By TIOL News Service

MUMBAI, MAR 02, 2017: THE ISSUE IS - Whether compensation paid by builder to members of his housing society, for purpose of arranging their alternate accomodation when the society is under work-in-progress, is not 'rent' and hence not liable for TDS u/s 194-I. YES is the answer.

Facts of the case: The assessee during the subject year had had paid compensation of Rs.65,86,000/- during the year whereupon TDS provisions were attracted u/s 194I and since assessee had failed to deduct TDS, the amount of expenses was disallowed u/s 40(a)(ia). On appeal, the CIT(A) confirmed the order of AO by observing that compensation paid for the use of the building / premises / place of the members for construction activities was in the nature of rent. It was also observed by CIT(A) that this amount was paid as rent for alternative accommodation, therefore, merely because it had been called as compensation, it would not be out of the provisions of section 194I. Therefore, the assessee challenged the action of lower authorities in reducing amount of Work-in-Progress by disallowing amount of compensation of Rs.65,86,800 paid to the members of the society under redevelopment, for purpose of arranging alternative accommodation of the members during year under consideration on the ground that the assessee failed to deduct tax at source u/s 194I.

On appeal, the ITAT held that,

++ it is seen that the Tribunal in the case of Sahana Dwellers Pvt Ltd. had decided an identical issue in favour of assessee by holding that the impugned payment was not in the nature of rent, and therefore, provisions of section 194-I were not applicable and, hence no disallowance could have been made u/s 40(a)(ia). The Tribunal therein observed that the concerned persons to whom the assessee had made the payment are neither tenants of the assessee nor the assessee has in reality paid rent on behalf of them. Only because the assessee was not able to provide alternative accommodation to these tenants the assessee had to pay compensation for enabling the tenants to meet the expenditure to be incurred by them towards rent payable whether they are actually paying rent or not. This is for the simple reason that tenants were displaced from the property where they were staying for construction of new building;

++ in the facts of the present case also, the assessee has merely paid compensation to the members of the society. It is for them to utilise this amount for payment of rent or otherwise. Even if it has been paid as rent, the contract of rent/lease would be between the members and their respective landlords from whom these members would take premises as alternative accommodation on rent/lease, and then the amount payable by these members to their respective landlords may be liable for deduction of TDS u/s 194-I, if applicable upon them. As far as assessee is concerned, there was no transaction, much less, transaction of rent between the assessee and the new landlords of members of the society. Therefore, it would be highly unjustified to treat this amount as payment of rent and to make it liable for deduction of tax at source u/s 194-I. Under these circumstances, invoking of provisions of section 40(a)(ia) is unjustified.

(See 2017-TIOL-204-ITAT-MUM)