Supreme Court Upholds TDS on Lease Rent, Clarifies “Local Authority” Status: Noida vs. CIT (2018)

Date of the Judgment: 02 July 2018
The Supreme Court of India, in a recent judgment, addressed the question of whether the New Okhla Industrial Development Authority (NOIDA) and Greater Noida Industrial Development Authority qualify as “local authorities” under the Income Tax Act, 1961, and consequently, whether tax deduction at source (TDS) is applicable on lease rent payments made to them. The core issue revolved around the interpretation of Section 10(20) of the Income Tax Act and its implications for these development authorities. This case is significant for real estate developers and other entities dealing with NOIDA and Greater NOIDA, as it clarifies their tax obligations. The judgment was delivered by a bench comprising Justices A.K. Sikri and Ashok Bhushan, with Justice Ashok Bhushan authoring the opinion.

Case Background

The case originated from a dispute between various private companies, including Rajesh Projects (India) Pvt. Ltd., and the Income Tax Department. These companies had entered into long-term lease agreements with Greater Noida Industrial Development Authority for land development. As per the lease agreements, these companies made payments to Greater Noida, which included initial lease premiums and annual lease rents. The Income Tax Department issued notices to these companies for not deducting tax at source (TDS) under Section 194-I of the Income Tax Act, 1961, on the annual lease rent payments made to Greater Noida. The companies argued that they were advised by Greater Noida that it was a government authority and hence, TDS provisions were not applicable. The Assessing Officer, however, held the companies as “assessee-in-default” for non-deduction of TDS. Aggrieved by this, the companies filed writ petitions in the Delhi High Court.

Timeline:

Course of Proceedings

The Delhi High Court heard multiple writ petitions together, which involved common questions of law and facts related to lease rent payments and interest payments to Greater Noida and NOIDA. The High Court held that NOIDA and Greater NOIDA are not local authorities within the meaning of Section 10(20) of the Income Tax Act, 1961, as amended from 01.04.2003. However, the High Court also held that the interest income of NOIDA and Greater NOIDA is exempt under a notification issued under Section 194A(3)(iii)(f) of the Income Tax Act. The High Court concluded that payments made as annual lease rent are subject to TDS, while payments towards the acquisition of leasehold rights are not.

Legal Framework

The primary legal provisions in question were:

• Section 10(20) of the Income Tax Act, 1961: This section deals with the exemption of income of a “local authority.” The definition of “local authority” was amended by the Finance Act, 2002, effective from 01.04.2003. The amended section reads: “local authority” means a Panchayat as referred to in clause (d) of article 243 of the Constitution or a Municipality as referred to in clause (e) of that article or a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund.”
• Section 194-I of the Income Tax Act, 1961: This section mandates the deduction of tax at source (TDS) on rent payments. It states: “Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of…ten per cent. for the use of any land or building…”
• Section 194A(3)(iii)(f) of the Income Tax Act, 1961: This section provides an exemption from TDS on interest payments to certain entities, including those notified by the government.

Arguments

Arguments by NOIDA and Greater NOIDA:

• NOIDA and Greater NOIDA contended that they are local authorities under Section 10(20) of the Income Tax Act, 1961, because they were constituted under the Uttar Pradesh Industrial Area Development Act, 1976.
• They argued that a notification dated 24.12.2001, issued by the Governor of Uttar Pradesh under Article 243Q(1) of the Constitution, classifies them as municipalities, thus bringing them under the definition of local authorities.
• They further argued that their interest income is exempt under the notification issued under Section 194A(3)(iii)(f) of the Income Tax Act, 1961.
• They relied on Circular No. 35/2016 dated 13.10.2016, which clarifies that Section 194-I of the Income Tax Act, 1961, does not apply to lump-sum lease premiums for long-term land acquisition.
• They also cited a circular dated 30.01.1995, arguing that there is no requirement to deduct income tax at source on rent payments to government or local authorities.

Arguments by the Revenue (Income Tax Department):

• The Revenue contended that NOIDA and Greater NOIDA do not fall under the definition of “local authority” as per Section 10(20) of the Income Tax Act, 1961, after the amendment in 2002.
• They argued that NOIDA and Greater NOIDA are not entitled to the benefit of the notification issued under Section 194A(3)(iii)(f) of the Income Tax Act, 1961.
• The Revenue relied on a judgment of the Allahabad High Court dated 28.02.2011, which held that NOIDA is not a local authority under Section 10(20).
• The Revenue argued that the respondent companies were liable to deduct TDS on rent payments to NOIDA and Greater NOIDA and were rightly held as “assessee-in-default” for non-deduction.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether NOIDA and Greater NOIDA are “local authorities” within the meaning of Section 10(20) of the Income Tax Act, 1961?
2. Whether the interest income of NOIDA and Greater NOIDA is exempt under Section 194A(3)(iii)(f) of the Income Tax Act, 1961?
3. Whether tax is deductible at source (TDS) on lease rent payments made to NOIDA and Greater NOIDA under Section 194-I of the Income Tax Act, 1961?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Civil Appeal No. 792-793 of 2014*: The Supreme Court relied on this judgment to conclude that NOIDA is not a “local authority” within the meaning of Section 10(20) of the Income Tax Act, 1961.
• CIVIL APPEAL NO._________ OF 2018 (arising out of SLP (C) No. 3168 of 2017)*: The Supreme Court relied on this judgment to conclude that NOIDA is covered by the notification dated 22.10.1970, and is entitled to the benefit of Section 194A(3)(iii)(f).
• Writ Petition Tax No. 1338 of 2005*: The Court acknowledged the Allahabad High Court’s view, which was in favor of the Revenue, but the Supreme Court did not rely on it for its final conclusion.
• Section 10(20) of the Income Tax Act, 1961*: The Court interpreted this section to determine that NOIDA and Greater NOIDA do not qualify as local authorities.
• Section 194-I of the Income Tax Act, 1961*: The Court interpreted this section to conclude that annual lease rent payments fall under the definition of “rent,” making TDS applicable.
• Section 194A(3)(iii)(f) of the Income Tax Act, 1961*: The Court interpreted this section to conclude that NOIDA is entitled to exemption under this provision.
• Circular dated 30.01.1995*: The Court held that this circular cannot be relied upon due to amendments in Section 10(20) and omission of Section 10(20A) of the Income Tax Act, 1961.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The amended definition of “local authority” under Section 10(20) of the Income Tax Act, 1961, which specifically lists the entities that qualify as local authorities, and NOIDA and Greater NOIDA do not fall under that definition.
• The interpretation of “rent” under Section 194-I of the Income Tax Act, 1961, which includes any payment under a lease agreement for the use of land.
• The notification dated 22.10.1970, which specifically exempts interest income of certain entities, including NOIDA.
• The fact that the circular dated 30.01.1995 was based on the unamended Section 10(20) and Section 10(20A) of the Income Tax Act, 1961, which were no longer in force.

Fact:Law Ratio

Logical Reasoning:

Key Takeaways

• NOIDA and Greater NOIDA are not considered “local authorities” under Section 10(20) of the Income Tax Act, 1961, as amended by the Finance Act, 2002.
• Tax is deductible at source (TDS) on annual lease rent payments made to NOIDA and Greater NOIDA under Section 194-I of the Income Tax Act, 1961.
• The interest income of NOIDA and Greater NOIDA is exempt under the notification dated 22.10.1970, issued under Section 194A(3)(iii)(f) of the Income Tax Act, 1961.
• The circular dated 30.01.1995, which exempted TDS on rent payments to local authorities, is no longer valid due to amendments in the Income Tax Act.

Directions

The Delhi High Court directed Greater Noida to comply with the provisions of law and make all payments, which would have been otherwise part of the deductions, for the periods in question, till the end of the date of the judgment. All payments to be made to it, henceforth, shall be subject to TDS.

Development of Law

The Supreme Court’s judgment clarifies the definition of “local authority” under Section 10(20) of the Income Tax Act, 1961, and reaffirms the applicability of TDS on lease rent payments. The judgment also clarifies that the circular dated 30.01.1995 is no longer valid due to the amendments in the Income Tax Act. The ratio decidendi of the case is that NOIDA and Greater NOIDA are not “local authorities” under the amended Section 10(20) and that TDS is applicable on annual lease rent payments as per Section 194-I of the Income Tax Act, 1961. This judgment reinforces the statutory obligations of tax deduction at source on rent payments.

Conclusion

In conclusion, the Supreme Court dismissed the appeals filed by NOIDA and Greater NOIDA, upholding the Delhi High Court’s decision that these authorities are not “local authorities” for the purpose of Section 10(20) of the Income Tax Act, 1961. The Court also upheld the High Court’s decision regarding the applicability of TDS on lease rent payments under Section 194-I of the Income Tax Act, 1961, while affirming the exemption of interest income of NOIDA under Section 194A(3)(iii)(f). This judgment provides clarity on the tax obligations of entities dealing with NOIDA and Greater NOIDA, particularly regarding TDS on rent payments.

Category

Parent Category: Income Tax Act, 1961

Child Categories:

• Section 10(20), Income Tax Act, 1961
• Section 194-I, Income Tax Act, 1961
• Section 194A(3)(iii)(f), Income Tax Act, 1961
• Tax Deduction at Source (TDS)
• Local Authority
• Lease Rent

FAQ

Q: Are NOIDA and Greater NOIDA considered “local authorities” for tax purposes?

A: No, the Supreme Court has clarified that NOIDA and Greater NOIDA are not “local authorities” under Section 10(20) of the Income Tax Act, 1961.

Q: Do I need to deduct TDS on lease rent payments made to NOIDA or Greater NOIDA?

A: Yes, you are required to deduct tax at source (TDS) under Section 194-I of the Income Tax Act, 1961, on annual lease rent payments made to NOIDA and Greater NOIDA.

Q: Is the interest income of NOIDA and Greater NOIDA exempt from tax?

A: Yes, the interest income of NOIDA is exempt under the notification dated 22.10.1970, issued under Section 194A(3)(iii)(f) of the Income Tax Act, 1961.

Q: What if I did not deduct TDS on rent payments in the past?

A: The Delhi High Court directed Greater Noida to comply with the provisions of law and make all payments, which would have been otherwise part of the deductions, for the periods in question, till the end of the date of the judgment. All payments to be made to it, henceforth, shall be subject to TDS.

Q: Does this judgment affect lump-sum lease premium payments?

A: No, this judgment primarily deals with annual lease rent payments. The circular No. 35/2016 dated 13.10.2016 clarifies that Section 194-I of the Income Tax Act, 1961, does not apply to lump-sum lease premiums for long-term land acquisition.