Transit rent paid for hardship due to dispossession not liable to TDS u/s 194I

Transit rent paid to tenant who suffers hardship due to dispossession does not fall within the definition “rent” under section 194I – ITAT 

In a recent judgment, the ITAT Mumbai has held that transit rent paid to tenant who suffers hardship due to dispossession does not fall within the definition “rent” under section 194I

ABCAUS Case Law Citation:
ABCAUS 4066 (2024) (06) ITAT

In the instant case, the Revenue had challenged the order passed by the CIT(A) on the question whether the payment made by the assessee towards alternate accommodation charges/hardship allowance/rent are liable for tax deduction under section 194I of the Income Tax Act, 1961 (the Act).

The assessee was a real estate developer and engaged in the business of development and construction. A survey action in TDS verification under section 133A(2A) was conducted. During the survey proceedings, the Assessing Officer noticed that the assessee for four years had debited an amount under the head “Alternate Accommodation/ rent”.

The AO called on the assessee to explain whether tax has been deducted at source on the above said amount. The assessee submitted before the AO that it had entered into a re-development agreement with a company which was encumbered with more than 300 tenants and that for the purpose of vacating the premises, the assessee had agreed to pay compensation of hardship according to the nature of tenancy occupied by each tenant.

The assessee further submitted that these tenants could not be provided that alternate accommodation and therefore, the assessee agreed to pay the above amount as compensation for the hardship of the tenants. The assessee also submitted that the amount paid towards alternate accommodation/hardship allowance does not fall within the definition “Rent” and therefore, tax was not liable to be deducted at source on the said payments.

The AO did not agree with the submissions of the assessee and held the same to be unacceptable. The AO held the payment to be rental compensation and therefore, was liable for tax deduction at source under section 194I of the Income Tax Act, 1961 (the Act).

Accordingly, the AO passed an order under section 201(1) / 201(1A) of the Act towards non-deposit of TDS and interest thereon. Accordingly the AO passed the order under section 201(1) / 201(1A) of the Act for all the assessment treating the assessee as an assessee in default.

On further appeal the CIT(A) gave relief to the assessee by relying on the decisions of the Co-ordinate Bench.

The Tribunal observed that from the terms of the development agreement it was clear that the impugned payment made was in the nature of compensation towards hardship the tenants would have to undergo in order to handover the vacant possession of the property for demolition and towards the alternate accommodation charges which the tenant has to bear during the time of re-development.

On the contention of the AO that the said payment was in the nature of rent and therefore TDS under section 194I ought to have been deducted, the Tribunal observed that the Hon’ble Jurisdictional High Court had considered a similar issue and held that the ordinary meaning of Rent would be an amount which the Tenant / Licensee pays to the Landlord / Licensor. However, the term “Transit Rent”, is commonly referred as Hardship Allowance /Rehabilitation Allowance / Displacement Allowance, which is paid by the Developer / Landlord to the tenant who suffers hardship due to dispossession. The ‘Transit Rent’ is not to be considered as revenue receipt and is not liable to be tax, as a result there will be no question of deduction of TDS from the amount payable by the Developer to the tenant.

The Tribunal noted that Hon’ble High Court in the above decision had held that the transit rent

which is paid to the tenant who suffers hardship due to dispossession does not fall within the definition “rent” under section 194I.

Therefore, applying the ratio of the decision of the Hon’ble High Court the Tribunal held that the payment made by the assessee towards “Alternate accommodation charges / rent” was not liable for tax deduction under section 194I of the Act.

Accordingly, the appeal of the Revenue was dismissed. 

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