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Tax Publishers 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.

Tax Publishers

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.