Transit rent not subject to TDS: Bombay HC

The High Court held that “Transit Rent” cannot be considered as revenue receipt and is not liable to be taxed.

The High Court of Bombay, in an order dated 15 April 2024 in the matter of Sarfaraz S. Furniturewalla vs Afshan Sharafali Ashok Kumar & Others, held that TDS (tax deducted at source) is not applicable on transit rent / hardship allowance paid by developers to the owners / occupants of a project under redevelopment. The High Court (HC) has clarified that such transit rent is not to be considered as revenue / income. Consequently, there is no question of TDS as this is not income in the first place.

Even though redeveloping a building brings lots of benefits, the tax implications of the transit rent has been debated for long.

The owners / occupants of a building which goes for redevelopment have to hand over possession of their property to the developer. To facilitate this, the developer provides transit rent / hardship compensation for them to relocate to a temporary alternative accommodation. Income tax authorities have seldom considered this payment as taxable income. However, developers have played safe and treated transit rent as revenue in the hands of the occupants, and deducted TDS from the  amount paid. Naturally, the owners / occupants objected to this.

In brief, in the matter before the HC, Sea Rock Construction LLP, the developer, sought photocopies of the PAN cards of the owners to deduct TDS from the amount payable as `transit rent.'  Sharafali objected, and submitted that TDS is not required to be deducted from the transit rent.

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The HC, after hearing all the arguments, clarified that rent is what a tenant pays the landlord. But, `transit rent,' also called hardship allowance / rehabilitation allowance / displacement allowance, is paid by the developer  to the owner / occupant, who suffers hardship due to dispossession by the developer.

Hence, the HC held that `transit rent' cannot be considered as revenue  / income, and is not liable to be taxed.

The Income Tax Appellate Tribunal (ITAT) has also taken  the same view in similar matters before it, providing relief to people whose buildings have gone for redevelopment, and also encouraging further redevelopment.