CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194-I — Rent (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Heavily litigated on the 'use versus service' question.
Finance Act, 2026: No amendment.
Mechanism: A specified person paying a resident 'rent' for the use of land, building, plant, machinery, equipment, furniture or fittings deducts tax (2% for plant/machinery/equipment; 10% for land/building/furniture) at the earlier of credit or payment, above the threshold.
Litigation profile: Treatise-grade. The decisive question is whether the payment is for the use of an asset or for services — governed by Japan Airlines (SC).
A. SECTION COMMENTARY
Section 194-I requires any person (other than an individual/HUF below the section 44AB limits) responsible for paying a resident any income by way of 'rent' to deduct tax at the time of credit or payment, whichever is earlier, where the aggregate in a financial year exceeds the threshold — at two per cent for the use of plant, machinery or equipment, and ten per cent for the use of land, building (including factory building), land appurtenant to a building, furniture or fittings. The Explanation defines 'rent' very widely, as any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use (either separately or together) of those assets, whether or not owned by the payee.
'Use of' the asset is the touchstone — substance over form
Despite the width of the definition, the decisive question is whether the payment is in substance for the use of the asset, or for a bundle of services and facilities of which the use of land/space is only an incidental and insignificant part. Where the payment is for services and facilities (with use of land merely ancillary), it is not 'rent' for section 194-I, even though some use of land is involved. The court looks at the substance of the transaction, not the label.
Reach of the definition and the sister-section boundary
The 2006 widening of 'rent' to include plant, machinery, equipment, furniture and fittings (whether or not owned by the payee) brought equipment-hire within section 194-I, sharpening the boundary with section 194C: a payment for the mere use of an asset, with possession/control passing to the user, is 'rent' under section 194-I; a payment for work done using the provider's asset and personnel as a composite obligation is for 'work' under section 194C. Hotel accommodation taken on a regular basis, cold-storage/warehousing arrangements and similar composite arrangements have all been tested against this 'use versus service' line.
Consequences
Default attracts the Chapter's common consequences (sections 201(1)/(1A), 271C, and disallowance under section 40(a)(ia)), tempered by the rule against double recovery where the payee has paid the tax, and by the principle that deduction attaches only to a chargeable sum.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—
(a) two per cent for the use of any machinery or plant or equipment; and
(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings: Providedthat no deduction shall be made under this section, where the income by way of rent credited or paid for a month or part of a month by such person to the account of, or to, the payee, does not exceed fifty thousand rupees:
Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section :
Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.
Explanation.—For the purposes of this section,—
(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,—
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings, whether or not any or all of the above are owned by the payee;
(ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
C. AUTHORITIES
The authorities turn on the 'use versus service' substance test. The Supreme Court's decision in Japan Airlines leads, with the boundary principle against section 194C. All citations are web-verified.
Cluster 1 — Rent is for the use of the asset, not for services
Japan Airlines Co. Ltd. v. CIT (2015) 377 ITR 372 (SC)
Issue: Whether landing and parking charges paid by airlines to the Airports Authority of India are 'rent' (use of land) within section 194-I.
Held: No. The charges are not for the use of land but for a variety of services and facilities connected with aircraft operations (air-traffic, navigational, safety, communication and meteorological services); the use of land is a minor and insignificant aspect. In deciding whether a payment is for the use of land the substance of the transaction must be seen; these charges are not 'rent' under section 194-I.
Significance: The leading authority establishing the 'use versus service' substance test and resolving the conflicting High Court views on landing/parking charges.
Cluster 2 — Width of 'rent' and the boundary with section 194C
Scope of the Explanation — equipment, plant and furniture (post-2006)
Principle: 'Rent' includes payment under any lease or 'other agreement or arrangement' for the use of land, building, plant, machinery, equipment, furniture or fittings, whether or not owned by the payee; the lower 2% rate applies to plant/machinery/equipment and 10% to land/building/furniture. The definition is wide enough to bring most pure asset-use payments within section 194-I.
Use: Fixes the rate and the broad coverage of section 194-I.
Principle: A payment for the mere right to use an asset (possession/control with the user) is 'rent' under section 194-I; a payment for work carried out using the provider's asset and personnel as a composite obligation is for 'work' under section 194C. The dominant object and the locus of possession and control decide which section applies.
Use: Resolves the frequent equipment/vehicle/space characterisation between sections 194-I and 194C (cf. the section 194C commentary).
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Caps the deductor's exposure for a failure to deduct under section 194-I.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194-I — Rent (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Heavily litigated on the 'use versus service' question.
Finance Act, 2026: No amendment.
Mechanism: A specified person paying a resident 'rent' for the use of land, building, plant, machinery, equipment, furniture or fittings deducts tax (2% for plant/machinery/equipment; 10% for land/building/furniture) at the earlier of credit or payment, above the threshold.
Litigation profile: Treatise-grade. The decisive question is whether the payment is for the use of an asset or for services — governed by Japan Airlines (SC).
A. SECTION COMMENTARY
Section 194-I requires any person (other than an individual/HUF below the section 44AB limits) responsible for paying a resident any income by way of 'rent' to deduct tax at the time of credit or payment, whichever is earlier, where the aggregate in a financial year exceeds the threshold — at two per cent for the use of plant, machinery or equipment, and ten per cent for the use of land, building (including factory building), land appurtenant to a building, furniture or fittings. The Explanation defines 'rent' very widely, as any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use (either separately or together) of those assets, whether or not owned by the payee.
'Use of' the asset is the touchstone — substance over form
Despite the width of the definition, the decisive question is whether the payment is in substance for the use of the asset, or for a bundle of services and facilities of which the use of land/space is only an incidental and insignificant part. Where the payment is for services and facilities (with use of land merely ancillary), it is not 'rent' for section 194-I, even though some use of land is involved. The court looks at the substance of the transaction, not the label.
Reach of the definition and the sister-section boundary
The 2006 widening of 'rent' to include plant, machinery, equipment, furniture and fittings (whether or not owned by the payee) brought equipment-hire within section 194-I, sharpening the boundary with section 194C: a payment for the mere use of an asset, with possession/control passing to the user, is 'rent' under section 194-I; a payment for work done using the provider's asset and personnel as a composite obligation is for 'work' under section 194C. Hotel accommodation taken on a regular basis, cold-storage/warehousing arrangements and similar composite arrangements have all been tested against this 'use versus service' line.
Consequences
Default attracts the Chapter's common consequences (sections 201(1)/(1A), 271C, and disallowance under section 40(a)(ia)), tempered by the rule against double recovery where the payee has paid the tax, and by the principle that deduction attaches only to a chargeable sum.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—
(a) two per cent for the use of any machinery or plant or equipment; and
(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings: Providedthat no deduction shall be made under this section, where the income by way of rent credited or paid for a month or part of a month by such person to the account of, or to, the payee, does not exceed fifty thousand rupees:
Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid, shall be liable to deduct income-tax under this section :
Provided also that no deduction shall be made under this section where the income by way of rent is credited or paid to a business trust, being a real estate investment trust, in respect of any real estate asset, referred to in clause (23FCA) of section 10, owned directly by such business trust.
Explanation.—For the purposes of this section,—
(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,—
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings, whether or not any or all of the above are owned by the payee;
(ii) where any income is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
C. AUTHORITIES
The authorities turn on the 'use versus service' substance test. The Supreme Court's decision in Japan Airlines leads, with the boundary principle against section 194C. All citations are web-verified.
Cluster 1 — Rent is for the use of the asset, not for services
Japan Airlines Co. Ltd. v. CIT (2015) 377 ITR 372 (SC)
Issue: Whether landing and parking charges paid by airlines to the Airports Authority of India are 'rent' (use of land) within section 194-I.
Held: No. The charges are not for the use of land but for a variety of services and facilities connected with aircraft operations (air-traffic, navigational, safety, communication and meteorological services); the use of land is a minor and insignificant aspect. In deciding whether a payment is for the use of land the substance of the transaction must be seen; these charges are not 'rent' under section 194-I.
Significance: The leading authority establishing the 'use versus service' substance test and resolving the conflicting High Court views on landing/parking charges.
Cluster 2 — Width of 'rent' and the boundary with section 194C
Scope of the Explanation — equipment, plant and furniture (post-2006)
Principle: 'Rent' includes payment under any lease or 'other agreement or arrangement' for the use of land, building, plant, machinery, equipment, furniture or fittings, whether or not owned by the payee; the lower 2% rate applies to plant/machinery/equipment and 10% to land/building/furniture. The definition is wide enough to bring most pure asset-use payments within section 194-I.
Use: Fixes the rate and the broad coverage of section 194-I.
Use versus work — section 194-I or section 194C?
Principle: A payment for the mere right to use an asset (possession/control with the user) is 'rent' under section 194-I; a payment for work carried out using the provider's asset and personnel as a composite obligation is for 'work' under section 194C. The dominant object and the locus of possession and control decide which section applies.
Use: Resolves the frequent equipment/vehicle/space characterisation between sections 194-I and 194C (cf. the section 194C commentary).
Cluster 3 — Default (cognate)
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC)
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Caps the deductor's exposure for a failure to deduct under section 194-I.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.