Section 194-I l Rent

1156. Whether requirement of deduction of income-tax at source under section 194-I applies in case of payment by way of rent to Government, statutory authorities referred to in section 10(20A) and local authorities whose income under the head “Income from house property” or “Income from other sources” is exempt from income-tax

1. Queries have been raised as to whether the requirement of deduction of income-tax at source under section 194-I of the Income-tax Act applies in case of payments by way of rent to the Government, statutory authorities referred to in section 10(20A) and local authorities whose income under the head ‘Income from house property’ or ‘Income from other sources’, is exempt from income-tax.

2. Under the provisions of section 196 of the Income-tax Act, no tax is required to be deducted at source from any sums payable to the Government.

3. The matter with regard to the statutory authorities and the local authorities referred to above, has been examined in the Board. Section 190 of the Income-tax Act provides for deduction of income-tax at source as one of the modes of collection of income-tax in respect of an income, notwithstanding that the regular assessment in respect of such income is to be made in a later assessment year. The income of an authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, is exempt from income-tax under section 10(20A). Similarly, the income of a local authority which is chargeable under the head ‘Income from house property’ or ‘Income from other sources’, is exempt from income-tax under section 10(20). There is no other condition specified in these two clauses of section 10 which is necessary to be satisfied in order to avail of the income-tax exemption.

4. In view of the aforesaid, 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 referred to in para 3 of this circular, 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.

1157. Clarification regarding deduction of tax at source from payment of rent

1. The Finance Act, 1994 introduced section 194-I in the Income-tax Act, 1961, which provides for deduction of tax at source from payment of income by way of rent. This section as amended by Finance Act, 1995 reads as follows :

‘194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to any person any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—

  (a)   fifteen per cent if the payee is an individual or a Hindu undivided family; and

  (b)   twenty per cent in other cases :

Provided that no deduction shall be made under this section where the amount of such income, or as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or, to the payee, does not exceed one hundred and twenty thousand rupees.

Explanation : For the purposes of this section—

   (i)   “rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee,

  (ii)   where any income is credited to any account, whether called “Suspense Account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.’

The Board has received a number of queries from various persons regarding the application of the aforesaid provision. These queries have been carefully considered by the Board and the following clarifications are issued for information and guidance of all concerned :

Query No. 1 :    Whether tax is required to be deducted at source where rent has been paid in advance before 1-6-1994?

Answer          :    Where an advance of rent has been paid before 1-6-1994, there is no requirement for deduction of tax at source.

Query No. 2 :    Whether tax is required to be deducted at source where a non-refundable deposit has been made by the tenant?

Answer          :    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 of the nature of rent as defined in section 194-I. If, however, the deposit is refundable, no tax would be deductible at source. It is further clarified that if the deposit carries interest, the tax to be deducted on the amount of interest will be governed by section 194A of the Income-tax Act.

Query No. 3 :    Whether the tax is to be deducted at source from warehousing charges?

Answer          :    The term ‘rent’ as defined in Explanation (i) below section 194-I means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, the warehousing charges will be subject to deduction of tax under section 194-I.

Query No. 4 :    On what amount the tax is to be deducted at source if the rentals include municipal tax, ground rent, etc. ?

Answer          :    The basis of tax deduction at source under section 194-I is “income by way of rent”. Rent has been defined, in the Explanation (i) of section 194-I, to mean any payment under any lease, tenancy, agreement, etc., for the use of any land or building. Thus, if the municipal taxes, ground rent, etc., are borne by the tenant, no tax will be deducted on such sum.

Query No. 5 :    Whether section 194-I is applicable to rent paid for the use of only a part or a portion of any land or building ?

Answer          :    Yes, the definition of the term “any land” or “any building” would include a part or a portion of such land or building.

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

1158. Clarification regarding payment of income by way of interest on securities and rent made to Regimental Funds or Non-public Fund established by Armed Forces of Union for welfare of past and present members of such forces or their dependants, whose income is exempt under section 10(23AA)

1. The issue of deduction of income-tax at source under section 193 and section 194-I of the Income-tax Act from any income received by any person on behalf of any Regimental Fund or Non-public Fund established by the Armed Forces of Union for the welfare of past and present members of such forces or their dependants, has been brought to the notice of the Board. Representations have also been received on behalf of Regimental Funds and Non-public Fund established by the Armed Forces.

2. The matter with regard to regimental fund or non-public fund established by Armed Forces has been examined in the Board. Since the income of these organisations is exempt under section 10(23AA) of the Income-tax Act, it has been decided that no tax may be deducted at source under sections 193 and 194-I from the income of such Funds.

Circular : No. 735, dated 30-1-1996.

1159. Clarification regarding applicability of provisions of section 194-I to film distributors and exhibitors

Representations have been received from the various quarters regarding applicability of the provisions of section 194-I of the Income-tax Act to the sharing of the proceedings of film between film distributor and a film exhibitor owning a cinema theatre. The matter has been examined by the Board and the Board are of the view that the provisions of section 194-I are not attracted to such payment 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.

You are requested to bring these instructions to the notice of the Assessing Officer under your charge.

Circular : No. 736, dated 13-2-1996.

1160. Clarification regarding scope of section 194-I in respect of payments made to a hotel for rooms

See Sl. No. 1157.

1160A. Exemption to specified entities

See Sl. No. 1080.