No TDS on refundable Security Deposits given to Landowners

Prestige Estates Projects Ltd Vs ACIT (ITAT Banglore) 

Now the issue before us is with regard to whether the amount paid by the assessee towards interest free security deposit to various land owners whether it constitutes as “Consideration” in terms of Transfer of Immovable Property. In the present case, as per JDA cum General Power of Attorney, land owners have agreed to transfer a portion of land (68.34%) belonged to them in lieu of share in the super-structure (31.66%) which should be constructed by the assessee. The value of 31.66% of the constructed area promised to be transferred by the assessee has been accepted as “Consideration” for transfer of 68.34% of land by the land owners. The assessee has paid refundable security to the land owners amounting to Rs.21.85 Crores. According to ld. DR, the payment of refundable security deposit is nothing but a part of sale consideration for transfer of immovable property in favour of the present assessee. Further it was submitted by the ld. DR that the refundable security deposit of Rs.21.85 Crores paid to the land owners which is actually not refundable and the same is to be adjusted with the sale proceeds of the constructed area. So, the nomenclature given by the assessee to such amount as refundable security deposit should not take away the essence of the transaction and it is nothing but advance sale consideration paid by the assessee to the land owners for transfer of immovable property. The basic condition to apply the provisions of Section 194-IA of the Act is that there should be a consideration for transfer of immovable property. The consideration as mentioned in JDA is the value of 31.66% of the constructed area which is to be transferred by the assessee as consideration for transfer of 68.34 of land by the land owners. In the present case, we have gone through the JDA cum General Power of Attorney to see whether there is a transfer within the meaning of Section 2(47)(v) of the Act or whether the transferee and transferor on the facts of the present case can be considered to have “performed or is willing to perform”, their respective obligation under the JDA cum General Power of Attorney.

It is specifically mentioned in caluse 1 of JDA that the assessee is only permitted by the land owners to enter upon the scheduled property to develop the scheduled property by constructing a residential apartment building as per the terms mentioned in JDA. It is also specifically mentioned tin Clause No. 1.2 that the permission to enter by way of license so granted shall not however be construed as delivery of position of the scheduled property in part performance of any conduct as defined u/s. 53A of the Transfer of Property Act r.w.s.2(47)(v) 86 (vi) of the Income Tax Act, 1961. Further it was mentioned that Clause No. 2.1 states that within four months from the date of this Agreement, the present assessee to get prepared development plan, building plan and all other drawings as per the buildings by law, rules and regulations in force for development of the scheduled property into residential apartment buildings with the required parking spaces, common amenities like club house, etc and present the same for the approval of the first party for obtaining consent from the transferee. After obtaining the consent from the land owners, the assessee shall take appropriate steps to obtain No Objection Certificate, other permissions required for undertaking the Project within 12 months from the date of the JDA. As seen from the above, it is actually mentioned that the assessee is only permitted by the land owners to develop the scheduled property as residential apartment buildings and also mentioned that it cannot be construed as delivery or possession in terms of Section 53 of the T.P. Act r.w.s. 2(47)(v) of the Act. Legal possession of scheduled property are continue to remain with the possession of the land owner.

There is a time limit to get the permission from the competent authority which is 12 months from the date of Agreement, thereafter 60 months time to complete the construction of residential apartment buildings form the receipt of the sanction plan, thereafter grace period has been given which show that the time is the essence of the contract. In the Assessment Year under consideration, nothing is brought on record to show that the assessee got approval of the sanctioned plan vis-à-vis any construction is started. Being so, the argument of the ld. DR is that there was a transfer of immovable property in the assessment year under consideration is not tenable. This is so, because the transferee is not able to complete any act as mentioned in JDA cum General Power of Attorney. The transferee only made payment of interest free refundable security deposit of Rs.21.85 Crores to the land owners as per clause No. 15. There was a condition in Clause No. 15 that the security deposit paid by the present assessee to the land owner shall be recovered through sale of the part of the owners constructed area. The ld. DR submitted that this is the payment of security deposit which is nothing but the payment of advance sale consideration on transfer of immovable property.

In our opinion, even if it is advance payment, it is not linked to the transfer of immovable property as enumerated in Section 194-IA of the Act, since the condition laid down in Section 2(47)(v) of the Act was not complied with within the meaning of Section 53A of the T.P. Act, so as to deduct TDS by the assessee on the said refundable security deposit. The assessee cannot be hold as the assessee in default u/s. 201(1) and 201(1A) of the Act. It is ordered accordingly.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against the order of the CIT(A)-13, Bangalore, dated 14.02.2019. The relevant assessment year is 2014-2015.

2. The assessee has raised the following grounds :

1. “ General Ground

1.1  The learned Assistant Commissioner of Income Tax- Circle 18(1) (‘AO)’, Bangalore has erred in passing the order under section 201(1) and 201(1A) of the Income Tax Act, 1961 (‘the Act’) in the manner passed by him and the Commissioner of Income Tax-(Appeals)-13 (‘CIT(A)’) has erred in partly confirming the said order. The said order to the extent prejudicial to the assessee is bad in law and liable to be quashed.

2. Grounds relating to applicability of section 194-IA

2.1. The learned CIT(A) has erred in concurring with the learned AO and concluding that refundable security deposits made with land owners amounting to Rs. 21,85,00,000/- are liable for TDS under section 194-IA of the Act.

2.2. On facts and in the circumstances of the case and law applicable, there was no liability to deduct tax at source under section 194-IA of the Act in respect of refundable deposit paid.

2.3. The learned AO and CIT(A) have erred in invoking section 194-IA in respect of the impugned transaction without appreciating that the

(a) section 194-IA was introduced by Finance Act 2013, with effect from 01.06.2013;

(b) assessee had credited the land owners in the books of accounts, on 29.05.2013 (i.e.) before introduction of section 194-IA.

2.4. The learned AO and CIT(A) have erred in not appreciating that existence of income is a sine qua non for attracting TDS provisions and that the refundable security deposit paid did not constitute income in the hands of land owners.

2.5 Without prejudice to the above, the learned AO and CIT(A) have erred in concluding that the refundable security deposit is ‘consideration’ for transfer of immovable property made by the assessee to land owners and liable for TDS under section 194-IA of the Act, without appreciating that:

a. The promise made by the assessee was to construct the superstructure and transfer a share in it to the land owners; constituted consideration for transfer of land;

b. That every payment in relation to development agreement is not a consideration for transfer of property;

c. That refundable security deposit is to only ensure proper execution of the terms of agreement;

d. the treatment of refundable of security deposit as shown as ‘current assets’ in the books of the assessee.

3. Grounds relating to applicability of section 201(1)

3.1. Assuming without admitting that tax had to be deducted at source under section 194-IA, the learned CIT(A) erred in treating the assessee as ‘assessee in default’ under section 201 without ascertaining whether deductees have also failed to pay the tax directly.

3.2. The learned AO and CIT(A) erred in treating the assessee as ‘assessee in default’under section 201(1) without demonstrating the satisfaction of the requirements of Explanation to section 191 and first proviso to section 201(1) of the Act.

3.3. The learned AO and CIT(A) erred in not appreciating that

(i) section 201 does not in any manner authorize the recovery of the amount of tax not / short deducted;

(ii) the recipient of income is liable to pay the tax directly as per the mandate of section 191 and consequently, no tax can be recovered from the deductor.

3.4. On facts and in the circumstances of the case and law applicable, no tax can be recovered from the assessee (deductor) and consequently, the demand raised on the assessee is liable to be held as bad in law.

3.5. Without prejudice, the learned CIT(A) erred in computing tax deductible in respect of refundable deposit paid to a minor (Master Kadiri Bhuvaneshwar) at 20% under section 206AA of the Act.

4. Grounds relating to applicability of section 201(1A)

4.1. The learned AO and CIT(A) have erred in levying interest under section 201(1A) of the Act. On facts and in the circumstances of the case and law applicable, no interest is leviable under section 201(1A) and the assessee denies its liability to pay interest under section 201(1A).

5. Prayer

Each of the above grounds is independent and without prejudice to the other grounds preferred by the assessee. In view of the above and other grounds to be adduced at the time of hearing, the assessee prays that the order passed by the learned CIT(A) to the extent prejudicial to the assessee be quashed or in the alternative, the aforesaid grounds and relief prayed for thereunder be allowed. The assessee prays accordingly.”

3. The facts of the case are narrated below :

3.1 The assessee is an Indian Company engaged in the business of real estate development. In the course of its business, the assessee entered into joint development agreements with 54 parties (hereinafter referred as ‘land owners’) on 03-06-2013. The said agreement had been entered in respect of 11 acres of land located in Ranga Reddy district of Andhra Pradesh. As per the agreement, the assessee agreed to construct and deliver a share of the total built up area (31.66%) along with car parking spaces, terrace areas, private areas and all other built up areas to the land owners in consideration of 68.34% of land being conveyed to it by the land owner.

3.2 In terms of the agreement, a sum aggregating to Rs.21,85,00,000/- had been paid by the assessee to the land owners as interest free ‘refundable security deposit’. This deposit is refundable to the assessee after 18 months of commencement of the construction. As per clause 15.3 of the Agreement the security deposit paid by the assessee is recoverable through sale of constructed area of the land owners. The Agreement also recognizes that any deficit shall be made good by the land owners.

3.3 The Assessing Officer issued a notice on 11.10.2013 whereby the assessee was provided an opportunity to show cause why proceedings under section 201(1) and 201(1A) should not be initiated in respect of payments made under the development agreement entered by the assessee on 03.06.2013. The assessee replied to the said notice vide letter dated 21.10.2013. The assessee also had a personal hearing
with the A.O. on 25.10.2013. Another response was filed by the assessee on 29.10.2013. The assessee contented that the amount paid to land owners are in the nature of refundable security deposit and therefore cannot be characterized as consideration for transfer of immovable property attracting provisions of section 194IA.

3.4 Another notice was issued by the A.O. on 07.11.2013 asking the assessee to show cause why refundable security deposit should not be treated as consideration for transfer. The assessee vide letter dated 13.11.2013 replied to this notice reiterating that a refundable security deposit is in the nature of a caution deposit and hence cannot be characterized as consideration for transfer

3.5 The A.O. again issued a notice dated 20.11.2013 asking the assessee to show cause by 26.11.2013 as to why the assessee should not be treated as an assessee-in-default under section 201(1) and 201(1A) of the Act in respect of default of not deducting tax under section 194IA from refundable security deposit paid to the land owners. The assessee replied to the said notice vide a letter dated 26.11.2013. The assessee therein sought an adjournment of the hearing. The A.O. was informed by the assessee that it has sought an expert opinion on applicability of section 194IA qua refundable security deposit.

3.6 Another notice was issued by the A.O. on 06.12.2013 asking the assessee to appear on 12.12.2013 to show cause why proceedings under section 201(1) and 201(1A) should not be initiated. The A.O. also asked whether the land owners have furnished their PAN to the assessee. The assessee replied to this notice vide 12.12.2013 reiterating its contention that it is not obliged to withhold taxes under section 194IA from the refundable security deposit as the same is not in the nature of consideration for transfer of immovable property. The assessee stated that the security deposit is repayable by the land owners which indicates that the same is not in the nature of consideration for transfer. The assessee also argued that the accounting treatment of the refundable security deposit as ‘current asset’ in its books of account coupled with the accounting treatment of the refundable security deposit as current liability in the books of land owners supports its argument that the refundable security deposit cannot be characterized as consideration for transfer of immovable property.

3.7 The A.O. rejecting the contentions of the assessee passed the impugned order on 31.12.2013. The A.O. in the impugned order has held that the assessee has failed in deducting tax under section 194-IA from ‘refundable security deposit’ given to the land owners. The A.O. has reasoned that the refundable security deposit given to land owners constitutes ‘consideration’ for the transfer of the immovable property (land) under section 194IA. In arriving at this conclusion, the A.O. relied on the meaning of the term “consideration” as defined in section 2(d) of Indian Contract Act 1872. The A.O. concluded that out of 54 land owners, the assessee is in default of not discharging TDS liability in respect of 15 land owners who were paid security deposit in excess of Rs 50 lakhs.

3.8 On appeal, the CIT(A) confirmed the order of the Assessing Officer. Against this, the assessee is in appeal before the Tribunal.

3.9 The learned AR submitted that section 194IA has been inserted by the Finance Act 2013 with effect from 01.06.2013. Section 194IA imposes a liability on a person responsible for payment to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), to deduct tax at source either at the time of payment or crediting of such income to the account of the payee. Section 194IA reads as under:

“(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one percent of such sum as income-tax thereon.

(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.”

3.10 He further submitted that a perusal of above indicate that the following conditions need to be cumulatively satisfied before setting section 194IA into motion:

(i) There should be a ‘consideration’ for ‘transfer’ of immovable property;

(ii) Consideration should be paid by way of a sum;

(iii) There should be credit of the consideration to the account of transferor or payment of the same to the transferor;

(iv) Immovable property which is the subject matter of transfer, should not be an agricultural land;

(v) Transferor should be a resident;

(vi) Consideration should not be less than less than 50 lakh rupees.

3.11 The learned AR submitted that on the basis of the reasons that follow that the conclusion of the A.O. that the refundable security deposit constitutes consideration for transfer of immovable property is incorrect. The refundable deposit does not constitute consideration for transfer of immovable property.

3.12 The learned AR submitted that the term ‘consideration’ is not defined in the Act. The Bombay High Court and the Kerala High Court in Keshub Mahindra v. CGT [1968] 70 ITR 1 and CGT v Smt C K Nirmala 215 ITR 156 respectively held that the term “consideration” in the absence of a definition under the direct taxes legislation would carry the meaning as defined in the Indian Contract Act. Section 2(d) of the Indian Contract Act defines the term ‘consideration’ in the following manner:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”

3.13 Evidently the definition of ‘consideration’ under the Indian Contract Act broadly means, “a promise, an act or abstinence” by the promisee. Such act, abstinence or promise could be past, present or future. Such act, abstinence or promise should be at the desire of the promisor.

3.14 He relied on the judgment in the case of The House of Lords in Currie v Misa (1875) 10 Exch. 153, 162 [as quoted at  Page 33 of the Pollock & Mulla Indian Contract and Specific Relief Acts 11th edition Volume I] defined the term ‘consideration’ to mean “A valuable consideration in the sense of the law may consist either in some right, interest, forbearance, detriment, loss or responsibility, given, suffered or undertaken by the other.” The Supreme Court in Chidambara Iyer v Renga Iyer (1966) 1 SCR 168 held that the definition of ‘consideration’ under section 2(d) of the Indian Contract Act and that in the decision of Currie v Misa denotes the same meaning.

3.15 The learned authors in Pollock & Mulla Indian Contract and Specific Relief Acts 11th Edition after referring to the definition of ‘consideration’ as per section 2(d) of the Indian Contract Act and the meaning ascribed in Chidambara Iyer’s case has observed that the term ‘consideration’ connotes a price of a promise. It is a return or quid pro quo for a promise made.

3.16 The learned AR submitted that the development agreement represents a contract formed by the exchange of mutual promises, each promise being the consideration for the other. A promise is made by the developer to construct the superstructure in exchange of a promise made by the land owner to transfer the share in land. The promise to construct and deliver the superstructure to the land owner constitutes the consideration in terms of section 2(d) of the Indian Contract Act.

3.17 He further submitted that as per the development agreement entered by the assessee on 03.06.2013, the land owners have promised to transfer an agreed portion of land to the developer. The assessee in turn has promised to construct and transfer a share in the constructed property to the land owner. The promise made by the assessee to construct the superstructure and transfer a share in it to the land owners constituted consideration for the latter to transfer a part of the land. He drew our attention to the relevant covenants in the development agreement highlighting this facet are as under:

“NOW THIS AGREEMENT WITNESSETH AS FOLLOWS: That in pursuance of the foregoing and subject to the mutual obligations undertaken by the First Party and the Second Party under this agreement, the Second Party hereby agrees to develop the schedule Property into Residential Apartment Building/s, club house, with required car parking spaces and all other amenities as detailed hereinafter (hereinafter referred to as the Project / Residential Apartment Building/s), subject to the terms and conditions hereinafter contained:

(a) The Second Party / Developers are hereby empowered and authorized to develop the Schedule Property into “Residential Apartment Building/s” at their cost.

(b) The Second party / Developers’ shall construct and deliver to the First Party 31.66% of the total super built-up area comprised in the Residential Apartment Buildings to be constructed in or upon the Schedule Property, together with 31.66% car parking spaces, terraces areas, private garden areas and all other built up areas, hereinafter referred to as “OWNERS’ CONSTRUCTED AREA’ which is further detailed below. The remaining 68.34% of the total super built-up area in the Residential Apartment buildings to be constructed in the Schedule Property together with 68.34% of car parking spaces, terraces areas, private garden areas and all other built up areas is for the share of the Second Party and shall hereinafter be referred to as “DEVELOPERS’ CONSTRUCTED AREA” which is further detailed below.

(c) In consideration of the Second Party carrying out and completing the construction of “OWNERS’ CONSTRUCTED AREA” at its cost and delivering the same to the First Party in terms hereof, the second Party and / or its nominees / transferees shall be entitled to conveyance of 68.34% undivided share of land in the Schedule Property proportionate to the “DEVELOPERS’ CONSTRUCTED AREA”. Upon completion of construction of the Residential Apartment Buildings and delivery of the “OWNERS’ CONSTRUCTED AREA” in terms hereof, the first Party shall convey 68.34% undivided Interest and ownership being the Second Party’s undivided share of Interest in the Schedule Property in terms hereof to the Second Party and / or their nominees / transferees.”

3.18 Evidently the land owners in the instant case have agreed to transfer a portion of land (68.34%) belonging to them in lieu of share in the superstructure (31.66%) which would be constructed by the assessee. The value of 31.66% of the constructed area promised to be transferred by the assessee has been accepted as ‘consideration for transfer of 68.34% of land’ by the land owners.

3.19 The learned AR submitted that the assessee in the instant case also paid refundable security deposit to the land owners. The refundable security deposit was insisted upon by the land owners in order to secure due performance of the obligations of the assessee under the development agreement. Clause 15 of the development agreement highlights this facet. Clause 15 reads as under:

“15. REFUNDABLE SECURITY DEPOSIT:

15.1 The Second Party has agreed to place with the First Party a sum of Rs.21,85,00,000/- (Rupees Twenty One Crore Eighty Five Lakhs Only) as interest Free Refundable Security Deposit (Security Deposit) for the due performance of the Developers obligations under this Agreement, calculated at the rate of Rs. 1,00,00,000/-(Rupees One Crore Only) per acre of the Schedule Property. The said amount shall be paid to the members of the First Party as detailed in Annexure 4 to this Agreement.

15.2 On execution of this agreement the Second, Party has today paid to the First Party (as detailed in Annexure 4) a sum of Rs. 21,85,00,000/- (Rupees Twenty One Crore Eighty Five Lakhs Only) towards full payment of the above referred to Security Deposit, the receipt of which Is hereby, acknowledged by the First Party.

15.3 The Security Deposit amount paid by the Second Party to the First Party shall be recovered through sale of part of the OWNER’S CONSTRUCTED AREA’. The First Party shall sell through the Second Party, after 18 months from the date of Second Party has commenced construction, a minimum of Rs 1,50,000/- (Rupees One Lakh Fifty Thousand) sq ft from out of the OWNERS’ CONSTRUCTED AREA’ to be identified by the First Party at a price to be mutually agreed and fixed by the First Party and the Second Party, It is clarified as long as the Second Party offers to sell the aforesaid portion of the OWNERS’ CONSTRUCTED AREA’ at price not lower than Its own selling price, the First Party shall not unreasonably withhold its consent for selling the aforesaid area. The First Party shall authorise the Second Party to collect and recover from the purchasers this portion of OWNERS’ CONSTRUCTED AREA’ all amounts and the amount so collected shall be appropriated against the refund of the Security Deposit amount to be made by the First party. Any deficit amount shall be made, good by the First Party on completion of the development against hand over 01 remaining portion of the OWNERS’

CONSTRUCTED AREA’ and excess if any collected by the Second Party shall be refunded by the Second Party after deducting the other amount payable by the First Party to the, Second Party in terms of this agreement. Both parties shall execute appropriate agreement to record the aforesaid understanding simultaneously along with the Sharing Agreement.”

Consideration as perceived by the parties in the development agreement should be accepted:

3.20 The A.O. without appreciating the commercial understanding of the parties (assessee and land owners) as contained in the development agreement has drawn a conclusion that the payment of refundable deposit constitutes consideration for transfer of land by the land owners.

3.21 The learned AR submitted that the Hon’ble Supreme Court has held that a transaction based on an agreement executed between parties would have to be understood by the department in the same manner as it is understood by the parties concern unless the same is shown to be sham or malafide [Vodafone International Holdings B.V. v UOI 341 ITR 1, Ishikawajma-Harima Heavy Industries Ltd v.DIT 288 ITR 408]. The Supreme Court in CIT v Motors & General Stores (1967) 66 ITR 692 (SC) approvingly quoted another landmark decision in the case of Lord Russell of Killowen in Inland Revenue Commissioners v Duke of Westminster in which it has been held as under:

“It is therefore obvious that it is not open to the income-tax authorities to deduce the nature of the document from the purported intention by going behind the documents or to consider the substance of the matter or to accept it in part and reject it in part or to re-write the document merely to suit the purpose of revenue.”

3.22 The learned AR submitted that the A.O. has not alleged in the impugned order that the payment of refundable security deposit is a disguised form of sale consideration. In other words, the A.O. has not questioned the sanctity of the development agreement entered by the assessee. In such circumstances the A.O. has erred in not appreciating that the commercial understanding of the development agreement viz., value of 31.66% of the constructed area promised to be transferred by the assessee constitute ‘consideration for transfer of 68.34% of land’.

3.23 He further submitted that the Courts have held that in a development agreement similar to one in the present case; the share in constructed property constitutes ‘consideration for transfer’ of land by the land owner. In this connection one could refer to the following observations of the Kolkata Tribunal in ITO v Vikas Bahal (2010) 131 TTJ 229:

“The assessee along with his co-owners entered into a development agreement on 31st Oct., 2000 with the developer for development and construction activity on the said premises and handed over the impugned land accordingly to the developer. As per said agreement, placed in the paper book at pp. 2 to 23, the developer was to construct on the said land two six storied buildings consisting of flats shops, common parking area etc. As per the said agreement, upon development of the premises, the developer shall retain with him as his share 67.5 per cent of the land and constructed area and the balance 32.5 per cent land and constructed area shall be allotted to all the five owners of the land. As per second schedule to the said agreement, the assessee’s 1/5th share out of 32.5 per cent land and constructed area comes to 6,225 sq. ft. Therefore, in effect, vide the said development agreement, the owners of the land, i.e., assessee and other co-owners, transferred 67.5 per cent of the total land belonging to them unto the developer in consideration of the construction at the developer’s cost over remaining 32.5 per cent of the land retained by the co-owners. The co-owners did not realise any cost for such transfer of 62.5 per cent of land to the developer and in lieu thereof, they were entitled to get back 32.5 per cent constructed area with land and other common place etc. From the above it is evident that the value of 32.5 per cent constructed area was the consideration for the transfer of 67.5 per cent of the land to the developer.”

3.24 The Chennai Tribunal in DDIT v G Raghuram (2010) 134 TTJ 87 held as under:

“Since the development agreement specifies that certain part of constructed area shall be surrendered to the owner by the builder on the completion of the contract and the value of the constructed area to be transferred to the assessee to be considered as consideration received…”

3.25 The Hyderabad Tribunal in Maya Shenoy v ITO (2009) 124 TTJ 692 held that the development agreement involves exchange of assets between parties. The Tribunal also held that the share in superstructure developed by the developer constitutes consideration for transfer of land in the hands of the land owner.

3.26 The Supreme Court in CIT v. George Henderson & Co. Ltd 66 ITR 622 answering this question held that in cases of exchange of asset, it is the value of the asset / thing received or accrued [asset that ‘comes in’] to the transferor that should be reckoned as the full value of consideration. The argument that market value of the transferred capital asset [asset that ‘goes out’] should be adopted as full value of consideration in such cases had been disapproved by the Supreme Court.

3.27 The Authority for Advance Ruling in Jasbir Singh Sakaria In re 294 ITR 196 has observed that under an usual development agreement the developer constructs on the owner’s land and hands over a part of the built up area to the owner as consideration.

3.28 The learned AR submitted that the development agreement entered by the assessee is a typical development agreement wherein the assessee has agreed to construct on the land owner’s land and hand over a part of the built up area to such owners as consideration. The A.O. without understanding this has concluded that the amount paid under clause 15 of the development agreement constitutes consideration of transfer.

3.29 According to the learned AR, the amount paid to the land owners under clause 15 of the said agreement is in the nature of ‘refundable security deposit’. In fact the A.O. has also accepted in para 11 of the impugned order that the amount paid by the assessee is in the nature of refundable security deposit.

3.30 In the real estate industry the land owners generally obtain refundable security deposit from the developers to ensure proper execution of terms of agreement. It is repaid by the land owner to the developer on achieving certain level of construction or complying with certain terms and conditions as stipulated in the development agreement.

3.31 The learned AR submitted that in the case of the assessee the land owners have agreed to repay the deposit to the assessee after 18 months of commencement of construction. This has been specifically stipulated in clause 15.3 of the development agreement. This fact has been accepted by the A.O. in para 13 of the impugned order.Despite noticing the fact that the security deposit would be repaid by the land owners, the A.O. held that the refundable security deposit constitutes payment of consideration for transfer of immovable property attracting TDS under section 194IA.

3.32 The learned AR submitted that an important characteristic of ‘consideration’ is that the same belongs to the transferor / seller (land owner in the present case). A recipient of consideration is not obliged to repay the same. The amount of consideration can be appropriated by the recipient. The said characteristic is however not associated with a deposit. A recipient of deposit does not enjoy the right of disposal. A ‘deposit’ is received with an obligation to repay the same. The decision of the Delhi High Court in Baidyanath Plastic Industries (P) Ltd. and Others v ITO 230 ITR 522 can be referred to in this connection. The High Court observed:

“”Now the only question which remains to be determined is whether the repayment was towards ‘deposit’ or the same was towards ‘loan’. In order to determine this question it will be necessary to consider whether the meaning of the term ‘deposit’ ascribed by the Expln. to s. 269T includes the term ‘loan’ in its ambit. The distinction between the loan and the deposit is that in the case of the former it is ordinarily the duty of the debtor to seek out the creditor and to repay the money according to the agreement and in the case of the latter it is generally the duty of the depositor to go to the banker or to the depositee, as the case may be, and make a demand for it.”

3.33 The Delhi High Court in CIT v Visisth Chay Vypapar Ltd (2012) 339 ITR 157 explaining the features of the terms ‘loan’ and ‘deposit’ made the following observations:

“It is rightly held by the Tribunal, on the analysis of various judgments of our Courts which are referred to by Mr. Vohra as well and already noticed above, there are three main test between the loan and deposit. These are:-

(i) A loan is payable immediately on receipt thereof as per the directions of the lender, while a deposit has a term for repayment, which may be a fixed date or it may be as per terms and conditions of the agreement,

(ii) The loan is obtained at the request of the borrower while a deposit is made at the instance of the depositor, and

(iii) The limitation period in case of a loan starts from the date of the loan, while it starts from the date of repayment in the case of deposit.”

3.34 The definition of the term ‘deposit’ as contained in explanation (iii) to section 269T of the Act also supports the proposition that the amount of deposit is repayable on demand. The definition reads as follows: “”loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature.”

3.35 According to the learned AR, the land owner in the instant is contractually bound to pay the impugned amount to the assessee. The land owner received the said amount with an obligation to repay the same to the assessee. The land owners cannot appropriate the said amount. Under such circumstances, the impugned amount cannot be characterized as consideration for transfer of immovable property.

3.36 The term ‘consideration’ in section 194IA is followed by the expression ‘for transfer of any immovable property’. This indicates that the term ‘consideration’ should be understood to include such payments which are made in order to achieve the transfer of the immovable property. Refundable security deposit is insisted upon by the land owner to ensure that the developer adheres to the stipulations of the development agreement within the stipulated time frame and not for achieving the transfer of the immovable property. A refundable security deposit thus cannot be characterized as consideration for transfer of an immovable property.

3.37 The Hyderabad Tribunal in K Radhika v DCIT (2011) 47 SOT 180 held that the receipt of refundable security deposit cannot be construed as receipt of sale consideration.

3.38 He submitted that the Hyderabad Tribunal in Binjusaria Properties Pvt. Ltd. v ACIT (2014) 8 TaxCorp (A.T.) 35996 (HYDERABAD) reiterated that receipt of security deposit in case of a development agreement cannot be termed as receipt of consideration. The Tribunal came to the above conclusion after noting the fact that the security deposit can be recovered by the developer by adjusting it from the share of constructed area ofthe land owner. The relevant observations of the Tribunal read as under:

“10. In the present case, admittedly, what has been executed by the assessee is a “Development Agreement-cum-General Power of Attorney”. A reading of the said agreement indicates that what was handed over by the assessee to the developer is only a “permissive possession”. Clause 5 of the said agreement dated 2nd February, 2006, on page 3 thereof, specifically provides that “First party on signing of this agreement has permitted the developer to develop the scheduled land” (emphasis added). As per Clause 9 of the said agreement, consideration receivable by the assessee from the developer is “38% of the residential part of the developed area””” (which was later reduced to 33%, by virtue of a supplementary agreement executed on 18.10.2007). That being so, it is only upon receipt of such consideration in the form of developed area by the assessee in terms of the development agreement, the capital gains becomes assessable in the hands of the assessee. We are supported in this behalf by the decision of the Third Member Bench of the Tribunal in the case of Vijaya Productions Pvt. Ltd. V/s. Addl. CIT (134 ITD 19)TM.

“11. Even though the assessee in terms of recital on page 2 of the supplementary agreement dated 3rd February, 2006, was to receive “a refundable deposit of Rs. 2,00,00,016, through two cheques, the said deposit was to be refunded on the complete handing over of the area falling to the share of the first party, viz. the assessee; and in the event of failure on the part of the assessee in refunding such deposit, the same shall be adjusted at the time of final delivery, by the developer against the area to be handed over to the assessee applying a mutually agreeable rate. Considering these specific clauses and peculiar facts and circumstances of the case, we are of the considered view that the capital gains in the case on hand, are liable to be taxed only in the year, in which the developed area, coming to the share of the assessee, has been handed over to the assessee, in terms of the development agreement. In the present case, as the undisputed facts on record reveal, the developer has not undertaken any developmental activity to execute the construction work even today, even though in the final supplemental agreement dated 18th October, 2007 provided extension of time for the execution of the construction, by stating that the construction activity should be completed and developed area coming to the share of the assessee should be handed over within a further time of 48 months from the date of that supplemental agreement.

12.It is an undisputed fact that as on date, there was no developmental activity on the land which is subject matter of development agreement. The process of construction has not been even initiated and no approval for the construction of the building is obtained. Thus, the sale consideration in the form of developed area has not been received. Mere receipt of refundable deposit cannot be termed as receipt of consideration.”(emphasis supplied)

3.39 The Jaipur Tribunal held to the same effect in M/s Unique Builders and Developers v DCIT ITA No 589 & 590 / JP / 2012. The Tribunal noted that the security deposit has been shown as liability in the books of the assessee (land owner) which supports the conclusion that the same does not represent receipt of consideration for transfer. The relevant observations of the Jaipur Tribunal are as under:

“On perusal of the relevant clauses of the development agreement, though the fixed amount as security is receivable / received by the assessee as owner of the land but we are of the considered view that under the agreement transfer of land has not taken place nor security deposit received by the assessee could be considered as sale proceeds. The said agreement according to us cannot be considered as an agreement to sell in view of the specific provision of Stamp Act. It is not in dispute that development agreement is registered and the stamp duty has been paid as a memorandum of agreement under Article 5(bbbb) and not stamped as deed of conveyance as per Article 21(i) of the Rajasthan Stamp Act. On perusal of relevant clauses of the Development Agreement, we are of the considered view that this agreement is entered into only for the purpose of protecting the respective rights of the parties and to ensure smooth development of the project and thereafter to sell to the prospective buyers of the developed project. We agree with the ld. AR that provision of Section 53A of the Transfer of Property Act cannot be made applicable to the land under consideration as undisputedly the said land is stock in trade of the assessee and not a capital asset. We observe that authorities below have considered the said development agreement which amount to transfer of land particularly in view of clause 4.1 thereof as it gives an irrevocable and exclusive license and permission to use the project land to the developer. But we are of the considered view that said permission has been given to the developer for the limited purpose of development of the project and not with the intention to transfer of land. The above facts are fortified in the light of clause 5 of the development agreement which gives an option to the developer to purchase the land if they want @ Rs. 3.50 crores per acre. It is also a fact that assessee received a security deposit of an amount of Rs. 39,55,95,900/- and not the proportionate amount of Rs. 41,94,75,000/- which was not disputed by ld. DR at the time of hearing. The assessee has not received any additional amount over and above the amount as mentioned in the orders of the authorities below. We agree that the security deposit received by assessee and  shown as liability is in order and same cannot be considered as sale consideration for transfer of land.”(emphasis supplied)

3.40 The decision of Bangalore Tribunal in Shri V Pushpraj v ITO ITA No 686/Bang/2011 also supports the proposition that a refundable deposit does not constitute consideration for transfer of land by the land owners in case of a development agreement.

3.41 The learned AR submitted that one may in this connection also refer to Circular No 718 dated 22-08-1995. The CBDT in this Circular held in context of section 194I that the tax should be deducted only from a non refundable deposit for the reason that the same represents the consideration for the use of the land or the building, etc., and, therefore, partakes of the nature of rent as defined in section 194-I. The CBDT clarified that the tax is not deductible from a refundable deposit. Applying the same analogy, one could state that the refundable security paid to the land owners does not partakes the character of consideration of transfer of immovable property.

Characterisation of security deposit in the books of account:

3.42 The assessee in the present case has recorded the security deposit as ‘current asset’ in the books of account. The characterization of the security deposit in the books of account is in accordance with accepted accounting principles. The learned Assistant Commissioner of Income tax (TDS) – Circle 18(1), Bangalore without rejecting the books of account of the assessee has concluded that the amount of security deposit paid to the assessee is in the nature of consideration for transfer of immovable property.

3.43 The learned AR submitted that the Hon’ble Supreme Court recently in CIT v Punjab Stainless Steel Industries Civil Appeal No 5592 of 2008 dated 05.05.2014 recognized a principle that when a term is not defined in the Act or CBDT circulars then the accounting meaning of the same can be accepted.

3.44 The Bombay High Court in Jessaram Fatehchand (Sugar Dept) (RB) v. CIT 75 ITR 33 has held that the accounts regularly maintained have to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. The Supreme Court has made identical observations in CIT v. Woodward Governor India P. Ltd 312 ITR 254.

3.45 According to the learned AR, the treatment given in the books of account are to be taken as correct, unless the books of account are rejected by the revenue for strong and sufficient reasons. In the instant case, as stated above, the learned TDS officer has not given cogent reasons for disregarding the accounting characterisation of the refundable security deposit as current asset in the books of account of the assessee. In the light of above judicial pronouncements, the conclusion of the learned TDS officer to treat the refundable security deposit as consideration for transfer of land is bad in law and deserves to be set aside.

Refundable security deposit does not constitute income in the  hands of the land owner – TDS provisions are not applicable:

3.46 The learned AR submitted that the conclusion of the A.O. that the refundable security deposit is in the nature of consideration for transfer of immovable property is also liable for rejection on the ground that the same does not constitute income of the recipients viz., land owners. The question of deducting tax at source under the Act does not arise if the amount received by the payee does not constitute income in his hands. Existence of income is a sine qua non for attracting TDS provisions. This is the mandate of section 4(2) read with section 190 of the Act.

3.47 It is the submission of the learned AR that Section 4 is the charging provision under the Income Tax Act, 1961. The charge is defined vis-à-vis a person who is the recipient of income. The charge is in respect of the total income of a person for any year. Sub-section (2) of section 4 establishes a basis for the discharge of this tax. Sub-section (2), provides that in respect of income chargeable under sub-section (1), income-tax shall be deducted at source where it is so deductible or payable in advance under any provision of the Act. The foundation for TDS provision is thus laid out in section 4(2).

3.48 Chapter XVII of the Act contains provisions for collection and recovery of tax. Part A of Chapter XVII contains general provisions which outline the basis for deduction at source and advance payments. Part A comprises of sections 190 and 191. Part B of the said Chapter comprises of sections providing for deduction of tax at source from various types of payments.

3.49 Section 190(1) of the Act reads as follows “Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on income shall be payable by deduction or collection at source or by advance payment or by payment under sub-section (1A) of section 192, as the case may be, in accordance with the provisions of this Chapter”. The use of expressions ‘in respect of income’ and ‘tax on income’ in section 190(1) clearly indicates that the provisions of Chapter XVII of the Act attracts only in respect of the income of an assessee.

3.50 The Supreme Court in Transmission Corporation of A.P Ltd v CIT (1999) 239 ITR 587 held that TDS provisions apply not only to pure incomes such as salaries, dividends, interest on securities but also to gross sums which contains the element of income chargeable to tax under the Act. This principle was reiterated by the Supreme Court in CIT v. Eli Lilly and Co. India (P) Ltd [2009] 312 ITR 225 and GE India Technology Centre P. Ltd. v. CIT [2010] 327 ITR 456. To Quote the relevant observations of the Supreme Court from the former decision:

“Under the 1961 Act, total income for the previous year is chargeable to tax under Section 4. Section 4(2) inter alia provides that in respect of income chargeable under Section 4(1), income-tax shall be deducted at source where it is so deductible under any provision of the 1961 Act. Section 192(1) falls in the machinery provisions. It deals with collection and recovery of tax. That provision is referred to in Section 4(2). Therefore, if a sum that is to be paid to the non-resident is chargeable to tax, tax is required to be deducted. The sum which is to be paid may be income out of different heads of income mentioned in Section 14, that is to say, income from salaries, income from house property, profits and gains of business, capital gains and income from other sources. The scheme of the TDS provisions applies not only to the amount paid, which bears the character of “income” such as salaries, dividends, interest on securities etc. but the said provisions also apply to gross sums, the whole of which may not be income or profits in the hands of the recipient, such as payment to contractors and sub-contractors.”

3.51 The decision of Supreme Court in Vijay Ship Breaking Corp. v CIT [2009] 314 ITR 309 is an authority for the proposition that income exempt from tax is not liable for deduction of tax at source under section 195. Following are some of the decisions wherein it has been held that income exempt from tax is not liable for deduction of tax at source.

Jagannath Temple Managing Committee vs. CIT [2008] 299 ITR 56 (Ori) – SLP dismissed [2009] 310 ITR (St.) 0007; CIT vs. HCL Info System Ltd [2006] 282 ITR 263 (Del); Hyderabad Industries Ltd. vs. ITO [1991] 188 ITR 749 (Kar)

3.52 The CBDT Circular No. 3 of 2002 dated 28.06.2002 and Circular No. 4 of 2002 dated July 16 2002 ([2002] 256 ITR (St.) 22) states that no tax is required to be deducted in respect of any amounts payable to anybody or authority or institution, whose income is unconditionally exempt under section 10. The CBDT in Circular No 4 of 2008 dated 28.04.2008 clarified in context of section 194I that the payer of rent need not deduct tax on the service tax component received along with the rent for the reason that the landlord is merely acting as a collecting agency for the Government and the same does not partake the character of ‘income’ of the recipient. The relevant portion of the circular reads as under:

“Service tax paid by the tenant does not partake the nature of “income” of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore, it has been decided that tax deduction at source (TDS) under section 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax.”(emphasis supplied)

3.53 The Mumbai Tribunal in ITO (TDS) v M/s Wadhwa & Associates ITA No 695/Mum/2012 held that the TDS provisions are not applicable in case of a capital receipt.

3.54 Thus, it is the contention of the learned AR that the above decisions and CBDT Circulars thus indicate that the presence of income (whole or part) chargeable to tax is mandatory to attract TDS provisions contained in Chapter XVII.

3.55 The term ‘income’ is defined in inclusive manner in section 2(24). It does not outline the attributes or characteristics of the term income. It only lists out categories of receipts that are to be regarded as income. The usage of the term “includes” in the definition of “income”, signifies that the term is to be understood according to its natural import. The term income in its natural import means a monetary return. It is something that increases the net assets of an assessee. Income increases the “power of disposal” of an assessee. Income is something that goes into one’s pocket. This understanding of the term income is supported by the decision of the Privy Council in Shaw Wallace’s case 6 ITC 178. The Privy Council defined the term ‘income’ to mean “connote a periodical monetary return, coming in with regularity or expected regularity, from definite sources”.

3.56 The learned AR submitted that to constitute an income the assessee must have control of the use of the impugned receipt / sum. The Supreme Court in Kanchanganga Sea Foods Ltd. v. CIT (2010) 325 ITR 540 observed “It is trite to say that to constitute income the recipient must have control over it.” The amount received must be at the disposal of the assessee (land owner / seller in the present case). Only on satisfaction of this essential requirement, a receipt could be regarded as ‘income’ chargeable to tax. In the instant case, the assessee has paid refundable security deposit to the land owners. A security deposit is not covered under any of the limbs of section 2(24). It is also not understood as ‘income’ in its natural import. The land owners are contractually bound to repay the deposits to the assessee. The lnad owners are thus have no ‘control’ over the security deposit.

3.57 In view of the above, the learned AR submitted that the conclusion drawn by the A.O. in the impugned order that the amount of security deposit constitutes consideration for transfer of immovable property (and thus income) is bad in law. The assessee under such circumstances and law applicable is not obliged to withhold taxes from refundable security deposit under section 194IA.

3.58 The learned AR further submitted that the A.O. has stated that the condition of year of deductibility under section 194IA is satisfied in the instant case. The A.O. has stated that the provisions of section 2(47)(v) of the Act mandates that the event of ‘transfer’ is to be reckoned as completed on the date of execution of the development agreement and as a result the assessee was required to withhold tax at the time of payment of refundable security deposit under section 194IA. In support of this conclusion the A.O. has relied upon the decision of the Bombay High Court in Chaturbhuj Dwarkadas Kapadia v CIT 260 ITR 491 and the Karnataka High Court in CIT v. Dr T.K Dayalu ITA No 3165/2005 (Kar).

3.59 The learned AR submitted that the above conclusion of the is bad in law. The has erred in not appreciating that the provisions of section 2(47) defining the term ‘transfer’ does not apply in context of section 194IA.

3.60 The term “transfer” under section 2(47) is defined in relation to a capital asset. The term ‘capital asset’ is defined in section 2(14) to mean property of any kind held by an assessee. It excludes, among others, property held as stock-in-trade. Even if the meaning of ‘transfer’ as defined in section 2(47) is adopted even then no tax is deductible as the property in the instant case is held by the assessee as stock in trade. The import of definition of transfer under section 2(47) in context of section 194-IA would necessarily involve a reference to the term capital asset and consequently result in excluding an immovable property characterized as stock-in-trade. Such an exclusion is not intended in section 194-IA. There is nothing in section 194-IA to indicate that the immovable property held as stock-in-trade is not covered therein. For the purpose of section 194IA, the characterization of immovable property in the hands of the payer (assessee in the present case) is inconsequential. In other words a payer is required to withhold tax under section 194IA even if the immovable property constitutes stock-in-trade.

3.61 The definition of the term ‘transfer’ in section 2(47) is relevant in context of computing ‘capital gains’ arising out of transfer of a capital asset. Section 194IA does not deal with taxability of capital gains. It fastens an obligation on the payee / transferee to withhold taxes from any consideration paid or credited for transfer of an immovable property [not being an agricultural land]. The provisions of section 2(47) cannot be imported in section 194IA in the absence of a specific mandate.

3.62 The learned AR submitted that inview of the above, it can be stated that the aspect of transfer in context of section 194IA should be understood in the same manner as it is understood in common parlance. Normally, transfer of an immovable property is effected when the sale deed is registered with the stamp authorities. The title in the immovable property passes on to the buyer on the execution of the registered conveyance deed [Refer among others Alapati Venkataramiah v. CIT 57 ITR 185 (SC), CIT v. Periera & Sons Pvt Ltd 184 ITR 461 (Ker)]. However the event of ‘transfer’ should not be constructed to mean a completed event in context of section 194IA. If the term ‘transfer’ is inferred as a ‘completed event’ then one cannot give effect to the deduction from payments made prior to completion of transfer. Furthermore, there would generally be no consideration after the completion of transfer to invite or warrant a deduction. The purpose of section 194IA under such an interpretation would easily be frustrated.

3.63 Thus, the learned AR submits that in view of the above it could be stated that the provisions of section 194IA is attracted if a person is making payment as consideration to secure transfer of an immovable property. The withholding of tax is to be made in the year in which any sum towards consideration for transfer of an immovable property is made or credited pursuant to an agreement to sell. The year of chargeability of capital gains in the hands of the landowner [by virtue of section 2(47(v)] does not translate into year of deductibility of tax for the developer under section 194IA.

3.64 According to the learned AR, the reliance placed by the A.O. on the decisions of the Bombay High Court and the Karnataka High Court in Chaturbhuj Dwarkadas Kapadia v CIT 260 ITR 491 and CIT v. Dr T.K Dayalu ITA No 3165/2005 (Kar) is also bad in law. The ratio of these decisions applies in determining the year of taxability of capital gains in context of a development agreement. The Court in these decisions held that by virtue of the deeming fiction created under section 2(47)(v), the land owner would be liable to pay tax on the capital gains in the year of execution of the development agreement if possession of land has been handed over to the developer in the year of execution of the said agreement. In short, these decisions apply qua the land owner and not qua the developer.

3.65 The learned AR contended that Section 2(47)(v) was introduced in the Act with effect from 01-04-1988. Prior to insertion of clause (v) of section 2(47), a practice was in vogue whereby possession of the property was enjoyed by the parties in pursuance of agreement to sell. The parties used to defer the registration of the sale deed. When the income tax authorities questioned this practice, the courts came to the rescue of such parties by holding that the requirement of ‘transfer’ of an immovable property under the Act is incomplete in the absence of registration of property. The courts took the view that possession sans registration is not sufficient to attract charge of tax under section 45 of the Act. This is despite the fact that the person holding the possession enjoys most of the privileges and benefits of ownership. With an objective to curb such practices, section 2(47)(v) was introduced in the Act to create a fiction that the possession sans registration of sale deed would constitute transfer of a capital asset.

3.66 He further contended that the deeming fiction created in section 2(47)(v) cannot be imported to section 194IA so as to deem that the event of transfer therein is completed on the date of execution of the development agreement. It is a settled principle of law that a deeming fiction cannot be stretched beyond the purpose for which it was created. To quote the Supreme Court in CIT v Mother India Refrigeration Industries 155 ITR 711: “the legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field.”

3.67 The learned AR submits that as already discussed, the assessee in the instant case has not made any payment during the relevant previous year which could be regarded as payment of sum towards consideration for transfer. The impugned payment (refundable security deposit) cannot be characterized as sum paid as consideration for transfer. The occasion to deduct tax under section 194IA had therefore not arisen in case of the assessee.

3.68 Without prejudice, the learned AR submits that a development agreement entered by the assessee cannot be characterized as an agreement to sell in the absence of a legal fiction similar to one under section 2(47)(v). Any payment under the development agreement cannot be treated as payment for securing the immovable property. Under the general law, a development agreement constitutes an agreement for service. The Bombay High Court in Chaturbhuj Dwarkadas Kapadia v CIT 260 ITR 491 has accepted this proposition. The relevant observations of the High Court are as under:

“It was argued on behalf of the assessee that there was no effective transfer till grant of irrevocable licence. In this connection, the judgments of the Supreme Court were cited on behalf of the assessee, but all those judgments were prior to introduction of the concept of deemed transfer under section 2(47)(v). In this matter, the agreement in question is a development agreement. Such development agreements do not constitute transfer in general law. They are spread over a period of time. They contemplate various stages. The Bombay High Court in various judgments has taken the view in several matters that the object of entering into a development agreement is to enable a professional builder/contractor to make profits by completing the building and selling the flats at a profit. That the aim of these professional contractors was only to make profits by completing the building and, therefore, no interest in the land stands created in their favour under such agreements, That such agreements are only a mode of remunerating the builder for his services of constructing the building [see Gurudev Developers v. Kurla Konkan  Niwas Co-operative Housing Society (2000) 3 Mah LJ 131]. It is precisely for this reason that the legislature has introduced section 2(47)(v) read with section 45 which indicates that capital gains is taxable in the year in which such transactions are entered into even if the transfer of immovable property is not effective or complete under the general law.”(emphasis supplied)

3.69 He relied on the following case laws:-

(a) In respect of that the document should be understood from the point of view of parties concerned.

(i) Vodafone International Holdings B.V. v. UOI [(2012)
341 ITR 1 (SC)]

(ii) Ishikawajma Harima Heavy Industries Limited v. DIT [(2007) 288 ITR 408 (SC)]

(i) CIT v. Motor General Stores [(1967) 66 ITR 692 (SC)]

(ii) ITO v. Vikas Bahal [(2010) 131 TTJ 229 (ITAT Kolkata)

In the case of Ishikawajma Harima Heavy Industries Ltd. v. DIT (supra) the Hon’ble Supreme Court held as under:

Section(s): Income-tax Act, 1961, ss. 005(2),009(1)(i), Expln. (a),009(1)(vii),115A(1)(b)(B)

WORDS AND PHRASES “PERMANENT ESTABLISHMENT” MEANINGS OF

The appellant, a non-resident company incorporated in Japan, along with five other enterprises formed a consortium. The consortium was awarded by Petronet a turnkey project for setting up a liquefied natural gas (LNG) receiving, storage and regasification facility in Gujarat. The contract specified the role and responsibility of each member of the consortium and the consideration to be paid separately for the respective work of each member. The appellant was to develop, design, engineer, procure equipment, materials and supplies to erect and construct storage tanks including marine facility (jetty and island breakwater) for transmission and supply of LNG to purchasers, to test and commission the facilities, etc. The contract involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and (v) construction and erection. The price for offshore supply and offshore services was payable in US dollars, that for onshore supply and onshore services and construction and erection partly in US dollars and partly in Indian rupees. The payment for offshore supply of equipment and materials supplied from outside India was received by the appellant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on the high seas outside India. Though the appellant unloaded the goods, cleared them from Customs and transported them to the site, it was for and on behalf of Petronet and the expenditure including the customs duty was reimbursed to it. The price of offshore services for design and engineering including detailed engineering in relation to the supplies, services and construction and erection and the cost of any other services to be rendered from outside India, was also paid in US dollars in Tokyo. On these facts the appellant applied to the Authority for Advance Rulings (Income-tax) for a ruling on the following points : (a) whether the amounts received/receivable by the appellant from Petronet for offshore supply of equipment, materials, etc., were liable to tax in India under the provisions of the Income-tax Act, 1961, and the Double Taxation Avoidance Convention between India and Japan ; (b) whether the amounts received/receivable from Petronet for offshore services were chargeable to tax in India under the Act and the Convention ; and (c) would the appellant be able to claim deduction for expenses incurred in computing the income from offshore services. The Authority ruled (i) that, though property in the goods passed to Petronet while the goods were on the high seas, and in so far as the activities of the appellant for taking delivery of the goods from the ship, payment of customs duty and transportation of the goods to the site were concerned, the applicant could be said to be acting as an agent of Petronet, these facts did not militate against the property in the goods passing to the appellant. In connection with the offshore supply, certain operations were inextricably interlinked in India, such as, signing of the contract in India which imposed liability on the appellant to procure equipment and machinery in India and receiving, unloading, storing and transporting, paying demurrage and other incidental charges on account of delay in clearance. The price of the goods covered not only their price but also of all these operations which were carried out in India and from which income accrued to the appellant. Therefore, income accrued to the appellant from the offshore supply through business connection in India and some operations of the business were carried out in India. Profits were deemed to accrue/arise to the applicant in India from offshore supply of equipment/machinery but the profits deemed to accrue/arise in India would be only such part of the profits as was reasonably attributable to the operations carried out in India. (ii) That having regard to article 7(1) of the Convention for Avoidance of Double Taxation and Fiscal Evasion with respect to Taxes on Income between India and Japan read with paragraph 6 of the Protocol ^[1]supply of equipment or machinery (sale of which was completed abroad, the order having been placed directly by the overseas office of the enterprise) would be within the meaning of the phrase “directly or indirectly attributable to that permanent establishment” and, therefore, so much of the amount received or receivable by the appellant as was directly or indirectly attributable to the permanent establishment as postulated in paragraph 6 of the Protocol would be taxable in India. The price of the offshore services would be deemed to accrue or arise under section 9(1)(vii) of the Income-tax Act, 1961. And inasmuch as fees for technical services were specifically provided in article 12 of the Convention, they would not fall under article 7. Therefore, the price of the offshore services was taxable in India under the Act as well as the Convention. (iii) That, however, in view of section 115A(1)(b)(B) of the Act and article 12(2) of the Convention, tax was payable at the fixed rate of 20 per cent. of the gross amount of fees for technical services and the applicant would not be able to claim any deduction from the gross amount. The appellant preferred an appeal by way of special leave to the Supreme Court :

Held, (i) that section 9 of the Income-tax Act, 1961, raises a legal fiction ; but, having regard to the contextual interpretation and in view of the fact that the court is dealing with a taxation statute, the legal fiction must be construed having regard to the object it seeks to achieve. The legal fiction created under section 9 must also be read having regard to the other provisions thereof.

MARUTI UDYOG LTD. v. RAM LAL [2005] 2 SCC 638 followed.

(ii) That since the appellant carried on business in India through a permanent establishment it would clearly fall out of the applicability of article 12(5) of the Convention and fall within the ambit of article 7. In the Protocol to the Convention it was stated that the term “directly or indirectly attributable” indicated the income that should be regarded on the basis of the extent appropriate to the part played by the permanent establishment in those transactions. The permanent establishment in this case had no role to play in the transaction of offshore supply, sought to be taxed, since the transaction took place abroad.

(iii) That the second sentence of article 7(1) which allowed the State of the permanent establishment to tax business profits, but only so much of them as was attributable to the permanent establishment excluded the applicability of the principle that where there was a permanent establishment, the State of the permanent establishment should be allowed to tax all income derived by the enterprise from sources in the State irrespective of whether or not such income was economically connected with the permanent establishment. The State of the permanent establishment was allowed to tax only those profits which were economically attributable to the permanent establishment, i.e., those which resulted from the permanent establishment’s activities, which were economically from the business carried on by the permanent establishment. In this case, the permanent establishment’s non-involvement in the transaction of offshore supply, excluded it from being a part of the cause of the income itself and thus there was no business connection.

(iv)That for attracting the tax there had to be some activities through the permanent establishment. If income arose without any activity of the permanent establishment, even under the Convention the taxation liability in respect of overseas services would not arise in India. Section 9 spelled out the extent to which the income of a non-resident would be liable to tax in India. Section 9 had a direct territorial nexus. Relief under a Double Taxation Avoidance Treaty, having regard to the provisions contained in section 90(2), would arise only in the event taxable income of the assessee arose in one Contracting State on the basis of accrual of income in another Contracting State on the basis of residence. So far as accrual of income in India was concerned taxability must be read in terms of section 4(2) read with section 9, where-upon the question of seeking assessment of such income in India on the basis of the Double Taxation Treaty would arise. Paragraph 6 of the Protocol to the Convention was not applicable, because, for the profits to be “attributable directly or indirectly”, the permanent establishment must be involved in the activity giving rise to the profits.

(v) That the fact that the contract was signed in India was of no material consequence, since all activities in connection with the offshore supply were outside India, and therefore income could not be deemed to accrue or arise in the country.

(vi) That where different severable parts of a composite contract were performed in different places, as in this case, the principle of apportionment could be applied to determine which fiscal jurisdiction could tax that particular part of the transaction. This principle helped determine where the territorial jurisdiction of a particular State lay and to determine its capacity to tax an event. Applying it to composite transactions which had some operations in one territory and some in the other, was essential to determine the tax-ability of various operations. Therefore, the concepts of profits of business connection and permanent establishment should not be mixed up. Whereas business connection was relevant for the purpose of application of section 9, the concept of permanent establishment was relevant for assessing the income of a non­resident under the Convention.

(vii) That in this case the entire transaction was completed on the high seas and, therefore, the profits on sale did not arise in India. Once excluded from the scope of taxation under the Income-tax Act application of the Double Taxation Avoidance Treaty would not arise.

(viii) That, in relation to offshore services, section 9(1)(vii)(c) required two conditions to be met : to be taxable in India the services which were the source of the income sought to be taxed had to be rendered in India as well as utilized in India. In this case, both these conditions were not satisfied simultaneously, thereby excluding the income from the ambit of taxation in India. Thus for a non-resident to be taxed on income for services, such a service had to be rendered within India, and had to be part of a business or profession carried on by such person in India. The appellants had provided services to persons resident in India, and though they had been used here, they had not been rendered in India.

(ix) That whatever was payable by a resident to a non-resident by way of technical fees would not always come within the purview of section 9(1)(vii). It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax.

(x) That even in relation to such income, viz., income from offshore services, the provisions of article 7 of the Convention would be applicable, as services rendered outside India would have nothing to do with the permanent establishment in India. Thus, if any services had been rendered by the head office of the appellant outside India, only because they were connected with the permanent establishment, even in relation thereto the principle of apportionment would apply.

(xi)There exists a distinction between a business connection and a permanent establishment. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and the latter is for the application of section 9 of the Income-tax Act.

Clause (a) of Explanation 1 to section 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. The existence of a permanent establishment would not constitute sufficient “business connection”, and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to taxing the entire income attributable to the permanent establishment.

There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection.

In construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions.

The concepts of profits of business connection and permanent establishment should not be mixed up. Whereas business connection is relevant for the purpose of application of section 9, the concept of permanent establishment is relevant for assessing the income of a non-resident under the Double Taxation Avoidance Agreement.

(b) In respect of consideration for the purpose of Joint development agreement.

(i) DDIT v. G.Raghuram [(2010) 134 TTJ 87 (ITAT Chennai)

(ii) Maya Shenoy v. ITO [(2009) 124 TTJ 692 (ITAT Hyderabad)

(iii) CIT v. George Henderson & Co. Ltd. [(1967) 66 ITR 622 (SC)]

(iv) Jasbir Singh Sakaria In re [(2007) 294 ITR 196 (AAR)]

In the case of CIT v. George Henderson & Co. Ltd. (supra), the Hon’ble Supreme Court held as under:-

“FULL VALUE OF CONSIDERATION” MEANING OF

The expression “full value of the consideration for which the sale, exchange or transfer of the capital asset is made”, appearing in section 12B(2) of the Indian Income-tax Act, 1922, does not mean the market value of the asset transferred, but the price bargained for by the parties to the sale, etc. The consideration for the transfer of a capital asset is what the transferor receives in lieu of the asset he parts with, viz., money or money’s worth, and therefore the very asset transferred or parted with cannot be the consideration for the transfer. The expression “full consideration” in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The main part of section 12B(2) provides that the amount of capital gain shall be computed after making certain deductions from the “full value of the consideration for which the sale, exchange or transfer of the capital asset is made.” In the case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words “full value of the consideration” because it was dealing not merely with sale but with other types of transfers, such as exchange, where the consideration would be other than money. The expression “full value” means the whole price without any deduction whatsoever and it cannot refer to the adequacy or inadequacy of the price bargained for. Nor has it any necessary reference to the market value of the capital asset which is the subject-matter of the transfer.

If the conditions of the first proviso to section 12B(2) are not satisfied the main part of section 12B(2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer.

It is true that the court is bound to proceed normally on the findings of fact which are mentioned in the statement of the case. But if the statement of the case does not correctly summarise or interpret the finding recorded in the order of the Appellate Tribunal which has been made part of the case, the court is entitled to look at the order itself in order to satisfy itself as to what was actually the finding of the Appellate Tribunal.

(c)    In respect of the contention that Deposit is with an obligation to repay:-

(i) Baidyanath Plastic Industries (P.) Ltd. and Others v. ITO [(2000) 230 ITR 522 (Delhi-HC)]

(ii) CIT v. Visisth Chay Vyapar Ltd. v. ACIT [(2011) 339 ITR 157 (Delhi-HC)]

In the case of CIT v. Visisth Chay Vypar Ltd (supra), the Hon’ble Delhi High Court held as under:-

WORDS AND PHRASES — ”LOAN” — MEANING OF.

The assessee placed intercorporate deposits of Rs. 22 crores at the disposal of SWC. The Commissioner (Appeals) held that the assessee had lent money to SWC, that the terms of the contract were decided by the lender and the nomenclature of intercorporate deposit was used ornamentally in the correspondence without taking into account the substance of the term and that, therefore, the transaction was not “a deposit” but “a loan”. The Tribunal, on the basis of information by the assessee that since SWC failed to return the deposit, for recovery of the amount, the assessee was forced to file civil suits and the suits were decreed in favour of the assessee the transaction was treated as in the nature of intercorporate deposit, came to conclusion that the nature of the transaction was that of “deposit” and not “loan”. On appeal :

Held, dismissing the appeals, that the three main tests between the loan and deposit are : (i) a loan was payable immediately on receipt thereof according to the directions of the lender, while a deposit had a term for repayment, which may be a fixed date or it may be according to the terms and conditions of the agreement, (ii) that the loan was obtained at the request of the borrower while a deposit was made at the instance of the depositor, and (iii) that the limitation period in the case of a loan starts from the date of the loan, while it starts from the date of repayment in the case of deposit. Since the monies given by the assessee to SWC did not fulfil these criteria the question of applicability of section 2(7) of the Interest-tax Act, 1974, would not arise. The expression “advance” occurring in section 2(7) along with the expression “loan” should take its colour from “loan” and could not be given wider interpretation to include deposit as well. Otherwise, money deposits given in the form of investments, etc., would also qualify as “advances” and interest thereon would become exigible to interest-tax. Such a situation was never contemplated by the Legislature. Wherever the Legislature intended that a deposit be treated as loan it made a specific statutory provision in this behalf. The intercorporate deposit given by the assessee to SWC was not in the nature of loan or advance within the meaning of section 2(7) of the Act and, therefore, was not chargeable under section 5 of the Act.

(d) In respect of the contention that refundable deposit cannot be regarded as consideration:

(i) K.Radhika v. DCIT [(2011) 47 SOT 180 (ITAT Hyderabad)]

(ii) Binjusaria Properties Pvt. Ltd. v. DCIT [(2014) 8 Taxcorp (AT) 35996, ITAT Hyderabad]

(iii) M/s.Unique Builders and Developers v. DCIT [(ITA No.589 & 590/JP/2012 – ITAT Jaipur Bench]

(iv) Shri V.Pushpraj v. ITO (ITA No.686/Bang/2011)

(v) ACIT v. R.Srinivasa Rao [(2014) 50 com 178 (ITAT Hyderabad).

In the case of K.Radhika v. DCIT (supra), the Hyderabad Bench of the Tribunal held as under:-

39. We have heard the rival contentions at considerable length. We have also perused the material on record and duly considered factual matrix of the case as also the applicable legal position. Learned representatives have addressed us on different aspects of the matter and also filed written submissions along with the judicial precedents which are placed on record.

40. As Revenue has placed heavy reliance on the judgment of Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra), and it is based on this judgment that the impugned addition has been made by the Assessing Officer, and sustained by the CIT(A), it is necessary to first appreciate what this judgment lays down, and perhaps even more important that that, what it does not lay down.

41. Their Lordships of Hon’ble Bombay High Court were examining the scope and import of section 2(47)(v) which was introduced with effect from 1-4-1988. This provision, which covers one of the modes of deemed ‘transfer’, lays down that the scope of expression ‘transfer’ includes ‘any transaction involving the allowing of the possession of any immovable property (as defined) to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act’. Elaborating upon the scope of section 2(47)(v), their Lordships observed as follows:

“Under section 2(47)(v), any transaction involving allowing of possession to be taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act would come within the ambit of section 2(47)(v). That, in order to attract section 53A, the following conditions need to be fulfilled. There should be contract for consideration; it should be in writing; it should be signed by the transferor; it should pertain to the transfer of immovable property; the transferee should have taken possession of property; lastly, transferee should be ready and willing to perform the contract. That even arrangements confirming privileges of ownership, without transfer of title, could fall under section 2(47)(v)”.

42. Their Lordships, having made the above observations, took note of the fact that section 2(47)(v) was introduced in the Act with effect from assessment year 1988-89 because prior thereto, in most cases, it was argued on behalf of the assessee that no transfer took place till execution of conveyance. It was also noted by their Lordships that, in this scenario, assessee used to enter into agreements for developing properties with the builders and under arrangement with the builders, they used to confer privileges of ownership without executing conveyance, and to plug that loophole, section 2(47)(v ) came to be introduced in the Act.

43. There was no dispute on whether or not the conditions of section 53A of the Transfer of Property Act were satisfied on the facts of the case before the Hon’ble Bombay High Court. It was in this context, and after elaborate analysis of the facts of the case before their Lordships, their Lordships also observed as follows:

“If on a bare reading of a contract in its entirety, an Assessing Officer comes to the conclusion that in the guise of agreement for sale, a development agreement is contemplated, under which the developer applies for permission from various authorities, either under power of attorney or otherwise and in the name of the assessee, the Assessing Officer is entitled to take the date of contract as the date of the transfer under section 2(47)(v).”

44.It is important to bear in mind that section 2(47)(v) refers to “possession to be taken or retained in part performance of the contract of the nature referred to in section 53A of the Transfer of Property Act” and in the case before Hon’ble Bombay High Court, there was no dispute that the conditions of section 53A were satisfied. In other words, the proposition laid down by their Lordships can at best be inferred as that when conditions under section 53A are satisfied, and when the assessee enters into a contract which is a development agreement, in the garb of agreement of sale, it is the date of this development agreement which is material date to decide the date of transfer. However, by no stretch of logic, this legal precedent can support the proposition that all development agreements, in all situations, satisfy the conditions of section 53A which is a sine qua non for invoking section 2(47)(v).

45. In order to invoke the principles laid down by the Hon’ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra), it is, therefore, necessary to demonstrate that the conditions under section 53A of the Transfer of Property Act are satisfied. This section is reproduced below for ready reference:

Section 53A : Part performance-Where any person contracts to transfer for consideration any immovable property by writing signed by him or on his behalf from which the terms necessary to constitute transfer can be ascertained with reasonable certainty, and the transferee has, in part performance of the contract, taken possession of the property or any part thereof, or the transferee, being already in possession, continues in possession in part performance of the contract and has done some act in furtherance of the contract, and the transferee has performed or is willing to perform his part of the contract then, notwithstanding that the contract, though required to be registered, has not been registered, or, where there is an instrument of transfer, that the transfer has not been completed in the manner prescribed thereof by the law for the time being in force, the transferor or any person claiming under him shall be debarred from enforcing against the transferee and persons claiming under him any right in respect of the property of which the transferee has taken or continued in possession, other than the right specifically provided by the terms of the contract:

Provided that nothing in this section shall affect the rights of a transferee for consideration who has no notice of the contract or of the part performance thereof.

46. A plain reading of section 53A of the Transfer of Property Act shows that in order that a contract can be termed to be “of the nature referred to in section 53A of the Transfer of Property Act” it is one of the necessary preconditions that transferee should have or is willing to perform his part of the contract. This aspect has been duly taken note of by the Hon’ble Bombay High Court when their Lordships observed as follows:

“That, in order to attract section 53A, the following conditions need to be fulfilled.

(a) There should be contract for consideration;

(b) It should be in writing;

(c) It should be signed by the transferor;

(d) It should pertain to the transfer of immovable property;

(e) The transferee should have taken possession of property;

(f) Lastly, transferee should be ready and willing to perform the contract”.

47. Elaborating upon the scope of expression “has performed or is willing to perform”, the oft quoted commentary “Mulla-The Transfer of Property Act” (9th Edn. : Published by Butterworths India), at p. 448, observes that:

“The doctrine of readiness and willingness is an emphatic way of expression to establish that the transferee always abides by the terms of the agreement and is willing to perform his part of the contract. Part performance, as a statutory right, is conditioned upon the transferee’s willingness to perform his part of the contract in terms covenanted thereunder.

Willingness to perform the roles ascribed to a party, in a contract is primarily a mental disposition. However, such willingness in the context of section 53A of the Act has to be absolute and unconditional. If willingness is studded with a condition, it is in fact no more than an offer and cannot be termed as willingness. When the vendee company expresses its willingness to pay the amount, provided the (vendor) clears his Income-tax arrears, there is no complete willingness but a conditional willingness or partial willingness which is not sufficient…

In judging the willingness to perform, the Court must consider the obligations of the parties and the sequence in which these are to be performed… .”

48. We are in considered agreement with the views so expressed in this commentary on the provisions of the Transfer of Property Act. It is thus clear that ‘willingness to perform’ for the purposes of section 53A is something more than a statement of intent; it is the unqualified and unconditional willingness on the part of the vendee to perform its obligations. Unless the party has performed or is willing to perform its obligations under the contract, and in the same sequence in which these are to be performed, it cannot be said that the provisions of section 53A of the Transfer of Property Act will come into play on the facts of that case. It is only elementary that, unless provisions of section 53A of the Transfer of Property Act are satisfied on the facts of a case, the transaction in question cannot fall within the scope of deemed transfer under section 2(47)(v) of the IT Act. Let us therefore consider whether the transferee, on the facts of the present case, can be said to have ‘performed or is willing to perform’ its obligations under the agreement.

49. Even a cursory look at the admitted facts of the case would show that the transferee had neither performed nor was it willing to perform its obligation under the agreement in the assessment year under consideration. The agreement based on which capital gains are sought to be taxed in the present case is agreement dated 11-5-2005 but this agreement was not adhered to by the transferee. The transferee originally made a payment of Rs. 10 lakhs on 11­5-2005 and another payment of Rs. 90 lakhs on the same day as refundable security deposit. However, out of this a sum of Rs. 50 lakhs was said to be refunded by the landlord to the developer on 5-3-2009. As such, the assessee has received only a meagre amount as refundable security deposit which cannot be construed as receipt of part of sale consideration. Admittedly, there is no progress in the development agreement in the assessment year under consideration. The Municipal sanction for development was obtained not in this assessment year and it was obtained only on 17-9-2006 from the Hyderabad Urban Development Authority. The sanction of the building plan is utmost important for the implementation of the agreement entered between the parties.Without sanction of the building plan, the very genesis of the agreement fails. To enable the execution of the agreement, firstly, plan is to be approved by the competent authority. In fact, the building plan was not got approved by the builder in the assessment year under consideration. Until permission is granted, a developer cannot undertake construction. As a result of this lapse by the transferee, the construction was not taken place in the assessment year under consideration. There is a breach and break down of development agreement in the assessment year under consideration. Nothing is brought on record by authorities to show that there was development activity in the project during the assessment year under consideration and cost of construction was incurred by the builder/developer. Hence it is to be inferred that no amount of investment by the developer in the construction activity during the assessment year in this project and it would amount to non-incurring of required cost of acquisition by the developer. In the assessment year under consideration, it is not possible to say whether the developer prepared to carry out those parts of the agreement to their logical end. The developer in this assessment year had not shown its readiness or having made preparation for the compliance of the agreement. The developer has not taken steps to make it eligible to undertake the performance of the agreement which are the primary ingredient that make a person eligible and entitled to make the construction. The act and conduct of the developer in this assessment year shows that it had violated essential terms of the agreement which tend to subvert the relationship established by the development agreement. Being so, it was clear that in the year under consideration, there was no transfer of not only the flats as superstructure but also the proportionate land by the assessee under the joint development agreement. As per clause Nos. 12.11 and 19.1 of Development Agreement-cum Power of Attorney, time is the essence of the contract and as per clause No. 12.11 the said property is to be developed and hand over the possession of the owners’ allocation to the owners’ and or their nominees within 24 months from the date of receiving the sanction of the plan from HUDA and Municipality/Gram Panchayat with a further grace period of 3 months. But the fact remains that the transferee was not only failed to perform its obligations under the agreement, but also unwilling to perform its obligations in the assessment year under consideration. Even otherwise, the assessing authorities has not brought on record the actual position of the project even as on the date of assessment or he has not recorded the findings whether the developer started the construction work at any time during the assessment year under consideration or any development has taken place in the project in the relevant period. He went on to proceed on the sole issue with regard to handing over the possession of the property to the developer in part performance of the Development Agreement-cum-General power of Attorney. In our opinion, the handing over of the possession of the property is only one of the condition under section 53A of the Transfer of Property Act but it is not the sole and isolated condition. It is necessary to go into whether or not the transferee was ‘willing to perform’ its obligation under these consent terms. When transferee, by its conduct and by its deeds, demonstrates that it is unwilling to perform its obligations under the agreement in this assessment year, the date of agreement ceases to be relevant. In such a situation, it is only the actual performance of transferee’s obligations which can give rise to the situation envisaged in section 53A of the Transfer of Property Act. On these facts, it is not possible to hold that the transferee was willing to perform its obligations in the financial year in which the capital gains are sought to be taxed by the Revenue. We hold that this condition laid down under section 53A of the Transfer of Property Act was not satisfied in this assessment year. Once we come to the conclusion that the transferee was not ‘willing to perform’, as stipulated by and within meanings assigned to this expression under section 53A of the Transfer of Property Act, its contractual obligations in this previous year relevant to the present assessment year, it is only a corollary to this finding that the development agreement dated 11-5-2005 based on which the impugned taxability of capital gain is imposed by the Assessing Officer and upheld by the CIT(A), cannot be said to be a “contract of the nature referred to in section 53A of the Transfer of Property Act” and, accordingly, provisions of section 2(47)(v) cannot be invoked on the facts of this case Chaturbhuj Dwarkadas Kapadia of Bombay (supra) undoubtedly lays down a proposition which, more often that not, favours the Revenue, but, on the facts of this case, the said judgment supports the case of the assessee inasmuch as ‘willingness to perform’ has been specifically recognized as one of the essential ingredients to cover a transaction by the scope of section 53A of the Transfer of Property Act. Revenue does not get any assistance from this judicial precedent. The very foundation of Revenue’s case is thus devoid of legally sustainable basis.

50.That is clearly an erroneous assumption, and the provisions of deemed transfer under section 2(47)(v) could not have been invoked on the facts of the present case and for the assessment year in dispute before us. In the present case, the situation is that the assessee has received only a ‘meagre amount’ out of total consideration, the transferee is avoiding adhering to the agreement and there is no evidence brought on record by the revenue authorities to show that there was actual construction has been taken place at the impugned property in the assessment year under consideration and also there is no evidence to show that the right to receive the sale consideration was actually accrued to the assessee. Without accrual of the consideration to the assessee, the assessee is not expected to pay capital gains on the entire agreed sales consideration. When time is essence of the contract, and the time schedule is not adhered to, it cannot be said that such a contract confers any rights on the vendor/landlord to seek redressal under section 53A of the Transfer of Property Act. This agreement
cannot, therefore, be said to be in the nature of a contract referred to in section 53A of the Transfer of Property Act. It cannot, therefore, be said that the provisions of section 2(47)(v) will apply in the situation before us. Considering the facts and circumstances of the present case as discussed above, we are of the considered view that the assessee deserves to succeed on reason that the capital gains could not have been taxed in this assessment year in appeal before us. The other grounds raised by the assessees in their appeals have become irrelevant at this point of time as we have held that provisions of section 2(47)(v) will not apply to the assessees in the assessment year under consideration.
Consequently, the appeal filed by the revenue in ITA Nos. 328 to 331/Hyd./2011 have become infructuous and dismissed accordingly.

(d) In respect of the contention that the Case laws and Circular on refundable security deposit not liable for Tax deducted at source:

(i) Circular No.718 dated 22.08.1995.

(ii) S.Cars (P.) Ltd. v. ITO [(2005) 4 SOT 143 (ITAT-Delhi)]

In the case of P.S.Cars (P.) Ltd. (supra), the Delhi Benches of the Tribunal held as under:-

5. We have duly considered the rival contentions and the material on record. As per section 194-I of the Act any person other than individual and HUF, who is responsible for paying to a resident any income by way of rent, is liable to deduct tax at source at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or issue of cheque or draft or by any other mode, whichever is earlier. Clause (i) of the Explanation to section 194-I defines the term “rent” to mean any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the lands appurtenant thereto, whether or not such building is owned by the payee.In the present case, as per clause (2) of the lease deed, the rent has been fixed at Rs. 37,000 per month. As per clause (3) of the deed if the lease is renewed for a further period of two years, the same terms and conditions are to continue except that the quantum of rent had to be increased by 10 per cent of the last paid rent. After the expiry of the period of 3 years, the lease was renewable with the consent of the lessor on the terms and conditions mutually agreed between both the parties. As per clause (4) of the deed, the lessee was to pay to the lessor a sum of Rs. 2,22,000 as interest-free deposit. At this juncture, it needs to be appreciated that in case of the lease being renewed with increased rent, the quantum of security deposit was not to be varied. The quantum of security deposit was decided at the start of the lease and only for the purpose of quantification, rent was taken as the basis. Merely because rent was taken as the basis, the deposit did not lose its character as a deposit. Moreover, the deposit was to be adjusted at the fag end of the lease. Reading the entire deed as a whole, the intention of the parties appears to be that the deposit will be adjusted only when the lessee finally decides to vacate the premises forever. Simply because the lease was on year-to-year basis, renewable every year, it did not imply that every year the lessor should refund the deposit and the lessee should again place the deposit with the lessor. In other words, if the lease period was renewed from year-to-year, the parties had thought it to be impracticable to refund and place back the deposit every year. To simplify it further, on renewal of lease, the deposit was deemed to have been refunded and placed again with the lessor. Therefore, in our considered view, the deposit placed by the lessee was not rent paid in advance but, in fact, was a security deposit as is commonly understood. Further, in order to consider it to be refund of deposit, it is not necessary that the lessor should physically refund the deposit to the lessee.In the event of the lease not being renewed at any time in future, the same could be adjusted against the rent payable by the lessee. Thus would tantamount to refund of deposit. Therefore it was a refundable deposit which could not be subjected to TDS as it did not fall within the definition of the term “rent” and also as clarified by the Board in its circular mentioned earlier. Accordingly, we hold that the assessee was not liable to deduct tax at source from the amount of Rs. 2,22,000 and hence no penalty was leviable. We cancel the penalty.

(e) In respect of the contention that characterization of refundable deposit as disclosed in the books of account cannot be disregarded:

(i) CIT v. Punjab Stainless Steel Industries – Civil
Appeal No.5592 of 2008 dated 05.05.2014 (SC).

(ii) B.Jessaram Fatehchand (Sugar Dept) (RB) v. CIT [(1970) 75 ITR 33 (Bombay HC)

(iii) CIT v. Woodward Governer India P. Ltd. [(2009) 312 ITR 254 (SC).

In the case of CIT v. Woodward Governer India P. Ltd. (supra), the Hon’ble Supreme Court held as under:-

WORDS AND PHRASES — “PROFITS”, MEANING OF.

“Loss” suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961.

Decision of the Delhi High Court in CIT v. WOODWARD GOVERNOR INDIA P. LTD. [2007] 294 ITR 451 affirmed.

For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profit/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is lower.

Decision of the Delhi High Court affirmed.

The expression “any expenditure” has been used in section 37 of the Income-tax Act, 1961, to cover both “expenses incurred” as well as an amount which is really a “loss” even though such amount has not gone out from the pocket of the assessee.

Profits and gains of the previous year are required to be computed in accordance with the relevant accounting standard. On general principles of commercial accounting, the value of the stock-in-trade at the beginning and at the end of the accounting year should be entered in the profit and loss account at cost or market price, whichever is lower the market value being ascertained on the last date of the accounting year, not at any intermediate date. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word “profits” implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset : it is a trading asset. Therefore, the concept of profits and gains made by a business during the year can only materialize where a comparison of the assets of the business at two different dates are taken into account.

Under the mercantile system of accounting, what is due is brought into credit before it is actually received : it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed.

UNITED COMMERCIAL BANK v. CIT [1999] 240 ITR 355 (SC) followed.

The accounting method followed by an assessee continuously for a given period of time has to be presumed to be correct till the Assessing Officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits.

(f)    In respect of the contention that case laws and Circular on to attract TDS provision, there should be an element of income.

(i) GE India Technology Centre P. Ltd. v. CIT [(2010) 327 ITR 456 (SC)]

(ii) Vijay Ship Breaking Corp. v. CIT [(2009) 314 ITR 309 (SC)]

(iii) Jagannath Temple Managing Committee v. CIT [(2008) 299 ITR 56 (Orissa-HC)]

(iv) Circular No.4 of 2008 dated 28.04.2008.

(v) ITO (TDS) v. M/s.Wadhwa & Associates [ITA No.695/ Mum/2012]

In the case of GE India Technology Centre P.Ltd. (supra), the Hon’ble Supreme Court held as under:-

DEDUCTION OF TAX AT SOURCE — MERE REMITTANCE TO NON-RESIDENT — DUTY TO DEDUCT TAX AT SOURCE — DOES NOT ARISE UNLESS REMITTANCE CONTAINS WHOLLY OR PARTLY TAXABLE INCOME — INCOME-TAX ACT, 1961, s. 195

The most important expression in section 195(1) of the Income-tax Act, 1961, dealing with deduction of tax at source consists of the words “chargeable under the provisions of the Act.” A person paying interest or any other sum to a non­resident is not liable to deduct tax if such sum is not chargeable to tax under the Act. Section 195 contemplates not merely amounts, the whole of which are pure income payments ; it also covers composite payments which have an element of income imbedded or incorporated in them. The obligation to deduct tax at source is, however, limited to appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. It is for this reason that the CBDT has clarified in Circular No. 728 dated October 31, 1995, that the tax deductor can take into consideration the effect of the DTAA in respect of payments of royalties and technical fees while deducting tax at source.

The expression “chargeable under the provisions of the Act” in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. If tax is not so assessable, there is no question of tax at source being deducted.

(g) In respect of the contention that extract of case laws on when assessee cannot be regarded as “Assessee in default”.

(i) IDBI v. ITO [(2007) 293 ITR (AT) 267.

(ii) Satellite Television Asian Region Ltd. v. DCIT (IT) [(2006) 99 ITD 91]

(iii) Jagran Prakash Ltd. v. DCIT [(2012) 345 ITR 288 (Allahabad HC).

(iv) CIT & Anr. v. Intel Tech India Pvt. Ltd. [(2011) 55 DTR (Kar.) 173.

In the case of Jagran Prakash Ltd. (supra), the Hon’ble Allahabad High Court held as under:-

NATURAL JUSTICE — PROCEEDINGS COMMENCED TEN DAYS BEFORE END OF YEAR AND COMPLETED IN TEN DAYS — FAILURE OF NATURAL JUSTICE.

Unless the pre-conditions for exercise of jurisdiction exist in an authority assumption of jurisdiction on assuming wrong facts can be questioned in a writ court and the mere fact that the Income-tax authorities have assumed jurisdiction and proceeded to pass an order does not preclude scrutiny as to whether or not jurisdictional facts to assume jurisdiction were present.

The fact that the parties have called their relationship an agency is not conclusive, if the incidents of this relationship, as disclosed by evidence do not justify a finding of agency, and the court must examine the true nature of the relationship and the functions and responsibilities of the alleged agent.

A deductor who fails to deduct Income-tax at source shall be deemed to be an assessee in default only when the assessee has also failed to pay such tax directly. Thus, there is no occasion to treat the deductor as an assessee in default unless the assessee has not paid the tax directly. The fact that the assessee has failed to pay tax directly is thus, a foundational and jurisdictional fact and only after finding that the assessee has failed to pay tax directly, can the deductor be deemed to be an assessee in default in respect of such tax.

The Explanation to section 191 of the Income-tax Act, 1961, is confined only to the amount of tax which was required to be deducted.

While interpreting the provisions of the charging section of the Income-tax Act and the machinery part both have to be treated as an integrated code.

In a case where tax has not been deducted at source, the short deducted tax cannot be realised from the deductor and the liability to pay such tax shall continue to be with the assessee direct, whose income is to be charged and a person who fails to deduct the tax at source, at best is liable for interest and penalty only. Nothing under section 201 can be read to mean that when the tax has not been deducted by the deductor, the tax not deducted can be realised from the deductor. No such provision is made under section 201 obviously because the liability to pay Income-tax is on the assessee directly in whose case, the tax has not been deducted. Two conditions to be fulfilled before holding a person liable for deduction at source under section 194H of the Act are that payment is received by a person as agent of a principal and, secondly, the payment is for services rendered (not being professional services).

An agency is a contract of employment for the purpose of bringing another in legal relation with a third party or in other words, the contract between the principal and agent is primarily a contract of employment to bring him into legal relation with a third party or to contract such business as may be going on between him and the third party. In publication of advertisements submitted by an advertising agency, the responsibility to make payment of bills of the newspaper is on the advertising agency and there is no responsibility of advertiser to make payment to the newspaper agency and no privity of contract between the newspaper agency and the advertiser and had the advertising agency being agent of newspaper agency, the advertiser was to be liable for payment to the newspaper agency.

The major source of revenue of the petitioner, the publisher of a Hindi daily newspaper, was generated from advertisements published in its newspapers. The petitioner was a member of the Indian Newspaper Society whose rules provide that advertising agencies are free from control or interference from any business or person who owns or controls a newspaper, that newspaper agencies cannot be treated as principals and advertising agencies agents and prohibit members of the Society from appointing advertising agency as their representa-tives, that it is the advertising agency which is responsible for payment even if the advertiser has not paid to the advertising agency, that the accreditation of advertising agency is for the object of providing better service to the advertiser and that advertising agencies work in the interest of consumers and advertisers. The petitioner gave a 15 per cent. trade discount to accredited advertising agencies and a trade discount of 10 per cent. to 15 per cent. to non-accredited advertising agencies in accordance with the Rules and Regulations of the Indian Newspaper Society. On the ground that the petitioner had failed to deduct tax at source under section 194H of the Act therefrom, orders were passed for the financial years 2009-10 and 2008-09 treating the assessee as in default and fastening liability to interest under section 201(1A) . On a writ petition :

Held, allowing the petition, (i) that the proceedings under section 201 / 201(1A) of the Act were clearly not permissible because the two foundational facts did not exist : (a) the relationship between the petitioner and the advertising agency was not that of principal and agent ; and (b) advertising agencies rendered service to advertisers and were accredited by the Society not as an agent of newspaper agency. The observation of the Assessing Officer that advertisement agencies rendered service to the petitioner was without anjities could have assumed jurisdiction under section 201 and directed recovery of tax which according to the authority was short deducted by the deductor and since the special leave petition filed by the Department against the Division Bench judgment of the Delhi High Court had been dismissed, this was not a fit case in which the petitioner should be relegated to the remedy of appeal. Further-more, huge liability running into several crores of rupees had been fastened on the petitioner and on the basis of the assessment order, reassessment notices had been issued by the Department for assessment years 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10, which would be nothing but multiplicity of proceedings to be faced by the petitioner whereas under law section 194H of the Act was not applicable in the facts. The petitioner had rightly invoked the jurisdiction of the court under article 226 and the petition could not be dismissed on the ground of alternative remedy.

(v) That notice was issued on March 19, 2012, and within ten days opportunity, hearing and proceedings were concluded and completed whereas, the petitioner was required to give details pertaining to more than 1,80,000 payments made to advertising agencies during the relevant period. Suddenly in the second quarter of March, the proceedings were started and concluded within ten days. The Department had rushed through the proceedings to complete them before March 31, 2012, which evidenced infraction of rules of natural justice. Thus, adequate opportunity to which the petitioner was entitled was not provided for by the Department and the Department rushed through the proceedings.

(h) In respect of the contention that the case laws on if tax is not deducted or short deducted under Chapter XVII the same cannot be recovered from the payer.

(i) DIT v. Maersk Co. Ltd. [(2011) 334 ITR 79 (Uttarakhand HC)

(ii) Associate Cement Co. Ltd. v. ITO [(2000) 74 ITD 369 (ITAT-Mumbai)

(iii) CIT v. Tata Elxsi Ltd. (ITA No.82 of 2008 dated 23.01.2008)

In the case of DIT v. Maersk Co. Ltd. (supra), the Hon’ble Uttarakhand High Court held as under:-

Looking into the scheme ojme is chargeable under the head “Salaries”, the person responsible for paying the income chargeable under the head “Salaries” shall at the time of paying, deduct Income-tax at source and failure on his part entails an obligation to pay interest under section 201(1A) of the Act in order to compensate the loss incurred to the Revenue. Upon failure on the part of the employer to deduct tax at source, the assessee only becomes liable to pay the tax directly under section 191 of the Act and does not become liable to pay interest under section 234B of the Act.

(i) In respect of the contention that the case laws on distinction between “Right in an Immovable Property” and “Immovable Property”.

(i) CIT v. Dr.V.V.Mody [(1996) 85 Taxmann 125 (Karnataka High Court).

3.70 Any payment pursuant to a development agreement therefore cannot be regarded as payment of consideration for transfer of immovable property.

3.71 In view of the above, the conclusion of the A.O. that the assessee was liable to withhold taxes at the time of execution of development agreement under section 194IA is bad in law and deserves to be rejected. Assessee can be regarded as an assessee-in-default only if the impugned amount constitute income in the hands of the landowners and tax remained unpaid by such landowners.

3.72 Without prejudice to the above, the learned AR submits that the A.O. has erred in treating the assessee as an ‘assessee in default’ without recording a finding that the refundable security deposit constitutes income in the hands of the land owners and such land owners have not paid the amount of tax directly on such income.

3.73 To reiterate, section 4 is the charging provision under the Act. The charge is defined vis-à-vis a person who is the recipient of income. The charge is in respect of the total income of a person for a year. Sub-section (2) of section 4 establishes a basis for the discharge of this tax. Sub-section (2), provides that in respect of income chargeable under sub-section (1), income-tax shall be deducted at source where it is so deductible or payable in advance under any provision of the Act.

3.74 Section 191 of the Act deals with a situation where a default occurs in the deduction of tax at source. In such a situation, the tax has to be borne / paid by the assessee directly. Section 191 also states that where no provision is made for deducting tax at source, the liability to tax will have to be discharged by the payee.

3.75 The learned AR submitted that from the above it emerges that the primary liability to discharge tax liability is on the recipient of income. To enable such a discharge, as also for various other reasons, the law has attached an obligation to the payer of certain sums to deduct tax at source. The deduction is done in discharge – either partially or completely – of the tax liability of the recipient. The payer or person responsible to deduct tax, thus functions like an agent of the Government. A vicarious liability is fastened on the payer of the specified sums to discharge the tax liability of the payee. The amount withheld is however tentative in nature. The final amount of tax to be paid is determined through the process of assessment. The amount of tax deducted at source is given credit and the balance tax if any is accordingly determined. Any person who fails to comply with the obligations imposed, may be treated as an assessee in default.

3.76 He relied on the judgment of the Hon’ble Supreme Court in Transmission Corporation of A.P Ltd and Another v CIT 239 ITR 587, wherein there had an occasion to examine the obligation of the person responsible for deduction of tax at source. The Court observed as under: “The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected.”

3.77 The Mumbai Tribunal in the case of IDBI Vs ITO 293 ITR (AT) 267 observed as follows:- “Section 190 makes it clear that the scheme of tax deduction at source is one of the methods of recovering the tax due from a person and it is notwithstanding the fact that the tax liability may only arise in a later assessment year. The tax liability is obviously in the hands of the person who earns the income, and tax deduction at source mechanism provides for method to recover tax such liability. Therefore, this tax deduction at source liability is, as we begun by taking note of, a sort of substitutionary liability. Section 191 further makes this position clear when it lays down that in a situation TDS mechanism is not provided for a particular type of income or when the taxes have not been deducted at source in accordance with the provisions of Chapter XVII, income-tax shall be payable by the assessee directly. This provision thus shows that tax deduction liability is a vicarious liability and the principal liability is of the person who is taxable in respect of such income. Section 202 lays down that tax deduction at source provisions are without any prejudice to any other mode of recovery from the assessee, which again points out to the tax deduction liability being vicarious liability in nature.”

3.78 The learned AR further submitted that it may happen that the person responsible to deduct tax at source fails to deduct tax at source. In such situations, as already stated, the liability to discharge tax shifts back to the assessee. The recipient is thus never absolved of the primary charge. In other words, the charge is never transferred to the payer of the income. Section 191 stipulates this. This is also confirmed by sub-section (2) of section 190 which states that the deduction of tax at source will not prejudice the charge created by section 4(1) of the Act. These two sections are incorporated in the statute to cover the eventualities arising out of the non-deduction or non-collection of taxes by the payer concerned.

3.79 The Mumbai Tribunal in case of Satellite Television Asian Region Ltd v. DCIT (International Taxation) (2006) 99 ITD 91 has recognised the above position of law. The Tribunal held that section 191 is a safety valve provided by the law to protect and enforce the charge of tax provided under section 4(1).

3.80 The learned AR contended that the fact that TDS is only a substitionary mechanism is reinforced by section 202 and section 205. Section 202 provides that tax deduction is only one mode of recovery. This mode is without prejudice to any other mode of recovery. Section 205 provides that in case tax is deductible under Chapter XVII of the Act then the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from the income. If the tax is deducted then the primary liability of the assessee is deemed to be discharged to that extent. However, in case the tax has not been deducted then the liability to discharge the tax shifts back to the assessee. The bar created under section 205 arises only in case of actual deduction. The assessee cannot take a stand that his liability is absolved to the extent the tax was deductible, but however not deducted. [Yashpal Sahni v. ACIT 293 ITR 539 (Bom)].

3.81 The learned AR submitted that the provisions of deduction of tax at source being tentative in nature, cannot subsist after the primary liability is discharged by the payee. The decision of the Supreme Court in Hindustan Coca Cola Beverage P. Ltd. v. CIT [2007] 293 ITR 226 may be referred in support of this proposition. The Supreme Court after referring to the provisions of section 4, 190 and 191 held as under in CIT v Eli Lilly and Co. (India) P. Ltd. [2009] 312 ITR 225:

“We are directing the AO to examine each case to ascertain whether the employee-assessee (recipient) has paid the tax due on the Home Salary/special allowance(s) received from the foreign company. In case taxes due on Home Salary/special allowance(s) stands paid off then the AO shall not proceed under Section 201(1).”

3.82 The Allahabad High Court in Jagran Prakashan Ltd. v. DCIT [2012] 345 ITR 288 explaining the scope of section 191 held as under:

• A deductor who fails to deduct income-tax at source shall be deemed to be an assessee in default only when the assessee has also failed to pay such tax directly.
• There is no occasion to treat the deductor as an assessee in default unless the assessee has not paid the tax directly.
• The fact that the assessee has failed to pay tax directly is thus, a foundational and jurisdictional fact and only after finding that the assessee has failed to pay tax directly, can the deductor be deemed to be an assessee in default in respect of such tax.
• In a case where tax has not been deducted at source, the short deducted tax cannot be realised from the deductor and the liability to pay such tax shall continue to be with the assessee direct, whose income is to be charged and a person who fails to deduct the tax at source, at best is liable for interest and penalty only.
• Nothing under section 201 can be read to mean that when the tax has not been deducted by the deductor, the tax not deducted can be realised from the deductor.

3.83 The learned AR submitted that no such provision is made under section 201 obviously because the liability to pay income-tax is on the assessee directly in whose case, the tax has not been deducted.

3.84 The Karnataka High Court relying on the decision of the Supreme Court in CIT v Eli Lily and Co (India) Pvt Ltd (Supra) held as under in CIT & Anr. V. Intel Tech India Pvt. Ltd. [2011] 55 DTR (Kar) 173:

“From the aforesaid judgment and the Explanation to s. 191, it is clear that once the payee acknowledges the receipt of the sale consideration, files a return assessing the said amounts in his hands and pays tax, which is accepted by the Department, the payer ceases to be an assessee in default. He is not liable to pay tax under s. 201(1) of the Act. However, that does not absolve his liability to pay interest on TDS amount which he has not deducted. Therefore in order to foist the liability of payment of tax under s. 201(1A) it is not necessary that on the date when the demand is made, the assessee should be an assessee in default. As held by the apex Court, both these sections are independent and mutually exclusive. They could be operated independent of each other. In that view of the matter, the Tribunal was justified in holding that on payment of tax due by the payee, the liability of the payer under s. 201(1) ceases, he ceases to be an assessee in default. But he has to pay interest under s. 201(1A) of the Act. Therefore the reasoning and finding recorded by the appellate authority is legal and valid and does not suffer from infirmity, which calls for interference.”

3.85 The learned AR submitted that the above discussed position of law has been statutorily recognized by the legislature in form of first proviso to section 201. The first proviso to section 201 has been incorporated in section 201 vide Finance Act 2012 with effect from 01.07.2012. The first proviso to section 201(1) reads as under:

“Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) chas paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed:”

3.86 The learned AR submitted that evidently the first proviso gives a statutory recognition to the proposition that a payer cannot be regarded as ‘assessee in default’ in respect of the sum paid to a resident from which he fails to withhold tax if the tax has been paid directly by the said resident. The legislature has also cast an onus on the payer to furnish a certificate to this effect from an accountant in such form as may be prescribed. The format of the certificate has been prescribed in Annexure A to Form 26A. The question of furnishing a certificate in Form 26A (and thus discharging the onus) by the payer however arises only if the sum paid constitutes income chargeable to tax in the hands of the recipient and the payer has failed in deducting tax from the same. The expressions ‘has taken into account such sum for computing income’ and ‘has paid the tax due on the income declared by him’ in clause (ii) and (iii) respectively fortifies this proposition. A perusal of Annexure A to Form 26A also indicate that the question of furnishing the same by the payer does not arise if the sum paid to the resident payee does not result in income chargeable to tax under the Act. The table under clause (i) requires information such as nature of payment, section under which tax was deductible, amount of tax deductible etc. Clause (ii) requires information pertaining to head of income under which the receipt is offered to tax in the return of income by the resident payee. These clauses clearly indicate that unless the sum paid constitutes income in the hands of the payee it would not be necessary upon the payer to furnish the certificate as required under first proviso to section 201. As already discussed, the impugned sum in the instant case is in the nature of a refundable security deposit which does not constitute income in the hands of the land owners. Under such circumstances, the assessee submits that it was not under an obligation to furnish certificate prescribed under first proviso to section 201. Moreover, it was impossible for the assessee to furnish such certificate before the learned Assistant Commissioner of Income tax (TDS) – Circle 18(1), Bangalore during proceedings under section 201. The said certificate requires information of date of filing and acknowledgement number of the return of income. These details were not available during the proceedings under section 201 as it was impossible for the payees (land owners) to file their return of income prior to 31.03.2014. The proceedings under section 201 had been initiated on 11.10.2013 [date of first show cause notice] and culminated on 31.12.2013. Thus it was impossible for the assessee to furnish the certificate as required under first proviso to section 201. Under such circumstances, going by the maxim of ‘Lex non cogit ad impossibilia’ [which means that the law does not compel anyone to do impossible things], non furnishing of the certificate as required under first proviso to section 201 should not be viewed as a ground to held that the assessee has not satisfied all the conditions of first proviso to section 201. On the facts and circumstances of the case and law applicable, the assessee cannot be regarded as an ‘assessee in default’ unless it is demonstrated that the impugned sum constitute income in the hands of the recipients (land owners) and they have not discharged the tax liability directly.

4. On the other hand, the learned Departmental Representative submitted that the payment of refundable deposit can’t be seen as a single transaction. It is to be read with the terms and conditions of the joint development agreement. The relevant conditions as per the JDA (Page No. 126 — 128 of the Paper Book filed by the AR) are mentioned below.

4.1 The First Party hereby permits the Second Party, by way of license, to enter upon the Schedule Property and further authorizes and empowers the Second Party to develop the Schedule Property by constructing Residential Apartments Building/s as aforesaid in term so this agreement and agrees not to revoke the said power until completion of development and sale of the ‘DEVELOPERS’ CONSTRUCTED AREA’ so long as there are no default or breaches by the Second Party of this Agreement. The Second Party has accordingly entered the Schedule Property and will develop the Schedule Property in terms of this Agreement (Clause 1.1 of Page 13 of JDA).

4.2 In the event as a condition for approval of development plan the HMDA/GHMC requires parties to mortgage of certain number of residential apartments in favour of HMDA/GHMC, the Second Party shall create such mortgage from out of the ‘DEVELOPERS’ CONSTRUCTED AREA’ as far as possible. If however the apartments to be mortgaged includes few of the apartments allocated to the share of the First Party, then the First Party also agree to mortgage same in favour of the HMDA/GHMC or the relevant statutory authority as required under the applicable law out. It is however clearly agreed and understood notwithstanding the First Party’s consent to mortgage their share apartments as provided in this clause, it shall be sole responsibility and obligations of the Second Party to comply with all conditions for release of mortgage of all apartments including the First Party’s share of apartments (Clause 2.8 of Page 15 of JDA).

4.3 The First to Eight members of the First Party have delivered to the Second Party certified copies of title deeds pertaining to Item No.1 of the Schedule Property as the same are common documents with other properties owned by the First to Eight members of the First Party. The Ninth to Fifty Forth members of the First Party have delivered to the Second Party all the original title deeds pertaining to Item No. 2 of the Schedule Property to be held by them for both the Parties hereto upon completion of the development the Second Party shall be entitled to retain or hand over the same to apartment owners association on its formation at its discretion. The First to Eighth members of the First Party hereby agree to allow inspection of original title deeds in respect of Item No.1 of the Schedule Property and if need be produce the same for verification by financial institutions, authorities and courts whenever necessary and hereby agree not to use the same to create any third party rights over the Item No.1 of the Schedule Property which affects the rights of the Second Party under this agreement or its ability to implement the Project. (Clause 16 of Page 28 of JDA).

4.4 The Second Party has agreed to place with the First Party a sum of Rs. 21,85,00,000/- (Rupees Twenty One Crore Eighty Five Lakhs Only) as interest Free Refundable Security Deposit (Security Deposit) for the due performance of the Developers obligations under this Agreement, calculated at the rate of Rs.1,00,00,000/- (Rupees One Crore Only) per acre of the Schedule Property. The said amount shall be paid to the members of the First Party as detailed in Annexure 4 to this Agreement. (Clause 15.1 of Page 28 of JDA).

4.5 The learned DR submitted that from the above conditions it is clear that irrevocable power of attorney was given by the land owners to the assessee and original title deeds were handed over to the assessee and the assessee has the right to mortgage even the owner’s construction area to raise loans. Further, the assessee has paid Rs.21,85,00,000 to the land owners which is to be adjusted against the sale proceeds of the constructed area. So, as seen from the conditions of the JDA, there is a transfer of the property and both the parties are willing to part perform the contract entered between them and the provisions section 2(47)(v) are applicable here.

Section 2(47) (v) reads as under

“any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882”

Further Explanation 2 says,

“…transfer includes and shall be deemed to have always included disposing of or parting with any asset or any interest therein, or creating any interest in any asset in any manner whatsoever directly or indirectly, absolutely or conditionally voluntarily or involuntarily, by way of an agreement or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India”

So, considering the above, the case of the assessee definitely falls under the definition of ‘transfer’.

4.6 She further submitted that if there is a transfer of the property, there should be some consideration. In Page 8 of the assessment order, the AO has discussed in detail the meaning of consideration as per section 2(d) of the Indian Contract Act, 1972. As per this Act, consideration means something in return and need not be adequate in return to the value of something given. Here, in this case the assessee has given Rs. 21,85,00,000 as refundable security deposit to the land owners which is actually not refundable and the same is to be adjusted with the sale proceeds of the constructed area. So the nomenclature i.e. refundable security deposit should not take away the essence of the transaction and it is nothing but advance sale consideration received for the transfer of the property.

3.1 The case laws quoted by the Ld. AR in respect of “consideration” is not applicable for the present case as there is no monetary consideration involved in those cases and the facts are also different.

3.2To support the stand of the assessee, the Ld.AR has quoted the case law i.e. M/s. Unique builders and developers vs DCIT (ITAT, Jaipur). The facts of the case are different and as per Para 31.1 of the order, the Hon’ble ITAT has made the following observation-

“…we observe that the AO by considering the said development agreement as agreement to sale of land and also considered entire amount of security deposit to be received by the assessee of Rs.105.85 crores as sale consideration ignoring the fact that the entire project execution did not materialize.”

With this background, the Hon’ble ITAT has decided the issue in favour of the assessee as there is no accrual of income to the assessee which is not the case of the assessee.

3.3 The facts are different from the case law quoted by the Ld. AR in the case of ACIT vs R. Srinivasa Rao (ITAT, Hyderabad are different. Though the issue was held in assessee’s favour, in para 11 of the order, the Hon’ble ITAT has made the following observations

“.. however the handing over of possession by the assessee towards part performance of the contract will not amount to transfer unless the transferee is also willing and ready to perform his part of the contract under the development agreement. As can be seen from the facts and materials on record, the developer apart from making payment of the refundable security deposit of Rs. 13 lakhs per acre has not taken any steps towards development of the property”

In view of this fact, it was decided in favour of the assessee which is not the case of the assessee. Here both the parties were willing to perform the contract and so not applicable.

4.7 She further submitted that it is not the case of the assessee that it had deducted TDS at the time of adjusting the sale proceeds against the refundable deposit and so not the case of double deduction of TDS.

5. We have heard rival contentions and carefully considered the material on record. In the present case, the Assessing Officer was of the opinion that since the assessee paid refundable deposit of Rs.21.85 Crores to 54 land owners on entering into JDA with them on 3.6.2013 is liable for deduction of TDS u/s. 194-IA of the Act at 20% in 5 cases, their PAN were not available with the Assessing Officer and 1 person in other case since these payments are related to transfer of property. The CIT(Appeals) observed that the assessee is liable for deduction of TDS at 1% in the case Jle property in terms of Section 2(47)(v) of the Act. In the present case, an amount of Rs.21.85 Crores has been paid to 54 land owners which was shown as interest free “Refundable Security Deposit” in the JDA cum General Power of Attorney and this security deposit paid by the assessee is recoverable through sale of constructed area of the land owners share which is specified in Clause 15 of the JDA cum General Power of Attorney. The provisions of Section 194-IA of the Act which was inserted by the Finance Act, 2013 w.e.f. 1.6.2013 which reads as follows :

“(1) Any person, being a transferee, responsible for paying (other than the person referred to in section 194-IA to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one percent of such sum as income-tax thereon.

(2) No deduction under sub-section (1) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

(3) The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.”

5.2 As per the provisions of Section 194-IA of the Act, the above conditions are to be fulfilled. Now the issue before us is with regard to whether the amount paid by the assessee towards interest free security deposit to various land owners whether it constitutes as “Consideration” in terms of Transfer of Immovable Property. In the present case, as per JDA cum General Power of Attorney, land owners have agreed to transfer a portion of land (68.34%) belonged to them in lieu of share in the super-structure (31.66%) which should be constructed by the assessee. The value of 31.66% of the constructed area promised to be transferred by the assessee has been accepted as “Consideration” for transfer of 68.34% of land by the land owners. The assessee has paid refundable security to the land owners amounting to Rs.21.85 Crores. According to ld. DR, the payment of refundable security deposit is nothing but a part of sale consideration for transfer of immovable property in favour of the present assessee. Further it was submitted by the ld. DR that the refundable security deposit of Rs.21.85 Crores paid to the land owners which is actually not refundable and the same is to be adjusted with the sale proceeds of the constructed area. So, the nomenclature given by the assessee to such amount as refundable security deposit should not take away the essence of the transaction and it is nothing but advance sale consideration paid by the assessee to the land owners for transfer of immovable property. The basic condition to apply the provisions of Section 194-IA of the Act is that there should be a consideration for transfer of immovable property. The consideration as mentioned in JDA is the value of 31.66% of the constructed area which is to be transferred by the assessee as consideration for transfer of 68.34 of land by the land owners. In the present case, we have gone through the JDA cum General Power of Attorney to see whether there is a transfer within the meaning of Section 2(47)(v) of the Act or whether the transferee and transferor on the facts of the present case can be considered to have “performed or is willing to perform”, their respective obligation under the JDA cum General Power of Attorney.

5.3 We have carefully gone through the JDA cum General Power of Attorney dt.3.6.2013. As per this JDA, it was specifically mentioned in Clause Nos.1 & 2 as follows :

“ 1. PERMISSION/POWER TO DEVELOP:

1.1 The First Party hereby permits the Second Party, by way of license, to enter upon the Schedule Property and further Authorizes and empowers the Second Party to develop the Schedule Property by constructing Residential Apartments Buildings as aforesaid in terms of this agreement and agrees not to revoke the said power until completion of development and sale of the DEVELOPERS’ CONSTRUCTED AREA’ so long as there are no default or breaches by the Second Party of this Agreement. The Second Party has accordingly entered the Schedule Property and will develop the Schedule Property in terms of this Agreement.

1.2 The permission to enter by way of license so granted shall not however be construed as the delivery of possession of the Schedule Property in part performance of any contract as defined under section 53 A of the Transfer of Property Act, 1882 read with section 2 (47) (V) &(”l) of Income Tax Act, 1961.

1.3 The First Party hereby agrees not to interfere or interrupt in arty manner whatsoever the development of Schedule Property and construction of the Residential Apartment Buildings as stated above and/ or stopping the work that has to be done under this agreement. However the First Party and/or their authorized representatives are entitled to inspection as provided in this agreement.1.2    The permission to enter by way of license so granted shall not however be construed as the delivery of possession of the Schedule Property in part performance of any contract as defined under section 53 A of the Transfer of Property Act, 1882 read with section 2 (47) (V) &(“l) of Income Tax Act, 1961.

1A) CONVERSION.

Immediately on execution of this Agreement the members of the First Party shall apply to the Concerned Revenue Authority for conversion of the Schedule Property from the existing agricultural to non-agricultural residential purposes under the Andhra Pradesh Agricultural Land (Conversion for Non Agricultural Purposes) Land Act, 2DD6. The members of First Party undertake to secure the same within 2 (two) months from date of this agreement. The Second Party has agreed to bear/pay. conversion fee/charges payable for getting the conversion order.

18) The members of the First party also agree to secure at their cost and furnish, if necessary, no objection certificates from Revenue Department and Urban Land Ceiling Authorities for the proposed Project.

2. PLANS/LICENCES:

2.1 The Second Party shall prepare or get prepared development plan, building plans and all required drawings as per the building bye-laws, rules and regulations in force for development of the Schedule Property Into Residential Apartment Building/s with required parking spaces, common amenities like club house etc., within a period of 4 months from the date of this Agreement and present the same for the approval of the First Party. Subject to First Party having given their consent for the proposed plans without any delay, and subject to receipt of conversion certificate and no objection certificate as per Clause 1A and 1B above, the Second Party shall take appropriate steps to secure at their cost necessary consents, no objection certificates and other.”

5.4 As seen from the Clause No.1 that day one, it is specifically mentioned that the assessee is only permitted by the land owners to enter upon the scheduled property to develop the scheduled property by constructing a residential apartment building as per the terms mentioned in JDA. It is also specifically mentioned tin Clause No. 1.2 that the permission to enter by way of license so granted shall not however be construed as delivery of position of the scheduled property in part performance of any conduct as defined u/s. 53A of the Transfer of Property Act r.w.s.2(47)(v) 86 (vi) of the Income Tax Act, 1961. Further it was mentioned that Clause No. 2.1 states that within four months from the date of this Agreement, the present assessee to get prepared development plan, building plan and all other drawings as per the buildings by law, rules and regulations in force for development of the scheduled property into residential apartment buildings with the required parking spaces, common amenities like club house, etc and present the same for the approval of the first party for obtaining consent from the transferee. After obtaining the consent from the land owners, the assessee shall take appropriate steps to obtain No Objection Certificate, other permissions required for undertaking the Project within 12 months from the date of the JDA. As seen from the above, it is actually mentioned that the assessee is only permitted by the land owners to develop the scheduled property as residential apartment buildings and also mentioned that it cannot be construed as delivery or possession in terms of Section 53 of the T.P. Act r.w.s. 2(47)(v) of the Act. Legal possession of scheduled property are continue to remain with the possession of the land owner.

5.5 Now commencement of the Project, clause 8 to 8.3 are reproduced below:

8. Commencement and completion of construction:

8.1 Within 60 (Sixty) days from the date of securing sanctioned plan for construction and executing Allocation / Sharing / Supplemental Agreement, the Second Party shall commence construction in the Schedule Property.

8.2 The Second Party shall develop the entire Schedule Property and under normal conditions and in the absence of any Force Majeure event, complete the overall development and construction of the Residential Apartment Buildings in accordance with the Specifications set out in Annexure 2 hereto and the Sanctioned Plans within Sixty (60) months from the date of receipt of sanctioned plans. However, the Second Party shall not incur any liability for any delay in delivery of possession of the `OWNERS CONSTRUCTED AREA’ by reason of non-availability of Government Controlled Materials, and / or by reason of Government restrictions and / or civil commotion, transporters strike, Act of God or due to any injunction or prohibitory order (not attributable to any action of the Second Party) or conditions force majeure provided the Second Party notifies the First Party of any such event within 7 working days of such event occurring with estimate or during of such event persisting. In which events, the Second Party shall be entitled to corresponding extension of time for completion and delivery of the said `OWNERS CONSTRUCTED AREA’. The time taken for obtaining occupancy certificate / completion certificate / power / water / sanitary connections by the Second Party shall be excluded at the time of computing the period stipulated for construction however the Second party in any event shall secure the occupancy certificate within 6 months from the date of completion of construction. In the event of delay in securing Occupancy Certificate / Completion Certificate or Power / Sanitary / Water Connections, the Second Party shall arrange to have temporary electrical, water and sanitary connections until permanent connections are obtained. Within the aforementioned overall time lines the Second Party shall be entitled to develop the Schedule Property in two or more phases, subject to the condition that in each of the phase the First Party shall be entitled to get their 31.66% of the built up area proportionately.

8.3 In the event of any delay in completing the construction and development as stated above other than for the reason stated herein above, the Second Party shall be entitled to Six (6) months grace period to complete the development and construction of `OWNERS CONSTRUCTED AREA’, if there is any delay beyond the grace period the Second Party shall be liable to pay to the First Party damages at the rate of Rs.8/- (Rupees Eight Only) per sq.ft. per month of delay in completing and delivering the OWNERS CONSTRUCTED AREA, applicable for period of Six (6) months after the the Second Party shall be liable to pay the damages at the rate of Rs.12/-(Rupees Twelve Only) per sq.ft. per month of delay. The parties acknowledge that the damages provided in this clause is reasonable and commensurate with loss that would suffered by the First Party on account of delayed delivery of OWNERS CONSTRUCTED AREA and apart from the agreed damages the First Party shall not be entitled to claim any other compensation / damages from the Second Party.

5.6 As seen from the above Clause 8.2, there is a time limit to commence construction i.e. 60 days from the date of securing the sanction plan for construction and construction shall complete within 60 months from the date of receipt of the sanction plan. Further if any delay in completing the construction, the assessee shall be entitled for six months grace period to complete the development and construction of owners constructed area. If there is any delay beyond the grace period, there is a penalty clause i.e. damage clause as mentioned in Clause No.8.3.

5.7 There is a time limit to get the permission from the competent authority which is 12 months from the date of Agreement, thereafter 60 months time to complete the construction of residential apartment buildings form the receipt of the sanction plan, thereafter grace period has been given which show that the time is the essence of the contract. In the Assessment Year under consideration, nothing is brought on record to show that the assessee got approval of the sanctioned plan vis-à-vis any construction is started. Being so, the argument of the ld. DR is that there was a transfer of immovable property in the assessment year under consideration is not tenable. This is so, because the transferee is not able to complete any act as mentioned in JDA cum General Power of Attorney. The transferee only made payment of interest free refundable security deposit of Rs.21.85 Crores to the land owners as per clause No. 15. There was a condition in Clause No. 15 that the security deposit paid by the present assessee to the land owner shall be recovered through sale of the part of the owners constructed area. The ld. DR submitted that this is the payment of security deposit which is nothing but the payment of advance sale consideration on transfer of immovable property. It is also clarified by the CBDT in its Circular No.718 dated 22.08.1995, which reads as under:-

150. Clarification regarding deduction of tax at source from payment of rent

1. The Finance Act, 1994 introduced section 194-I in the Income-tax Act, 1961, which provides for deduction of tax at source from payment of income by way of rent. This section as amended by Finance Act, 1995 reads as follows :

‘194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to any person 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 cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—

(a)   fifteen per cent if the payee is an individual or a Hindu undivided family; and

(b) twenty per cent in other cases :

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 amount 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 one hundred and twenty thousand rupees.

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 any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is 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.’

The Board has received a number of queries from various persons regarding the application of the aforesaid provision. These queries have been carefully considered by the Board and the following clarifications are issued for information and guidance of all concerned :

Query No. 1 : Whether tax is required to be deducted at source where rent has been paid in advance before 1-6-1994?

Query No. 2  : Whether tax is required to be deducted at source where a non-refundable deposit has been made by the tenant?

Answer: Where an advance of rent has been paid before 1-6-1994, there is no requirement for deduction of tax at source.

Answer  : In cases where the tenant makes a non-refundable deposit tax would have to be deducted at source as such deposit represents the consideration for the use of the land or the building, etc., and, therefore, partakes of the nature of rent as defined in section 194-I. If, however, the deposit is refundable, no tax would be deductible at source. It is further clarified that if the deposit carries interest, the tax to be deducted on the amount of interest will be governed by section 194A of the Income-tax Act.

Query No. 3 : Whether the tax is to be deducted at source from warehousing charges?

Answer  : The term ‘rent’ as defined in Explanation (i) below section 194-I means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, the warehousing charges will be subject to deduction of tax under section 194-I.

Query No. 4 : On what amount the tax is to be deducted at source if the rentals include municipal tax, ground rent, etc. ?

Answer : The basis of tax deduction at source under section 194-I is “income by way of rent”. Rent has been defined, in the Explanation (i) of section 194-I, to mean any payment under any lease, tenancy, agreement, etc., for the use of any land or building. Thus, if the municipal taxes, ground rent, etc., are borne by the tenant, no tax will be deducted on such sum.

Query No. 5 : Whether section 194-I is applicable to rent paid for the use of only a part or a portion of any land or building ?

Answer : Yes, the definition of the term “any land” or “any building” would include a part or a portion of such land or building.

5.8  In our opinion, even if it is advance payment, it is not linked to the transfer of immovable property as enumerated in Section 194-IA of the Act, since the condition laid down in Section 2(47)(v) of the Act was not complied with within the meaning of Section 53A of the T.P. Act, so as to deduct TDS by the assessee on the said refundable security deposit. The assessee cannot be hold as the assessee in default u/s. 201(1) and 201(1A) of the Act. It is ordered accordingly.

6. In the result, the appeal of the assessee is allowed.

Order pronounced on this 02ⁿd day of March, 2021