#TaxmannPPT | Taxability of Benefits & Perquisites u/s 28(iv) and TDS u/s 194R

Taxability of Benefit & Perquisites under section

28(iv) and withholding under section 194R Training

► Section 2(13) – defines the term “business” and section 2(36) defines the term “profession”

► Section 2(24) of the Income-tax Act, 1961 (the Act) defines “income” – Inclusive definition

► Since inclusive definition - Ambit would be as per word “income” occurring in Entry 82 of List I of 7th Schedule to Constitution; “Taxeson income other than agricultural income”

► Illustrative judicial precedents dealing with Entry 82 of List of 7th schedule to constitution Navinchandra Mafatlal vs. CIT (Civil Appeal No. 194 of 1952, Dated -1/11/1954), Elel Hotels & Investments Ltd. v. Union of India [1989] 44 Taxman 304 (SC) Aero Leather (P.) Ltd. v. Union of India [1993] 67 Taxman 486 (Delhi); Union of India v. A. Sanyasi Rao [1996] 85 Taxman 321 (SC).

► Section 2(24)(vd) includes the value of any benefit or perquisite as taxable under clause (iv) of section 28;

► Section 14 of the Act specifies – heads under which “income” would be liable to tax i.e., Salaries, Income from house property, Profits and gains from business and profession, Capital Gains and Income from Other source.

► Section 28 – Specifies income chargeable under the head PGBP;

► Section 28 - exhaustive list of income chargeable under the head PGBP

► Income not falling under any of the clauses of section 28 would not be chargeable under the headPGBP;

- “Profits and gains from business and profession”

Section 28(iv) – Overview

Inserted through Finance Act, 1964 and Circular No. 20D dated 7 July 1964;

Old section 28(iv) : “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession”

Benefit or Perquisite should arise to the recipient;

Ingredients of erstwhile section 28(iv)

Should arise from business or exercise or exercise of a profession;

Whether convertible into money or not

Section 28(iv) – Understanding the term “Benefit” / “Perquisite”

Term “benefit” and “perquisite” not defined under the Act – definitions in dictionaries and judicial definitions to be referred.

Meaning of term “Benefit”

Black’s Law Dictionary – defines “benefit” – ‘advantage’;profit; fruit; privilege.

► CIT vs. Smt. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj) – rendered in context of 2(24)(iv)

The word “benefit” implies an element of advantage, profit or gain. The word “benefit” occurring in clause (iv) of section 2(24) would mean any advantage, gain or improvement in condition.

► Diwan Rahul Nanda vs. Dy CIT [2008] 25 SOT 454 (Mum-Trib) – rendered in context of 2(24)(iv)

For the purpose of these provisions, it is immaterial whether the benefit or perquisite is convertible into money or not. The intention of legislature is to tax any benefit if it is received by a director, etc. irrespective of the fact whether the benefit was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company (provider of benefit) or not in the transaction.

Meaning of term “Perquisite”

► Section 17(2) of the Act defines “Perquisite”inclusively – however, this applies to salary income and not “PGBP”;

► Ordinary meanings of word “perquisite” should be explored.

Meaning of term “Perquisite”

► Black’s Law Dictionary – defines “Perquisite” – A privilege or benefit given in addition to one’s salary or regular wages – often shortened to perk.

Section 28(iv) – Understanding “arising from” business and profession

The “benefit” or “perquisite” should have a connection with business or profession of the recipient and not with the business or profession of the person providing the perquisite of benefit

The amount was not received by the assessee as a result of any business transaction or transaction with the firm. This amount had no connection or nexus with the business of the assessee. It did not represent value of any benefit or perquisite arising from the business of the assessee. This amount, therefore, would not partake of the character of the income.

For the purposes of attracting of section 28(iv) it is necessary that the benefit should arise from business.

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It was not correct, that as assessee was not doing the business of selling and purchasing entitlement, the provisions of section 28(iv) could not be pressed into service. What is necessary for attracting section 28(iv) is that the benefit originates or grows out of the business done and if that aspect is proved, the aforesaid provision would apply.

Before sub-section (iv) of section 28 is invoked it is necessary to show and prove the proximate cause or nexus between the alleged benefit or perquisite and the business actually carried on by the assessee. The nexus or the proximatecause must be real, immediateand not illusionary or imaginary.The benefit or perquisite contemplated by sec. 28(iv) must necessarily have a live connection with the business carried on by the assessee and the benefit must accrue or arise in the course of carrying on of such business.

CIT vs. Bhavnagar Bone, & Fertiliser Co. Ltd. [1987] 32 Taxman 180 (Guj.)

Agra Chain Mfg. Co. vs. CIT (IT Reference No. 644 of 1974, Dated-7/04/1978)

ITO vs. Undavalli Constructions [2021] 131

204/191 ITD 749 (VisakhapatnamTrib.)

Section 28(iv) – Understanding “whether convertible into money or not”

Commissioner v. Mahindra and Mahindra Ltd.[2018] 93 taxmann.com 32/255 Taxman 305 (SC)

Gujarat HC – CIT V. Chetan Chemicals (P.),

Ltd. [2004] 139 Taxman 301 (Guj.)

CIT v. Alchemic (P.) Ltd.[1981] 5 Taxman 55 (Guj.)

► Amount received as cash receipt due to the waiver of loan - Very first condition of Section 28 (iv) of the Act which says any benefit or perquisite arisingfrom the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied.

► It cannot be said that the assesseecompanywas carrying on business of obtainingloans and that the remission of such loans by the creditors of the company was a benefit arising from such business.

► The phrase "whether convertible into money or not“ would normally mean something else than money. Section 28(iv) would not apply when the amount received is cash or is considered in terms of money.

SC

- CIT v. T.V.Sundaram Iyengar & Sons

Ltd. [1996] 88 Taxman429 (sc)

► Taxpayer received certain deposits from customers. Such deposits were not claimed by the customersand hence, taxpayertransferredit to P&L a/c

► Although it was treated as deposit and was of capital nature at the point of time it was received, by influx of time the money had become the assessee's own money. It became a definite trade surplus.

► Where loan was taken for acquiring capital asset, waiver thereof would not be taxable;

► If loan was taken for trading purpose, waiver thereof would result in income, more so when it was transferred to P&L.

Amount representingprincipal loan waived by bank under one time settlement scheme would constitute income falling under section 28(iv)

Delhi HC - Logitronics (P.) Ltd.

Madras HC - Ramaniyam Homes (P.) Ltd.

Section 28(iv) – Understanding the amendment

Points

Comments in Memorandum for the proposed amendment

Particulars

The intention of legislature while introducing this provision was also to include benefit or perquisite whether in cash or in kind. However, courts have interpreted that if the benefit or perquisite are in cash, it is not covered within the scope of this clause of section 28 of the Act.

In order to align the provision with the intention of legislature, it is proposed to amend clause (iv) of section 28 of the Act to clarify that provisions of the said clause also applies to cases where benefit or perquisite provided is in cash or in kind or partly in cash and partly inkind.

Amended provision –clause (iv) of section 28

“the value of any benefit or perquisite arising from business or the exercise of a profession, whether –

(a) convertible into money or not; or

(b) In cash or in kind or partly in cash and partly in kind

Benefit or Perquisite should arise to the recipient;

Ingredients of amended section 28(iv)

Should arise from business or exercise or exercise of a profession;

Whether convertible into money or not

In cash or in kind or partly in cash and partly in kind

Section 28(iv) – Impact Areas

Waiver of Loan

The words “in cash or in kind or partly in cash and partly in kind” would rope gains from loan waiver under onetime settlement

Discount on redemption of FCCB

Share application money writtenback

Mumbai Tribunal in Pidilite Industries held that discount received on buy-back of FCCB not taxable as receipt was in shape of money and capital receipt

Mumbai Tribunal in Nalwa Chrom Pvt. Ltd. had held that such write back is not taxable u/s 28(iv) and 41(1)

Point for consideration

► Whether waiver of such loan can be considered as “arising from” business or exercise of profession?

► Whether discount on redemption of FCCB can be considered as “arising from” business or exercise of profession?

► Whether write back in respect of share application money received is “arising from” business or exercise of profession?

Section 28(iv) – Impact Areas

Benefit from EmployerEmployee relationship

Bonus shares / Right shares

Allocation of common expenditure

Not covered u/s 28(iv)

– Can be taxable as Salaries in hands of employees under section 17

- Whether benefit / perquisite at all? –Especially in bonus

- Whether arising in course of business?

Allocation of common expenditure amongst the companies – if less expenditure allocatedwhether benefit received by other group company

Point for consideration

► If benefit provided by Hospital to doctor who is employee – may be taxable u/s 17. However, if benefit provided by Hospital to doctor who is consultant – may be taxable u/s 28(iv)

► Circular issued in context of 194R for Rights / Bonus shares cannot be automatically extrapolated into section 28(iv)

► Whether write back in respect of share application money received is “arising from” business or exercise of profession?

Section 28(iv) – Impact Areas

Interestfree / Concessional rate loan

Maintenance Services

- Rule 3 prescribes that perquisite for section 17(2) includes interest free loan – no corresponding provision under PGBP

- Cost is factored and recovered from customers through price of goods at time of sale;

Either consumer foregoes discount and pays zero cost or interest is inbuilt in the product price. No benefit in real terms

Point for consideration

► Interestfree loan – Benefit arising to recipient to be demonstrated– i.e., the giver of loan borne interest cost which would have been otherwise payable by the recipient of loan

► Free Maintenance Services - there is difference between “benefit” / “perquisite” vs. “consideration” – Benefit / Perquisite should be over and above the consideration.

Free

Zero Cost EMI

Withholding under section 194R – Understanding the section

Particulars Provisions of section 194R

Which payment covered Benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession, payable to resident

Rate of withholding

TDS to be deducted

Person obligated to withhold

10% (not required to be enhanced by surcharge and cess). Nil withholding certificate not possible.

Value or aggregate payment > Rs. 20,000 during the FY

Person responsible for providing the benefit or perquisite (i.e., benefit provider)

No withholding obligation on individuals or HUF where sales / gross receipts / turnover < INR 1

crore (business) / INR 50 lakhs (profession) during immediately preceding FY

Status of payee Should be resident

Date of applicability

Timing of withholding

TDS obligation for inkind payments

1 July 2022

TDS to be deducted ‘before’ providing benefit or perquisite

First proviso covers benefit or perquisite

- wholly in kind or - partly in cash an partly in kind but cash component insufficient to meet TDS on whole of benefit/perquisite

Power to CBDT to issue guidelines to remove difficulties

CBDT to issue guidelines for purpose of removal of any - binding on both tax authorities and person responsible for providing benefit / perquisite

Withholding under section 194R – Circular 12 of 2022 and Circular 18 of 2022

Clarification

Withholding under section 194R applies on benefit or perquisite provided regardless of : -chargeable to tax under section 28(iv) or 41(1) or other provisions of the Act; - whether it is chargeable to tax or not

Illustrative issues

Memorandum provided that section 194R introduced to widen the tax base since recipient of benefit / perquisite are not reporting such benefit / perquisite received in the course of business as taxable income.

Comparable to section 196D / PILCOM judgment

Section 194R applicable to monetary benefits

The clarification that the recipient is not required to check whether the amount would be taxable in the hands of recipient, or under which section such amount would be taxed appears to be contrary to the intent of introducing section 194R

Prior to amendment in section 28(iv) – monetary benefits were not covered within the ambit of section 28(iv) –Mahindra and Mahindra (SC)

► Loan settlement / waiver by bank – lead to hardship since bank would incur additional withholding cost – specified borrowers exempted;

► Waiver of loan apart from specified borrower – whether 194R applicable?

► Write off of bad-debt – whether 194R applicable?

Section 194R applies to benefit in formof capital asset

What would be cost of acquisition in the hands of recipient?

Circular 18 of 2022 clarified that if tax has been deducted as per section 194R and the recipient has offered such receipt of capital asset as income in the return of income (ROI) – then the amount of benefit included by dealer in ROI shall be deemed as “actual cost” for depreciation purpose

Withholding under section 194R – Circular 12 of 2022 and Circular 18 of 2022

Clarification

Sales discount, Cash discount, Rebates and buy one get one - Are benefit / perquisite –However, tax not deductible to avoid genuine difficulty

Illustrative issues

Memorandum provided that section 194R introduced to widen the tax base since recipient of benefit / perquisite are not reporting such benefit / perquisite received in the course of business as taxable income.

Further clarified that the above would not apply to benefits like car, TV, mobile phones, free event ticket, sponsored trips, computers, gold coin, free medicine samples

Following whether benefit or perquisite and subject to section 194R?

► Free Medicine samples;

► Brand recallers;

► Vouchers / Coupons / Loyalty points (Post 28(iv) amendment);

► Discount / Credit note to dealers on achieving specified sales target (Post 28(iv) amendment).

Option 1 - withholding in the name of recipient entity if the benefit is “used” by owner/director/employee or relative. Recipient entity to evaluate withholding under section 194R / 192.

Option 2 - TDS may be deducted directly in the name of recipient

Challenges in dual TDS obligations

1. Benefit given to distributor with an obligation to pass such benefit to dealers;

2. Challenges in claiming TDS credit in dual withholding – where income is not offered to tax by accommodating party;

Threshold of 20,000 is qua recipient

Withholding under section 194R – Circular 12 of 2022 and Circular 18 of 2022

Clarification

Benefit / Perquisite to Government entities not carrying on business / profession – Section 194R not applicable

Guidelines on valuation : Value = Fair market value except,

1. Purchase price : where the benefit provider has purchased such benefit / perquisite

2. Price to customers : Benefit / perquisite is product manufactured by such benefit provider GST to be excluded for determination of value

Products given to social media influencer for the purpose of advertising not liable for 194R if such products are returned after use

Illustrative issues

Whether similar principle can be extended to other entities not carrying on business (e.g., charitable trusts)

TDS applicable if products is retained

Fair Market Value has not been defined in circular

Where the manufacturer sells the products to distributors – whether sales price to distributor or sale price of product to ultimate customer to be considered?

Whether “purchase” of service would also be covered?

-

Implications if product is given for use till end of economic life of the product - FMV to be seen at which point of time (i.e., at the time of giving product or at the time when the influencer / product giver decided that such product may not be returned)

Withholding under section 194R – Circular 12 of 2022 and Circular 18 of 2022

Clarification

Reimbursement of out-of-pocket expenses:

-TDS applicable if invoice in the name of service provider (whether directly paid or reimbursed by client);

-TDS not applicable if invoice in the name of client

Illustrative issues

1. It has been clarified that amount incurred by "pure agent" [GST concept] for which he is reimbursed by the recipient would not be treated as benefit/perquisite for the purpose of section 194R of the Act.

2. Overlap with FAQ 30 of circular no. 715 – If tax is deductible under other provision of the Act (other than section 194R) – there will not be further liability to deduct tax under section 194R.

Section 194R - Dealer / Business conferences

- No TDS if primary objective is to educate dealers

-TDS applicable if the conference is for selected dealers who have achieved the targets;

-TDS applicable on expenditure attributable to leisure, family members, prior or overstay.

1. Whether all dealers are to be invited? – No all dealers need not be invited

2. Prior stay and overstay – Expenditure incurred for stay of dealer one day immediately prior to start day and one day following the actual end date of conference – not subject to 194R

3. How to identify and document leisure expenditure? - clarified that if it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his option not claim the expense as deductible expenditure. If he decides to opt so, he will not be required to deduct tax under section 194R on such benefit/perquisite and not be treated as assessee in default under section 201 of the Act

Withholding under section 194R – Circular 12 of 2022 and Circular 18 of 2022

Clarification

Compliance for benefits provided in kind: Option 1 - Advance tax payment challan to be obtained from the recipient of such benefit and such challan number to be inserted in Form 26Q bythe benefit provider

Option 2 – Deduct and pay on “net of tax basis”

Computation of threshold of INR 20,000

- Value from April 2022 to June 2022 to be included for computing INR 20,000 limit

-However,no TDS required till 1 July 2022 on such benefits/perquisites if threshold breached

Whether Embassy / High Commission required to deduct tax at source?

Illustrative issues

1. Whether provider can collect tax from the recipient and deposit the same as TDS?

2. Manner of grossing up – computation challenge of double gross up?

3. Whether such grossed-up tax can be claimed as deduction under section 37 of the Act?

Issuance of bonus shares / right shares:

- If issued to all shareholders by a 2(18) company –not applicable

Section 194R not applicable on benefit / perquisite provided by an organization in scope of The UN (Privileges and Immunity Act), 1947, an international organization whose income is exempt under specific Act or parliament, embassy, high commission, legation, commission, consulate and trade representation of foreign state.

Whether similar principles applicable when bonus / rights issue undertaken by a company which is not 2(18) company.