TDS claim – in the case of FDs where TDS is paid periodically and interest income is credited to the account at the maturity of FDs.

 TDS claim – in the case of FDs where TDS is paid periodically and interest income is credited to the account at the maturity of FDs.  Compliances
Aug 132021
 

Facts:

The assessee was following the cash system of accounting. She was holding cumulative term deposits in a bank entitling her for interest, which was periodically credited by the bank in the deposit account of the assessee.

  • During the previous years relevant to the assessment years 1997-98 to 2000-01, the bank deducted tax at source on the interest credited in the deposit account of the assessee and issued TDS certificates to her.

 

  • Though the assessee in the returns of income filed for the assessment years 1997-98 to 2000-01 did not disclose the interest income from these deposits as her income, she claimed credit of tax based on TDS certificates issued by the bank.

 

  • The Assessing Officer declined to give credit for the tax deducted at source by the bank for the reason that interest income on which deduction of tax was made by the bank was not returned by the assessee in the relevant assessment years.

 

  • However, the Assessing Officer accepting the contention of the assessee that she was following the cash system of accounting did not assess any interest income in the assessment years concerned.

 

Analysis of facts:

From a reading of the provisions of section 199, as they stood during the relevant assessment years 1997-98 to 2000-01, it is clear that the assessee is entitled to a credit of tax paid in the assessment year in which the income is assessed. In other words, the assessee should claim credit of tax based on the TDS certificate in the year in which the assessee returns the income from which deduction is made for the purpose of assessment. Even after the amendment of the section through the introduction of sub-section (3) in section 199, the Central Board was authorized to make rules for giving credit for tax deducted at source. As required under that section, rule 37BA was inserted in the Rules by the IT (Sixth Amdt.) Rules, 2009, with effect from 1-4-2009.

Thus, the assessee can retain the TDS certificates and claim credit in the assessment year in which the assessee returns the income on which deduction of tax is made for assessment.

Now the question arises – Whether the Assessing Officer was justified in refusing to give credit for tax deducted at source based on TDS certificates issued by the bank for the reason that income is not returned for assessment by the assessee in the assessment years following the years in which tax is deducted and paid by the bank?

Section 199 makes it clear that the assessee is entitled to a credit of tax based on the TDS certificate only in the assessment year in which income from which tax is deducted is assessed. Therefore, when the statute makes it mandatory that credit of tax based on TDS certificate is available only in the assessment year in which the income from which tax deducted at source is assessed, the Tribunal cannot overrule the statutory provisions.

Conclusion:

Thus, in such cases assessee has two methods of claiming credit of TDS in return for income as given below:

Method 1 –  Going by the practical difficulty to retain TDS certificates for several years until the interest is returned for assessment on the cash basis, prudent assessees should return income on which tax is deducted and remitted by the payer in the assessment year following the year in which such income is subject to deduction of tax and remittance by the payer.

Method 2 – The assessee who does not follow method 1 supra,  should follow section 199 and rule 37BA, retain the TDS certificates, and claim credit in the assessment year in which such income is returned for assessment.

In other words, the assessee should claim credit of tax based on the TDS certificate in the year in which the assessee returns the income from which deduction is made for the purpose of assessment. Even after the amendment of the section through the introduction of sub-section (3) in section 199, the Central Board was authorized to make rules for giving credit for tax deducted at source.

 

 

In the case of a Joint Venture, when co-joint venturer can claim credit of TDS.

 In the case of a Joint Venture, when co-joint venturer can claim credit of TDS.  Compliances
Aug 102021
 

Facts:

  • The assessee was a partnership firm engaged in the manufacture of PSCC/RCC and MS pipes, cement slabs and also executed civil contracts.

 

  • Subsequently, by virtue of the conversion, all the assets and liabilities of the erstwhile partnership firm became assets and liabilities of the company.

 

  • The assessee along with three others entered into a joint venture agreement for the purposes of preparing and submitting pre-qualification/post-qualification tender to the Hyderabad Metropolitan Water Works and Sewerage Board.

 

  • As per the terms of the agreement, each of the parties to the joint venture was concerned with its share of work/contract and the profit or loss arising therefrom.

 

  • With respect to the contract work receipts, TDS was done and the assessee claimed credit of the tax mentioned in the said TDS certificates.

 

  • The Assessing Officer refused to give credit on the ground that some of the TDS certificates belonged to the joint venture and some other TDS certificates were in the name of Directors but said certificates did not relate to the assessee firm/company.

 

  • The Commissioner (Appeals) allowed the assessee’s claim holding that where the joint venture had not filed the return of income and claimed credit for TDS certificates, then the said credit had to be entertained in the assessee’s hands.

 

Analysis of facts:

By the Income Tax (8th amendment) Rules, 2011, the CBDT amended Rule 37 BA, and in sub-rule (2), for clause (i), the following clause was substituted:

“(i) Where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, credit for the whole or any part of the tax deducted at source, as the case may be, shall be given to the other person and not to the deductee”

This amendment has done away with the specified four clauses in the pre-amended Rule 37BA which restricted the benefit of the rule only in four specified situations. It has thus widened the scope of rule 37 BA thereby enabling the credit of taxes to the actual payee in whose hands the income is assessable and not restricting this benefit only to the specified four situations.

Thus, the assessee is entitled to the credit of the TDS mentioned in the TDS certificates issued by the contractor, whether the said certificate is issued in the name of the Joint Venture or in the name of a Director of the assessee company. They have considered the terms of the agreement dated 12-03-2003 among the parties to the joint venture and held that credit for TDS certificates cannot be denied to the assessee while assessing the contract receipts mentioned in the said certificates as income of the assessee. The income shown in the TDS certificates has either to be taxed in the hands of the joint venture or in the hands of the individual co-joint venturer. As the joint venture has not filed a return of income and claimed credit for TDS certificates and the TDS certificates have not been doubted, credit has to be granted to the TDS mentioned therein for the assessee.

The Revenue cannot be allowed to retain tax deducted at the source without the credit is available to anybody. If the credit of tax is not allowed to the assessee, and the joint venture has not filed a return of income, then credit of the TDS cannot be taken by anybody. This is not the spirit and intention of the law.

Who is to claim credit of TDS?

 Who is to claim credit of TDS?  Compliances
Aug 072021
 

Facts of the case

The assessee company entered into a foreign technical collaboration for Basic Engineering and Training (BEAT) Agreement with D, a foreign company, to set up a gas-based Sponge Iron Plant in India. In terms of the agreement, D was to deliver the designs, drawings, and data besides training a certain number of employees of the petitioner company outside India. In lieu of the services, it was agreed that in addition to the consideration, all tax liabilities of D, if any, arising in India shall be borne by the petitioner company.

The assessee- company sought no objection certificate from income tax authorities to remit the consideration payable to D without deducting TDS but the same was denied.

Subsequently, the assessee- company paid TDS under protest as withholding tax which was over and above the agreed consideration payable to D.

Later on, D filed its nil return of income in India for the same period but the Assessing Officer held that D had taxable income in India and accordingly, the withholding tax paid by the assessee- company was adjusted towards D’s tax liability.

Against such order, a writ petition was filed together by the assessee- company and D wherein on 5th May 2010, the Bombay High Court rendered its judgment and held that such income was not taxable in India and further the income tax authorities were directed to pass fresh orders excluding the income received by D.

Subsequent to this order, the assessee-company requested the income tax authorities that it was entitled to refund of TDS deposited on behalf of D but the department refuted its claim by holding that since TDS was deposited on behalf of D and D had claimed the credit of such TDS deposited in its return of income, petitioner company was not entitled to such refund.

Analysis of facts:

The tax was deducted at source at the relevant time on behalf of D in accordance with Section 199 of the Act, credit can only be given to Davy and the benefit of the order of this Court rendered on 5 May 2010 can only be given to D who had filed its return of income for the A.Y.1990-91 and 1991-92.

It is, therefore, submitted that the assessee cannot claim a refund of tax deducted at the source which was deposited by the Petitioner on behalf of D, as there is no provision in the Act for the same.

It is submitted that the Assessee has no locus standi to claim a refund on behalf of D.

The order passed by the High Court & Conclusion

As regards the question of whether the petitioner is entitled to get such a refund, the Court is not expressing any opinion at this stage. However, the Court directs that if any amount deducted at source for the Assessment’s years 1990-91 and 1991-92 is required to be refunded to D pursuant to the judgment dated 5th May 2010 in Writ Petition of this Court, the respondents shall deposit the said amount along with interest in accordance with the law in this Court.

TDS credited by mistake – can benefit be availed.

 TDS credited by mistake – can benefit be availed.  Compliances
Aug 042021
 

Facts:

  1. The assessee derived income from the business of erection, commissioning, and installation of towers on a contract basis.
  2. The Assessing Officer noticed that total receipts declared by the assessee were less than the amount on which TDS credit was claimed. [Rs. 6,20,99,368/- as opposed to Rs. 19,08,20,903/- & the TDS claimed was Rs. 1,20,73,097/-]
  3. The assessee explained that discrepancy arose because the vendor had billed the assessee’s sister company REPL for the work but had mistakenly mentioned the assessee’s PAN in the TDS certificate and, thus, inadvertently crediting assessee’s TDS account in the 26AS statement, which was PAN-based.
  4. The assessee had claimed credit of all TDS certificates, including those related to REPL stating that benefit of the TDS certificates mistakenly issued in the assessee’s PAN name had not been availed by REPL. The total TDS claim made by the assessee was Rs. 1,20,73,097/- against a total of Rs. 19,08,20,903/- received.
  5. The Assessing Officer rejected the assessee’s claim relying on section 199 and held that the TDS credit should be allowed to the person from whose income the deduction was made.
  6. On appeal, the Commissioner (Appeals) allowed the assessee’s claim on the ground that since the assessee had already paid the due taxes in REPL, it would be a travesty of justice to not allow the benefit of TDS to the assessee. The Tribunal upheld the order of the Commissioner (Appeals).

Analysis of facts:

“199. Credit for tax deducted.

(1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of the property or of the unit-holder, or of the shareholder, as the case may be.

(2) Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3) The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.”

Revenue cannot be allowed to retain tax without credit being allowed to anybody: Revenue cannot be allowed to retain tax deducted at the source without the credit is available to anybody. If the credit of tax is not allowed to the assessee, and the joint venture (sister concern in the above case) has not filed a return of income, then credit of the TDS cannot be taken by anybody. This is not the spirit and intention of the law. Also, the procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice.

Applicability of rule 37A: At this stage, it is also relevant to note the provisions of Rule 37BA of the Income Tax Rules, 1962, which envisions grant of TDS credit to entities other than the deductee (herein, M/s REPL). We must clarify that we are not oblivious of the fact that Rule 37BA is not directly applicable in the facts of this case. The reliance placed on Rule 37BA is merely to demonstrate that in not all circumstances is TDS credit given to the deductee.

Conclusion:

When can the assessee claim credit of TDS even in the case of mistake of credit of TDS to a wrongly but related person/account?

Where due to an inadvertent mistake of the vendor, the TDS relating to the assessee’s sister concern was credited to the assessee’s TDS account, the assessee could claim credit of such TDS, provided its sister concern had not availed the benefit of such TDS certificates.

A few extracts from this decision would probably indicate that even after an amendment to rule 37BA, credit for TDS can be claimed by the person who is not liable to pay tax on the receipt covered by that TDS.

  1. TDS benefit may be taken even in cases where corresponding income is not offered for tax

“The Assessing Officer denied credit of TDS in the hands of the assessee on the ground that corresponding income by way of compensation has not been offered to tax. – It is worth noting here that once TDS certificates are in the name of the assessee and credit for such TDS is appeared in the name of the assessee in the AIR database and also the fact that the particular income is not taxable either in the hands of the assessee or in the hands of the HUF credit for TDS cannot be rejected merely on the ground that the corresponding income has not been offered to tax.

There is merit in the arguments for the reason that when a particular income is exempt from tax in view of specific provisions provided under section 10(37) and also the fact that the HUFs have declared the compensation received on account of compulsory acquisition of agricultural land in their return of income and claimed exemption under section 10(37) there is no reason for the Assessing Officer to deny credit for TDS merely on the ground that no income has been offered to tax in the hands of the assessee. The compensation received on account of compulsory acquisition of agricultural land is exempt from tax under section 10(37).

It is further noticed that HUFs have declared the said compensation in the return of income. It is also undisputed that the HUFs have not claimed credit for TDS in their return of income.

Therefore, when the facts are clear in respect of exemption of particular receipt in the hands of the assessee as well as HUFs, the question of offering such income for tax in the hands of the assessee does not arise.

  1. Where credit of TDS is appearing in AIR database and assessee have furnished TDS certificate

When the credit for such TDS is appearing in the name of the assessee in the AIR database and the assessee has furnished the necessary TDS certificate in his name, the Assessing Officer erred in rejecting the claim of credit for TDS by citing the provisions of section 199 read with rule 37BA.

Therefore, the revenue’s contention that the assessee instead of claiming the entire TDS amount ought to have sought a correction of the vendor’s mistake would unnecessarily have prolonged the entire process of seeking a refund based on TDS credit. Therefore, the Assessing Officer erred in denying credit of TDS to the assessee.

TDS credit when income assessable in the hands of a person other than deductee – deviation from prescribed procedure.

 TDS credit when income assessable in the hands of a person other than deductee – deviation from prescribed procedure.  Compliances
Jul 292021
 

Facts:

  • The assessee, a HUF, invested the funds belonging to the HUF in RBI taxable bonds. The details of such investments and assessment for the relevant year can be tabulated as below:
Details of the assessment year 2012-13 Income shown Tax on income
Net income (incl. income from above investments) Rs.30,50,120/- Rs.7,90,045/-
TDS

TDS on income earned on above investment                = Rs. 5,42,800/-

TDS on other income of HUF                                           = Rs 2,40,835/-

   Rs.7,83,635/-
TDS disallowed TDS due to PAN mismatch Rs. 5,42,800/-

 

  • Inadvertently the above investment is made in the name of the Karta of the HUF and he was not described as the Karta of the HUF.
  • The Permanent Account Number (PAN) given to RBI also was that of Karta in a personal capacity and not that of the HUF.
  • The RBI while deducting tax at source amounting to Rs. 5.42 lakhs on the interest income of such bonds issued TDS certificates in the name of Karta carrying his PAN and not in the PAN of HUF.
  • The return filed by Karta in his individual capacity showed a total TDS of Rs.30,42,697/- but he did not claim the benefit of the said TDS of Rs.5,42,800/- and resultantly claimed TDS only of Rs.24,99,897/- (i.e. Rs 30,42,697/- fewer Rs 5,42,800/-).

 

  • The Assessing Officer while processing the return of the assessee for the assessment year 2012-13 under section 143(1) did not grant the weightage of TDS of Rs. 5.42 lakhs to assess HUF, since the PAN did not match.
  • The assessee also filed a revision petition before the Commissioner stating that the income in relation to which TDS was made was that of the assessee-HUF. The HUF had filed a return and offered such income to tax. Such return had been accepted by the Assessing Officer and the income had been duly taxed. Also, Karta of the HUF, in his personal capacity had filed a separate return in which such TDS was not claimed.
  • The Commissioner rejected the revision petition holding that on account of the mismatch of PAN reflected in the TDS certificate and that of the assessee, the credit could not be granted.

Analysis of Facts:

The provision of section 199(1) dealing with credit of TDS/TDS to the assessee is given below:

“  42199. (1) Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of the property or of the unit-holder, or of the shareholder, as the case may be….”

Thus, the above facts can be analyzed as under:

  1. Income belongs to HUS is undisputed: The source of the funds which came to be invested with the RBI was that of the HUF. The interest income, therefore, would belong to the HUF. At the same time, TDS was deducted under the PAN of Karta as investments were made in the name of Karta, and the PAN of Karta was given in his individual capacity.
  2. Owns of department: The anxiety of the department, therefore, to ensure proper matching of the PAN in the TDS certificate as compared to the PAN of the assessee who claims the benefit of such tax deducted at source.
  3. Analysis of section 199 in light of the above facts: As per Section 199(1) any TDS would be treated as payment of tax on behalf of the person from whose income the deduction was made. Subsection 3 the same permits a deviation authorizing CBDT to make rules in respect of:
    1. Giving credit of TDS or
    2. The year during which the credit of such tax deducted at source should be granted.
  4. The obligation of Karta as per the above provision: The petitioner could have applied to RBI in terms of sub-rule 2 of Rule 37BA and completed the procedure envisaged therein. That is,
    1. Deductee, Karta, files a declaration
    2. Deductor reports the tax deduction in the name of the other person, i.e. HUF, to income tax authorities
    3. Declaration shall contain
  • Name of the person to whom credit is to be given,
  • Address of the person to whom credit is to be given,
  • Permanent Account Number of the person to whom credit is to be given,
  • Payment or credit in relation to which credit is to be given and
  • Reasons for giving credit to such a person
  1. Power of department: There is no dearth of power with the department to grant credit of tax deducted at source in such a genuine case like given above.

 

Conclusion:

In view of such special facts and circumstances, the high court directs the department to give credit of the said sum of Rs.5,42,800/- to the petitioner HUF deducted by way of tax at source upon Shri Naresh Bhavanji Shah filing an affidavit before the department that the sum invested by the RBI does not belong to him, the income is also not his and that he has not claimed any credit of the tax deducted at source on such income for the said assessment year.

How to claim credit of TDS / TCS?

 How to claim credit of TDS / TCS?  Compliances
Jul 262021
 

The Finance Bill 2008 amended section 199 of the Act and the purpose for which section 199 of the Act was amended was explained by the Memorandum explaining the provisions in the Finance Bill,2008 under the heading “Amendments to the provisions of Dematerialisation of TDS and TCS certificates “in the following words-

“The system of allowing credit to the assessee for TDS/TCS needs a certain degree of flexibility considering the ongoing technological and business process changes. Providing rigorous conditions regarding the method of giving credit for TDS/TCS in the Act makes the system difficult to restructure and implement according to the changing technological environment. Because of this, it is proposed to substitute section 199 and section 206C(4) so that the manner in which credit of TDS/TCS is to be given will be governed by Rules to be framed under section 199 and section 206C(4), i.e. the Board may make such rules as may be necessary for the purpose of giving credit in respect of TDS/TCS or tax paid by an employer on perquisite under section 192(1A).

These amendments will take effect from the 1st day of April 2008.”

 

This section after this amendment and as on date reads as under-

Section 199. CREDIT FOR TAX DEDUCTED (TDS).

(1)           Any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made, or of the owner of the security, or of the depositor or of the owner of the property or of the unit-holder, or of the shareholder, as the case may be.

(2)           Any sum referred to in sub-section (1A) of section 192 and paid to the Central Government shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.

(3)           The Board may, for the purposes of giving credit in respect of tax deducted or tax paid in terms of the provisions of this Chapter, make such rules as may be necessary, including the rules for the purposes of giving credit to a person other than those referred to in sub-section (1) and sub-section (2) and also the assessment year for which such credit may be given.

Rule 37BA, as on date, reads as under-  CREDIT FOR TAX DEDUCTED AT SOURCE FOR THE PURPOSES OF SECTION 199

(1)    Credit for tax deducted at source and paid to the Central Government in accordance with the provisions of Chapter XVII, shall be given to the person to whom payment has been made or credit has been given (hereinafter referred to as the deductee) on the basis of information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorized by such authority.

(2)    (i) where under any provisions of the Act, the whole or any part of the income on which tax has been deducted at source is assessable in the hands of a person other than the deductee, credit for the relevant amount, as the case may be, shall be given to the other person and not to the deductee:

Provided that the deductee files a declaration with the deductor and the deductor reports the tax deduction in the other person’s name in the information relating to deduction of tax referred to in sub-rule (1).

(ii) The declaration filed by the deductee under clause (i) shall contain the name, address, permanent account number of the person to whom credit is to be given, payment or credit in relation to which credit is to be given, and reasons for giving credit to such person

(iii) The deductor shall issue the certificate for deduction of tax at source in the name of the person in whose name credit is shown in the information relating to deduction of tax referred to in sub-rule (1) and shall keep the declaration in his safe custody.

(3)   (i) Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.

(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.

(3A) Notwithstanding anything contained in sub-rule (1), sub-rule (2), or sub-rule (3), for the purposes of section 194N, credit for tax deducted at source shall be given to the person from whose account tax is deducted and paid to the Central Government account for the assessment year relevant to the previous year in which such tax deduction is made.

(4)    Credit for tax deducted at source and paid to the account of the Central Government shall be granted on the basis of-

(i)     the information relating to deduction of tax furnished by the deductor to the income-tax authority or the person authorized by such authority; and

(ii)    the information in the return of income in respect of the claim for the credit,

subject to verification in accordance with the risk management strategy formulated by the Board from time to time.

Know about Changes in new ITR Forms for AY 2021-22 – ITR 5.

 Know about Changes in new ITR Forms for AY 2021-22 – ITR 5.  Compliances
Jul 162021
 

Most of the new ITR forms changes are consequential to the amendments made by the Finance Act, 2020 to the Income-tax Act. We have scrutinized the new ITR Forms and have identified the key changes in new ITR forms viz-a-viz last year’s ITR Forms. These changes have been explained below.

  1. No option to carry forward TDS deducted under Section 194N [ITRs 2 to 7]

In case of tax deducted under Section 194N, credit for tax deducted shall be allowed in the assessment year relevant to the previous year in which such tax has been deducted. The corresponding amendment has been made in ITR-2 to ITR-7 to restrict the carry forward of TDS deducted under Section 194N.

  1. Consequential changes due to change in taxability of dividend Income [ITRs 1 to 7]

The Finance Act, 2020 reverts to taxation of dividends in the hands of the recipient shareholders instead of payment of dividend distribution tax (DDT) on the declaration, distribution, or payment of dividends by the domestic company. The new ITR forms notified for the Assessment Year 2021-22 have been amended to incorporate these changes.

2.1. Schedule OS (other sources)

Dividend income earned by a person is taxable as ‘income from other sources’ under section 56(2)(i). Up to the Assessment Year 2020-21, Schedule OS required disclosure of that dividend income only which is not exempt in hands of the taxpayer. In the new ITR forms, Schedule OS has been amended to include disclosure of all dividend income earned by the taxpayers.

(a) Deduction of expenses from dividend income
A new row has been inserted in Schedule OS to allow deduction of interest expenses. However, the deduction is available only if the dividend income is offered to tax in Schedule OS.
(b) Dividend income chargeable to tax at a special rate
The Finance Act, 2020, has abolished the DDT. Consequently, provisions of section 115BBDA are not applicable on dividends distributed, declared, or paid by companies on or after 01-04-2020. Thus, reference of section 115BBDA has been removed from Schedule OS in the new ITR forms
(c) Dividend Income of non-resident unitholders

A new row has been inserted under the column ‘any other income chargeable at special rate’ of Schedule OS to seek details of dividend income taxable in the hands of the unitholders of the Business trust.

2.2. Schedule SI (Special Income)

Schedule SI contains a list of incomes that are chargeable to tax at a special rate (long-term capital gains, winning from lotteries, games, etc.). Since Section 115BBDA has become redundant, corresponding changes have been made to Schedule SI.

2.3. Schedule EI (Exempt Income)

Now the entire dividend income is taxable in the hands of the shareholders, hence the reference of ‘Dividend income from the domestic company (amount not exceeding Rs. 10 lakh)’ has been removed from Schedule EI.

2.4. Schedule PTI (Pass-through Income)

‘Schedule PTI’ seeks details of Pass-through Income from business trust or investment fund as per Section 115UA and Section 115UB.

2.5. Schedule DDT removed from ITR-6

Schedule DDT seeks details of distributed profits of domestic companies and payment of DDT. Since the payment of DDT has been abolished on any distributed profit on or after April 1, 2020, Schedule DDT has been removed from the new ITR-6 Form.

  1. Effect of marginal relief to be highlighted in the ITR [ITR 2, 3, 5]

Marginal relief is allowed when taxable income is beyond the threshold limit after which surcharge is payable, but the net income over the threshold limit is less than the amount of surcharge.

Computation of marginal relief

Particulars Amount
♦ Tax on actual total income [A] xxx
♦ Tax on deemed total income [B] xxx
The difference in tax [C] xxx
♦ Actual total income [D] xxx
♦ Deemed total income [E] xxx
The difference in income [F] xxx
Marginal Relief (if C is more than F) xxx

Now, the ITR Forms for the Assessment year 2021-22 have been amended to specifically require the assessee to show the effect of marginal relief on the tax payable by disclosing “surcharge computed before marginal relief” and “surcharge computed after marginal relief” separately.

  1. Adjustment of unabsorbed depreciation if the assessee has opted for Section 115BAC or 115BAD [ITR 3 & 5]

The ITR forms notified for Assessment Year 2021-2022 has amended Schedule DPM (Depreciation on Plant and Machinery) to make such one-time adjustment to the WDV of the respective block of the asset. Further, Schedule UD [Unabsorbed Depreciation and allowance under Section 35(4)] has also been amended to make the corresponding adjustment to the unabsorbed depreciation for the amount of depreciation already adjusted with the WDV of the respective block of the asset.

  1. Adjustment of carried forward losses if the assessee has opted for Section 115BAC or 115BAD [ITR 3 & 5]

Assessee opting for an alternative tax regime of Section 115BAC or Section 115BAD has to forego various exemptions and deductions. Further, carried forward losses attributable to such exemptions and deductions are not allowed to be set off. These losses are deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

ITR Forms notified for Assessment Year 2021-2022 have been amended to require the adjustment of such losses which are not allowed to be carried forward and set off.

  1. Deletion of Schedule DI [ITR 1 to 6]

Since the benefit of such extension was available for the Assessment Year 2020-2021 only, ITR forms for the Assessment Year 2021-2022 have been removed from the Schedule DI. Another consequential amendment has also been made to remove reference to Schedule DI.

  1. Exercise of option prescribed under section 115BAC [ITR 1 to 4]

The Finance Act, 2020, has inserted a new Section 115BAC to provide a special tax regime (also known as ‘alternate tax regime’) for Individuals or HUF wherein they have an option to pay taxes at concessional rates subject to fulfillment of certain conditions.

In Part-A (General Information) the assessee is required to choose whether he is opting for the alternative tax regime of Sections 115BAC or not.

Further, an assessee having income from business or profession is required to exercise such option on or before the due date for furnishing the returns of income by filing Form 10-IE. Thus, such assessee is required to mention the date of filing of Form 10-IE and Acknowledgement the number in case he has chosen the alternate regime of Section 115BAC.

  1. Clause-wise disclosure in respect of interest taxable under Section 115A read with Section 194LC [ITR 2, 3, 5, 6 & 7]

The Finance Act, 2020 has amended Section 194LC to provide for deduction of tax shall be done at 5% except in case the interest is payable in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee-denominated bond, TDS is required to be deducted at the rate of 4%, subject to fulfillment of certain conditions.

Since two different rates have been prescribed under Section 194LC (4% and 5%), ITR forms have been amended to require separate disclosure in respect of the income taxable at the rate of 4% and 5%.

  1. Increase in safe harbor limit prescribed under Section 50C [ITR 2, 3, 5 & 6]

Up to Assessment Year 2020-2021, this provision was not applicable if the value adopted for the payment of stamp duty was up to 105% of the consideration received. The Finance Act, 2020, has increased such a tolerable limit from 105% to 110% from Assessment Year 2021-2022. Consequential changes have been made to ITR-2, 3, 5, and 6.

  1. Exercise of option prescribed under section 115BAD [ITR 5]

. The Co-operative society has to exercise this option on or before the due date for furnishing the returns of income by filing Form 10-IF.

In Part-A (General Information) a cooperative society is required to choose if it is opting for the alternative tax regime of Sections 115BAD. Further, it is required to mention the date of filing of Form 10-IF and Acknowledgement number if it is exercising the option of Section 115BAD.

  1. Date of cash donation in case of deduction under Section 80GGA [ITR 2, 5 & 6]

Section 80GGA provides a deduction for the donations made by an assessee who is not earning income under the head ‘profits and gains of business or profession’. No deduction is allowed for the cash donation over Rs. 2,000.

ITR-2, 5, and 6 contain a Schedule 80GGA which requires separate reporting of the donation made in cash and donation made through other modes. The ITR forms notified for Assessment year 2021-2022 require additional disclosures of the date on which such cash donation has been made.

  1. No separate reporting of income from life insurance business [ITR 5 & 6]

The ITR forms notified for Assessment Year 2021-2022 have removed separate reporting requirements in respect of income from the life insurance business in Schedule BP.

  1. Nature of security to be furnished in Schedule 112A and Schedule 115AD [ITR 2, 3, 5, 6]

The ITR forms notified for the Assessment year 2021-2022 have inserted one new column in both the schedules requiring the assessee to provide the nature of the securities transferred (shares or units).

  1. Computation of cost of acquisition for Section 112A and 115AD [ITR 2, 3, 5, 6]

The relevant schedules in the ITR forms notified for Assessment year 2021-2022 have been modified to enable the assessee to put information regarding the sale price, FMV, and the cost of acquisition of the security and ascertain the gains appropriately.

  1. Ceiling to claim deduction under section 54EC specifically provided [ITR 5]

All the ITR Forms (except ITR 5) contained the ceiling for deduction under this section. The ITR-5 for the Assessment year 2021-22 also provides that deduction under section 54EC shall not exceed Rs. 50 lakhs.

  1. Nature of business code to be mentioned if assessees are claiming deduction under Section 80P [ITR 5]

Schedule 80P of the ITR requires the assessee to furnish various information relating to income and the amount of deduction. ITR form for the assessment year 2021-22 has inserted one more column in the Schedule 80P. This column requires the assessee to provide the nature of the business code in front of various types of income of such person.

  1. Additional question for ensuring the compliance under Section 92E [ITR 3, 5, 6]

Additional questions have been inserted in Part-A (General Information) to ensure that the assessee has complied with the requirements to obtain a Transfer Pricing report under Section 92E.

  1. Reference of distribution of accumulated loss by Investment fund has been removed [ITR 5 & 6]

Adjustment of such accumulated losses was allowed to be made in the Assessment Year 2020-2021 only, the ITR forms for Assessment Year 2021-2022 have removed the reference for adjustment of such losses.

  1. No need to bifurcate carried forward losses into Pass-through losses and Normal losses [ITR 2, 3, 5 & 6]

Losses carried forward by an assessee have the same treatment under the Income-tax Act even if they are in nature of pass-through losses. Old ITR forms bifurcated the losses under the head House property and Capital gains in Schedule CFL between pass-through losses and Normal losses. However, ITR utilities issued by the department do not require any such bifurcation. To bring the ITR forms in line with the ITR utilities issued by the department, ITR forms notified for the assessment year 2021-2022 have removed such bifurcation, and now a consolidated figure of such losses is to be disclosed.

Know about Changes in new ITR Forms for AY 2021-22 – ITR 2.

 Know about Changes in new ITR Forms for AY 2021-22 – ITR 2.  Compliances
Jul 142021
 

Most of the new ITR forms changes are consequential to the amendments made by the Finance Act, 2020 to the Income-tax Act. We have scrutinized the new ITR Forms and have identified the key changes in the new ITR 2 form viz-a-viz last year’s ITR Form. These changes have been explained below.

  1. Reporting of the amount deferred in respect of ESOPs [ITR 2 & 3]

If an employee has received ESOPs from an eligible start-up referred to in Section 80-IAC in respect of which the tax has been deferred, the Part B of Schedule TTI (Computation of tax liability on total income) seeks the disclosure of the tax amount which has been deferred in this respect.

  1. No option to carry forward TDS deducted under Section 194N [ITRs 2 to 7]

In case of tax deducted under Section 194N, credit for tax deducted shall be allowed in the assessment year relevant to the previous year in which such tax has been deducted. The corresponding amendment has been made in ITR-2 to ITR-7 to restrict the carry forward of TDS deducted under Section 194N.

  1. Consequential changes due to change in taxability of dividend Income [ITRs 1 to 7]

The Finance Act, 2020 reverts to taxation of dividends in the hands of the recipient shareholders instead of payment of dividend distribution tax (DDT) on the declaration, distribution, or payment of dividends by the domestic company. The new ITR forms notified for the Assessment Year 2021-22 have been amended to incorporate these changes.

3.1. Schedule OS (other sources)

Dividend income earned by a person is taxable as ‘income from other sources’ under section 56(2)(i). Up to the Assessment Year 2020-21, Schedule OS required disclosure of that dividend income only which is not exempt in hands of the taxpayer. In the new ITR forms, Schedule OS has been amended to include disclosure of all dividend income earned by the taxpayers.

(a) Deduction of expenses from dividend income
A new row has been inserted in Schedule OS to allow deduction of interest expenses. However, the deduction is available only if the dividend income is offered to tax in Schedule OS.
(b) Dividend income chargeable to tax at a special rate
The Finance Act, 2020, has abolished the DDT. Consequently, provisions of section 115BBDA are not applicable on dividends distributed, declared, or paid by companies on or after 01-04-2020. Thus, reference of section 115BBDA has been removed from Schedule OS in the new ITR forms
(c) Dividend Income of non-resident unitholders

A new row has been inserted under the column ‘any other income chargeable at special rate’ of Schedule OS to seek details of dividend income taxable in the hands of the unitholders of the Business trust.

3.2. Schedule SI (Special Income)

Schedule SI contains a list of incomes that are chargeable to tax at a special rate (long-term capital gains, winning from lotteries, games, etc.). Since Section 115BBDA has become redundant, corresponding changes have been made to Schedule SI.

3.3. Schedule EI (Exempt Income)

Now the entire dividend income is taxable in the hands of the shareholders, hence the reference of ‘Dividend income from domestic company (amount not exceeding Rs. 10 lakh)’ has been removed from Schedule EI.

3.4. Schedule PTI (Pass-through Income)

‘Schedule PTI’ seeks details of Pass-through Income from business trust or investment fund as per Section 115UA and Section 115UB.

  1. Effect of marginal relief to be highlighted in the ITR [ITR 2, 3, 5]

Marginal relief is allowed when taxable income is beyond the threshold limit after which surcharge is payable, but the net income over the threshold limit is less than the amount of surcharge.

Computation of marginal relief

Particulars Amount
♦ Tax on actual total income [A] Xxx
♦ Tax on deemed total income [B] Xxx
The difference in tax [C] Xxx
♦ Actual total income [D] Xxx
♦ Deemed total income [E] Xxx
The difference in income [F] Xxx
Marginal Relief (if C is more than F) xxx

Now, the ITR Forms for the Assessment year 2021-22 have been amended to specifically require the assessee to show the effect of marginal relief on the tax payable by disclosing “surcharge computed before marginal relief” and “surcharge computed after marginal relief” separately.

  1. Deletion of Schedule DI [ITR 1 to 6]

Since the benefit of such extension was available for the Assessment Year 2020-2021 only, ITR forms for the Assessment Year 2021-2022 has removed the Schedule DI. Other consequential amendment has also been made to remove reference of Schedule DI.

  1. Exercise of option prescribed under section 115BAC [ITR 1 to 4]

The Finance Act, 2020, has inserted a new Section 115BAC to provide a special tax regime (also known as ‘alternate tax regime’) for Individuals or HUF wherein they have an option to pay taxes at concessional rates subject to fulfillment of certain conditions.

In Part-A (General Information) the assessee is required to choose whether he is opting for the alternative tax regime of Sections 115BAC or not.

Further, an assessee having income from business or profession, is required to exercise such option on or before the due date for furnishing the returns of income by filing Form 10-IE. Thus, such assessee is required to mention the date of filing of Form 10-IE and Acknowledgement the number in case he has chosen the alternate regime of Section 115BAC.

  1. Clause-wise disclosure in respect of interest taxable under Section 115A read with Section 194LC [ITR 2, 3, 5, 6 & 7]

The Finance Act, 2020 has amended Section 194LC to provide for deduction of tax shall be done at 5% except in case the interest is payable in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee-denominated bond, TDS is required to be deducted at the rate of 4%, subject to fulfillment of certain conditions.

Since two different rates have been prescribed under Section 194LC (4% and 5%), ITR forms have been amended to require separate disclosure in respect of the income taxable at the rate of 4% and 5%.

  1. Increase in safe harbour limit prescribed under Section 50C [ITR 2, 3, 5 & 6]

Upto Assessment Year 2020-2021, this provision was not applicable if the value adopted for the payment of stamp duty was upto 105% of the consideration received. The Finance Act, 2020, has increased such a tolerable limit from 105% to 110% from Assessment Year 2021-2022. Consequential changes have been made to ITR-2, 3, 5, and 6.

  1. Date of cash donation in case of deduction under Section 80GGA [ITR 2, 5 & 6]

Section 80GGA provides a deduction for the donations made by an assessee who is not earning income under the head ‘profits and gains of business or profession’. No deduction is allowed for the cash donation in excess of Rs. 2,000.

ITR-2, 5 and 6 contain a Schedule 80GGA which requires separate reporting of the donation made in cash and donation made through other modes. The ITR forms notified for Assessment year 2021-2022 requires additional disclosures of the date on which such cash donation has been made.

  1. Nature of security to be furnished in Schedule 112A and Schedule 115AD [ITR 2, 3, 5, 6]

The ITR forms notified for the Assessment year 2021-2022 have inserted one new column in both the schedules requiring the assessee to provide the nature of the securities transferred (shares or units).

  1. Computation of cost of acquisition for Section 112A and 115AD [ITR 2, 3, 5, 6]

The relevant schedules in the ITR forms notified for Assessment year 2021-2022 have been modified to enable the assessee to put information regarding the sale price, FMV, and the cost of acquisition of the security and ascertain the gains appropriately.

  1. No need to bifurcate carried forward losses into Pass-through losses and Normal losses [ITR 2, 3, 5 & 6]

Losses carried forward by an assessee have the same treatment under the Income-tax Act even if they are in nature of pass-through losses. Old ITR forms bifurcated the losses under the head House property and Capital gains in Schedule CFL between pass-through losses and Normal losses. However, ITR utilities issued by the department does not require any such bifurcation. To bring the ITR forms in line with the ITR utilities issued by department, ITR forms notified for the assessment year 2021-2022 have removed such bifurcation, and now a consolidated figure of such losses is to be disclosed.

Know about Changes in new ITR Forms for AY 2021-22 – ITR 3.

 Know about Changes in new ITR Forms for AY 2021-22 – ITR 3.  Compliances
Jul 122021
 

Most of the new ITR forms changes are consequential to the amendments made by the Finance Act, 2020 to the Income-tax Act. We have scrutinized the new ITR Forms and have identified the key changes in new ITR forms viz-a-viz last year’s ITR Forms. These changes have been explained below.

  1. Reporting of the amount deferred in respect of ESOPs [ITR 2 & 3]

If an employee has received ESOPs from an eligible start-up referred to in Section 80-IAC in respect of which the tax has been deferred, the Part B of Schedule TTI (Computation of tax liability on total income) seeks the disclosure of the tax amount which has been deferred in this respect.

  1. Consequential changes due to change in taxability of dividend Income [ITRs 1 to 7]

The Finance Act, 2020 reverts to taxation of dividends in the hands of the recipient shareholders instead of payment of dividend distribution tax (DDT) on the declaration, distribution, or payment of dividends by the domestic company. The new ITR forms notified for the Assessment Year 2021-22 have been amended to incorporate these changes.

2.1. Schedule OS (other sources)

Dividend income earned by a person is taxable as ‘income from other sources’ under section 56(2)(i). Up to the Assessment Year 2020-21, Schedule OS required disclosure of that dividend income only which is not exempt in hands of the taxpayer. In the new ITR forms, Schedule OS has been amended to include disclosure of all dividend income earned by the taxpayers.

(a) Deduction of expenses from dividend income
A new row has been inserted in Schedule OS to allow deduction of interest expenses. However, the deduction is available only if the dividend income is offered to tax in Schedule OS.
(b) Dividend income chargeable to tax at a special rate
The Finance Act, 2020, has abolished the DDT. Consequently, provisions of section 115BBDA are not applicable on dividends distributed, declared, or paid by companies on or after 01-04-2020. Thus, reference of section 115BBDA has been removed from Schedule OS in the new ITR forms
(c) Dividend Income of non-resident unitholders

A new row has been inserted under the column ‘any other income chargeable at special rate’ of Schedule OS to seek details of dividend income taxable in the hands of the unitholders of the Business trust.

2.2. Schedule SI (Special Income)

Schedule SI contains a list of incomes that are chargeable to tax at a special rate (long-term capital gains, winning from lotteries, games, etc.). Since Section 115BBDA has become redundant, corresponding changes have been made to Schedule SI.

2.3. Schedule EI (Exempt Income)

Now the entire dividend income is taxable in the hands of the shareholders, hence the reference of ‘Dividend income from the domestic company (amount not exceeding Rs. 10 lakh)’ has been removed from Schedule EI.

2.4. Schedule PTI (Pass-through Income)

‘Schedule PTI’ seeks details of Pass-through Income from business trust or investment fund as per Section 115UA and Section 115UB.

  1. Effect of marginal relief to be highlighted in the ITR [ITR 2, 3, 5]

Marginal relief is allowed when taxable income is beyond the threshold limit after which surcharge is payable, but the net income over the threshold limit is less than the amount of surcharge.

Computation of marginal relief

Particulars Amount
♦ Tax on actual total income [A] xxx
♦ Tax on deemed total income [B] xxx
The difference in tax [C] xxx
♦ Actual total income [D] xxx
♦ Deemed total income [E] xxx
The difference in income [F] xxx
Marginal Relief (if C is more than F) xxx

Now, the ITR Forms for the Assessment year 2021-22 have been amended to specifically require the assessee to show the effect of marginal relief on the tax payable by disclosing “surcharge computed before marginal relief” and “surcharge computed after marginal relief” separately.

  1. Increase in threshold limit for tax audit [ITR 3 & 6]

Previous year ITR forms required the assessee to furnish whether during the year total sales/ turnover/ gross receipts of business exceeds Rs. 1 crore but does not exceed Rs. 5 crores. Necessary amendments have been brought in the ITR forms as notified for the assessment year 2021-22 to enhance the limit.

  1. Adjustment of unabsorbed depreciation if the assessee has opted for Section 115BAC or 115BAD [ITR 3 & 5]

The ITR forms notified for Assessment Year 2021-2022 has amended Schedule DPM (Depreciation on Plant and Machinery) to make such one-time adjustment to the WDV of the respective block of the asset. Further, Schedule UD [Unabsorbed Depreciation and allowance under Section 35(4)] has also been amended to make the corresponding adjustment to the unabsorbed depreciation for the amount of depreciation already adjusted with the WDV of the respective block of the asset.

  1. Adjustment of carried forward losses if the assessee has opted for Section 115BAC or 115BAD [ITR 3 & 5]

Assessee opting for an alternative tax regime of Section 115BAC or Section 115BAD has to forego various exemptions and deductions. Further, carried forward losses attributable to such exemptions and deductions are not allowed to be set off. These losses are deemed to have been given full effect to and no further deduction for such loss shall be allowed for any subsequent year.

ITR Forms notified for Assessment Year 2021-2022 have been amended to require the adjustment of such losses which are not allowed to be carried forward and set off.

  1. Exercise of option prescribed under section 115BAC [ITR 1 to 4]

The Finance Act, 2020, has inserted a new Section 115BAC to provide a special tax regime (also known as ‘alternate tax regime’) for Individuals or HUF wherein they have an option to pay taxes at concessional rates subject to fulfillment of certain conditions.

In Part-A (General Information) the assessee is required to choose whether he is opting for the alternative tax regime of Sections 115BAC or not.

Further, an assessee having income from business or profession is required to exercise such option on or before the due date for furnishing the returns of income by filing Form 10-IE. Thus, such assessee is required to mention the date of filing of Form 10-IE and Acknowledgement the number in case he has chosen the alternate regime of Section 115BAC.

  1. Clause-wise disclosure in respect of interest taxable under Section 115A read with Section 194LC [ITR 2, 3, 5, 6 & 7]

The Finance Act, 2020 has amended Section 194LC to provide for deduction of tax shall be done at 5% except in case the interest is payable in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee-denominated bond, TDS is required to be deducted at the rate of 4%, subject to fulfillment of certain conditions.

Since two different rates have been prescribed under Section 194LC (4% and 5%), ITR forms have been amended to require separate disclosure in respect of the income taxable at the rate of 4% and 5%.

  1. Increase in safe harbor limit prescribed under Section 50C [ITR 2, 3, 5 & 6]

Up to Assessment Year 2020-2021, this provision was not applicable if the value adopted for the payment of stamp duty was up to 105% of the consideration received. The Finance Act, 2020, has increased such a tolerable limit from 105% to 110% from Assessment Year 2021-2022. Consequential changes have been made to ITR-2, 3, 5, and 6.

  1. Reference of Form 16D has been inserted in Schedule of Tax payments [ITR 3 to 7]

ITR forms require details of tax deducted at source as per the certificate issued by the Deductor. The ITR Forms for Assessment Year 2021-2022 have included a reference to Form 16D.

  1. Undertakings not eligible for deductions removed from Schedule Section 80-IB [ITR 3, 5, 6]

Schedule 80-IB has been amended to remove appropriate rows allowing deduction under the above obsolete sub-sections.

  1. Nature of security to be furnished in Schedule 112A and Schedule 115AD [ITR 2, 3, 5, 6]

The ITR forms notified for the Assessment year 2021-2022 have inserted one new column in both the schedules requiring the assessee to provide the nature of the securities transferred (shares or units).

  1. Computation of cost of acquisition for Section 112A and 115AD [ITR 2, 3, 5, 6]

The relevant schedules in the ITR forms notified for Assessment year 2021-2022 have been modified to enable the assessee to put information regarding the sale price, FMV, and the cost of acquisition of the security and ascertain the gains appropriately.

  1. Schedule 5A requires the assessee to furnish the tax audit requirement of the spouse under sections 44AB or 92E [ITR 3]

Finance Act, 2021 has extended the due date to file a return of income in case of a person, who is a partner of a firm who is required to obtain a Transfer Pricing report under Section 92E, to 30th November of the assessment year.

Finance Act, 2021, has amended the due date for filing of return of income in case of spouse of a person, being a partner in a firm whose accounts are required to be audited or who is required to furnish a Transfer pricing report under Section 92E, if such spouse is governed by the provisions of Section 5A.

Schedule 5A requires the assessee to furnish information regarding apportionment of income between spouses governed by the Portuguese Civil Code. Various details regarding the spouse in such cases are captured in the ITR such as the Name and PAN of the spouse, income under various heads of income.

In order to ensure that such spouse has furnished return of income by the applicable due date, the consequential changes have been made in ITR -3 notified for the Assessment year 2021-22 to seek the due dates applicable in case of a spouse.

  1. Additional question for ensuring the compliance under Section 92E [ITR 3, 5, 6]

Additional questions have been inserted in Part-A (General Information) to ensure that the assessee has complied with the requirements to obtain a Transfer Pricing report under Section 92E.

  1. STCG other than those covered under section 111A can’t be shown in Schedule PTI [ITR 3]

Short-term capital gains other than those covered under section 111A cannot be disclosed in Schedule PTI.

  1. No need to bifurcate carried forward losses into Pass-through losses and Normal losses [ITR 2, 3, 5 & 6]

Losses carried forward by an assessee have the same treatment under the Income-tax Act even if they are in nature of pass-through losses. Old ITR forms bifurcated the losses under the head House property and Capital gains in Schedule CFL between pass-through losses and Normal losses. However, ITR utilities issued by the department do not require any such bifurcation. To bring the ITR forms in line with the ITR utilities issued by the department, ITR forms notified for the assessment year 2021-2022 have removed such bifurcation, and now a consolidated figure of such losses is to be disclosed.

Reporting in ITR of deferment of tax on ESOPs.

 Reporting in ITR of deferment of tax on ESOPs.  Compliances
Jul 102021
 

ITR – 1 and ITR – 4 cannot be filed in case of deferment of tax on ESOPs

The Finance Act, 2020, has allowed deferring the payment or deduction of tax on ESOPs allotted by an eligible start-up referred under Section 80-IAC. The tax is required to be paid or deducted in respect of such ESOPs within 14 days from the earliest of the following period:

(a) After expiry of 48 months from the end of assessment year relevant to the financial year in which ESOPs are allotted;
(b) From the date the assessee ceases to be an employee of the organization; or
(c) From the date of sale of shares allotted under ESOP.

Consequently, Rule 12 has been amended to provide that an assessee in whose case payment or deduction of tax in respect of such ESOPs has been deferred shall not be eligible to furnish his return of income in ITR-1 and ITR-4. Corresponding changes have been made to ITR-1 and ITR-4.

Reporting of the amount deferred in respect of ESOPs in ITR 2 & ITR 3

If an employee has received ESOPs from an eligible start-up referred to in Section 80-IAC in respect of which the tax has been deferred, the Part B of Schedule TTI (Computation of tax liability on total income) seeks the disclosure of the tax amount which has been deferred in this respect.

The ITR Form does not provide any guidance on the computation of the tax to be deferred. In such a situation, the tax to be deferred can be computed in accordance with the guidance give below.

  1. The applicable rate of tax

As the perquisite arising from ESOPs shall be taxable in the year in which shares are allotted or transferred by the employer to employees, the tax shall be calculated on the basis of rates applicable in the year in which shares are allotted or transferred.

2 How to calculate the amount of tax to be deferred?

An employee is required to disclose the value of perquisite from ESOPs in his return of income (Schedule TTI) of the year in which shares are allotted. However, due to the deferment of payment of tax, the employee shall not be required to pay tax on perquisite arising from ESOPs in such year. The tax to be payable on the salary income, excluding the perquisite value of ESOPs, should be computed as per the following formula.

Tax payable on salary income excluding ESOPs perquisite = Tax on total income including ESOPs perquisites X Total income excluding ESOPs perquisites
Total income including ESOPs perquisites

Case 2 –  Mr. A, working in a start-up company, has been allotted 100,000 shares at the rate of Rs. 10 per share under the ESOP scheme in the Financial Year 2020-21. The fair market value of shares at the time of exercising of option by Mr. A is Rs. 100. The perquisite value of ESOPs taxable in the hands of Mr. A shall be Rs. 90 Lakhs [100,000 shares* (Rs. 100 – Rs. 10)].

The annual salary of Mr. A (excluding perquisite value of ESOPs) in that year is Rs. 40 Lakhs. He continues with the company even after the expiry of 48 months from the end of the assessment year in which shares are allotted and he does not sell the shares even after the expiry of said period. What shall be the mechanism for deferment of TDS and tax on the perquisite value of ESOPs in such a case?

(a) Assessment Year 2021-22

Mr. A would be required to disclose the perquisite value of ESOPs, i.e., Rs. 90 lakh in his return of income. The tax to be payable on the salary income, excluding the perquisite value of ESOPs, shall be computed in the following manner:

Particulars Amount (in Rs.)
Total Income before including perquisite value of ESOPs (A) 40,00,000
Add: Perquisite Value of ESOPs (B) 90,00,000
Total Income after including perquisite value of ESOPs (C) 1,30,00,000
Tax on Rs. 1.30 crores as per slab rates applicable for Assessment Year 2021-22 as per old taxation regime (D) 37,12,500
Add: Surcharge [E = D * 15%] 5,56,875
Add: Education Cess [F = (D + E) * 4%] 1,70,775
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs [G = D + E + F] 44,40,150
Tax liability attributable to salary income (excluding the prerequisite of ESOPs) [G * A / C] 13,66,200

(b) Assessment Year 2026-27

As Mr. A continues with the company after the expiry of 48 months from the end of the Assessment Year in which shares are allotted and he does not sell the shares even after expiry of said period, the liability to deduct tax or make payment of tax on perquisite value of ESOP will arise in the Assessment Year 2026-27, i.e., after the expiry of 48 months from the end of the Assessment year (2021-22) in which shares are allotted. The TDS shall be deducted within 14 days from the end of the assessment year 2025-26. The tax liability for the Assessment Year 2026-27 shall be computed as under:

Particulars Amount (in Rs.)
Total tax liability for Assessment Year 2021-22 after considering perquisite value of ESOPs 44,40,150
Less: Tax already paid at the time of filing of return for the Assessment Year 2021-22 13,66,200
Differential amount to be deducted or paid by the employer or employee in the Assessment Year 2026-27 30,73,950

 

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