual or HUF, the obligation of tax deduction will be there, provided payment for the use of hall exceeds ₹2,40,000

Payments to hotels for holding seminars including lunch:- Where hotels do not charge for use of premises but charge for catering/meal only, the provisions of Sec. 194I would not apply. However, Sec.194C would apply for catering part.

Payment for warehousing charges is liable for TDS u/s 194-I [CBDT Circular No. 718 dated 22.08.1995.]

Payments for hotel accommodation on regular basis is liable for TDS u/s.194-I–CBDT Circular No.5/2002

3) Who is responsible to deduct tax u/s 194I?

The person (not being an Individual or HUF) who is responsible for paying any income to a resident by way of rent is liable to deduct tax at source.

However an individual or a Hindu undivided family is liable to deduct TDS u/s 194I if total sales, gross receipts or turnover exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such rent is credited or paid.

In case the aggregate of the amount of such income credited/paid or likely to be credited/paid during the financial year by the aforesaid person to the account of or to the payee exceeds ₹2,40,000/-[Including Advance Rent & Arrears of Rent] (w.e.f.  01/04/2019).

TDS threshold for deduction of tax on rent is increased from ₹1,80,000 to ₹ 2,40,000 for FY2019-20.

4) When to Deduct TDS under Section 194I?  

Tax is required to be deducted at source at the time of credit of ‘income by way of rent’ to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

5) Rate of TDS under Section 194I

• No surcharge and Health & Education Cess shall be added to the above rates. Hence, tax will be deducted at source at the basic rate.
• The rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee.

6) Under what circumstances TDS u/s 194I is not deductible?

Amount payable/paid not exceeding ₹ 2,40,000 during the financial year- No tax is required to be deducted in case the amount of rent due or paid does not exceed ₹2,40,000.

• Sharing or proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre– In case of a film exhibitor and film distributor contract, the share of the exhibitor is on account of composite services. The distributor does not take cinema building on lease or sub-lease or tenancy or under an agreement of similar nature. The payment made is not rental in nature.
• Where the payee is the Government at agency– A person making payment to Government is not required to deduct tax at source under Section 196. The payments made to statutory authorities and local authorities are exempt from tax and hence not tax deductible.
• Wharfage Charges– Angre Port (P) Ltd vs. ITO [TS-219-ITAT-2019(PUN)]: Wharfage Charges in common parlance are shipping fees for carrying on loading/unloading along the river front. Wharfage charges paid by assessee-company [engaged in providing port facilities for shipment of cargo] to the Maharashtra Maritime Board (MMB) could not be equated with ‘rent’. MMB did not own the ‘water’ or ‘waterfront’ as it belongs to the State Government, thereby the Board could not have leased, sub-leased or created any tenancy for the use of the said water, as also there was no arrangement/contract between the assessee and the Board for the use of land/water. Thus, S. 194I not applicable
• Lounge Services– CIT vs. Jet Airways (India) Ltd [TS-231-HC-2019(BOM)]: Payment by assessee for usage of lounge space at the airport is not rent liable for TDS u/s. 194-I. The payment for certain services, need not be seen in isolation. The real character of the service provided and for which the payment is made, would have to be judged. The dominant part of the service is to provide quiet, comfortable and a clean place for customers to spend some spare time and providing refreshments/beverages is only an incidental activity. Observing that the lounge is not exclusively used by assessee’s customers, but even customers of other airlines would be allowed to use the facility, the High Court held that the payment does not contain an element of rent. High Court upheld the assessee’s conduct of deducting tax u/s 194C.

7. Will tax be deducted from GST included in rent?

GST paid by the tenant does not partake the nature of income of landlord. The landlord only acts as a collecting agency for Government for collection of GST. Therefore tax deduction at source (TDS) under Sec. 194-I of the Income-tax Act would be required to be made on the amount of rent paid/payable without including GST.

ILLUSTRATION–

Ram Limited has taken a 3500 Sq. ft. flat on rent from Sham Limited to set up its Branch office. The rent payable to Sham Limited for the flat is ₹65,000 per month plus applicable GST. Ram Limited wishes to know whether tax is required to be deducted at source under Section 194-I from gross amount of rent including GST?

Vide Circular No. 23/2017 the CBDT has clarified as under:

In the light of the fact that even under the new GST regime, the rationale of excluding the tax component from the purview of TDS remains valid, the Board hereby clarifies that wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid or payable without including such ‘GST on services’ component.

Therefore, in the given case, the TDS is not to be deducted on the gross amount including GST. It shall be deducted only on the rent excluding GST i.e. ₹ 7,80,000.

8. Whether the limit of ₹ 2,40,000 for non-deduction of tax at source applicable in case of each co-owner?

Where the share of each co-owner in the property is definite and ascertainable, the limit of ₹2,40,000 will be applicable to each co-owner separately. [CBDT Circular No. 715 dtd.08.08.1995]

Extract of Section 194I TDS on Rent

194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—

(a) two per cent for the use of any machinery or plant or equipment; and

(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:

Provided that no deduction shall be made under this section where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed [two hundred and forty thousand rupees] :

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed [one crore rupees in case of business or fifty lakh rupees in case of profession] during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.

Explanation.—For the purposes of this section,—

(i) “rent” means any payment, by whatever 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;

(ii) where any income is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(Republished with amendments)

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