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Notifications and Circulars

CBDT issues clarifications on newly introduced withholding tax provisions of Section 194R

Finance Act, 2022 has introduced section 194R under the Income Tax Act, 1961 (‘ITA’) providing for deduction of tax at the rate of 10 per cent from value of benefit or perquisite arising from carrying out of business or profession from 1 July 2022 onwards. This new tax withholding provision would not apply, in case aggregate value of benefit or perquisite provided to the person does not exceed INR 20,000 (approx. Eur 235) during financial year.

The Central Board of Direct Taxes (CBDT) has issued guidelines to remove difficulties regarding the applicability of section 194R of ITA. Some of the key clarifications provided are given below:

There is no requirement for person withholding taxes to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.
Tax withholding will be applicable in respect of all the three scenarios i.e., benefit or perquisite in cash, in kind or partly in cash and partly in kind.
Tax withholding will be applicable even if the benefit is in the form of capital asset.
Double tax withholding is envisaged in respect of gifts/ benefits to employees of distributor/ recipient entity.
If third party invoice for out-of-pocket expenses incurred by service provider is not in the name of service recipient and it is reimbursed, then section 194R is applicable. If such invoice is in the name of service recipient and discharged by service provider, then such reimbursement is not covered by section 194R.

In addition to above, clarifications are also provided on other points such as Gift to social media influencer, Dealer conference, Valuation, grossing up of taxes etc. [CBDT Circular No. 12/2022 dated 16 June 2022]

Domestic Tax Rulings

1. Supreme Court upholds validity of reassessment notices issued under section 148 after 1 April 2021 under unamended section 148 by using its extraordinary power under Article 142 of the Constitution of India

In a very unsual "one of a kind" verdict, The Indian Supreme Court on 4 May 2022 in the case of Union of India vs. Ashish Agarwal – 444 ITR 1, has reversed the decisions of various High Courts, whereby High Courts had unanimously quashed the reassessment notices issued after 1 April 2021 under the unamended section 148 of ITA.

Finance Act, 2021 has revamped the old reassessment scheme and has also introduced new section 148A, which provides opportunity of hearing prior to issue of notice under section 148. The new reassessment scheme was made effective from 1 April 2021.

Due to extension of various time limits under Taxation and Other Laws Amendment Act, 2020 (‘TOLA’) and also relying on explanations in the Notifications No. 20 & 38 of 2021, the tax authorities had issued reassessment notices from 1 April 2021 till 30 June 2021 under the unamended provisions of section 148. Thus, the procedure of section 148A of providing pre-issuance hearing to the assesses was not followed.

Almost all High Courts in India including Bombay, Delhi, Rajasthan, Allahabad, Madras etc. had accepted petitions filed by assesses against such notices and quashed the reassessment notices issued under unamended section 148 till 30 June 2021.

A. On appeal by tax authorities, the Supreme Court held that:

High Courts were correct in holding that the notices issued after 1 April 2021 ought not to have been issued under the unamended provisions of ITA; but ought to have been issued under the substituted provisions of sections 147 to 151 of ITA.
Despite the position that amended provisions were applicable from 1 April 2021, if action of High Courts quashing notices was upheld, it would make the tax authorities remediless, and the object and purpose of reassessment proceedings would be frustrated.

Thus, to provide some leeway, the Supreme Court invoked its extra-ordinary power under Article 142 of the Indian Constitution, which provides that to do complete justice amongst parties, Supreme Court can pass any order and such order would be enforceable throughout India in such a manner, as prescribed by Supreme Court or as if it is law made by the parliament.

B. Amongst other the Supreme Court issued following directions under Article 142:

Notices issued after 1 April 2021 under unamended section 148 would be deemed to be show cause notices under amended section 148A(b).
The requirement of Conducting inquiry by tax authorities with prior approval as per amended section 148A(a) was dispensed with as one time measure
Tax authorities were given time limit of 30 days to provide information and material relied upon and assesses has been given with time limit of 2 weeks to furnish his reply to notice containing said information from the date of receipt of information.

All defenses, which may be available to the assessees, including those available under section 149 of ITA on account of period of limitation, may be taken by the assessees.

2. Indian Supreme Court allowed forex fluctuation on repayment of foreign currency loans taken for business of financing deductible

The Indian Supreme Court allowed the claim of deduction on account of expenses incurred on foreign exchange fluctuations incurred by the taxpayer on loans taken for carrying on its business of financing. The Supreme Court, in concluding so, observed that it was not for creation or acquisition of assets for the purpose of its business, rather for carrying on its business of financing. It is inconsequential that Indian enterprises that borrow money from the taxpayer acquire assets by entering a leasing and hire purchase agreement with the taxpayers (loans being indirectly used for acquisition of assets).

3. Panji ITAT holds onetime payment for subscription of lease line for 3 years to be revenue in nature and allowable fully in year in which it was incurred

The taxpayer had entered a contract to implement Multiprotocol Label Switching/Virtual private network (MPLS/VPN) for a term of three years on a one-time contact price of Rs. 14.52 lakhs. Assessing Officer disallowed amount related to unexpired period based on periodic apportionment treating expenditure pertaining to period outside the previous year.

Panji ITAT in case of Goa Tourism Development Corp Ltd. [2022] 139 taxmann.com 233 held that, expenditure was intrinsically connected to conduct of business and thus becomes an essential component of profit making process. It is not incurred for acquisition of an asset or right of a permanent nature. Hence, it should be regarded as revenue expenditure, allowable fully in year, in which it was incurred.

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