The High Courts have debated this issue and have adjudicated that no withholding is required on payments pursuant to long-term leases, as the payments are capital in nature/in the nature of deemed sale. Further, all the rights pertaining to the property would stand transferred to the lessee and, moreover, there is no provision in the lease arrangement to adjust the lump sum payment against any rent payable by the lessee.
In this background, Central Board of Direct Taxes (CBDT), has issued clarification on the applicability of tax withholding provisions on lump sum lease premium payable on long- term leases. The CBDT noted that in various favorable judicial precedents, it has been held that such payments which are not adjustable against periodic rent payable are not in the nature of rent for the use of land or any property and are not subject to withholding. Accordingly, CBDT has issued the Circular clarifying non-applicability of withholding on lump sum premium or one-time lease charges paid for acquisition of long-term leasehold rights.
This is yet another Circular issued by the CBDT to provide clarity and certainty on the issue which, as noted by the CBDT, is covered by many of the judicial precedents. The Circular provides much needed certainty and avoids litigation. However, what would one mean by "long-term lease" has not been clarified and, hence, there can be certain ambiguity in this regard.
CBDT Circulars are binding on revenue authorities and applies to all pending proceedings including pending appeals.
Source: [Circular No. 35 of 2016 dated 13 October 2016]
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