TDS on Rentals: Section 194I, Section 194IB and Section 194IC*

Clipped from:

Section 194I : Any person excluding Individual and HUF (However if they have 1 Cr. Turnover in case of Business and 50 Lacs in case of Profession, provision also applies to them) on payment of Rental Income of more than Rs. 2,40,000 to resident is required to deduct Tax at Source.

Definition of Rent: “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,—

(a) land; or

(b) building (including factory building); or

(c) land appurtenant to a building (including factory building); or

(d) machinery; or

(e) plant; or

(f) equipment; or

(g) furniture; or

(h) fittings,

whether or not any or all of the above are owned by the payee;

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

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

To widen the coverage and bring in those individual or HUF who pay big amount of rent but are still not liable to audit, Section 194 IB was introduced in Budget 2017.

Section 194 IB: Any Individual or HUF not liable for TDS under Section 194 Ion payment of rental income to a resident more than Rs. 50,000 per month is required to deduct tax at source on that payment.

Rate of Tax : Tax to be deducted at the rate of 5%

Difference between Section 194I and Section 194IB

ParticularsSection 194ISection 194 IB
Person responsible for TDSAny person (Including Individual and HUF whose turnover exceeds Rs. 1 Cr. In business and 50 lacs in profession)Individual and HUF except on whom Section 194 I applies
Monetary LimitRs. 2,40,000 per annumRs. 50,000 per month
Applicable on which assetsLand, Building, Plant and Machinery, Equipments, Furniture or Fitting etc.Land and Building
Tax rate10% on Land, Building, Furniture and Fitting2% on Plant and Machinery5% on Land and Building
Time Limit of TDSAt the time of credit or payment whichever is earlierAt the time of credit for the rent of last month / last month of tenancy or at the time of payment whichever is earlier
Time Limit for payment of TDSWithin 7 days from end of the month in which deducted30 days from end of the month in which tax deducted
TAN RequiredYesNo
Form to be filled26Q26QC

Section 194 IC : Notwithstanding anything contained in section 194-IA, any person responsible for paying to a resident any sum by way of consideration, not being consideration in kind, under the specific agreement, shall at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax thereon.

“specified agreement” means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash;

TDS on Rentals Section 194I, Section 194IB and Section 194IC

Some Issues :

1. Section 194I provides that a person who is responsible for paying to any person any income by way of rent shall deduct income tax thereon at the rate prescribed therein. Explanation (i) to section 194 I defines 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 building together with furniture or fixtures. In case assessee has acquired a right to display advertisement on hording than that is different from rent for Land Building etc., There has to be a link between rent income and use of any Land, Building etc.

It was pleaded in the case that circulars are not in any way binding on the appellate authorities and assessee, circulars are binding on Income tax Authorities. [ITO Vs Roshan Publicity Pvt. Ltd. (2005) 4 SOT 105 (Mum)]

The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act. [Circular No. 715, dated 08.08.1995]

2. Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I. [Circular 715 dated 08.08.1995]. However a difference has been established between rate agreement and accommodation on regular basis. To constitute accommodation on regular basis there has to be an obligation on the part of hotel provided a room from specified set of during the period of agreement [Circular 5/2002 dated 30.07.2002]

3. The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.[Circular 715 dated 08.08.1995].

4. The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.[Circular 715 dated 08.08.1995]

5. Clarification regarding deduction of tax at source from payment of rent ( Circular 718 dated 22.08.1995)

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

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.

6. If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof. [Circular 715 dated 08.08.1995]

7. Representations have been received from the various quarters regarding applicability of the provisions of section 194-I of the Income-tax Act to the sharing of the proceedings of film between film distributor and a film exhibitor owning a cinema theatre. The matter has been examined by the Board and the Board are of the view that the provisions of section 194-I are not attracted to such payment because :

(i)The exhibitor does not let out the cinema hall to the distributor;

(ii)Generally, the share of the exhibitor is on account of composite services; and

(iii) The distributor does not take cinema building on lease or sub-lease or tenancy or under any agreement of similar nature.

[Circular 736 dated 13.02.1996]

8. Assessee was paying rent to the holding company as reimbursement for last many years. This position had been accepted by the department all through and it has been never disputed even after insertion of section 194-I and amendment in section 40(a)(ia). There was no material change in the facts and law during the year under consideration. The holding company had also not debited the whole of rent to its books of account. It had only debited the rent which pertained to the part of the premises occupied by it. Therefore, there was no lessor and lessee relationship between the holding company and assessee where the provisions of section 194-I were attracted. Therefore, the addition made under section 40(a)(ia) was to be deleted.

[ACIT Vs Result Services (P) Ltd. ]

9. Landing and Parking Charges paid by the assessee to airlines Airport Authority of India were rent with in the meaning of Section 194 I Singapore Airlines Ltd Vs ITO (2006) 7SOT 84 (Chennai)

10. Storage tanks in question did not qualify either as land or as building within the meaning of Section 194I, what is attached to the land belongs to the land is a principle not applicable to India. Therefore, structure though erected on land, could not be regarded as part of the land. [Gulf Oil India Ltd Vs ITO (2000) 75 ITD 172 (mum)]

11. Rent paid to Co Owners separately will not partake the character of rent paid to AOP [CIT Vs Lally Motors (2009) 311 ITR 29 (P&H)]

12. A perusal of the above terms of the agreement clearly reveals that the agent not only stores the goods but also renders certain other professional services like inventory management on behalf of the appellant, packing the goods in required quantity according to the requirement of the stockist/dealers, follow up collection, maintain bank accounts of the sale proceeds. It cannot be said that the dominant purpose of the agreement is only warehousing. The agreement, terms of which we have set out above, cannot be said to be a composite arrangement which is in essence an agreement for taking premises on rent. The appellant does not have any interest whatsoever over the various places where his goods are stored. The agreement between the appellant and the agents cannot also be said to be a warehousing agreement. Section 194 I not Applies.

[ Eli Lilly & Co. (India) Ltd. Vs. DCIT (2006) TTJ 461 (Del.)]

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