TDS on Perquisites: One-Time Settlement of Bank Loans would not attract Tax, CBDT clarifies [Read Circular]

The Central Board of Direct Taxes (CBDT) has clarified that one-time settlement of bank loans would not attract tax under section 194R of the Income Tax Act, 1961.

The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10% of the value or aggregate of the value of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business or from exercising a profession, by such resident.

With regard to treating the waiver or settlement of loan by the bank as a perquisite, the circular clarified that the same 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 an extra cost on the such bank, as this would require payment of tax by the deductor in addition to him taking a haircut already. Hence, to remove the 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,” the circular said.

The circular stated that there may be expenses during such dealer/business conference which need to be classified as benefit/perquisite and tax is required to be deducted under section 194R of the Act. However, there may be practical difficulties in identifying such benefit/perquisite to the actual recipient due to the fact that it is a group activity and reasonable allocation is not possible. Noncompliance of the provision of section 194R of the Act, in such a case, would not only result in disallowance under clause (ia) of section 40 of the Act but may also result in treating the benefit/perquisite provider as assessee in default under section 201 of the Act with all other consequences. “In order to remove these practical difficulties, it is clarified that if benefit/perquisite is provided in a group activity in a manner that it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his option not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income. If he decides to opt so, he will not be required to deduct tax under section 194R on such benefit/perquisite and therefore he will not be treated as assessee in default under section 20 I of the Act. Thus, in such a case he must add back the expenditure, representing such benefit/perquisite, to calculate his total income if such expenditure is debited in the account,” the Board said.