Calcutta High Court
Enterprise International Ltd. vs Income Tax Officer on 22 December, 1999
Equivalent citations: [2000]77ITD189(CAL)
ORDER
S. Bandyopadhyay A.M. :
This appeal has been filed by the assessee against the order of the Commissioner (Appeals) upholding the order passed by the Assessing Officer under sections 215/201(1)/201(1A) of the Income Tax Act, 1961 on 7-10-1998.
2. The assessee-company entered into a tenancy agreement for taking on rent basis the land and premises No. 382/1B, Keyatalla Lane, Calcutta from four different co-owners viz.
(1) M/s. Laxmi Shelter (P) Ltd.
(2) M/s. Shree Shelter (P.) Ltd.
(3) M/s. Ganesh Awas (P.) Ltd.
(4) M/s. Siddhi Homes (P.) Ltd.
According to the aforesaid lease agreement, the assessee was required to pay a monthly rent of Rs. 3,000 to each of the four landlords and furthermore another amount of Rs. 12,00,000 as advance to each of them.
3. The assessing officer found out that during the financial year 1994-95, relevant to the assessment year 1995-96, the following payments had been made by the assessee to the four landlords:
1.
M/s. Laxmi Shelter (P.) Ltd.
Rs. 8,50,000 on 30-1-1995
-do-
Rs. 50,000 on 2-3-1995
2. M/s. Shree Shelter (P) Ltd.
Rs. 8,50,000 on 30-1-1995
3. M/s. Ganesh Awas (P) Ltd.
Rs. 8,50,000 on 30-1-1995
-do-
Rs. 75,000 on 25-2-1995
4. M/s. Siddhi Homes (P.) Ltd.
Rs. 8,50,000 on 30-1-1995
-do-
Rs. 3,00,000 on 4-3-1995 Rs. 38,25,000 The assessing officer noted that the above advance payment of rent to the extent of Rs. 38,25,000 exceeded the limit of Rs. 1,20,000 in excess of which tax was required to he deducted by the assessee under section 194-I of the Act. For lack of non-deduction of tax at source in this regard, an order was originally passed by the assessing officer determining the short deduction of tax to the extent of Rs. 8,79,750 and demanding the said amount under section 201(1A) and furthermore levying interest under section 201 (1) of an amount of Rs. 2,96,915. In the first appeal, this order passed by the assessing officer was set aside to the assessing officer for examining the matter afresh before framing the fresh order. Accordingly, the impugned fresh order was passed by the assessing officer on 7-10-1998.
4. Before the assessing officer, the assessee had tried to take futile arguments to the extent that the payments as mentioned above were of the nature of commercial transactions for the purpose of procuring raw-silk from the four parties, as mentioned above. The assessing officer discusses in details with proper reasonings that the contention of the assessee in this regard is not tenable. Ultimately, the assessing officer found out on examination of the books of the assessee-company that on 31-3-1995 all the four landlords companies, as mentioned above, were credited in the books of the assessee with a sum of Rs. 12,00,000 each against the building situated at 382/1B, Keyatalla Lane, Calcutta. The assessing officer thus concluded that the commercial transactions were subsequently transferred to rent-in-advance account at the end of the year. The assessing officer also relied on the fact that even as per the tenancy agreement also, the advance rents to the extent of Rs. 48,00,000 (Rs. 12 lakhs to each of the four parties) adjustable against future rents were required to be paid by the assessee. He also held that this amount of advance rents adjustable against future rent should be subjected to TDS under section 194-I. The assessing officer also mentions certain circulars of the Central Board of Direct Taxes to which we shall refer later on. He, thereafter, refers to the Explanation to section 194-1 providing the definition of the word rent in a wider sense and meaning 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. The assessing officer thus held that it was incumbent upon the assessee to have deducted tax at source from the total amount of Rs. 48,00,000 credited to the accounts of the four landlords on 31-3-1995 by way of advance of rent in accordance with the provisions of section 194-I. Accordingly levies under sections 201(1) and 201(1A) were made, as mentioned above.
5. In the first appeal, the assessee tried to take a completely different turn. The learned counsel for the assessee, after stating that the payment of Rs. 38,25,000 having been made to the four landlords for certain business purposes, claimed that inasmuch as the payments had been made before 1-4-1995, the same could not be treated as advance payments pursuant to the tenancy agreement dated 1-4-1995.
As regards the transfer entries in the books of the assessee passed on 31-3-1995 it was submitted on behalf of the assessee that there was nothing to indicate that this sum had been paid as advance rent as contemplated by the assessing officer. It was furthermore argued that the tenancy agreement as well as the transactions in respect of rent started only on 1-4-1995 and hence the order of the assessing officer relating to the financial year 1994-95 was misconceived. It was furthermore argued that even the advances were of the nature of refundable advances and although a small part of the advances paid had been adjusted against the rents for certain months, the entire balance amount of advances were ultimately refunded back to the assessee by the landlords on termination of the agency in January 1998.
6. The Commissioner (Appeals) noted that the definition of rent as provided in section 194-I was wide enough to include advance of rent. He relied on the Circular No. 715 dated 8-8-1995 issued by the Central Board of Direct Taxes clarifying the question No. 22 put to it that if the deposit made by the tenant is adjustable against future rent, the said deposit would be in the nature of advance rent subject to TDS. On the other hand, the Commissioner (Appeals) also discussed the issues raised by the learned counsel for the assessee by placing reliance on a subsequent Circular No. 718 dated 22-8-1995 on the same issue and overriding the earlier circular. In the said circular dated 22-8-1995 in response to query No. 2, it was clearly stated by the Central Board of Direct Taxes that if the deposit is refundable no tax would be deductible at source.
The Commissioner (Appeals) strongly relies on clause (a) included in the tenancy agreement to the effect that monthly rent shall be adjusted against the advance of Rs. 12,00,000 paid to each of the landlords and furthermore that such adjustment of monthly rent against the advances did actually take place. He admitted that the agreement provided for refund of the advance money in case of surrender of the tenancy rights. He also noted that the tenancy had already been surrendered with effect from 1-4-1998 and the balance amount of advance lying with the landlords had also been returned to the assessee. The Commissioner (Appeals), however, was of the view that this fact would not alter the position that the amounts which had been credited to the accounts of the landlords as advance rent were adjustable against future rent. He was thus of the opinion that it could not be held that the amounts were refundable. He argued that the assessee had in fact paid the rent in advance instead of paying the same later and furthermore that had the assessee continued to enjoy the tenancy, the entire amounts of advance would have ultimately been adjusted against the monthly rent payments. Ultimately, the Commissioner (Appeals) upheld the version of the assessing officer that the amount of Rs. 48,00,000 credited to the accounts of the landlords on 31-3-1995 should be treated as advance rent and should have been subjected to tax deduction under section 194-I. He upheld the levies made by the assessing officer under sections 201(1) and 201(1A).
7. At the stage of hearing of this further appeal filed by the assessee against the above-mentioned order of the Commissioner (Appeals), the learned counsel for the assessee first of all drew our attention to various clauses of the tenancy agreement dated 1-4-1995. Clause (b), at page 3, states as under:
"It is recorded that the tenant has agreed to deposit by September 1995 with each of the landlords above named a sum of Rs. 12,00,000 (Rupees Twelve lakhs only) as and by way of advance. The said advance amount shall not carry any interest."
Clause (d) provides that monthly rent shall be adjusted every month from the said advance of Rs. 12,00,000. Clauses (s) and (t) provide for refund of advance money lying with the landlords in the event of termination of the tenancy agreement either at the instance of the landlords or of the tenant.
8. Thereafter, the learned counsel for the assessee takes us through the dictionary meaning of the word "rent" and on that basis argues that rent being of the nature of periodical payments cannot cover any advance payment of rent. Our attention has also been drawn to the discussions made in the commentary authored by Shri H.R. Khanna on "The Transfer of Property Act (7th Edn.)" with regard to section 50 of the said Act, at page 219 of the above-mentioned commentary. It is discussed therein that in order to get the benefit of section 50, the tenant must have paid the rent, as rent, and not in advance, for a payment in advance is treated as a loan. The learned counsel for the assessee thus strongly argues that the advance payment in the instant case was of the nature of a loan and cannot be considered as forming rent for the purpose of section 194-I.
9. Thereafter, the learned counsel for the assessee has also drawn our attention to para 3 of Circular No. 699 dated 30-1-1995 in which it is stated as follows:
"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."
At para 4 of the said circular again, it is stated as under:
"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 statutory authorities referred to in para 3 of this circular, there will be no requirement to deduct 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."
The learned counsel for the assessee seems to argue in this connection that inasmuch as the advance amounts did not constitute income in the hands of the recipients thereof there was no need to deduct tax at source therefrom.
10. It is curious to note that although the learned counsel for the assessee relied on the discussions made at Circular No. 718 dated 22-8-1995 (as mentioned above) to the effect that if the deposit is refundable, no tax need be deducted at source, at the same time again, he refutes the applicability of circulars issued by the Central Board of Direct Taxes in general and of Circular No. 715 dated 8-8-1995 in particular to the question of determination of the present issue. In support of his contention he has relied on a number of cases as listed below:
1. Kerala Financial Corpn. v. CIT (1994) 210 ITR 129, at page 135
2. Reiter Machine Works Ltd. v. CIT (1995) 211 ITR 144 at 149 (Mad.)
3. Pawan Kumar & Co. v. State of Rajasthan (1988) 173 ITR 394 at page 395 (Raj.).
11. Finally, the learned counsel for the assessee argues that so far as the financial year 1994-95 was concerned the payment was merely of the nature of business advance inasmuch as the tenancy agreement had not come into existence. In this regard, he argues by trying to place reliance on the following judgments that while interpreting the statute, regard must be had to the scheme, context and the legislative history of the provisions and furthermore that if two reasonable constructions of a taxing provision are possible, that construction which favours the assessee must be adopted :
1. CIT v. N.C Budharaja & Co. (1993) 204 ITR 412, at 434
2. CIT v. Vegetable Products Ltd. (1973) 88 ITR 192/195 (SC)
3. CIT v. Sodra Devi (1957) 32 ITR 615, at 632 & 633 (SC) On the other hand, the learned Departmental Representative strongly relies on the orders of the assessing officer and the Commissioner (Appeals). He reiterates the departmental reliance on the clause (a) of the Tenancy Agreement relating to adjustability of the deposit against rent. He has also pointed out that, in fact, such adjustment did take place. In this connection, the learned Departmental Representative has placed reliance on a judgment of the Calcutta High Court in the case of Smt. Bishaka Sarkar v. Union of India (1996) 219 ITR 327 (Cal). In this case, it has been held that rent cannot be split up and the entire rent paid to the co-owners would come within the expression "other cases" and the provisions relating to deduction of tax at source would apply to the aggregate amount of rent payable to all the co-owners.
12. We are unable to agree with the contention of the assessee that advance payment of rent, if any, cannot be subject to the provisions of section 194-I. In spite of the dictionary definition of the word "rent", in view of the extended definition thereof as provided in the Explanation to section 194-I, even advance payment of rent is also required to be taken into consideration for the purpose of section 194-I. The main issue, therefore, before us, would be to look into the question whether payments/credits under consideration be considered as advance payment of rent. Actually, the payments in respect of the aggregate amount of Rs. 38,25,000 were made on different dates during the months of January to March 1995. The credit of the entire amount of Rs. 48,00,000 to the accounts of the four landlords was, on the other hand, made in the books of the assessee on 31-3-1995. That is why the assessing officer has made levies in respect of the financial year 1994-95. However, it is an undisputed fact that during that particular year the tenancy agreement was not in operation at all. The tenancy agreement did come into existence on 1-4-1995 and if we closely examine clause (b) of the said agreement, we find that it does not at all refer to the deposit already made on 31-3-1995. On the other hand, this particular clause states about the agreement on the part of the tenant to make the deposit by September 1995. It may be argued that at the time of making the credit entry on 31-3-1995, the tenancy agreement was already in the contemplation of the parties and, therefore, the deposits of Rs. 12 lakhs to each of the four landlords as credited by the assessee as on 31-3-1995 must relate to the requirement under clause (b) of the tenancy agreement. It should, however, be noted at the same time that even this clause does not declare the amounts to be of the nature of advance rent. On the other hand, the amounts have merely been described as "deposits". There is no doubt about the fact that these deposits were adjustable, against the monthly rents. There was, however a stipulation to the effect that in the event of termination of the tenancy agreement, the deposited amounts or the balances thereof were refundable. In fact, a large portion of such deposit amounts vi.,., to the extent of Rs. 11,01,000 seems to have been refunded by, each of the landlords in January 1998. Taking an overall view of the factual position, as evidenced by the tenancy agreement and the subsequent acts of the parties concerned, it would, therefore, be necessary to come to the conclusion that the deposits were actually refundable in nature. Had the tenancy agreement continued for a long time, then the question of refund would not have arisen is not of much consideration. Advance rent actually means rent paid in advance for a fixed period. There may be a written or verbal agreement between the landlord and the tenant that rent in respect of some period should be paid, instead of contemporaneously, at some earlier point of time. Advance rent cannot certainly be equated with deposit made in connection with tenancy which may again be adjusted against rent in full or in part. Unless there is a specific provision for declaring the deposit to represent the rent in advance for certain future period, the question of considering the deposit as advance rent cannot at all come in. In the instant case, the monthly rent was only Rs. 3,000, whereas the amount of deposit was a very large one like Rs. 12,00,000. If this amount of Rs. 12,00,000 has got to be treated as advance rent it would cover a period of more than 33 years. It is inconceivable to hold that a tenancy agreement would provide for payment of advance rent for a long period of 33 years. On the other hand, on a proper construction of the agreement under consideration and taking into account the facts of the case one must come to the conclusion that the deposits in the instant case, represented nothing but refundable deposits, which were required to be adjusted against the future rents gradually. In absence of any specific provision either in the agreement or even verbally amongst the parties about the deposit amount representing the advance rent for certain periods, it will not be possible to consider the deposit amount as advance rents. Hence, we ultimately are of the view that although the contention on behalf of the assessee that the deposits constitute commercial deposits cannot be accepted, at the same time again, the deposits may be found to be clearly in connection with the tenancy agreement but even then they do not represent advance rent. In our view, therefore, these deposits do not attract the provisions of section 194-I. Hence, we reverse the orders of the lower authorities and delete the levies made under sections 201(1) and 201(1A).
13. In the result, the appeal filed by the assessee is allowed.