Brief of the case:
One time upfront payment cannot be considered as lease rent when dominant intention is sale of rights
The Hon’ble Madras HC in the above cited case held that the one time upfront payment made by assessee lessee to lessor for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor because the dominant intention of leasing is sale of rights in immovable property for a long period of 99 years. Therefore, such one-time payment not subject to TDS u/s 194I.
Facts of the case:
- The State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT), registered under the Companies Act, 1956, as a Government of Tamil Nadu Undertaking, acquired a vast extent of land measuring about 2469 acres, in various villages of Sriperumbudur Taluk, Kanchipuram District, for the purpose of developing the same as an Industrial Park. Government of Tamil Nadu chose the assessee as a “Developer” to establish a project known as “Product-Specific Special Economic Zone” in the SriperumbudurHitech Special Economic Zone, in partnership with SIPCOT.
- The assessee signed another Memorandum of Understanding on 11.1.2007 with SIPCOT, agreeing to be a co-developer along with SIPCOT, for the development of the aforesaid project namely “Product Specific SEZ”. SIPCOT issued two orders of allotment, one on 11.1.2007 and another on 10.4.2007. The first order of allotment was for the land of an extent of 100 acres and the second order was for the allotment of 51.85 acres.Under the first order of allotment, the assessee was required to pay an amount of Rs.10.50 crores at the rate of Rs.10.50 lakhs per acre towards upfront lease rent. Under the second order of allotment, the assessee was liable to pay Rs.17,59,20,000/- at the rate of Rs.32 lakhs per acre.
- The order of allotment stipulated that the amount indicated therein was to be paid as Non-refundable One Time Upfront charges and that a lease deed would be executed only after payment of 100% of the Upfront charges.Therefore, the assessee paid the upfront charges, as per the conditions stipulated in the order of allotment. After the payment was so made, the SIPCOT executed two lease deeds both dated 30.4.2008, granting a lease of the land of an extent of 100 acres and 51.85 acres respectively.Under both the lease deeds, the assessee was entitled to enjoy the land for a period of 99 years, upon payment of annual lease rent of Re.1/- per year for 98 years and Rs.2/- per year for the 99th year.
- AO passed an order holding that the upfront charges constituted rent on which tax should have been deducted at source under Section 194-I and that since the assessee did not do so, they were liable to pay Rs.6,43,84,991/- together with interest of Rs.1,73,86,623/-. The demand was made under Section 201(1) and Section 201(1-A).
- CIT (A) also upheld the action of AO but taking note of the fact that SIPCOT had already included these upfront charges in their income and also paid the tax thereon, he held that no TDS can be recovered from the assessee. But the demand for interest was sustained. The demand for interest was directed to be calculated from the date of payment of the upfront charges by the assessee to SIPCOT, up to the date of payment of advance tax by SIPCOT. Thus, the appeal of the assessee stood partly allowed.
- Aggrieved assessee is in appeal before the high court.
Contention of the Assessee:
It was contended that the one time non-refundable upfront fee paid by the assessee was premium which is distinguishable from rent u/s 105 of the Transfer of Property Act, 1882, as it is for the acquisition of an enduring benefit for a long duration of time . Since the payment of premium is capital in nature while payment of rent is revenue in nature, even the Explanation under Section 194-I would not get attracted.
Contention of the Revenue:
It was submitted that the assessee cannot take advantage of Section 105 of the Transfer of Property Act, since the lease deeds do not contain the expression “premium”. Further , if for any reason this court concludes that the upfront charges paid by assessee could not entirely be treated as advance rent, a portion of the same should be treated as the cost of acquisition and the balance treated as lease rent. If this has to be done, the matter has to be remitted back to the Assessing Officer.
Held by Hon’ble High Court:
- The question to be decided by this court is that whether the upfront payment made by an assessee, under whatever name including premium, for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years, could be taken to constitute rental income at the hands of the lessor, obliging the lessee to deduct tax at source under Section 194-I of the Act.
- The lease deed were executed only after the payment of One Time Non-refundable Upfront Charges by the assessee to SIPCOT. The lessor as well as the lessee intended to treat the transaction as “deemed sale” which was so intimated by SIPCOT to assessee and not disputed by it.
- Further , the circumstances under which lease deeds executed suggest that the assessee was chosen not merely as a lessee of the land, but as a co-developer along with SIPCOT to establish a project in the “Product Specific Special Economic Zone”.
- It makes very clear that the One Time Nonrefundable Upfront Charges paid by the assesseewas made for a variety of purposes such as (i) becoming a co-developer (ii) developing a Product Specific Special Economic Zone in the Sriperumbudur Hi-Tech Special Economic Zone (iii) for putting up an industry in the land.
- The lessor as well as the lessee intended to treat the lease virtually as a deemed sale giving no scope for any confusion. In such circumstances, the court is of the considered view that the upfront payment made by the assessee for the acquisition of leasehold rights over an immovable property for a long duration of time say 99 years could not be taken to constitute rental income at the hands of the lessor, obliging the lessor to deduct tax at source under Section 194-I.
- Thus, assessee cannot be termed as assessee is default and accordingly not liable to face any disallowance, interest and penalty.In result the appeal of assessee was allowed.