In a recent judgment, Delhi High Court has held that bi-annual or annual payments, being capital payments for a limited/specific period towards acquisition of lease hold rights, are not subject to TDS.
The assessee had entered into 90 years long term lease with Greater Noida Industrial Development (GNOIDA). According to lease deed assessees had to pay upfront consideration and the balance payment in term of annual installments along with lease premium and interest. The department was of the view that these payments are income of the assessee and they should have deducted TDS on it.
The Court however, in its decision dated 16-02-2017, held that amounts paid as part of the lease premium in terms of the time-schedule(s) to the Lease Deeds executed between the petitioners and GNOIDA, or bi-annual or annual payments for a limited/specific period towards acquisition of lease hold rights are not subject to TDS, being capital payments. It was also held that amounts payable towards interest on the payment of lump sum lease premium, in terms of the lease covered under Section 194-A are covered by the exemption under Section 194A (3) (f) and therefore, not subjected to TDS.
Amounts constituting annual lease rent, expressed in terms of percentage (e.g. 1%) of the total premium for the duration of the lease, were however held to be rent and therefore subject to TDS. The Authority stated that was constituted under Section 3 of Uttar Pradesh Industrial Developers Act, 1976 and was a ‘local authority’ and hence no income tax was to be deducted. It contended that as per the definition in Section 10 (20) of the Income Tax Act, 1961, it qualified as a municipality referred to in clause (e) of Article 243P of the Constitution. The Authority was constituted for the purpose of planning, development or improvement of cities, towns and village and had been declared to be an ‘Industrial Township’ and was empowered to carry out municipal functions. It argued that it functioned as an arm of the government.
However the Court held that as per Article 243P clause (e) of the Constitution of India, a “Municipality” means an institution of self-government constituted under Article 243Q, and hence the prerequisite for characterization of a unit or body as a municipality is that it should be self-governing and its members ―shall be filled by election from the territorial constituencies in the Municipal Area. It was held that in the case of GNOIDA, this essential characteristic is absent. Also, the payment collected towards the lease deed were not in nature of exactions by use of sovereign power. Hence, the Authority was not a municipality or local authority whose income was exempt from taxation.
Since the petitioners could not deduct tax as per the terms of the agreement with GNOIDA, a direction was issued to the said authority (the Authority) to comply with the provisions of law and make all payments.