Section 194-I

Deduction of tax at source - Rent

n There is no requirement to deduct income-tax at source on income by way of ‘rent’ if the payee is the Government. In the case of the local authorities and the statutory authorities, there will be no requirement to deduct income-tax at source from income by way of rent if the person responsible for paying it is satisfied about their tax-exempt status under clause (20) or (20A) of section 10 on the basis of a certificate to this effect given by the said authorities.—Circular : No. 699, dated 30-1-1995.

n The following clarifications are issued :

- If a person has taken a particular space on rent and thereafter sublets 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.

     Payments made by persons, other than individuals and HUFs, for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.

- If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and the payees are however advised not to enter into sham agreements to avoid TDS provisions.

- The tax is to be deducted from the 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.

- In cases where the agreement is styled as a business centre agreement, the incidence of deduction of tax at source will not be affected, since it does not depend upon the nomenclature but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.

- In cases of composite arrangement for user of premises and provision of man power for which consideration is paid as a specific percentage of turnover, if the composite agreement is in essence the agreement for taking the premises on rent, tax will be deducted under section 194-I from payments thereof.

- In regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.—Circular: No. 715, dated 8-8-1995.

n The following clarifications are issued :

- Where advance of rent was paid before 1-6-1994, there is no requirement for deduction of tax at source.

- 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 the nature of rent as defined in section 194-I. If however the deposit is refundable, no tax would be deductible at source. If the deposit carries interest, the tax to be deducted on the amount of interest will be governed by section 194A.

- Warehousing charges will be subject to deduction of tax under section 194-I.

- If the municipal taxes, ground rent, etc., are borne by the tenant, no tax will be deducted on such sum.

- The definition of the term ‘any land’ or ‘any building’ would include a part or a portion of such land or building, and hence section 194-I would apply to rent paid for the use of only a part or a portion of any land or building.

     Circular : No. 718, dated 22-8-1995.

n In respect of any income received by any person on behalf of any Regimental Fund or Non-public Fund established by the Armed Forces of the Union for the welfare of past and present members of such forces or their defendants, no tax may be deducted at source under section 194-I, since the income of these organisations is exempt from tax  under section 10(23AA)—Circular : No. 735, dated 30-1-1996.

n In respect of sharing of the proceeds of film exhibition between a film distributor and a film exhibitor owning a cinema theatre, the provisions of section 194-I are not attracted, 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: No. 736, dated 13-2-1996.

n Assessees faces problem in getting due credit for tax deducted at source in the following two situations :

    (a)   Tax is deducted at source under the provisions of section 194I of the Act on advance rent pertaining to more than one financial year to be adjusted against future rent.

    (b)   Subsequent to the deduction of tax at source on advance rent pertaining to one or more financial years:

                  (i)   Rent agreement gets terminated/cancelled resulting into refund of balance amount of advance rent to the tenant.

                (ii)   Rented property is transferred by way of sale, lease, gift, etc., with tenant in occupation or otherwise resulting into refund of balance amount of advance rent to the transferee or the tenant, as the case may be.

It has been decided by the CBDT that credit for tax deducted at source shall be allowed to the assessees on whose behalf such tax has been deducted and to whom certificate for tax deducted at source has been furnished under section 203 of the Act as under :

     (i)   In such cases as referred to in (a) above where advance rent is spread over more than one financial year and tax is deducted thereon, credit shall be allowed in the same proportion in which such income is offered for taxation for different assessment years based on the single certificate furnished for tax so deducted on the entire advance rent.

    (ii)   In respect of situation as at (b), credit for the entire balance of tax deducted at source, which has not been given credit so far, shall be allowed in the assessment year relevant to the financial year during which the rent agreement gets terminated/cancelled or rented property is transferred and balance of advance rent is refunded to the transferee or the tenant, as the case may be - Circular No. 5/2001, dated 2-3-2001.