Law on s. 192 TDS obligation on medical reimbursement & LTC explained.

ACIT vs. Infosys BPO (ITAT Bangalore)

 

The assessee recruited employees under a contract of employment which provided the salary as a ‘cost to company’ or ‘CTC’. Having determined the CTC, the employee was permitted to choose what would be the various components of his salary and for this purpose a basket of allowances was made available for the employee to choose from. The maximum allowance for each such allowance was fixed by the assessee. The said allowances included a component towards medical expenditure & leave travel concession (LTC). If the employee submitted proof of having incurred the expenditure towards medical treatment, he was allowed exemption to the extent provided in proviso (iv) to s. 17(2) of the Act. Likewise, if the employee submitted proof regarding leave travel, he was allowed exemption u/s 10(5) read with Rule 2B. The AO held that as Proviso (iv) to s. 17(2) and s.10(5) used the expression “actually incurred”, the exemption towards medical reimbursement and LTC could be conferred only for amounts paid as reimbursement after they were incurred by the employee and not before. She held that as the assessee was paying medical reimbursement & LTC as a component of salary every month, without the employee having incurred expenditure, the same had to be considered as salary disbursement for purposes of TDS u/s 192. The assessee was accordingly treated as being in default. On appeal by the assessee, the CIT(A) reversed the AO. On appeal by the department to the Tribunal, HELD dismissing the appeal:

Though TDS has to be effected at the time of payment of salary, s. 192(3) permits the employer to increase or reduce the amount of TDS for any excess or deficiency. Even assuming that the case of the AO that at the time of payment the assessee ought to have deducted tax at source is sustainable, the assessee, on a review of the taxes deducted during the earlier months of the previous year, is entitled to give effect to the deductions permissible under proviso (iv) to s.17(2) or exemption u/s10(5) of the Act in the later months of the previous year. What has to be seen is the taxes to be deducted on income under the head ‘salaries’ as on the last date of the previous year. The case of the AO that LTC and Medical reimbursement should be paid at the time the expenditure is incurred or after the expenditure is incurred by way of reimbursement and not at an earlier point of time and that if it is so paid, then, even though the payment would not form part of taxable salary of an employee, the employer has to deduct tax at source treating it as part of salary, is contrary to s.192(3) and cannot be sustained. The reliance placed by the AO on the expression “actually incurred” in s.10(5) & Proviso (iv) to s.17(2) cannot be sustained. In any event, the interpretation of the word “actually paid” is not relevant while ascertaining the quantum of tax that has to be deducted at source u/s192. As far as the assessee is concerned, his obligation is only to make an ”estimate” of the income under the head “salaries” and such estimate has to be a bona fide estimate. The primary liability of the payee to pay tax remains. In a situation of honest difference of opinion, it is not the deductor that is to be proceeded against but the payees of the sums. On facts, as the assessee had granted exemption towards medical expenditure and leave travel after verifying the details and evidence furnished by the employees, it could not be treated as an assessee-in-default.

Rupee rebounds as RBI sells dollars to oil companies.

 The Indian rupee has rebounded from the record low it hit yesterday after the Reserve Bank of India said it would sell dollars to the country's major oil companies. With oil India's biggest import item, the action is aimed at removing $400-500M worth of demand a day for the dollar from the spot market and reducing downward pressure on the rupee. The USD-IRN was -1.9% at 67.465 at the time of writing, while shares were +2.25% and 10-year bond yields -16 bps at 8.805%

Equities rebound on possible delay to action against Syria.

 U.S. stock futures and European shares were higher at the time of writing, while most indices in Asia rose, following the emergence of divisions in the U.S. and U.K. that could delay military intervention in Syria. Meanwhile, gold and oil, which rose because of the tension, were lower.

The repercussions of excess debt are glaring. Take the example of West. Most countries are facing dire consequences of allowing excesses in their economies. In Asia, the situation of Japan is not good either. In fact, the finance minister of Japan has requested to set aside approximately US$257 bn towards funding interest payments for FY15. This is almost equivalent to GDP of Portugal which roughly stood at US$245 bn in 2012, as reported by IMF!

In the past, incessant spending to revive the sagging economy resulted in higher debt. Increasing welfare cost of the ageing population also added to the debt pile. In fact, right now, Japan's debt is almost two times the size of its economy. Increasing debt has raised concerns over how the country will finance its interest payments. If it increases tax rates then consumer spending will slowdown. This will further hurt economic growth. And if it plans to service the payments by printing additional money, yen would come under severe pressure. It seems like after the rupee debacle, another Asian currency is on the verge of a collapse.

S. 32: A finance lease designed as a sale-and-lease back has to be treated as a sham transaction

Hathway Investments Pvt. Ltd vs. ACIT (ITAT Mumbai)

 

The assessee, an investment company, bought electric meters from the Gujarat State Electricity Board (GSEB) which were leased back to GSEB simultaneously. The assessee claimed 100% depreciation on the purchase cost of the meters. The AO and CIT(A) rejected the claim on the ground that the circumstances like no physical possession of the meters given etc showed that the transaction of ‘sale and lease-back’ was a “sham” and that it was one merely of giving finance and that the assets were held as a security for the finance given. On appeal by the assessee to the Tribunal HELD:

A distinction between an ‘operating lease’ and a ‘finance lease’ has been made by the Special Bench in IndusInd Bank 135 ITD 165 (Mum) (SB) on the basis of which it can be said that a ‘finance lease’ is a ‘sale’ which is given the colour of a ‘lease’ by the parties for their mutual benefit and to avoid tax. In such transactions, it has to be seen whether the sale transaction is a real transaction or a sham transaction with the object of enabling the alleged purchaser to claim himself as the owner of the goods, which are further claimed to be leased back to the original owner of the goods. In a sham transaction of sale and lease back the ownership of the goods is not transferred to the alleged lessor, but is shown to be done, so as to enable the purchaser to claim ownership for the goods for the purpose of tax relief. On facts, the ‘sale and lease back’ transaction is a sham transaction done with the object to facilitate the benefits of depreciation to a person who otherwise is not eligible to claim the same. The intention of the parties was not that of sale or lease but was a loan transaction. The rates of interest/ rental have been fixed taking into consideration that the equipments are eligible for 100% depreciation and it is provided that if the claim of depreciation is changed, the rental in the shape of interest will accordingly change. Such clauses cannot be a part of any lease agreement but finance agreement only because in a normal lease agreement, the lessee is not concerned as to what benefits are available to the owner/ lessor under the Income-tax Act. The contention that as the transaction is with a State Government undertaking, it would be highly improper to impute any collusiveness or colourable nature of the transaction is misconceived. The argument that there is no bar for the assessee for making tax planning so as to reduce its taxes, provided it is within the framework of the law, is also not acceptable as u/s 23 of the Indian Contract Act, even if the consideration or object of an agreement may not be expressly forbidden by law, but if it is of such a nature that, if permitted, it would defeat the provisions of law, the same will not be lawful. Engaging in sham transactions with the object of reducing tax liability cannot be said to be a case of tax avoidance but is one of tax evasion (ICDS 350 ITR 527 (SC), IndusInd Bank 135 ITD 165 (Mum)(SB) & Development Credit Bank referred)

Contrast with ICDS 350 ITR 527 (SC) where it was held that even a “financier” satisfies the “ownership” &“user” test for depreciation and with Development Credit Bank (ITAT Mumbai) (the AM was common) where it was held that IndusInd Bank 135 ITD 165 (Mum)(SB) is no longer good law

Rupee fall continues.

The Indian rupee's collapse shows no sign of abating, with the currency hitting yet another record low of 68.71 to the dollar as the tension in the Middle East adds to the Fed's prospective tapering and domestic economic problems as reasons to sell. However, shares have recovered from earlier losses and were +0.2% at the time of writing. The collapse in the rupee is causing havoc for companies, as it's boosting import costs at the same time that consumer spending is falling.

Prospect of intervention in Syria again weighs on markets.

The increasing likelihood of Western military action against Syria has again rattled markets across the globe, although U.S. stock futures were slightly higher at the time of writing after sharp falls on Wall Street yesterday, while gold and oil continued to climb. Many Asian and European share indices fell, with some emerging-market asset classes continuing to suffer, whether they be equities or currencies.