By TIOL News Service

KOLKATA, JUNE 23, 2015: THE issue before the Bench is - Whether the sum paid as lease premium has any nexus with the market rent of the property leased to the assessee and thus attracts the provisions of Sec 194I. NO is the answer.

Facts of the case

The assessee is a private limited company and is engaged in the business of real estate investment. MMRDA, a body corporate constituted and established under provision of Mumbai Metropolitan Region Development Authority Act, 1974 allotted a plot of land to the assessee on lease for a period of 80 years. The lease deed was executed and the lease premium was paid by the assessee for grant of lease. Said payment was made before execution of the lease deed. As per the lease deed the assessee was also required to pay the annual rent every month of Rs.8077 every year to MMRDA. The annual rent was to be increased by 10% over the rent of the preceding year. AO issued a notice requiring the assessee to show cause as to why the payment made to MMRDA was not covered by the TDS provision u/s 194-I of the Act. AO held that the lease premium was in fact an advance rent and therefore the assessee was required to deduct tax at source. The assessee was therefore treated as assessee in default in terms of section 201(1) and 201(1A) of the Act for non-deduction of TDS and non-payment of interest.

In appeal, CIT(A) allowed the appeal of the assesse thereby holding that the payment of premium by the assessee is not for "use" of property itself rather it is for the rights for the exploitation of the property by constructing commercial apartments. It was held that premium was not paid under lease but was paid as a price for obtaining the lease.

Having heard the parties, the tribunal held that,

++ terms of the lease deed leave no manner of doubt that the lease premium was for acquisition of rights in the lease hold property rather than use of land. Therefore the provisions of section 194-I of the Act are not applicable in the case of the assessee. The purport of section 194-I of the Act is not to bring in its purview payments of any or every kind. Only those payments which are in the nature of "use" of land come within the ambit of section 194-I of the Act. The word "use" is therefore of prime importance for transactions where the consideration paid for the property would be termed as "rent". The term "use" according to us has to be interpreted keeping in mind the relationship between the landlord and the tenant. The same cannot be extended to bring within its purview exploitation of any kind with reference to the property by changing its identity for its own benefit and thereafter selling it for profit;

++ the amount paid by the assessee for lease premium has no connection with the market rent of the property leased to the assessee. Furthermore the term of lease deed is for a considerable period of 80 years which further supports the case of the assesee that the payment made was for the acquisition of rights in the land along with the right of possession, right of exploitation of property, its long term enjoyment, to mortgage the property, to sell the property etc. Also the entire lease premium has been paid before the execution of the lease deed and not after;

++ supreme Court in the case or CIT vs Panbari Tea company Ltd. 57 ITR 422 has held that when the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties;

++ Calcutta High Court in the case of CIT vs Purnendu Mullick 116 ITR 0591 observed that in case where the leases is for a long period, the lumpsum payment cannot be treated as rent;

++ Delhi High Court in the case of Bharat Steel Tubes Ltd. Vs CIT reported in (2001) 252 ITR 0622 has brought out the distinction between the lease premium and the rent by laying down broad principles relating to the term lease premium/salami. The said principle are applicable in the case of the assessee in as much as the lease premium has been paid before the execution of the lease which is for a term of a long period of 80 years and there is no provision to treat the same as advance rent in the succeeding years. The broad principle relating to term Salami are as follows:

(1) Prima facie Salami or premium is not income, it is for the taxing authorities to prove that the facts exist which would make the same as income, if they seek to tax it;

(2) Where the premium represents payment of rent in advance it is income. But if it represents the whole or part of the price of the land or the sale price of the leasehold interest is not income but capital;

(3) Salami to be income should be a periodical monetary return coming in which some sort of regularity or expected regularity from definite sources;

(4) Salami or premium paid at the beginning of a mining lease for a long period ordinarily represents the purchase price of an out anti out sale of the property and the sum received is capital and not income but rent or royalty paid periodically is income. The principle is the same whether the premium is for a simple lease of land or for a lease of mineral rights. But royalty payable under the mining lease stands on a different footing from premium or Salami;

(5) When a premium is received merely as an incident in the possession of property (even if leasehold) and there is no finding that the letting out of the property is the business of the assessee, the premium receipt is capital;

(6) Salami or premium paid in advance of rent once for all at the outset the period of tenancy being uncertain and the changes of the resettlement of the same land to some other tenant being remote, is capital;

(7) Premium (Salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to him by the lease. Money paid to purchase the said general right is a payment on capital account;

(8) Salami is the amount of money which a landlord insists on receiving as condition precedent for parting with the land in favour of the lessee and that it was received by the landlord not because of the use of the land, but before the land was put into use by the assessee;

(9) The question of Salami should not be decided on the length of the period of the lease but on the nature of the right conveyed. The characteristics of the payment should be decided without reference to the nature of the lease including the wasting nature of the assets under the lease;
(para 4.9)

++ accordingly ground no.1 is decided in favour of the assessee and against the revenue. Thus ground no.1 of the revenue is dismissed.

(See 2015-TIOL-855-ITAT-KOL)