Taxmann's Direct Taxes Law & Practice | A.Y. 2023-24

THE compendious and complex nature of our law relating to direct taxes makes the task of students and professional practitioners, who have not only to understand it but have also to develop the ability to apply it in given situations, extremely onerous and difficult. They have to acquire a familiarity with, and awareness of, the nature and scope of the main provisions of direct taxes. At the same time, they also require an up-to-date knowledge of how a statutory provision has been interpreted by different courts of law on different occasions. As such, they need a book on direct taxes which not only is comprehensive and up-to-date on both the law and its judicial interpretations but which also explains the difficult subject lucidly and through appropriate illustrations so as to render the study of direct taxes simple and easy.

Unlike other text books available on this subject, this book makes a fresh and novel approach to the study of direct taxes keeping in view the specific requirements of the candidates appearing in CA, CS, ICWA, MCom., LLB and MBA examinations as well as those appearing in the income-tax departmental examination. The chief aim of the book is to enable the students to cut the time spent by them in preparing for the examination, while, at the same time, giving them the most precise and up-to-date information on the subject of their study.

The present edition of the book has several unparalleled features which make it distinct from other available text books. These are :

The present edition is thoroughly revised with a view to making it more reader-friendly.

The treatment of the subject is lucid, to-the-point and the matter is painstakingly arranged in paras and sub-paras with distinct numbers to save time and energy. Besides, debatable issues have been deliberated to their logical conclusion.

Theoretical discussion is suitably supplemented by illustrations (over 600 in number and covering an exhaustive range of issues) providing solutions to the knotty problems with reference to the latest case law.

Hints are given wherever tax planning can be resorted to.

Latest circulars, notifications, amendments and the case laws (i.e., up to January 1, 2023) are included in the discussion. All recent citations of court rulings, circulars and notifications have been highlighted.

In a nutshell, law is lucidly enumerated and its practical application is adequately explained.

A few words from the authorsI-6

Our grateful thanks are due to Shri Rakesh Bhargava for his guidance and suggestions and for extending various facilities during the preparation of the manuscript of this book.

Readers’ views, comments and criticism relating to the present work are most welcome.

22 Deepali, Pitampura, VKS Delhi - 110034. KS

Email : vks@taxmann.com

Phone : 27015500, 27016686, 9810008160

Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976. His fields of special interest include all facets of corporate legislation and corporate economics especially the tax laws. Associated in different capacities with several professional institutes and business houses in India and abroad, Dr. Singhania is author of many popular books and software published by Taxmann. He has to his credit more than 300 research articles which have appeared in leading journals. He has been a resource person in over 800 seminars in India and abroad. He can be reached at vks@taxmann.com.

Dr. Kapil Singhania, a Fellow of the Institute of Chartered Accountants of India and belonging to the alumni of Shri Ram College of Commerce, has completed his research work for which he has been awarded Ph.D. in 2003. His fields of involvement in research work in form of articles in various reputed journals and analytical studies span across from corporate laws to direct and indirect taxation. He has authored a variety of acclaimed books on direct and indirect taxes published by Taxmann. Dr. Singhania is providing tax consultancy to a number of business organizations, which include multinational and public sector companies.

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5

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9 Income of other persons included in assessee’s total income

10 Set off and carry forward of losses

11

Deductions from gross total income and tax liability

Deduction in respect of life insurance premia, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc.759

Deduction in respect of deposit under National Savings Scheme767

Deduction in respect of contribution to a National Pension System (NPS)770

Deduction in respect of subscription to long-term infrastructure bondsWhen available under section 80CCF772

Deduction in respect of investment made under any equity saving scheme772

Deduction in respect of medical insurance premia773

Deduction in respect of maintenance including medical treatment of a dependent being a person with disability - When and to what extent available776

Deduction in respect of medical treatment, etc.778

Deduction in respect of payment of interest on loan taken for higher studies781

241A. Deduction in respect of interest on loan taken for residential house property781

241B. Deduction in respect of interest on loan taken for certain house property782

241C. Deduction in respect of interest on loan taken for purchase of electric vehicle783

242. Deduction in respect of donation to certain funds, charitable institutions, etc.783

243. Deduction in respect of rent paid789

244. Deduction in respect of certain donations for scientific research or rural development 791

245. Deduction in respect of contributions given by companies to political parties or electoral trust792

246. Deduction in respect of contributions given by any person to political parties or electoral trust792

247. Deduction in respect of profits and gains from projects outside India793 248. Deduction in respect of profits and gains from housing projects aided by World Bank 793

249. Tax incentives for exports793

250. Deduction in respect of earnings in convertible foreign exchange793

251. Deduction in respect of profit from export of computer software793

252. Deduction in respect of profits and gains from export or transfer of films software 793

253. Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. - How to find out793

253A. Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone805

253B. Deduction in respect of eligible start-up806

254. Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings - How to avail807

254A. Deduction in respect of profits from housing projects824

Deduction in respect of profits and gains of certain undertakings in certain special category of States - How to find out826

Deduction in the case of hotels and convention centre in NCR829

Deduction in respect of certain undertakings in North-Eastern States829

Deduction in respect of profits and gains from the business of collecting and processing of bio-degradable waste830

in respect of employment of new employees831

Deduction in respect of interest on certain securities, investments, etc.833

21 Advance payment of tax

33 Business restructuring

Section-wise Index I-26

SectionPara numberSectionPara number

I-27

Section-wise Index

SectionPara numberSectionPara number

Section-wise Index

SectionPara numberSectionPara number

Finance (No. 2) Act, 2004

Chapter VII (i.e., Securities Transaction Tax)573

Finance Act, 2013 Chapter VII (i.e., Commodities

Transaction Tax) 578

Finance Act, 2016

Chapter VIII (i.e., Equalisation Levy) 575

CHAPTER TWENTY-THREE

Tax deduction or collection at source

Scheme of tax deduction at source

404. Under the scheme of tax deduction at source (TDS), persons responsible for making payment of income, covered by the scheme, are responsible to deduct tax at source and deposit the same to the Government’s treasury within the stipulated time. The recipient of income—though he gets only the net amount (after deduction of tax at source)—is liable to tax on the gross amount and the amount deducted at source is adjusted against his final tax liability.

404.1 Payments covered by TDS scheme - TDS scheme covers payments like salary (to resident/ non-resident), payment other than salary to residents (namely, interest, dividend, rent, commission/ brokerage, lottery winnings, winnings of races, technical/professional fees, royalty, compensation, etc.) and payment to non-residents/foreign companies. These provisions are discussed in paras given below.

404.2 TDS rates during the financial year 2022-23 - Normal TDS rates are summarized in Annex 1, para 0.6.

■ When recipient does not furnish his/its PAN [Sec. 206AA] - If the recipient does not furnish his PAN to the deductor, tax will be deducted by virtue of section 206AA* at the normal rate or at the rate of 20 per cent, whichever is higher. However, this rule is subject to following modifications –

❑ Case 1 - The provisions of section 206AA are not applicable in respect of payment of interest to a non-resident under section 194LC on long-term bonds including infrastructure bonds.

❑ Case 2 - Where tax is deductible on the strength of the provisions of DTAAs which is lower than 20 per cent, the provisions of section 206AA cannot be invoked (to compel the assessee to deduct tax at the rate of 20 per cent) even if the recipient does not have PAN—DIT v. Serum Institute of India Ltd. [2015] 56 taxmann.com 1 (Pune - Trib.), CIT (International Taxation) v. Infosys BPO Ltd. [2015] 154 ITD 816 (Bang.), Danisco India (P.) Ltd. v. Union of India [2018] 90 taxmann.com 295 (Delhi).

❑ Case 3 - If the recipient does not furnish PAN, tax will be deducted under section 192A at the maximum marginal rate of tax (i.e., 42.744 per cent for the financial year 2022-23) and not at the rate of 20 per cent given by section 206AA.

❑ Case 4 - If the recipient does not furnish PAN, tax is deductible under section 194-O or section 194Q at the rate of 5 per cent and not at the rate of 20 per cent.

❑ Case 5 - The provisions of section 206AA are not applicable, if conditions of rule 37BC are satisfied†. The benefit of rule 37BC is available, if the recipient is non-resident, he/it does not have PAN and the payment/credit subject to TDS is interest, royalty, fees for technical service, dividend or payment on transfer of a capital asset. In such a case, tax will be deducted at the regular rate (and not at the rate of 20 per cent given by section 206AA), if the non-resident recipient furnishes the following details/documents to the payer –

-name, e-mail id, contact number;

-address in the home country;

-certificate of being a resident in the home country, if the law of the country provides such a certificate; and

-Tax Identification Number (TIN) in the home country. Where TIN is not available, a unique identification number through which the deductee is identified in the home country.

*Section 206AA is unconstitutional if income of payee is below taxable limit—A. Kowsalya Bai v. Union of India [2012] 22 taxmann.com 157 (Kar.).

† The provisions of section 206AA are also not applicable if conditions of rule 114AAB are satisfied.

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PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

■ When recipient is non-filer of income-tax return [Sec. 206AB] - When tax is required to be deducted in the case of a specified person under any provision of the Act (other than sections given below), tax shall be deducted (with effect from July 1, 2021) at twice the normal rate or at the rate of 5 per cent, whichever is higher.

When section 206AB is not applicable - The above provisions of section 206AB are not applicable if tax is deductible under the following sections –

-Section 192, 192A, 194B, 194BB, 194LBC or 194N (during July 1, 2021 and March 31, 2022),

-Section 192, 192A, 194B, 194BB, 194-IA, 194-IB, 194LBC, 194M or 194N (after March 31, 2022). Specified person - For the purposes of section 206AB, “specified person” means a person –Applicable during July 1, 2021 and March 31, 2022Applicable after March 31, 2022

Who has not filed the returns of income for bothWho has not furnished the return of income for of the two assessment years relevant to the twothe assessment year relevant to the previous previous years immediately prior to the previousyear immediately preceding the financial year year in which tax is required to be deducted [forin which tax is required to be deducted [for which the time-limit of filing return of incomewhich the time-limit of filing return of income under section 139(1) has expired] and the aggre-under section 139(1) has expired] and the aggregate amount of TDS/TCS in his case is Rs. 50,000gate amount of TDS/TCS in his case is Rs. (or more) in each of these two previous years‡.50,000 (or more) in the said previous year‡.

Overlapping between sections 206AA and 206AB - If the provisions of section 206AA are applicable to a specified person (in addition to the provisions of section 206AB), tax shall be deducted at higher of two rates provided in sections 206AA and 206AB.

■ When recipient is located in a notified jurisdictional area [Sec. 94A(5)]- Where any person located in a notified jurisdictional area† is entitled to receive any sum on which tax is deductible under any provision of the Act, the payer will deduct tax—

a. at the rates in force or at the rate specified in the relevant provision of the Act (i.e., rates given in Annex 1); or

b. at the rate of 30 per cent (surcharge or education cess cannot be added), whichever is higher.

404.2-1 -

Surcharge is applicable for the purpose of TDS during the financial year 2022-23 in the following cases–

1. Payment of salary to a resident or non-resident (surcharge is applicable @ 10 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 50 lakh but does not exceed Rs. 1 crore, surcharge is 15 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 1 crore but does not exceed Rs. 2 crore, surcharge is 25 per cent of TDS if

† ‘Cyprus’ was specified as notified jurisdictional area for purposes of section 94A vide Notification No. SO 3307(E), dated November 1, 2013. However, this notification has been rescinded (except as respects things done or omitted to be done before such rescission) vide Notification No. SO 4033(E), dated December 14, 2016.Vide Circular No. 15/2017, dated April 21, 2017, CBDT clarified that Notification No. SO 3307(E), dated November 1, 2013 has been rescinded with effect from the date of issue of the said notification, thereby, removing Cyprus as a notified jurisdictional area with retrospective effect from November 1, 2013.

‡ To ease this compliance burden the Central Board of Direct Taxes has issued a new functionality “Compliance Check for sections 206AB and 206CCA”. This functionality is made available through reporting portal of the Income-tax Department. The tax deductor or the collector can feed the single PAN (PAN search) or multiple PANs (bulk search) of the deductee or collectee and can get a response from the functionality if such deductee or collectee is a specified person. For PAN search, response will be visible on the screen which can be downloaded in the PDF formant. For bulk search, response would be in the form of downloadable file which can be kept for record – Circular No. 11/2021, dated June 21, 2021 and Circular No. 10/2022, dated May 17, 2022. For detailed working of this functionality, one can refer to Notification No. 1/2021, dated June 22, 2021.

amount subject to TDS during the financial year 2022-23 exceeds Rs. 2 crore but does not exceed Rs. 5 crore and surcharge is 37 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 5 crore).

2. Payment/credit (other than salary) to a non-resident (individual, HUF, AOP, BOI or artificial juridical person) (surcharge is applicable @ 10 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 50 lakh but does not exceed Rs. 1 crore, surcharge is 15 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 1 crore but does not exceed Rs. 2 crore, surcharge is 25 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 2 crore but does not exceed Rs. 5 crore and surcharge is 37 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 5 crore).

3. Payment/credit (other than salary) to a non-resident (firm, LLP or co-operative society) (surcharge is applicable @ 12 per cent of TDS if amount subject to TDS during the financial year 2022-23 exceeds Rs. 1 crore).

4. Payment/credit (other than salary) to a foreign company (surcharge is applicable only if amount subject to TDS during the financial year 2022-23 exceeds Rs. 1 crore, surcharge is 2 per cent of TDS if the payment subject to TDS is more than Rs. 1 crore but not more than Rs. 10 crore, 5 per cent of TDS if payment subject to TDS exceeds Rs. 10 crore). In no other case, surcharge will be applicable for TDS purposes during the financial year 2022-23.

■ Health and education cess during the financial year 2022-23 - During the financial year 2021-22, health and education cess (at the rate of 4 per cent) will be applicable only in the following cases—

1. Tax deduction from payment of salary (where recipient is resident or non-resident).

2. Tax deduction from payment/credit of any sum (other than salary) to a non-resident or a foreign company.

In the case of payment/credit (other than salary) to a resident, surcharge/health and education cess is not applicable for TDS purposes during the financial year 2022-23.

404.3 Consequences of default - Where a person who is required to deduct tax at source, does not deduct, or does not pay, or after deducting fails to pay, the whole or any part of tax, as required by the Act, then such person shall be deemed to be an assessee-in-default in respect of such tax under section 201(1). He will be liable for payment of tax‡, interest [see para 385.2], penalty [see paras 373, 373.4 and 373.6] and prosecution [see para 379]. Besides, disallowance under section 40(a) will be attracted [see paras 143.1, 143.2 and 143.6].

■ Time-limit (applicable from October 1, 2014) - No order shall be made under section 200(1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of 7 years† from the end of the financial year in which payment is made or credit is given#.

■ Relaxation given when tax is paid by the recipient (applicable from July 1, 2012) - Section 201 was amended by the Finance Act, 2012 with effect from July 1, 2012. Under the amended version, the payer shall not be deemed to be an assessee-in-default if the resident recipient has included such income in the return submitted under section 139 and the recipient has paid tax on such income. The payer will have to submit electronically a certificate to this effect from a chartered accountant in Form No. 26A.

‡ Recovery provisions under section 201(1) can be invoked. However, these provisions can be invoked only when loss to revenue is established and that can only be established when it is demonstrated that the recipient of income has liability to pay tax and has not paid due taxes—Allahabad Bank v. ITO [2014] 46 taxmann.com 200 (Agra), National Highway Authority of India v. CIT [2014] 49 taxmann.com 32 (Jabalpur), CIT (TDS) v. D.P. Vekaria [2014] 227 Taxman 92 (Guj.).

† The increased limitation period of 7 years under section 201(3) [as amended by Finance (No. 2) Act, 2014 with effect from October 1, 2014] shall not apply retrospectively to orders which had become time-barred under old time-limit set by unamended section 201(3) and no order under section 201(1) deeming deductor to be assessee in default could have been passed if limitation had already expired as on October 1, 2014—Tata Teleservices v. Union of India [2016] 238 Taxman 331 (Guj.).

# If time-limit expires during March 20, 2020 and March 30, 2021, it has been extended to April 30, 2021 by virtue of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

■ When tax is paid by recipient and it pertains to the period preceding July 1, 2012 - The aforesaid relaxation given by the Finance Act, 2012 is applicable only when the recipient is resident and the default pertains to the period commencing on or after July 1, 2012. If the recipient is a non-resident (or if the recipient is resident but default pertains to the period prior to July 1, 2012), the amendment made by the Finance Act, 2012 is not applicable. In such a case, one can take shelter of the Supreme Court ruling in the case of Hindustan Coca Cola Beverage (P.) Ltd. v. CIT [2007] 163 Taxman 355. In this case, the Supreme Court held that where the payer has failed to deduct tax but the deductee (i.e., recipient of income) has paid tax on the amount received from the deductor, the department once again cannot recover tax from the deductor on same income by treating the deductor to be an assessee-in-default for non-deduction/short-deduction of tax. Moreover, the Gujarat High Court in the case of CIT v. Rishikesh Apartments Co-op. Housing Society Ltd. [2001] 119 Taxman 239 held that in such a situation interest cannot be recovered from the deductor for short-deduction/nondeduction of tax.

404.4 Whether reimbursement to an agent/associate enterprise is again subject to TDS when tax was properly deducted by the agent/associate enterprise - Where technical fees (or any other expenditure like rent, commission, royalty, professional fees, etc.) is paid by an agent or associate enterprise on behalf of the assessee and tax is deducted properly within the legal parameters by the agent/associate enterprise, reimbursement later on by the assessee of the expenditure to his agent/ associate enterprise is not again subject to tax deduction at source – see Metro Railway Kolkata v. ITO (TDS) [2013] 32 taxmann.com 232 (Kol.), Temasek Holdings Advisors India (P.) Ltd. v. CIT [2017] 87 taxmann.com 168 (Mum.). Temasek Holdings Advisors (I) (P.) Ltd. v. CIT [2013] 60 SOT 134 (Mum.), CIT v. Harbanslal Malhotra & Sons (P.) Ltd. [2013] 217 Taxman 112 (Cal.), CIT v. Gujarat Narmada Valley Fertilizers Co. Ltd. [2013] 217 Taxman 114 (Guj.), CIT v. Vector Shipping Services (P.) Ltd. [2013] 218 Taxman 93 (All.)‡. The same proposition is given by Circular No. 5/2002, dated July, 30, 2002. Where, however, seconded employees are also making available their technical expertise and know-how to regular employees of assessee company, the amount reimbursed by the assessee to overseas companies in terms of secondment agreement amounts to “fee for technical services” liable to tax in India—Centrica India Offshore (P.) Ltd. v. CIT [2014] 44 taxmann.com 300 (Delhi)††.

404.5 No TDS on GST/service tax - The Central Board of Direct Taxes has decided that wherever in terms of the agreement/contract between the payer and the payee, the GST/service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under any section on the amount paid/payable without including such GST/ service tax component – Circular No. 1/2014, dated January 13, 2014 , Circular No. 23/2017, dated July 19, 2017.

404.6 At what point of time tax is deductible - In a few cases, tax is deductible at the time of payment. This rule is applicable in sections 192, 192A, 194, 194B, 194BB, 194DA, 194EE, 194F and 194LA. In all other cases, tax is deductible either at the time of payment or at the time of passing credit entry or book entry in the books of the payer, whichever is earlier.

■ No tax deduction when a book entry is passed and subsequently reversed - Mere passing of book entry, which is subsequently reversed, does not give any effective credit to the recipient. At the time of passing such book entry (which is subsequently reversed) tax is not deductible—DIT v. Ericsson Communications Ltd. [2015] 234 Taxman 895 (Delhi).

‡ SLP of the Department against the ruling of the Allahabad High Court has been rejected by the Supreme Court on July 2, 2014.

†† SLP against the Delhi High Court judgment has been rejected by the Supreme Court—Centrica India Offshore (P.) Ltd. v. CIT [2014] 51 taxmann.com 386.

Deduction of tax from salaries [Sec. 192]

405. Any person responsible for paying any income chargeable under the head “Salaries” is required to deduct tax at source on the amount payable. Tax is to be calculated at the rates prescribed for the financial year in which the payment to employees is made†. The person responsible for paying the salary may, at the time of deducting tax at source, increase or decrease the amount to be deducted for the purpose of adjusting any previous deficiency or excess deduction [sec. 192(3)*].

405.1 How to compute salary and tax thereon - For computing taxable salary, refer to Chapter 4 and Chapter 11. At the time of deducting tax at source, the person responsible for paying salary during the financial year 2022-23 should keep the following points in mind—

■ House rent allowance exemption - Exemption pertaining to house rent allowance shall be calculated by the employer on the basis of specified limits provided by section 10(13A). These limits have been given in the book in para 50.2. This exemption depends upon rent paid by the employee. The concerned employee should submit to the employer a written statement pinpointing rent paid, name of landlord, address of the property and PAN of landlord (PAN is required only if rent paid is more than Rs. 1,00,000 per annum) along with rent receipt given by the landlord. However, for the purpose of tax deduction, the Central Board of Direct Taxes has given a concession that rent receipt is not required if house rent allowance is Rs. 3,000 per month or less.

■ Reimbursement of LTC/medical expenditure in advance - In ITO v. Goodrich Aerospace Services (P.) Ltd. [2014] 64 SOT 27 (Bang.), the assessee paid to its employee every month certain amount in advance towards leave travel concession (LTC). Once the concerned employee completed his travel, he had to submit evidence for having incurred expenditure and it was on basis of such evidence exemption was worked out by the assessee in accordance with provisions of section 10(5) read with rule 2B. Similarly, the assessee paid to its employee every month an amount of Rs. 1250 (i.e., Rs. 15,000 per annum) in advance towards medical reimbursement. The said amount was treated as exempt only if supported by bills and whenever bills were not submitted the amount was treated as taxable salary and tax is deducted accordingly at the end of the year. The Tribunal held that in peculiar facts of case, the assessee was not obliged to deduct tax at source on amount paid in advance towards LTC and medical reimbursement at time of making payment. A similar ruling is given by the Tribunal in the case of CIT v. Infosys BPO [2014] 64 SOT 36 (Bang.).

■ Deduction from gross total income - Employer should take into consideration amount deductible under sections 80C, 80CCC, 80CCD, 80CCG, 80D, 80DD, 80DDB, 80E, 80EE, 80GG, 80GGA, 80TTA and 80U. The employer should not give any deduction in respect of donation given by an employee to a notified public charitable institute. The tax relief admissible under section 80G in respect of such donations will have to be claimed by the employee at the time of finalization of his assessment. However, where donations/contributions are made to other funds (e.g., the Jawaharlal Nehru Memorial Fund, the Prime Minister’s Drought Relief Fund, the National Children’s Fund, etc.) deduction should be allowed by the employer while calculating tax deductible from salary income.

■ Tax liability - Tax is deductible on the taxable income at the rates applicable for the financial year. These rates are given in Annex 1. If the employee does not have PAN, tax is deductible either at the normal rate or at the rate of 20 per cent, whichever is higher. Tax is not deductible, if estimated salary of an employee does not exceed exemption limit‡ (this rule is applicable even if the employee does not have PAN). At the request of an employee, the employer can give relief under section 89. However, this facility is available only if the employer is Government or public sector undertaking or company, co-operative society, local authority, university, institution or association or body.

† For TDS rates, see Annex 1.

*Intention of section 192(3) is not that an employer can casually take deduction of tax from payments of salary in different months and resort to a lump sum deduction at the end of the relevant financial year for making good deficiency—Madhya Gujarat Vij Co. Ltd. v. ITO [2011] 14 taxmann.com 156 (Ahd. - Trib.).

‡ Exemption limit for the assessment year 2023-24 is Rs. 2,50,000 [higher exemption limit (a) in the case of a resident senior citizen born on or after April 2, 1943 but on or before April 1, 1963: Rs. 3,00,000; and (b) in the case of a resident super senior citizen born on or before April 1, 1943: Rs. 5,00,000]. In the case of an individual (who has opted for alternative tax regime under section 115BAC), exemption limit is Rs. 2,50,000 (irrespective of his age).

■ When a person is employed by two or more employers during the financial year - In such a case, tax will be deducted by each employer separately. However, the employee is under obligation to declare salary received (and tax deducted thereon) from other employers to one of the employers by submitting information in Form No. 12B. The employer to whom Form No. 12B is submitted shall deduct tax on the basis of aggregate salary.

■ TDS certificate - TDS certificate will be given to the employee in Form No. 16 annually on or before May 31 after the end of the financial year. This certificate has to be given in paper format. However, if a few conditions are satisfied Form No. 16 can be given with digital signature. The employer should also give a statement of perquisites/profits in lieu of salary [see para 405.2-7].

■ Salary without TDS or with lower TDS - To get salary without TDS or with lower TDS, the employee will have to approach the Assessing Officer by submitting an application in Form No. 13 under section 197. These provisions are given in para 426.2.

405.2 Other points - The following points should be noted—

405.2-1

- Section 192(1A) provides that the person responsible for paying any income in the nature of a perquisite (not provided for by way of monetary payment) referred to in section 17(2) may pay at his option, tax on the whole (or part of such income) without making any deduction therefrom at the time when such tax was otherwise deductible under the provisions of section 192(1).

For this purpose tax shall be determined at the average of income-tax computed on the basis of the rates in force for the financial year, on the income chargeable under the head “Salaries” and the tax so payable shall be construed as if it were, a tax deductible at source from the income under the head “Salaries”. See also problem 64-P6 and para 143.8.

- Where an employee has more than one employer, he is required by section 192(2) to furnish in Form No. 12B to one of the employers (as selected by the employee having regard to the circumstances of the case) the details of salary due/received by him from other employers. Only after submission of information in Form No. 12B, it becomes the obligation of the employer (to whom Form No. 12B is submitted) to deduct tax at source after considering the information submitted by the employee. If information is submitted in the month of October, only from October onwards, tax shall be deducted at the average rate determined after considering the details submitted in Form No. 12B—CIT v. Marubeni India (P.) Ltd. [2007] 165 Taxman 467 (Delhi).

405.2-2

405.2-3

- Section 192(2A) provides that in respect of salary payments of employees of Government or public sector undertakings, company, co-operative society, local authority, university, institution, association or body, deduction of tax at source is to be made after allowing relief under section 89. To avail this benefit, the concerned employee should furnish information in Form No. 10E† to the employer.

405.2-4

- The provisions are given below—

1. The employee may (or may not) declare his other incomes to the employer.

2. If the employee wants to declare his other incomes to the employer, then such information should be given on a plain paper1 to the employer.

3. The employee may declare details of his other incomes (including loss‡ under the head “Income from house property” but not any other loss) and tax deducted thereon by others. If the aforesaid information is not submitted by the employee to the employer, then employer cannot take into consideration other incomes of the employee (even if the quantum of other incomes is otherwise known to the employer).

4. After receipt of such information, the employer should deduct (out of salary payment) tax due on total income as follows—

1. A verification shall be annexed to the statement of other income given on plain paper as follows—

“I................(name of employee) do declare that what is stated above is true to the best of my information and belief.”

†The department insists that the concerned employee should submit electronically Form No. 10E along with his return of income to claim rebate under section 89 (however, there is no such legal requirement under the Income-tax Act or Income-tax Rules).

‡While taking into account the loss from house property, the DDO shall ensure that the employee files the declaration referred to above and encloses therewith a computation of such loss from house property. The following details shall be obtained and kept by the employer in respect of loss claimed under the head “Income from house property” separately for each house property –

a.gross annual rent/value;

b .municipal taxes paid, if any;

c.deduction claimed for interest paid, if any;

d .other deductions claimed;

e.address of the property;

f.amount of loan, if any, and

g.name and address of the lender (loan provider)—Circular No. 20/2015, dated December 2, 2015.

Computation one [on the basis of (a) salary andComputation two [on the basis of salary and ignoring (b) other incomes* declared by the employee]the other incomes* declared by the employee]

a. Find out salary income

b.Add : Other incomes declared by the employee (in

j.Find out salary income

k.Less: Loss under the head “Income from house case of loss, only house property loss would beproperty” as declared by the employee considered; no other loss would be taken into consideration)

c. Find out aggregate of (a) and (b)

d.Less : Deduction under sections 80C to 80U

e. Find out (c) – (d)

f. Find out tax on (e)

g.Add : Surcharge** and health and education cess‡

h.Less: Tax deducted by others as per information

l. Find out (j) – (k)

m.Less : Deduction under sections 80C to 80U

n. Find out (l) – (m)

o. Find out tax on (n)

p.Add : Surcharge** and health and education cess‡

q.Less: Tax deducted from rent by others (if there is given by the employeeloss of house property) as per information given by the employee

i. Find out tax liability [(f) + (g) – (h)]

r. Find out tax liability [(o) + (p) – (q)]

*Only house property loss declared the assessee would be considered.

**Surcharge is applicable only if (e) or (o) exceeds Rs. 50 lakh.

‡ Health and education cess is 4 per cent of tax and surcharge.

The tax deductible at source from salary payment is amount determined at (i) or (r), whichever is higher.

405.2-5

- If employer is a start-up (qualified for deduction under section 80-IAC) and it allots any specified security/sweat equity shares/ESOP to its employees, TDS on the perquisite (with effect from April 1, 2020) may be deducted under section 192 within 14 days –

a. after the expiry of 48 months from the end of the relevant assessment year; or

b. from the date of the sale of such specified security or sweat equity share by the assessee; or

c. from the date of the assessee ceasing to be the employee of the start-up, whichever is earlier. Tax shall be calculated based on rates in force for the previous year in which said security or share is allotted or transferred to the employee.

■ How to compute TDS in such cases - See case study given in 52.21-1P1.

405.2-6 - Rule

26C has been inserted with effect from June 1, 2016. Under this rule, an employee shall furnish supporting evidence pertaining to the following in Form No. 12BB for the purpose of estimation of his income and tax deduction at source. This form should be submitted to the person responsible for tax deduction under section 192–

Nature of claimEvidence or particulars

House rent allowance-Name and address of landlord/landlords

-Amount of rent paid/payable

-PAN of landlord/landlords (where the aggregate rent paid during the financial year exceeds Rs. 1 lakh)

Leave travel concession or assistanceExpenditure and evidence pertaining to expenditure

Deduction of interest under the head “Income fromName, address, PAN of the lender and interest paid/ house property” payable

Deduction under sections 80C, 80CCC, 80CCD, 80CCG,Amount of investment/expenditure and evidence of 80D, 80DD, 80DDB, 80E, 80EE, 80GG, 80GGA, 80TTAinvestment/expenditure and 80U

Time-limit for submission of Form No. 12BB by employee to employer - No time-limit has been specified for submission of Form No. 12BB.

Submission of above information by employer to Income-tax Department - The above information collected by an employer in Form No. 12BB from his employees shall be retained by the employer.

However, PAN and name of landlord (in the case of house rent allowance) and PAN and name of lender (in the case of interest on housing loan) shall be submitted by the employer in Columns 357 and 358 in Form No. 24Q (Annexure II) every year in the TDS statements pertaining to the fourth quarter.

405.2-7

- Any person responsible for paying salary shall furnish to the person who receives the salary a statement giving particulars of perquisites or profits in lieu of salary provided to him in Form 12BA. Form No. 12BA stating the nature and value of perquisite is to be provided by the employer to employee if salary exceeds Rs. 1,50,000. In other cases, the information shall be provided in Form No. 16—Circular No. 20/2015, dated December 2, 2015.

405.2-8

- Short deduction of tax under section 192 by allowing deductions under sections 80G and 80GGA would justify action of the Assessing Officer in treating the employer as assessee-in-default—Drawing & Disbursing Officer v. CIT [2008] 115 ITD 411 (All.).

405.2-9

- For the purposes of deduction of tax on salary payable in foreign currency, the value in rupees of such salary shall be calculated at the “telegraphic transfer buying rate” of such currency as on the date on which tax is required to be deducted at source [see rule 26]—Circular No. 20/2015, dated December 2, 2015.

Tax deduction at source from withdrawal from employees provident fund scheme [Sec. 192A]

405A. Under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF & MP Act, 1952), certain specified employers are required to comply with the Employees Provident Fund Scheme, 1952 (EPFS). Under this scheme, provident fund contributions of the employer and employees are transferred to the Provident Fund Commissioner. Provident fund is managed by the Provident Fund Commissioner and at the time of retirement employees get payment from the trustees of Employees Provident Fund Scheme (EPFS). This provident fund is known as recognised provident fund (RPF).

Alternatively, some employers are also permitted to establish and manage their own private provident fund scheme (PPFS) subject to fulfilment of certain conditions given under section 17 of EPF & MP Act, 1952. PPFS exempted under section 17 of the said Act and recognised under Part A of the Fourth Schedule to the Income-tax Act is also termed as recognised provident fund (RPF). Under PPFS, a provident fund trust is created by the employer and employees. Provident fund is managed by the trust and at the time of retirement employees get payment from provident fund trust.

■ Withdrawal of accumulated balance at the time of retirement or at the time of leaving job - Under the existing provisions of rule 8 of Part A to the Fourth Schedule, the withdrawal of accumulated balance by an employee from the RPF is exempt in the hands of employee in the following situations–

-If the employee has rendered continuous service with his employer for a period of 5 years or more. For the purpose of calculating 5-year time-limit, service rendered with the previous employer shall be included, if the previous employer also maintained recognized provident fund and the provident fund balance of the employee was transferred by him to the current employer.

-If the employee has been terminated because of certain reasons which are beyond his control (e.g., ill health of the employee, discontinuation of business by employer, completion of project for which the employee was employed, etc.).

-If the employee has resigned before completion of 5 years but has joined another employer (who maintains recognized provident fund and provident fund amount with the current employer is transferred to the new employer).

-If the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred to in section 80CCD and notified by the Central Government (i.e., NPS). If the employee makes withdrawal before continuous service of 5 years (other than the cases given above), such withdrawal shall be treated as withdrawal from unrecognized provident fund. Unrecognized provident fund withdrawal (excluding employee’s contribution) is taxable (hereinafter referred to as “taxable premature withdrawal”). Exact tax liability in such cases can be ascertained only after recomputation of income of earlier years (deduction given earlier under section 80C will be taken back). Rule 9 of Schedule IV-A provides computation mechanism for determining tax liability of the employee. For ensuring collection of tax in respect of these withdrawals, rule 10 of Schedule IV-A provides that the trustees of the RPF, at the time of payment, shall deduct tax.

■ Mechanism of tax deduction under section 192A - Under section 192A (inserted with effect from June 1, 2015), tax is deductible (notwithstanding anything contained under other provisions of the Act) as follows –

1. Who is deductor - Tax is to be deducted by the trustees of Employees’ Provident Fund Scheme, 1952 or any other person authorised under the scheme to make payment of accumulated sum to employees. When payment is made by trustees of private provident fund scheme (PPFS), section 192A is not applicable (tax is to be deducted within the parameters of section 192 only).

2.Which amount is subject to tax deduction under section 192A - Tax is deductible from “taxable premature withdrawal”. In other words, tax is deductible from accumulated lump sum payment (at the time of retirement or at the time of leaving job) in case the employee has not rendered continuous service of 5 years (and he does not fall in any of the 3 cases given above). Out of the lump sum payment, only amount includible in the total income of the employee is subject to tax deduction at source.

3. Time of tax deduction - Tax is deductible at the time of payment.

4. Rate of TDS under section 192A - Tax is deductible under section 192A at the rate of 10 per cent of “taxable premature withdrawal”. If recipient is a resident, surcharge/health and education cess are not applicable. If recipient is non-resident, the rate of 10 per cent will be increased by surcharge and health and education cess.

If PAN of the recipient is not available, tax is deductible at the maximum marginal rate of tax (i.e., at 42.744 per cent for the financial year 2022-23).

5. What is threshold limit under section 192A - Tax is not deductible if “taxable premature withdrawal” is less than Rs. 50,000 (Rs. 30,000 from June 1, 2015 to May 31, 2016).

6. Is it possible to get lower TDS certificate under section 197 - Lower rate TDS certificate cannot be obtained to get payment without TDS or with lower TDS by submitting Form No. 13 to the Assessing Officer.

7. Is it possible to avoid TDS by submitting Form No. 15G/15H under section 197A - An employee can submit a declaration in Form No. 15G to the effect that his total income including taxable premature withdrawal from provident fund does not exceed the maximum amount not chargeable to tax and on furnishing of such declaration, no tax will be deducted. Similar facility of filing self-declaration in Form No. 15H for non-deduction of tax under section 197A is also extended to the senior citizen employees receiving pre-mature withdrawal.

Deduction of tax at source from interest on securities [Sec. 193]

406. Any person responsible for paying any interest on securities to a resident is required to deduct income-tax at source at the rates in force‡.

406.1 Time of tax deduction - Tax has to be deducted at source at the time of payment or at the time of credit to the account of payee or transfer to interest payable account or suspense account, whichever comes earlier. However, tax cannot be deducted until identity of the person in whose hands it is includible as income can be ascertained—Industrial Development Bank of India v. ITO [2006] 10 SOT 497 (Mum.), Apollo Tyres Ltd. v. CIT [2017] 78 taxmann.com 195 (Delhi).

406.2 Interest on securities which is not subject to tax deduction - Tax is not deductible in respect of interest payable on the following† :

a.debentures issued by any institution or authority or any public sector company or co-operative society (including a co-operative land mortgage bank or a co-operative land development bank) notified by the Central Government ;

b .any security of the Central Government or a State Government [however, interest exceeding Rs. 10,000 (from June 1, 2007) on 8 per cent Savings (Taxable) Bonds, 2003 or (from April 1, 2018) on 7.75 per cent Savings (Taxable) Bonds, 2018 during the financial year, is subject to tax deduction under section 193];

c. securities beneficially owned by the Life Insurance Corporation of India or the General Insurance Corporation of India or to any of the four companies formed by virtue of the schemes framed under section 16(1) of the General Insurance Business (Nationalisation) Act, 1972 or any other insurer; and

d. any listed Demat security.

†Only securities which are currently in force are pointed in the book. ‡ For the financial year 2022-23, TDS rate is 10 per cent (no surcharge or health and education cess). If the recipient does not furnish his PAN to the deductor, tax will be deducted at the rate of 20 per cent. PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

406.3 Cases when tax is not deducted or deducted at lower rate - In the following cases, tax is not deductible or deducted at lower rates :

406.3-1 - See para 426.2.

406.3-2 - See para 426.1.

406.3-3 It is not necessary to deduct tax at source from any interest on debentures paid to a resident individual or a resident Hindu undivided family, if the following conditions are fulfilled—

a. the debentures have been issued by a company in which the public are substantially interested;

b. the interest is paid by the company by an account payee cheque ; and

c. the aggregate amount of interest paid or likely to be paid by the company to the holder of the debentures during the financial year does not exceed Rs. 5,000.

406.3-4

- Since the income of these organisations is exempt under section 10(23AA), no tax should be deducted at source under section 193 from the income of such funds—Circular No. 735, dated January 30, 1996.

406.3-5 - The Board has decided that in the case of a provident fund whose income is exempt under section 10(25)(ii), the income by way of interest on securities of Central and State Governments may be paid to such provident funds without deduction of incometax at source— Circular No. 741, dated April 18, 1996.

406.3-6 - Tax is deductible at the time of redemption [see Circular No. 4/2004 dated May 13, 2004]. If the recipient has paid tax on interest on accrual basis, he can take relief under section 197 [see para 426.2] or 197A [see para 426.1].

406.3-7 - The following clarifications have been given in respect of application of TDS on 8 per cent Savings (Taxable) Bonds, 2003—

■ Tax deduction at source on 8 per cent Savings (Taxable) Bonds, 2003 is effective from June 1, 2007. Any interest credited or paid on 8 per cent Savings (Taxable) Bonds, 2003 on or after June 1, 2007 will attract TDS if the amount of interest exceeds Rs. 10,000 for the financial year. Therefore, the date of investment is not a relevant factor. TDS would, thus, apply to existing bond holders also.

■ The recipient can submit Form No. 15G or 15H to get interest without TDS [for the relevant conditions see para 426.1].

■ On ‘cumulative’ type of investments, if the interest is credited every year, tax deduction has to be made if the interest credited during the financial year exceeds the threshold limit of Rs. 10,000. Thus, in the case of ‘cumulative’ type of investments, though the interest is payable on the date of maturity, tax deduction is still to be made whenever the interest credited or paid exceeds the threshold limit during the financial year.

■ A certificate issued by the Assessing Officer under section 197 [see para 426.2] for deduction of tax at a lower rate or Nil rate is required in the case of charitable institutions and trusts. No special dispensation is allowed to charitable institutions and trusts as far as TDS discipline is concerned.

Deduction of tax at source from dividends [Sec. 194]

407. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India to a shareholder who is resident in India, is required, before making any payment by any mode, to deduct tax at source from the amount of dividend at the prescribed rate [i.e., 10 per cent].

407.1 Cases in which tax is not deductible or deductible at lower rates - In the following cases tax is not deductible or deductible at lower rates –

■ Lower TDS certificate - A shareholder may apply in Form No. 13 to the concerned Assessing Officer and obtain a certificate authorising the payer to pay dividend without tax deduction or with deduction at lower rate.

■ Declaration in Form No. 15G/15H - Tax is not to be deducted if the recipient furnishes a declaration in Form No. 15G (in the case of senior citizen : Form No. 15H), to the payer of dividend to the effect that the tax on his total income will be nil

■ No TDS if dividend is not more than Rs. 5,000 - In the case of dividend payable to an individual, tax is not liable to be deducted if the following conditions are satisfied –

a. the dividends are paid by such company by any mode (other than cash); and

b. the amount of such dividend, or as the case may be, the aggregate amount of such dividends distributed or paid, or likely to be distributed or paid, during the financial year by such company to the shareholder does not exceed Rs. 5,000.

■ No TDS if dividend is paid or credited to an insurance company - TDS provisions of section 194 are not applicable if recipient of dividend is LIC, General Insurance Corporation or any other insurance in respect of any shares owned by the recipient or in which recipient has full beneficial interest.

■ No TDS if paid or credited by special purpose vehicle to business trust - TDS provisions of section 194 are not applicable (with effect from April 1, 2020) if the recipient of dividend is a business trust.

■ No TDS if paid or credited to notified persons - With effect from April 1, 2020, TDS provisions of section 194 are not applicable if the recipient of dividend is a person notified by the Central Government.

Deduction of tax at source from interest other than interest on securities [Sec. 194A]

408. Any person, (not being an individual£ or a Hindu undivided family£), who is responsible for paying to a resident any income by way of interest other than income chargeable as interest on securities, is required to deduct income-tax thereon at the rates in force [see Appendix 1] at the time of credit** of such income to the account of payee or “interest payable account” or “suspense account” or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier [see also para 406.1].

Deduction of tax is to be made from gross interest and not net interest payable after mutual set off between parties—CIT v. S.K. Sundararamier & Sons [1999] 240 ITR 740 (Mad.).

■ Tax rates - For the financial year 2022-23, TDS rate is 10 per cent (no surcharge, health and education cess, etc.). If the recipient does not furnish his PAN to the deductor, tax will be deducted at the rate of 20 per cent. PAN of the deductee should be mentioned in any correspondence and document which is exchanged between the deductor and deductee.

408.1 Adjustment in the case of short deduction - The person responsible for making the payment at the time of making any deduction, increase or reduce the amount to be deducted under section 194A for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year.

**Tax is to be deducted at source even where due to losses, no interest is paid by the assessee to its creditors but credit entry of interest is made—Solar Automobiles India (P.) Ltd. v. CIT [2012] 17 taxmann.com 260 (Kar.).

£ The provisions of sections 194A, 194C, 194H, 194-I, 194J and 194R are applicable even in the case of payment/credit given by an individual/HUF if –

- total sales, turnover or gross receipts from the business or profession carried on by him exceed the monetary limits specified under section 44AB(a)/(b) during the financial year immediately preceding the financial year in which the income is to be credited or paid (applicable up to March 31, 2020); or

- total sales, turnover or gross receipts from the business or profession carried on by him exceed Rs. 1 crore in the case of business or Rs. 50 lakh in the case of profession during the financial year immediately preceding the financial year in which the income is to be credited or paid (applicable from April 1, 2020).

408.2 When section 194A is not applicable - By virtue of sections 194A(3) and 197(1C), tax is not deductible in the following cases :

a.where the aggregate amount of interest credited or paid (or likely to be credited or paid) during the financial year does not exceed a specified amount see para 408.2-1];

b.where interest is credited or paid to any banking company, co-operative bank, public financial institutions, the Life Insurance Corporation, the Unit Trust of India, an insurance company or a co-operative society carrying on the business of insurance (or institutions notified before April 1, 2020) [see Taxmann’s Direct Taxes Circulars, Vol. 2, 2011 edition];

c.where interest is credited or paid by the firm to its partner(s);

d. where interest is credited or paid by a co-operative society (other than a co-operative bank, with effect from June 1, 2015) to its members [i.e., interest on time deposits/other deposits to members holding one share—Circular No. 9/2002, dated September 11, 2002‡] or to any other co-operative society;

e.where interest is credited or paid in respect of deposits under the schemes of Post Office (Time Deposits), Post Office (Recurring Deposits), Post Office Monthly Income Account, Kisan Vikas Patra, National Savings Certificates VIII Issue and Indira Vikas Patra;

f.where interest is credited or paid in respect of deposits (other than time deposits made on or after July 1, 1995) with a banking company or interest to non-members on deposits with a co-operative bank [see also para 408.2-1] ;

g. where interest is credited or paid in respect of deposits (by non-members) with a primary agricultural credit society or primary credit society or co-operative land mortgage bank or cooperative land development bank ;

h.where interest is credited or paid by the Central Government under different provisions of the direct taxes;

i. where the interest is paid (or, up to May 31, 2015, credited) on compensation awarded† by the Motor Accidents Claims Tribunal if the amount of payment or the aggregate amount of such payment does not exceed Rs. 50,000* ;

j. where income is payable in relation to zero coupon bonds by an infrastructure capital company or infrastructure capital fund (or with effect from April 1, 2021 infrastructure debt fund) or public sector company or scheduled bank;

k. interest referred to in section 10(23FC); and

l. interest paid or payable by an Offshore Banking Unit on deposits (or borrowing) made on or after April 1, 2005 by a person who is resident but not ordinarily resident in India.

■ In the case of a co-operative society referred to in (d) or (g) (supra) tax is liable to be deducted (with effect from April 1, 2020), if –

a. total sales, turnover or gross receipts of the co-operative society exceeds Rs. 50 crore during the financial year immediately preceding the financial year in which the interest is to be credited or paid; and

b. the amount of interest (or the aggregate amount of such interest) paid/credited during the financial year is more than Rs. 40,000 (Rs. 50,000 if recipient is a senior citizen).

408.2-1 - Tax under section 194A is not deductible where the aggregate amount of interest credited or paid (or likely to be credited or paid) during a financial year does not exceed the amount given below—

*The threshold limit of Rs. 50,000 is applicable separately where interest is to be shared by 2 or more claimants— National Insurance Co. Ltd. v. Draupadibai [2011] 11 taxmann.com 65 (MP).

† Compensation awarded by Motor Vehicle Accident Claims Tribunal or interest accruing therein, cannot be subjected to TDS as said amounts are not incomes as defined in Income-tax Act—Tamil Nadu State Transport Corpn. (Salem) Ltd. v. Chinnadurai [2016] 240 Taxman 162 (Mad.).

‡The CBDT overstepped the authority available to it and, consequently, Circular No. 9/2002 does not give correct interpretation of law—Jalgaon District Central Co-operative Bank Ltd. v. Union of India [2004] 134 Taxman 1 (Bom.), Gujarat Urban Co-operative Bank Federation v. Union of India [2012] 209 Taxman 340 (Guj.).

Who is payerInterest is payable onDuring JuneFrom April 1, 2018

↓ 1, 2007 andWhen payeeWhen payee is any other person March 31,is a senior DuringFrom April 2018citizen

Notes –

1. The aforesaid limits shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society, as the case may be. However, branch-wise computation system is discontinued from June 1, 2015. From June 1, 2015, section 194A has been amended to provide that for computing threshold limit (given above) interest credited or paid by the banking company/co-operative bank which has adopted core banking solutions (CBS), shall be considered.

2. The expression “time deposits” has been defined to mean deposits, excluding recurring deposits, repayable on the expiry of fixed period. The scope of TDS provisions has been extended (with effect from June 1, 2015) to cover interest on recurring deposits within its scope for the purposes of deduction of tax under section 194A.

3. The interest on time deposits made with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank, will not be subject to the requirement of deduction of income-tax at source.

408.2-2

- Under sub-section (5), the Central Government has power to notify (with effect from April 1, 2020) that tax deduction under section 194A shall not be made (or shall be made at such specified lower rate), from such specified payment to such person or class of persons, as may be specified in the notification.

408.3 Cases where tax is deducted at lower rate or when no tax is deducted - In the following cases, tax is not deducted or deducted at lower rates :

408.3-1

408.3-2

- See para 426.2.

- See para 426.1.

408.4 Deposit in joint names - If there is a deposit of Rs. 7,000 in a joint account of XY (the payer does not give any information about share of X and Y) and there are deposits of Rs. 45,000 in the name of X and Rs. 3,000 in the name of Y with the same person, the rate of interest being 10 per cent per annum, the payer may aggregate the interest in the joint account amounting to Rs. 700 with the interest Rs. 4,500 on the deposit of X (who has higher interest income) and since the aggregate interest during a financial year exceeds Rs. 5,000, he may deduct tax at source. The fact that the joint account may be styled as YX instead of XY will not make any difference. On the other hand, if the payer has definite information about the separate share of X and Y in the joint deposit (say both have equal shares), then their respective interest (50 per cent in each case) on joint deposit will be added to separate interest income of each of them. Since, in this particular case amounts to be arrived at do not exceed Rs. 5,000 (Rs. 4,850 and Rs. 650 in the case of X and Y, respectively) the payer is not liable to deduct tax at source—Circular No. 256, dated May 29, 1979.

408.5 Interest payment under Land Acquisition Act - Vide Circular No. 526, dated December 5, 1988, interest payment made under the Land Acquisition Act are covered by the provisions of section 194A.The Supreme Court has stated in Bikram Singh v. Land Acquisition Collector [1996] 89 Taxman 119 that section 194A is not applicable in the case of interest payable on delayed compensation for compulsory acquisition.

408.6 Tax deduction on the deposits in banks in the name of the Registrar to the Supreme Court/ High Court during pendency of litigation - The Board has issued Circular No. 8/2011, dated October 14, 2011. This Circular is applicable where one (or more) litigant is directed by the Court that a specified amount be deposited in the bank directly or through the Court. However, in the case of UCO Bank v. Union of India [2014] 51 taxmann.com 253 (Delhi), the Court has quashed Circular No. 8/2011. Subsequently, the Board has clarified that interest on FDRs made in the name of Registrar General of the Court or the depositor of the fund on the directions of the Court, will not be subject to TDS till the matter is decided by the Court. However, once the Court decides the ownership of the money lying in the fixed deposit, the provisions of section 194A will apply to the recipient of the income—Circular No. 23/2015, dated December 28, 2015.

408.7 Interest payable on hundi by buyer to supplier in the case of outstation sale of goodsWhether tax to be deducted by the buyer - In the case of out-station sale of goods, the supplier draws a hundi on the buyer and routes it through his banker along with transport documents with instructions to deliver the documents on retirement of the hundi and to charge interest on the amount of hundi from the date of acceptance thereof to the date of actual payment. A problem arises whether, in such circumstances, tax is to be deducted at source by the party retiring the hundi on the amount of interest at the time of making payment to the bank. In the aforesaid case, interest paid by the buyer to the supplier is not to the bank as such but only routed through the bank.

The exemption under section 194A(3)(iii)(a) is available when interest is paid to a bank. As the interest from the buyer is not for the bank as such, but only routed through bank to the supplier (who is the recipient), the buyer has to deduct tax at source under section 194A from the interest paid and routing of the interest through bank will not make any difference—Circular No. 48, dated November 7, 1970.

408.8 Interest payable by consignors to their commission agent - Tax is to be deducted at source in accordance with section 194A from the interest paid by the consignors to their commission agent even where such interest is paid under an arrangement whereby the commission agent retains for himself the interest due to him at the time of paying to the consignor the moneys due to him on account of the consignment—Circular letter F. No. 12/12/68-IT(A-II), dated September 23, 1968.

408.9 Finance service company - Payment made by the assessee, which is a company engaged in retail finance services, corporate advisory services, securities trading and assets securitisation, to the persons who has invested in a scheme floated by the assessee under which the investor is guaranteed a minimum return of 1.5 per cent a month, is ‘interest’ as defined in section 2(28A) and as such assessee is liable to deduct tax at source under section 194A from payment of interest made to investors under the above scheme—Viswapriya Financial Services & Securities Ltd. v. CIT [2002] 258 ITR 496 (Mad.).

Likewise, where assessee has borrowed money from financiers for making payment to its suppliers and had paid ‘financial charges’ to the financiers and debited the same under the head ‘Discounting charges’, said discounting charges are in nature of interest and liable for tax deduction at source under section 194A—Kanha Vanaspati Ltd. v. CIT [2007] 17 SOT 160 (Delhi).

408.10 TDS on interest on deposits made under Capital Gains Accounts Scheme where depositor has deceased - The Board has decided vide Notification No. 8/2017, dated September 13, 2017 that in the case of deposits under the Capital Gains Accounts Scheme, where the depositor has deceased –

a. TDS on the interest income accrued for and up to the period of death of the depositor is required to be deducted and reported against PAN of the depositor, and

b. TDS on the interest income accrued for the period after death of the depositor is required to be deducted and reported against PAN of the legal heir, unless a declaration is filed under rule 37BA(2).

408.11 Who is an individual - Section 194A is not applicable in some cases if the payer of income is an individual or a Hindu undivided family. Even an artificial juridical person can be treated as an individual under section 194A. Status fixed for the purpose of assessment cannot get altered for the

purpose of section 194A. Once a trust has been assessed as an individual under section 161, section 194A will not be applicable to it— ITO v. Arihant Trust [1995] 214 ITR 306 (Mad.).

408.12 Payment under a hire purchase agreement - When a part of purchase instalment is paid by a hirer to the owner under a hire purchase contract, the provisions of section 194A are not attracted—Instruction No. 1425, dated November 16, 1981.

408.13 Cheque discounting charges - Cheque discounting charges are different from interest payments and the provisions of section 194A are not attracted—ITO v. A.S. Babu Sah [2003] 86 ITD 283 (Mad.).

408.14 Interest on delayed payment of insurance compensation - Tax at source is to be deducted by insurance company in case of interest on delayed payment of compensation awarded by Motor Accident Claims Tribunal and trial court cannot direct insurance company to make payment without deduction of tax at source—New India Assurance Co. Ltd. v. Mani [2004] 270 ITR 394 (Mad.).

408.15 Personal loan of directors routed through company - Where director’s personal loans were routed through the company’s books by back-to-back transactions/cheques, the Supreme Court, in CIT v. Century Building Industries (P.) Ltd. [2007] 163 Taxman 188, held that the company has an obligation to deduct tax on interest payment. It does not matter that it has only acted as a medium for collecting and disbursement purpose. The Supreme Court held that the tax should have been deducted at the time of credit notwithstanding the arrangement between the company, directors and the agency giving loan.

408.16 Chit fund - Discount distributed to subscribers of a chit fund in form of bid amount offered by the successful bidder who takes chit, is not interest under section 2(28A) and consequently, tax is not deductible under section 194A—CIT v. Sahib Chits (Delhi) (P.) Ltd. [2009] 185 Taxman 34 (Delhi), ITO v. Daspalla Chits & Investments Ltd. [2010] 4 ITR (Trib.) 732 (Visakha.).

408.17 Interest on time deposit by bank on daily/monthly basis in CBS software - Since no constructive credit to the depositor’s/payee’s account takes place while calculating interest on time deposits on daily or monthly basis in the CBS software used by banks, tax need not be deducted at source on such provisioning of interest by banks for the purposes of macro monitoring only. In such cases, tax shall be deducted at source on accrual of interest at the end of financial year or at periodic intervals as per practice of the bank or as per the depositor’s/payee’s requirement or on maturity or on encashment of time deposits whichever event takes place earlier—Circular No. 03/2010, dated March 2, 2010.

408.18 Judgment debtor - Judgment debtor is not liable to deduct tax at source on interest component of decree—Madhusudan Shrikrishna v. Emkay Exports [2010] 188 Taxman 195 (Bom.).

408.19 Interest for utilization of credit limit of other party - Where an assessee utilizes unspent credit limit of another party and reimburses interest payable by the said party to bank, the assessee is liable to deduct tax at source from such payment under section 194A—Bhura Exports Ltd. v. ITO [2011] 13 taxmann.com 162 (Cal.).

408.20 Interest on overdue purchase bills is not ‘interest’ - Payments which have direct link and immediate nexus with the trading liability connected with the delayed purchase payments, will not fall within the category of interest as defined in section 2(28A). Therefore, interest on delayed payment of purchase bills is not subject to tax deduction under section 194A—Sri Venkatesh Paper Agencies (Hyd.) (P.) Ltd. v. CIT [2012] 24 taxmann.com 52 (Hyd.).

408.21 Loan processing fees - Loan processing fee falls within definition of ‘interest’ under section 2(28A), and same would be liable to TDS under section 194A—Aban Investments (P.) Ltd. v. CIT [2012] 52 SOT 36 (Chennai)

408.22 Charges to get export sale bills discounted - The Supreme Court has dismissed SLP against the Delhi High Court’s decision in CIT v. Cargil Global Trading (P.) Ltd. [2011] 11 taxmann.com 219 wherein the High Court held that discounting charges paid to get export sale bills discounted is not “interest” as defined in section 2(28A) and does not attract TDS under section 194A—CIT v. Cargil Global Trading (P.) Ltd. [2012] 21 taxmann.com 496 (SC).

Deduction of tax at source from winnings from lotteries or crossword puzzles [Sec.194B]

409. A person responsible for paying to any person any income by way of winnings from lotteries or crossword puzzles or card game or any other game of any sort exceeding Rs. 10,000 is required, at the time of such payment, to deduct income-tax thereon at the rate in force. The rate of tax deduction at source for the financial year 2022-23 is 30 per cent*. Tax is deductible from the amount payable to the winner. Unclaimed and/or undisbursed prize money is not a winning from lottery and, as such the provisions of section 194B for deduction of income-tax at source are not applicable in respect thereof— Director of State Lotteries v. CIT [1999] 238 ITR 1 (Gauhati).

For instance, X wins a lottery prize of Rs. 2,00,000 on March 11, 2022 out of which Rs. 20,000 is payable to the agent. Out of Rs. 1,80,000 payable to the winner, Rs. 54,000 (being 30 per cent of Rs. 1,80,000) shall be tax deduction at source under section 194B.

■ Prizes on the basis of gift coupon may not be “lottery” - State Government’s District Level GiftLinked Savings Mobilisation Scheme cannot be treated as lottery merely because prizes were distributed on basis of gift coupons issued—Director of Small Savings v. ITO [2000] 75 ITD 152 (Mad.).

409.1 Prize given partly in cash and partly in kind - Where the prize is given partly in cash and partly in kind, tax will be deductible from cash prize with reference to the aggregate amount of the cash prize and the value of the prize in kind. Where the winnings are wholly in kind or where they are partly in cash and partly in kind but the part in cash is not sufficient to meet the liability for tax deduction in respect of the whole of the winnings, the person responsible for paying shall, before releasing the winnings either in cash or in kind, ensure that tax has been paid in respect of the winnings.

For instance, X wins a Maruti-Zen (value of Rs. 3.70 lakh) in a draw of lot organised by Maruti Udyog on January 31, 2023. Tax liability on the prize in kind comes to Rs. 1,11,000 (i.e., 30 per cent of Rs. 3.70 lakh) which may be recovered by the Maruti Udyog from X and the same can be deposited with the Government on account of tax deduction.

Deduction of tax at source from winnings from horse races [Sec. 194BB]

410. Tax is deductible at source from any income by way of winnings from the horse races at prescribed rates. The rate of tax deduction at source for the financial year 2022-23 is 30 per cent†. Deduction of tax at source can be made only in cases where income by way of winnings from horse races to be paid to a person exceeds Rs. 10,000. The obligation to deduct tax at source applies only where such winnings are paid by a bookmaker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course.

Deduction of tax at source from payments to contractors or sub-contractors [Sec. 194C]

411. Provisions of section 194C are given below —

411.1 Who is responsible for tax deduction - Any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between a specified person and the resident contractor is required to deduct tax at source. For this purpose, payer himself is treated as person responsible for paying any sum to contractor. If, however, payer is a company, the company itself including the principal officer thereof, is the person responsible for paying to resident contractor.

*Under sections 194B and 194BB, if recipient is a resident, tax is deductible during the financial year 2023-24 at the rate of 30 per cent (no surcharge, health and education cess). If, however, recipient is non-resident, tax is deductible at the rate of 30 per cent {+SC [if amount subject to TDS exceeds Rs. 50 lakh (if recipient is non-resident individual/HUF/ AOP/BOI/artificial juridical person) or Rs. 1 crore (if recipient is non-resident firm/co-operative society)] +HEC}.

†See para 404.2.

■ Specified person - Meaning of - Tax is deductible under section 194C(1) only if payment is made in pursuance of a contract between a specified person and a resident contractor. The following are “specified persons” for this purpose :

a. the Central Government or any State Government ; or

b. any local authority ; or

c. any corporation established by or under a Central, State or Provincial Act; or

d. any company ; or

e. any co-operative society ; or

f. any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both ; or

g. any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India ; or

h. any trust ; or

i. any University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University under section 3 of the University Grants Commission Act, 1956 ; or

j. any foreign Government or a foreign enterprise or any association or body established outside India; or

k. any firm; or

l. any individual/HUF/AOP/BOI if amount paid/credited is not exclusively for personal purposes (of individual or any member of HUF) and if –

a. total sales, turnover or gross receipts from the business or profession carried on by him exceed the monetary limits specified under section 44AB(a)/(b) during the financial year immediately preceding the financial year in which the income is to be credited or paid (applicable up to March 31, 2020); or

b. total sales, turnover or gross receipts from the business or profession carried on by him exceed Rs. 1 crore in the case of business or Rs. 50 lakh in the case of profession during the financial year immediately preceding the financial year in which the income is to be credited or paid (applicable from April 1, 2020).

411.2 When tax has to be deducted at source - Tax is to be deducted either at the time of credit of such sum to the account of the payee, or at the time of payment thereof in cash or by issue of cheque or by any other mode, whichever is earlier.

For this purpose, any sum credited to any account, whether called “Suspense account” or by any other name, in the books of account of the payer, is treated as credit of such income to the account of the payee. See also para 406.1.

411.3 Consideration/sum exceeding a particular sum is subject to tax deduction at source - The provisions are given below :

■ Petty cases - To avoid tax deduction in petty cases, tax is required to be deducted at source where the amount credited or paid to a contractor or sub-contractor exceeds Rs. 30,000 in a single payment/credit or Rs. 1,00,000 in the aggregate during a financial year. In other words, tax is not deductible under section 194C if the following two conditions are satisfied—

a. the amount of any (single) sum credited or paid (or likely to be credited or paid) to the contractor or sub-contractor does not exceed Rs. 30,000; and

b. the aggregate of the amounts of such sums credited or paid (or likely to be credited or paid) during the financial year does not exceed Rs. 1,00,000.

■ Payment or credit to transport operators (applicable from October 1, 2009) - If recipient (maybe an individual, firm, company, or any other person) is a transport contractor (who is in the business of plying, hiring or leasing goods carriages) and satisfies the following conditions, tax is not deductible –

Direct Taxes Law & Practice | A.Y. 2023-24

AUTHOR : VINOD K. SINGHANIA, KAPIL SINGHANIA

PUBLISHER : TAXMANN

DATE OF PUBLICATION : JANUARY 2023

EDITION : 68TH EDITION

ISBN NO : 9789356225923

NO. OF PAGES : 1764

BINDING TYPE : PAPERBACK

Description

Taxmann’s flagship publication on Direct Taxes has been the ‘go-to-guide’ for Students & Professional Practitioners for over 40 years. This book aims to make the reader understand the Law and develop the ability to apply the Law. In other words, this book aims at providing the reader with the following:

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