• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

R. Anand

R. Anand on whether cold storage plant is in the nature of building

WHILE embarking on the task of expanding the network for tax deduction at source (TDS), Section 194-I of the Income-tax Act, 1961 was introduced by the Finance Act, 1994. This provision was designed to ensure TDS on payments in the nature of rent at the rate of 15-20 per cent depending on the status of the payee.

Like all other provisions, Section 194-I was confronted with several legal interpretations and circulars were issued clarifying some doubts in the section. Recently, the Rajkot Bench of the Tribunal had to consider whether payment made for the use of cold storage plant will fall under the TDS requirements of Section 194-I in the Ganesh Alu Bhandar vs Income-tax Officer (2003 87 ITD 588) case.

Facts, issues

The assessing officer (AO) observed that two assessees had used part of the property owned by Vinayak Cold Storage [VCS] by keeping their goods in the said cold storage. In consideration thereof, the assessees had made various payments to VCS. The AO was of the view that the payment made by the assessees was nothing but rent paid for the use of VCS' property and, hence, was covered by Section 194-I of the Act.

However, since the assessees had not deducted tax at source from the payments made and since no return in the prescribed Form 26J was filed, a show-cause notice was issued to the assessees asking why the tax deductible under Section 194-I should not be charged.

The assessee's standpoint was that Section 194I is not attracted because:

a) No space is taken on rent; b) the payments made are in substance preservation charges, though loosely it may be referred to as rent; c) preservation charges to paid to save the goods from the decay; d) payment made is for services rendered and not for use of property; e) payment is not controlled by the Rent Control Act and no tenancy right is vested in the payer of the charges; f) control of the cold storage rests with the cold storage operator and the payer has no access to it; g) cold storage charges are determined per piece, bag or article as the case may be; h) Section 194-I relate to tenancy, by whatever name called; and i) the payment is not in the nature of rent but is for the use of plant of the cold storage building.

In short, distinction was sought to be made between preservation charges and rent. The AO, however, did not agree with the submissions of the assessees. He referred to the CDBT Circular Nos. 715 (of August 8, 1995), 718 (August 22, 1995) and 736 (February 13, 1996) and held the applicability of Section 194-I in the instant case to be at a par with warehousing charges for keeping goods in the warehouse.

Thus, since the assessees had failed to deduct tax at source under Section 194-I of the Act, he levied tax at 20 per cent of the payment made and also levied interest under Section 201(1A). The CIT (A) upheld the action of the AO. The matter reached the Tribunal.

Provision and circular

The term rent is defined in Section 194-I thus: "Rent means 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 any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee."

CBDT Circular 718, explaining the various positions on the non-applicability of TDS under Section 194-I and on the specific question of TDS on warehousing charges the circular, states that the term `rent', as defined in Explanation (i) below Section 194-I, means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, warehousing charges will be subject to deduction of tax under Section 194-I.

But would payment of rent for the use of cold storage plant constitute payment of rent for the use of land or building or, for that matter, constitute warehousing charges?

Tribunal decision

The Tribunal held that in the instant case the question of application of Section 194I does not arise and cold storage plant does not constitute building to warrant TDS. The tribunal analysed the definition of "rent" in Section 194I and reasoned that the definition of rent under Section 194-I does not include any payment for the use of a plant, which a cold storage is, thus, when the term `plant' is specifically excluded from the definition, there is no question of applying Section 194-I for payment made for the use of cold storage.

The Revenue may be tempted to treat it as a building, though it may be a specialised building. However, in view of the specific connotations ascribed to a building and plant in the Act, that proposition cannot be accepted. At best, it may be called a structure. Thus, payment made for the use of cold storage cannot be subjected to deduction under Section 194-I.

The Tribunal also went into the question as to how one should link cold storage facility to a plant and held that "now the question is whether cold storage can be called a `plant' despite the fact no manufacturing or any other process is carried on therein. It cannot be gainsaid that a cold storage building has a specialised planning and construction and is very much an integral part of the air-conditioning plant to enable the assessee to run its business of a cold storage.

"Hence, it cannot be put on the same footing as that of a warehouse. It is not necessary that in order to qualify as a plant, it needs to manufacture, produce, generate or process an article or thing. If that were to be the case, then the wide definition of `plant' given in Section 43(3) to include books and vessels manufacturing process is carried out in a cold storage, yet it will qualify as a plant. This view was further strengthened by the fact that Section 80-I while granting deduction to certain industrial undertakings uses the expression... or operates one or more cold storage plant or plants...

"The same expression cannot be used in relation to a warehouse. There is no reason to assign any other meaning than a `plant' to a cold storage when one of the provisions of the Act with which there is dealing described it as a plant. Therefore, one can say that a cold storage is plant."

Assessees generally take a safe approach while effecting TDS on various categories of payments. At times, the safety factor places the recipient into considerable hardship, particularly where he has to file a return of income and get only the TDS amount as refund, while there are provisions built into the Act to enable assessees/recipients to obtain a certificate from the AO for lower or nil tax deduction.

The lawmakers should ensure that issues on interpretation should be clarified as early as possible to avoid unnecessary litigation.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Making safe whistle blowing

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line