Decision cited :

In the case of M/s. Sahana Dwellers Private Limited v. ITO bearing ITA no. 5963/Mum/2013, the court has held that the payment made  by  the  assessee to the tenants  does  not  come  within the purview of rent as prescribed in Income Tax Act, 1961 as the assessee is not making such payment for use of any land, building, etc. The payment made   by   the   assessee   is   nothing   else   but   in   the   nature   of compensation. Thus, the compensation paid by the assessee to the tenants towards an alternative accommodation not being in  the   nature  of  rent  as  defined  in  section  194I,  there  is  no requirement for deduction of tax under the said provisions.

In the present case, the court has held that the above decision is right to an extent that, the said amount are in the form of compensation paid to the tenant, to do an act i.e. vacating the premises for redevelopment as well as tolerating construction cum redevelopment work during the specified period of redevelopment as per their agreement and also to tolerate an act i.e. the act of not having received the new premises within 3 years from the developer.

Facts of the case :

M/s. Future Communications Limited (the “Owner”) owned a commercial building at Village Mohili. Shri Zaver Bhanushali (the “tenant”) is a tenant of shop on 2^nd floor of the said commercial building.

The Owner had entered into an agreement with M/s. Spenta Residency Pvt. Ltd. (the “Developer”) to develop a new building in place of the old commercial building. Accordingly, they have entered into an agreement with the tenant for allotment of permanent alternate accommodation i.e. shop in new premises in lieu of giving up the possession of shop in old building. Consequently, the tenant was required to vacate the said old premises and in consideration, the developer / owner agreed :

(i)               To pay an amount of Rs.2,05,000/- per month as compensation for alternate accommodation for 2 years ;

(ii)             If the construction period extends beyond 2 years, then compensation for alternate accommodation shall be increased to Rs.225,000/- per month for next six months and thereafter Rs.247,000/- for further 6 months ; and

(iii)            In case, the construction period goes beyond 3 years, then the tenant shall be eligible for Rs.500,000/- per month as compensation for alternate accommodation damages for delayed handover of possession.

However, till this period, the tenant shall continue to pay to the Owner the rent as previously applicable.

 Question before AAR :

Is GST applicable on compensation as agreed to be paid by the developer / owner ? 

GST officer's contention :

The tenant is supplying services to the developer inasmuch as doing the act of vacating the premises which was rented by the Owner. For this act, the tenant is receiving compensation for alternate accommodation. Thus, this transaction of vacating the premises for re-development and also getting compensation is in furtherance of business and therefore, taxable as per section 7(1)(d) read with Schedule II at sr.no. 5(e) of the GST Act.

In addition, the tenant will get permanent alternate accommodation, shop in the new building. Thus, the developer would be liable to pay tax on the construction services for permanent alternate accommodation, shop provided to the tenant.

 AAR's verdict :

The act of vacating premises for redevelopment as per the agreement of redevelopment, the tenant is agreeing to the obligation to refrain from an act or tolerating an act or situation of redevelopment in place of old premises and of not causing hindrance or creating obstacle in the same. Such act, squarely falls under clause 5(e) of the Schedule II as mentioned below :

“SCHEDULE II (See section 7) Activities to be treated as supply of goods or supply of services :

5. Supply of services :

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.”

Therefore, the amounts received by the tenant for having agreed to do such an act, would attract GST.