Section 194: TDS Rate and Tax Deduction Treatment on Dividend Payment

Section 194 deals with the deduction of tax at source on payment of dividends by any domestic company to resident shareholders. In case of dividend payable to non-resident shareholders, tax is deducted at source u/s 195.

Dividend means dividend on equity or preference shares, or it may also be deemed dividend u/s 2(22). Dividend may be interim dividend also.

Deduction shall be made @ 10% on the dividend. Tax is to be deducted at the earliest i.e.:

•  before making any payment of dividend in cash
• before issuing any cheque or warrant in respect of dividend, or
• before making any distribution or payment to a shareholder, of any dividend within the meaning of S. 2(22)

No deduction of tax at source shall be made on dividends on which S. 115-O is applicable i.e. dividends on which dividend distribution tax is been paid, no tax shall be deducted at source.

The TDS provision shall not apply on dividends received or receivable by LIC, GIC, its subsidiaries or any other insurer provided the shares, or they have beneficial interest in such shares.

It is proposed to amend the definition of ‘time deposits’ as per section 194(3) to include recurring deposits also. This implies that now, interest on recurring deposits is also subject to TDS.

The updated chart of tax Deduction at Source for FY 2015-16 or AY 2016-17 is as under:

Related Cases:

Deemed dividend—S. 2(22), r/w S. 194, of the Income-tax Act, 1961. BRIGGS OF BURTON (INDIA) (Pvt.) LTD.,

S. 194 of IT Act, 1961, S. 4 of Sale of Goods Act, 1930—TDS—The assessee, a cellular operator provides prepaid connections to the subscribers through distributors called prepaid market associates (PMAs) appointed by it. Transaction between the assessee, a cellular operator, and PMAs whereby SIM cards/recharge coupans are sold to the subscribers through the latter does not amount to sale of goods and, therefore, the discount offered by the assessee to the distributors on payments made by the latter for the SIM cards/recharge coupans which are eventually sold to the subscribers at the listed price is amount to commission and it is subject to TDS u/s 194H of the Act—CIT vs. IDEA Cellular Ltd. [2010] 325 ITR 148 (DEL) 230 CTR 43 (DEL)

S. 194, Expln. of IT Act, 1961—Deduction of tax at source—The airlines had an agreement with their agents to sell tickets at a minimum fixed commercial price which was lower than the published price but was of a variable nature and could be increased by the agent at his discretion to the extent up to the published price. Thus, the difference in amount between commercial price and published price is neither commission nor brokerage within the meaning of Explanation (i) to S. 194H of the Act, 1961 and thus, no tax is deductible on the such difference between the commercial price and the published price—CIT vs. Qatar Airways (2011) 332 ITR 253 (Bom)

S. 194 of IT Act, 1961—Deduction of tax at source—The assessee is engaged in providing computer education and training through its own centres and franchisees. The assessee is required to provide the infrastructure facilities. The model fees collected from the students are deposited in the accounts of the assessee and then shared on milestone basis by the terms of franchisee/licence agreement and such fees is shared by the assessee under two head, marketing claim and infrastructure claim. According to the agreement between the assessee and the franchisee is to share the revenue and not hire the premises provided by the assessee, and that therefore, the assessee is not liable to deduct tax u/s 194-I of the Act in respect of the amount shared by the assessee remitted to the franchisees for infrastructure claims—CIT vs. NIIT Ltd. [2009] 318 ITR 289 (Del)

Income Tax Act, 1961, S. 194(c), 194(H), 201(A), Expln. (1), 201(1A) and S. 182 of the Contract Act, 1972—Tax Deduction at source and levy of interest—”Ground No.1 of the assessee is a general ground of appeal and needs no separate adjudication. In ground Nos. 2 and 3 the assessee has challenged the applicability of S. 194H of the IT Act 1961, levy of interest u/s 201(1A) and the consequent demand raised by the Income tax Officer TDS [ITO, (TDS)] on account of the non deduction of tax at source of Rs. 9,53,664 u/s 194H”. While allowing the appeal of the assessee, the Income Tax Appellate Tribunal, Jaipur Bench held that:- “We are of the view that the demand raised by the ITO of the amount of the TDS u/s 194H is illegal being without jurisdiction and hence the same is hereby quashed. Thus the ground Nos. 2 and 3 of the assessee are allowed. The next ground No. 4 challenges the levy of interest of Rs. 1,14,439/- u/s 201(1A). The learned Authorised Representative submitted that this is consequential to the earlier grounds. He further submitted that to levy interest u/s 201(1A), it is obligatory and a condition precedent for the ITO to have held the assessee to be an assessee in default, as defined u/s 200, the learned Departmental Representative however, opposed. Heard the parties. Since we have already held that the assessee was not liable to make any deduction under s. 194H hence there cannot be any charging of interest u/s 201(1A). Thus ground No.4 of the assessee is allowed”. Ajmer Zila Dugdh Utpadak Sangh Ltd., Ajmer vs. ITO-TDS, Ajmer [2009] 13 ITCD 59 (ITAT-Jaipur)

S. 194 of IT Act, 1961—TDS—The petitioner is a Third party Administrator and engaged in the business of providing health insurance claim services under various health insurance policies issued by several insurers and it is the authority or the person to pay the amount to the hospital, thus, such TPA is required to deduct the tax at source u/s 194J of the Act—The Medi Assist India TPA (Pvt.) Ltd. vs. DCIT (2009) 226 CTR 392 (Kar)

S. 2(22)(e) 194, 201 & 201(IA) of IT Act, 1961—TDS—Since there is no requirement of TDS u/s 194, the assessee cannot be treated as assessee in default u/s 201 of the Act, therefore, no interest u/s 201(1A) can be charged—ANZ Reality (Pvt.) Ltd. vs. ITO.

Income-tax Act, 1961, S. 194C, 194-1 and 201(1A)—Circular No. 275/201/95-IT(B) dated 29.1.97—Tax deducted at source—Payments to deductee for use of premises for receipt, storage and dispatch of goods, belonging to the assessee—Whether assessee in default—While allowing the appeal of the assessee, the Supreme Court held that:—”In the instant case, the appellant had paid the interest u/s 201 (1A) of the Act and there is no dispute that the tax due had been paid by deductee-assessee (M/s Pradeep Oil Corporation). It is not disputed before us that the circular is applicable to the facts situation on hand. In the circumstances, it is not necessary to go in detail as to whether the Tribunal could have at all reopened the appeal to rectify the error apparent on the face of the record. We do not wish to express any firm view on this aspect.” Hindustan Coca Cola Beverage Pvt. Ltd. vs. CIT (SC)

S. 194 of IT Act, 1961—Deduction of tax at source—Since the assessee was nothing but on intermediary between the exporters and airlines and it booked cargo for and on behalf of the exporters and mainly facilitated the contract for carrying goods therefore, assessee is not a ‘person responsible’ for deduction of tax at source in terms of S. 194C of the IT Act, 1961—CIT vs. Cargo Linkers

S.194H of IT Act, 1961—TDS—Discount given to the stamp vendors for purchasing the stamps in bulk quantity is a cash discount and, therefore, S. 194H is not applicable—CIT vs. Ahmedabad Stamp Vendors Association [2012] 254 CTR 111 (SC)

S. 194A of IT Act, 1961—Deduction of tax at source—Co-operative socities are exempt from provisions of S. 194A of the Act—Kadachira Service Co-operative Bank Ltd. vs. ITO. [2013] 141 ITD 270 (ITAT-COCHIN)

S. 194A, 201(1) & 201(1A) of  IT Act, 1961—TDS—If any interest is liable to be charged under the Act, the same can be charged only if the Government is deprived of its funds or any loss is caused to the Government, since interest is compensatory in nature. Provisions of S. 194A cannot be excluded in respect of interest paid/credited by a partner to the firm—Thomas Muthoot vs. DCIT [2012] 150 TTJ 665 (ITAT-Coch)

S. 194C, 194-I, Expln. (i) of IT Act, 1961—Deduction of tax at source—The Provisions of S. 194-I of the Act are applicable for the payment of rent and tax is to be dedcucted at source on payment of specified rent—ACIT vs. Kiran Constructions [2013] 22 ITR (Trib) 356 (ITAT-HYD)

S. 194-I & 197A of IT Act, 1961—Business expenditure—Mistake in the form submitted by the landlady as provided under the Act remains a mere technical formality when the assessee cannot be subjected to disallowance of expenditure claimed as rent for its shop and godown which together were to be considered under the provisions of S. 194-I r/w S. 197A of the Act. The disallowance u/s 40(a)(ia) comes after considering the collection and recovery of tax by deduction of tax at source which the assessee has satisfied for non-deduction cannot result in disallowance of expenditure for no fault of the asssesse—Pareek Electricals vs. ACIT (2013) 151 TTJ 526 (ITAT-Ctk.)

S. 145A & 194C of IT Act, 1961—Valuation of stock—Whenever any adjustment is made in the valuation of stock, this would affect both reopening as well as closing stock. Since the Assessing Officer did not take into account the opening stock of work-in-progress, no addition can be made on account of work-in-progress—ITO vs. Navjivan Systhetics [2012] 20 ITR (Trib) 712 (ITAT-Ahd)

S. 194C, of IT Act, 1961—Deduction of tax at source—The assessee company was promoted as joint venture company (JVC) by HPCL and GAIL. HPCL and GAIL deputed their personnel who worked under the control and management of assessee. Assessee paid HPCL and GAIL certain amount towards reimbursement of cost of salaries of employees who were on deputation to Assessee Company without deducting tax at source. merely because the companies had in an agreement agreed to depute their employees would not mean that it was a work contract. Therefore, the payment which was paid by the assessee company towards reimbursement of cost of salaries of said deputed employees cannot be considered as payment towards work executed by GAIL and HPCL in the course of work contract.— Bhagyanagar Gas Ltd. vs. ACIT. (2013) 140 ITD 591 (ITAT-Hyd)

S. 194C of Act, 1961—Deduction of tax at source—The assessee had lorry booking business and own booking business. It collected freight charges from the clients who intended to transport their goods through separate transporters. The entire amount collected from the clients was paid to the transporters after deducting commission from the amount. There was no privity of contract of carriage of goods between assessee and his clients. Since the assessee was only a facilitatory and, therefore, no tax is deductible at source under s.194C of the Act— CIT vs. Hardarshan Singh [2013] 350 ITR 427 (Delhi)

S. 194H of IT Act, 1961—Deduction of tax at source—Against utilization of credit card facilities the payments made to banks would be in nature of bank charge and not in nature of commission within the meaning of S. 194H of the Act—Tata Teleservices Ltd. vs. DCIT [2013] 140 ITD 451 (ITAT-Bangalore)

S. 194J of IT Act, 1961—Deduction of tax at source—The artwork and photography do not come within the purview of professional services. Therefore, the case of artwork and photography covered under the provision of S. 194C(1) of the Act—Kodak India Pvt. Ltd. vs. DCIT [2013] 22 ITR (Trib) 721 (ITAT-MUMBAI)

S. 194H, 201 of IT Act, 1961—Deduction of tax at source—The assessee-company was engaged in selling SIM cards and recharge coupons to wholesale dealers and paying commission. The assessee-company treated such commission paid to dealers on sale of recharge coupons as discount and did not deduct tax at source u/s 194H of the Act. The payment given to wholesalers against sale of recharge coupons is commission and tax is deductible at source on such amount—Cellular Mobile Telecom Services vs. ITO [2013] 21 ITR (Trib) 456 (ITAT-Chennai)

S. 40(a)(ia), 194H, Expln. (i) of IT Act, 1961—Deduction of tax at source—The definition of commission or brokerage in Explanation (i) to S. 194H does not include transactions in securities. The assessee is in the business of mutual funds distribution and investment agent. The sub-brokerage paid is connected with the services rendered in the course of buying and selling of unit of mutual funds or in relation to transactions pertaining to mutual funds and as per the provision of S. 194H Expln. (i) these are not covered by the provision for deduction of tax at source— DCIT vs. S. J. Investment Agencies Pvt. Ltd. [2013] 21 ITR (Trib) 258 (ITAT-Mum)

S. 194C, of IT Act, 1961—Deduction of tax at source—S. 194C would be  applicable when a person is responsible for paying any sum to any residents  for carrying out any work including supply of labour for carrying out any work in pursuance of a contract at the time of payment or crediting the said amount. The assessee hired lorries/ trucks from lorry owners and thereafter gave them on hire to another who used same for carriage of goods. Therefore, since there was no contract for carriage of goods between the tax payer and the lorry/truck owners from whom the truck/lorries were hired, provisions of S. 194C are not applicable—DCIT vs. shri Reez Karakkattil Raghavan Friends Transport Co. (2013) 140 ITD 598 (ITAT-Cochin)

S.  194C—Deduction of tax at source—IT ACT, 1961—CIT vs. RELIANCE ENGINEERING ASSOCIATES Pvt. LTD.

S. 194A—Deduction of tax at source—IT ACT, 1961—GUJARAT URBAN CO-OPERATIVE BANK FEDERATION vs. UOI.

S. 194LA—Deduction of tax at source—IT ACT, 1961—LEELA BHAGWANSING ADVANI vs. UOI.

S. 194C—Deduction of tax at source—IT ACT, 1961—STATE OF UTTARAKHAND vs. CIT.

S. 192, 194J, 201(1A), of IT Act, 1961—Deduction of tax at source—The assessee-company is running a hospital and it engaged certain professional doctors for service rendered with them. The professional doctors shares fees received from the patients, their remuneration was not fixed and they were free to render service to the patients as they considered appropriate in terms of time or duration. The assessee company deducted tax u/s 194J from the payments made to them treating the payments as professional fees. The doctors were never under the employment of the Hospital and, therefore, any consultation fees received could not take the character of salary and therefore, deductible at source. Mere holding of an office does not create a relationship of employer-employee. The relationship between doctors and the hospital is essentially that of a professional consultant and a client and there was no employer-employee relationship—DCIT vs. Ivy Health Life Sciences Pvt. Ltd. [2012] 20 ITR (Trib) 179 (ITAT-Chandigarh)

S. 194B of IT Act, 1961, r/w Art. 226 of Constitution of India—Deduction of tax at source—The error of jurisdiction which the Deputy Commissioner has allegedly committed in passing the impugned order is not a mere error apparent on the face of the record which can be corrected under Art. 226 of the Constitution of India—Hyderabad Race Club vs. DCIT

S. 194H of the Income tax Act, 1961—Tax deducted at source—During the course of survey, it was noticed that the appellant company has appointed many distributors / dealers for distribution and sale of its products. The AO took the view that the payment has been made to the distributor representing difference in MRP of the product and the invoice raised on distributor and therefore constitutes commission u/s 194H of the Act and the company has deliberately chosen the nomenclature of discount to conceal the true nature of payment. Therefore, he concluded that the appellant company has failed to deduct tax at source on the full amount of commission paid to its dealers/ distributors and treated the appellant as an assessee in default. While dismissing the appeal of the revenue ITAT, Delhi held that:—From all that has been noted above, it is evident that the distributor was to purchase products at pre-determined price from the assessee for selling the same within specified area. The products were to be purchased by the distributor against 100% advance payment or may be some times on credit at the discretion of the assessee. Both the assessee and the distributor have been collecting and paying their sales tax separately. Both the parties have clearly understood and accepted the agreement between them. That being the arrangement between the assessee and the distributor, it could not be said that the relation between them was that of principal-agent. On the other hand it was clearly stipulated to be an arrangement between them on principal-to-principal basis [2013] 27 ITCD 83 (ITAT-DELHI)

S. 194C—Deduction of tax at source—IT ACT, 1961—CIT vs. SINGAPORE AIRLINES LTD.

S. 194A—Deduction of tax at source—IT ACT, 1961—RAMESHWAR vs. UJJAIN DEVELOPMENT AUTHORITY.

S. 194C, of the IT Act, 1961—Deduction of tax at source—The mandate of S. 194C is that the relationship of the person paying any sum to the person carrying out any work including the supply or labour should be in nature of the principal to contractor. Hence, in absence of relationship of principal and contractor existed between assessee and Mathadi Board, the assessee is not required to deduct tax at source while making payment of wages to Mathadi Board. — — Gokuldas Virjibhai & Co. Vs. ITO [2012] 139 ITD 284 (ITAT-Pune)

S. 40(a)(ia), 194C of IT Act, 1961—Business Expenditure—The assessee claimed deduction of expenditure towards transportation charges paid during the financial year relevant to the assessment year under consideration. The balance sheet as on March 31, 2007 indicated that there was no liabilities which meant that the assessee had paid the transportation charges before the end of the financial year relevant to the assessment year under consideration. Thus, there was no justification in making the disallowance by the Assessing Officer u/s 40(a) (ia) of the Act—ITO vs. Vinod Datta [2013] 22 ITR (Trib) 243 (ITAT-MUMBAI)

S. 40(a)(ia), 194H, 194J, 263 of IT Act, 1961—Revision—When the Assessing Officer had Completely Omitted the issue in question from consideration and made the assessment in arbitrary manner and therefore, such assessment order is not only prejudicial to the interest of revenue but also erronuos. Hence it is a fit case for the Commissioner to exercise its revisional jurisdiction u/s 263 of the Act— Bharti Hexacom Ltd. vs. CIT—[2013] 21 ITR (Trib) 648 (ITAT-DELHI)

S. 194C, 197 of IT Act, 1961—Deduction of tax at source—The assessee appointed various persons for executing the works, making it liable to deduct tax at the rate prescribed u/s 194C. The assessee’s Mumbai unit had a separate tax deduction account number from its Bahadurgarh unit. The genuineness of the issue of certificate u/s 197 of the Act was also not doubted by the Assessing Officer. Merely because the assessee was having separate tax deduction account numbers for the Bahadurgarh unit and for the Mumbai unit, that would not rendered the certificate issued u/s 197(2) redundant. Hence merely on the ground of having two separate tax deduction certificate the assessee may not be held defaulter—CIT vs. Parle Biscuits Pvt. Ltd. [2013] 351 ITR 138 (P&H)

S. 194A of IT Act, 1961—Deduction of tax at source—The assessee is a society registered under Travancoree-kochi Literary Scientific and charitable Societies Registration Act, 1955 whereas Notification issued by Government of India u/s 194A(iii)(f) shows that only the societies which are registered under the Societies Registration Act, 1860 are exempted. Therefore, assessee-society is not exempted from the levy of TDS—Kerala State Nirmiti Kendra vs. CIT.

S. 194-I, 201(1) & 201(1A) of IT Act, 1961—TDS—It is well settled position in law that ‘mere book entries will not determine the correct income or expenditure’. The actual rent to be paid by the assessee is what is to be considered for the purpose of determining the TDS to be made u/s 194-I and consequential interest u/s 201(1A) of the Act—ITO vs. Hotel Parag Ltd. [2013] 154 TTJ 382 (ITAT-BANG)

S. 194C, 194J, 201 (1) & 201(1A) of IT Act, 1961—TDS—TDS is transitory tax and it is a mode of collection and recovery of tax under Chapter XVII. TDS by buyer is to be allowed credit in the hands of the payee. Explanation to clarify the doubt so raised has been inserted by the Finance Act, 2008 with retrospective effect from 1st June, 2003 in S. 191 and its plain reading makes it abundantly clear that the deductee can deemed to be an assessee in default u/s 201(1) if the recipient fails to pay such tax directly since the assessee company has proved that the recipients have shown these charges as their income and have paid due taxes thereon, it cannot be treated as an assessee in default—ACIT vs. Chambal Fertilizers & Chemicals Ltd. [2013] 154 TTJ  407 (ITAT-JD)

S. 194C, 194J & 201(1) of IT Act, 1961—TDS—The Assessing Officer did not bring anything on record that there was any contract between the assessee and GAIL. From the copy of the invoice raised by the GAIL India Ltd. on the assessee, it is cleared that transmission charges were also part of the cost of gas on which the assessee had paid service tax, higher education fess and VAT. So it could not be said that transmission charges were paid separately under a work contract and were not a part of the cost of gas. Thus, the CIT(A) was justified in holding that provisions of S. 194C and 194J of the Act were not applicable—ITO vs. Samtel Glass Ltd. [2013] 154 TTJ 401 (ITAT-JD)

S. 194LA of IT Act, 1961—TDS—The assessee is a part of the Government of India and is engaged in establishing and running metro railway network in the city of Kolkata. The assessee made payment of compensation to the competent authority appointed u/s 16 of the Metro Railways (Construction of works) Act, 1978 for compulsory acquisition of land under the said Act. The said competent authority appointed u/s 16 of the Act, 1978 is to  make the payment to the landowners. Thus, the TDS liability u/s 194LA comes into play only when the competent authority makes payment to the actual beneficiaries of compensation and not when payments are made to the competent authority by the assessee—Metro Railway Kolkata vs. ITO [2013] 154 TTJ 592 (ITAT-KOL)

S. 194A, 271C & 273B of IT Act, 1961—Penalty—The rigour of provisions of S. 271C is softened by the provisions of S. 273B, which provides that the penalty under that section shall not be imposable on the person, if he proves that there was a reasonable cause for the failure. When the explanation offered by the assessee was found fit in the category of “reasonable cause” in terms of S. 273B, penalty imposed u/s 271(1)(c) of the Act is not justified—Tomos Muthoot vs. JCIT [2013] 154 TTJ (UO) 5 (ITAT-Cochin)

S.194C, 194-I of IT Act, 1961—Deduction of tax at source—The assessee entered into a contract with bus owners for transportation of its students and it is covered under cl. (iv) of the Expln. to S. 194C of the Act. The nature of such contract cannot be termed as contract for hiring of vehicles. Therefore, the said transport contract is covered by S. 194C and not S. 194-I of the Act—ACIT vs. Delhi Public School [2013] 24 ITR (Trib) 531 (ITAT-Delhi)

S. 194A—Deduction—IT ACT, 1961—CIT vs. Swarup Vegetable Products.

S. 194-I of the Income-tax Act, 1961—Deduction of tax at source—United Airlines vs. CIT [2006]

S. 194LA, r/w S. 194A and 194L, of the Income-tax Act, 1961—Deduction of tax at source—State of Kerala vs. Mariyamma.

S. 194C of the Income-tax Act, 1961—Deduction of tax at source—BDA Ltd. vs. ITO.

S. 194C of the Income-tax Act, 1961—Deduction of tax at source—CIT vs. Poompuhar Shipping Corpn. Ltd.

S. 194C, r/w S. 194J, of the Income-tax Act, 1961—Deduction of tax at source—CIT vs. Prasar Bharti (Broadcasting Corpn. of India).

Reference:

As Per Section 194, of the Income Tax Act, 1961-

1. The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, [who is resident in India,] of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax  at the rates in force :

Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—

(a)  the dividend is paid by the company by an account payee cheque; and

(b)  the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed [two thousand five hundred] rupees:

Provided further that the provisions of this section shall not apply to such income credited or paid to—

(a)  the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;

(b)  the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;

(c)  any other insurer in respect of any shares owned by it or in which it has full beneficial interest :

Provided also that no such deduction shall be made in respect of any dividends referred to in section 115-O.