2021 April » Sensys Blog.

What if – Employer does not issue a TDS certificate.

What if – Employer does not issue a TDS certificate. Compliances

Apr 292021

Facts:

An issue which is of serious concern for those salaried employees employed by Companies and Corporations, whose Promoters and persons in charge do not bother to issue, to the employees from whose salary, the tax is deducted at source, the certificates.

Hence, the petitioner says that Form No. 16 having not been issued in time, the employees are suffering serious consequences and are proceeded against for breaching and violating legal provisions.
Some of these employees are senior citizens.

HIGH COURT OF BOMBAY in the case of Ramprakash Biswanath Shroff v.Commissioner of Income-tax (TDS) had held that:

We would, therefore, request the respondents, particularly the Commissioner of Income Tax (TDS), Mumbai to file a comprehensive affidavit.
We want the Ministry of Finance, Department of Revenue also to be made aware of these serious lapses in Mumbai and around.

We have noticed that there is no transparency, in the sense, no information is ever displayed in relation to such defaulters by the Department. We expect the Department to provide information of such defaulters so that those seeking employment or awaiting either retiral benefits or such other sums from the employers would know in advance as to how they are expected to comply with the law.

In the instant case, the petitioner is a senior citizen of 65 years of age and because he is not in possession of Form No.16, he has suffered at the hands of the Department.

Let, therefore, the necessary steps be taken in law so that such occurrences are avoided in the future.

We would expect the Department of Revenue, particularly, Department of Income Tax to penalize such defaulters and take other strict measures contemplated by law against them.

We post this matter in the hope that this Writ Petition will be taken as a test case by respondent No. 1.

Legal position:

Section 205 – Bar against direct demand on assessee Where tax is deductible at the source under the foregoing provisions of this Chapter], the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income

Section 191 – Direct payment. : [(1)] In the case of income in respect of which:

Provision is not made under this Chapter for deducting income-tax at the time of payment, and
In any case where income tax has not been deducted in accordance with the provisions of this Chapter,

income-tax shall be payable by the assessee direct.

¹[Explanation.—For the removal of doubts, it is hereby declared that if any person including the principal officer of a company,—

(a)		who is required to deduct any sum in accordance with the provisions of this Act; or
(b)		referred to in sub-section (1A) of section 192, being an employer,

does not deduct, or after so deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act, and where the assessee has also failed to pay such tax directly, then, such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default within the meaning of sub-section (1) of section 201, in respect of such tax.

Interest on Loan to repay a HOME LOAN.

Interest on Loan to repay a HOME LOAN. Compliances

Apr 262021

Facts:

Nature and business of transaction		The company is engaged in the business of construction, development of real estate projects, and renting of a commercial building.
Interest on loan for pre-construction period	Rs 19,52,752/-
Interest due and paid during the financial year to corporation bank for the purpose of construction and letting out of commercial building project	Rs 20,19,618/-	The interest of unsecured loan taken from Mrs. Kaveri Bai (Taken and used for the purpose of repayment of loan taken from corporation bank)	Rs 30,22,041/-
Total expenses claimed u/s 24(b)			Rs 69,94,411/-

Details as to unsecured loan: Borrowed monies from Mrs. Kaveri Bai and repaid the loan that was availed by the Assessee from Corporation Bank for the purpose of construction of a commercial building project.

Relevant rule – Section 24(b):

Sec. 24 of the Act lays down that income chargeable under the head “Income from house property” shall be computed after making some deductions. One of the deductions allowed u/s. 24(b) is as follows:

“Sec. 24(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

Provided that in respect of property referred to in section 23(2) (self-acquired property etc.), the amount of deduction shall not exceed thirty thousand rupees :

Provided further that where the property referred to in the first proviso is acquired or constructed with capital borrowed on or after the 1st day of April 1999 and such acquisition or construction is completed ⁵⁰[within three years from the end of the financial year in which capital was borrowed], the amount of deduction under this clause shall not exceed one lakh fifty thousand rupees.

Explanation.—Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted under this clause in equal installments for the said previous year and for each of the four immediately succeeding previous years:

Provided also that no deduction shall be made under the second proviso unless the assessee furnishes a certificate, from the person to whom any interest is payable on the capital borrowed, specifying the amount of interest payable by the assessee for the purpose of

o such acquisition or construction of the property, or,

o conversion of the whole or any part of the capital borrowed which remains to be repaid as a new loan.

Explanation.—For the purposes of this proviso, the expression “new loan” means the whole or any part of a loan taken by the assessee subsequent to the capital borrowed, for the purpose of repayment of such capital.”

Analysis of the above provision:

The expression used in sec. 24(b) is ‘property’ and not residential or commercial property. Therefore, irrespective of the nature of the property whether it is residential or commercial, the deduction has to be allowed under section 24(b) of the Act.

All the provisos to sec. 24(b) of the Act deal with property referred to in section 23(2), i. e., residential property. The proviso only carves out an exception to section 24(b) of the Act, in so far as it relates to property used for residential purposes and does not deal with the right of an assessee to get a deduction on interest paid on loans borrowed for the purpose of constructing a commercial property.

Whether pure commercial transactions are deemed dividend u/s 2(22)(e)?

Whether pure commercial transactions are deemed dividend u/s 2(22)(e)? Compliances

Apr 222021

The assessee was a shareholder and director in M/s Associated Cine Exploiters Pvt. Ltd. (ACEL) and obtained a loan of Rs.1,00,000/-.

Reason for such advance: The assessee has received Rs.1,50,000/- as commercial advance for granting rights for distribution of the movie and the amount was paid to M/s Sukrit Pictures on 03.05.2010 was a commercial advance for screening of the movie. It is a fact on record that the amount received from ACEL which is running a Cinema Theatre in Rohtak has given a loan to Sukrit Pictures which is the distributor. Thus, this is the amount received from the theatre owner to the distributor of the films.

Whether 2(22)(e) is attracted on commercial transactions:

To attract the provision of section 2(22)(e), the important consideration is that there should be a loan and/or advance by a company to its shareholder. Every payment by a company to its shareholder may not be a loan/advance. To treat the payment as a loan following is worthwhile to note:

Amount paid must make the company a creditor of shareholder
If at the time of making payment, the company is already a debtor, the payment would merely a repayment by the company.
If, an amount so paid exceeds the already existing debt, the amount so exceeds will be treated as a loan to the assessee and would attract section 2(22)e).
If, the assessee has a current account with the company, the above position as regards each debit will have to be considered individually. However, credits to the account will have to be completely ignored.
Thus, the amount does not bear the characteristics of loans, and advance section 2(22)(e) is not applicable.
Even, advance given by the company in exchange for an advantage conferred upon the company by such shareholders can not be treated as deemed dividend.
Section 2(22)(e) is applicable even if the whole amount is repaid before the close of the previous year.
Also, a bona fide loan, whether in the form of overdraft or otherwise, for a short duration is treated as a dividend if all the conditions of section 2(22)(e) are satisfied.
This section is applicable even if the loan is given in kind.

Thus, section 2(22)(e) covers not only advances and loans to shareholders but any other payments by the company on behalf of or for the individual shareholders, such as payment of shareholders’ personal expenses, insurance premia, etc., to the extent of the accumulated profits of the company.

The distinction between the other dividend and deemed dividend u/s 2(22)(e):

Dividend declared by a company or deemed dividend falling under section 2(22)(a) to (d)	Deemed dividend u/s 2(22)(e)
If the dividend is covered by the above sections, the dividend distribution tax is paid by the assessee company and what the assessee would receive is the tax-free income. However, this situation is changed with budget 2020.	In case of deemed dividend under section 2(22)(e) – the same is taxable in the hands of shareholders since the inception at the applicable slab rate of shareholder. However, after the applicability of budget 2020, TDS have to be deducted in both cases.

Conclusion:

Where amounts are advanced to the assessee by another company for business purpose wherein both entities are having common directors and if it is in nature of a commercial transaction, provisions of section 2(22)(e) are not attracted.

Whether trust is eligible for claiming deduction in respect of House Property Income?

Whether trust is eligible for claiming deduction in respect of House Property Income? Compliances

Apr 192021

Facts of the case:

Rental receipt of trust	Rs. 1,16,88,161/-
standard deduction u/s 24(a) of the IT Act of	Rs. 35,06,448/-	(30% of rental receipts)

Now, the issue arises, whether the computation of trust income is to be made on purely commercial considerations or as per taxation law. If income is to be computed on commercial considerations the deduction of Rs 35,06,448/- would have not been allowed. However, from a taxation point of view assessee trust is eligible for deduction.

Section 24 of the act:

Deductions from income from house property.

Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—

(a) a sum equal to thirty per cent of the annual value;

(b) where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital:

A bare reading of the above makes it amply clear that the provisions of the Act do not provide any restriction whatsoever that any category of the taxpayer is excluded from this deduction.

It is settled law that the provisions of the Act have to be construed in a strict manner when there is no ambiguity whatsoever in the provisions of the Act. Hence, extrapolation made by learned CIT(A) that the Trust shall not be entitled to deduction u/s. 24 of the Act in computation of income from house property is totally unsustainable in law.

In the case of CIT v. Institute of Banking Personnel Selection, wherein capital expenditure for acquiring asset which was already shown as the application of income was held to be eligible for depreciation which was denied by the Revenue.

Conclusion:

Hence, the assessee trust is eligible for standard deduction from income from house property and thus, 30% of rental income is deemed to be utilized for purposes of the trust.

Gujarat Minimum wages 1st Apr 2021 to 30th Sep-2021.

Gujarat Minimum wages 1st Apr 2021 to 30th Sep-2021. Compliances

Apr 162021

Gujarat Minimum wages have been revised from 1st Apr 2021 to 30th Sep-2021

Notification:-Gujarat VDA 01.04.2021 to 30.09.2021

Detail Industry-wise Breakup:- Gujarat Minimum Wages 1st Apr-2021 to 30th Sep-2021

SOURCES: PRAKASH CONSULTANCY SERVICES

Deduction of TDS on wrong estimates is enough to establish TDS is deducted on wrong amounts.

Deduction of TDS on wrong estimates is enough to establish TDS is deducted on wrong amounts. Compliances

Apr 152021

Facts of the case:

As per provisions of section 10(5) of the Act, only that reimbursement of travel concession or assistance to an employee is exempted which was incurred for travel of the individual employee or his family members to anyplace in India. Nowhere in this clause, it has been stated that even if the employee travels to foreign countries, the exemption would be limited to the expenditure incurred to the last destination in India. Section 10(5) and the relevant rule is reproduced below:

Section 10(5)- exemption in respect of leave travel concession

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included

(5) in the case of an individual, the value of any travel concession or assistance received by, or due to, him,—

(a)		from his employer for himself and his family, in connection with his proceeding on leave to any place in India;
(b)		from his employer or former employer for himself and his family, in connection with his proceeding to any place in India after retirement from service or after the termination of his service,

subject to such conditions as may be prescribed (including conditions as to the number of journeys and the amount which shall be the exempt per head) having regard to the travel concession or assistance granted to the employees of the Central Government;

Provided that the amount exempt under this clause shall in no case exceed the amount of expenses actually incurred for the purpose of such travel

Conditions for the purpose of section 10(5) as prescribed under rule 2 B of the Income-tax Rules, 1962

2B. (1) The amount exempted under clause (5) of section 10 in respect of the value of travel concession or assistance received by or due to the individual from his employer or former employer for himself and his family, in connection with his proceeding—

(a)		on leave to any place in India;
(b)		to any place in India after retirement from service or after the termination of his service,

shall be the amount actually incurred on the performance of such travel subject to the following conditions, namely:—

(i)		where the journey is performed on or after the 1st day of October 1997, by air, an amount not exceeding the air economy fare of the national carrier by the shortest route to the place of destination;
(ii)		where places of origin of journey and destination are connected by rail and the journey is performed on or after the 1st day of October 1997, by any mode of transport other than by air, an amount not exceeding the air-conditioned first-class rail fare by the shortest route to the place of destination; and
(iii)		where the places of origin of journey and destination or part thereof are not connected by rail and the journey is performed on or after the 1st day of October 1997, between such places, the amount eligible for exemption shall be:—
(A)		where a recognized public transport system exists, an amount not exceeding the 1st class or deluxe class fare, as the case may be, on such transport by the shortest route to the place of destination; and
(B)		where no recognized public transport system exists, an amount equivalent to the air-conditioned first-class rail fare, for the distance of the journey by the shortest route, as if the journey had been performed by rail.

Liability to deduct TDS:

There is a subtle line of demarcation between what is taxable in the hands of the assessee and what is the amount of estimated income in respect of which tax is required to be deducted at source by the employer.

Section 192 (1), which imposes tax withholding obligations on the employers in respect of payments for salaries, requires that tax deduction is made by the employer “on the estimated income of the assessee under this head (i.e., income from salaries) for that financial year“. Thus, the tax withholding obligation is clear in respect of “estimated income of the assessee” and not in respect of “taxable income of the assessee”.

There can be situations in which the employer genuinely and reasonably estimates income of the employees under the head salaries, and yet actual taxability of income under the head salaries of the related employees may be higher than the employer’s estimation.

Therefore, while examining the question as to whether the employer has properly discharged his duties under section 192, all that is to be seen is whether the employer has reasonably, or bonafide, estimated the income of the employees and deducted tax in respect of such estimated income.

Conclusion:

Under section 192 a duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While forming this opinion, the employer is undoubtedly expected to act honestly and fairly. But if it is found that the estimate made by the employer is incorrect, this fact alone, without anything more, would not inevitably lead to the inference that the employer has not acted honestly and fairly. Unless that inference can be reasonably raised against an employer, no fault can be found with him. It cannot be held that he has not deducted tax on the estimated income of the employee.

Whether amount shown in form 16 is sufficient to hold it taxable under head salary?

Whether amount shown in form 16 is sufficient to hold it taxable under head salary? Compliances

Apr 132021

Facts of the case:

Residential status: On a worksheet submitted by the assessee along with Form-16, the assessee claimed that he comes under the NOR (Not Ordinarily Resident) category for the assessment year 2010-11 based on particulars of the days, in which he stayed in India from 1-4-2002 to 31-3-2009, i.e., for 401 days only which was well within 732 days required for a regular resident.

He was given 5500 stock options, when he joined Google Inc, California, USA, in June 2005. Thereafter, in the year 2008, he left the USA and relocated to India and further joined Google India Private Limited, an Indian company fully owned by the parent company Google Inc. USA.

Accrue and arise of income outside India: During the assessment year 2010-11 under consideration, he sold 900 stock options, and still, he owns 2100 stock options. Hence, the entire 900 options sold in the assessment year 2010-11, clearly came out of the lot of 4583 options that had already vested before his move to India, and transactions were initiated and executed through Smith Barney Inc., based in the USA and the proceeds were wired directly to his old account in the USA bank.

Thus, the amount of Rs. 1,19,49,709/- under “stock options” mentioned in Form-16 pertains to the sale of stock options that were granted in the USA while he was working in Google Inc., USA and vested while he was living in the USA. The same was sold through a US-based company and the cash proceedings were directly sent to his old account in the USA bank.

Analysis of the above facts:

As per Section 5(1) of the Income-tax Act, the assessee comes under the category of NOR assessee and is liable to pay tax only on income earned in India.

Section 5(1) excludes “income which accrues or arises outside India” in the case of Not Ordinarily Resident assessee.

Assessee, in the above case, is a “non-resident”. The word “non-resident” is defined in Section 115C(e) of the Act. It means an individual, being a citizen of India or a person of Indian Origin who is not a “resident”.

Further, the employee acquired asset viz., ‘stock’ from the employer’s stock option scheme, when he was serving abroad in a parent company prior to the assessment year 2010-11 when he was non-resident.

Without considering this fact his employer erroneously treated the sale proceeds of stock options as ‘perquisites’ and included that as income in Form-16.

Whether it is correct to say that based on computation made in form 16 the claim of an employee shall be rejected and income so earned on the sale of stock options shall be treated as income of the employee for AY 2010-11?

It is not correct to say that particulars of income shall be added to the assessment of the employee because the employer has deducted TDS on the same. The NOR status & the purchase of stock option of the assessee is a mixed question of fact & law and because of this fact also, the fact that the employer could not go into the exact residential status of its employee, which involves complicated questions of law viz., interpretation of Section 6(6) (a) and 5(1) (c) of Income-tax Act, as a measure of caution, erroneously deducted income tax for the said exempt income of Rs.1,19,49,709/-. Thus, the same can not be the only ground to add the income in the assessment made by AO.

Computation of income of LIC agents.

Computation of income of LIC agents. Compliances

Apr 112021

Facts of the case:

The assessee in a development office of LIC. The issue that arises here is – whether the incentive bonus received by DO-LIC is a salary income. If so, whether amount so received by him is entitled to a separate deduction?

Whether 30 periods of incentive bonus were to be excluded from the definition of ’emoluments’ under section 17?

Whether incentive bonus being salary, the assessee was entitled to any deduction excess/different from standard deduction allowable under section 16(1)?

Analysis of fact:

Whether any expenditure is allowable in the computation of income or any receipt has to be added to income only after providing for the expenditure is a matter to be found in the statute, that is, the income-tax Act. The scheme of the Act is compartmentalization of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions, rebates, and allowances provided therein.

The first step in this regard is to identify the head under which the income is assessable and Deductions and allowances are specific for each head of income.

The definition of “salary” under section 15 of the Income-tax Act, 1961, is so wide and is only an inclusive one taking in all receipts from the employer in the form of wages, commission, bonus, profits in lieu of or into the employee towards consideration for services rendered in the course of employment comes within the description of “salary” which includes perquisites as well. The definition of salary as provided under section 15 is reproduced below:

The following income shall be chargeable to income-tax under the head “Salaries”—

(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.

Explanation 1.—For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.

Explanation 2.—Any salary, bonus, commission, or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.

For the purposes of sections 15and 16 and of this section,—

(1) “salary” includes—

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commissions, perquisites, or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(a) any payment received by an employee in respect of any period of leave not availed of by him;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule;

(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof; and

(viii) the contribution made by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme, referred to in section 80CCD;

Meaning of bonus to DO-LIC:

The incentive bonus is a percentage of the premium received by the LIC of India for the business canvassed through the Development Officers,

It is not the reimbursement of any expenditure and is not even linked to expenditure, if any, incurred by the Development Officers.

Further, in cases where the remuneration otherwise receivable by the Development Officers is in excess of 20 percent of the net premium, then the Development Officer is not entitled to any incentive bonus.

Conclusion:

It is an additional payment and is nothing but a salary coming within the meaning of section 15 of the Act and the Development Officer is not entitled to any deduction over and above the standard deduction.

Deduction of Social security Charges in computing income under the head salary income.

Deduction of Social security Charges in computing income under the head salary income. Compliances

Apr 082021

Computation of salary income of a Czech national employed with Skoda Auto AS, a company incorporated in Czechoslovakia and is currently under deputation to Skoda Auto India (P.) Ltd:

Income tax return filed on : 31-7-2006,

Basic Salary:

Bonus:

Total Salary:

Rs. 47,31,650

Rs. 8,81,760

Rs. 56,13,410

Deductions:

Hypothetical-tax : 20,21,281
Social security charges: 9,23,498

Net Salary:

Rs. 26,68,631

Taxable allowances:

Taxable perquisite:

Rs. 17,74,558

Rs. 25,79,856

Taxable income under the head salary:

Rs. 70,23,050

The explanation for deduction of social security charges: As regards the social security contribution, it was explained that Skoda a.s. has made a contribution to the social security plan for the assessee in the home country.

It is admitted position that domestic law of the Czech Republic lays down a compulsion whereby all citizens of the Czech Republic are required to contribute to the social security plan, regardless of the fact whether they are working in the Czech Republic or any other place.

There is a thin diving line between diversion of income and application of income as explained below:

Diversion of income: Income is received by a person other than the person who is entitled to it. The recipient, later on, diverts the income under a pre-existing title to the person who is actually entitled to it. It is the diversion of income by overriding title.

In such cases, income is not taxable in the hands of the person who first receives it. The tax is payable by the person to whom income is diverted by overriding title.

Application of income: Income is received by the person who is actually entitled to it. He is made chargeable to tax.

In order to decide whether a particular payment is a diversion of income or application of income, it has to be seen whether the disbursement of income is a result of the fulfillment of an obligation on him or whether income has been applied to discharge an obligation?

In the first case income is not taxable in the hands of the assessee but in the latter case same consequences to law not follow and income is taxable in the hands of the assessee recipient.

Analysis of present case and conclusion:

In the above case, the assessee had no discretion in the matter of social security charges contributions and the assessee does not have any enforceable right over it.

Also, no benefits accrued to the assessee, under this social security plan, in the relevant financial year.

Thus the payment is not taxable as the employee does not have a present enforceable vested right in the contribution.

Also, in the case of Gallotti Raoul v. Asstt. CIT, it was highlighted that only net income was chargeable to tax after adjustment of the French social security charges as was the assessee’s case.

Thus, the facts of this case show that the amount to the extent of the social security plan never reaches the assessee as his income, and, therefore not taxable.

Also, the non-existence of provision for deduction either under section 16 of the Income-tax Act or in the tax treaty between India and the appellant’s home country is immaterial in this case.