No TDS on payments made to drivers.

 No TDS on payments made to drivers.  Compliances
May 212021
 

Facts:

Uber Technologies Inc. (parent of Uber India) is a USA-based company that owns Uber App which provides lead generation services (online platform) to the various independent driver-partners. The driver partners use the platform of Uber to contract with various customers in India (the contract of transportation is between Driver-partners and customer directly). Following services are provided by Uber:—

i. Informing driver about customers who need transportation services;
ii. Connecting driver with the customers in real-time;
iii. Offer an option to collect fare digitally; &
iv. Making a payment to the driver for fare collected.

For the abovementioned service, Uber charges a Service Fee from Driver Partner. Driver-partners are free to choose the timings and other conditions of the ride even whether to accept/reject the ride and therefore, the said drivers are neither the employee of Uber nor they are agents but are entering a transaction with Uber on principal to principal basis.

Uber India’s role in the complete process is only to provide cash collection and other support at a cost-plus markup basis to the Uber Group.

Issue involved:

Whether the payment made by Uber to various drivers located in India is liable to deduction of TDS u/s 194C? Whether remittances of payment by Uber India to Uber Technologies Inc. involve TDS deductions?

Relevant rules analysis:

Condition to attract liability to deduct TDS u/s 194C Analysis
The person responsible for payment Uber India is only a remitter of money and not a payer or liable to pay money.
The disbursement to the driver should be in pursuance of any work done for Uber India  The payment made by Uber is not for the work done by the driver under any agreement.
There is a contract between Uber India and driver for the work done The contract between Uber and driver is only to provide lead

 

Conclusion:

Therefore, it can be held that Uber India is not liable to deduct TDS on payments made to drivers as well as its parent company in the USA. The same analogy would apply to all other e-commerce companies which are struggling with the withholding tax compliances in India. These principles would apply in all cases where the platform is only keeping a minuscule margin for providing the technical support however, every case has to settle by looking at who is the principal service provider.

Therefore to put such transaction of sale or provision of service into TDS ambit government has issue section 194-O when is reproduce below:

194-O. (1) Notwithstanding anything to the contrary contained in any of the provisions of Part B of this Chapter, where the sale of goods or provision of services of an e-commerce participant is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called), such e-commerce operator shall, at the time of credit of the amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier, deduct income-tax at the rate of one percent of the gross amount of such sales or services or both.

Indexed cost of property – from date of allotment.

 Indexed cost of property – from date of allotment.  Compliances
May 182021
 

Facts:

The date of allotment of the property was 20-5-1986,

Consideration paid for allotment of property on 29-5-1986

Date of possession certificate 23-6-1998 and title deed was executed on 06-01-2004

The issue is whether, for computing cost of inflation of asset, the date to be reckoned was the date of allotment of property to the assessee, i.e. 1986-1987, or date on which possession certificate was issued, i.e. 1998-1999?

Impact analysis: while computing the cost of acquisition and/or cost of improvement in the case of long-term capital assets, indexation of the nominal value of actual money invested in acquiring such property is allowed. Higher the indexation factor more will be the indexed cost and lower will be taxable capital gain which is computed after deduction of such indexed cost from “net consideration received or receivable”.

“indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, [2001], whichever is later;

“Cost Inflation Index”, in relation to a previous year, means such Index as the Central Government may, having regard to seventy-five percent of average rise in the Consumer Price Index (urban) for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify, in this behalf.

Thus, if we consider the index of 1986-1987 the indexed cost works out to be Rs. 20,34,539/- however considering the year 1998-1999 same would be Rs. 8,11,497 resulting in a difference in a taxable long-term capital gain of Rs. 12,23,042/-.

Relevant rules:

“Short term capital asset” in Section 2(42A), a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer is a Short term capital asset.

Section 2(29A) defines “Long term capital asset” means a capital asset that is not a short-term capital asset.

Analysis of law:

For the purpose of determining the nature of capital gain, the law is concerned with the period during which the asset is held by the assessee for all practical purposes on a de facto basis. The law is not concerned with absolute legal ownership of the asset for determining the holding period.

The allottee gets the title of the property on the issuance of an allotment letter and full payment of the cost of the site. The issuance of a possession certificate is only a consequential action upon which delivery of possession flows. Therefore, the date of allotment letter and payment of consideration viz., 29-5-1986, i.e. 1986-87, is the year of acquisition for the purpose of calculation of the inflated cost of acquisition.

When a capital asset is transferred, in order to determine the capital gain from such transfer, what is to be seen is, out of the full value of the consideration received or accruing, the cost of acquisition of the asset, the cost of improvement and any expenditure wholly or exclusively incurred in connection with such transfer is to be deducted. What remains thereafter is the capital gain. It is not necessary that after payment of the cost of acquisition, a title deed is to be executed in favor of the assessee.

Conclusion:

Even in the absence of a title deed, the assessee holds that property, and therefore, it is the point of time at which he holds the property, which is to be taken into consideration in determining the period between the date of acquisition and date of transfer of such capital gain in order to decide whether it is a short-term capital gain or a long term capital gain and accordingly indexation needs to be done.

Whether employees’ certification is sufficient for non-deduction on TDS on uniform reimbursement?

 Whether employees’ certification is sufficient for non-deduction on TDS on uniform reimbursement?  Compliances
May 142021
 

Facts:

Assessee deductor had made payments under the head “uniform allowance”; however, the deductor had neither included this allowance to the total salary payments nor had he deducted tax at source (TDS) on such income.

The assessee had disclosed in writing that out of around 790 to 800 employees at Hazira, 752 employees had taken this reimbursement on the basis of self-certification and thus, it has not been included in the gross salary chargeable to TDS under section 192 of the Act for the financial year in question presuming that since the employees had given self-certification, they might have incurred or would be incurring such expenditure. Therefore, no further check had been observed by the deductor as to whether they had actually incurred such expenditure or not, and original/genuine and real bills and vouchers to this effect were not taken at the relevant point of time during the relevant financial year.

Section 10(14)(i) of the Act provides that any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specially granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed to the extent to which such expenses are actually incurred for that purpose are not to be included in the total income of the assessee

Thus, the assessee had claimed expenditure incurred towards uniform allowance as exempt section 10(14)(i) of the Act on the basis of self-certification by the concerned employees without calling for any proof in the nature of bills, vouchers, etc. regarding such expenditure having been actually incurred and without due verification.

Section 10(14)(i) on the above point:

Section 10 of the Act provides that the total income of a previous year of any person falling in any of the clauses set out thereunder shall not be included. Sub-clause (i) of clause (14) thereof, as it stood at the relevant time, reads thus:

“(14) (i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose.”

Rule 2BB of the rules prescribe the allowances for the purpose of clause (14) of section 10. The allowances enumerated under sub-rule (1) thereof are prescribed for the purposes of clause (14) of section 10. The allowance prescribed by clause (f) of Rule 2BB(1) of the rules is any allowance granted to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit.

 

 

Analysis:

The present case relates to uniform allowance, which as noticed earlier is exempt from tax under section 10(14)(i) of the Act read with rule 2BB(1)(f) of the rules to the extent to which such expenses are actually incurred for that purpose. Under the Act, the liability to the employer is to deduct tax at source to the extent of the taxable income of the employee. If any part of such income is exempt, there is no liability to deduct tax at source from such income. Since liability to pay tax under the Act is of the individual employee and the liability on the part of the employer is only to deduct tax at source, Circular No. 15 dated 8-5-1969 provides that self-certification on the part of the employee is sufficient for the disbursing officer for calculation of the tax-deductible at the source. While the said circular relates to conveyances, the underlying principle can well be applied even in the case of uniform allowance. Therefore, if an employee gives a certificate certifying that he had incurred certain expenditure towards uniforms and maintenance thereof, insofar as the disbursing officer is concerned, that would be adequate while calculating the tax deductible at source.

However, if no uniform was prescribed by the employer then, the payment of allowance under the head of the uniform allowance would not fall within the exemption clause of section 10(14)(i) of the Act read with rule 2BB of the rules.

Whether gift become unexplained credit if the occasion of the gift not explained?

 Whether gift become unexplained credit if the occasion of the gift not explained?  Compliances
May 122021
 

Facts:

This issue relates to a gift of Rs.50,000 received from the father of the assessee and a gift of Rs.50,000 from the sister-in-law. However, the assessee is unable to explain the occasion of receiving such gifts.

Following are undisputed facts in the above case:

  1. Gifts have been received through the banking channel
  2. The identity of the donors is well established.
  3. Both the donors, i.e., the father and sister-in-law, fall under the category of relatives provided in explanation (e) of section 56(2).

Section 56(2)(v), (vi) & (vii) –

Where any sum of money exceeding twenty-five thousand rupees is received without consideration by an individual or a Hindu undivided family from any person on or after the 1st day of September 2004 59[but before the 1st day of April 2006], the whole of such sum :

Provided that this clause shall not apply to any sum of money received—

 

(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
60[(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; or
(g) from any trust or institution registered under 60a[60aa[section 12AA]].]

 

Explanation.—For the purposes of this clause, “relative”61 means—

 

(i) spouse of the individual;
(ii) brother or sister of the individual;
(iii) brother or sister of the spouse of the individual;
(iv) brother or sister of either of the parents of the individual;
(v) any lineal ascendant or descendant of the individual;
(vi) any lineal ascendant or descendant of the spouse of the individual;
(vii) spouse of the person referred to in clauses (ii) to (vi);]

 

62[(vi) where any sum of money, the aggregate value of which exceeds fifty thousand rupees, is received without consideration, by an individual or a Hindu undivided family, in any previous year from any person or persons on or after the 1st day of April 2006 63[but before the 1st day of October 2009], the whole of the aggregate value of such sum:

Analysis of Section 56(2):

From a perusal of section 56 sub-section (2) as well as explanation (e), we find that sections 56(2)(v), 56(2)(vi) & 56(2)(vii) which provides a cap of the sum received without consideration by an individual or Hindu Undivided Family (HUF) to be taxed as income from other sources, if amount exceeding the cap provided in these sub-sections is received by the assessee.

However, the above sub-sections 56(2)(v), 56(2)(vi) & 56(2)(vii) shall not be applicable if any sum is received from any relative ( as defined in explanation (e) to section 56).

There is no mention about the occasion to be a necessary condition for receiving any sum from any relative.

Conclusion:

In the instant case, the alleged gifts of Rs.50,000/-, Rs.1,00,000/- and Rs.50,000/- for A.Ys. 2004-05, 2005-06 & 2006-07 have been received from relatives of the assessee i.e. father and sister-in-law through account payee cheques/demand draft. Therefore, the same cannot be included in the income of the assessee by any cannon of law.

Hence, the above payments can not be added on account of unexplained gifts for all three assessment years.

Service Charges – whether liable to deduct TDS u/s 194H?

 Service Charges – whether liable to deduct TDS u/s 194H?  Compliances
May 102021
 

Facts:

Whether, a third partly viz., National Financial Switch and Cash Tree has been acting as an agent by collecting charges from the bank for its services rendered to the bank as an intermediary between the bank and its customers? Or

Whether there is a relationship between the parties shall be regarded as a principal-to-principal basis?

And therefore, whether the provisions of section 194H apply and whether the bank is liable to deduct TDS on each transaction of service charge payable to a third party.

Relevant Rules:

Section 194H – TDS on Commission, brokerage, etc.

(1) Any person, not being an individual or a Hindu Undivided Family, who is responsible for paying, on or after the 1st day of October 1991, but before the 1st day of June 1992 to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income 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 ten percent.

(2) The provisions of sub-section (1) shall not apply-

(a) to such persons or class or classes of persons as the Central Government may, having regard to the extent of inconvenience caused or likely to be caused to them and being satisfied that it will not be prejudicial to the interests of the revenue, by notification in the Official Gazette 4, specify in this behalf;
(b) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed two thousand five hundred rupees.
Explanation.- For the purposes of this section,-
(i) ” commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or concerning any transaction relating to any asset, valuable article or thing;
(ii) ” professional services” means services rendered by a person in the course of carrying on a legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as is notified by the Board for the purposes of section 44AA;
(iii) 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 the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

 

Analysis of facts and Section 194H:

Mode of working:

Suppose, the credit card issued by the bank was used on the swiping machine of another bank, the customer whose credit card was used got access to the internet gateway of acquiring bank resulting in the realization of the payment.

Subsequently, the acquiring bank realizes and recovers the payment from the bank, which had issued the credit card.

Analysis of working in the eyes of law:

The relationship between the assessee and any other bank is not of an agency but that of two independent bases on a principal-principal basis.

Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, then also it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it.

if the payment was received or is receivable directly or indirectly by a person acting on behalf of another person for services rendered not being professional and for any services in the course of buying and selling of goods or in relation to any transaction relating to an asset, valuable article or thing.

Also, from a perusal of section 194H, it is evident that the provision would apply if the payment was received or is receivable directly or indirectly by a person acting on behalf of another person for services rendered not being professional and for any services in the course of buying and selling of goods or in relation to any transaction relating to an asset, valuable article or thing.

Conclusion:

Thus, in the instant case, the third party and the bank are acting as independent parties and hence, the bank is not liable to deduct TDS on service charges payable to a third-party agency.

Claiming deductions for making investment shall be out of date Income?

 Claiming deductions for making investment shall be out of date Income?  Compliances
May 052021
 

Facts:

Liabilities Assets
Capital a/c

Income earned during the year                         Rs 35,0000

 Investment

(For claiming deduction u/s 80CCA & 80CCB)

National Savings Scheme – Rs 40,000

Unit Trust of India – Rs 10,000
Unsecured loans                                                 Rs 2,05,000 Loan and Advances

M/s. Ganesh Prasad Hira Lal – Rs 200,000

Less: withdrawals – (Rs 50,000)

(Invested in NSC and UTI) – Rs 150,000

Whether the above claims of deductions against investment be rejected on the ground that the same had not come out of income chargeable to tax?

Relevant rules:

Section 80CCA – Deduction in respect of deposits under National Savings Scheme or payment to a deferred annuity plan. (1) Where an assessee, being—

(a) an individual, or
(b) a Hindu undivided family, 19[***]
(c) 20[***]

has in the previous year—

(i) deposited any amount in accordance with such scheme as the Central Government may, by notification21 in the Official Gazette, specify in this behalf 22[* * *]; or
(ii) paid any amount to effect or to keep in force a contract for such annuity plan of the Life Insurance Corporation as the Central Government may, by notification23 in the Official Gazette, specify,

out of his income chargeable to tax, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income of the whole of the amount deposited or paid (excluding interest or bonus accrued or credited to the assessee’s account, if any) as does not exceed the amount of twenty thousand rupees in the previous year :

Section 80CCB – Deduction in respect of investment made under Equity Linked Savings Scheme. (1) Where an assessee, being—

(a) an individual, or
(b) a Hindu undivided family, 31[* * *]
(c) 32[* * *]

has acquired in the previous year, out of his income chargeable to tax, units of any Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), under any plan formulated in accordance with such scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf (hereafter in this section referred to as the Equity Linked Savings Scheme), he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income of so much of the amount invested as does not exceed the amount of ten thousand rupees in the previous year :

Analysis of principles for claiming deductions out of investments made under section 80CCA etc:

  1. Investment in National Savings Certificates, etc. for claiming deduction under section 80C of the Act, need not be from the income earned up to that period.
  2. It is sufficient – if the total income for that year covers the investment

Thus, in the instant case assessee’s current year income is sufficient to cover the current year’s investment and hence deductions shall be allowed for the aforesaid investments. Thus, the mathematical rule for claiming deductions under section 80CCA and section 80CCB would be:

An aggregate of investments under section 80CCA and section 80CCB < Gross taxable income of the previous year whose tax liability needs to be calculated

LIC premium – can be paid by 3rd person.

 LIC premium – can be paid by 3rd person.  Compliances
May 032021
 

Facts:

Whether the assessees are not entitled to deduction u/s 80C of the Act on the LIC premium paid in respect of his LIC policies if:

  • Assessee derives salary income from a concern named M/s SME. Thus, filing his return of income under the salary and income from other sources and claiming deduction u/s 80C of Rs. 1,00,000/-.
  • The above premium amounts were paid by the Grandfather of the assessee
  • The grandfather was the proprietor of M/s SVR where –
    • LIC accounts were shown as assets
    • The above amounts were duly debited to the account of the assessee in the books of the proprietary concern of his grandfather.
    • The assessee could not pass corresponding credit entry, since he did not maintain books of account

So the question arises, whether LIC premium so paid by his grandfather would be eligible as a deduction to the assessee in a case where the assessee neither in receipt of any loan nor a gift from his grandfather? Or for ease in understanding can LIC premium be said to be paid by the assessee or his grandfather.

Analysis of section 80C:

Analysis of 80C before the introduction of rebate u/s 88 Analysis of 80C after the introduction of rebate u/s 88
The old provisions of sec. 80C which prescribed the condition that the eligible payments should have been made out of income chargeable to tax.

B. Deductions in respect of certain payments

 The present provisions of sec. 80C do not contain the words “out of income chargeable to tax”.
54a[55[Deduction in respect of life insurance premia, contributions to provident fund, etc.

5680C.57[(1) In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section, an amount calculated, with reference to the aggregate of the sums specified in sub-section (2), at the following rates, namely:

where such aggregate does not exceed Rs.6,000 the whole of such aggregate;
(b) where such aggregate exceeds Rs. 6,000 but does not exceed Rs. 12,000 Rs. 6,000 plus 50 percent of the amount by which such aggregate exceeds Rs. 6,000;
(c) where such aggregate exceeds Rs. 12,000 Rs. 9,000 plus 40 percent of the amount by which such aggregate exceeds Rs. 12,000.]

(2)       The sums referred to in sub-section (1) shall be the follow ing, namely:

            (a)        where the assessee is an individual, any sums paid in the previous year by the assessee out of his income chargeable to tax

 77[Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc.

7880C.7980(1) In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, in accordance with and subject to the provisions of this section, the whole of the amount paid or deposited in the previous year, being the aggregate of the sums referred to in sub-section (2), as does not exceed 81[one hundred and fifty thousand rupees].

 

Thus, it can be inferred that:

  1. The deduction under sec. 80C shall be made if the sums specified in sub-section (2) are paid or deposited in the previous year.
  2. It does not place any condition about the source for making the payments or deposit.
  3. Further, the deduction is given while computing the total income, i.e., out of gross total income.

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.

  1. 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.
  2. 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:

  1. We would, therefore, request the respondents, particularly the Commissioner of Income Tax (TDS), Mumbai to file a comprehensive affidavit.
  2. 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:

  1. Provision is not made under this Chapter for deducting income-tax at the time of payment, and
  2. 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:

  1. 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.

 Older Entries  Newer Entries