Compensation paid to the existing tenants of the
property for the inconvenience caused to them due to dislocation--No tax
deductible under section 194-I
CA. Manoj Gupta
Facts: Assessee
company was engaged in construction and re-development of properties. It
claimed a sum of Rs. 2.12 crores as rent expenses during the year under
consideration. Assessee stated that it was liable to pay compensation to the
existing tenants of the property for the inconvenience caused to them due to
dislocation. As a part of this compensation, monthly amount was paid to these
tenants which was debited to the account 'rent for alternate accommodation'.
The assessee furnished party-wise details of reimbursement paid. AO held that
liability was that of assessee, and not of the tenants and hence, assessee was
liable to deduct TDS under section 194-I and since it had not deducted, the
amount of Rs. 2.12 crores was liable to be disallowed under section 40(a)(ia).
Held: On perusal of
agreement entered into between assessee and the society formed by tenants, it
was relevant to note that since assessee was not able to provide alternative
accommodation to the tenants, it was provided under the agreement that assessee
would pay them compensation towards expenditure to be incurred by them on
account of rent payable by them for alternative accommodation and in accordance
with such terms assessee initially paid compensation of Rs. 5,000 per month to
each tenant which was subsequently revised from time-to-time as the assessee
could not construct the building within the stipulated time period for various
reasons. From the aforesaid facts, it was very clear that concerned persons to
whom made assessee payment were neither tenants of assessee nor assessee in
reality paid rent on behalf of them. Only because the assessee was not able to
provide alternative accommodation to these tenants, assessee was 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
was for the simple reason that tenants were displaced from the property where
they were staying for construction of new building. On a plain reading of said
definition of rent, under clause (i) of Explanation to section 194-I it becomes
clear that payment made by assessee did not come within the purview of rent as
prescribed in the said provision as assessee was not making such payment for
use of any land, building, etc. On the contrary, if the facts involved are
considered as a whole the payment made by the assessee was nothing else but in
the nature of compensation. For alternative accommodation by the recipients
held such payments at their hand as income from other sources instead of income
from house property. That being the case, the payment made by the assessee also
being in the nature of compensation for alternative accommodation. Moreover,
such compensation could not be treated as rent for the simple reason that not
only the assessee was not using any land and building but it might also be a
fact that persons to whom such payments have been made might not be incurring
any expenditure on account of rent. Therefore, no TDS under section 194-I was
called for.
Case: ITO v.
Salient Traders (P) Ltd. 2022 TaxPub(DT) 0762 (Mum-Trib)
Comments: In the case of Jatinder Kumar Madan v. ITO reported in (2012)
32 CCH 0059 (Mum) : 2012 TaxPub(DT) 2202 (Mum-Trib), it was held
that displacement compensation or compensation received for alternate
accommodation in excess of actual rent paid by assessee is taxable as income
from other sources and not income from house property in the hands of the
recipient.
In the case of Sahana Dwellers Pvt. Ltd. v. ITO reported
in (2016) 158 ITD 78 (Mum) : 2016 TaxPub(DT) 1402 (Mum-Trib), it
was held that compensation paid by assessee to tenants for alternate
accommodation could not be treated as rent as defined in section 194-I of the
Act and there was no requirement for deduction of tax at source thereof.