A critical analysis on the provisions of Tax Deductions at sources with respect to rental income & brokerage /commission income on immovable Properties (Updated as per Finance Act , 2020)
In order to enhance the effectiveness of the discussion, I would like to present it in Frequently asked questions and answers Mode –
1) Normally in practical world, Brokers and Real estate agents involves in the deals related to buying /selling of properties or Renting /leasing out or properties.
They charge brokerage /commissions from either parties or sometimes from both.
Discuss the Provisions of Tax deduction at Sources with regards to such payments made to the Brokers /real estate agents ?
Ans – Chapter XVII- B of Income Tax Act , 1961, contains section 194H which deals with Deductions of Taxes at Sources from the payment made to the Resident persons which is in the nature of commission or brokerage.
The threshold limits for the purposes of Section 194H shall be 15,000 p.a. and the Rates of TDS shall be 5%.
2) Are there any Exemption from the applicability of Section 194H exists ?
Ans – Section 194H is not applicable to those individuals or HUF who are not being subject to tax audit us 44AB because of the reasons that their turnover /Gross Receipt doesn’t exceeds the prescribed monetary limits of Rs 100/50 lacs , during the financial year immediately preceding the financial year in which such commission /brokerage is paid or credited.
3) If the individual or HUF was subjected to tax audit by virtue of Invoking of Section 44AD(5) , then whether they are liable to deduct the TDS us 194H ?
Cover the related aspects of Section 44AD also.
Ans – As per Section 44AD(4) , if the Assessee opts for Presumptive Taxation Scheme, and if he subsequently declared his profits below 8% in any of the five assessment year succeeding after that Assessment year , then he is not eligible to opts for this schemes for five assessment years beginning with the Assessment year succeeding the assessment year in which he doesn’t declared its income in accordance with section 44AD(1).
Further as per Section 44AD(5) , if during any of those 5 years , his income exceeds maximum amount not chargeable to Tax, then he will be subjected to tax audit us 44AB.
For Example –
Assessee Opts for section 44AD in Assessment year 17-18.
In Assessment year 18-19, he shows its incomes below the prescribed Percentage of 8%.
Hence as per 44AD(4), introduced by finance Act , 2016 , he is not eligible to opts for Section 44AD(1) for Next 5 years i.e. From AY 19-20 to AY 23-24. Say , if in AY 2020-21, his total income exceeds Rs 2,50,000 and hence now he is liable to get its accounts audited us 44AB.
Now, in Assessment year 21-22, he makes a payment to Mr . X , Brokerage for purchase of Buildings of Rs 4,00,000 , Whether he is liable to deduct the TDS us 194H ?
Answer is no , since he was subjected to tax audit because of other reasons and his turnover doesn’t exceeds the prescribed limits. And hence he is not liable to deduct the TDS us 194H.
4) Would the answer be Yes, if the turnover of Assessee exceeds Rs 100 lacs in the Assessment year 20-21 ?
Ans – Now, he is liable to deduct the TDS us 194H , since now he is liable to get his accounts audit because of the reason that his turnover exceeds the Prescribed monetary Limits us 44AB
5) Mr X a resident individual having no taxable income and he pay Brokerage to Mr Z an Non Residents individual broker ? Will he required to deduct the TDS , if the amount paid is – Case A – Rs 60,000, Case B – Rs 8,000
In both the cases , Mr X have to deduct the TDS. The threshold limits given in Section 194H is of no relevance.
Since 194H is applicable only in case of payment made to the Residents brokers and agents.
However , in case of payment made to the non residents assessees the Provisions of Section 194H have no role & Section 195 comes to play.
The Rate of TDS in accordance with section 195 shall be 20% further enhanced by Educational Cess of 4% in every case and surcharge at applicable Rates depending upon the each case.
Hence, in both cases TDS will be deducted , at the applicable Rates of 20.8%.
6) Suppose, in the above cases Mr Z obtained a certificate from assessing officer us 197 for no Deductions of TDS on his Brokerage , Then what will be legal position now ?
Ans – in such a case, Mr X even he is subject to tax audit is not liable to deduct the TDS us 195.
7) Can we make a statement , than an individual or HUF whose turnover/Gross Receipt doesn’t exceeds the prescribed monetary limits of Rs 100/50 lacs in the preceding financial years , doesn’t required to deduct the TDS at all in the Current financial year whatever may be the amount of Brokerage he paid to the Broker/Real estate agents ?
Suppose Mr X falls in above categories and paid Rs 60,00,000/- to Mr Y a Resident broker, as Brokerage , Discuss in the light of recent amendments in law.
Ans – No, it can’t be said after the introduction of Section 194M in the income tax act , 1961.
in the given cases , the Provisions of Section 194M which have been introduced by the finance act , 2019 in order to curve down the generation and rotation of black money shall apply.
Memorandum explaining the finance bills , 2019 said that substantial amount of payments is made by individuals or HUF who are not being subjected to tax audits to brokers /contractors .
Hence, in order to plug this loop hole , a new Section 194M was introduced which applicable to those individuals or HUF who are not being subject to tax audit and make the payment to the contractor/Brokers etc.
In excess of Rs 50,00,000/- in a financial year , are now being liable to deduct the TDS @ 5%.
Hence , Mr X is now liable to deduct the TDS @ 5 % on entire 60,00,000 us 194M.
8) Suppose, Mr X hadn’t possessed TAN number to deduct the TDS , will this situation altered the Provisions of Section 194M ?
Ans – No, since Section 194M overruled the Provisions of 203A which deals with quoting of TAN while deducting the TDS . Hence, there is no requirement of TAN.
9) Can Mr Y obtained the certificate us 197 for Deductions of TDS at a lower rates or No Deductions of TDS at all ?
Ans – Yes , he can obtain the certificate from Assessing officer with these effects , and once he received the certificate , Mr X is no longer required to deduct the TDS .
(Amended by finance Act , 2019)
10) X limited makes the payment to Mr Z a resident broker of Rs 55,000/- However X limited is not subject to tax audit . Will it is required to deduct TDS ?
Ans – X limited is very much required to deduct the TDS, and Deductions shall be made in accordance with 194H only.
Since, exception given us 194H applicable to only on Individual or HUF and not for Companies and Firms.
11) Are there exists any situations in 194H whether the companies are not required to deduct the TDS us 194H ?
Ans – Only if the Broker/ agents received the Certificate us 197 from the concerned assessing officer or where the threshold limits of Rs 15,000 in a financial year doesn’t exceeds, then only X limited is exempted from the requirements of Deductions of TDS.
Now, I am discussing the Provisions of income tax with respect to the payment of Rent etc. by the tenant of the immovable Properties-
12) As per the income tax act , 1961 when tenant makes the payment which is in the nature of rent, leasing charges etc. , Will he required to deduct the tax at sources at the time of making or crediting the payment ?
Ans – Section 194I of the income tax act , 1961 have been prescribed in the chapter XVII B which deals with Deductions of Tax at Sources in such cases.
As per section 194I every persons other than those individuals or HUF who are not being subject to tax audit because of the reasons that their turnover/gross receipts doesn’t exceeds the prescribed monetary limits of 100/50 lacs during the financial year immediately preceding the financial year in which such amount in nature of Rent is paid or credited , shall required to deduct the TDS @ –
a) 2 % for the use of any plant or equipment or machinery
b) 10 % for the uses of any Land or Building or factory building or land appurtenant to a building or furniture or fittings.
However , No TDS shall required to deduct if the amount credited or paid or likely to credited or paid doesn’t exceeds Rs 2,40,000/-
Further the exception with regards to individual or HUF is exactly same as discussed already in Section 194H.
13) whether TDS will be required to deduct the TDS on Residential flats , provided other conditions is satisfied ?
Ans – Yes , all the Buildings whether they are residential or commercial are covered here provided other conditions with respect to Deductions of TDS as mentioned us 194I also satisfied.
14) X limited took a Shop on Rent . This shop is jointly owned by Mr A and Mr B , and the shares of each partner is definite and ascertainable.
As per the Rent agreement , Mr A is eligible to receive Rs 2,00,000 and Mr B is eligible to receive Rs 3,00,000 yearly .
Discuss the applicability of TDS
Ans – Where the shares of the each co- owner is definite and ascertainable , then while considering the limits of Rs 2,40,000/- share of each co – owner shall be considered.
Hence , in the given case , X Limited is liable to deduct the TDS @ 10 % on Rs 3,00,000/- only from the share of Mr B. And No TDS is required to deducted when the payment is made to Mr A.
14) Keeping other information same, if the share of each co owner is not ascertainable , then whether TDS shall be deducted ?
Ans – Yes, in that case, TDS on entire 5,00,000/- shall be deducted as per section 194I @ 10 %.
15) X limited took a plant and machinery on Rent @ 1,90,000/- per annum from Y limited. However , Due to some financial issues , X limited is not able to run this plant and machinery and Further sub-leased this plant and machinery to Mr P @ Rent of Rs 2,80,000/- per annum.
Now, Mr P is in argument that since X limited is not the actual owner of the plant and machinery and Hence , he is not liable to deduct the TDS us 194I. Discuss the viability of the proposition of Mr P ?
Ans – The arguments of Mr P that he is not liable to deduct the TDS @ 2 % , because of the reason that X limited is not the actual owner of the plant and Machinery is not tenable in accordance with the Law.
The definition of the Rent given in Section includes sub – Rent also. And when the assets is sub rent to other parties, then obviously the criterion of ownership will no longer be valid.
Hence Mr P shall liable to deduct TDS @ 2% under section 194I when it makes payment to X limited.
Further it is very interesting to note that X limited while making making the payment to Y limited is not liable to deduct the TDS since the prescribed limits of Rs 2,40,00/- hadn’t crossed.
16) Mr P rented it’s factory land which is vacated from so many years to a company who is engaged in the manufacturing of articles or things. Whether the Provisions of Section 194I shall be applicable keeping in mind that prescribed limits of Rs 2,40,000 p.a. have been crossed ?
Ans – Yes , Since section 194I also covered the Renting of land or buildings (including factory land or buildings or both ). Hence , In such a cases also , the Provisions of Section 194I also applicable.
17) The Central Government of india introduced & promotes the concepts of Business Trust in India specially during the past 10 years for the purposes of extensive development of infrastructure facilities & real estate investments in India. Hence , Government provides many Taxation benefits to them .
Mr X , acquires the residential Flats from Business Trust being Real Estate investments trusts at a Rent of Rs 4,80,000/- P.a. what will be the Provisions of TDS us 194I in such a case ?
Ans – The first proviso to Section 194I exempted the requirements of Deductions of TDS us 194I when payment in nature of rent in made or credited to the business trust being Real Estate investments trust.
Hence, there is no requirement of Deductions of TDS despite of the fact , that amount exceeds the prescribed limits of Rs 2,40,000/-
18) Would the Answer be different, if such payments is made to the InVit instead of Real Estate Investments Trusts?
Ans – The first proviso to Section 194I , is exempted the requirements of TDS only when the payment is made to the business trust being a real estate investments trust and not in the case of InVit.
Hence , in such a case, the Provisions of TDS us 194I shall equally applicable when the payment of rent is paid or credited to the business trust being InVit.
19) Mr. X an individual , whose turnover in the financial year 19-20 was Rs 12,00,000/- makes the payment to Mr P an Non Residents individual a Rent of Rs 50,000/- P.a. in financial year 20-21. What will be the Position of the law now ?
Ans – The law relating to applicability of Section 194I on Individual or HUF shall exactly applicable (With one exception discussed in FAQ No 26) as was in the case of Section 194H as discussed earlier.
Hence, Applying the rationale of the earlier discussed , Mr X required to deduct the TDS @ 10 % assuming the assets is a building.
20) X Inc a foreign companies make payment of Rs 8,00,000/- p.a on Plant and Machinery which was taken on Rent from Mr X. However it is to be noted that Mr X is not subjected to tax audit in the preceding financial year . Discuss the applicability of Section 194I ?
Ans – Normally all the Provisions in the chapter of XVII B are the “Payee Centric” .
Means the status of the Payee should be kept in mind before deciding the applicability of provisions of tax deductions at sources. And Section 194I is also on the same line. Hence , since the Payee is Residents and it’s hardly matters who is the Payer whether it is a resident or non residents. Hence, the Provisions of TDS us 194I shall equally applicable and TDS shall be deducted @ 2 % on Rs 8,00,000/- while making the payment to the Resident Assessee Mr X even if the payment is made by Foreign Companies X Inc.
Further, it is also irrelevant to check whether the tax audit of the Payee being an individual or HUF have been conducted in the previous year or not. Since, the status of tax audit is relevant in case of individual or HUF only when they are the Payer and not the Payee.
Since, in the Given case, individual is Payee, hence it is redundant to check the status of tax audit for the purposes of applicability of Section 194I.
21) Assessee X limited took furniture along with building on Rent. The Rent towards the use of furniture is specifically indicated .
The Assessee is of view that he is not liable to deduct the TDS on payment of rent made for the usage of Furniture ?
Ans – The view of the Assessee that he is not liable to deduct the tax at sources while making the payment of rent towards the usage of the Furniture and Fixtures is not valid in law. Since, Furniture and Fixtures is specifically included in Section 194I .
Hence, X limited is liable to deduct the TDS us 194I even if the rent is towards the usage of the Furniture and Fixtures.
22) What is the treatment of the Securities deposits for the purpose of Section 194I ?
Ans – As clarified by the central board of Direct taxes , Refundable deposits is actually towards the Security of the assets and can’t be attributable towards the rent of the assets. Hence , TDS shall not be applicable in such a case.
on the other hand , Securities deposits which is being adjusted towards the Rent is in the nature of advanced rent and hence, the Provisions of Section 194I shall be applicable.
23) X limited letting out its warehouse on Rent to the customers since it is engaged in the business of Operations of warehousing covered in Section 35AD. X limited is of view that the payment of rent of warehouse is not covered us 194I. Hence, he have the right to receive the full amount of rent without Deduction of TDS ?
Ans – The contention of X limited that the warehousing rent is not being subjected to TDS as per section 194I is overruled by the CBDT circular. Hence, warehousing rent shall also be covered in the definition of rent for the purposes of Section 194I.
24) It is a four storey building and Assessee taken only 1 room on Rent for the purposes of keeping his stock. The Assessee having a view that since it doesn’t acquired the entire building on Rent and Acquired only a small part of the building, and Hence TDS shall not required to deducted while making the payment towards the rent us 194I. Discuss
Ans – No, the Assessee’s views that his case is not covered under Section 194I since he acquired only a small portion of the land or Building is not tenable as per law. Since , the definition of the land or buildings includes ” any Land ” or ” any building ” which means even the smallest portion of the building or land is covered.
25) Since, Rent is a revenue expenditures for the tenant which Assessee normally claims under section 37 or Section 57 read with 40A(2)/40A(3)/40A(3A) provided the Provisions of TDS have been complied with , otherwise Deductions shall be disallowed us 40(a)(i)/40(a)(ia) . Suppose X limited taken a building on Rent for the purposes of the business. And he paid rent and deduct the TDS and claims Deductions us 37 of the Act. After 2 years the building got substantially damaged and X limited incurred an capital expenditures on the above. The Assessee while filing a return of income of that year claims Depreciation us 32 on such capital expenditures. However AO while passing the order us ,143(3) disallowed the Deduction of Depreciation on the ground that Assessee X Limited is not the actual owner of the building , he is only the tenant of the building and accordingly raised a demand us 156 of the Act.
Comments on the action of the assessing officer.
Ans – The Action of assessing officer is not justified and in contradiction of Explanation 1 to Section 32(1) of the income tax act , 1961. As per Explanation 1 to section 32(1) , where the business or professional carried on by the Assessee in a Building which is not owned by him and Assessee incurred any expenditures not being the expenditures of revenue expenditures , then such capital expenditures shall be treated as deemed building and he is eligible for claiming the Depreciation On such deemed building.
Hence, applying the rationale of the above explanation , the Assessee X Limited was rightly claimed the Depreciation On such deemed building , and the assessing officer order us 143(3) is not tenable in accordance with law. Hence , Assessee should go for appeal/revision in such a case against the order of the AO.
26) Can we make a statement , than an individual or HUF whose turnover/Gross Receipt doesn’t exceeds the prescribed monetary limits of Rs 100/50 lacs in the preceding financial years , doesn’t required to deduct the TDS at all in the Current financial year whatever may be the amount of Rent he paid to the owner of the building/ land etc. ?
Suppose Mr X falls in above categories and paid Rs 70,000/- Per month in Financial Year 2019-20 as Rent , Discuss in the light of recent amendments in income tax act, 1961.
Ans – On the similar line of Section 194M which was introduced for the purposes of Brokerage/Commission , Section 194 – IB have been introduced for the purposes of payment of the Rent paid by the individual or HUF which are not being subjected to Tax audit us 44AB because of the reason that their turnover/gross receipts in the preceding financial year doesn’t exceeds the limits of Rs 100/50 lacs. Hence it is applicable only on those Individual or HUF ” who are not liable to get its accounts audited us 44AB since their turnover /Gross Receipts doesn’t exceeds prescribed limits of Rs 100/50 lacs”. Further ,This provisions shall be attracted only when the rent per month exceeds 50,000 per month and shall be deducted on ” the last month of the previous year or the last month of tenancy in which property is vacated during the year.
27) Mr John a non residents individual of USA paid the rent to Mr X an Residents individual for the property which is situated at USA @ 60,000/- per month. Mr John is not liable to tax audit in the preceding financial year us 44AB. Whether he is liable to deduct TDS us 194 – IB of the income tax act , 1961.?
Ans – it’s hardly matters where the property for which rent is to be paid is actually situated , further it also irrelevant to see whether the Payer is Residents or Not, what actually relevant is that Payee must be the Resident and the Provisions of Section 44AB shouldn’t be applied on Payer. In the given case, since the Payee Mr X is Resident Assessee , Mr John is not subject to tax audit us 44AB and the Rent per month exceeds Rs 50,000/-. Hence Mr John is liable to deduct the TDS @ 5 % while making the payment to Mr X
28) A Clarification of an important issue —
X limited took on hires an oil Rigs drilling machine from A Inc of Singapore & Pays Rs 400 lacs as hiring charges to the Singapore based Corporate. This hiring charges is covered under the provisions of Section 44BB
and 10 % of such hiring charges shall be deemed to be the income under the head PGBP which comes to 40 lacs. And since , it’s a foreign company, effective tax rates shall be 41.6% of Rs /- which comes to Rs 1,66,400/-
In nut shell , the effective tax rates shall be 4.16% i.e. (10 * 41.6%)..
Although it is also a hiring charges paid on plant & machinery which includes in Section 194I , but since the payment is made to the non residents assessees, and hence the Provisions of TDS shall not be dealt in accordance with Section 194I.
Hence, the Provisions of TDS shall be dealt in accordance with the provisions of Chapters of Foreign Taxation.
29) Justify the practical importance of section 194 – IB in order to detect the foreign undisclosed income of the Assessee and the properties of the Assessee ?
Ans – Assuming this section doesn’t exist in the income tax laws , then Mr John can pay the rent of the assets situated abroad without deducting the TDS. Since , there is no violation of the law. Now, Mr X can easily hide it’s rental income or he may show income of other natures which is received from Mr John instead of Rental income. Mr X will not willing to show this as a rental income if he holds an intention to hide the Foreign assets from the revenue.
Because, When he shows Rental income, it normally leads to a directions for the revenue, that he must have a immovable assets. Plus since such rent is Received from NRI , it means it might be possible that Assessee have a property outside india. And again as per Explanation to Section 147 , such cases shall be fall under the definition of “deemed escapement of income”, and Assessing officer hasn’t required any reason to belief to open the case of Mr X under Section 147.
Apart from that , even if the case of Assessee had been opened earlier in Section 143(3) and Assessee had filled the Return of income and disclosed all the relevant materials and information in that Assessments proceedings, the cases of the Assessee can be reopened even after the end of the 4 relevant Assessment years and accordingly the fourth proviso to Section 149(1) shall not apply. Further in the cases of Assessee having an undisclosed income found abroad , the cases of Assessee can be opened up to 16 assessment years as per Section 149(1). Hence, if this section doesn’t exists then such a consequences can takes places .
After the introduction of Section 194 IB, Mr John is now required to deduct the TDS @ 5% , and now department can easily scrutinize the return of Mr X and check whether he shows its Foreign assets in the ROI and thus hit a major break over the potential generation & Rotation of the black Money.
30) keeping other information same, Mr John also liable to pay Rs 8,000/- per month for the uses of furniture situated in Residential property of Mr X. On what amount TDS will be deducted ?
TDS shall be deducted @ 5 % on Rs 60,000/- .
The payment of rent towards the usages of the Furniture & Fixtures is not covered under the definition of the Rent as given in Section 194IB. Hence, applying the above concepts TDS shall be deducted @ 5 % on Rs 60,000/- rent only.
31) Mr John making an argument that since he doesn’t Possessed TAN and hence he is not liable to deduct the TDS ?
Ans – Mr John’s contentions that he is not liable to deduct the TDS since he doesn’t have TAN , is not tenable in the law.
Since the requirements of quoting of TAN which deals under Section 203A shall overruled for the prospective of Section 194 – IB. Hence, Mr John have to deduct the TDS even he doesn’t Possessed TAN.
32) Rent paid is Rs 60,000/- per month by the Resident Mr X to X Limited an Indian Companies.
Mr X is not liable to tax audit in the preceding year because his turnover /gross receipts doesn’t exceeds the prescribed limits of Rs 100/50 lacs as the case may be. The property is taken on Rent on 01/04/2019. Compute the amount of TDS required to be deducted and the month in which TDS is required to deducted when –
Case A – The property is held up to 31/03/2020
Case B – The property is vacated on 30/09/2020.
Ans – Section 194 – IB although said that TDS shall be deducted @ 5 % on Rent payment provided the rent amount exceeds Rs 50,000/- per month and payer is individual or HUF not subjected to tax audit. However in order to remove the genuine hardship from the compliance of TDS provisions , Entire TDS shall required to deduct only at the last month of the previous year.
However , if Assessee vacated the property before the end of the previous years , then TDS shall be deducted on the last month in which the property is vacated. Hence if property held till the last date of the Previous year then TDS of Rs 36,000 i.e.( 60,000*12* 5%) shall be deducted from the Rent of month of March , 2020 and
Assessee shall remit Rs 24,000 ( 60,000-36,000) to the landlord of the building. However if he vacated the building on 30/09/2019 , then TDS of Rs 18,000 i.e. (60,000* 6* 5%) shall deducted from the rent of September , 2019 and shall remit the balance Rs 44,000/- to Mr X , the owner of the property.
33) Can Mr X move an application to the assessing officer for the purposes of issues of certificate for no Deductions of TDS us 194 – IB u/s 197 of the income tax Act, 1961 ?
Ans – No, the Provisions of Section 197 hadn’t amended to include the Provisions of Section 194 IB . Hence, Mr X can’t get certificate of Deductions of TDS at a lower rates or No Deductions at all from the concerned Assessing officer. Only Section 194M is covered by finance act, 2019. We can expect , to incorporate the section 194 IB in Section 197 in the upcoming budgets .
But as of now, it is not included. Now, I am discussing the Provisions of income tax with respect to the Receipt of Rent by the owner or in case of sub- leaser of the immovable Properties-covered
34) Under Which head of incomes the Rental income shall considered for the purposes of taxability of income ?
Ans – Normally , income from Rent, leasing rent is largely under the head House property. Further , we know that in Section 194I Tax Deductions at Sources Sub – Renting of the property being land or Building or plant & Machinery etc. also covered.
The very basic requirements of income to be taxable under the head House property is that Assessee must be the owner of the housing property, this is as per section 22 of the income tax act , 1961 which is a charging section of the House Property.
However, in the case of Sub – Renting /Leasing , the criterion of ownership is no longer exists , hence in such a cases income from sub – Renting /leasing shall be taxable us 57 i.e. income from other sources.
It is to be noted that the position of Deductions of TDS us 194I & 194 – IB can’t be altered on the ground that income from Rent is considered in which head of the income by the Payee of the Rent. Hence , TDS us 194I & 194 – IB shall normally be applicable as it is as discussed earlier.
35) The Assessee company is a real estate developers whose main objectives as per memorandum of association is to acquire the landed properties & developed them into the markets. However, after the markets being developed , some of the shops couldn’t be able to sold and hence , Assessee had rented out such properties and Offers the rental income under the head Profits and gains from Business or Profession . The Assessee took such view after considering the Historical Rulings of Hon’ble Supreme Court in the case of Chennai Properties & Investments limited . However , AO denies the claim of the Assessee and accordingly taxed the income under the head House property . Discuss
Ans – Held in the landmark Judgment of East India Housing and Land Development Trust Limited , the Hon’ble Supreme court gave the Judgment which crux is as follows.
Merely because the Assessee earned the rental income on the Properties which is being developed by him couldn’t altered the situation and can’t be concluded that Assessee main business objectives is to letting out of the properties.
In the given case, assessee main objectives was to develop the landed properties and rental income earned was only accidentally earned since some of the properties couldn’t be able to sold by the Assessee. Further , supreme Court while giving it’s Rulings in the case if East India Housing & Land Development Trust Limited made a clear demarcation of the present cases with the case of Chennai Properties & investments Limited.
The Supreme court said that in the case of Chennai Properties , the main objectives of the companies is to acquired the Properties which had already being developed and Letting out those properties on the rent & additionally the memorandum of association of the company also clarified that the objectives of the company in this direction also.
Hence , We can Conclude that if the business objectives of the Assessee is to acquired the developed properties and letting them on hire, the income from such hiring shall be taxable under the head Business /Profession.
And on the other hand , if the business objectives of the Company is to acquired the landed properties and developed them and after development if it’s earn any rental income, then such income shall be taxable under the head income from house property.
On the similar line of Chennai Properties & investments Limited , supreme Court also held in the case of Commissioner of Income Tax Vs NDR Warehousing Private Limited that Rental income from letting out of warehouses and godowns shall be taxable under income from Profits and gains from Business or Profession.
36) What will be the difference if rental income taxable under House property & if such income is taxable under income from Profits and gains from Business or Profession ?
* If rental income is taxable under the house Properties then Assessee is allowed to avail an standard Deductions @ 30% on annual value or rental income us 24(b).
However , if rental income is taxable under the head Business or Profession , then such income shall be taxable flat and no standard Deductions shall be allowed to the Assessee , since Section 24(b) which deals with standard Deductions falls under the chapter of the house Properties and not applicable for the chapter of profits and gains from Business or Profession.
* If rental income is dealt in accordance with the head of business or Profession , actual expenditures in order to earn those income of rent shall be allowed as Deductions normally under Section 37 – General Deductions.
However if such Income is taxable under the head House property , no actual expenditures shall be allowed to him since he had allowed an standard Deductions of flat 30 %.
Hence , it will be unfavorable for those Assessee who incurred actual expenditures more than 30 % of rental income.
But one have to noted that it’s not a choice that given to the Assessee to treat their rental income under the head House property or under the head Profits and gains from Business or Profession.
It will solely the subject matters of facts and circumstances of each individual cases which normally be tested in practical life, on the line of Judgments of hon’ble supreme Court in the case of East India Housing and Land Development Trust Limited and Chennai Properties & investments Limited.
* Further if the income is taxable under the head House property , such losses can be able to set off in the current year only to the extent of Rs 2,00,000/- as per recent amendments in Section 71 related to the inter head adjustments of current year losses.
However, if such income is covered under the head of profits and gains from Business or Profession , then the losses under the head Profits and gains from Business or Profession can be set off against any other head of income (Except Salaries) , in the current year without any Monetary restrictions i.e.
Inter head adjustments of business Losses is possible against other head of income in the current year without any Monetary restrictions, Except Salaries income.
However , on the other head current year losses of the house property can also be adjusted against the salaries income to the extent of Rs 2,00,000/-.
Since , restrictions is with respect to only losses under the head profits and gains from Business or Profession which couldn’t be able to set off against the income under the head salaries.
Such restrictions of Section 71, is not applicable in cases of losses under the head House Properties in the current year.
* To carry forward the losses of the house property, there is no requirement that return of income must be filled within the due date mentioned us 139 (1) or even if the Return of income is not filled , such losses can be carried forward.
Since section 80 doesn’t make any reference of Section 71B , Which deals with carried forward of Losses of house Properties.
However , in order to carried forward the losses under the head Business or Profession , the return of the income must be filed within the due date mentioned us 139(1) , otherwise losses shall be lapsed, provided Assessee doesn’t move condonation application to the concerned authorities to condone the delay in filling of ROI & allow him to carry forward the losses as per circular No. 09/2015 issued by the board.
37) The first proviso to Section 194I exempted the requirements of Deductions of TDS when the payment of rent is made to the business trust being Real Estate investments trust.
is it means that Rental income in the hand of real estate investments trusts is exempted from income tax ?
Ans – The proposition that Rental income earned by the business trust being Real Estate investments trust is exempted from taxes is partially correct.
It means such income is exempted in the hands of real estate investments trusts us 10(23FCA) , since they are enjoying the pass through status.
It means when Real Estate investments trust passed its rental income to its unit holders , then such incomes shall be taxable in the hands of the unit holders normally as per the status of the recipient unit holders.
Further business trust is required to deduct the TDS on such pass through of rental income to its unit holders @ 10 % . However , this Deductions of Tax at sources shall be made us 194LBA & not in accordance with Section 194I.
38) Will the situation be altered in FAQs 37 if such rental income is received by the business trust being infrastructure investments trusts (InVit) ?
Ans – When the rental income is payable to business trust being infrastructure investments trusts (InVit) , then TDS shall be required to deduct @ 2 % /10% us 194I and
Hence such income is taxable in the hands of business trust being infrastructure investments trusts (InVit).
Further when infrastructure investments trusts passed on these rental incomes to its units holders , then such rental income shall be exempted in the hands of its units holders and Hence , there is no requirement of Deductions of Tax at sources in accordance with the chapter XVII – B of the Income Tax Act , 1961.
Summary of the article –
In chapter XVII B there are 4 places where individual or HUF are not required to deduct the tax at sources when they are not subjected to tax audit , in the current financial year
Section 194J – Payment to professional
Section 194C – payment to contractors
Section 194H – payment of brokerage
Section 194I – payment of Rent
If we made a close observations regarding the nature of the payment , we will come to a conclusion that more or less these incomes are for the purpose of personal usage. The law regarding the penalty & interest for failing to deduct the TDS or after deducting fails to make the payment within due date or not paid are very stringent. Hence, in order to provide the relief to small taxpayers being individual or HUF , these Section exempt them from requirements if deductions of TDS. Hence , tax audit criterion is fixed to decide their eligibility for exemption, which is quiet logical. However , to defeat the intention of the law, it might be possible the Individuals/HUF who holds the wrong Intentions to escape the substantial amount of income of contractor, brokers/agents , Landlord, professionals from taxation may made the payment in cash and since they are not Subjected to tax audit , the TDS requirements is not applicable.
Now, substantial amount in this way have escaped Assessment. Hence, in order to cover those areas ,a welcome move made by the Parliament by introduction of Section 194M & 194IB.
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