In the backdrop of various redevelopment projects being carried out in the city of Mumbai, Bombay High Court in the landmark judgement of Sarfaraz S Furniturewalla Vs. Afshan Sharfali Ashok Kumar & Ors. held that no TDS under section 194I of The Income Tax Act, to be deducted from transit rent.
What is transit rent?
Transit rents, also known as hardship or rehabilitation or displacement allowance, are paid by the developer or the landowner to the flat owners or tenant who suffer due to dispossession of the house. In a redevelopment project, the developer either provides alternate accommodation or a monthly compensation in the form of rent to the flat owners or tenants.
Background:
When alternate accommodation is provided by the developer there is no tax levied in the hands of the flat owners or tenants based on fair market value of the accommodation so provided. The question of taxability arises only in cases where a fixed monthly compensation or rent is paid to the flat owners. Under the provisions of The Income Tax Act, any rent or compensation received under any lease, sub lease, tenancy or any other agreement for use of land, building or structure appurtenant thereof is taxable under the head “Income from House Property.” Further, Section 194I of The Income Tax Act states that tax at source should be deducted on any payment in the nature of rent. As per the principles of taxation, any receipt of income is broadly classified as Revenue receipt or Capital receipt. Revenue receipts are generated from business activities and are termed as operating income whereas capital receipts are received from non-operational activities.
Taxation Issue?
Can Transit rent be taxable in the hands of recipient and is the payer liable to deduct TDS under section 194I of The Income Tax Act, before making the payment?
Bombay High Court’s view:
In general parlance rent is the amount paid by the tenant or the licensee to the landowner or the licensor. Transit rent is an allowance paid by the developer or landowner as compensation for the hardships faced by the tenants on account of rehabilitation or displacement. Such compensation cannot be treated as revenue in nature and so, not chargeable to tax. As a result of which, the question of deducting TDS on such payments does not arise. In the case of Shri Devshi Lakhamshi Dedhia vs. ACIT, the Tribunal also held that hardship or rehabilitation allowance are capital in nature and are not liable to tax.
Conclusion:
A major relief to the tenants of the redevelopment projects as transit rent is not chargeable to tax.
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