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I-T, TDS to cover cash ‘benefits’

Mumbai, Feb 3, 2023

The Budget has amended certain sections of the Income Tax (I-T) Act to ensure that any cash benefit or perquisite will be taxable as ‘business income’ under section 28 and will also attract tax deduction at source (TDS) provisions under section 194R.

Section 28(iv) is amended to include benefits or perquisites arising from business or exercise of a profession which are received in cash or partly in cash or kind. These will be taxed under the head income from business or profession.

The Supreme Court, in the case of Mahindra & Mahindra, had held that a waiver of loan in relation to a capital asset is not taxable as a benefit under section 28(iv). The value of a benefit or perquisite can be treated as a taxable business perquisite only if it is not in cash, the apex court had held. However, the proposed amendment overturns this decision.

“Certain relaxations introduced in the guidelines under section 194R (the TDS provision) — such as for loan waiver by financial institutions — are not extended to section 28 (iv). Thus, the proposed amendment may lead to multiple tax litigation. It will impact various sectors including FMCG, retail and pharma,” stated Mitesh Jain, partner at Economic Laws Practice (ELP).

According to chartered accountant Ketan Vajani, “With this amendment, it will be difficult for a taxpayer to contend that waiver of loan does not result in taxable transaction even if the loan had been actually utilised for capital transaction. This amendment is in violation of the fundamental principle that capital receipt cannot be subjected to tax. It will be interesting to see how the courts will look at this provision and constitutional validity of such an amendment.”

Under section 194R, tax is required to be deducted at 10% if the value of benefits or perquisites provided to a resident, arising from carrying out of business or profession, exceed Rs 20,000 in a financial year.

The Budget clarifies that the TDS deduction would apply to any benefit or perquisite whether in cash or in kind, or partly in cash and partly in kind. While a circular issued by the Central Board of Direct Taxes (CBDT) had this clarification, a legal heft is given by a legislative amendment.

“The purpose of section 194R was to tap income on account of non-monetary perquisites to widen the tax net since these items were going unreported at the recipient’s end in some cases. Withholding tax on cash perquisites is not in keeping with this intent. This amendment would increase compliance without commensurate benefit on the tax collection front,” states Jain.

[The Times of India]

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