Deduction of tax at source - Rent
Non-applicability to payments to certain entities - 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.
Scope of deduction - 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.
- 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.
The following clarifications are also 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.
Payments for hotel accommodation - Circular No. 715, dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.—Circular : No. 5/2002, dated 30-7-2002.
Income received by certain defence funds - 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.
Sharing of proceeds of film exhibition - 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.
Problems faced by assessees in getting due credit for tax deducted at source - Number of representations have been received by the Board pointing out the problems being faced by the assessees in getting due credit for tax deducted at source under the provisions of section 199 in respect of tax deducted in terms of section 194-I of the Act. Such problems in getting due credit for tax deducted at source mainly relate to the following situations :
(a) Tax is deducted at source under the provisions of section 194-I 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.
In the situation mentioned at (a) in para above, difficulty in getting due credit for tax deducted arises because the entire amount of advance rent does not accrue to the assessees as income in one financial year since the income from the property is taxed on the basis of annual letting value whereas the tax is deducted at source on the entire amount of advance rent pertaining to more than one financial year. Therefore, credit for entire amount of tax deducted at source is not allowed in terms of section 199 of the Act because the credit is to be given for the assessment year for which such income is assessable. Thus, the assessees do not get credit for the entire amount of tax deducted at source in the first assessment year, in which part of the advance rent is offered as rental income, on the basis of the certificate furnished under section 203 of the Act. Further there is a difficulty in claiming the credit in the remaining assessment years to which balance of advance rent relates in the absence of the certificate for tax deducted at source for these years.
In the situation as at (b) mentioned above, difficulty in getting due credit for tax deducted at source arises because rental income ceases to accrue to the assessees on account of termination/cancellation of rent agreement or transfer of the rented property subsequent to the deduction of tax at source on advance rent pertaining to one or more financial years. The credit is not given in the hands of the assessees in whose names certificate for tax deduction at source stands because there is no relatable rental income and, further credit for tax is not allowed to any person other than the person in whose name certificate for tax deducted at source has been issued. Thus, in such cases, even though tax has been deducted at source and paid to the Government, due credit for such tax deducted is not allowed.
The matter has been considered by the Board and it has been decided 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 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 the 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.
Exemption to specified entities - See section 194-I.