194I - Delhi HC decision

HIGH COURT OF DELHI Commissioner of Income-tax, Delhi-XVII v. Reebok India Co. Section 194-I, read with section 201(1A), of the Income-tax Act, 1961 - Deduction of tax at source - Rent - Assessment year 1994-95 - Assessee-company entered into a lease agreement with one ‘A’ to take on lease premises of ‘A’ at a monthly rent - Under that agreement, assessee paid certain sum as security deposit which was to be reduced every six months by an amount of rent which became payable in accordance with agreement - Assessing Officer held that said deposit amount was nothing but advance rent and, accordingly, that assessee had failed to deduct tax at source therefrom under section 194-I - Whether since amount in question paid by assessee was not fully refundable at time of termination of lease, it could be said that said amount was in fact advance rent and as such, assessee was required to deduct tax at source from payment of such advance rent under section 194-I - Held, yes Facts The assessee-company entered into a lease agreement with one ‘A’ to take on lease the premises of ‘A’ at a monthly rent. The said lease agreement provided for the payment of security deposit amounting to Rs. 1,50,24,000 which was to be reduced by the amount of rent which became payable every six months in accordance with the agreement. With the execution of the lease agreement, the assessee paid Rs. 1,50,24,000 as security deposit to the landlord. Thereafter, the assessee deducted tax at source under section 194-I on the actual payment of rent made by it. The Assessing Officer in his order held that the amount of security deposit was nothing but advance rent and, accordingly, the assessee should have deducted tax at source therefrom under section 194-I. Thereafter, the Assessing Officer raised a demand of tax under section 201(1A) from the assessee and, accordingly, levied interest upon the assessee. The Commissioner (Appeals) as well as the Tribunal held that the amount of security deposit paid by the assessee to its landlord under the agreement of lease was not rent as defined in the Explanation to section 194-I and, accordingly, deleted the levy of interest. In revenue’s appeal, the revenue contended that the amount of Rs. 1,50,24,000 paid by way of security deposit by the assessee was a non-refundable deposit, representing the advance consideration for use of land and building and was in the nature of a rent under section 194-I and as such, there was no justification on the part of the assessee for not deducting tax at source. Held The definition for the purpose of the Act of the nomenclature ‘rent’ as expounded in the Explanation to section 194-I itself, amply reveals that the same is projected as a generic term which includes within its ambit payment made on whatsoever account for occupation of a tenanted portion. After taking into account the definition of ‘rent’, it apparently appears to be a composite concept. Once the rent is comprehended as a composite concept, it is not capable of being fragmented. The moment any attempt is made to have the germane expression fragmented by splitting up the amount covered by the rent, it will cease to be rent and the same will not satisfy the test of the definition.’[Para 9] A bare reading of clause 3.2(a) of the lease agreement showed that the sum of Rs. 1,50,24,000 paid by the assessee to ‘A’ was in the nature of ‘advance rent’ and not as security deposit as according to the clause ‘such security deposit would stand reduced every six months when the rent became due and payable.’ [Para 11] If it had been the security amount, then firstly, it would have been in the nature of ‘refundable amount’ at the time of the termination of the lease. Secondly, there would have been no reduction in the security amount, after every six months and thirdly, as per clause 14 of the lease agreement, the assessee was obliged to refund the unadjusted portion, if any, of advance/security deposit, which meant that the amount was adjustable against rent and the same was adjusted also, and, thus, that amount was in the nature of advance rent. [Para 12] Since the amount paid by the assessee was not fully ‘refundable deposit, that amount was in fact the advance rent and as per the provision of section 194-I, the assessee was required to deduct tax at the source from the payment of such advance rent. [Para 13] Accordingly, the Tribunal was wrong in law in holding that the amount of Rs. 1,50,24,000 (termed as security deposit) paid by the assessee to ‘A’ under the agreement of lease , was not ‘rent’ as defined in the Explanation to section 194-I and, accordingly, the appeal filed by the revenue was to be accepted. [Para 14]