Direct Tax Vista Your weekly Direct Tax recap Edn. 13 – 5th July 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

No need to pay 30% tax and 1% TDS on some NFTs and digital assets

There has been a lot of confusion around the implementation of taxation rules for virtual digital assets. The exhaustive definition of virtual digital assets led many to believe that several online transactions, which had nothing to do with crypto or blockchains, may also be taxed as VDAs. This was because a VDA is defined to inter alia mean a code, number or token generated through cryptographic means providing a digital representation of value exchanged with or without consideration. Gift cards, vouchers, coupons, reward points, subscription to websites and such items will not be considered as virtual digital assets (VDAs), and will not fall under the steep 1% tax deducted at source (TDS) levy on digital assets such as cryptocurrencies. Vide Notification No. 74/2022 dated 30th June 2022, The CBDT has notified the Exclusion of such items from definition of virtual digital asset u/s 2(47A).

 

The CBDT has also notified Vide Notification No. 75/2022 dated 30th June 2022, that NFTs whose transfer results in the transfer of ownership of underlying tangible assets which is legally enforceable, would not be considered as VDAs for taxation. Accordingly, NFTs of tangible assets, like land records, would not be considered virtual digital assets for taxation purposes. 

 

CBDT further reinstates Circular 13 of 2022 vide Order u/s 119

Section 119 is one of the most important laws that India can boast about because it empowers CBDT to issue instructions to lower levels of authority. It also empowers CBDT to direct income tax authorities to allow any relief under the Act. CBDT on June 28, 2022 has issued Notification regarding Order under section 119 of the Income-tax Act, 1961 (the Act) in relation to TDS under section 194S of the Act for transactions other than those taking place on or through an Exchange. This Order is further reinstatement of the earlier circular.

 

o     Liability to deduct tax at source when the consideration is other than in-kind - Any person who is responsible for paying to any resident any sum by way of consideration for transfer of VDA is required to deduct tax. However, the TDS shall be on consideration for transfer of VDA less GST.

o     Liability to deduct tax at source when the consideration is in kind or in exchange of VDA - There could be a situation where the consideration is in kind or in exchange of another VDA or partly in kind and cash is not sufficient to meet the TDS liability. In this situation, the person responsible for paying such consideration is required to ensure that tax required to be deducted has been paid in respect of such consideration, before releasing the consideration.

o     Interplay between provision of section 194S and section 194Q - Once tax is deducted under section 194S of the Act, tax would not be required to be deducted under section 194Q of the Act.

 

The CBDT amends Rule 31A and notifies Form 26QF TDS Return for 194S

The CBDT has amended Rule 31A of the Income-tax Rules notifying Form 26QF for filing of TDS statement in respect of tax deducted under section 194S by ‘Exchange’. Vide Circular no. 13 of 2022, dated 22-06-2022 the board has issued guidelines giving clarity on who is required to deduct tax under section 194S when the transfer of VDA is taking place on or through an Exchange. It had cast responsibility on Exchange to deduct TDS and furnish a quarterly statement in Form no. 26QF when there is a written agreement between the Exchange and the broker that the broker alone shall be deducting tax if payment between Exchange and Seller is done through a broker; and there is a written between Exchange with the buyer/broker that Exchange would be paying tax on the transfer of VDA that takes place on or through an Exchange and the VDA is owned by such Exchange.

 

The board has also inserted a new sub-rule 4E to provide that Exchange shall also be responsible to furnish particulars of account paid or credited on which tax was not deducted in accordance with guidelines.

 

ITO cannot take two views in respect of same transaction/bank deposits

The doctrine of res-judicata states that the same officer cannot pass different orders for the same issue in different period. While, this Doctrine does not apply to Tax Case, yet a Dual Position for the same transaction cannot be taken by an AO. In the case of Swami Shibrupananda Jayrambati Ramkrishna Saradamath & Mission Vs ITO (ITAT Kolkata) it was held accordingly, Where AO had taken two views in respect of same transaction/bank deposits made by the assessee, one pre-demonetization period deposits, which he treated as income from profession of the assessee and 50% of such deposits treated as income from profession. On the other hand, deposits of Rs. 13,00,000/- made post demonetization treated as undisclosed income u/s. 69A r.w.s 115BBE of the Act.

 

‘Training’ activity can be a Charitable Activity

Section 12AA and Section 80G registrations are sometimes denied by CIT-Exemption on the ground that they are commercial activities and not Charitable activities. Many times at the CIT(A) also similar views are taken on the backdrop of the amendment/s u/s 2(15). However, the facts are deeply studied at the ITAT level and the taxpayers get a relief. Regarding considering “Training” activities as commercial activities, it is important to note that Imparting skill development training for sustaining and enhancing the growth and development of The Country is a charitable activity following within the definition education u/s 2(15) entitling the applicant company for registration u/s 12AA of the Act and consequent approval u/s 80G of the Act.

 

Training is the act of increasing the knowledge and skill of a person for doing a particular job. An assessee with the affiliation of Ministry of Skill Development & Entrepreneurship (MSDE) under the scheme has provided training to youths of India and falls under the category of Education and/ or Advancement of any other objects of general public u/s 2(15) of the Act. Such view was taken in the case of C. R. Dadhich Memorial Society Vs CIT(E) (ITAT Delhi).

 

Foreign Exchange Fluctuation Loss is not a ‘notional loss’

Whether unrealised foreign exchange fluctuation loss recognized under AS11 at the end of the year is a ‘notional loss’ and allowable u/s 43A and ICDS-VI or not has been dealt with in great detail by The Apex Court in the case of CIT vs M/s Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC). It is allowed u/s 37(1) is now a settled fact. Yet some field officers find out ways to add back the expenses on additional grounds. In one such case of BELLISSIMO PROPERTIES DEVELOPMENT PVT LTD Vs DCIT [2022-VIL-801-ITAT-MUM], it has been held that even where the assessee has extended loans / advances facility to its subsidiaries for the purpose of business of constructions and development of real estate properties, it will be considered as a ‘revenue expenses for the purpose of business’ and not ‘capital expense’ or ‘notional loss’

 

RBI: Provisioning Requirement for Investment in Security Receipts (SRs)

RBI vide circular dated June 28, 2022 has directed strict compliance with provisioning Requirement for Investment in Security Receipts (SRs) under Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021. The master direction provides that difference between the carrying value of such SRs and the valuation arrived at as on the next financial reporting date after the date of issuance of MD-TLE, may be provided over a five-year period starting with the financial year ending March 31, 2022 – i.e. from FY2021-22 till FY 2025-26. All lending institutions shall put in place a board approved plan to ensure that the provisioning made in each of the financial years is not less than one fifth of the required provisioning on this count. Valuation of investments in SRs made after the issuance of MD-TLE shall be strictly in terms of the provisions thereunder.

 

(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)