Due Date for Income tax Compliance (October 2023)

1. Amendments applicable from 1st Oct 2023

A. TCS on specified foreign remittance
In Finance Act 2023, scope of TCS collection on foreign remittances by persons under LRS scheme of RBI w.e.f 01 July 2023 was expanded by removing the threshold of INR 7,00,000 and TCS rate was increased to 20%. However, these 2 changes did not have an impact on the amount remitted for Educational and Medical Purposes.

Relief was given to all the affected persons by Circular 10 of 2023 dated 30 June 2023 by which no TCS on first INR 7,00,000 remittance under LRS and the old rates were applicable till 30September 2023. Accordingly, from 01 October 2023, the new rate of TCS of 20% shall be applied along with the threshold limit of INR 7,00,000 on specified transaction on LRS remittances.

B. Claim TDS in subsequent year for income already offered

In many instances, TDS is deducted in the year in which the income is actually paid to the assessee. However, following accrual method, the assessee may have already disclosed this income in earlier years in their ITR. The assessee cannot claim the credit of TDS in the year in which tax is deducted since income is not offered to tax in that year and 26AS shows TDS in subsequent year.

In order to remove this difficulty, new provisions were added in finance Act 2023 by which where any income has been included in the return for any year and TDS has been deducted in a subsequent financial year, assessee can make application in the prescribed form to the Assessing Officer within 2 years from the end of the financial year in which such tax was deducted at source. Officer shall amend the order of assessment or any intimation allowing credit of such TDS. Vide notification dated 30th August 2023, Form 71 is notified for making said application. Form is required to be filed online.

2. Income Tax valuation rules for shares are amended and new rules notified for CCPS

Section 56(2)(viib) of the Income Tax Act applicable to closely-held companies issuing shares to resident (from FY 23-24 non-resident also) investors at a value exceeding the “fair market value” of those shares. In such cases, the surplus amount of the issue price over the fair value is income of the company issuing the shares.

CBDT, vide Notification No. 81/2023 dated Sep 25, 2023, notifies the amendments in Rule 11UA. Summary of said notification are as follows:

– two additional valuation options are notified respect to investment in VC undertaking and investment from entities notified

– In addition to two existing methods and two new methods; for investment made by non-residents, 5 valuation methods are notified for valuation determined by a merchant banker (i) Comparable Company Multiple Method, (ii) Probability Weighted Expected Return Method, (iii) Option Pricing Method, (iv) Milestone Analysis Method, and (v) Replacement Cost Method.

– Valuation method option is notified for Investment in Compulsorily Convertible Preference Shares (CCPS)

– Where the date of a merchant banker’s valuation report (required for DCF and 5 new methods) is not more than 90 days prior to the date of issue of shares under valuation dispute, then such date at the option of the assessee shall be deemed to be the valuation date.

–  For investment by residents, issue price shall be FMV if issue price doesn’t exceed 10% of valuation  arrived at by NAV or DCF methods.

– For investment by non-residents, issue price shall be FMV if issue price doesn’t exceed 10% of valuation  arrived at by NAV or DCF or five new methods

3. Income Tax due date extension – Charitable Trust

CBDT, vide Notification No. 7/2023 dt. Feb 21, 2023 notifies new Form 10B and 10BB (Audit under Income Tax); The new rules and forms come into effect from Apr 1, 2023.

On consideration of difficulty, CBDT vide Circular No. 16/2023 dt. Sep 18, 2023 extends due date for furnishing audit reports in Form 10B/Form 10BB for FY 2022-23 to Oct 31, 2023 from Sep 30, 2023; Also extends due date of furnishing ITR-7 for AY 2023-24 to Nov 30, 2023 from Oct 31, 2023 for persons to whom Form 10B/10BB applicable.
4. 3301 crores DDT demand on Cognizant India – “LOOK THROUGH” approach on scheme of purchase of own shares
[Chennai ITAT – Cognizant Technology – Solutions India Pvt. Ltd -ITA No.269/Chny/2022]

Cognizant Technology Solutions Corporation, USA did restructuring in FY 2011-12 for its Indian and Mauritius Company. In FY 2016-17, restructuring was done in its Indian entity.   AO and CIT(A) held that consideration paid to its shareholders for purchase of its own shares (54.7%) is reduction of capital out of accumulated profit, taxable as deemed dividend [u/s 2(22)(d)].

ITAT while upholding order gave very important remarks which may give directions to ongoing arrangements/pending litigations:

1) Two essential pre-requisites to be satisfied for applicability of Section 2(22)(d) i.e. (i) there must be a distribution to the shareholders on the reduction of the capital and (ii) it must be to the extent that the company possesses accumulated profits.

2) Though scheme of purchase of own shares is made through offer and acceptance; it can not be argued that there is no ‘distribution’ which is required under Section 2(22)(d) –  follows SC case in Punjab Distilleries.

3) While sanctioning the scheme, the High Court will merely look at the commercial wisdom of the creditors and approve the same if it is just and fair and there are no illegalities. The tax consequences and otherwise would be for the AO to look into the scheme in light of relevant provision of the Income Tax Act.

4)  Non-obstante clause in Section 115O will override all other provisions of the Act where the legislature has deliberately taken a decision to give an overriding effect to all other provisions of the Act.

5. Bombay HC: Quashes TDS proceedings for non deduction of TDS, where recipient not liable to tax u/s 195
[The Commissioner of Income Tax (IT) Vs Red Hat India Pvt. Ltd INCOME TAX APPEAL (IT) NO. 745 OF 2018]

Company made foreign remittances for purchase of subscription to Red Hat Asia Pacific Pte Ltd., Singapore without deducting TDS u/s 195 on the basis that the remittance was not taxable under Article 7 r.w. Article 5 of the India-Singapore DTAA.

Revenue held that the said subscription fees are liable to be taxed as royalty and fees for technical services both under the Act and the India-Singapore DTAA. Accordingly, it was held ‘assessee-in-default’ under Section 201(1) and levied interest. CIT(A) partly allowed Assessee’s appeal and ITAT allowed Assessee’s appeal.

HC stated that in order to treat an ‘assessee-in-default’, (i) there should be failure on the part of person to perform his obligation of making TDS and (ii) non-payment of tax by the payee/recipient directly. HC considered assessee’s argument that there was no liability on the part of the recipient to pay any tax in India, thus, one of the conditions remains unfulfilled. Thus, holds that Assessee cannot be held as assessee in default under Section 201(1) and dismisses Revenue’s appeal.
6. CBDT press release – highlights reasons behind pendency of ITR processing for AY 23 24

CBDT, vide press release dt. Sep 5, 2023, mentioned that CBDT is committed to process the Income Tax Returns in a speedy and efficient manner for AY 2023-24

CBDT informs that 12 lakh verified returns in which further information is sought for which requisite communication has been sent to the taxpayers

CBDT also alerts that Department is unable to issue refunds where taxpayers have not yet validated their bank account in which the refund is to be credited

7.”Income Tax Department’s Feature – Pay Tax later”

The Income Tax Department provides options on the income tax e-filing website, giving you the option to pay your income tax at a later date.  This means you can complete your Income Tax Return (ITR) filing without having to settle pending tax dues upfront.

Once the ITR is filed, then the income tax amount can be paid, albeit with some conditions. Further, “The ‘Pay Later’ option can be used for payment of self-assessment taxes only at the time of ITR filing.

When the ‘pay later’ option is selected, the person may be considered as “assessee in default” and the person might be liable to pay interest @1% as compensatory interest for default in advance tax, if any. An additional 1% interest applies if taxes are paid after 30 days of receiving notice for outstanding tax amount.