It has really been a long time when a favorable decision on Income Tax front has come on issue of promoters borrowing funds from the companies they promoted. Most small and medium businessmen use to incorporate companies to run their businesses. In the eyes of law, such companies are separate entities from their promoters. During the times of need, it is quite common for such promoters to withdraw money from the company.

Tax regime in India is tightening. No doubt, this has resulted in higher realizations. One area that was, hitherto, taken lightly by Income Tax Authorities, is now ready to spring surprises. Till now, Assesses defaulting in timely payment of TDS could walk away lightly without any levy of interest or penalty. Only in the rare cases, the department used to prosecute a person for failure to deposit tax.

Recent amendment to Income Tax Act as proposed in budget-2007 has sought to change the definition of rent. Hitherto, rental would not mean only the rent for letting out the buildings alone.

Under the exiting provisions contained in section 194-I, tax is required to be deducted at source on payment of rent. The term “Rent” has been defined in the Explanation to the said section to, inter alia, mean payment for use of any building (including factory building) together with furniture, fitting and the land appurtenant thereto whether or not such building is owned by the payee.

In a judgment that could have far reaching implications, the Authority for Advance Rulings (AAR) has held that income received by a foreign company in providing access to its server located outside India would be taxable in India.