while Issuing Bonus Or Rights Shares, Private Companies Must Deduct Tax At Source

The Central Board of Direct Taxes (CBDT) issued another circular on Tuesday to further clarify issues relating to tax deduction at source under the newly-inserted Section 194-R in respect of benefits or perquisites provided to residents in cash or in kind in the course of business or profession. According to the circular, banks and financial institutions are no longer required to deduct tax at source on benefits provided to borrowers such as loan waivers or one-time advances.

Similarly, a company in which the public has a significant stake does not have to deduct tax at source when issuing bonuses or rights shares. The implication of this clarification is that a company in which the general public has no substantial interest will be required to deduct tax at source when issuing bonus or right shares, despite the fact that such receipt of bonus or right shares is not taxable in the hands of the shareholders.

According to experts, the reasoning given in this circular for exempting a company in which the public is substantially interested from deducting tax at source while issuing bonus or rights shares also applies to a private company in which the public is not substantially interested.

Experts say this circular may be fishing in troubled waters as it is differentiating between taxpayers. Experts also question whether such circulars are circumventing legislative intent.