[Kumar Aditya is a third-year B.B.A, LL.B (Hons.) student at Chanakya National Law University, Patna]
A new section 194R has been inserted in the Income Tax Act 1961, by the Finance Act of 2022. The section provides that any person responsible for providing any benefit or perquisite to a resident, is required to deduct tax at the source (TDS) at a rate of 10% if the total value of such benefit/perquisite exceeds INR 20,000 within a financial year. Further, it states that the benefit or perquisite, whether in cash or kind, must arise either from carrying out of business or exercising a profession by such resident.
As evidenced from the section, there must be a benefit or perquisite in the hands of the recipient in order to trigger the section. The term benefit or perquisite has not been defined anywhere in the Act. However, the term is also used in section 28(iv) of the Income Tax Act wherein only those benefits which are in some other form, rather than money, are termed as benefits or perquisite. Section 194R(2) of the Income Tax Act empowers the Central Board of Direct Taxes (CBDT) to issue guidelines for the removal of difficulties while giving effect to this provision. In exercise of the said provision, the CBDT has, vide Circular No. 12 of 2022 dated 16 June 2022 (the Circular), prescribed guidelines to remove difficulties that taxpayers would face while implementing or analysing section 194R of the Act. One of the most crucial clarifications in the Circular is that it is not necessary for the person responsible for providing the benefit or perquisite to determine the taxability of such benefit or perquisite in the recipient's hands, or the head of income under which it is taxed in the recipient's hands. In light of the clarification, even if the ‘benefit or perquisite’ is in the form of money, the provision of section 194R would get triggered attracting a tax deduction of 10%
One significant impact of this interpretation would be on a ‘loan waiver’, since the waived loan amount would be regarded as ‘benefit or perquisite’ under section 194R requiring the lender to pay the tax on such waiver. Thus, the article deals with the question of whether such a benefit or perquisite falls within the ambit of section 194R of the Act.
Section 194R(3) provides that that every guideline issued by the CBDT shall be laid before each House of the Parliament, and shall be binding on the income tax authorities and on any person providing such benefit or perquisite. The general law is that a circular can provide an interpretation of the CBDT's intent and it is binding on tax authorities, however, the same is not binding on taxpayers or courts. Further, a circular cannot override the provisions of the Act under which it is issued unless there is a specific provision in the Act for the same.
The Circular has been issued to provide guidelines for the removal of difficulties. The guidelines, therefore, cannot override the Act and expand the scope of section 194R of the Act.
Whether the intent of Section 194R is only to cover the benefits or perquisites taxable under section 28(iv) of the Income Tax Act?
The way of interpreting a statute is to seek the intention of its makers, and apply that to the facts of the case at hand. An interpretation of the statutory provision which defeats the intent and purpose for which the statute was enacted should be avoided.
Section 28(iv) of the Act, provides that,
"The following income shall be chargeable to income tax under the head' Profits and gains of business or profession'-
…
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession"
Similarly, section 194R of the Act, provides that,
"Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent. of the value or aggregate of value of such benefit or perquisite."
Due to both the aforesaid sections use the same phrase ‘any benefit or perquisite, whether convertible into money or not’, the legislature inserted the term with the same frame of mind and therefore the meaning of the both is same. Furthermore, the proviso to section 194R cannot expand the scope of the section which otherwise clearly intended to cover only amounts taxable under section 28(iv) of the Act. Therefore, the tax would be withheld under section 194R of the Act only when such benefit or perquisite falls within the ambit of section 28(iv) of the Act.
Reference can be made to the memorandum of the Finance Bill 2022 which mentioned the rationale of bringing section 194R as:
"As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.
Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite…"
After going through the quoted part of the memorandum, it can be inferred that the intention behind introducing section 194R is to cover cases where income under section 28(iv) has escaped tax.
Further, the finance minister, Mrs. Nirmala Sitharaman, in her budget speech stated that,
"It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds 20,000 during the financial year"
It can be observed that there has been a lot of emphasis upon the fact that there should be a benefit/perquisite in the hands of the recipient. The term ‘benefit or perquisite’ is not defined in the Act. Nevertheless, the Circular has stated that there is no requirement of determining taxability in the hands of the recipient. The highlighted part of the Circular quotes, that the sum can be taxable under any other section like section 41(1) of the Act. CBDT has aldo distinguished section 194R from section 195 of the Act in the Circular, by stating that section 195 of the Act requires deduction of the tax on 'any other sum chargeable under the provisions of the Act' at the rate in force while section 194R of the Act does not specify any such condition of chargeability of the income.
In light of the above discussion, it is submittedthat the Circular is deviating from the intent of legislature and has expanded the scope of section 194R of the Act and therefore, it cannot be enforced. The legislature inserted the term with the same frame of mind in section 28(iv) and section 194R. Also, the intent of the legislature behind introducing section 194R is to cover cases where income under section 28(iv) has escaped tax. Therefore, it can be concluded that the only benefits or perquisites covered by Section 194R are those that are taxable under Section 28(iv) of the Income Tax Act.
Does waiver of the loan constitute income under section 28(iv) of the Income Tax Act?
In the recent case of The Commissioner of Income Tax v. Mahindra and Mahindra Ltd., division bench of the Supreme Court of India had ruled that section 28(iv) of the act intends to tax only those benefits which are in some other form, rather than money, i.e. non-monetary benefits. Further, it held that a loan waiver is not taxable under section 28(iv) of the Act as it is a cash receipt and not a non-monetary benefit.
The Court recognized that the taxability of the waiver of loan has been a highly debated issue and there have been contradictory judgements in the past. For instance, the Madras High Court, in the case of Commissioner Of Income Tax vs M/S. Ramaniyam Homes P Ltd, had held that a sum of principal loan amount waived by a bank in the one-time settlement scheme would constitute income under section 28(iv) of the Act.
However, the Supreme Court, pronounced a judgement in the favour of the taxpayer. Currently, waiver of loan by any creditor would result in receipt in the hands of the assessee and once this waiver is treated as a receipt, then it can be said that the benefit accrued to the assessee is monetary benefit and it would automatically fall outside the purview of section 28(iv). Consequently, it can be said that the waiver of loan amounts to a monetary benefit and therefore it cannot be taxed under section 28(iv).
Concluding Remarks
In order to cover situations when income under section 28(iv) has eluded taxation, the lawmakers introduced section 194R. It follows that only advantages or perquisites that are taxable under Section 28(iv) of the Income Tax Act are covered under Section 194R. Right now, when a creditor waives a debt, the assessee receives a receipt; once this waiver is considered as a receipt, it might be argued that the benefit accruing to the assessee is a monetary benefit and would immediately be exempt from section 28. (iv).As a result, such a waiver cannot be considered income subject to taxation under section 28. (iv). Therefore, it is not possible to claim that the waiver of the loan's principal amount qualifies as a benefit or perquisite under section 194R.