Issuance of bonus, right shares by listed company not a benefit or perquisite, will not attract TDS: IT Dept

Issuance of bonus share or shares issued under rights issue by listed company and subsidiaries will not be covered under the new provision of Tax Deducted at Sources (TDS) on perquisites and benefits, the Central Board of Direct Taxes (CBDT) has said. Also, banks will not have to pay tax on one-time settlement.

The new Section, 194R, came into effect from July 1. It mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source at the rate of 10 per cent of the value. The new provision is applicable only when value of the benefit or perquisite exceeds ₹20,000.

No benefit to shareholders

In a circular, CBDT said that bonus share does not result in any benefit to shareholders as the overall value and ownership of their holding does not change. Further, the cost of acquisition of bonus share is taken as nil for capital gains computation when this share is sold. Similar representations have been received seeking clarity on issuance of right shares.

“It is clarified that the tax under Section 194R of the Act is not required to be deducted on issuance of bonus or right shares by a company by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Income Tax Act, where bonus shares are issued to all shareholders by such a company or right shares are offered to all shareholders by such a company,,” it said.

According to Ved Jain, former President of Institute of Chartered Accounts of India, the implication of this clarification will be that a company in which a public is not substantially interested will be required to deduct tax at source while issuing bonus/ right shares despite such receipt of bonus / right shares being not taxable in the hands of the shareholders. The reason given in this circular for exempting a company in which public is substantially interested from deduction of tax at source while issuing bonus / right shares equally applies to a private company in which public is not substantially interested .

Talking about one-time settlement by banks, the circular acknowledged that waiver or settlement of loan by the bank may be an income to the person who had taken the loan. It is also true that subjecting such a transaction to tax deduction under Section 194R of the Act would put extra cost on such bank, as this would require payment of tax by the deductor in addition to him taking a haircut already. Hence, “to remove difficulty, it is clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by the following would not be subjected to tax deduction at source under Section 194R of the Act,” it said.

On the issue of perquisites or benefits for dealers attending product awareness conference by the company, CBDT said it is not necessary that all dealers are required to be invited in a dealer/business conference for the expenses to be not considered as benefit/perquisite for the purposes of TDS. Overstay, for calculation of tax, will not include, a day or after the actual date of conference.  It is also clarified that if benefit/perquisite is provided in a group activity, it is up to the provider of such benefit to claim this as business expenses. If he does not do so, then no TDS is required.

Commenting on the circular, Sandeep Sehgal, Partner- Tax, AKM Global, said, in cases of reimbursements, a much needed relief has been provided where the service provider receives the reimbursement as a pure agent. However, “with respect to the dealer’s conference where the group benefit is involved, the condition that the company should not claim the expense in order to not attract the provisions of Section 194R would clause hardship to the taxpayers and a hence a prudent view should have been taken in this regard,” he said.

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