Under section 194 I of the Income tax Act, on Rent payments exceeding Rs. 120000 in aggregate during a financial year, at the time of credit or payment which ever is earlier, tax as required, has to be deducted at source and remitted to the Government within the time prescribed. This applies even to Rent paid or payable by Individuals and HUF, when in the preceding financial year, total sales, gross receipts or turnover from the business or profession carried on, exceed the monetary limits specified u/s 44AB.
The definition of Rent was originally intended to cover Rent paid for use of land and buildings together with furniture. By an amendment made in July 2006, the definition is now expanded to include along with land and buildings, lease of machinery, plant, equipments, furniture and fittings.
Phrases such as, `any payment’,` by whatever name called’ etc., have high elasticity and their use in the definition, has helped to stretch its meaning to cover even advances and deposits which are adjustable against future rent dues. It even includes a deposit not adjustable against rent dues and is not refundable. An amount paid by a tenant, which is not refundable as per agreement, cannot generally be called a deposit. A non refundable amount, paid by a tenant as per agreement, though called a deposit is only a consideration for enjoyment of the property and therefore part takes the nature of rent.
In Reebok case (291 ITR 455), the tenant was required to pay a security deposit which was to be reduced every six months against rent that becomes payable. The assesssee had duly deducted tax on the rent amounts and remitted to the Government. The Assessing Officer passed an order contending that, the security deposit amount represents only advance rent and tax ought to have been deducted from the whole deposit amount and not merely from the rent that became due. The officer levied interest for non deduction of tax on the full advance amount. The lower Appellate Authorities decided the case in favour of the assessee and the levy of interest was cancelled. The Department took up the matter in appeal to Delhi High Court. The argument put forth by the assessee that, ` as per agreement, the unadjusted portion of the security deposit has to be refunded and therefore tax was not deductible unless rent becomes due’, went against the assessee. Court took the view that if the amount received is a security deposit, it would have been refundable at the end of the lease period or on termination of the agreement. The nature of the transaction, and the fact that the amount is available for adjustment against rent dues and any excess will be refunded, confirm that the amount received, though named as Security deposit, is only rent advance. Tax on the amount should have been deducted at source. Accepting the appeal, the lower Appellate Authorities orders were set aside.
The intension of the Revenue to bring advance rent in to the ambit of TDS, raises further more issues. The advance rent may pertain to more than one financial year. If TDS is made on the advance amount in the year of payment, based on a single TDS certificate, credit for tax paid has to be claimed in different assessment years in proportion to the rent income offered in each year. Some times it may so happen that, after deduction of tax at source on the entire amount, for some reason or other, the agreement may get terminated/ cancelled before expiry of the tenure. The property which was let out may get transferred to another, by sale, gift, etc., before expiry of the term for which the agreement was made. All such things will result in refund of the balance advance rent either to the tenant or to the transferee. Credit for all the balance of
TDS amount has to be claimed in the assessment year relevant to the previous year in which the agreement was terminated/ cancelled, or the rented property was transferred and a refund of advance was made. The Department may not grant refund or give credit to such excess tax paid, for adjustment towards tax dues suomoto. Care has to be exercised in claiming such credits in time properly; otherwise, the assessee will stand to lose.