Tuesday, 22 April 2014

Frequently asked questions on tax deducted as source (TDS)

Clarifications to issues some of the issues relating to TDS:
1) Whether capitalization of interest payable attracts TDS U/S 194A?
A) Yes, Capitalization of interest payable attracts the provisions of TDS.
TDS is to be made on interest payment regardless of the fact whether borrower uses funds for acquiring fixed assets, capital assets or stock-in-trade or for making payments of trading debts.
2) How TDS U/S 194B is deducted in case where gift (prize by way of winnings from lottery) is given in kind?
A) Generally we come across two types of situations in case gift is given in kind-
(i) If prize is given partly in cash and partly in kind- Tax will be deducted from cash prize with reference to the aggregate amount of the cash prize and the value of price in kind. And where in the part of cash is not sufficient to meet the liability for tax deduction in respect of whole of the winnings then payer has to collect the balance from the payee.
(ii) Where the prize is wholly in kind- The payer has to collect the liability for tax deduction from payee.
Example – Mr.” X “wins a Maruthi-Zen value of Rs.3,70,000/- on August 20, 2008, in a draw of lot organized by Maruthi Udyog. Tax liability on prize in kind comes to Rs.1,14,330/- (i.e., 30.9% of Rs.3,70,000/-) which may be recovered by the Maruthi Udyog from Mr. “X” and the same can be deposited with the government on account of tax deduction.
3) Whether payment made to Disk jokey (DJ) is covered under 194C or 194J, explain briefly?
A) Artistic performances and services provided by persons are covered U/S 194J. Even though a contract is entered with him, he is rendering professional services only and hence it is subjected to TDS u/s 194J.
4) Whether definition of profession U/S 194J is inclusive or exclusive?
A) Exclusive, almost all the definitions in the act which are favorable to the revenue is not inclusive in nature.
5) Whether TDS U/S 194J is to be made inclusive of reimbursement of expenditure or exclusive?
A) TDS on reimbursement is not required to be made if separate bills are raised one is for professional fee and the other is for reimbursement of expenditure.
If a single bill is raised for the professional fee inclusive of reimbursement of expenditure, in such a case TDS is to be made on gross amount.
The above view is supported by a case law ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71 (ITAT).
Where as per CBDT circular No. 715 dated 8-8-1995, TDS should be on total payment including reimbursement of expenses. But ITAT in the above decision it was held that reimbursement of expenses for which bill is separately raised did not attract the provisions of section 194J, the above circular attracts only in case bill is raised inclusive of reimbursement of expenditure.
6) Whether contract U/S 194C must be in writing?
A) A contract may be written or oral. Even implied contracts are also attract provisions of section 194C. Circular: No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
7) Whether order of visiting cards, scribbling pads, letter heads in the name of company attracts TDS provisions?
A) Yes, section 194C would apply in respect of supply of printed material as per prescribed specifications.
Circular: No. 715, dated 8-8-1995.
8) Whether TDS U/S 194I to be made on rent is inclusive of maintenance or exclusive?
A) TDS U/S 194I on maintenance charges is not required to be made if separate bills are raised one is for rent and the other is for maintenance charges .
How ever payments made towards maintenance charges attracts sec 194C.
9) Is there any change in the time period for failing quarterly TDS returns 27Q?
A) Yes there is a change,
For the financial year 2014-15, these dates are as follows-

Quarter Due date
First quarter ending on June30, 2014 July 15,2014
Second quarter ending on September 30, 2014 October 15,2014
Third quarter ending on December 31, 2014 January 15,2015
Fourth quarter ending on march 31,2015 May 15,2015

Earlier it was 14th of the month following the quarter.
10) What is due date for remittance of TDS certificates? (Form-16 and Form-16A)
A) (i) Time limit for issue of Form No. 16- The certificate should be given with in one month from the close of the financial year in which such deduction is made. For example, for the financial year 2009-10, certificate should be given by April 30, 2010.
(ii) Time limit for issue of Form No.16A- The certificate shall be issued within one month from the end of the month during which credit is given or the amount is paid. This rule is subject to following exceptions:
a) If the amount is credited to the payee’s account, by the person, on the last date of the accounting year, then such certificate shall be issued with in one week after the expiry of 2 months from the end of the month in which the amount is credited.
For instance, if sum is credited to the account of payee on March 31, 2009, certificate shall be issued by June 7, 2009.
b) If on the request of the recipient, a consolidated certificate is to be issued, then such certificate can be issued within 30 days from the end of the financial year.
11) Whether plant include vehicle? Whether payment of hire charges attracts Sec 194I (TDS on rent)?
A) (i) Yes, plant includes vehicle. According to Sec.43 (3) Plant includes-
  • Ships,
  • Vehicles,
  • Books,
  • Scientific apparatus and
  • Surgical equipment used for the purpose of business or profession.
But it excludes-
  • Tea bushes,
  • Livestock,
  • Buildings,
  • Furniture and fittings.
(ii) Yes, payments made towards hire charges of vehicles attracts Sec194I
W.e.f. A.Y.2007-08, rent means any payments by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for use of (either separately or together) any-
  • Land, or
  • Building (including factory building), or
  • Land appurtenant to a building (including factory building), or
  • Machinery, or
  • Plant, or
  • Equipment, or
  • Furniture, or
  • Fittings,
  • Whether or not any or all of the above are owned by the payee.
12) Difference between TDS and TCS?
A) TDS is Tax deducted at source and TCS is tax collected at source. The meaning can be understood from its definition itself. TDS is for expense and where as TCS is for revenue (Ex- scrap sale).
13) Nil TDS returns are to be filed or not required?
A) For an assesse who is filing return for the first time there is no need to file NIL TDS return. For others it is compulsory.
14) Whether any person is exempted from TDS deduction? Is there any such relaxation? If so what is the procedure that should be followed?
A) Yes, if the assessing officer is satisfied that the total income of the recipient is below the basic exemption limit or the tax liability of the person is NIL, he should, on an application in Form-13, may issue a certificate on a plain paper for deduction of tax at lower rate or no deduction of tax.
15) Difference between Form-15G and Form-15H?
A) Form-15G: It is declaration given by an individual or other person (not being a company or firm) to the person responsible for deducting tax at source not to deduct tax, since the total income including the current receipts will not exceed the maximum amount which is not chargeable to income tax.
Form-15H: It is declaration given by an individual who is the age of 65 years or more to the person responsible for deducting tax at source not to deduct tax, since the total income including the current receipts will not exceed the maximum amount which is not chargeable to income tax.
16) Whether conversion of out standing interest on loan into loan attracts TDS?
A) There are two situations generally we come across while dealing the above case-
(i) Interest payment to banks/financial institutions- Any interest paid or credited to the banks/financial institutions is not subject to tax deduction U/S 194(3)(iii), hence TDS is not required to be made on interest payments.
Even the interest payments does not attract TDS provisions, hence there is no question of TDS in case of capitalization of interest on loan as loan.
(ii) Interest payments to others (other than persons those who are covered under 194(3)(iii))- According to sec-194A, TDS is to be made at the time of credit or payment which ever earlier.
So the liability to deduct TDS arises at the time of credit or payment, where as the conversion of interest out standing into loan arises after a long period from the time interest liability becomes due for payment. This is due to inability of the borrower in making the interest payments.
There is a point of timing difference between the interest due and conversion of interest into loan.
Hence the liability to deduct TDS arises only at the time the interest becomes due but not at the time of conversion of interest outstanding into loan.
Clarifications relating to TAX AUDIT matters
1) Whether gross turn over (or) gross receipts criteria for Tax Audit U/S 44AB to exceed 40 Lakhs or 10 Lakhs include other income?
A) In the “Guidance Note issued on the Terms Used in Financial Statements” published by the institute, the expression “Sales Turnover” has been defined as under :- “The aggregate amount for which sales are affected or services rendered by an enterprise. The term ‘gross turn over’ and ‘net turn over’ are sometimes used to distinguish the sales aggregate before and after deduction of returns and trade discounts”.
It does not include income falling under other heads.
2) Whether write off of ROC fee payments for increasing authorized share capital is allowed?
A) Registration fee paid for increase of authorized share capital is in the nature of capital expenditure and hence disallowed. The same view is supported by a case law
Punjab State Industrial Development Corporation Limited Vs
CIT [1997] 93 Taxman 5 (SC)
3) What is the Treatment of capitalization of interest borrowed for acquiring capital asset as per IT act? And
What it the tax treatment of interest once the asset is capitalized?
A) (a) If loan is borrowed for acquiring an asset then interest on such loan up to the time the asset is put to use can be capitalized.
(b) Interest on loan taken to purchase an asset is deductible U/S 36(1)(iii) if it pertains to the period after the plant and machinery is put to use.
4) In case of cash negative balance in books of accounts, what are the implications?
A) Negative cash balances indicates that
  • the receipts are not properly accounted
  • Cash brought in by partners were not considered in the books
  • payments made to creditors by the proprietor/partner from their personal money were not accounted

During the scrutiny the assessing officer may raise the question on the correctness of books of accounts in case of cash negative balances and hence it the responsibility of the tax auditor to verify such issues before issuing tax audit report

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