Circular No. 35 /2016
Circular No. 35/2016 was issued by the Central Board of Direct Taxes on 13 October 2016. Its subject is Circular No. 35 /2016.
Clarifies that a lump sum lease premium or one-time upfront lease charge, not adjustable against periodic rent, paid or payable for acquiring long-term leasehold rights over land or any other property is not rent within section 194-I and attracts no deduction of tax at source under that section. The Board records the Delhi High Court's ruling in The Indian Newspaper Society, where an 80 year lease premium was held to be capital expenditure outside section 194-I, and the Chennai High Court's rulings in Foxconn India Developer Limited and Tril Infopark Limited on 99 year leases, and notes that the Department accepted those decisions and filed no special leave petition.
Representations were received on whether tax was to be deducted under section 194-I on a lump sum lease premium or one-time upfront lease charge paid for acquiring long-term leasehold rights, and the Board took the question as settled in favour of the assessee once the High Court decisions were accepted.
Circular No. 35 /2016
F. No. 275/29/2015-1T (B)
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi
13th October, 2016Subject: Applicability of TDS provisions of section 194-1 of the Income-tax Act, 1961
on lump sum lease premium paid for acquisition of long term leaseregardingSection 194-1 of the Income-tax Act, 1961 (the Act) requires that tax be deducted at
source at the prescribed rates from payment of any income by way of rent. For the purposes of
this section, "rent" has been defined as 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 building or
machinery or plant or equipment or furniture or fittings.2. The issue of whether or not TDS under section 194-1 of the Act is applicable on 'lump
sum lease premium' or ' one-time upfront lease charges" paid by an assessee for acquiring longterm leasehold rights for land or any other property has been examined by CBDT in view of
representations received in this regard.3. The Board has taken note of the fact that in the case of The Indian Newspaper Society
(ITA No. 918 & 920/2015), the Hon'ble Delhi High Court has ruled that lease premium paid by
the assessee for acquiring a plot of land on an 80 years lease was in the nature of capital
expense not falling within the ambit of Section 194-1 of the Act. In this case, the court
reasoned that since all the rights easements and appurtenances in respect of the said land were
in effect transferred to the lessee for 80 years and since there was no provision in lease
agreement for adjustment of premium amount paid against annual rent payable, the payment of
lease premium was a capital expense not requiring deduction of tax at source under section
194-1 of the Act.4. Further, in the case Foxconn India Developer Limited (Tax Case Appeal No. 80112013),
the Hon'ble Chennai High Court held that the one-time non-refundable upfront charges paid by
the assessee for the acquisition of leasehold rights over an immovable property for 99 years
could not be taken to constitute rental income in the hands of the lessor, obliging the lessee to
deduct tax at source under section 194-1 of the Act and that in such a situation the lease
assumes the character of "deemed sale". The Hon'ble Chennai High Court has also in the cases
of Tril Infopark Limited (Tax Case Appeal No. 882/2015) ruled that TDS was not deductible
on payments of lump sum lease premium by the company for acquiring a long-term lease of 99
years.-2-
5. In all the aforesaid cases, the Department has accepted the decisions of the High Courts
and has not filed an SLP. Therefore, the issue of whether or not TDS under section 194-1 of the
Act is to be made on lump sum lease premium or one-time upfront lease charges paid for
allotment of land or any other property on long-term lease basis is now settled in favour of the
assessee.6. In view of the above, it is clarified that lump sum lease premium or one-time upfront
lease charges, which are not adjustable against periodic rent, paid or payable for acquisition of
long-term leasehold rights over land or any other property are not payments in the nature of
rent within the meaning of section 194-1 of the Act. Therefore, such payments are not liable for
TDS under section 194-1 of the Act.Hindi version follows.
Under Secretary to the Gov!. ofIndia
Tele: 2309 4182
Email: sandeep.singh68@nic.in1. Chairperson, Members and all other officers of the Central Board of Direct Taxes.
2. Pr. CCIT/ Pr. DGIT/ CCIT/ DGIT with a request to circulate the same amongst all
officers in their Region / Charge.
3. Commissioner (Media & Technical Policy) and Official Spokesperson, CBDT.
4. Add!. Director General of Income-tax (PR, PP & OL)
5. Office of Comptroller & Auditor General of India.
6. ADG (Systems)-IV for uploading on the Departmental website.
7. Database Cell for uploading on the IRS Officers website.
8. Guard File.
In an order under section 201(1) and section 201(1A) treating the lessee as an assessee in default for not deducting on a lease premium, or in a TDS survey on a land allotment.
It mentions. Circular No. 35/2016
Source: the Income Tax Department’s own published text — its page for this instrument.
