CBDT Circular No. 18 of 2022 dated 13th September, 2022 issuing Additional Guidelines for removal of difficulties under sub-section 2 of section 194R of the Income Tax Act, 1961.
CBDT has issued another circular No. 18 of 2022 dated 13th September, 2022 in which additional guidelines were embedded to remove difficulties arising on account of deduction of tax at source under newly inserted section 194R of the Income Tax Act, 1961 in respect of benefits or perquisites provided to residents in cash or in kind arising out of business or profession.
1. It is clarified that one time loan settlement (OTS) with borrowers or waiver of loan granted on reaching settlement with the borrowers by the banks, NBFCs and financial institutions. Such waiver of provisions of section 194R of the Act to the banks, NBFCs and financial institutions is made applicable to the effect that subjecting a transaction to tax deduction under section 194 R of the Act would put extra cost on such banks, NBFCs and financial institutions, as this would require payment of tax by the deductor in addition to him taking a haircut already in the form of OTS and or waiver of loan.
2. Further, another issue which arose is, if under the terms of agreement, the expense incurred by the service provider (SP) is the cost of service recipient (SR) and such cost is reimbursed by the service recipient (SR) to service provider (SP), will it be benefit/perquisite if the bill is not in the name of service provider (SP)?
If service provider incurs some expense in the course of rendering service to service recipient and the bill is in the name of service provider, then in substance (irrespective of the terms of the agreement) this expense is the liability of the service provider and not of service recipient.
For this issue, it has been clarified that any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession. Hence, in such a situation, reimbursement of an expense is benefit/perquisite on which tax is required to be deducted under section 194R of the Act.
3. It is further clarified that for reimbursement of the out of pocket expenses, there will not be liability for deduction of tax under section 194R of the Act provided such reimbursement of out of pocket expenses are already part of the consideration in the Invoice/Bill on which tax is already deducted under the relevant provisions of the Act (section 194J of the Act in such case), other than section 194R of the Act.
4. Another issue which arose is if there is a dealer conference to educate the dealers about the products of the company, how to identify benefit/perquisite against individual dealers in a group activity?
It is brought to the notice that there may be expenses during such dealer/business conference which need to be classified as benefit/perquisite and tax is required to be deducted under section 194R of the Act. However, there may be practical difficulties in identifying such benefit/perquisite to actual recipient due to the fact that it is a group activity and reasonable allocation is not possible. Noncompliance of the provision of section 194R of the Act, in such a case, would not only result in disallowance under clause (ia) of section 40 of the Act but may also result in treating the benefit/perquisite provider as assessee in default under section 201 of the Act with all other consequences.
In order to remove these practical difficulties, it is clarified that if benefit/perquisite is provided in a group activity in a manner that it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his option not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income. If he decides to opt so, he will not be required to deduct tax under section 194R on such benefit/perquisite and therefore he will not be treated as assessee in default under section 20 I of the Act. Thus, in such a case he must add back the expenditure, representing such benefit/perquisite, to calculate his total income if such expenditure is debited in the account.
Further, Expenditure on participants of dealer/business conference for days which are on account of over stay prior to the dates of conference or beyond the dates of such conference would be considered as benefit/perquisite for the purposes of section 194R of the Act. However, a day immediately prior to actual start date of conference and a day immediately following the actual end date of conference would not be considered as over stay. The intent behind excluding arrive one day before and leave one day after from the term of ‘over stay’ is the mindset of the businessman/dealer who travels one day before and leave one day after the event to avoid any inconvenience and last minute rush to reach the destination.
5. It is further clarified that the tax under section 194R of the Act is not required to be deducted on issuance of bonus or right shares by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act, where bonus shares are issued to all shareholders by such a company or right shares are offered to all shareholders by such a company, as the case may be.
Here, it is pertinent to note that this circular has not stated any clarification to not deduct tax at source under section 194R of the Act in case when bonus/right shares will be issued by a company in which public is not substantially interested, therefore, it implies that the company in which public is not substantially interested will be required to deduct tax at source while issuing bonus/right shares.
I believe that there are still some clarifications needed from the CBDT regarding the follwoing:
1. Applicability of provisions on issue of bonus/right shares by a company in which public is not substantially interested i.e. a Private Limited Company. Issue of bonus/right shares cannot be treated as income of the recipient, irrespective of the issuer of the shares, as it does not result in any benefit to shareholders as the overall value and ownership of their holding does not change.
2. The allotment of shares are not arising out of carrying a business or profession by the recipient.
3. Hence, TDS provisions of section 194R shall not be applicable on a Pvt. Ltd. Co.
How can we apply TDS on bonus and right issue given by private company, when the same are not income in the hands of recipient ? Can someone please clarify this ?