The Bombay High Court held in Sarfaraz S. Furniturewalla vs Afshan Sharafali Ashok Kumar & Others that tax deducted at source (TDS) should not apply to transit rent/hardship allowance paid by developers to owners/occupants whose building is under redevelopment. While redevelopment benefits many, the tax status of transit rent has been debated for a long time. Developers provide transit rent to facilitate temporary relocation during redevelopment. Tax authorities viewed this as non-taxable, but developers deducted TDS. In this case, Sea Rock Construction sought PAN cards to deduct TDS from transit rent payments. The High Court clarified the difference between rent and transit rent, ruling that transit rent is not income and thus not subject to TDS.
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 tax deducted at source (TDS) is not applicable on transit rent / hardship allowance paid by developers to the owners / occupants of a project under redevelopment. The High Court clarified that such transit rent should not be considered as revenue/income. Consequently, there is no question of deducting TDS as this payment does not constitute income in the first place.
While redevelopment brings many benefits, the tax implications of transit rent have been debated for a long time. Owners/occupants must hand over possession of their property to the developer for redevelopment. To facilitate this, developers provide transit rent/hardship compensation for temporary alternative accommodation. Tax authorities have generally not viewed this payment as taxable income. However, developers played it safe by treating transit rent as revenue for occupants and deducted TDS from amounts paid. Naturally, owners/occupants objected to this.
Specifically, in this case Sea Rock Construction LLP, the developer, sought photocopies of PAN cards from owners to deduct TDS from the "transit rent" payable. Sharafali objected, arguing that TDS is not required to be deducted from transit rent.
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.
The High Court's clear definition of transit rent versus rent provides certainty to both developers and building owners/occupants regarding the non-taxable nature of transit rent. This ruling encourages continued real estate redevelopment projects in Mumbai by removing doubts around their tax implications.
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