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Year: 2026

Intimation u/s. 143(1) — Adjustment to the return of income — First proviso — Mandatory in nature — No adjustment to be made unless an opportunity is given to the assessee — No prior opportunity to the assessee before making adjustment — Intimation u/s. 143(1) is liable to be quashed and set-aside.

62. Bax India Ventures Pvt. Ltd. vs. CPC

2026 (2) TMI 319 Bom.

Date of order: 02/02/2026

Ss. 143(1) of ITA 1961

Intimation u/s. 143(1) — Adjustment to the return of income — First proviso — Mandatory in nature — No adjustment to be made unless an opportunity is given to the assessee — No prior opportunity to the assessee before making adjustment — Intimation u/s. 143(1) is liable to be quashed and set-aside.

The Assessee company filed its return of income u/s. 139(8A) and claimed the benefit of lower rate of tax as per section 115BAA of the Income-tax Act, 1961. Along with the return filed u/s. 139(8A), the assessee also filed Form 10-IC which was mandatory as per section 115BAA of the Act. However, the Assessee’s claim was denied, and an adjustment was made in the Intimation order u/s. 143(1)(a) of the Act.

The Assessee challenged the said Intimation order by way of writ petition before the High Court on the ground that the assessee was not given prior intimation about the proposed adjustment and therefore the Intimation order passed u/s. 143(1)(a) of the Act was not sustainable and ought to be set-aside.

The contention of the Department was that the present case was that of denying the beneficial rate of tax to the assessee and not that of adjustment to the total income or loss and therefore there was no need to provide an opportunity to the assessee. Further, since the assessee had failed to file the return of income along with Form 10-IC by the due date mentioned u/s. 139(1), the tax was correctly levied at the normal rate of tax.

The Bombay High Court allowed the petition of the assessee and held as follows:

“i) Admittedly, no intimation was given to the assessee as contemplated in the first proviso to Section 143 (1) (a). The first proviso, in our opinion, is clearly mandatory in nature, as it clearly stipulates that no adjustment ‘shall be made’ unless an intimation is given to the assessee of such adjustment either in writing or in electronic mode. Once this is a mandatory provision, no Intimation order u/s. 143(1)(a) can be passed, making any adjustment in the Return of Income filed by the assessee, unless such proposed adjustment is first intimated to the assessee and he has been given a chance to respond thereto.

ii) In the facts of the present case, no intimation as contemplated under the first proviso to Section 143(1)(a) was ever issued to the Petitioner. This is an undisputed fact. On this ground alone, the Intimation order dated 1st December, 2025, issued u/s. 143(1)(a), is liable to be quashed and set aside.

iii) We are unable to agree with the submission of the learned Advocate appearing on behalf of the Revenue that this exercise would be an exercise in futility because in the facts of the present case, admittedly, Form 10-IC was not filed by the due date. There could very well be a case where, after belatedly filing a return and belatedly filing Form 10-IC, and before the Intimation order is passed u/s. 143 (1)(a), the Petitioner could have obtained an order seeking condonation of delay in filing form 10-IC u/s. 119(2)(b) of the Act. This could possibly be the response that the assessee may give to the CPC in respect of the notice issued under the first proviso to Section 143(1) (a) and contend that the proposed adjustment ought not to be made. It is therefore incorrect to suggest that the intimation proposing an adjustment, as contemplated under the first proviso to Section 143(1)(a), would be an exercise in futility. Once we find that the said provision is mandatory in nature, the same has to be complied with by the Revenue. The Revenue cannot decide in which case it would be futile and in which case it would not.

iv) The Department is free to issue a notice to the assessee as contemplated under the first proviso to Section 143(1)(a) as well as take the response of the Petitioner, if any, into the consideration, and only thereafter pass a fresh Intimation order as contemplated u/s. 143(1)(a)”

Equalisation levy — Refund — Interest on refund — Refund granted as excess Equalisation levy paid by assessee after three years — Obligation on Department to pay interest as compensation for use and retention of money collected in excess — Department’s contention that statute does not provide for payment of interest on refund of equalisation levy not tenable — High Court directed the Department to pay interest at the rate of six per cent from April 1 of the year following the financial year in which excess payments made by assessee till date of actual refund.

61. Group M Media India (P) Ltd. vs. Dy. CIT (International Tax): (2025) 483 ITR 593 (Bom): 2023 SCC OnLine 2740: (2024) 336 CTR 270 (Bom)

A. Y. 2018-19: Date of order 18/12/2023

S. 244A of ITA 1961 and Ss. 164(i), 165, 166 and 168(1) of the Finance Act, 2016

Equalisation levy — Refund — Interest on refund — Refund granted as excess Equalisation levy paid by assessee after three years — Obligation on Department to pay interest as compensation for use and retention of money collected in excess — Department’s contention that statute does not provide for payment of interest on refund of equalisation levy not tenable — High Court directed the Department to pay interest at the rate of six per cent from April 1 of the year following the financial year in which excess payments made by assessee till date of actual refund.

The petitioner assessee availed “specified services” as defined in clause (i) of section 164 of the Finance Act, 2016, effective from April 1, 2016. Section 164 of the Finance Act, 2016 ((2016) 384 ITR (Stat) 1) provides in clause (i), unless the context otherwise requires, “specified service” means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government.

For the A. Y. 2018-19, the petitioner filed its statement of specified income originally on June 26, 2018 disclosing the total consideration for specified services at ₹3,99,41,76,889 and equalisation levy of ₹23,96,50,668. After declaring the total levy paid of ₹23,96,50,670, the assessee claimed a refund of ₹4,23,60,940.

By an intimation/order u/s. 168(1) of the Finance Act, 2016 the Department determined the refund at ₹4,23,60,940. However, despite repeated requests, the refund was not given. The assessee therefore filed a writ petition alleging that there is failure on the part of the respondents to release the undisputed refund due and determined by the respondents themselves in the intimation/order issued u/s. 168(1) of the Finance Act, 2016 ((2016) 384 ITR (Stat) 1) for the F. Y. 2017-2018 corresponding to the A. Y. 2018-2019 despite reminders sent and for a direction to the respondents to refund an admitted amount of ₹4,23,60,940 plus interest thereon. After filing the writ petition the Department gave the refund of the amount but refused to give interest on refund.

The Bombay High Court allowed the petition and held as under:

“i) The issue that remains to be decided in this petition is whether the petitioner was entitled to interest on the amount refunded.

ii) The stand of the Revenue is interest is not provided for refund of amounts deposited under the equalisation levy and, therefore, the question of payment of any interest does not arise.

iii) When the collection is illegal, there is corresponding obligation on the Revenue to refund such amount with interest in-as-much as they have retained and enjoyed the money deposited.

iv) In Union of India vs. Tata Chemicals Ltd. [(2014) 363 ITR 658 (SC); (2014) 6 SCC 335; (2014) 3 SCC (Civ) 553; 2014 SCC OnLine SC 176; (2014) 43 taxmann.com 240 (SC).] the apex court also held that refund due and payable to the assessee is debt owed and payable by the Revenue.

v) In the present case, it is not in doubt that the petitioner was entitled to refund of ₹4,23,60,940 because the amount has been paid after the petition was filed. Since the excess amount has been paid over by the petitioner on various dates during the F. Y. 2017-2018, in our view, the refund ought to have been processed and paid latest by July 31, 2018. The interest, therefore, of course, will become payable from April 1, 2018 if we apply the principles prescribed in section 244A of the Act. The amount, as noted earlier, has been paid only on August 21, 2023. Consequently, we are of the view that the petitioner is entitled to interest on this amount of ₹4,23,60,940 from April 1, 2018 up to August 21, 2023 at the rate of six per cent. per annum which is the rate prescribed u/s. 244A of the Act.

vi) This order shall be given effect to and the interest shall be paid over on or before February 15, 2024. If not paid, with effect from February 16, 2024, the rate of interest payable will be at nine per cent. per annum until the date of payment.

vii) This will be in addition to other proceedings to hold the Department and concerned officers to be in wilful disobedience of the orders passed by this court. The difference of three per cent. (nine per cent. – six per cent.) will be recovered from the Officer who will be responsible to have the interest paid.”

Article 8 of India-Ireland DTAA – in absence of specific notification under Section 90 of the Act, DTAA cannot be said to have been modified through Multilateral Instrument ; on facts, consideration received by Irish company from dry lease of aircraft was taxable only in Ireland under Article 8 of India-Ireland DTAA

19. [2025] 177 taxmann.com 579 (Mumbai – Trib.)

Sky High Appeal XLIII Leasing Company Ltd. vs. ACIT (International Taxation)

IT APPEAL NOS. 1122, 1106, 1198, 1157, 1108, 1156 AND 1155 (MUM) OF 2025

A.Y.: 2022-23 Dated: 13 August 2025

Article 8 of India-Ireland DTAA – in absence of specific notification under Section 90 of the Act, DTAA cannot be said to have been modified through Multilateral Instrument ; on facts, consideration received by Irish company from dry lease of aircraft was taxable only in Ireland under Article 8 of India-Ireland DTAA

FACTS

The Assessee, a tax resident of Ireland, was incorporated in 2018. A licensed corporate service provider in Ireland managed the day-to-day operations of the Assessee. Ireland’s tax authorities had granted a tax residency certificate (“TRC”) to the Assessee. The Assessee was engaged in business of aircraft leasing globally. The Assessee had entered into dry operating lease agreements with an Indian airline company (“Ind Co”). In respect of the relevant year, the Assessee filed its return of income (“ROI”) declaring nil taxable income on the footing that, in terms of Article 8 of India-Ireland DTAA, consideration received by it from Ind Co was taxable only in Ireland.

The AO invoked Articles 6 and 7 of the Multilateral Instrument (“MLI”) that modified the provisions of India-Ireland DTAA and observed that: (a) the ultimate beneficiary was located in Cayman Islands; (b) Assessee did not have any employee; (c) daily affairs of Assessee were managed by third-party service providers; and (d) Assessee’s directors held positions in multiple other Irish companies. The AO further observed that the leases were in the nature of finance leases. Accordingly, he taxed the consideration as royalty under Article 12 of India-Ireland DTAA. The DRP further held that in absence of employees and infrastructure, Ireland operations could not be considered genuine. It further observed that the Assessee retained ultimate control over leased aircraft. Accordingly, the DRP upheld the order of the AO.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

(a) Application of MLI

The Hon’ble Supreme Court (“SC”) in Nestle SA [458 ITR 756], while interpreting the Most Favoured Nation (“MFN”) provisions in the protocol, has held that a separate notification under Section 90(1) of the Act was required to import the benefit from a subsequent DTAA into an existing DTAA.

India and Ireland had ratified their final MLI positions in 2019. India issued a notification regarding the adoption of the MLI. However, a separate notification highlighting the consequences/impact of the MLI on India-Ireland DTAA was not issued. As per the principles upheld in Nestle SA (supra), a separate notification was a prerequisite for applying the modifications to DTAA caused by MLI provisions, and MLI cannot be regarded as a self-operating instrument. Accordingly, Articles 6 and 7 of MLI could not be applied to deny DTAA benefits.

A TRC issued by foreign tax authorities could not be questioned unless it was a case of fraud.

A Principal Purpose Test (“PPT”) could not be applied merely because taxpayer derived a benefit provided by a DTAA or if its parent entity was located in a third country. In a global context, a Special Purpose Vehicle (“SPV”) usually does not have a dedicated workforce and is generally managed by service providers. Based on the evidence submitted, the SPV had assumed real economic risk.

A benefit cannot be denied under PPT if the object and purpose of relevant DTAA provision is to grant such benefits. On a holistic reading of Articles 8 and 12, the object of DTAA was to exclude aircraft leasing from the scope of source-country taxing rights.

(b) Nature of Lease

The terms of the lease clearly indicated that it was a dry lease. In the event of default, the lessor may take possession of the aircraft, and at the end of the lease period, the aircraft must be returned to the lessor. One need not travel beyond contract terms, unless the transaction was a sham.

Having regard to the terms of the agreement, Guidelines of DGCA, classification by RBI, statutory definition, and ruling of coordinate bench of ITAT in Celestial Aviation Trading [2025] 176 taxmann.com 902 (Delhi – Trib.), lease of aircraft was an operating lease.

(c) Permanent Establishment

As per agreement, the aircraft was under the control and disposal of the lessee. DGCA Guidelines required lessee to have operational control over the aircraft. Lessor rights towards periodic inspection, compliance with maintenance standards, and repossession in case of default cannot confer any right of disposal over the asset/place. Hence, presence of aircraft of assessee on a lease basis cannot constitute a permanent establishment.

Based on the above, the ITAT held that in terms of Article 13 of India-Ireland DTAA, the consideration received by the Assessee for lease of aircraft was taxable only in Ireland.

Author’s Note:

One may need to take into account the impact of the SC Decision in AAR vs. Tiger Global International II Holdings [2026] 182 taxmann.com 375 (SC), to the extent the decision may be regarded as laying down guiding, binding principles. Although the SC was concerned with, and decided whether AAR was right in rejecting the petition as involving a prima facie case of tax avoidance, the tribunal’s ruling, to the extent it is contrary to the SC’s binding ratio will require reconsideration.

Where the assessee had utilised its limited funds mainly for construction of a Satsang Bhawan in accordance with its charitable objects, its mere inability to carry out other charitable activities on account of paucity of funds could not be a ground for denial of registration under section 12AB / section 80G.

90. (2026) 182 taxmann.com 202 (Lucknow Trib)

Kirti Mahal Satsang Bhawan Trust vs. CIT

A.Y.: 2023-24 Date of Order: 05.01.2026

Section : 12AB, 80G

Where the assessee had utilised its limited funds mainly for construction of a Satsang Bhawan in accordance with its charitable objects, its mere inability to carry out other charitable activities on account of paucity of funds could not be a ground for denial of registration under section 12AB / section 80G.

FACTS

The assessee submitted applications in Form No. 10AB on 27.06.2024 seeking registration under section 12AB as well as approval under section 80G. Both the applications were rejected by CIT (E) on the ground that the assessee was not carrying out any substantial charitable activity as per objects of the trust and the genuineness of charitable activities being carried out by the trust had not been satisfactorily established.

Aggrieved, the assessee filed appeal before ITAT.

HELD

The Tribunal set aside the orders of the CIT(E) and directed him to grant registration under sections 12AB and approval under section 80G, holding that the assessee’s limited funds were mainly utilised for construction of the Satsang Bhawan, which was in in accordance with its charitable objective. It further observed that the inability to undertake other charitable activities was solely due to paucity of funds which was used mainly for construction of Satsang Bhavan. It noted that the construction of the Satsang Bhawan had now been completed and the assessee was presently carrying out charitable activities, including Satsang.

In the result, the appeal of the assessee was allowed.

A securitisation trust formed in accordance with the SARFAESI Act and RBI Guidelines is a revocable trust within the meaning of section 61 / 63 and consequently its income is not chargeable to tax in the hands of trust but in the hands of the Security Receipt Holders; accordingly, such trust cannot be assessed as an AOP under section 164.

89. (2026) 182 taxmann.com 849 (Mum Trib)

ITO vs. Arcil Retail Loan Portfolio -001- A- Trust

A.Y.: 2016-17

Date of Order: 22.01.2026 Section: 61, 63, 164

A securitisation trust formed in accordance with the SARFAESI Act and RBI Guidelines is a revocable trust within the meaning of section 61 / 63 and consequently its income is not chargeable to tax in the hands of trust but in the hands of the Security Receipt Holders; accordingly, such trust cannot be assessed as an AOP under section 164.

FACTS

The assessee was constituted as a trust by Asset Reconstruction Company (India) Ltd. (ARCIL) pursuant to the provisions of the SARFAESI Act, 2002 and RBI Guidelines for the purpose of acquisition and resolution of Non-Performing Assets. Funds were raised by issuance of Security Receipts (SRs) to Qualified Institutional Buyers. ARCIL functioned as settlor, trustee and asset manager of the assessee-trust. The trust filed its return of income for A.Y. 2016-17 declaring total income at Rs. NIL, after claiming exemption on income of ₹27,63,75,223 under section 61 read with section 63. The return was processed under section 143(1) of the Act and the case was selected for complete scrutiny under CASS.

The AO held that the assessee could not be regarded as a trust for the purposes of sections 61 to 63 and that, on the facts, the contributors and beneficiaries had joined in a common purpose of earning income and therefore, constituted an Association of Persons within the meaning of section 2(31). The AO further held that the trust was neither revocable nor determinate, that the provisions of section 164 were attracted, and that even otherwise the assessee was liable to be assessed as an AOP. Accordingly, the claim of exemption under sections 61 to 63 was denied and the AO assessed the total income of the assessee at ₹30,33,45,950 and initiated penalty proceedings under sections 271(1)(b) and 271(1)(c).

On appeal, CIT(A) allowed the appeal of the assessee in full.

Aggrieved, the revenue filed an appeal before ITAT.

HELD

On the questions of whether the assessee trust is revocable or irrevocable for the purposes of sections 61 to 63 and whether it is liable to be assessed as an Association of Persons and consequently whether the income can be brought to tax in the hands of the trust by invoking section 164, the Tribunal observed as follows:

(a) Sections 61 to 63 form a self-contained code dealing with taxation of income arising from revocable transfers. The legislative scheme is explicit that where the transferor retains, directly or indirectly, the right to re-assume control over income or assets, such income cannot be assessed in the hands of an intermediary entity but must be taxed in the hands of the transferor. Section 63 deliberately adopts a wide and inclusive definition of both “transfer” and “revocable transfer”. The statute does not prescribe that revocation must be unilateral, unconditional, or exercisable by an individual contributor. What is required is the existence of a contractual or legal mechanism for re-transfer of assets or re-assumption of power. This statutory scheme must be read harmoniously with the regulatory framework governing securitisation trusts, which are mandated under the SARFAESI Act and RBI Guidelines to operate as passthrough vehicles with beneficial ownership resting with Security Receipt Holders.

(b) On a plain reading of Clause 5.2 of the Trust Deed, it can be seen that the Security Receipt Holders were expressly conferred a right to revoke their contributions during the subsistence of the trust. Upon such revocation, the entire Trust Fund stood retransferred to the Security Receipt Holders or their designees in proportion to their holdings, the scheme itself stood dissolved, the trustee ceased to act as trustee, and the Security Receipts stood extinguished. These provisions clearly satisfied both limbs of section 63(a).

(c) It is evident that section 63 does not mandate unilateral or unconditional revocation, and that a revocation mechanism embedded in the governing instrument is sufficient. Collective revocation does not dilute the revocable character of the transfer.

(d) The formation of the assessee trust was statutorily mandated under the SARFAESI Act and RBI Guidelines. The trust was not a voluntary association of persons coming together for a common purpose, but a regulatory vehicle created for securitisation. The trustee functioned independently and exclusively in accordance with the Trust Deed. There was no joint management, no sharing of responsibilities, and no common volition among Security Receipt Holders so as to constitute an AOP.

(e) The beneficiaries were clearly identifiable with reference to the Trust Deed, offer documents and contribution records, and their respective shares were determinable in proportion to Security Receipts held. Merely because the names of beneficiaries were not set out in the Trust Deed itself did not render the trust indeterminate. This position is well settled by judicial precedents.

(f) Once it is held that the trust is revocable, section 164 has no independent application. Sections 61 to 63 override section 164 in cases of revocable transfers. The AO’s attempt to apply section 164, therefore, proceeded on an incorrect legal premise.

(g) The legislative intent to treat securitisation trusts as passthrough entities is further reinforced by later amendments and CBDT clarifications. The Finance Bill, 2016 expressly recognised securitisation trusts, including those set up by ARCs, as vehicles through which income is to be taxed in the hands of investors and not the trust. These amendments are clarificatory in nature, explaining the manner of taxation rather than altering the character of such trusts. They fortify the conclusion that, even prior to the amendments, the law recognised the trust as a conduit and not as a separate taxable entity in respect of such income.

Observing that its decision is supported by a series of decisions of the coordinate benches of the Tribunal, the Tribunal dismissed the appeal of the revenue and affirmed the order of CIT(A).

Where the assessee-company operating a solar power plant supplied electricity exclusively to its holding company, the activity could not be regarded as being carried out for “preservation of environment” / “charitable purpose” under section 2(15), as the dominant object was to benefit a single related entity rather than the public at large or a defined section of the public; accordingly, the assessee was not entitled to registration under section 12AB.

88. (2026) 182 taxmann.com 242 (Bang Trib)

Infosys Green Forum vs. ITO

A.Y.: N.A.

Date of Order : 12.01.2026

Section: 2(15), 12AB

Where the assessee-company operating a solar power plant supplied electricity exclusively to its holding company, the activity could not be regarded as being carried out for “preservation of environment” / “charitable purpose” under section 2(15), as the dominant object was to benefit a single related entity rather than the public at large or a defined section of the public; accordingly, the assessee was not entitled to registration under section 12AB.

FACTS

“I” Ltd. set up a 40 MW solar power plant on leasehold land as part of its Corporate Social Responsibility (CSR) activities. As the amount spent resulted in capital assets, as per rule 7(4) of the CSR Rules, 2014, such assets were required to be transferred to a new section 8 company. Therefore, the assessee-company was incorporated as a non-profit company under section 8 of the Companies Act, 2013 on 31.8.2021 by “I” Ltd. (as its 100% shareholder) with the object, inter alia, of promoting clean energy and environmental sustainability. Thereafter, “I” Ltd. and the assessee-company entered into an agreement to transfer the solar power project to the assessee. They also entered into a power supply agreement whereby the assessee was required to sell the power generated from the solar plant at Tumkur district, Karnataka exclusively to “I” Ltd at agreed rates.

The assessee-section 8 company obtained provisional registration under section 12AB on 2.10.2021 for AY 2022-23 to 2024-25 on the ground that its activities of running a solar power plant fell within the category of “preservation of environment” under section 2(15). Thereafter, the assessee filed an application for permanent registration under section 12AB and section 80G.

CIT(E) rejected the application for registration under section 12AB (and also cancelled the provisional registration) on the ground that activity of generation of power and operating as a captive solar power plant was a commercial venture which was not a charitable activity under ‘preservation of environment’ and thus did not fall within the definition of section 2(15).

Aggrieved, the assessee filed appeal before ITAT.

HELD

The Tribunal observed as follows:

(a) While setting up of a solar power plant is an activity which preserves the environment, the predominant or primary object test for “charitable purpose” is that benefit must enure to the public or a section/ class of the public. It is also not necessary that all persons universally benefit from the activities mentioned in section 2(15). Benefit to
sufficiently wide or defined section of public will suffice so long as private gain to a particular person is not the dominant object. Naturally, incidental benefit to individuals does not disentitle the assessee claiming it to be for “charitable purpose”.

(b) Upon detailed analysis of the power supply agreement, assets transfer agreement and other evidence, it could be seen that there was no benefit to the public at large or a section of a public at all. The dominant object of the whole exercise was to get the power for “I” Ltd. through captive solar power plant shown as CSR activity and then make an attempt to claim the benefit of registration under section 12AB and section 80G.

(c) In common parlance, the facts of the assessee were not different from a case where a donor sets up school for his own children and claims it as “educational activity”, or a company setting up a hospital exclusively for its own promoters / employees and claiming it as “medical relief”, or setting up own yoga centre for himself and claiming it as “Yoga” etc. Putting a solar panel over one’s house was also preservation of environment, but these are not charitable purposes as these do not have dominant object of benefit to others, that is, public at large. These are benefit to self. In all these cases there is no public benefit at large.

On the argument of the assessee that two wings of the Government cannot take a different view, the Tribunal observed that the view under the Companies Act (as stated in MCA Circular No. 21 / 2021 dated 25.8.2021) and provisions of section 2(15) of the Act are in consonance with each other and has taken a similar view that activity for the benefit of one person cannot be a CSR activity and the same is also not charitable. Both the Acts say that dominant object must be for the benefit of public or a defined section of public.

Accordingly, the Tribunal dismissed the appeals of the assessee and upheld the order of CIT(E) in not granting registration under section 12AB and approval under section 80G.

Company Law

24. Abhishek Maheshchand Khandelwal vs. Khandelwal Finstock (P.) Ltd.

Before, National Company Law Tribunal,

Ahmedabad Bench

Date of Order: 19th January, 2026

Where legal heirs of the deceased had produced death certificate of their late father and other required documents, the requirements under Section 56 of the Companies Act 2013 (CA 2013) were substantially complied with and, thus, the company was to be directed to transmit shares to the legal heirs of the deceased shareholder without insisting on probate.

FACTS:

  • The appellants were the legal heirs of late M who originally held 25 per cent shares in KFPL. The appellants and R were family members of the Khandelwal Family. Disputes arose among the family members. An arbitrator was appointed to resolve the disputes among four factions of the Khandelwal Family. The arbitrator passed an award which revised the shareholding of the family in KFPL and reduced the shareholding of M to 21 per cent.
  • M died on 13th October, 2020. After the death of M, there was no representation from his faction in the company. Only R was managing the affairs of the company. The appellants sent representation requesting transmission. The daughter gave no objection for transmission of shares in equal proportion to the appellants.
  • The company replied and acknowledged the 25 per cent holding but stated that no probate or legal document was received. In Gujarat, no probate was required for transmission of shares in a private company. The appellants stated that the company had not transmitted the shares despite intimation under section 56 and the company acted in breach of section 56 of CA 2013.
  • The appellants filed present appeal under section 59 seeking direction to the company to transmit the shares held by their late father in favour of the appellants and for rectification of its Register of Members.

HELD:

  • The Appellants produced the death certificate of their late father, no-objection affidavit of the daughter, and indemnity/affidavits as directed by the Tribunal. KFPL acknowledged the Appellants and their sister as legal heirs in proceedings arising out of the arbitral award. The identity of the legal heirs was not disputed before the Tribunal.
  • The objections regarding absence of Form SH-4 or allegations of fraud do not pertain to transmission by operation of law. Transmission on death does not require execution of a transfer deed. KFPL has failed to show any legal impediment which could justify refusal or delay in transmission of shares after receipt of complete documents.
  • Once it is established that late Maheshchand Khandelwal had shareholding in the company, and he died intestate, the legal heirs are entitled to transmission of the said shares, and their names are required to be entered in the register of members. There is no dispute on facts. As transmission occurs by operation of law under section 56(2) of CA 2013, no instrument of transfer (Form SH-4) is required, distinguishing it from voluntary transfers under section 56(1) of CA 2013.
  • It is also noted that the audited balance sheet of the Respondent Company reflects the shareholding of the deceased shareholder. Allegations regarding irregularities in filings are pending before statutory authorities and do not bar lawful transmission of shares. Such issues cannot be used to deny statutory rights of legal heirs under the CA 2013.
  • In view of the above discussion, it was found that the Appellants have established unnecessary delay and default on the part of KFPL in registering the transmission of shares. The requirements under section 56 were substantially complied with by the Appellants. The jurisdiction of the Tribunal under section 59 is clearly attracted and appeal filed by the aggrieved persons, the legal heir of the deceased, is maintainable.
  • Accordingly, Tribunal held that the Appellants were entitled to transmission of 21 percent shares standing in the name of Late Shri Maheshchand Radhakishan Khandelwal, as per the arbitral award dated 6th November 2018, and to rectification of the Register of Members of KFPL. This realignment as per the arbitral award overrides the original 25% holding reflected in the balance sheet, as the award, being enforceable, must be given effect under section 59 of CA 2013.

Therefore, in the light of above observations and findings, this Tribunal ordered as under: –

  • KFPL was directed to register the transmission of the said 21 percent shares to the Appellants, namely Abhishek Maheshchand Khandelwal and Apoorva Maheshchand Khandelwal, in equal proportion of 10.5 percent each, within 30 days from the date of receipt of a certified copy of the order, after verification of the documents already submitted, without requiring probate or original share certificates (as none were issued).
  • KFPL was further directed to rectify its Register of Members accordingly within the said period.

25. Shree Radhe Tea Plantation Private Limited & Anr. vs. Registrar of Companies, West Bengal & Ors. WPA 23115 of 2022

IN THE HIGH COURT AT CALCUTTA

Date of Order: 18th November 2022

The Calcutta High Court, upheld the powers of the Registrar of Companies (ROC) to conduct multiple inquiries under Section 206 to 210 of the Companies Act, 2013, specifically relating to the inspection, inquiry, and investigation provisions.

The Court implicitly upheld the ROC’s ability to initiate subsequent inquiries as part of its statutory duties.
The Key Upholding in the Case by Calcutta High Court are as follows:

  • The Court ruled that Sections 206-210 of the Companies Act, 2013, do not impose any bar on the Registrar to initiate subsequent proceedings under Section 206 as this is permissible if the Registrar comes across additional material warranting a second inquiry.
  • The High Court dismissed the petition, emphasizing that the petitioners had an Alternate Forum (NCLT, Kolkata) to contest the ROC’s inquiry report. The report was already part of the evidence in the ongoing winding-up proceedings under Section 271 of the Companies Act, 2013.
  • The Court noted that the Tribunal (NCLT) has wide powers under Section 273 of the Companies Act, 2013 to pass any orders as it may deem fit. This power is sufficient to ensure that the petitioners get an opportunity to seek appropriate relief regarding the impugned inquiry report in the winding-up proceedings.

In conclusion, the High Court ultimately decided not to stop the Registrar of Companies (ROC) from continuing its investigation and clarified that Section 206 of the Companies Act, 2013 is an ongoing supervisory power with ROC. If the ROC discovers further irregularities or additional documents, it is legally obligated to initiate a subsequent proceeding.

An order passed without considering a binding precedent, though not cited at the time of hearing, constitutes a mistake apparent on record.

87. TS-207-ITAT-2026 (Delhi)

Tigre SAS Liquors India Pvt. Ltd. vs. DCIT

A.Y.s: 2013-14 & 2014-15

Date of Order : 18.2.2026 Section: 254

FACTS:

The assessee filed an application u/s 254(2) of the Act, on the basis that the grounds no. 2 & 3 raised by the Appellant in ITA No. 7969/Del/2018 (AY 2014-15) was against confirming the ad-hoc disallowance on account of legal and professional expenses amounting to ₹35,52,173/- on account of legal expenditure incurred towards registration of trademark and ₹4,77,794/- towards label registration charges, considering the same as intangible asset being capital in nature.

In the application u/s 254(2) of the Act, it was pointed out that these findings are contrary to the decision of the Supreme Court in CIT vs. Finlay Mills Ltd [(1951) 20 ITR 475 (SC)].

HELD

The Tribunal held that the order as passed is established to be passed without taking into consideration the relevant and binding precedent, which though not cited at the time of hearing, were there in favour of assesse. In ACIT vs. Saurashtra Kutch Stock Exchange Ltd. [(2008) 305 ITR 227 (SC)], the Supreme Court ruled that non-consideration of a binding decision of the Jurisdictional High Court or the Supreme Court by the ITAT constitutes a “mistake apparent from the record”. Such an error is rectifiable under section 254(2) of the Act. The Tribunal held that non consideration of binding judicial precedents is an error apparent on record, accordingly, it recalled the order dated 28.08.2025, to the limited extent of fresh adjudication of aforesaid grounds in both the appeals.

Protective addition under Section 69 cannot survive where substantive addition on identical facts has been deleted on merits and no independent corroborative evidence establishes payment of on-money. Mere reliance on third-party statements, without independent corroboration, is insufficient when the assessee categorically denies payment.

86. TS-191-ITAT-2026 (Mum.)

Dhiraj Solanki vs. DCIT

A.Y.: 2019-20

Date of Order : 10.2.2026 Section: 69

Protective addition under Section 69 cannot survive where substantive addition on identical facts has been deleted on merits and no independent corroborative evidence establishes payment of on-money.

Mere reliance on third-party statements, without independent corroboration, is insufficient when the assessee categorically denies payment.

FACTS

The assessee, a resident individual, for the assessment year under dispute, filed his return of income on 17.08.2011, declaring total income of ₹3,49,640/-. On 17.03.2021, a search and seizure operation u/s. 132 of the Act was carried out in case of Rubberwala Group and others. In course of search and seizure operation, certain incriminating material/information pertaining to the assessee were found. Based on such information/material, proceedings u/s. 153C of the Act were initiated in case of the assessee.

In course of assessment proceeding, the Assessing Officer (AO) observed that during the search and seizure operation conducted in the premises of Rubberwala Housing & Infrastructure Ltd. and its promoter Director- Shri Tabrez Shaikh and a key employee of Rubberwala Group, Shri Imran Ansari, a pen drive containing excel sheet was found which contained the details of on-money paid by various buyers in respect of shops purchased in the ‘Platinum Mall’ project.

Statements were recorded u/s. 132(4) of the Act from Shri Imran Ansari and Shri Tabrez Shaikh based on a seized materials. In the statement recorded, Shri Imran Ansari explaining the details of the transactions noted in the excel sheet, stated that it contained the agreement value of the shops floor and level wise by as also the actual price at which shops were sold. He stated, the agreement value is lower than the actual sale price and the differential amount (on-money) was received in cash from the buyers and handed over to Shri Tabrez Shaikh.

Based on such statements, the AO called upon the assessee to explain why the alleged on-money paid of ₹52,40,950/- should not be added to the income of the assessee. Though, the assessee vehemently objected to the proposed addition, categorically stating that he had not paid on-money over and above the actual sale consideration paid as per the agreement, however the AO was not convinced. He concluded that the assessee indeed had paid on-money in cash towards purchase of the shop. Since the alleged on-money was added on substantive basis at the hands of another assessee, namely, Shri Praveen Jagdeesh Solanki, the AO made the addition on protective basis at the hands of the assessee.

Aggrieved, assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, assessee preferred an appeal to the Tribunal where it contended that the substantive addition made by the AO in case of Shri Praveen Jagdish Solanki has been deleted by the learned First Appellate Authority on merits. Hence, the protective addition made in case of the assessee cannot survive.

HELD

The Tribunal noted that it is evident that the assessee jointly with his brother Shri Praveen Jagadish Solanki had purchased a shop in the ‘Platinum Mall’. The Tribunal narrated the modus operandi as explained in the statement of Mr. Imran Ansari recorded in the course of search. The Tribunal noted that the modus operandi explained inter alia stated that Mr. Imran Ansari after receiving confirmation from Mr. Abrar Ahmad, cashier, regarding the cash received, makes necessary entries in the diary given to the buyer at the time of booking of shop mentioning the cash amount along with date of payment and also puts his signature against each entry. It observed that surprisingly, though, shops have been sold to number of buyers however not a single diary has been recovered from any of the buyers to demonstrate the fact that against the cash payment entries have been made in the diary and initialled by Shri Imran Ansari as explained in his statement. In fact, except the pen drive containing the excel sheet, the AO has not referred to any other incriminating material. The seized material does not explicitly reveal payment of on-money by buyers individually.

The Tribunal held that when the assessee has categorically denied of having paid any cash, merely relying upon a third party statement and limited evidence seized from a third party, assessee cannot be accused of paying on-money in absence of any other corroborative evidence to demonstrate that the facts stated in the statement recorded from the key persons of Rubberwala Group and the excel sheets are authentic. It remarked that in any case of the matter, in case of the present assessee, the AO has made the addition on protective basis and that the substantive addition made in case of assessee’s brother Shri Praveen Jagdish Solanki has been deleted by the very same First Appellate Authority in order dated 18.11.2025 on merits after taking note of all relevant facts. The Tribunal held that when the substantive addition has been deleted on merit, the protective addition made at the hands of the assessee cannot survive. The Tribunal deleted the addition made by the AO and confirmed by CIT(A).

The Rise of Algorithmic Trading In Securities Market: Retail Participation and Regulatory Shifts

The Indian securities market is experiencing a structural shift as algorithmic trading expands from institutional dominance to robust retail participation via API-driven platforms. To mitigate risks and protect investors, SEBI has tightened regulations, positioning brokers as principal gatekeepers for third-party algorithms. Algos are now categorized into White Box and Black Box, with Black Box providers required to register as Research Analysts. Unlike the U.S., India enforces stricter rules, including prior exchange approval and mandatory order tagging. This rigorous framework generates significant opportunities for professionals in compliance, system audits, cybersecurity, and risk management.

The Indian securities market has witnessed a steady shift in the share of algorithmic and non-algorithmic trading across segments. While institutional participation continues to account for a significant proportion of algorithmic volumes, the gradual penetration of automation into retail trading marks a structural evolution in market conduct.

Algorithmic trading refers to the use of computer programs to automatically generate and/or execute trades based on pre-defined rules, parameters, or quantitative models, with limited or no real-time human intervention.

Long before the advent of algorithmic trading in India, dealers manually monitored market indicators, price movements, and technical parameters to execute trades in securities on stock exchanges on real time basis. As trading strategies became increasingly rule-based and repetitive—often driven by fixed indicators and predefined conditions—the limitations of manual execution became evident. This operational monotony, coupled with the growing need for speed, consistency, and discipline, catalyzed the adoption of algorithmic trading systems to automate decision-making and execution processes.

Cash Markets

Derivative Market

Equity Futures

Equity Options

Index Futures

Stock Futures

Traditionally, algorithmic trading in India was dominated by institutional players leveraging Direct Market Access (DMA) and co-location facilities to achieve ultra-low latency and efficient execution. Retail traders, in contrast, have largely accessed automation through broker-provided APIs and third-party platforms. Over time, all stakeholders in the algo trading ecosystem i.e. stock brokers, technology and API providers, strategy vendors, and trader have evolved as integrated functions, thereby leading to a more complex and interdependent market structure that raises new regulatory, compliance, and accountability considerations.

A key inflection point in this transition has been the rise of discount brokers and fintech platforms that lowered entry barriers for technologically inclined retail traders. The availability of APIs, developer-friendly documentation, and plug-and-play models have enabled a new layer of participants to either build or to deploy automated strategies without actually incurring any huge capital expenditure. This shift has created a parallel ecosystem of strategy developers, platform providers, and retail users, blurring the lines between trading, technology, and advisory services.

REGULATORY EVOLUTION OF ALGORITHMIC TRADING IN INDIA

With increased volume of algo trading including that of retail participation, SEBI’s regulatory focus expanded from institutional algos to the algos used by retail trades. While the core algo framework continued to apply formally at the broker level, SEBI incrementally tightened risk management norms such as order-to-trade ratio penalties, system audit requirements, and broker responsibility for surveillance of algorithmic activity routed through their infrastructure.

This period marked a regulatory transition from “who runs the algo” to “who enables the algo.” Brokers were positioned as the principal gatekeepers, even where trading logic originated from third-party platforms or client-side automation. With increase of retail algo trading, the occurrences of market mis- selling’s, bogus performance claims, could not be ruled out.

RECENT REGULATORY PUSH

SEBI’s recent regulatory push marks a structural shift from ensuring “Safer participation of retail investors in Algorithmic trading”, vide SEBI circular dared 4th February 2025. SEBI explicitly recognized retail algos as a distinct regulatory category and mandated exchanges to frame comprehensive operational standards governing APIs, algo registration, tagging, and risk controls. This reflects SEBI’s policy intent to balance technological adoption with systemic stability and investor protection, especially in light of the rapid growth of API-based retail trading.

Algos shall be categorized into two categories i.e. White Box Algos and Black Box Algos. White Box algos are algos where logic is disclosed and replicable and Black box algos are algos where logic is not known to user and is not replicable. For Black Box algos the algo provider shall register as a Research Analyst and maintain a detailed research report for each such algo and confirm to the exchanges that such report has been maintained. In case of any change in the logic governing the algo, register such algo as a fresh algo and maintain a detailed research report for the new algo, and confirm to the exchanges that such report has been maintained.

Pursuant to SEBI’s directions, National Stock Exchange (NSE) issued implementation standards and detailed operational modalities in May–July 2025. This framework also formalizes the role of third-party algo platforms as “Algo Providers” who must be empanelled with exchanges, with brokers acting as principals and bearing ultimate responsibility for orders routed through APIs. It also defines the standard operations related to API Access for Clients, APIs without registering algo, client generated algos, broker generated algos, threshold orders per second, Algo ID tagging and risk management.

International Financial Services Centre Authority (IFSCA) has recognized the growing importance of algorithmic trading for the growth and development of securities market in IFSC and therefore released consultation paper on Guidelines for Algorithmic Trading on the Stock Exchanges in IFSC. It provides for responsibilities of Stock Exchange which includes load management, performance study of its systems, Periodic Testing of Algorithms and audit trail.

WAY FORWARD

The expanding regulatory framework around algorithmic trading is materially increasing the compliance and operational functions across all market participants—including stock exchanges, brokers, algo and strategy providers, technology vendors etc.

The USA markets are generally considered to have the highest proportion of trades executed algorithmically, whereas in India the percentage of algo trading as a share of total trades is relatively lower; however, India’s regulatory framework is far more stringent, with active involvement of brokers and exchanges in compliance and risk supervision.

Key differentiators in India include the requirement of prior approval and mandatory order tagging of each algorithmic strategy, empanelment of brokers acting as regulatory gatekeepers and exchange-level approval required prior to deployment, algo registration and tagging, etc.

On the contrary, the U.S. algorithmic trading is primarily supervised through firm-level risk management systems, internal controls, and ongoing compliance and surveillance mechanisms which is adhered in India through API security, simulation testing, audit trails, surveillance, and incident reporting.

In view of the above, meaningful opportunities for professionals across legal, compliance, risk, audit, cyber security, and technology domains shall be available which include:

  • Designing governance frameworks,
  • implementing compliant trading architectures.
  • conduct system and model audits,
  • manage regulatory change, and
  • bridge the gap between complex trading technology and evolving SEBI/NSE requirements

These opportunities will position regulatory and tech-fluent professionals as key enablers of compliant innovation in the algorithmic trading ecosystem.

Section 44AB as well 271B clearly show that the requirement of audit and penal consequence are dehors the finding of the assessment proceedings relating to the computation of income and audit u/s 44AB is required on the basis of the turnover exceeding the threshold limit.

85. TS-184-ITAT-2026 (Kol.)

Jalpaigura Zilla Regulated Market Committee vs. ITO

A.Y.: 2017-18 Date of Order : 10.2.2026

Section: 44AB

Section 44AB as well 271B clearly show that the requirement of audit and penal consequence are dehors the finding of the assessment proceedings relating to the computation of income and audit u/s 44AB is required on the basis of the turnover exceeding the threshold limit.

FACTS

The assessee, M/s. Jalpaiguri Zilla Regulated Market Committee (AOP) did not file its return of income for AY 2017-18. As per the information available with the Department, the assessee deposited cash in the bank account during the FY 2016-17. Notice u/s 142(1) of the Income-tax Act, 1961 (“Act”) was issued asking the assessee to furnish its return of income for the AY 2017-18, but the assessee did not respond. Therefore, a showcause notice was issued to the assessee which also resulted in non-compliance.

The Assessing Officer (AO) therefore, treated the total credits amounting to ₹2,40,65,509/- in its bank account as the total turnover of the assessee. The net profit of the assessee was estimated @8% of the total receipts which came to ₹19,25,400/- (8% of ₹2,40,65,509/-) for AY 2017-18.

The assessment was completed u/s 144 of the Act, bringing ₹19,25,400/- to tax. Since the total turnover in this case was estimated at ₹2,40,65,509/- and sufficient & reasonable opportunities were provided to the assessee but the assessee failed to get its accounts audited as required u/s 44AB of the Act, therefore, penalty proceeding u/s 271B of the Act were initiated for non-filing of the Audit report. The AO levied penalty of ₹1,20,330/- u/s 271B of the Act.

Aggrieved, assessee preferred an appeal to CIT(A) who upheld the order of the AO.

Aggrieved, assessee preferred an appeal to the Tribunal where it contended that being Agricultural Produce Market Committee constituted under the state law which is entitled to full tax exemption under section 10(26AAB) of the Act its income was exempt and such Agricultural Produce Market Committee or Regulated Market Committee is generally not required to undergo tax audit under section 44AB or to file income tax returns for this exempt income, provided the income is used for statutory purposes. The statutory audit as specified under the Act was claimed to have been carried out.

HELD

Perusal of section 44AB as well as 271B of the Act shows that the requirement of audit and the penal consequence are dehors the finding of the assessment proceedings relating to computation of income and the audit under section 44AB of the Act is required on the basis of the turnover exceeding the threshold limit. The Tribunal held that despite the income being exempt, since the turnover had exceeded the specified amount for the purpose of getting the statutory audit done, the required audit report u/s 44AB of the Act on Form-3CD was required to be filed.

Since it was further submitted that the assessee had a reasonable cause for not getting the audit carried out and no such reasonable cause was mentioned before the Tribunal, except for mentioning the fact that the income was exempt, the Tribunal, in the interest of justice and fair play, remanded the matter to the CIT(A) for giving another opportunity to the assessee and present its case that it had a reasonable cause for not getting the audit done, who shall decide the issue as per law.

Bilateralism In An Era Of Protectionism – The India–Us Trade Deal In Perspective

The proposed India–US Trade Deal emerges at a time of heightened global trade turbulence marked by tariff escalations, supply chain fragmentation, and strategic energy realignments. Against the backdrop of intensified tariff-led negotiations under the Trump administration, both countries have engaged in calibrated discussions aimed at restructuring bilateral trade. This article examines broad and sector-specific trade trends, tariff diplomacy, energy considerations, benefits of the proposed India-US trade deal and a brief analysis of the recent Supreme Court of the United States (‘SCOTUS’) decision invalidating the reciprocal tariffs imposed by the Trump administration under the IEEPA. From an Indian perspective, the article further evaluates the implications of reciprocal concessions on commodities included in the trade deal, the strategic re-positioning of India in the global supply chains involving the US, and diversification of India’s export markets as a by-product of increased US tariffs over the last year. The analysis concludes that the proposed arrangement reflects not merely tariff adjustment, but a broader strategic recalibration within an increasingly fragmented global trade order.

INTRODUCTION

The announcement of the India-US Joint Statement on February 6, 2026,1 marked a watershed moment in a bilateral relationship that had, for much of the previous year, been defined by tactical friction and escalating tariff protectionism by the United States (“US”) under the President Donald Trump’s (“Trump”) ‘America First Trade Policy’. After nearly a year of high-stakes tariff diplomacy, both nations have finally signalled a transition toward a framework for an Interim Trade Agreement (“Interim Agreement”). This development is a strategic recalibration aimed at stabilizing the India-US trade corridor that faced unprecedented strain in the second half of 2025 and opening months of 2026.

To recall, India was one of the first countries to engage in a dialogue for a mutually beneficial trade agreement with the US after the historic meeting of the two heads of the State on February 13, 2025. In a joint statement after the meeting, both countries had signalled an intent to enter into Bilateral Trade Agreement (“BTA”) by the fall of 2025.2 The leaders had also set a bold bilateral trade mission – “Mission 500” – aiming to more than double total bilateral trade between the countries to $500 billion by 2030.

However, the following months saw the Trump administration imposing wide range of tariffs on several countries, including India, to correct the long-standing trade deficits which the US ran with most of its trading partners. The most prominent of these tariffs were, the country-specific ‘reciprocal tariffs’ imposed under the US President’s emergency powers of International Emergency Economic Powers Act, 1977 (“IEEPA”) and the product-specific or sector-specific tariffs imposed under Section 232 of the Trade Expansion Act, 1962 (“TEA”). In the tariff-led trade diplomacy that followed, the Trump administration negotiated framework reciprocal trade deals (as against the concept of full-fledged Free Trade Agreements) with many countries that reduced those reciprocal tariffs in return for almost zero-duty and increased market access for US products with some countries even agreeing to investment commitments in the US. In effect, the Trump administration was able to effectively deploy the trade strategy of ‘Tariff-First, Deal-later’ to achieve better negotiated outcomes from a position of command.

1 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2224783&reg=3&lang=2
2 https://www.whitehouse.gov/briefings-statements/2025/02/united-states-india-joint-leaders-statement
3 The US-China trade truce announced in May 2025 (extended in August/November 2025); 
the ‘Economic Prosperity Deal’ with the UK in May 2025; the ‘Turnberry Framework’ with the EU in July 2025; 
Framework deals with Asian countries like Indonesia, Thailand, Philippines, 
South Korea, Vietnam, Malaysia between July to November 2025 (illustrative)

For India, following the breakdown of initial talks in mid-2025, the Trump administration imposed a staggering 50% aggregate duty on majority Indian exports – comprising of a 25% reciprocal tariff4 and a further 25% penal tariff linked to India’s energy trade with Russia.5 India’s response, notably matured and rational, avoided the pitfalls of retaliation. Instead, India adopted a calibrated stance, leveraging diplomatic patience to finally negotiate a removal of 25% Russian oil tariffs and a reduction of reciprocal tariffs to 18%.6 This period of cooling relations has now given way to a multitude of press releases and official mandates aimed at adjusting the tariffs and non-tariff barriers to trade flows between the two nations.

4 Executive Order (“EO”) 14257 available at https://www.whitehouse.gov/presidential-actions/2025/07/further-modifying-the-reciprocal-tariff-rates
5 EO 14329 available at https://www.whitehouse.gov/presidential-actions/2025/08/addressing-threats-to-the-united-states-by-the-government-of-the-russian-federation 
6 At the time of writing, with the announcement of SCOTUS decision dated Feb 20, 2026, 
the reciprocal tariffs, including India’s 18% tariffs, have been held to be illegal,
and the US administration has imposed a 10% temporary surcharge under a separate provision of law (announced to be raised to 15%).

Section I of this Article deals with an analysis of the shift in India-US empirical trade trends and sector-specific performance, followed by an evaluation of trade diplomacy and energy considerations, including developments relating to Russian oil imports. Section II elaborates on the diversification of India’s export markets in the backdrop of strains in India-US trade relations. Section III discusses the prospective trade benefits and concessions on commodities embedded within the proposed framework. Section IV further discusses implications of The Supreme Court of the United States (“SCOTUS”) decision dated Feb 20, 2026, limiting the executive tariff powers of the US’s President and invalidating the so-called “liberation day” or reciprocal tariffs imposed by the US administration on most countries, including India. The article concludes by reflecting on the strategic and legal issues and assessing the importance of the current trade deal and its long-term implications.

I. SHIFT IN INDIA-US TRADE TRENDS

Historically, India has had a long-standing strategic relationship with the US. The bilateral trade has been one of the important pillars of this relationship with exports as a major forex earner insofar that India’s largest trading partner is the US commanding a lion’s share of ~20% in India’s total merchandise exports of $437 billion in FY 24-25. The chart below shows India’s top 5 destinations for exports of goods.

Indias Top Export markets for good

Source: MoC, Trade Statistics

As reflected in the above chart, India’s exports to the US registered strong growth of 11.6% from FY24 to FY25, reaffirming US as a key export destination for India. The data also shows that amongst the top export destinations for India, US leads the pack by a big margin. Further, barring Netherlands, India had a trade surplus ($40.8 billion) only with the US from amongst the above countries in FY 24-25. This makes US as the leading export market for India.

The trend somewhat reversed in FY26 following the imposition of steep US tariffs on Indian merchandise exports. On 6 August 2025, Trump announced an additional 25% tariff as a penalty linked to India’s imports of Russian oil, raising total duties to as high as 50% on several products, which came into effect on and from 27 August 2025.7 For analytical clarity, FY25–26 may be divided into 5 months of April–August 2025 (pre-penalty) and 4 months of September 2025 to December 2025 (post-penalty).

India’s exports to USA (in US $ Million)
Time Period Amount Time Period Amount Growth (in %)
Apr-Aug 2024 34,210.80 Apr-Aug 2025 40,308.85 17.82
Sept-Dec 2024 25,814.62 Sept-Dec 2025 25,507.49 -1.19

 

India’s exports to USA (in US $ Million)
Time Period Amount Time Period Amount Growth (in %)
Sep-24 6,206.06 Sep-25 5,425.06 -12.58
Oct-24 6,899.47 Oct-25 6,262.29 -9.24
Nov-24 5,695.19 Nov-25 6,934.87 21.77
Dec-24 7,013.91 Dec-25 6,885.28 -1.83 
7 https://www.whitehouse.gov/presidential-actions/2025/08/addressing-threats-to-the-united-states-by-the-government-of-the-russian-federation/

While the period from April to August 2025 showed strong growth of 17.82% on anticipation of trade deal and a favourable tariff rate for India as compared to other countries like China, the period from September to December 2025 showed contraction in US exports, attributable to the heightened tariff burden and resulting loss of price competitiveness. Furthermore, a decline in the YoY growth from September till December 2025 (barring November 2025) shows a de-growth as compared to 2024. The decline in exports to India’s largest trading partner, coupled with sustained pressure on labour intensive and export dependent sectors, accelerated the diplomatic engagements on energy trade and provided significant impetus for the structured negotiation of a trade arrangement between the two countries.

While the aggregate data highlights a macro-economic de-growth in late 2025, a sectoral breakdown reveals which industries bore the brunt of US tariffs and which are poised for a recovery under the revised trade terms of the proposed Interim Agreement. For the Indian exporter, particularly in labour-intensive segments, the 2025-26 fiscal year was a masterclass in risk management.8. The following table summarizes the performance of some of the key sectors.

Sector-specific Exports from India to
USA (in US $ Million)
Chapter(s) Commodity Apr-Dec 2024 Apr-Dec 2025 % Growth
50-63 Textiles 7,780.00 7,156.78 -8.01
3 and 16 Fisheries and Shrimp 2,055.35 1,860.15 -9.5
71 Gems and Jewellery 7,025.80 3,870.14 -44.92
39, 41-42 and 64 Plastics and Leather Goods 2,193.27 2,018.90 -7.95
30 Pharmaceuticals 6,601.44 6,561.55 -0.6

Source: MoC Trade Statistics

a. Textiles:9 This sector, a cornerstone of Indian exports, recorded an 8.01% contraction for exports to the US. The data confirms that despite being a high-volume category, the lack of a formal trade deal and the presence of reciprocal tariffs forced a de-growth. The proposed trade deal provides a strategic gateway to the $118 billion U.S. import market, revitalizing India’s largest textile destination. By securing preferential access for high-value apparel (70%) and made-ups (15%), the U.S. is projected to contribute over 20% of India’s $100 billion textile export target for 2030.

b. Fisheries and Shrimp:11 Marine Products also showed a decline of 9.5%, as increased US scrutiny and competition from Latin American exporters (Ecuador) rerouted global supply chains. The U.S. remains the primary destination for Indian frozen shrimp, accounting for nearly 48% of total exports. Following the tariff reduction, industry experts project a 10-15% volume increase in shipments to the U.S. as stalled export orders resume.

c. Gems and Jewellery:12 This sector experienced the most severe contraction, with a nearly 45% drop in value (from $7 billion to $3.8 billion), attributed to the tariffs that peaked in late 2025 and high US interest rates which made the consumers cut down on discretionary spends. High tariffs caused businesses to shift to competitors in Thailand and Vietnam, that had lower reciprocal tariffs of 19-20% with no additional tariffs linked to energy imports. The proposed deal includes “Annex III” provision which secures zero-duty access for cut-but-not-set natural diamonds, coloured gemstones, platinum, and coins. With a reduced rate, India may now hold a structural advantage over China, while matching or undercutting regional rivals like Vietnam and Bangladesh, assuming Trump administration will use other available Statutes to reach the pre-SCOTUS ruling tariffs. The deal also revitalizes key industrial hubs like Surat (processing 90% of the world’s diamonds) and the Mumbai Diamond Bourse, positioning India as the world’s “one-stop destination” for gems and jewellery.

8 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2225318&reg=3&lang=2 
9 https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2224925&reg=3&lang=2
10 Based on total US imports under Chapters 51-63 from Trade Map 
11 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2202977&reg=3&lang=2 
12 https://gjepc.org/admin/PressRelease/205231113_GJEPC_Statement_on_India-US_Deal.pdf

d. Plastics and Leather Goods: This segment saw a 7.95% decline, with export values dropping from $2.2 billion to $2 billion. The nearly 10% slump underscores the vulnerability of these MSME-heavy sectors to trade volatility. Reduction of tariffs from the peak of 50% is critical for restoring the viability of leather footwear and industrial plastic clusters (like those in Kanpur and Agra) which were priced out of the US market in Q4 2025.

e. Pharmaceuticals: The pharmaceuticals sector demonstrated remarkable resilience, recording only a marginal 0.6% dip. This stability was primarily due to exemptions granted by the US to pharmaceutical products, which shielded critical generic drugs from the 25% reciprocal and 25% Russian oil tariffs applied to other sectors in late 2025. This sector has been maintaining its position as a top-three export commodity. The Interim Agreement (Annex III) proposes 0% duty access for generic drugs and APIs while initiating Mutual Recognition Agreements (MRAs) to streamline United States Food and Drug Administration (USFDA) inspections and reduce regulatory friction.

Apart from above, there are several other sectors wherein Indian exports could register an increase on the back of the trade deal. This includes processed food sector with “zero-duty” access for specific agricultural items. This duty-free access specifically targets spices, tea, coffee, fresh fruits (mango, guava), nuts (cashew), and processed fruit products. With the removal of the 50% tariff ceiling, Indian processed food exports are projected to see a 15-20% volume surge as they become more price-competitive against Latin American and Southeast Asian suppliers. Mutually recognised quality checks are also applicable for this sector.

It is worth noting that the items mentioned in the press release under the zero reciprocal tariffs are only illustrative and details of all such items will be known when the text of the agreement is finalised and released in public. In particular, the EO 14346 of September 5, 2025, issued by the US includes a wide range of products that are eligible for NIL or reduced reciprocal tariffs for countries that reach a trade agreement with the US.

The strategic trade posture adopted by both countries was closely intertwined with energy considerations, particularly India’s imports of Russian crude oil. The backdrop to this development lies in the outbreak of the Russia-Ukraine War. Western sanctions and price caps redirected Russian oil flows toward Asian markets, with India emerging as a principal destination for discounted crude. Russia’s share in India’s crude imports rose from under 2% prior to 2022 to approximately 30–35% during 2023–2413 and thereafter with geopolitical tensions fell to a low of 21.2% in January 2026.14 The imports of Russian oil into India saw a negative growth from in Q3 FY24 to Q3 FY25, as is evidenced in the table below.

13 https://www.reuters.com/business/energy/russian-oil-drives-opec-share-indias-imports-record-low-data-shows-2025-04-22/
14 https://www.reuters.com/business/energy/russian-share-indias-january-oil-imports-lowest-since-late-2022-data-shows-2026-02-18/
India’s imports from Russia (in US $ Million)
Time Period Amount Time Period Amount Growth
(in %)
Sep-24 4,674.72 Sep-25 3,321.85 -28.94
Oct-24 5,801.83 Oct-25 3,566.16 -38.53
Nov-24 3,902.80 Nov-25 3,722.92 -4.61
Dec-24 3,199.16 Dec-25 2,714.54 -15.15

Source: MoC Trade Statistics

Following the imposition of the additional 25% US tariffs, there was a recalibration in sourcing patterns. Preliminary estimates suggest a decline in the share of Russian crude in India’s imports by approximately 11–14% percentage points in the immediate post-penalty phase, reflecting cautious recalibration rather than abrupt disengagement. It is important to maintain analytical neutrality in assessing this shift. India has not formally ceased imports of Russian oil; rather, its procurement strategy has been guided by considerations of energy security, and geopolitical balancing. The diversification of oil sourcing observed post-penalty appears driven by a combination of commercial prudence and systemic trade pressures, rather than overt political capitulation. The imposition of penalty tariffs reflected the structural approach of the Trump administration, whose economic policy orientation prioritise US domestic industrial revival and, critically, expansion of US energy production and exports. The strategy was sequential, deliberate and transactional. Tariffs were imposed first to create negotiating leverage, and trade agreements were pursued thereafter from a position of enhanced bargaining strength. Subsequent elimination of the additional 25% tariffs via the Joint Statement demonstrates how energy trade became a central axis of negotiation within the evolving India–US framework.

II. EXPORT MARKET DIVERSIFICATION

The dip in exports to the US during the high-tariff phase of 2025 exposed the structural concentration risk inherent in India’s exports. With the US accounting for a significant share of India’s merchandise exports (~20%), sudden imposition of elevated duties generated an immediate need for geographic diversification. Notably, Indian Government, over the last 4 years, has taken major steps to forge newer relationships with trading partners. India signed a free trade agreement with United Arab Emirates (UAE) in February 2022; with Australia in April 2022; with EFTA countries (Switzerland, Norway, Iceland, and Lichtenstein) in early 2024; with the UK in July 2025; and concluded the negotiations with the EU for a trade agreement in January 2026. In response, Indian exporters accelerated engagement with alternative markets across the Middle East, Europe, Southeast Asia, and Africa. The UAE emerged as a key rebalancing destination, supported by preferential arrangements and logistical proximity. The bilateral trade between India and UAE is projected to reach US$ 250 billion by 2030.15 Similarly, trade outreach intensified toward ASEAN economies16 and select EU markets, where tariff exposure was comparatively stable. This rapid market agility ensured that while bilateral trade with the US dipped, India’s total global exports registered a growth of 2.34% between April to December 2025 as compared to same period in 2024, proving that the Indian export machine could function effectively under pressure. This shift was not entirely market-driven; it was institutionally supported. The Ministry of Commerce and Industry operationalised targeted export promotion schemes, credit support measures, and market-access initiatives to cushion exporters from US volatility. Launched with an outlay of ₹25,060 crore in the Union Budget 2025-26, the Export Promotion Mission introduced two critical pillars to strengthen MSMEs exports: ‘Niryat Protsahan’, which provided financial enablers like interest subvention and a ₹20,000 crore credit guarantee, and ‘Niryat Disha’, which focused on non-financial support such as quality compliance and international branding for MSME.17 Incentives for exploring new jurisdictions, participation in trade fairs, and facilitation of compliance with alternative regulatory regimes contributed to partial absorption of the shock. Sectorally, labour-intensive industries displayed the highest degree of adaptive movement. Textile and leather exporters, in particular, redirected shipments to EU and other markets,18 while pharmaceutical exporters deepened penetration in Latin American and EU markets.19

Although diversification may not fully offset the decline in US-bound exports in the short term, it is bound to reduce over-dependence on a single market. Strategically, the episode has accelerated a structural reorientation in India’s export philosophy—from market concentration toward calibrated pluralism. The diversification undertaken during 2025 has strengthened India’s bargaining position in ongoing negotiations by demonstrating reduced vulnerability to unilateral tariff action. In this sense, export market diversification represents not merely a reactive adjustment, but a long-term resilience mechanism for India’s evolving trade architecture.

15 https://www.ibef.org/indian-exports/india-uae-trade#:~:text=India%20and%20UAE%20signed%20the,Tata%20Motors%2C%20and%20Tata%20Power.
16 https://www.orfonline.org/expert-speak/resetting-india-asean-trade-in-2025
17 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2210874&reg=3&lang=2
18 https://www.reuters.com/world/india/indias-textile-exporters-pin-hopes-eu-deal-after-us-tariff-blow-2026-01-29/
19 https://www.ibef.org/economy/quarterly-newsletter/market-spotlight-latin-american-countries-q3

III. BENEFITS OF THE PROPOSED DEAL

The strategic architecture of the 2026 Interim Agreement is built upon a foundation of concessions and calculated market openings that prioritize long-term industrial synergy over immediate, broad-based liberalisation. Central to this framework is a significant reduction in MFN based customs duties for a wide range of US industrial products and high-priority agricultural commodities. According to the official fact sheets, India has agreed to lower or eliminate tariffs on goods such as dried distillers’ grains (DDGs), red sorghum, tree nuts, fresh and processed fruits, soybean oil, and premium spirits.20 However, these concessions are far from unconditional; they exemplify a “farmers-first” selectivity.21 A notable victory for Indian negotiators was the deliberate exclusion and no tariff concessions on sensitive agricultural, dairy, or spice products, ensuring that major grains, fruits, dairy items, and key farm commodities remain fully protected and that no market access has been opened to the US in these critical sectors, despite earlier US pressure.22 By walling off such sensitive categories, alongside dairy and poultry, India has demonstrated a sophisticated ability to deepen trade ties while insulating its agrarian core from sudden market shocks. Beyond immediate duty cuts, the deal is anchored by a massive “Intent to Purchase” framework, wherein India envisions sourcing over $500 billion in US goods and services over the next five years. It is directed toward high-value sectors that are critical to India’s $30 trillion economic vision.

Additionally, a critical, yet often overlooked, facet of this realignment is the focus on harmonizing the “invisible” barriers to trade. The framework includes a commitment to the mutual recognition of BIS (Bureau of Indian Standards) and ISO quality standards, particularly for ICT and medical devices. India has agreed to eliminate the restrictive import licensing procedures that previously hampered the flow of US ICT products including laptops, tablets, and servers. This ensures that India’s digital infrastructure remains powered by top-tier global hardware while providing US tech giants with a stable, transparent market access to India.

20 https://in.usembassy.gov/fact-sheet-the-united-states-and-india-announce-historic-trade-deal/#:~:text=India%20will%20eliminate%20or%20reduce,
and%20spirits%2C%20and%20additional%20products.
21 https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2223894&lang=1&reg=3&, 
https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2229322®=3&lang=2
22 https://www.pib.gov.in/PressReleasePage.aspx?PRID=2225186&reg=3&lang=2

GEOPOLITICAL ARBITRAGE: TARIFF DIFFERENTIAL

Perhaps the most significant competitive advantage offered by this deal lies in the tariff differential it establishes relative to other global players, especially China. While the agreement caps the reciprocal tariffs on Indian goods at 18% (after SCOTUS ruling, the current additonal duty rates are 10% which may change to 15% as per the latest annoucements), many Chinese exports remain subject to Section 301 and other duties which can soar significantly higher for many tariff lines.23 This “tariff gap” provides a powerful fiscal incentive for global corporations to accelerate the “China+1” strategy, positioning India as the premier alternative for high-volume manufacturing. By maintaining a tariff rate—which is lower than the duties faced by regional competitors like Vietnam or Bangladesh—India effectively institutionalizes its role as a stable, low-tariff gateway for the US market. This strategic arbitrage not only safeguards India’s labour-intensive exports like textiles and leather but may also signals a shift in global supply chains. A stark example of this is Apple Inc. which is actively shifting its manufacturing and supply chain base from China to India for consumption in the US.24

23 https://www.congress.gov/crs-product/IF12125#:~:text=In%20May%202024%2C%20the%20USTR,%22actionable%22%20under%20Section%20301.
24 https://www.reuters.com/world/china/apple-aims-source-all-us-iphones-india-pivot-away-china-ft-reports-2025-04-25/

IV. LATEST SCOTUS RULING AND ITS IMPLICATIONS

While the proposed India–US trade framework progresses at the diplomatic level, parallel judicial developments within the United States introduce an additional layer of uncertainty. The Supreme Court of the United States (SCOTUS) in Learning Resources Inc., V. Trump, decision dated Feb 20, 2026, by a 6:3 majority has held that US President has no executive authority to impose sweeping reciprocal tariffs (on all countries) and fentanyl linked drug tariffs (on Canada, Mexico and China) under the IEEPA, the statute invoked to justify certain emergency-based trade measures.25 The ruling is firmly grounded in the basic principles of separation of powers between the legislative authority of the Congress and the executive authority granted to the President for imposition of tariffs. For Indian exporters, the ruling is a shot in the arm to not only recalibrate the furture export startegies to the US, but also consider the legality of past collected duties on Indian exports (including Russian oil tariffs collected under IEEPA). The ruling opens the door for refunds of all tariffs imposed during 2025 under IEEPA. The importers, who paid these duties, may consider claiming refunds after lodging appropriate entry summary corrections or lodging protests before the US Customs and Border Protection (CBP) and may also consider an appellate challenge before the United States Court of International Trade (CIT) for such refunds. Any practical financial recovery for Indian exporters would depend on contractual arrangements with their US buyers regarding the incidence of duty.

At the time of writing, while the full impact of SCOTUS ruling was still being analysed, the Trump administration had already issued several executive orders, notably to order termination of reciprocal tariffs (on all countries) and fentanyl linked drug tariffs (on Canada, Mexico and China) as well as certian other tariffs actions under the IEEPA.26 It also issued a proclamation imposing temporary 10% import surcharge section 122 of the Trade Act of 1974, effective February 24, 2026, on all imports into the US27 (announced to be raised to 15%).28 That statute gives power to the President to impose tariffs of up to 15% for 150 days, unless extended by Congress, to deal with fundamental international payments problems.

As per another fact sheet issued by the Trump administration,29 the US has indicated that it will continue with its tariff policy even after the SCOTUS ruling albeit with different Statutes which provide clear powers to the President to impose tariffs. It indicated that Trump has already directed the Office of the United States Trade Representative (USTR) to use section 301 of the Trade Act of 1974 to investigate unreasonable and discriminatory acts, policies, and practices that burden or restrict U.S. commerce. It is under this Statute that the US has imposed duties on China since 2018 for unfair trade and IPR violations. The intent shows that the SCOTUS ruling is not going to deter Trump administration in aggressively pursuing its tariffs and deal approach in coming months and years, while the uncertainty plays out for past collected duties under an illegally invoked statutory authority.

25 https://www.supremecourt.gov/opinions/25pdf/24-1287_4gcj.pdf
26 https://www.whitehouse.gov/presidential-actions/2026/02/ending-certain-tariff-actions
27 https://www.whitehouse.gov/presidential-actions/2026/02/imposing-a-temporary-import-surcharge-to-address-fundamental-international-payments-problems
28 https://indianexpress.com/article/world/us-news/us-president-trump-increases-global-tariffs-10-15-supreme-court-10544932
29 https://www.whitehouse.gov/fact-sheets/2026/02/fact-sheet-president-donald-j-trump-imposes-a-temporary-import-duty-to-address-fundamental-international-payment-problems

V. CONCLUSION

The proposed trade arrangement between India and the United States must be viewed not as an isolated tariff negotiation, but as a defining inflection point in bilateral economic relations. The events of 2025—marked by heightened tariffs, export contraction, energy-linked penalties, and judicial scrutiny—tested the structural resilience of India’s external trade framework. India’s response, however, has been measured and strategic. Rather than adopting retaliatory escalation reminiscent of earlier trade tensions, the approach has been calibrated—preserving critical agricultural and dairy interests, diversifying export markets, recalibrating energy sourcing, and simultaneously pursuing a structured agreement. This reflects a maturing trade philosophy grounded in stability, risk management, and long-term competitiveness. Equally significant is the broader shift from transactional trade engagement to strategic alignment—encompassing supply-chain resilience, energy cooperation, and regulatory coordination. The proposed framework signals movement toward institutionalised predictability, reducing the vulnerability of exporters to unilateral policy shocks. Yet, it must be emphasised that the agreement remains prospective. Its ultimate impact will depend upon the precise drafting of tariff schedules, rules of origin, dispute resolution mechanisms, and implementation timelines. The final text will determine whether the framework delivers durable relief or merely temporary reprieve. The India–US Trade Deal represents not merely tariff calibration, but the redefinition of India’s place in an increasingly polarised global trade order.

Redeemable Preference Shares – Debt or Equity?

In EPC Constructions vs. Matix Fertilizers, the Supreme Court ruled that redeemable preference shares (RPS) constitute equity, not “debt”. Consequently, RPS holders cannot initiate insolvency as financial creditors under the IBC. The Court emphasized that non-redemption is not a legal default, since the Companies Act strictly restricts redemption to distributable profits or fresh share issues. Although Ind AS 32 classifies mandatory RPS as financial liabilities, the Court held that this accounting treatment cannot override statutory legal character,. Ultimately, RPS classification depends on the specific statute: while Income Tax and Stamp Duty treat RPS as equity, FEMA regulations explicitly classify them as debt.

INTRODUCTION

In EPC Constructions India Ltd. vs. Matix Fertilizers and Chemicals Ltd. [2025] 260 Comp Case 766 (SC), the Supreme Court has delivered a significant judgment clarifying the legal character of cumulative redeemable preference shares and their treatment under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court unequivocally held that preference shares, being part of a company’s share capital, do not constitute “debt” and that a preference shareholder cannot assume the status of a financial creditor for the purposes of initiating a Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC.

The ruling settles an important and frequently litigated question at the intersection of company law, Ind AS and the IBC — whether equity instruments structured with redemption features and fixed returns can be recharacterised as financial debt on the basis of their “commercial effect of borrowing”.

FACTS

The dispute arose from an engineering, procurement and construction (EPC) relationship between EPC Constructions India Limited and Matix Fertilizers and Chemicals Limited. EPC Constructions had undertaken substantial construction work for Matix’s fertilizer complex. Over time, significant sums became payable to EPC Constructions. Faced with a liquidity crunch, Matix converted a portion of EPC Constructions’ outstanding receivables into redeemable preference share capital. The terms provided for redemption at par after three years, subject to statutory conditions, and for cumulative dividends at a fixed rate of 8%. Subsequently, EPC Constructions issued a demand notice to Matix, asserting that non-redemption of CRPS constituted a default in payment of a financial debt and, hence, invoked the corporate insolvency of Matix under s.7 of the IBC.

The NCLT dismissed the Section 7 application, holding that:

  • preference shares were a part of share capital and not debt;
  • redemption of preference shares was statutorily restricted under Section 55 of the Companies Act, 2013;
  • non-redemption did not result in the preference shareholder becoming a creditor; and
  • in the absence of profits or proceeds from a fresh issue of shares, no redemption obligation could legally arise. Hence, it was not possible for a default in redemption to become a debt.

The NCLAT affirmed these findings, observing that the original contractual receivables stood extinguished upon conversion into preference share capital and that the appellant’s rights thereafter were confined to those of a shareholder.

ISSUE BEFORE THE SUPREME COURT

The issue before the Court was whether a holder of cumulative redeemable preference shares could be regarded as a financial creditor, and whether non-redemption of such shares could constitute a default under Sections 3(12) and 7 of the IBC.

PREFERENCE SHARES ARE SHARE CAPITAL, NOT DEBT

The Supreme Court held that it was a settled principle of company law that preference shares formed a part of a company’s share capital, and amounts paid on such shares were not loans. Dividends on preference shares were payable only out of distributable profits, and redemption is similarly constrained. The Court noted that the appellant had consciously agreed to convert its receivables into preference shares and had approved the transaction as an “investment”. Once such conversion took place, the original debt stood extinguished.

Relying on precedents, the Court held that a preference shareholder “does not and cannot become a creditor merely because redemption has not taken place”. It relied on the decision of the AP High Court in Lalchand Surana vs. Hyderabad Vanaspathy Ltd [1990] 68 COMP CASE 415 (Andhra Pradesh) which had held as follows:

“…………whether, in case of failure of the company to repay the amount due thereunder, such shareholders become “creditors”. ……….no such shares shall be redeemed except out of the profits of the company, which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. This aspect, in my opinion, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a “creditor”. The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for dividend, or by a fresh issue of shares. This is a limitation which is not applicable to the case of an ordinary creditor. In the face of this position in law, and in the absence of any authority on the subject, I hold that the holders of redeemable preference shares do not and cannot become creditors of the company in case their shares are not redeemed by the company at the appropriate time. They continue to be shareholders, no doubt subject to certain preferential rights mentioned in section 85. If they do not become the creditors of the company, they cannot apply for winding up of the company under section 433(e).”

The Court also referred to an English Commentary, “Principles of Modern Company Law” (Tenth Edition) by Gower, page 1071 which had stated:

The line between the holder of a debt instrument and a share is particularly narrow if the contrast is made with a preference shareholder, who is a member of the company, but a member whose share rights may limit the shareholder’s dividend to a fixed percentage of the nominal value of the share and give that shareholder no right to participate in surplus assets in a winding-up, and perhaps only limited voting rights. The main difference between the two in such a case may then be that the dividend on a preference share is not payable unless profits are available for distribution, whereas the debt holder’s interest entitlement is not subject to this.

The Court highlighted that redemption of preference shares under s.55 of the Companies Act, 2013 could occur only:

a) out of profits available for distribution as dividends; or
b) out of the proceeds of a fresh issue of shares made for the purpose of redemption.

The Court observed that in the present case, it was undisputed that Matix had incurred losses and had not made any fresh equity issue for redemption. Consequently, the CRPS had not become legally due and payable.

The Court rejected the argument that mere expiry of the contractual redemption period could override statutory restrictions, holding that redemption contrary to Section 55 would amount to an impermissible return of capital.

No “Debt” and No “Default” under the IBC

Turning to the IBC, the Court examined the definitions of “debt”, “financial debt” and “default”. It emphasised that a default could occur only when a debt has become due and payable in law and remains unpaid.

The Court held that since preference shares do not constitute debt, and since no redemption obligation had arisen in law, there could be no default under Section 3(12) of the IBC. Consequently, the threshold requirement for admission of a Section 7 application was not met.

The Court reiterated that the IBC is not a recovery statute and that its triggering mechanism is strictly circumscribed by statutory prerequisites.

COMMERCIAL EFFECT OF BORROWING

The Court drew an important distinction. It observed that while the phrase “commercial effect of borrowing” allows courts to look beyond form in appropriate cases, it cannot be used to recharacterise equity as debt where the legal nature of the instrument is clear and statutorily defined.

The Court noted that Section 5(8) expressly refers to instruments such as bonds, debentures and notes, but makes no reference to preference shares. The omission, the Court held, was significant.

The Court placed reliance on Radha Exports (India) Pvt. Ltd. vs. K.P. Jayaram, (2020) 10 SCC 538 which had held that the payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt.

ACCOUNTING ENTRIES NOT CONCLUSIVE

Reliance was sought to be placed on the fact that the issuer company had shown the preference shares as a financial liability in its books of accounts under Ind AS. However, the Court negated this ground and held that the treatment in the accounts, due to the prescription of accounting standards, would not be determinative of the nature of the relationship between the parties as reflected in the documents executed by them.

Further it held that the IBC has its own prerequisites which a party needs to fulfil, and unless those parameters are met, an application under Section 7 will not pass the initial threshold. Hence, by resorting to the treatment in the accounts, this case could not be decided. It relied upon an earlier decision in Sutlej Cotton Mills Ltd. vs. CIT, (1979) 116 ITR 1 (SC) which had held that it was well settled that the way in which entries are made by an entity in its books of account is not determinative of the question whether it has earned any profit or suffered any loss.

It also relied upon another decision in Union of India vs. Association of Unified Telecom Service Providers of India and Others, (2020) 3 SCC 525, which dealt with the definition of gross revenue as appearing in AS-9, which was contrary to the definition as understood under earlier decisions. The Court held that the accounting standard is not comprehensive and does not supersede the practice of accounting. It only lays down a system in which accounts have to be maintained. Accounting standards make it clear that these do not provide for a straitjacket formula for accounting but merely provide for guidelines to maintain the account books in a systematic manner. The AS-9 definition could not supersede the generally accepted definition.

FINAL RULING OF THE COURT

The Supreme Court dismissed the appeal, holding that:

a) preference shares were equity, not debt;

b) a preference shareholder was not a financial creditor under the IBC;

c) non-redemption of preference shares did not constitute default;

d) accounting treatment could not override statutory and contractual character; and

e) the s.7 application was rightly rejected by the NCLT and NCLAT.

TREATMENT OF PREFERENCE SHARES UNDER OTHER LAWS

While the Supreme Court has given a good exposition of the treatment of preference shares under the IBC, it would be worthwhile to examine their classification under other laws also.

COMPANIES ACT

Under the Companies Act, 2013, redeemable preference shares are expressly classified as share capital and not as debt instruments. Section 43 recognises preference share capital as a distinct category of share capital, conferring preferential rights with respect to dividends and repayment of capital in winding up.

In this respect, an old decision of the Madras High Court in the case of Kothari Textiles Ltd. vs. Commissioner of Wealth-tax [1963] 48 ITR 816 (Madras) is quite relevant:

“We are unable to find any authority in support of this proposition. The real position seems to be to the contrary. In Palmer’s Company Law, it is stated at page 295 :

“Preference shares carry invariably a preferential right as to dividend which is expressed in a percentage of the nominal amount of the share, e.g., ‘6 per cent, preference shares’.

This does not mean that the preference shareholder is invariably entitled to six per cent, per annum. Unlike the debenture-holder, the preference shareholder who, after all, is a shareholder, is only entitled to income from his investment if a distributable profit within the meaning of the law is available. His right is not to dividend but to preferential treatment if and when dividend is distributed.

Moreover, this right will, in the normal cases, not automatically become effective when distributable profit is available; normally, according to the terms defining the rights of the preference shares, the preference shareholders are only entitled to claim preferential treatment when a dividend is declared. …………. The result accordingly is that the contention that the proposed dividends are classifiable as debts as on the valuation dates though there had been no declaration of the dividend by the general body fails. “

FEMA (NON-DEBT INSTRUMENTS) RULES, 2019

The Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEMA NDI Rules) classify fully and mandatorily convertible preference shares as equity instruments, while optionally convertible or non-convertible preference shares are treated as debt instruments for FEMA purposes. Redeemable preference shares, which do not convert into equity but are repayable at par or otherwise, therefore fall outside the definition of “equity instruments” under Rule 2(k) of the NDI Rules. Thus, the FEMA approach is contrary to the one expressed by the Supreme Court in the context of IBC and Companies Act.

FEMA OVERSEAS INVESTMENT RULES, 2022

Under the FEMA Overseas Investment Rules and Regulations, 2022, redeemable preference shares issued by foreign entities are generally classified as debt instruments for outbound investment purposes, unless they are fully and compulsorily convertible into equity within a specified timeframe. Redeemable preference shares typically fall under the debt category, attracting restrictions on maturity, return, and leverage, and are subject to the overall financial commitment limits prescribed for overseas investments.

ACCOUNTING CLASSIFICATION UNDER IND AS 32

Ind AS 32 adopts a substance-over-form approach in distinguishing between financial liabilities and equity instruments. Under this standard, a preference share that contains a contractual obligation to deliver cash or another financial asset, such as mandatory redemption at a fixed or determinable date, is classified as a financial liability, notwithstanding its legal form as share capital. Consequently, mandatorily redeemable preference shares are typically presented as borrowings or other financial liabilities in the issuer’s balance sheet, with dividends treated as finance costs rather than distributions. Compulsorily convertible preference shares would continue to be shown as equity capital.

However, as the Supreme Court emphasised, this accounting classification is not determinative of legal rights and remedies under the Insolvency and Bankruptcy Code or the Companies Act. Ind AS 32 serves financial reporting objectives and cannot alter the statutory character of an instrument or elevate a shareholder to the status of a creditor for insolvency purposes.

INCOME TAX

Preference Shares are treated as capital under the Income Tax Act and dividend paid on them is treated as dividend both in the hands of the payer company and the investor. Thus, preference dividend is not allowed as a deduction for the payer company even if the shares are classified as debt under Ind AS.

STAMP DUTY

An issue of preference shares attracts duty as on an issue of capital. RPS are treated as securities under the Securities Contract (Regulation) Act, 1957 and hence, would be treated as capital for the purposes of levy of stamp duty. The Indian Stamp Act, 1899 levies duty at 0.005% on the value of the shares.

CONCLUSION

The Supreme Court’s decision in EPC Constructions vs. Matix Fertilizers marks a critical clarification in insolvency law. By holding that preference shares do not constitute debt and that preference shareholders cannot invoke the IBC as financial creditors, the Court has drawn a clear and principled boundary around the insolvency regime.

The ruling promotes certainty, preserves the integrity of corporate capital structures, and prevents misuse of the insolvency process. For practitioners, investors and corporate advisors, the judgment serves as a reminder that commercial substance cannot override statutory form where the law draws an explicit line — and that equity, however structured, remains equity unless Parliament decides otherwise.

However, when the statutes expressly provide otherwise, such as in the case of FEMA and Ind AS, the preference shares would be classified as debt. Hence, one needs to first determine the statute being dealt with and then adopt a “horses for courses approach”. Clearly, a “one-size-fits-all attitude” would not work in this case!!

Business Responsibility And Sustainability Reporting (BRSR)

Sustainability reporting has rapidly evolved from a voluntary communication exercise to a core mechanism for accountability, risk management, and long term value creation. India’s Business Responsibility and Sustainability Reporting (BRSR) framework represents a significant regulatory and institutional innovation in this evolution. This article delves into the conceptual foundations, regulatory trajectory, and emerging empirical insights from BRSR reporting in India, with particular emphasis on the role of independent assurance and board level oversight. With the given mandate of SEBI for reporting by top 1000 listed companies based on market capitalisation, BRSR has the potential to move organizations beyond compliance driven disclosure towards integrated, decision useful sustainability reporting. The article also outlines practical, organization level steps for effective BRSR implementation, derived from observed reporting challenges and leading practices.

INTRODUCTION: SUSTAINABILITY REPORTING IN A HIGH EXPECTATION ENVIRONMENT

Businesses today operate under unprecedented scrutiny from investors, regulators, customers, and society at large. Climate change, nature loss, social inequality, and governance failures increasingly translate into financial risks, supply chain disruptions, and reputational consequences. In response, stakeholders demand transparent, reliable, and comparable information on how organizations manage environmental, social, and governance (ESG) impacts and dependencies.

Within this context, sustainability reporting has emerged as a critical interface between corporate performance and stakeholder trust. India’s introduction of Business Responsibility and Sustainability Reporting (BRSR) marks a decisive step in institutionalizing ESG disclosure. By mandating standardized sustainability reporting for the top 1000 listed entities along with mandatory assurance in a phased manner on key ESG metrics (BRSR core which is a subset of BRSR), India has positioned itself at the forefront of global sustainability reporting and assurance practices.

THE BRSR FRAMEWORK: REGULATORY REQUIREMENTS

Evolution from Business Responsibility Reporting

BRSR builds on India’s earlier Business Responsibility Reporting (BRR) regime and reflects global developments in sustainability disclosure standards. Introduced by the Securities and Exchange Board of India (SEBI) under the SEBI (Listing Obligations and Disclosure Requirements) Regulations,BRSR became mandatory for the top 1,000 listed entities by market capitalization from FY 2022–23 onwards.

The framework is anchored in the National Guidelines on Responsible Business Conduct (NGRBC) and aligned with the UN Sustainable Development Goals. Its stated objective is to link financial performance with sustainability outcomes, thereby enabling stakeholders to assess long term enterprise value rather than short term financial results alone.

STRUCTURE OF BRSR DISCLOSURES

BRSR disclosures are organized into three sections:

  •  General Disclosures, providing contextual information on the entity’s operations, products, markets, and CSR activities.
  •  Management and Process Disclosures, focusing on governance structures, policies, and processes aligned with responsible business conduct.
  • Principle wise Performance Disclosures, requiring reporting against nine principles through mandatory “essential” indicators and voluntary “leadership” indicators.

This structure reflects an intentional progression—from descriptive information to governance mechanisms and, finally, to performance outcomes—designed to discourage superficial disclosure and promote substantive integration of ESG considerations.

EMPIRICAL INSIGHTS FROM BRSR REPORTING BY INDIAN COMPANIES

By FY 2024–25, more than 1,000 listed companies were reporting sustainability information through BRSR as part of their annual reports, indicating widespread institutionalization of ESG disclosures. This scale of adoption positions BRSR as one of the most comprehensive mandatory sustainability reporting regimes globally. BRSR disclosures by companies for the year 2024-25 offers valuable insights into corporate sustainability performance in India. Aggregate analysis reveals mixed trends across environmental, social, and governance indicators. Some of the observations based the reporting made by listed entities for the year 2024-25 are given below (these are only illustrative and are not comprehensive):

  • Environmental performance shows incremental progress in certain areas, including modest reductions in Scope 1 and Scope 2 greenhouse gas emissions for some companies. In contrast, Scope 3 emissions increased sharply, reflecting growing upstream and downstream value chain impacts and reinforcing the need for supplier engagement and value chain disclosures.
  •  Resource use and circularity indicators reveal rising absolute waste generation alongside declining recycling volumes in several sectors, suggesting inefficiencies in waste management practices or limitations in data collection and classification methodologies.
  • Social indicators present a nuanced picture. While female participation in the workforce has increased in absolute terms, median wages paid to women remain comparatively low across most sectors, highlighting persistent gender equity challenges despite enhanced disclosure.

The above observations support the view that sustainability reporting functions as a diagnostic tool: it surfaces risks, inefficiencies, and blind spots that might otherwise remain obscured, thereby enabling more informed strategic decision making. As companies prepare to report for FY 2025-26, they may review BRSR reports submitted by other organizations to gain insights and benchmarks for their own disclosures. The reports can be accessed at NSE website Corporate Filings Business and Sustainability Reports.

ASSURANCE IN BRSR CORE: ENHANCING TRUST AND TRANSPARENCY

A distinctive feature of India’s approach is the introduction of BRSR Core, a subset of 46 critical ESG metrics spanning environmental footprints, social well being, and governance practices. SEBI has mandated assurance on BRSR Core in a phased manner, extending from the largest listed entities to the top 1,000 companies by FY 2026–27.

This requirement elevates non financial reporting to a level of rigor comparable to financial reporting. Assurance serves not only as a compliance mechanism but also as a safeguard against inconsistent data, weak controls, and greenwashing—concerns that have become increasingly prominent as ESG information influences capital allocation and regulatory oversight.

To support consistent application, SEBI has issued master circulars and industry standards on BRSR & BRSR core that clarify definitions, calculation methodologies, and estimation approaches for BRSR Core indicators. These standards aim to enhance comparability across sectors and reduce interpretational ambiguity for both preparers and assurance providers.

FY 2024–25 is notable for the first full cycle of mandatory assurance on BRSR Core for the top 250 listed companies. Evidence from this cohort indicates a strong preference for higher levels of assurance:

  •  Approximately 91% of listed companies subject to mandatory assurance obtained reasonable assurance on BRSR Core, demonstrating a clear inclination toward enhanced credibility rather than minimum compliance.
  • A subset of these companies voluntarily extended assurance beyond BRSR Core, obtaining limited assurance on non core BRSR indicators, signalling growing confidence in BRSR data systems and increasing stakeholder expectations.

The assurance landscape during FY 2024–25 also reflects diversity in assurance providers and standards. Assurance providers can be Chartered Accountants and other professional as appointed by the Board with necessary knowledge and expertise.While SEBI has not prescribed a single assurance standard, most companies adopted internationally or nationally recognized frameworks such as ISAE 3000 or ICAI’s SSAE 3000, contributing to a gradual convergence toward globally accepted assurance practices. ISSA 5000, the first comprehensive International Standard on Sustainability Assurance 5000, will be effective for assurance engagements on sustainability information reported for periods beginning on or after December 15, 2026. Early adoption is encouraged, and it applies to both limited and reasonable assurance engagements.

REPORTING ON VALUE CHAIN COMPONENTS

Value chain components is a concept described or defined by sustainability reporting frameworks. The value chain encompasses all the activities and processes involved in creating a product or service, from raw material extraction to end-of-life disposal or recycling. SEBI issued a circular dated March 2025 on ‘Measures to facilitate ease of doing business with respect to framework for assurance or assessment, ESG disclosures for value chain, and introduction of voluntary disclosure on green credits. The circular covered the relaxations for ESG Disclosures for Value Chain as summarised below (refer Circular):

  •  ESG disclosures for the value chain shall be applicable to the top 250 listed entities (by market capitalization), on a voluntary basis from FY 2025-26.
  •  The assessment or assurance of the above shall be applicable on a voluntary basis from FY 2026-27.
  • For the first year of reporting ESG disclosures for value chain, reporting of previous year numbers shall be voluntary. To illustrate, for value chain disclosures of FY 2025-26, reporting of previous year data (i.e., data for FY 2024-25) shall be voluntary.
  • If a listed entity provides ESG disclosures for value chain, then it shall disclose the percentage of total sales and purchases covered by the value chain partners, respectively, for which ESG disclosure are provided.

Reference may also be made to the FAQs issued by SEBI in April 2025 on SEBI LODR, 2015. The FAQs clarify that both the disclosures and the associated assessment or assurance for value chain entities are voluntary and the relaxations apply from the first year of applicability and shall continue unless modified by SEBI through subsequent circulars or regulations.

FY 2025-26 will be the first year of voluntary reporting for value chain entities. In case the listed entities opt to report data for value chain entities as part of BRSR report, the listed entity will have to update its systems to capture the details of its value chain partners as on March 31 of the respective financial year. However, collecting data pertaining to value chain components and reporting them as part of BRSR report includes various challenges. One of the foremost issues is the lack of reliable data from value chain partners, which can hinder the accuracy and completeness of reported information. Additionally, differences in reporting timelines across various entities in the value chain create difficulties in synchronising data collection and disclosure efforts. Establishing a clear reporting boundary further complicates the process, as organisations must determine the extent of their value chain for inclusion in the BRSR report.

Given these complexities, it is anticipated that the regulator may issue further guidance to assist reporting entities in navigating these challenges and ensuring consistency in value chain disclosures.

GOVERNANCE AND OVERSIGHT: THE ROLE OF BOARDS AND AUDIT COMMITTEES

The effectiveness of BRSR reporting is closely linked to governance quality. The boards and audit committees plays a pivotal role in overseeing ESG disclosures, approving relevant policies, and ensuring the integrity of non financial data. Active board engagement is associated with stronger internal controls, better resource allocation, and greater credibility in the eyes of investors and rating agencies.

Audit committees, in particular, are increasingly expected to extend their oversight beyond financial reporting to include sustainability metrics, assurance scope, and remediation of gaps identified during assurance engagements. This expanded mandate reflects the convergence of financial and non financial reporting in assessments of enterprise value. The boards and audit committees should systematically assess the reliability of ESG data, review significant disclosures, and hold management accountable for demonstrating the impact of sustainability initiatives. Their responsibilities include endorsing BRSR-related policies, promoting alignment between sustainability objectives and overall business strategy, and ensuring that senior executives—including the Chief Executive Officer (CEO) and Chief Sustainability Officer (CSO)—are directly engaged in advancing these priorities.

PRACTICAL STEPS FOR EFFECTIVE BRSR IMPLEMENTATION

Drawing on the challenges and enabling factors identified in the BRSR landscape, organizations may consider the following practical steps to strengthen implementation and reporting quality as they gear up for the upcoming year of reporting:

  •  Early Planning and Scoping

Organizations benefit from initiating BRSR readiness well in advance of reporting timelines. This includes identifying applicable disclosures, mapping data sources across functions and value chains, and clarifying roles and responsibilities. Early planning reduces last minute data gaps and improves traceability.

  •  Embedding BRSR into Business Strategy

BRSR is most effective when sustainability objectives are integrated into core business strategy rather than treated as a standalone compliance exercise. Aligning ESG priorities with strategic risks, opportunities, and capital allocation enhances the relevance and decision usefulness of disclosures.

  •  Strengthening Data Governance and Controls

Many reporting challenges stem from fragmented data systems and weak internal controls over ESG metrics. Establishing standardized data definitions, documentation, and review mechanisms—aligned with industry standards for BRSR Core—supports consistency and auditability.

  •  Leveraging Technology and Digitization

Digital tools can significantly improve data collection, validation, and consolidation across multiple locations and value chain partners. Technology enabled reporting also facilitates smoother assurance processes and enhances confidence in reported information.

  •  Investing in Capability Building

Given the evolving nature of ESG standards, continuous training for personnel involved in data collection, analysis, and reporting is critical. Capacity building reduces errors, improves interpretation of requirements, and fosters a culture of responsible reporting.

  •  Proactive Engagement with Assurance Providers

Engaging assurance providers early—particularly for BRSR Core—allows organizations to identify control gaps, clarify methodologies, and improve data quality before formal assurance. This proactive approach strengthens both compliance and credibility.

BOTTOM LINE

BRSR represents a significant advancement in the evolution of sustainability reporting in India. By combining standardized disclosure requirements with a phased assurance mandate, it addresses long standing concerns around comparability, credibility, and greenwashing. More importantly, it creates a platform for organizations to integrate sustainability considerations into governance, strategy, and performance management.

As regulatory expectations continue to evolve and global standards converge, the true value of BRSR will depend on how effectively organizations move beyond compliance to embed responsible business conduct into everyday decision making. Robust governance, credible assurance, and disciplined implementation practices will be central to realizing this potential and unlocking long term value for businesses, investors, and society.

Allied Laws

53. Rajia Begum vs. Barnali Mukherjee

2026 INSC 106

February 02, 2026

Arbitration Agreement – Partnership firm – Serious Allegations of Forgery – Non-arbitrability of Dispute – High Court’s order referring the dispute to arbitration was set aside. [S. 8, 9 & 11, Arbitration and Conciliation Act, 1996; Article 227, Constitution of India]

FACTS

A partnership firm was constituted between Barnali Mukherjee (Respondent) and two others. Rajia Begum (Appellant) claimed that by virtue of a Power of Attorney she executed a Deed of Admission and Retirement whereby she was inducted as a partner and the original partners retired. The Admission Deed contained an arbitration clause and formed the sole basis of her claim. Respondent categorically denied the execution and existence of the Admission Deed and alleged that it was a forged and fabricated document. It was further contented that Appellant never acted as a partner and was reflected only as a guarantor in all contemporaneous records. The partnership business was later absorbed into a company. Appellant initiated proceedings under Section 9 of the Arbitration and Conciliation Act, 1996, which were rejected by the High Court on ground that the arbitration agreement was doubtful. The said finding attained finality after dismissal of the Special Leave Petition. Subsequently, Respondent filed a civil suit seeking a declaration that the Admission Deed was forged. Appellant applied under Section 8 of the Act to refer the dispute to arbitration, which was rejected by the Trial Court and the First Appellate Court, However, the High Court, exercising jurisdiction under Article 227 of the Constitution, set aside these orders and referred the dispute to arbitration. Parallelly, Appellant also sought to appoint an arbitrator under Section 11 of the Act, which was rejected by the High Court on the ground that the existence of the arbitration agreement itself was in serious dispute. Both orders were challenged before the Supreme Court.

HELD

The Supreme Court held that, where serious allegations of fraud are made which go to the very root of the arbitration agreement itself, such disputes are non-arbitrable. Arbitration is founded on consent, and a party can be compelled to arbitrate only if the existence of a valid arbitration agreement is established even at a prima facie level. The Court found substantial and cogent material casting grave doubt on the genuineness of the Admission Deed, including its unexplained absence from records for nearly nine years, inconsistencies with admitted facts, and contemporaneous documents showing that Appellant acted only as a guarantor and not as a partner. The arbitration clause being embedded in a document whose existence was seriously disputed could not be enforced independently. It was further held that although findings under Section 9 proceedings are prima facie, once they attain finality, they cannot be ignored in the subsequent proceedings arising from the same factual foundation. The High Court, therefore, erred in exercising supervisory jurisdiction under Article 227 to upset concurrent findings of the Trial Court and First Appellate Court while referring the matter to arbitration under Section 8. The Supreme Court affirmed the High Court’s refusal to appoint arbitrator under Section 11, holding that appointment would premature and legally impermissible when the existence of the arbitration agreement itself under serious cloud.

Accordingly, the appeal challenging the Section 8 reference was allowed, the High Court’s order referring the dispute to arbitration was set aside, and the appeal challenging the rejection under Section 11 was dismissed.

54. Rampyare & Anr. vs. Ramkishun & Anr.

2026:CGHC:5238

January 29, 2026

Will – Presumption under Evidence Act not applicable to Will – Mere registration of a Will does not dispense with the mandatory requirement of proof of execution and attestation. [S 63(c), Indian Succession Act, 1925; S 68, S. 69 of the Indian Evidence Act, 1872]

FACTS

The Plaintiffs/Appellants instituted a civil suit seeking declaration of title, possession and permanent injunction in respect of agricultural land situated in Chhattisgarh. Their claim was founded on a registered Will, allegedly executed by their grandfather (Mahadev), bequeathing the suit property in favour of their father (Ramavatar). It was pleaded that after grandfather’s death, the Will came into effect and father’s name was mutated in the revenue records. Upon father’s death, the Plaintiffs claimed to have inherited the suit land and continued in possession for several decades. The Defendant No. 1, the brother of the father allegedly got his name wrongly recorded in the revenue records and forcibly took possession of the land. The Defendants contested the Suit contending that the property was ancestral in nature, that grandfather had no male issue, and that after his death the property was equally partitioned between the Plaintiffs and Defendants. The Defendants denied execution of any Will and alleged that the Will relied upon by the Plaintiffs was forged and fabricated. The Trial Court dismissed the Suit holding that the Will was not proved in accordance with law.

HELD

The High Court dismissed the Second Appeal and upheld the concurrent findings of the courts below. It was held that mere production of a Will which is more than 30 years old does not attract the presumption under Section 90 of the Indian Evidence Act, 1872. A Will stands on a distinct footing and must be strictly proved in accordance with Section 63(c) of the Indian Succession Act, 1925 read with Section 68 and 69 of the Indian Evidence Act, 1872. The observed that none of the attesting witnesses to the Will were examined, nor was the Will proved through permissible secondary evidence as required by law. The testimonies of the Plaintiffs merely asserted execution of the Will without satisfying statutory requirements. Mere registration of a Will does not dispense with the mandatory requirement of proof of execution and attestation. The High Court further held that the scope of interference in a Second Appeal is extremely limited and no substantial question of law arose in the present case. The concurrent findings of fact recorded by the Trial Court and the First Appellate Court were neither perverse nor contrary to law.

Accordingly, the Second Appeal was dismissed.

55. Rampyare & Anr. vs. Ramkishun & Anr.

2026:BHC-AS:4235

January 28, 2026

Stamp Duty – DRT Auction – Stamp Duty Payable on Auction Sale Consideration and not on Independently Determined Market Value – The Collector of Stamps was directed to adjudicate stamp duty on the basis of the auction sale consideration. [S. 25(b), S. 34(a)(ii) and S. 31 of the Maharashtra Stamp Act, 1958]

FACTS

The property was a secured asset in recovery proceedings initiated by the Central Bank of India before the Debt Recovery Tribunal-I. Pursuant to a recovery certificate issued, the Recovery Officer ordered the sale of the property by public e-auction. A sale proclamation was issued, and the auction was conducted. The Petitioner was declared the successful bidder and purchased the property. A sale certificate was issued. After rectification, the Petitioner applied to the Collector of Stamps for adjudication of stamp duty under Section 31 of the Maharashtra Stamp Act, 1958, contending that stamp duty ought to be calculated on the auction sale consideration. By an interim order and a final order, the Collector of Stamps determined stamp duty on the market value of the property instead of the auction price, levying stamp duty along with a penalty. Aggrieved thereby, the Petitioner approached the Bombay High Court. The Respondent objected to the maintainability of the Writ Petition on ground of the availability of an alternate statutory remedy and contented that, stamp duty was rightly levied on market value as per ASR rates.

HELD

The Bombay High Court held that availability of an alternate statutory remedy does not bar exercise of writ jurisdiction where the controversy involves a pure question of law. The Court observed that the core issue was whether stamp duty on a scale certificate issued pursuant to a DRT conducted auction should be levied on the auction sale price or on an independently assessed market value. The Court further held that the Circulars cannot be applied to override the legal sanctity of a transparent tribunal conducted auction. Determination of stamp duty on a higher market value, ignoring the auction consideration, was held to be legally unsustainable.

Accordingly, the writ petition was allowed, the impugned orders were quashed and set aside, and the Collector of Stamps was directed to adjudicate stamp duty based on the auction sale consideration.

56. Hemalatha (D) By Lrs. vs. Tukaram (D) By Lrs. & Ors.

2026: INSC: 82

January 22, 2026

Registered Sale Deed – Presumption of Validity – Sham Transaction – Scope of Oral Evidence – Allegations of inadequacy of consideration and continued possession were held insufficient to invalidate the sale. [S. 91 & 92, Indian Evidence Act, 1872; Order VI Rule 4, Civil Procedure Code, 1963; S. 58(C) of the Transfer of Property Act]

FACTS

The Respondent-Plaintiff, Tukaram was the owner of a residential house, he mortgaged the property to one Sadanand Garje. A registered sale Deed was executed in favour of Smt. Hemalatha (Defendant No. 1) for a consideration out of which some amount was paid directly to redeem the mortgage and the balance was paid in cash. On the same date, a registered Rental Agreement was executed whereby Respondent and his family became tenants in the Suit property at a monthly rent. The Respondents paid rent for about fourteen months and thereafter defaulted. The Appellants initiated eviction proceedings. As a counter, Respondent filed a Civil Suit seeking declaration that the Sale Deed and Rental Agreement were nominal, Sham, and not intended to be acted upon, contending that the transaction was in substance a loan or mortgage and that he continued to be the real owner. The Trial Court decreed the suit in favour of the Plaintiff holding the Sale Deed to be sham. The First Appellant Court reversed the decree and upheld the sale as genuine. The High Court, in second Appeal, restored the Trial Court’s Judgment. Aggrieved, the Defendants approached the Supreme Court.

HELD

The Supreme Court allowed the appeal, set aside the judgement of the High Court, and restored the decision of the First Appellate Court. The Court held that a registered Sale Deed carries a strong presumption of validity and genuineness, and courts must not lightly declare such documents as sham. The burden to rebut this presumption lies heavily on the party alleging sham or nominality and requires clear pleadings with material particulars. It was held that Sections 91 and 92 of the Evidence Act bar oral evidence to contradict the terms of a clear and unambiguous registered document. While oral evidence may be admissible where a document is alleged to be a sham, such plea must be supported by cogent pleadings and proof. Mere use of expressions like “nominal” or “sham” without particulars, amounts to clever drafting creating an illusion of cause of action. The Court found that the Sale Deed did not contain any conditions required under Section 58(C) of the Transfer of Property Act, 1882 to constitute a mortgage by conditional sale. There was no clause for reconveyance, no debtor-creditor relationship, and no evidence of security for a loan. The Plaintiff’s conduct – execution of a registered rent agreement, payment of rent, admission of tenancy in reply to legal notice, delay in challenging the sale, and collusion with co-defendants-clearly established that the transaction was an outright sale. Allegations of inadequacy of consideration and continued possession were held insufficient to invalidate the sale.

Accordingly, the appeal was allowed, the judgment of the High Court was set aside and restored the decision of the First Appellant Court.

57. Bhaskar Yadav vs. Directorate of Enforcement

2026 LiveLaw (Del) 127

February 02, 2026

PMLA – Anticipatory Bail under PMLA – Applicability of Twin Conditions – Necessity of Custodial Interrogation in Large-Scale Cyber fraud and Cryptocurrency-Based Money Laundering – The Applicants failed to satisfy the mandatory twin conditions under Section 45 PMLA and dismissed both Anticipatory Bail Applications.[S. 3, 4, 17, 44, 50 & 70, Prevention of Money Laundering Act, 2002; S. 420, 120B IPC; S. 66C & 66D, Information Technology Act, 2000]

FACTS

The present anticipatory bail applications arose from a large-scale investigation into cyber fraud and money laundering initiated by the Directorate of Enforcement (ED) on the basis of two FIRs registered by the CBI for offences of cheating, criminal conspiracy, and IT-related frauds. These offences constituted Scheduled offences under the Prevention of Money Laundering Act, 2002 (PMLA). The prosecution alleged the existence of an organised transitional cyber fraud syndicate operated by foreign actors through platforms such as Telegram, WhatsApp, and fraudulent websites. Victims were induced to part with money on the pretext of part-time jobs and investment schemes. The proceeds of crime were routed through numerous mule bank accounts in India and layered across multiple accounts before being siphoned abroad, primarily through UAE-based fintech platform PYYPL or by conversion into cryptocurrency. The Applicants, both Chartered Accountants, were alleged to be key members of the so-called “Bijwasan Group”, which controlled and operated multiple shell entities and mule bank accounts. Though initially not arrested, the Applicants were granted interim protection from arrest by the predecessor bench, subject to joining investigation. The ED opposed anticipatory bail, citing the need for custodial interrogation and failure of Applicants to satisfy the twin conditions under Section 45 PMLA.

HELD

The Delhi High Court dismissed both the anticipatory bail applications, holding that the rigours of Section 45 PMLA constitute a distinct and grave class of economic offences with serious transnational ramifications, warranting a stricter approach to bail. Rejecting the contention that the case involved mere cryptocurrency trading, the Court observed that cryptocurrency was only a tool used for laundering proceeds of crime generated through cyber frauds. The Courts found that the investigation revealed a complex vertical and horizontal layering of proceeds of crime, with the Applicants playing a significant role at multiple levels. The Courts held that there were no reasonable grounds to believe that the Applicants were not guilty of the offences alleged, nor could it be said that they were unlikely to commit offences while on bail. The plea of parity with co-accused was rejected on the ground that those accused were granted regular bail and custodial interrogation was not sought in their cases. The Court further held that dilution of the twin conditions under Section 45 PMLA on the grounds of Article 21 applies primarily in cases of prolonged incarceration and cannot be extended to anticipatory bail where custodial interrogation is required. In view of allegations of destruction of evidence, assault on officials, bribery, and continuing investigation with fresh complaints still emerging, the Court found custodial interrogation to be necessary.

Accordingly, the Court held that the Applicants failed to satisfy the mandatory twin conditions under Section 45 PMLA and dismissed both anticipatory bail applications.

Chatting Up About India: Part I Lipid Profile Of Regulatory Cholesterol

India’s ambition to become a developed nation by 2047 is severely hindered by over-regulation, which the author terms “strangulation“. Driven by an archaic, distrust-based approach, current laws are overly complex, coercive, and often weaponized for bureaucratic intimidation and corruption. This excessive compliance burden stifles risk-taking, innovation, and the overall ease of doing business. Instead of enabling growth, the system traps citizens in multiple registrations, overlapping filings, and unending litigation without administrative accountability. To unlock its economic potential, India must shift towards trust-based governance, proportionate regulations, and unified compliance systems like “One Nation, One Business, One Number“.

Reform is China’s second revolution – Deng Xiaoping

Since independence we have solved innumerable problems, which most born after 1990 cannot even imagine. My past articles1 have covered few areas of phenomenal transformation and challenges in recent times. Bharat now seeks to become a developed nation by 2047 (21 years to go).

In this article, we look at a limiting factor – over regulation – that blocks the target. Apart from being a remnant of the Raj, OVER REGULATION or as I call it STRANGULATION, is a first order issue that fundamentally contaminates the ability of individuals and businesses to operate in India with speed, scale and certainty.

Speaking about the erstwhile Indian Civil Services, PM Nehru is supposed to have said this2 – it is neither Indian, neither civil nor service. In the following pages, we will talk about nature of regulations and effect of their implementation without going into any specific law or civil service that governs it. The dangerous chasm between where we are and destination 2047, is the challenge of how the government can reduce the sting effect of regulations. Recent GST 2.0 and Jan Vishwas bills have made effort towards removing the sting of strangulation and decriminalising the otherwise civil matters. This article is written from a perspective of ease of doing business (EoDB) and ease of living (EoL) and what makes over-regulation a deterrent to uncovering the potential our nation has.

You may have read about or faced over-regulation such as: despite there being 26,000 ways3 (18,000 only in labour laws) to put an employer in jail, few employers actually go to jail for violations. The reason being, that these laws are often used as a means of intimidation and corruption to extract money by those who control implementation. Who doesn’t know that many of the laws are excessive (disproportionately intrusive), coercive (threatening punishment), one sided (loaded in favour of administrator with low recourse for citizen), archaic (irrelevant), detrimental to growth and freedom, and a means for ‘babudom’4. They exist to leave a window open to exploit the situation and make side income. The extent of bureaucratic overreach is aptly captured by the phrase – “you show me the person and I will show you the crime”. Continuing with the example of labour laws, this is possible only because there are 21 definitions of wages, 17 definitions of workers. In such a scenario, no one can comply without violating something, somewhere, sometime.

1 Chatting Up about India series published in September 2023, August 2024, and January 2025
2 Indian Civil Services as it was called before being morphed into IAS after independence in 1947
3 Jailed for Doing Business Report, Dated February 2022
4 The collective Indian civil service and its culture, implying a system of power, coercion, 
entitlement, and often inefficiency, red tape, corruption, focus on hierarchy, 
with a tendency towards slow, rule-bound processes rather than effective action, 
especially in the post-colonial era. This is not just IAS but collective of more than 2 crore civil servants.

Let’s look at the problem of over regulations through these questions–

i) Why are we fifth in total GDP but 128th in per capita GDP?

(generally per capita is linked to productivity of sectors, firms, people!)

ii) Why are there only 30,000 companies with paid up capital of more than Rs. 10 Crores?

(We have infrastructure, skills, and capital but risk taking at scale is a challenge.)

iii) What is stopping the pace of growth? Why does UP and Karnataka have about the same GSDP, but Karnataka does it at 1/3 the population?

iv) Why is there five to six times difference between richest and poorest large states and why are backward states not creating habitat for ease of doing business despite its obvious benefits to its people?

v) Why are HNIs leaving India5?

vi) Why do politicians praise the diaspora for their entrepreneurial contribution in that country?

(We all know that most left India often for better ‘opportunities’ in the first place.)

Despite considerable positive sentiments – policies or the politics of policies remain unstable and untrustworthy6, babudom makes things difficult rather than facilitates ease. Politicians go back on promises, and if it came to political benefit, they will change laws and contracts anytime. In other words, there is a contrast between objectives and tools.

The other day I met an architect friend, who won a contract at L1 to build a museum for a state government. The State government appointed a project manager. On day one, the manager asked how he can get 15% of the total cost of the contract to approve the project progress and expenses. The architect had to contact chief secretary in Delhi, to ensure the manager backs off. However, if he had his way, he could stall the contract, block payments and create havoc for the architect taking risk and putting his capital at stake. That is why a lot of businesses stay quiet, stay small, rather than suck up to politicians and sahebs, and risk taking / innovation suffers. There are innumerable examples like this. However, here we will focus on a more controllable factor – nature and implementation of regulations.

5 Secession of the Successful: The Flight out of New India by Sanjay Baru citing ease of living, 
business environment, escaping bureaucracy, and better quality of life.
6 Many policies are based on the government, and with change of power, 
there is an impending threat that they will invert the current policies on day 1.

REGULATION AND STRANGULATION

Indian governments (includes central, state and local) as an institution historically displayed negligible sense between the two words despite the difference between meaning and spelling. The Indian approach to refining absurd regulations most of the time has been sloooooooooow or postponed until a crisis builds up. The entire system is like a maze of wires we see on photos of old Delhi streets which no one wants to touch. Take the example of four labour codes – have combined 29 laws into four and how much time this took to legislate (2019) and notify (2025).

Regulations and strangulation – in nature, function and everything in between – they are as apart from each other as chalk and cheese. The following indicative list gives a bunch of distinctions. As you go through the list under few headings. Each aspect is juxtaposed under what a Regulation can be vs. what it ends up being : Strangulation

Breaking The Chains From Strangulation to Regulation

I . Philosophical Foundations: Presumption of Guilt over Trust

a) Enables, facilitates, and makes things easy vs. Restrictions, suppression or destruction

b) Akin to a seatbelt vs. Akin to chaining hands and legs while being in the driver’s seat

c) Based on trust of participants vs. Based on distrust of participants

d) Permitted unless prohibited approach vs. Prohibited unless permitted approach

e) For equitable, orderly and balanced growth of everyone; you cannot harm others to benefit yourself vs. Focus on control, manipulation, surprises, excesses where many will give up and say I don’t want to be in this, it’s too much or evade as compliance is disproportionately high in terms of time, cost and risk

f) Makes entry and exit easy vs. Barrier for entry, exit and existence – high degree of difficulty

g) Democracy – Governance – Nagarik is supreme vs. Tyranny– Ruling – Praja is subordinate

h) Business failure is treated with an approach to find out whether it is due to bad judgment, situational change, incompetence or fraud vs. Business failure is seen suspiciously and treated as fraud to start with unless proved otherwise

i) Crimping of administrative state to serve the people to excel and rise instead of crimping of free society which is in pursuit of happiness vs. Crimping of free society with dos and don’ts and coercive provisions which are often tools of corruption

j) Positive reinforcement of good behaviour of citizens, to encourage people to be good citizens vs. Negative reinforcement with only punishments for bad behaviour, good behaviour begets nothing

Examples: Take most laws we deal with and find out Number of provisions asking citizens for a certain type of action or prohibition. Add to it penalties for violations. Now look for number of things that government will do for you or not do and penalties for not doing it on the administrator. The first list almost makes the entire Act. Now take the language of saying this. Add to that fictional items taxed (Section 2(22) (e) of the ITA7 or Rule 8D of calculating mathematically something that may have no relevance for Section 14A to work). Lastly add distrust provisions to this. These lead to constant misuse and conflict, forcing citizens to perpetually prove they are in the right.

7 Indian Income Tax Act

II. Design and Accessibility: Monuments of Complexity and Archaic language

a) Crisp, clear, intelligible vs. Voluminous, ambiguous, incoherent

b) Reads like clauses when reading – plain, simple, in normal language vs. Feels like claws – complicated, long winding and written in English of 200 years ago

c) Low possibilities to interpret and extend meanings, is objective, and lacks susceptibility to litigation vs. Loopholes embedded in laws to extend meanings, interpret, leading to absurd outcomes and litigation

d) Current, realistic, allowance for reality, relevant, pacing with time and addresses current market vs. Outdated, not pacing with time and reality, idealistic to the extent of being absurd

e) Law made by parliament/legislature and rules by executive vs. Guidelines, rules, circulars, office orders, government order, memorandum, FAQs, and multiple instruments which are unrecognised by constitution and become quasi laws throwing their weight around

f) Adaptable, flexible and allowance for reality of current addressable market and its participants vs. Bans (say audits have to be done per individual partner as opposed to firm total to enable specialisation in case of CAs)

Examples: The recently replaced ITA used to be a monument of complexity and inaccessibility (incomprehensible) with 900 odd sections, proviso, explanations, and clauses, sub clauses and the rest. There are decisions and circulars that contradict one another or retrospective changes (recent being LTCG at 12.5% without grandfathering or c/f of losses) where compliance requires constant monitoring so one isn’t hit by a new missile launched from the North Block. Proliferation of scope expansion beyond legislative intent by circulars, notifications, FAQs which lay down ‘laws’ by the unelected and result in administrative enforcement. Unclarity in Section 80JJAA or even Section 44ADA, are prone to litigation. For larger firms that specialise, now there is a ban on number of audits one partner can sign off instead of allowance for average based on total partners.

III. Proportionality and Market Dynamics: One size fits all Regulations

a) Proportionate to activity and risk, need not be equal for all players and is based on situation/need vs. Applies in same proportion to all with disregard for context/need/situation

b) Registration based, creates competition/supply through an open architecture vs. Licenses/permission based, restricts supply/shortage and a closed system

c) Encourages new entrants when laws are less and thresholds are proportionate to the size of the entity vs. Favours incumbent almost always as laws can be a barrier to entry

d) Raises standards, focussed on outcomes, enhances trust in the market vs. Keeps ‘small’ small and make them smaller, makes people want to take short cuts, focussed on process without view of outcomes

e) Degree of economic complexity is less when compared to per capita GDP of our nation (say high thresholds) vs. Degree of economic complexity is much higher when compared to per capita GDP of our nation (say low thresholds)

f) Number of people required by a business for regulatory control/compliance – LOW vs. Number of people required by a business for regulatory control/compliances – HIGH

g) Steel frame – where capacity is increased to facilitate protecting and enabling EoDB and EoL vs. Steel cage – where pressure is put on capacity of business or individual to decrease ease

h) Administrator proportionate for size of business, because laws are so vs. Administrator too big for small fish, and too small for big fish

i) Inexpensive to be in formal economy. Cost makes sense for receiving capital, skills and productivity vs. Expensive to be in formal economy. Makes low sense even to receive capital and skills and productivity

Examples: Look at ITR or TAR Forms – they have low linkage to the business that is filing them – risks, complexity or profitability. A GIANT CAP entity and a small individual will file same ITR and TAR. Isn’t it time that based on business code or something similar that TAR is differentiated for manufacturing, trading and service entities – that it is shorter and take relevant data only and which will get rid of standard questionnaires during ‘assessments’ at later stage. Imagine a single business registration – say PAN instead of CIN, TAN, PF IDs, and the rest of it. Are we one nation or different fiefdoms under a sovereign? A small business is filing same number of forms for companies act, TDS, GST, income tax, DGFT, PF, and so on. There are instances where a politician or a local civil servant can close or shut down a business for illegitimate reasons. If there is benefits to be granted to small businesses, why should they be deducting TDS to start with for the government and be exposed to delays and filings? Why not exempt non TAR cases from TDS deduction? Why should I as a taxpayer or business owner deal with numerous departments and offices if I am living in unified nation – why should there not be a single Indian Tax Office or Indian Revenue Office which has customs, income tax, international tax, GST, employment tax authorities sitting together and talk to one another? Why can I not pay one tax based on turnover which is a combination of GST and Income tax? Federalism is made out to be small kingdoms spread all across for ‘collecting’. BTW we still have something called ‘collector’? ONE NATION, ONE BUSINESS, ONE NUMBER and EVERYTHING on ONE DASHBOARD is the way to go.

Even as an individual, you must still secure a domicile certificate. Why is this necessary and why it can’t be downloaded from a single portal where I have all my data from passports, to ration cards, to Aadhaar, to electricity bills, municipal bills and the rest? One great FM brought one law that existed in Australia and said Bharat needs it too, with zero sense of comparative dissimilarities of GDP of Austrialia and India. the point is people in government think less of people.

IV. Administrative burden and Compliances: Multiple Registrations and Excessive Filings

a) Bare minimum procedures, filings vs. Excessive procedures, filings

b) Timelines are clearly and fairly given wherever action is required from citizen or administrator vs. Administrator works without timelines or favourable timelines compared to citizen

c) Not data hungry. Takes basic data directly. Rest of the data is taken discretely from other sources directly vs. Obsessive data greed, burdening the citizen with forms for supplying more and more data, akin to snooping

d) Tatasthataa – can interrupt on severe critical matters with consideration of people who have taken the risk to start a business vs. Dakhalandazi – can touch almost every area of life or business, disrupt where unelected regulator has no skin in the game

f) Single registration for all laws – one nation one entity one registration – why should a citizen register everywhere and give the same data and do overlapping filings/reporting. Everything linked to a single identifier like Aadhaar or similar instead of numerous registration numbers like PF, ESIC, PAN, DIN, CKYC, CIN, etc. vs. Multiple registrations, permissions, returns, submissions of identical or similar data at a number of places in the garb of ‘compliance’ for taking services. Every law has its different identifier number and having its own registration numbers for individuals and businesses

g) Low jail provisions when there are no cases of prosecution, as law need not be deterrence as it leads to promotion of corruption vs. Jail provisions without examples of prosecutions, to encourage fear and corruption

Examples: India loves compliance. A private company with less than ₹100 Crores of turnover will have to comply with ITR (1), TDS (4) + payments (4), GST (4+4), Company Law – Annual Filings (2), Board Meetings (4), Registers, KYC (1+), Appointments / resignations, all changes, PF (12+12), PT (12+), TAR (1), GST (4+4) plus calculations and dealing with notices and other avoidable harassment like non-working portals or 5 MB upload size by a ₹4000 crore income tax portal’ which is supposed to shrink the size on its end and not tell taxpayers to do this. A minimum of 30-50 compliances per LLP / Company are a normal threshold. The question is – why most of these can’t be filed once a year or twice a year, at the same place under same number? Add to this – if you are running a small entity and its 50% assets and / or income happen to be financial assets – you may trigger a Reserve Bank of India coverage8! Indian industrial laws asking how many times the wall should be painted or whitewashed, and specifying penalties for not doing so. Every department is trying to encroach on businesses to obtain its pound of flesh when its existence is questionable. Imagine single Indian Tax office – all taxes at one location, under one number, under one portal, one login, one DSC registered, one signatory,… I must be crazy to even think this way!

8 Recently raised to `1000 Crore threshold as RBI could possibly not manager no threshold law applied to entities without public interface

V. Outcomes, Accountability, and Continuous Improvement: Litigation without resolution

a) Fast, smooth and inexpensive recourse/escalation for the aggrieved vs. Slow, steep and expensive recourse to excesses inflicted

b) Revisited often for correlating it to fulfilment of its initial purpose and by testing it with present situation vs. Not revisited anytime till there is uproar, mess, crisis or repeated representations

c) Pruning and self-correcting mechanism built inside the law where law will be reviewed, or have sunset clauses for relevance, stability and clarity every few years on a systematic basis vs. No pruning or self-correcting mechanism or modifications set for clarity and stability

d) Data based correlation between written law, its interpretation, practices and enforcement vs. Low evaluation of existing laws, especially at state and municipal levels

e) Creates no friction to justify oil for greasing vs. Needs oil for greasing to remove frictions (pun intended)

f) Penalties and punishment for similar offences are similar across laws vs. Penalties and Punishment for similar offences are different across laws

g) Accountability of regulator vs. Penalties and punishment for similar offences are different across laws vs. Accountability of only citizens

Examples: How long does an appeal take to be heard? Tribunal for GST on paper established 9 years after the law enforced. Should related parties be defined consistently under accounting, direct taxes, indirect taxes? If you delay filing you pay fine/interest or lose chance to fight back and if regulator delays response or gives false response what is she accountable for? Under BNS (S. 319) imprisonment for cyber criminal is different compared to IT Act, 2000 (S.66C). Crime is same/similar – Identity theft. Same for Adulteration under IPC and FSSAI where difference in fine is ₹1,000 and ₹10 Lacs. Look at Charity commissioner sitting like judges – for change of a trustee due to death – takes 6 months, appearing in person, filing 1 inch fat docket and hiring a lawyer through whom the money moves to the approver. Zero reason for any ‘hearing’ – death of a trustee can be ‘seen’ from QR code and name removal should be free of so called ‘hearing’.

The above list seems particularly long to emphasize the fact that innumerable lifetimes wasted by terrible regulations, compliance, adjudication and even recalibration/deletion9. The next two decades are possibly the last big opportunity of Bharat when we are a nation full of youth and energy.

(the second part of the article will be published next month…)

9 It took 100 years to change Indian Succession Act, 1925 where the law makers realised that probate was there in Mumbai but not required in 
Delhi and Bangalore and was required for Hindus, Sikhs, Jains, …and not Christians and Muslims. That’s as bizarre, deaf and blind a law can get.

The Pillar of Audit Integrity – Engagement Quality Control Reviewer (EQCR)

The Engagement Quality Control Reviewer (EQCR) acts as an independent gatekeeper of audit integrity, objectively evaluating significant judgments before an audit report is issued. To combat global audit failures, India is transitioning to SQM 1 and SQM 2 by April 2026, mandating a proactive, risk-based system of quality management. Under SQM 2, an EQCR must possess technical competence, absolute objectivity, and adequate time. Although the EQCR rigorously scrutinizes high-risk areas across the audit’s lifecycle, ISA 220 (Revised) asserts that the Engagement Partner retains ultimate accountability for overall audit quality. Ultimately, robust EQCR involvement ensures professional skepticism and bolsters stakeholder trust.

1. INTRODUCTION: THE EVOLVING FACE OF AUDIT OVERSIGHT

In the realm of statutory audits, audit quality remains the single most critical determinant of stakeholder trust. As corporate reporting grows in complexity and stakeholder expectations intensifies, the audit process is undergoing profound transformation. Amidst these shifts, the Engagement Quality Control Reviewer (EQCR) has emerged as a cornerstone of professional assurance and credibility.

The engagement quality control reviews (EQC reviews) ensure that significant audit judgments, especially in high- risk or contentious areas, undergo an independent, objective evaluation before the audit report is issued. In essence, the EQCR is both a guardian of professional skepticism and a mentor of quality within the firm’s governance ecosystem.

While the engagement quality reviews are not new to the audit profession, their rigor, governance and regulatory expectations have significantly evolved in response to global audit failures. Following major audit failures regulators across the globe underscored one recurring issue: insufficient EQC reviews and lack of independent challenge. As a response, global standard setters have tightened the EQC reviews framework through the ISQM 1, ISQM 2, and ISA 220 (Revised) suite of Quality Management Standards issued by the IAASB.

This article discusses EQC reviews in the context of SQM 1, SQM 2 and ISA 220 (Revised). Currently, the governing standard for audit firm quality control in India is SQC 1 “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements”. ICAI has formally issued and notified Standard on Quality Management (SQM) 1 and SQM 2, which are designed to align closely with the corresponding international standards, ISQM 1 and ISQM 2, and prescribe the firm-level quality management framework and detailed requirements relating to EQC reviews. From 1 April 2026, SQC 1 will be replaced by SQM 1 and SQM 2. However, SA 220 (Revised), which is closely aligned with ISA 220 (Revised) and sets out the engagement partner’s responsibilities relating to quality management at the engagement level, has not yet been notified by ICAI. Accordingly, while this article refers to ISA 220 (Revised) for conceptual completeness and international alignment, the currently applicable engagement-level standard in India continues to be the existing SA 220, until SA 220 (Revised) is formally issued and becomes effective.

2. DEFINING THE EQC REVIEW — PURPOSE, PRINCIPLES AND SCOPE

Under SQM 1 .16(d) and SQM 2.13(a), an EQC review is:

“An objective evaluation of the significant judgments made by the engagement team and the conclusions reached thereon, performed by the EQCR and completed on or before the date of the engagement report.”

This definition reflects three essential attributes:

  • Objectivity: The reviewer must be fully independent of the audit team.
  • Significance: Focus on key judgments, material risks, and complex estimates.
  • Timeliness: Completion must occur prior to signing the audit opinion.

In practice, this translates to a layered defense model:

a. The engagement team performs and documents the audit.

b. The engagement partner reviews and approves key judgments.

c. The EQCR performs an independent evaluation before the audit report is issued.

In many large audit firms, the EQCR role is assigned to a senior partner with extensive industry and technical experience who has had no prior involvement in the audit engagement.

For listed entities / PIE, this review is mandatory, while firms may voluntarily extend EQC reviews coverage to high-risk non-PIE engagements as a quality safeguard.

3. THE QUALITY MANAGEMENT FRAMEWORK: SQM 1, SQM 2, AND ISA 220 (REVISED)

a) SQM 1 – Firms quality management system

SQM 1 redefines the quality control paradigm by introducing a proactive, risk-based approach to managing audit quality.

It requires firms to establish a System of Quality Management (SOQM) that provides reasonable assurance that:

  • Professional and ethical requirements are consistently met.
  • Engagements are conducted in accordance with standards and regulations.
  • Reports issued are appropriate under the circumstances.

EQC reviews are integrated within this system, serving as monitoring and remediation checkpoints for high-risk engagements.

Para 34(f) of SQM 1 defines Policies / procedures for EQC reviews and which engagements must have EQCR: –

Firm shall establish policies/procedures addressing EQC reviews in accordance with SQM 2, and require EQC reviews for:

  1. Audits of financial statements of listed entities (Para 34(f)(i))
  2. Engagements where engagement quality review is required by law / regulation (Para 34(f)(ii))
  3. Engagements where the firm determines engagement quality review is an appropriateresponse to one or more quality risks (Para 34(f)(iii)).

APPLICATION GUIDANCE (PARA A133-A137) – HOW TO THINK ABOUT (PARA 34(F)(II)) AND (PARA 34(F)(III))

  • A 133: Law or regulation may mandate an Engagement Quality Review for certain audits, such as those of public interest entities, public sector or government-funded entities, entities in high-risk industries (e.g. Banks and insurers), large entities crossing prescribed thresholds, or entities under court or judicial supervision, due to their higher public impact and risk. The firm has not got a choice. Most laws and regulations do not explicitly state that an Engagement Quality Control Review is required. Instead, laws and regulators identify certain entities as high public interest, high risk, or publicly accountable (e.g., listed companies, banks, insurance companies, large or government-funded entities, entities under court processes). SQM 1 and SQM 2 translate these legal and regulatory classifications into audit quality requirements. SQM 1- A133 clarifies that audits of such entities are ordinarily subject to EQCR, unless law or regulation provides otherwise.

Therefore, EQCR becomes mandatory through auditing standards and firm policies, even when the law itself is silent on EQCR.

In practice, firms must check applicable laws/regulations to identify high-risk entities and then apply EQCR as required by SQM 1 and SQM 2.

A134-A137: If an engagement is complex, highly judgmental, sensitive, or involves higher public or regulatory risk, the firm may determine that an Engagement Quality Review (EQC review) is an appropriate response to address quality risks. EQC review is used not only for mandatory PIE audits, but also where engagement or entity characteristics elevate audit risk.

EQC review may be appropriate for:

  • Complex or judgment-heavy engagements, such as audits with high estimation uncertainty, going concern issues, or assurance engagements requiring specialized expertise.
  • Engagements with prior or ongoing issues, including recurring inspection findings, significant control deficiencies, or financial statement restatements.
  • Unusual acceptance or continuance circumstances, such as disagreements with previous auditors or other acceptance red flags.
  • Regulatory or sensitive reporting engagements, including IPOs, prospectuses, or pro forma financial information.
  • Entities with high public interest or accountability, even if not listed, such as fiduciary entities, high-profile entities, or those with many stakeholders.
  • New or unfamiliar industries, where the firm has limited prior experience.

The nature, timing, and extent of EQCR should be commensurate with the assessed quality risks, and the review should be completed before the engagement report is issued.

B) SQM 2 – EQCR MECHANISM

SQM 2 establishes explicit criteria for the appointment and eligibility of an EQCR.

The reviewer must possess:

  • Sufficient technical competence, Industry knowledge and professional experience relevant to the engagement;
  • Independence and objectivity, with no prior involvement in the audit. Carry out the role on the engagement with objectivity, integrity and impartiality. Comply with relevant ethical and independent requirements and laws and regulations;
  • Appropriate authority and adequate time to conduct a meaningful review. EQCR must have sufficient time available to perform the EQC review. Lack of sufficient time available to perform the EQC review has been a key root cause of EQC review quality issues identified.

These requirements ensure that the reviewer’s evaluation is both credible and free from bias. Firms are also expected to implement policies for assessing and maintaining the ongoing competence and ethical integrity of EQCRs. This represents a shift toward formalised governance and oversight over who can serve as an EQCR.

Further a minimum two-year cooling-off period applies where the reviewer previously served as the engagement partner, unless a longer period is required by ethical standards. Individuals assisting the reviewer must not be members of the engagement team and must meet relevant competence and ethical requirements, with the reviewer retaining overall responsibility for the engagement quality review. Firms are also required to address circumstances that may impair reviewer eligibility, including withdrawal where necessary.

SCOPE AND RESPONSIBILITIES OF THE EQCR

The EQCR’s responsibilities under SQM 2 extend beyond procedural formality. The reviewer must evaluate whether:

  • The engagement team’s significant judgments are appropriate and consistent with professional standards;
  • The audit evidence obtained adequately supports the conclusions reached;
  • Consultations on difficult or contentious matters have been appropriately performed and documented;
  • The engagement report should be issued, based on the sufficiency of the evidence and the reasonableness of the conclusions.

Importantly, SQM 2 requires that the engagement report must not be dated or released until the EQCR has completed their review and all significant matters have been resolved. This embeds the EQCR as a final quality gatekeeper before the issuance of the audit report.

TIMING AND DOCUMENTATION REQUIREMENTS

SQM 2 mandates that the EQC review is completed on a timely basis at appropriate points in time during the engagement and the engagement report cannot be dated until completion of the EQC review.

Firms must maintain comprehensive documentation of:

  • The nature, timing, and extent of the EQCR’s procedures;
  • The significant discussions between the EQCR and the engagement partner;
  • The conclusions reached, including how differences in view were addressed.

Such documentation enhances transparency and accountability, providing a verifiable record for both internal quality monitoring and external regulatory inspections.

c) ISA 220 (Revised) – Partner Accountability in respect of EQC review

ISA 220 (Revised) enhances the focus on quality management at the engagement level and clarifies that the Engagement Partner (EP) is responsible and accountable for managing and achieving quality on the audit engagement, notwithstanding the involvement of an Engagement Quality Reviewer (EQCR) or the performance of an Engagement Quality Review (EQC review).

The performance of an EQCR does not reduce, substitute, or transfer the Engagement Partner’s responsibility.

The Engagement Partner remains accountable for:

  • Managing and achieving quality on the audit engagement
  • Compliance with professional standards and applicable legal and regulatory requirements
  • The appropriateness of the auditor’s report issued

EP ACCOUNTABILITY IN RELATION TO EQCR:

a) Responsibility to Ensure an EQC review is Performed

The Engagement Partner is responsible for:

  • Ensuring that an EQC review is performed when required by firm policies or applicable standards (e.g., public interest entities, high-risk engagements)
  • Ensuring that the EQCR is appointed at an appropriate stage of the engagement, such that significant judgments are subject to timely review.

b) Responsibility for Cooperation with the EQCR The Engagement Partner shall:

  • Ensure that the EQCR is provided with sufficient and appropriate information to perform the EQC review
  • Engage in discussions with the EQCR regarding significant judgments, including:
  • Significant risks identified
  • Significant accounting and auditing judgments
  • Conclusions relating to going concern
  • Matters that may affect the auditor’s report

c) Responsibility for Resolving Differences of Opinion

Where differences of opinion arise between:

  • The engagement team and the EQCR, or
  • The Engagement Partner and the EQCR

The Engagement Partner is responsible for:

  • Ensuring that such differences are resolved in accordance with firm policies
  • Ensuring that the auditor’s report is not dated until the EQCR is completed and the matter is appropriately resolved.

d) Responsibility for Timing of the Auditor’s Report

The Engagement Partner shall ensure that:

  • The EQC review is completed on or before the date of the auditor’s report
  • The auditor’s report is not dated until:
  • The EQC review has been completed, and
  • The EQCR has not raised any unresolved matters that would require further action.

Limitations on Reliance on EQC review

The Engagement Partner shall not:

  • Regard the EQC review as a substitute for the engagement partner’s own judgment or responsibility
  • Treat the EQCR as assuming ownership of significant or complex judgments
  • Issue the auditor’s report prior to completion of the EQC review.

CORE PRINCIPLE FROM ISA 220 (REVISED)

The engagement partner remains responsible and accountable for managing and achieving quality on the audit engagement, including when an engagement quality review is performed.

However, it is to be noted that during the recent regulatory inspections, the regulatory body has extended its jurisdictions beyond the engagement partner to the EQCR. Such regulatory action against EQCR can be understood not as transfer of engagement accountability but as an enforcement of the EQCR’s independent responsibility to exercise the objective evaluation and professional skepticism in performing quality review. To sum up, accountability for the audit quality and responsibility for the quality review coexist, each operating within the clearly defined but complementary boundaries.

4. THE EQCR’S ROLE IN ENHANCING STATUTORY AUDIT QUALITY

4.1 Independence and Objectivity

EQCR’s independence is both ethical and structural. They must:

  • Be free of any prior involvement in the engagement.
  • Avoid financial or business relationships with the client.
  • Refrain from participating in decision-making for the audit.

4.2 PROFESSIONAL SKEPTICISM AND CHALLENGE

The EQCR effectiveness is directly proportional to the extent of professional challenge they exert.

In firms with strong “challenge culture,” EQCRs more frequently identify inconsistencies in management estimates and risk assessments— leading to measurable improvement in audit outcomes.

5. PERFORMING THE EQC REVIEW: STAGES AND PROCEDURES

An effective EQC review follows a structured process.

STAGE 1: RISK ASSESSMENT STAGE

a) Understanding the Engagement & Firm Inputs

EQCR should:

  • Read and understand:
  • Engagement acceptance/continuance: Ensure the engagement was accepted based on firm policies and quality risk considerations.
  • Resources: EQCR should also confirm that engagement resources (staffing, expertise, time) are adequate for identifying risks.
  • Entity and environment: Understand the entity and environment, background of the engagement, entity’s risk profile, and nature of the operations.
  • Firm monitoring & remediation: Communications from the firm monitoring & remediation: Review any firm-level findings or remediation actions relevant to engagement quality

Document all review procedures and conclusions.

KEY EQCR QUESTION:

“Is this engagement appropriately accepted and resourced given the firm’s quality risks?”

b) Independence & Ethics Evaluation

EQCR reviews:

  • Engagement team’s independence assessment: Verify that the team has appropriately assessed and documented independence in line with firm and regulatory requirements. EQCR should challenge whether independence threats were mitigated effectively, not just documented.
  • Non-audit services and safeguards: Ensure any non-audit services provided to the entity have proper safeguards to maintain independence.
  • Partner rotation /familiarity threats: Confirm compliance with partner rotation rules and evaluate any familiarity threats that could impair objectivity.
  • Consultations on ethics (if any): Review outcomes of any ethics-related consultations to ensure issues were addressed appropriately.
  • Compliance: Ensure compliance with firm’s independence policies and applicable regulatory requirements.

Focus:

  • Whether threats were identified early and mitigated, not merely documented.

c) Review of Planned Audit Approach

EQCR evaluates:

  • Overall audit strategy: Review whether the audit strategy aligns with engagement objectives and addresses key quality risks.
  • Materiality: The EQCR considers whether the benchmark and other metrics selected for determining materiality are suitable in the circumstances and whether the percentages applied to those benchmarks are reasonable. EQCR should also consider whether performance materiality and thresholds for misstatements are reasonable
  • Group audit scoping (if applicable): Ensure the scope for group audits is clearly defined, including component auditor involvement and risk considerations. EQCR should review whether component auditor instructions are clear and address significant risks.
  • Fraud risk assessment: Evaluate whether the elements of the fraud risk triangle have been appropriately identified and addressed in the audit plan. Ensure fraud risk response is proportionate and documented.
  • Significant Risks: Confirm that significant risks are properly identified, documented, and incorporated into the audit approach.

d) Discussion of Significant Matters & Judgments (at planning stage)

EQCR Should:

  • Document discussions and rationale for significant judgments.
  • Assessed professional skepticism applied by the engagement team.
  • Ensure documentation reflects appropriate responses to significant and fraud risks.
  • Discuss expected areas of judgment with engagement partner (e.g., revenue recognition, impairment, going concern, provisions, related parties).

STAGE 2: TESTING STAGE

a) Review of Going Concern & Compliance Risks

EQCR reviews:

  • Going concern assessment: Confirm that management’s going concern assessment has been critically evaluated and appropriately challenged. EQCR should confirm whether alternative scenarios were considered in going concern evaluation.
  • Cash flow forecasts and assumptions: Review whether cash flow projections and underlying assumptions are reasonable and supported by evidence.
  • Actual or suspected:
  • Non-compliance with laws: Ensure any identified or suspected non-compliance is properly addressed and documented.
  • Illegal acts: Verify that procedures for investigating and reporting illegal acts are followed.
  • Fraud indicators: Evaluate whether fraud indicators have been considered and incorporated into the audit response

KEY QUESTION:

“Has professional skepticism been applied, or has management bias influenced conclusions?”

b) Review of Significant Judgments & Estimates

EQCR examines selected documentation relating to:

  • Accounting estimates: Assess whether significant accounting estimates are reasonable, supported by evidence, and free from bias. EQCR should verify whether management’s assumptions were corroborated with external evidence where possible.
  • Management bias indicators: Evaluate if there are signs of management bias in judgments or assumptions impacting financial statements.
  • Use of experts: Review the appropriateness of using specialists and the reliability of their work in forming audit conclusions.
  • Sensitivity analysis: Confirm that sensitivity analyses have been performed for key assumptions and their impact adequately considered.

EQCR FOCUS:

  • Quality of challenge
  • Corroboration of assumptions
  • Whether alternative views were considered

c) Review of Communications & Consultations

EQCR evaluates:

  • Internal consultations (technical, independence, valuation): Verify that all required consultations were sought, documented, and appropriately concluded. EQCR should ensure consultation conclusions are implemented in audit work.
  • Communications with TCWG: Ensure timely and complete communication of significant matters to those charged with governance.
  • Difference of opinion: Review conclusions and ensure differences of opinion were resolved appropriately.
  • Regulator/governance communications: Examine all significant written communications to governance bodies or regulators.

d) Ongoing Discussion of Significant Matters

EQCR:

  • Maintain dialogue with engagement partner: Maintain regular communication with the engagement partner to stay informed on key developments and decisions. EQCR should maintain documentation of all significant discussions and emerging issues.
  • Tracks whether earlier identified risks are being addressed appropriately: Monitor progress to ensure previously identified risks are mitigated and documented effectively.
  • Flags emerging issues: Proactively identify and escalate new or evolving issues that may impact audit quality or conclusions.

STAGE 3: COMPLETION STAGE

a) Review of Misstatements

EQCR reviews:

  • Uncorrected misstatements: Assess whether uncorrected misstatements are properly summarised and evaluated for materiality. EQCR should confirm whether management’s rationale for not correcting misstatements is reasonable and documented.
  • Qualitative considerations: Consider qualitative factors that may render otherwise immaterial misstatements significant.
  • Aggregation impact: Verify that aggregated misstatements have been analyzed for their cumulative effect on materiality.

Key Question:

“Is the conclusion reasonable in light of both quantitative and qualitative factors?’’

b) Review of Financial Statements & Draft Auditor’s Report

EQCR evaluates:

Consistency between:

  • Audit evidence
  • Financial statements
  • Auditor’s report
  • Disclosures: Ensure completeness and consistency.
  • Key Audit Matters (KAM) (if applicable): Review that KAMs are appropriately identified, justified, and clearly communicated.
  • Significant matters missed: EQCR must identify any significant matters missed by the engagement team and ensure resolution before report issuance
  • Emphasis of Matter / Other Matter paragraphs: Evaluate whether these paragraphs are necessary, accurate, and properly presented in the report.
  • Timing: The engagement partner cannot date the audit report until the EQC review is complete.

c) Evaluation of Significant Judgments & Conclusions

EQCR concludes whether:

Significant judgments are:

  • Reasonable: Confirm that key judgments made by the engagement team are logical and aligned with audit evidence.
  • Adequately supported: Ensure judgments are backed by sufficient, appropriate documentation and analysis.
  • Appropriately documented: Verify that all significant judgments are clearly recorded in the audit file for transparency and compliance.

Engagement partner’s involvement was:

  • Sufficient
  • Timely
  • Appropriate

ISA 220.36 compliance: Identify and resolve missed significant matters (risk classification, non-compliance, ethical lapses).

d) Review of Communications

EQCR reviews:

  • Final communications with TCWG: EQCR should confirm that communications to TCWG include all significant findings, judgments, and ethical matters.
  • Management representation letter: Verify that the representation letter is complete, accurate, and consistent with audit conclusions.
  • Consistency across communications: Confirm that all communications (internal and external) are aligned and free of  contradictions.

e) Completion of EQCR Checklist & Conclusion

EQCR:

  • Completes EQCR documentation: Finalize and sign off on all required EQCR documentation for compliance and transparency.
  • Confirms all concerns resolved: Ensure that any issues identified during the review have been satisfactorily addressed.
  • Provides formal approval before report date: Grant formal EQCR approval prior to the issuance of the auditor’s report.

6. COMMON DEFICIENCIES AND PITFALLS OBSERVED IN EQC REVIEWS

Regulatory inspections globally reveal consistent weaknesses in EQC reviews:

Core Observation What Reviewers Are Really Seeing Why It Matters
1. EQCR involvement is often too late in the audit process EQCR is performed close to completion and sometimes after major judgments are already finalised Limits EQCR’s ability to influence significant judgments; contrary to the intent of SQM 2
2. EQCR reviews lack sufficient depth and professional challenge Reviews rely on high-level checklists and summaries with limited documented challenge Weakens demonstration of professional skepticism and audit quality
3. Documentation does not clearly evidence EQCR work performed Audit files often lack clarity on what was reviewed, when, and the reviewer’s conclusions Creates quality inspection risk due to inability to evidence compliance
4. EQCR focus is not consistently risk-based Significant risks and key judgments are not always clearly linked to EQCR procedures Increases risk that critical audit areas are not adequately scrutinised
5. EQCR findings are not effectively embedded into firm-wide quality improvement Recurring themes appear across inspection cycles with limited systemic remediation Indicates broader weaknesses in quality management systems

7. LEADING PRACTICES FOR EFFECTIVE EQC REVIEW IMPLEMENTATION:

  1. Early Planning: Engage EQCRs at engagement acceptance stage.
  2. Dynamic Review: Perform reviews progressively, not just post-completion.
  3. Risk-Based Depth: Calibrate review effort to engagement complexity.
  4. Structured Documentation: Use firm-standardized EQC review checklists.
  5. Rotation and Peer Review: Regularly rotate EQCRs to prevent familiarity threats.

8. THE FUTURE OF EQCR: FROM REVIEWER TO QUALITY LEADER

The role of the EQCR is evolving toward strategic quality leadership.
Emerging developments include:

  • Al-driven risk mapping for EQCRs to prioritize areas of focus.
  • Continuous monitoring systems that integrate EQC review insights into firm-wide dashboards.
  • Behavioral analytics to detect “review fatigue” or bias.
  • Expanded disclosures of EQCR involvement in transparency reports.

As audit firms move toward Integrated Quality Management Systems (IQMS), the EQCR will not only review judgments but also inform firm-wide learning, governance, and accountability mechanisms.

9. CONCLUSION: THE ETHICAL CONSCIENCE OF AUDIT QUALITY

The Engagement Quality Control Reviewer stands as the profession’s ethical compass —ensuring that audits remain credible, transparent, and resilient to bias or pressure.

By embedding EQC reviews into the DNA of quality management, firms reaffirm their commitment to public interest, audit excellence, and professional integrity.

In the Indian landscape, where audit credibility underpins economic growth and investor trust, strengthening the EQCR role represents not just compliance— but a strategic imperative for the future of the profession.

References: –

  • SQM 1, SQM 2, SQC 1 , SA 220 issued by ICAI
  • ISQM 1 , ISQM 2, ISA 220 (Revised) issued by IAASB

A Comprehensive Analysis Of India’s New Labour Codes And Their Impact On Financial Statements

India’s new Labour Codes, effective November 2025, introduce a standardized “Wages” definition that fundamentally alters corporate liabilities. If excluded allowances exceed 50% of an employee’s Cost to Company, the excess is legally deemed “Wages,” drastically increasing the calculation base for statutory benefits like gratuity and provident fund. Furthermore, fixed-term employees now qualify for pro-rata gratuity after just one year. Under Ind AS 19, these structural changes constitute a “Plan Amendment“. Consequently, companies must immediately recognize the heightened obligations as a Past Service Cost in their Profit & Loss statements, directly reducing net profit, earnings per share, and net worth.

The enactment of the 4 new Labour Codes, the Code on Wages, 2019, the Code on Social Security, 2020, the Industrial Relations Code, 2020, and the Occupational Safety, Health and Working Conditions (OSH) Code, 2020 represents the most significant structural reform in India’s employment history. These codes came into effect from November 21, 2025, which will consolidate and simplify 29 central labour laws into a unified framework. However, for the financial community specifically Chief Financial Officers (CFOs), auditors, actuaries, and institutional investors, the implications extend far beyond mere regulatory compliance. These reforms will necessitate a fundamental restructuring of employee benefit obligations that will materially impact financial statements prepared under Ind AS 19 – Employee Benefits and AS 15 Employee Benefits (revised 2005).

The most disruptive element of this legislative overhaul is the standardized definition of “Wages,” which mandates that aggregate of specified exclusions from total CTC must not exceed 50%of the total Cost to Company (CTC) for the calculation of statutory benefits like gratuity and provident fund. For decades, Indian corporate compensation structures have been “allowance-heavy,” often keeping basic pay at 30-35% of CTC to minimize long-term liabilities and increase immediate take-home pay. By artificially uplifting the “wage” base to minimum of 50% of remuneration (CTC) through this deeming fiction, the Present Value of Defined Benefit Obligations (PVDBO) for gratuity and leave encashment is projected to rise by 25% to 50% for many entities, particularly in the service sectors.

This article provides a detailed technical analysis of these changes. It dissects the interplay between the legislative text and accounting standards, explores the actuarial complexities of the transition and considers the importance of disclosures in financial statements.

PART 1: THE LEGISLATIVE AND REGULATORY LANDSCAPE:

Rooted in the industrial era of the mid-20th century, the legacy framework comprised over 40 central laws and 100 state laws, creating a compliance labyrinth that stifled formal employment while failing to provide universal social security. The genesis of the current reforms lies in the report of the Second National Commission on Labour (2002), which recommended consolidating these laws into broad functional groups to ensure uniformity and ease of compliance. The objective is to balance worker welfare (through universal social security and minimum wages) with industrial flexibility (through fixed-term employment and simplified dispute resolution).

The consolidation has resulted in four pillars:

1. Code on Wages, 2019:

Subsumes the Payment of Wages Act, 1936; Minimum Wages Act, 1948; Payment of Bonus Act, 1965; and Equal Remuneration Act, 1976. Its primary financial impact stems from the unified, non-negotiable definition of wages.

2. Code on Social Security, 2020:

Subsumes nine laws, including the Employees’ Provident Funds (EPF) Act, 1952; Employees’ State Insurance (ESI) Act, 1948; and Payment of Gratuity Act, 1972. It extends social security coverage to gig and platform workers and alters eligibility criteria for gratuity enabling eligibility employees engaged under fixed-term contracts of more than one year.

3. Industrial Relations Code, 2020:

Streamlines regulations regarding trade unions, strikes, and lockouts, and introduces statutory recognition for Fixed Term Employment, allowing employers flexibility in hiring while mandating pro-rata benefits.

4. Occupational Safety, Health and Working Conditions (OSH) Code, 2020:

Consolidates safety regulations and significantly impacts leave encashment policies by standardizing leave entitlement and accumulation rules.

THE UNIFIED DEFINITION OF WAGES: THE 50% RULE:

The cornerstone of the financial impact across all four Codes is the new, uniform definition of “Wages” provided in Section 2(y) of the Code on Wages, 2019, which is adopted by reference in the other three codes. This definition is the mathematical engine that drives the increase in employee benefit liabilities.

The definition is structured in 3 distinct parts:

Indias New Labour Code the Financial impact

  •  The Inclusions: The core components that always constitute wages: Basic pay, Dearness Allowance (DA), and Retaining Allowance.
  • The Exclusions: A specific list of components that are not wages, provided they do not exceed the cap. These include House Rent Allowance (HRA), conveyance allowance, overtime allowance, commission, house accommodation value, statutory bonus, and employer contributions to PF/Pension.
  • The Proviso (The 50% Cap): This is the critical “deeming fiction” introduced by the legislation. The Code explicitly states that if the aggregate of the specified excluded components exceeds 50% (or such other percentage notified by the Central Government) of the total remuneration calculated, the excess amount shall be deemed as “Wages” and added back to the inclusions for the purpose of calculating benefits. However, if the aggregate of exclusions exceeds the prescribed limit, the excess amount is deemed to be “Wages” and added back for the purpose of computing statutory benefits.

Now, this prevents employers from engineering compensation structures where the majority of the payout is disguised as allowances (e.g., “Special Allowance,” “Flexi-Pay”) to suppress the base for Provident Fund (PF) and Gratuity contributions.

ILLUSTRATION

Consider a typical service sector employee (e.g., a Software Engineer or Consultant) with a Cost to Company (CTC) of ₹1,000,000.

Component Pre-Code Structure (Typical) Post-Code Statutory Base Calculation
Basic Salary ₹ 300,000 (30%) ₹ 300,000
HRA ₹ 150,000 Excluded
LTA & Conveyance ₹ 50,000 Excluded
Special/Flexi Allowances ₹ 450,000 Excluded
Employer PF ₹ 36,000 Excluded
Gratuity Allocation ₹ 14,000 Excluded
Total Remuneration ₹ 1,000,000 ₹ 1,000,000
Total Exclusions ₹ 700,000 (70%)
Permissible Exclusion Limit ₹ 500,000 (50%
of Total)
Excess Exclusion ₹ 700,000 – ₹500,000 =
₹ 200,000
Deemed Wages ₹ 200,000
Final Wage Base for Benefits ₹ 300,000 ₹ 300,000 +
₹ 200,000 =
₹ 500,000

In this scenario, the liability base for Gratuity and PF increases from ₹300,000 to ₹500,000, a 66.6% increase. This increase is not a function of salary increment or inflation; it is a purely legislative adjustment that creates an immediate financial obligation.

Now, consider another scenario, continuing above illustration,

Component Pre-Code Structure (Typical) Post-Code Statutory Base Calculation
Basic Salary ₹ 600,000 (60%) ₹ 600,000
HRA ₹ 50,000 Excluded
LTA & Conveyance ₹ 25,000 Excluded
Special/Flexi Allowances ₹ 225,000 Excluded
Employer PF ₹ 72,000 Excluded
Gratuity Allocation ₹ 28,000 Excluded
Total Remuneration ₹ 1,000,000 ₹ 1,000,000
Total Exclusions ₹ 400,000 (40%)
Permissible Exclusion Limit ₹ 500,000 (50% of Total)
Excess/(Shortfall) Exclusion ₹ 400,000 –
₹ 500,000 =
(₹ 100,000) Negative and hence, shortfall will be ignored for deemed wage calculation
Deemed Wages ₹ 0
Final Wage Base for Benefits ₹ 600,000 ₹ 600,000

Here, exclusions i.e., 60% exceed the limit i.e., 50%, the surplus is mandatorily reclassified as “Wages” and included for benefit computation and hence Gratuity has been computed on ₹ 600,000 and not on deeming fiction of 50% i.e., ₹ 500,000.

THE FIXED-TERM EMPLOYMENT (FTE) PARADIGM SHIFT

The Code on Social Security, 2020 and the Industrial Relations Code, 2020 formalise the concept of “Fixed Term Employment.” Historically, fixed-term contracts were often utilised by industries to maintain workforce flexibility and, crucially, to avoid long-term vesting liabilities. Under the Payment of Gratuity Act, 1972, an employee was required to render five years of continuous service to be eligible for gratuity.

Under Section 53 of the Code on Social Security, 2020, this regime is dismantled. The Code mandates that fixed-term employees are entitled to gratuity on a pro-rata basis if they render service for one year or more. The five-year vesting cliff is removed only for this category of workers.

Now, the financial impact

Pre-Code Post-Code
An entity hiring 1,000 contract workers for a 3 year project had zero gratuity liability on its balance sheet for these workers, assuming they would leave before 5 years. The entity must accrue gratuity liability for all 1,000 workers from Year 1. This moves a significant portion of the workforce from a “defined contribution” (or no benefit) mindset to a “defined benefit” classification.

The probability of vesting for FTEs jumps from near 0% (under the 5-year rule) to 100% (under the 1-year rule).

THE GIG AND PLATFORM ECONOMY

The Code on Social Security, 2020 is pioneering in its recognition of gig and platform workers (e.g., drivers for ride-hailing apps, delivery partners). Section 113 and Section 114 mandate social security schemes for these workers, funded by contributions from aggregators. Aggregators may be required to contribute 1-2% of their annual turnover (capped at 5% of the amount paid to such workers) to a designated Social Security Fund.

While this is not “gratuity” in the traditional defined-benefit sense, it represents a new statutory levy on revenue for platform companies, impacting unit economics and EBITDA margins directly. For financial reporting, this will likely be treated as a statutory levy like PF, recognized as an expense as the service is rendered.

PART 2: ACCOUNTING IMPLICATIONS (IND AS 19 & AS 15)

The primary standards in focus are Ind AS 19 (Employee Benefits) for listed and large unlisted companies following Ind AS, and AS 15 for those reporting under Indian GAAP. The treatment of the sudden, legislatively induced increase in liability is the subject of intense debate, which has been recently clarified by the Institute of Chartered Accountants of India (ICAI).

THE CLASSIFICATION DILEMMA:

The central accounting question triggered by the Labour Codes is: Is the increase in liability due to the new wage definition a change in actuarial assumption or a plan amendment?

  • Actuarial Assumption Change: These typically relate to changes in estimates (e.g., discount rate fluctuations, mortality table updates, changes in future salary growth expectations). Under Ind AS 19, the financial impact of such changes is recognized in Other Comprehensive Income (OCI). Crucially, items in OCI are not reclassified to profit or loss; they bypass the income statement, shielding the Earnings Per Share (EPS).
  • Plan Amendment (Past Service Cost): This arises when the terms of the plan are introduced, withdrawn, or changed (by deed or regulation), resulting in a change in the benefit payable for past service. Under Ind AS 19, Past Service Cost is recognized immediately in the statement of Profit and Loss (P&L). Where such amounts are material, entities may present or disclose them separately, including within line items described as exceptional, to enhance transparency in line with presentation principles under Ind AS 1.

The ICAI Accounting Standards Board (ASB), in its guidance and FAQs on the Labour Codes, has clarified that the changes triggered by the new Codes constitute a Plan Amendment. The reasoning is jurisprudential: the benefit formula itself has effectively been changed by the force of law. The law has structurally redefined the input variable (‘Wages’) upon which the benefit is computed. It is not merely a change in the estimation of the variable, but a redefinition of the variable itself. Therefore, the increase in the Present Value of Defined Benefit Obligation (PVDBO) is a Past Service Cost.

ACCOUNTING UNDER IND AS 19:

For entities complying with Ind AS, the impact is immediate, transparent, and may be potentially severe for the reporting period.

Paragraph 103 of Ind AS 19 requires an entity to recognize past service cost as an expense at the earlier of:

1. When the plan amendment or curtailment occurs; and

2. When the entity recognizes related restructuring costs or termination benefits.

Since the Labour Codes became effective on November 21, 2025, the “amendment” is deemed to have occurred on that date. Ind AS 19 does not allow for the deferral or amortization of past service costs, regardless of whether the benefits are vested or unvested. The concept of “vesting” is irrelevant for recognition under Ind AS 19; once the liability exists, it must be booked.

The Impact on the Financial Statements:

Upon the effective date, the entity must re-measure its DBO using the new wage definition.

  •  Hypothetical Scenario:

              ●  DBO (Old Rules): ₹ 100 Crores.

             ●  DBO (New Rules): ₹ 140 Crores (due to wage base increase + FTE inclusion).

             ●  Increase (Past Service Cost): ₹ 40 Crores.

  • Journal Entry:

             ●   Debit: Employee Benefit Expense (Past Service Cost) – Profit & Loss A/c: ₹ 40 Crores.

            ●   Credit: Net Defined Benefit Liability – Balance Sheet: ₹ 40 Crores.

FINANCIAL CONSEQUENCES:

1. Profitability: The ₹ 40 Crore charge reduces Profit Before Tax (PBT) immediately in the reporting period (Q3 FY 2025-26). It is not routed through OCI, meaning it directly reduces Net Profit.

2. EPS: Earnings Per Share will take a sharp, one-time dip in the transition quarter.

3. Net Worth: The charge flows into Retained Earnings, permanently reducing the Net Worth of the company.

4. Deferred Tax: Since the expense is booked but not paid, a Deferred Tax Asset (DTA) should theoretically be created (subject to probability of future taxable profits), which might partially offset the Net Loss impact, although the cash tax outflow remains unchanged until actual payment.

Companies might attempt to restructure salaries to mitigate the impact (e.g., shifting allowances to basic pay voluntarily). The ICAI guidance notes that if a company increases basic pay disproportionately to comply with the code (e.g., attributing the entire increment to basic pay to reach the 50% threshold), this change in structure is also treated as a Plan Amendment, not an actuarial change. The rationale is that the change is driven by the statutoryamendment, even if executed through an internal policy change.

ACCOUNTING UNDER AS 15:

For companies following Indian GAAP (SMEs, certain unlisted entities, and NBFCs not yet covered by Ind AS), AS 15 offers a slightly different treatment, though the liability must still be recognized.

Unlike Ind AS 19, AS 15 maintains a distinction between vested and unvested past service costs:

  • Vested Benefits: The past service cost relating to benefits that are already vested must be recognized immediately in the P&L.
  • Unvested Benefits: The past service cost relating to unvested benefits can be recognized on a straight-line basis over the average period until the benefits become vested.
    Application to Labour Codes
  • For employees with >5 years of service (already vested for gratuity), the impact of the wage increase is immediate and fully expensed.
  • For employees with <5 years (unvested), the increase in liability due to the new wage definition can be amortized over the remaining vesting period.
  • Crucial Exception: For Fixed-Term Employees who now vest at 1 year, the “unvested” period is significantly shortened. If an FTE has completed 9 months, the amortization period is only 3 months. Thus, the relief offered by AS 15 amortization is practically very limited.

COMPARATIVE ANALYSIS OF IND AS AND AS:

Feature Ind AS 19 AS 15
Event Classification Plan Amendment (Past Service Cost) Plan Amendment (Past Service Cost)
Recognition of Cost Immediate in P&L (100%) Immediate for Vested; Amortized for Unvested
Balance Sheet Impact Full Liability recognized immediately Liability recognized (less unamortized cost)
Impact on EBITDA Significant One-time Hit Significant Hit (Vested portion)

LEAVE ENCASHMENT: THE OSH CODE NUANCE

While Gratuity is the headline post-employment benefit, Leave Encashment liabilities also face pressure. The OSH Code standardizes leave rules, entitlement to encashment, and carry-forward limits, linking them strictly to the new “Wages” definition.

ACCOUNTING TREATMENT:

  • Under Ind AS 19/AS 15, leave encashment is typically classified as an “Other Long-Term Employee Benefit” (OLTB) rather than a post-employment benefit (unless it is strictly payable only on separation).
  • Remeasurement: For OLTB, all components of the change in liability, including past service cost and actuarial gains/losses are recognized immediately in P&L. There is no OCI option for leave encashment.
  • Implication: This compounds the volatility in the P&L. The “50% wage rule” applies here too, meaning the value of each accrued leave day increases. Since companies cannot route any part of the leave liability change through OCI, the P&L hit for leave encashment is often more severe relative to the size of the liability than gratuity.

PART 3: ACTUARIAL VALUATION

The financial statements are merely the reflection of the underlying actuarial models. The Labour Codes necessitate a recalibration of the Projected Unit Credit (PUC) method, the standard actuarial method mandated by Ind AS 19.

THE PROJECTED UNIT CREDIT (PUC) METHOD UNDER THE NEW LABOUR CODE

The PUC method views each period of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to build up the final obligation.

Previously, the model projected Basic Salary + DA. Now, the model must project Maximum of (CTC – Exclusions (Maximum of 50% of CTC)).

The actuary cannot simply project the basic salary using a standard escalation rate. They must project the entire CTC and the individual components to check the 50% threshold at every time.

For the transition valuation (March 31, 2026), companies must provide two distinct sets of data to their actuaries:

  1.  Current/Old Salary Structure: To calculate the opening DBO and verify the “pre-amendment” status.
  2. New Salary Structure: Reflecting the 50% adjustments and FTE inclusions to calculate the closing DBO and derive the Past Service Cost.

IMPACT ON SALARY ESCALATION RATE (SER) DYNAMICS:

The Salary Escalation Rate is a critical actuarial assumption representing the expected long-term growth in the salary base used for benefits. Due to these reforms,

  • The Inflationary Pressure: To maintain “take-home” pay (which drops due to higher PF deductions), employers might be forced to increase gross pay, suggesting a higher short-term SER.

  • The Structural Dampener: If the basic pay is forcibly increased to 50% today (a structural jump), future increments might be suppressed or directed into allowances (up to the limit) to manage costs. Management might argue for a lower future SER on the higher base.
  • ICAI & Actuarial View: The SER must reflect the best estimate of future growth. A one-time structural jump is a “Plan Amendment,” not an “Escalation.” However, the future rate of growth on this higher base must be consistent with the company’s long-term business plan and inflation expectations.

ATTRITION AND MORTALITY IN THE FTE ERA

Attrition (Withdrawal Rate) Assumptions must be overhauled for the FTE population.

  • Old Regime: High attrition in years 1-4 was beneficial for gratuity liabilities because employees leaving before 5 years forfeited the benefit. The actuary would apply a high withdrawal rate, reducing the Net Present Value (NPV).
  • New Labour Code: With 1-year vesting for FTEs, attrition in years 1-4 no longer extinguishes the liability; it only crystallizes it earlier.
  • Actuarial Impact: The valuation model must now assume that almost every FTE who survives one year will vest. This effectively increases the DBO.

PART 4: TRANSITION AND DISCLOSURE:

Major Transition Impact:

A critical area of concern is Section 142 of the Code on Social Security, 2020. While it provides for the validation of acts done under the repealed enactments, it does not explicitly “grandfather”
the gratuity calculation for past service at the old salary rates.

  • The Legal Position: Gratuity is a terminal benefit calculated on the “last drawn wage.”
  • The Consequence: If an employee retires in Dec 2025, their “last drawn wage” is the new (higher) wage defined by the Code.

There is effectively no grandfathering of the liability calculation. The entire past service liability gets re-valued at the new, higher wage rate. This lack of grandfathering is the primary source of the massive “Past Service Cost” hit.

RECOMMENDED DISCLOSURES:

To maintain transparency and investor confidence, the following disclosures are recommended in the financial statements for the year ending March 31, 2026:

  1. Quantitative Impact: Clearly quantify the “Past Service Cost” derived from the legislative change separate from routine current service cost.
  2. Narrative Disclosure:

A Following Note to the Financial Statements:

“Effective November 21, 2025, the Code on Social Security, 2020 and Code on Wages, 2019 was notified. The Codes mandate a revised definition of ‘Wages’ for the calculation of Gratuity and expand eligibility to Fixed Term Employees. The Company has assessed the impact of these changes as a Plan Amendment under Ind AS 19 ‘Employee Benefits’. Consequently, the Defined Benefit Obligation was remeasured using the revised wage definition, resulting in an increase of ₹ [Amount] million. This amount has been recognized as Past Service Cost in the Statement of Profit and Loss. This is a non-recurring item resulting from a change in law.

As the detailed rules under the Codes are currently in draft form and subject to final notification, the assessment is based on the Company’s interpretation of the notified provisions and available guidance. Any subsequent changes arising from finalisation of the rules may require reassessment of the impact in future periods.”

Given the non-recurring nature of the adjustment arising from a legislative change, entities may, where material, present or disclose the impact separately, including within items described as exceptional, to enhance transparency in financial reporting.

   3.  Sensitivity Analysis: Show the sensitivity of the DBO to the wage definition assumption (e.g., impact if the interpretation of “Special Allowance” changes).

  4. Exceptional Item: Argue for presenting the Past Service Cost as an exceptional item to normalize “Adjusted EBITDA” for analyst presentations

CONCLUSION:

The implementation of the New Labour Codes is not merely a legal compliance tick-box; it is a significant financial event that reshapes the cost structure of India Inc. For the Auditor, the focus must be on ensuring that the “Deemed Wage” calculation strictly follows the Section 2(y) proviso and that the financial impact is transparently disclosed as a Past Service Cost, preventing entities from burying the impact in OCI.

The scope for “salary engineering” to avoid the gratuity liability is severely restricted by the “Deeming Fiction” in the Code. The strategy must shift from “avoidance” to “optimization” of the residual 50% allowances to ensure they deliver maximum perceived value to the employee (e.g., through NPS) rather than just being cash allowances that get capped.

Ultimately, while the short-term financial pain is acute, the Codes promise a more transparent, equitable, and legally robust employment framework.

Significant Beneficial Ownership (SBO) Under The Companies Act 2013: A Study

The Significant Beneficial Ownership (SBO) framework under the Companies Act 2013 identifies natural persons who ultimately control companies, preventing corporate misuse. SBO status triggers via a dual-test: a quantitative threshold of 10% indirect or combined shareholding, voting, or dividend rights, or a qualitative test of exercising “control” or “significant influence”. Companies must seek SBO details (Form BEN-4), SBOs declare interests (Form BEN-1), and companies notify the Registrar (Form BEN-2). Non-compliance invites steep penalties and NCLT restrictions on dividend and voting rights. Recent rulings against Samsung and LinkedIn underscore strict enforcement regarding indirect group control.

Significant Beneficial Ownership (SBO) represents one of the most critical compliance requirements under the Companies Act 2013 (CA 2013), aimed at identifying the natural persons who ultimately control or benefit from companies, thereby preventing misuse of corporate structures for illicit purposes. Following recommendations from the Financial Action Task Force (FATF) and the Company Law Committee, India introduced the SBO regime through the Companies (Amendment) Act 2017, which substantially amended Section 90 of the CA 2013. The regime underwent further refinement through the Companies (Significant Beneficial Owners) Rules 2018 (SBO Rules), subsequently amended in 2019, and further refined for Limited Liability Partnerships
(LLPs) in 2023, establishing a comprehensive framework for identification, declaration, and ongoing compliance.

This article provides a detailed examination of the SBO provisions, including identification criteria, trigger points, compliance procedures, and practical examples demonstrating various scenarios where SBO obligations are triggered.

1. UNDERSTANDING THE SBO FRAMEWORK

1.1 Statutory Definition and Scope (What is an SBO)

Section 90 of the CA 2013 establishes a comprehensive framework for identifying and reporting significant beneficial ownership.

Section 90(1) of CA 2013 reads as under:

(1) Every individual, who acting alone or together, or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent. or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual exercising of significant influence or control as defined in clause (27) of section 2, over the company (herein referred to as “significant beneficial owner”), shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed:

Thus, every individual who, acting alone or together, or through one or more persons or trust (including trusts resident outside India), holds beneficial interests of not less than 25 percent (now 10 percent as per SBO Rules) in shares of a company or exercises the right to exercise or actually exercises significant influence or control (as defined in Section 2(27) of the Act), is required to make a declaration to the company.

However, the Companies (Significant Beneficial Owners) Rules 2018 have reduced this threshold to 10 percent, creating an important distinction between the statutory provision and the delegated legislation.

The definition of “significant beneficial owner” has been strategically broadened to encompass ultimate beneficial ownership, acknowledging that corporate structures often intentionally obscure the real owners behind multiple layers of corporate vehicles, trusts, and other entities. The legislation specifically contemplates an “extra-territorial reach,” applying to foreign registered trusts and persons resident outside India, thereby ensuring that sophisticated international structuring cannot circumvent Indian disclosure requirements. This approach aligns with global beneficial ownership disclosure standards promoted by the FATF and reflects India’s commitment to combating money laundering, terrorist financing, and other illicit financial activities.

1.2 Beneficial Interest under Section 89 and Section 90

A fundamental distinction exists between direct holdings and beneficial interests in the SBO framework. “Direct holding” refers to shares held in an individual’s own name as recorded in the company’s Register of Members, or shares in respect of which a declaration has been made under Section 89(2) of CA 2013. In contrast, “beneficial interest” encompasses a much broader concept defined in Section 89(10) of CA 2013, applicable to Section 90 of CA 2013 as well, extending to include the right to exercise any rights attached to shares or to participate in any distribution in respect of such shares, whether held directly or indirectly through any contract, arrangement, or otherwise.

This distinction is critical because the SBO Rules specifically exclude direct holdings as a sole basis for identifying an SBO, focusing instead on indirect holdings and the exercise of control or significant influence. This clarification, introduced through the 2019 Amendment Rules, ensures that the regime targets those who control companies from behind corporate veils rather than those whose shareholding is already transparent in the company’s register of members.

2. TRIGGER POINTS FOR SBO IDENTIFICATION:

2.1 Threshold-Based Trigger Points

The identification of an SBO is determined through a dual-test framework comprising both quantitative (objective) tests and qualitative (subjective) tests. The objective test primarily focuses on shareholding thresholds, while the subjective test examines control and significant influence exercised over the company.

2.1.1 The 10% Shareholding Threshold: Under the SBO Rules, an individual or a group of individuals triggers SBO status if they hold, either indirectly or together with direct holdings, not less than 10 percent of the shares of the company. This threshold represents the primary quantitative trigger point. For example, if Individual A holds 12 percent of the shares in his own name, he will not qualify as an SBO by virtue of direct shareholding even if it exceeds the 10 percent threshold. However, if Individual B directly holds 8 percent of shares and indirectly holds 3 percent through another entity, the aggregate holding of 11 percent would trigger SBO status.

2.1.2 Voting Rights and Dividend Participation: Beyond share capital, an individual is identified as an SBO if he holds, either indirectly or together with direct holdings, not less than 10 percent of the voting rights in shares. Additionally, an individual who has the right to receive or participate in not less than 10 percent of the total distributable dividend or any other distribution in a financial year, whether through indirect holdings alone or together with direct holdings, qualifies as an SBO. These alternative thresholds recognize that control over a company is not always exercised through share ownership but may be achieved through contractual arrangements that confer voting or dividend participation rights.

2.2 Control and Significant Influence:

Beyond shareholding thresholds, the SBO Rules establish a subjective test based on the exercise of control or significant influence. “Control” is defined in Section 2(27) of CA 2013 to include the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding, management rights, shareholders’ agreements, voting agreements, or any other manner. This definition is notably broad, extending control to those who influence policy through contractual arrangements rather than shareholding alone.

“Significant influence,” as defined in the SBO Rules, means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but not constituting control or joint control of those policies. This intermediate category captures those who have substantial influence over company decisions without wielding decisive control.

For instance, an individual with the right to appoint one director (ensuring his presence is necessary to form quorum) would exercise significant influence but not control. Conversely, an individual with the right to appoint the majority of directors would exercise control.

These subjective tests are particularly important in identifying hidden beneficial owners in complex corporate structures where voting rights may be dispersed, or where control is exercised through management agreements or shareholders’ agreements rather than shareholding. The subjective test ensures that the SBO regime captures not only the formal shareholders but also the individuals who direct the company’s operations and strategic decisions.

2.3 Indirect Holding Mechanisms and “Acting Together” Concept:

2.3.1 SBO Identification Matrix:

Diverse Scenarios for SBO Identification Triggering Points

The SBO Rules establish detailed mechanisms for determining indirect holdings, recognizing that corporate structures often involve multiple layers of entities. An individual is considered to hold a right or entitlement indirectly in the reporting company if he satisfies one or more of the following criteria.

  • Body Corporate Ownership: Where a shareholder in the reporting company is itself a body corporate (company or an LLP), an individual is regarded as indirectly holding the shares if he holds a majority stake in that body corporate or holds a majority stake in the ultimate holding company of that body corporate, whether incorporated in India or abroad. “Majority stake” means holding more than 50 percent of equity shares, voting rights, or the right to receive more than 50 percent of distributable dividend or other distributions. For instance, if Company X holds 30 percent of the shares in Target Company Y, and Individual C holds 60 percent of Company X, then Individual C’s indirect holding in Target Company Y would be calculated as 60 percent of 30 percent, equaling 18 percent.
  • Undivided Family (HUF) Holdings: When a shareholder in a company is a Hindu Undivided Family, the Karta (the managing member of the HUF) is regarded as the natural person holding the beneficial interest. This provision recognizes that an HUF is essentially a family of natural persons holding shares collectively, and Karta, as the managing member, exercises control over those shares. If an HUF holds 12 percent of shares in a company and Individual D is the Karta, then Individual D would be identified as the SBO in relation to that shareholding.
  • Partnership Entity Holdings: Where the shareholder is a partnership firm (including Limited Liability Partnerships), an individual or Group of Individuals is regarded as indirectly holding the shares if they meet any of the following conditions: (a) they are partners in that partnership firm; (b) they hold a majority stake in the body corporate where they are partners; or (c) they hold a majority stake in the ultimate holding body corporate of that partnership entity. The partnership provision acknowledges that partners collectively control partnership capital and profits.

•     If Individual E holds 55 percent of a Limited Liability Partnership that holds 18 percent of the shares in Target Company Y, then since LLP is holding more than 10%, each partner is considered as an SBO.

•     Take another situation. If Firm is holding more than 10% of ABC Private Limited (A). If Partner in the said firm is body corporate, then find an Individual holding more than 50% of the body corporate (B). Go up to the ladder find an Individual who holds more than 50% then he is an SBO (C). If no Individual meets the above criteria, then no SBO is identified in such a situation.

  • Trust Holdings: In the case of trusts holding shares, the determination of indirect holdings varies depending on the nature of the trust. For discretionary trust (where beneficiaries have no fixed entitlements), the trustee is regarded as holding beneficial interest and would be identified as an SBO. This reflects the principle that the trustee exercises control over trust assets.

•    For a specific trust or fixed-entitlement trust, the beneficiary or beneficiaries with entitlements are identified as holding beneficial interest.

•   For a revocable trust, the author or settlor of the trust (the person who created and can revoke it) is regarded as the beneficial owner.

  • Pooled Investment etc.: In case the Member of Reporting Company is (a) A Pooled Investment Vehicle (“PIV” i.e. Mutual Fund, Venture Capital Fund, etc.); or (b) An Entity Controlled by the Pooled Investment Vehicle (“Controlled Entity”), based in member State of the FATF on Money Laundering and the regulator of the securities market in such member State is a member of the IOSCO (International Organization of Securities Commissions). Further, the individual in relation to the Pooled Investment Vehicle is- (a) A General Partner; or (b) An Investment Manager; or (c) A CEO where the Investment Manager of such pooled vehicle is a Body Corporate or a partnership entity. However, where the PIV or Controlled Entity is based in a jurisdiction that does not meet the requirements above, the provisions of Explanation III (i) to (iv) to Rule 2(1)(h) of the SBO Rules, shall apply. PIV or Controlled Entity should be treated according to its legal form (as a company, LLP, trust, or HUF) and the company must identify all natural persons who, directly or indirectly, hold at least 10% of shares, voting rights, distributable dividends, or exercise control or significant influence over the reporting company.

2.3.2 The “Acting Together” Principle:

The SBO Rules introduce the concept of “acting together,” meaning natural persons who hold shares in concert or in coordination to exercise control or influence over the company. When several individuals act together, their shareholdings are aggregated to determine whether the combined holding reaches the 10 percent threshold. The critical element of “acting together” is not a general community of economic interests but rather a concerted exercise of control or significant influence specifically in relation to the target company. This togetherness is typically demonstrated through voting patterns, concerted acquisitions, holding of offices in concert, or explicit agreements (which can be formal or informal) to coordinate shareholding decisions.

For example, if Individual F holds 6 percent and Individual G holds 5 percent of the shares, but they have entered into a voting agreement under which they coordinate their voting decisions, their combined holding of 11 percent would trigger SBO status for both individuals.

3. IDENTIFICATION AND DECLARATION PROCEDURES

3.1 Initial Identification Obligations

Companies bear the primary responsibility for identifying SBOs within their shareholding structures. The Companies (Significant Beneficial Owners) Rules 2018, as amended in 2019, impose mandatory obligations on reporting companies to identify potential SBOs and solicit their declarations.

The identification process typically follows these sequential steps:

Step 1: Identification of Non-Individual Members: Every company must identify all non-individual members (entities such as companies, LLPs, partnerships, trusts) holding 10 percent or more shares, voting rights, or dividend participation rights. The company must then trace through these entities to identify the natural persons behind them, following the indirect holding mechanisms prescribed in the SBO Rules.

Step 2: Issuance of Form BEN-4 Notice: Upon identifying potential SBOs or non-individual members, the company must issue formal notice in Form BEN-4 to each such individual or entity, seeking information regarding their beneficial ownership status. The BEN-4 form is annexed with a blank declaration form (BEN-1) to facilitate response. This notice requirement applies both to members and non-members whom the company knows or has reasonable cause to believe may be SBOs. The notice period prescribed for response is 30 days from the date of notice.

Step 3: Receipt and Recording of Declarations: Upon receipt of declarations in Form BEN-1 from identified SBOs, the company must maintain a Register of Significant Beneficial Owners in Form BEN-3. This register must be open to inspection by members of the company upon payment of prescribed fees, ensuring transparency and accountability.

3.2 SBO Declaration Forms and Filing Requirements

The SBO compliance regime involves four primary forms, each serving a distinct purpose in the identification and reporting framework:

Form BEN-1 (Declaration by SBO): Every individual identified as an SBO is required to file a declaration in Form BEN-1 with the company, specifying the nature of his interest and other particulars as prescribed. The declaration must be submitted within prescribed timelines: (a) within 90 days of the applicability of the SBO Rules (a one-time filing for pre-existing SBOs), or (b) within 30 days of acquiring such SBO status in the future. Form BEN-1 captures detailed information regarding the SBO’s ownership structure, the mechanism through which they hold beneficial interest (direct, indirect through various entities, acting together, control, or significant influence), and confirmation of compliance with applicable laws.

Form BEN-2 (Return by Company to the Registrar): Upon receipt of a declaration in Form BEN-1, the company is mandated to file a return with prescribed fees to the Registrar of Companies in Form BEN-2 within 30 days of receiving such declaration. This return formally communicates the identification of an SBO to the regulatory authority, creating an official record of beneficial ownership disclosure. Form BEN-2 must be signed by a director, manager, CEO, Chief Financial Officer, or Company Secretary of the company and further certified by a practicing professional (Chartered Accountant, Company Secretary, or Cost Accountant) in whole-time practice. Filing delays result in additional fees as prescribed.

Form BEN-3 (Register of Significant Beneficial Owners): Every company must maintain and preserve a Register of Significant Beneficial Owners in Form BEN-3, comprising details of all individuals identified as SBOs. This register serves as an internal reference document documenting the company’s SBO identification exercise and is open to inspection by members and registered officials.

Form BEN-4 (Notification Letter to Potential SBOs): In accordance with Section 90(5) and Rule 2A of the SBO Rules, every company must issue a notice in Form BEN-4 seeking information regarding ultimate beneficial owners to (A) every non-individual member holding not less than 10 percent of shares, voting rights, or dividend participation rights, (B) any other person where the company has reasonable cause to believe that such member or person is SBO or, (C) has knowledge of the identity of a SBO or (D) was a SBO at any time during the immediately preceding three years.. This form initiates the identification process and gives potential SBOs an opportunity to disclose their status directly to the company.

3.3 Timelines for Compliance

The Companies (Significant Beneficial Owners) Rules 2018, as originally notified, established an initial one-time filing deadline of 90 days from the effective date (February 8, 2019) for all pre-existing SBOs to file their declarations. This transitional period recognized that companies with existing structures needed reasonable time to identify SBOs and facilitate their declarations. For new SBOs identified after this transition period, the timeline for declaration is 30 days from the date of acquiring SBO status. The company, upon receipt of an SBO declaration, must file the corresponding Form BEN-2 with the Registrar within 30 days. Importantly, delays in filing incur additional fees as prescribed under the Rules, creating a financial disincentive for non-compliance and encouraging timely reporting.

4. PRACTICAL EXAMPLES AND SCENARIOS

To understand the application of SBO provisions in diverse corporate structures, the following detailed examples illustrate various trigger points and compliance requirements:

4. 1 Direct Shareholding Exceeding Threshold

Scenario: Mr. Makrand holds 15 percent shares in ABC Private Limited, a private limited company. The shares are registered in his name on the company’s Register of Members.

Analysis: Although Mr. Makrand’s shareholding is direct and already visible in the Register of Members, since the 2019 Amendment Rules clarified that direct holdings of shares or voting rights are excluded from requiring mandatory declaration if the person is already on the Register of Members, Mr. Makrand would not need to file a separate BEN-1 declaration if he is already registered as a member holding 15 percent. The company would simply record this holding in the Register of Members.

Compliance Action: No separate BEN-1 filing required if registered member; no BEN-2 filing required as no additional disclosure is needed. (Mandatory Indirect Holding is necessary)

4.2 Indirect Holding Through a Single Corporate Layer

Scenario: Mr. Makrand holds 70 percent of the shares in Investment Company X Private Limited. Investment Company X holds 20 percent of the shares in Target Company Y Limited. Mr. Makrand is not directly registered as a member of Target Company Y.

Analysis: Mr. Makrand’s indirect holding in Target Company Y is calculated as 70 percent of 20 percent, equaling 14 percent. Since Mr. Makrand holds a majority stake (70 percent, which exceeds 50percent) in Investment Company X, which in turn is a shareholder in Target Company Y, Mr. Makrand’s holding through Investment Company X is regarded as an indirect holding under Rule 2(1)(h)(iii) of the SBO Rules. As his indirect holding exceeds the 10 percent threshold, Mr. Makrand qualifies as an SBO of Target Company Y.

Compliance Action: (1) Target Company Y must issue a Form BEN-4 notice to Investment Company X seeking information about ultimate beneficial owners; (2) Mr. Makrand must file a Form BEN-1 declaration with Target Company Y within 30 days from the notice date or 30 days of acquiring this status or within 90 days if pre-existing; (3) Target Company Y must file Form BEN-2 with the Registrar within 30 days of receiving Mr. Makrand’s BEN-1 declaration; (4) Target Company Y must record Mr. Makrand in its Register of Beneficial Owners (BEN-3).

4.3 Indirect Holding Through HUF

Scenario: Shetty Hindu Undivided Family holds 12 percent of the shares in XYZ Corporation Limited. Mr. Makrand Shetty is the Karta of this HUF and exercises management and control over the family properties, including this shareholding.

Analysis: Under Explanation III(ii) to Rule 2(1)(h) of the SBO Rules, where a shareholder in a body corporate is a Hindu Undivided Family, the individual who is the Karta of the HUF is regarded as the natural person holding the beneficial interest. Accordingly, Mr. Makrand Shetty, as the Karta of the Shetty HUF, is identified as the SBO in relation to the 12 percent shareholding held by HUF. The shareholding of 12 percent exceeds the 10 percent threshold, confirming Mr. Makrand’s SBO status.

Compliance Action: (1) XYZ Corporation Limited must identify the Karta of the HUF through the company’s records and/or issuance of Form BEN-4; (2) Mr. Makrand Shetty must file Form BEN-1 declaring his beneficial interest as Karta of the Shetty HUF; (3) XYZ Corporation Limited must file Form BEN-2 with the Registrar; (4) XYZ Corporation Limited must maintain the record in Form BEN-3.

Important Note: If Mr. Makrand Shetty holds an additional 5 percent of the shares in his personal name, his aggregate beneficial interest would be 12 percent (through HUF) plus 5 percent (direct), totaling 17 percent, which must be disclosed in his BEN-1 declaration.

4.4 Beneficial Interest Through Limited Liability Partnership

Scenario: Ms. Priya Sharma holds 60 percent of the capital contribution in Tech Innovations LLP. Tech Innovations LLP holds 15 percent of the shares in Software Solutions Limited. Ms. Priya is not a direct member of Software Solutions Limited.

Analysis: Under Explanation III(iii) to Rule 2(1)(h) of the SBO Rules, where a member (shareholder) in a company is a partnership entity, an individual is regarded as indirectly holding the shares if he is a partner holding a majority stake (more than 50 percent) in that partnership entity. Ms. Priya Sharma’s holding of 60 percent in Tech Innovations LLP constitutes a majority stake. Accordingly, her indirect holding in Software Solutions Limited is deemed to be 15 percent (the full holding of Tech Innovations LLP in Software Solutions Limited). Since 15 percent exceeds the 10 percent threshold, Ms. Priya qualifies as an SBO of Software Solutions Limited.

Compliance Action: (1) Software Solutions Limited must issue a Form BEN-4 notice to Tech Innovations LLP; (2) Ms. Priya Sharma must file Form BEN-1 disclosing her indirect holding through the LLP; (3) Software Solutions Limited must file Form BEN-2 with the Registrar; (4) Software Solutions Limited must maintain the record in Form BEN-3.

4.5 Control Through Board Appointment Rights

Scenario: Dr. Ravi Menon holds 8 percent shares of Healthcare Enterprises Limited. However, through a shareholder’s agreement, Dr. Ravi has the explicit right to appoint three directors out of a five-member board, thereby securing majority control of the board composition and management decisions.

Analysis: Although Dr. Ravi’s direct shareholding of 8 percent is below the 10 percent threshold, he exercises control over Healthcare Enterprises Limited through his contractual right to appoint the majority of directors. This control mechanism satisfies the subjective test under Rule 2(1)(h)(iv) of the SBO Rules, which identifies (as an SBO) any individual who has the right to exercise or exercises significant influence or control in any manner other than direct holdings alone. Dr. Ravi’s right to appoint three directors out of five constitutes control as defined in Section 2(27), exceeding the threshold for significant influence.

Compliance Action: (1) Healthcare Enterprises Limited must identify Dr. Ravi as an SBO based on his control through board appointment rights despite his below-threshold shareholding; (2) Healthcare Enterprises Limited must issue Form BEN-4 or directly request Form BEN-1 from Dr. Ravi; (3) Dr. Ravi must file Form BEN-1 disclosing his control mechanism and not merely his shareholding; (4) Healthcare Enterprises Limited must file Form BEN-2 with the Registrar specifying the basis of SBO identification as control, not shareholding; (5) Healthcare Enterprises Limited must maintain detailed records in Form BEN-3.

4.6 Acting Together – Coordinated Shareholding

Scenario: Mr. Rohan Desai holds 6 percent and Ms. Sneha Verma holds 5 percent of the shares in Retail Dynamics Limited. The two individuals have entered into a shareholders’ agreement which permits them to vote in unison on all company matters and to coordinate their shareholding decisions.

Analysis: Under the “acting together” principle, although neither Mr. Rohan nor Ms. Sneha individually meet the 10 percent threshold, their aggregate shareholding of 11 percent, combined with their commitment to exercise coordinated control through voting agreements, triggers SBO status for both individuals. The togetherness element is satisfied by their explicit shareholders’ agreement demonstrating concerted exercise of control. Each individual must be identified and declared as an SBO with specific reference to their acting-together arrangement.

Decoding Significant Beneficial Ownership (SBO) under the Companies Act

Compliance Action: (1) Retail Dynamics Limited must identify both Mr. Rohan and Ms. Sneha as SBOs, noting their acting-together status; (2) Both individuals must file separate Form BEN-1 declarations, each specifying their 6 percent and 5 percent shareholdings respectively, along with a note indicating that they are acting together and the aggregate is 11 percent; (3) Retail Dynamics Limited must file two separate Form BEN-2 returns documenting the identification of each SBO; (4) Retail Dynamics Limited must maintain both individuals’ records in Form BEN-3 with clear indication of the acting-together arrangement.

4.7 Significant Influence Without Control

Scenario: Mr. Suresh Patel, a foreign investor, holds 8 percent of the shares in Manufacturing Corp Limited. Through his shareholders’ agreement, Mr. Suresh has the right to nominate one director to the board of five directors and has contractual rights requiring consultation on all acquisition, divestiture, and major capital expenditure decisions. However, he does not have the right to appoint the majority of directors or to control company policy unilaterally.

Analysis: Although Mr. Suresh does not hold 10 percent shareholding and does not exercise control (defined as the right to appoint majority directors), he exercises significant influence over Manufacturing Corp Limited. Significant influence encompasses the power to participate, directly or indirectly, in financial and operating policy decisions without possessing control or joint control. His rights to nominate one director require consultation on major transactions and participating in financial decisions constitute significant influence. This subjective test triggers SBO status despite his shareholding below the 10 percent threshold.

Compliance Action: (1) Manufacturing Corp Limited must identify Mr. Suresh Patel as an SBO based on significant influence through contractual arrangements; (2) Mr. Suresh must file Form BEN-1 specifying his 8 percent shareholding and explaining his significant influence mechanism; (3) Manufacturing Corp Limited must file Form BEN-2 with the Registrar; (4) Manufacturing Corp Limited must maintain detailed records in Form BEN-3 noting the basis of SBO identification as significant influence.

5. REGULAR COMPLIANCE AND ONGOING OBLIGATIONS

5.1 Maintenance of SBO Register and Updates

Once an SBO has been identified and declared, the company must maintain an up-to-date Register of Significant Beneficial Owners in Form BEN-3. This register must be preserved and made available for inspection by members, directors, and regulatory authorities upon payment of prescribed fees. The register must be open for inspection at the registered office of the company during
business hours, ensuring transparency in corporate governance.

Companies must also file information with the Registrar of Companies whenever there is a change in beneficial ownership. Any material change in an SBO’s holdings, control mechanisms, or identity triggers a new filing obligation. The concerned individual involved must file an updated Form BEN-1 within 30 days of the change, and the company must file a corresponding Form BEN-2 within 30 days of receiving the updated declaration. Changes include acquisitions or disposals of shares, changes in control arrangements, changes in the identity of the Karta of an HUF, changes in partnership composition, or changes in trust beneficiaries or trustees.

Additionally, companies are required to file regular returns with the Registrar and to notify the Registrar whenever an SBO ceases to have beneficial interest falling below the triggering thresholds. These ongoing compliance obligations ensure that the beneficial ownership information maintained by the Registrar of Companies remains updated and reflective of the actual ownership structures.

There has to be a mechanism in place with an SBO as well as the Company for understanding the changes in the Significant Beneficial Ownership since the provisions of Section 90 specifically state that the SBO shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed. In this situation, any kind of change in the particulars which are already declared needs to be declared again which imposes a lot of responsibility on the SBO.

SBO identification under section 90 and the SBO Rules continues to pose interpretational and practical challenges, especially for layered, cross-border and complex ownership structures. One needs to note the confusion between Section 90(4A) and Section 90(5) of CA 2013. Section 90(4A) casts an absolute duty on the company to identify SBOs, even without “reason to believe”, whereas section 90(5) is triggered only when such reason exists. Absence of a defined due diligence standard creates uncertainty when a company can safely say that it has discharged its obligation. Even when utmost care is taken for identification of SBOs, non-identification can expose the company to the penalties prescribed.

There can be a situation that after the analysis by SBO or by the Company there is no SBO who is traced and, in such circumstances, or in case the Company is not required to comply with the provisions of the Act as mentioned above, it would be prudent to have a noting of the same in the meeting of a Board of Directors of the Company. Also, just like annual disclosures received from the Directors for their interest and non-disqualification, the Company may have a mechanism of noting the no change in SBO declaration even though this is not specifically mentioned in the rules or Section.

6. PENALTIES FOR NON-COMPLIANCE

CA 2013 prescribes stringent penalties for non-compliance with Section 90 and the SBO Rules, reflecting the regulatory importance of beneficial ownership transparency. The penalty regime operates on multiple levels:

  • Penalty on the Individual (SBO): If an individual fails to make the required declaration as an SBO or makes false or incomplete declarations, he is liable to a penalty of ₹50,000 and an additional ₹1,000 per day for continuing violations, up to a maximum of ₹200,000. The daily component creates a substantial financial disincentive for sustained non-compliance. If the individual willfully furnishes false or incorrect information or suppresses material information, additional consequences may follow under Section 447 of the CA 2013, which deals with fraud and carries criminal penalties.
  • Penalty on the Company: If a company fails to maintain the SBO register, fails to file the required information with the Registrar, or denies inspection of the register to authorized persons, the company is liable to a penalty of ₹100,000 with an additional ₹500 per day for continuing violations, up to a maximum of ₹500,000. These enhanced penalties reflect the company’s greater ability to control compliance and its role as the custodian of beneficial ownership information.
  • Penalty on Officers in Default: Directors and senior management personnel of the company who are in default with respect to the company’s obligations are liable to a penalty of ₹25,000 with an additional ₹200 per day for continuing violations, up to a maximum of ₹100,000. This provision ensures personal accountability of corporate decision-makers for non-compliance.

7. REGULATORY ACTIONS AND NCLT REMEDIES

Beyond penalties, Section 90(7) of the CA 2013 empowers the National Company Law Tribunal (NCLT) to issue orders imposing restrictions on shares held by non-compliant SBOs. If a person fails to provide information sought by the company through Form BEN-4 notice, or if the information provided is not satisfactory, the company may apply to the NCLT seeking an order directing that the shares in question be subject to the following restrictions:

  • Restrictions on transfer of beneficial interest
  • Suspension of voting rights
  •  Suspension of all dividend rights and other distributions
  • Such other restrictions as may be prescribed.

These NCLT orders create significant practical consequences for non-compliant shareholders, potentially rendering their shares economically worthless by suspending dividend rights and preventing any monetization through transfer. This NCLT remedy mechanism provides a powerful enforcement tool for ensuring SBO compliance, as the consequences extend beyond monetary penalties to substantive restrictions on shareholder rights.

8. RECENT CASE STUDIES AND REGULATORY DEVELOPMENTS

8.1 Samsung Display Noida Private Limited Case

A significant regulatory development occurred in the case of Samsung Display Noida, where the Registrar of Companies (Uttar Pradesh) issued an adjudication order dated June 12, 2024, penalizing the company and its officers for violation of SBO disclosure requirements under Section 90 of CA 2013. Samsung Display Noida is a wholly owned subsidiary of Samsung Display Co. Limited (South Korea), which is in turn 84.8 percent owned by Samsung Electronics Co. Limited (South Korea). The company initially contended that because its shareholding was transparent (being entirely owned by Samsung Display Co.), no additional SBO declaration was required. However, the Registrar’s order rejected this position, holding that Samsung Display Noida failed to identify and declare the ultimate beneficial owners, including individuals residing outside India who exercised control through the corporate chains.

The Registrar specifically noted that the company failed to recognize that persons residing outside India hold beneficial interest in the reporting company, which falls squarely within Section 90(1) of CA 2013. The company was required to identify and declare specific natural persons holding controlling interests through the multi-layered structure, including the appointment of Mr. Lee (the director of Samsung Electronics) as an SBO. The Registrar’s order imposed aggregate penalties of ₹8,14,200/ on Samsung Display Noida Private Limited, its managing director, and other key managerial personnel for the default period of approximately 1,212 days.

Key Learning: This case establishes that companies cannot rely on transparent corporate shareholding alone to satisfy SBO obligations. Even where shareholding structure is entirely clear, companies must trace through non-individual members to identify and declare the ultimate beneficial owners, including foreign residents who exercise control through appointment rights, management decisions, or policy influence.

8.2 LinkedIn India Technology Private Limited Case

The Registrar of Companies (Delhi and Haryana) issued an adjudication order on May 22, 2024, determining that LinkedIn India and its parent entities failed to comply with SBO disclosure requirements. The order found that LinkedIn Corporation (USA) exercises control over LinkedIn India through its ability to influence the composition of the Indian subsidiary’s board of directors. This control was attributed to overlapping directorships and reporting structures within the corporate hierarchy. The Registrar further held that the acquisition of LinkedIn by Microsoft extended this control to Microsoft’s CEO, Satya Nadella. Consequently, both Satya Nadella and Ryan Roslansky (LinkedIn CEO) were deemed significant beneficial owners of LinkedIn India.

The order imposed penalties of approximately ₹27 lakhs on various individuals, including Satya Nadella and other executives. This order is particularly significant because it establishes that control exercised through board appointment mechanisms and corporate governance arrangements, even without direct shareholding, constitutes sufficient basis for identifying an individual as an SBO.

Key Learning: The LinkedIn order demonstrates that control and significant influence exercised at the group level, including through appointment of nominee directors and management hierarchies, triggers SBO status in subsidiary companies. This order has expanded the practical scope of SBO identification to encompass group structures with centralized management and board control.

The case highlights how crucial it is to openly disclose nominee directors, even if they are employees of the holding company. It suggests that if a holding company can stop its employees from being on a subsidiary’s board, those directors might be seen as nominees.

The Adjudicating Officer’s emphasis on “widespread control” through financial dealings and the authority given to parent company employees sets a standard for examining the real control that holding companies have over their subsidiaries, even when it looks like just administrative arrangements

This case is a big reminder for MNCs working in India to carefully review their corporate structures and beneficial ownership, making sure they follow Indian corporate laws, which might interpret “control” and “significant influence” more broadly than in other countries.

9. EXEMPTIONS FROM SBO DISCLOSURE

The SBO regime (through The Companies (Significant Beneficial Owners) Rules, 2018) provides specific exemptions recognizing that certain categories of investors operate under different regulatory regimes or pose minimal risk of misuse. Exempted Investors include:

  • IEPF: The authority constituted under sub-section (5) of section 125 of the Act (Investor and Education Protection Fund)
  • Holding Company of reporting company: Its holding company, provided that the details of such holding company shall be reported in Form No. BEN-2.
  • Government Companies: Government Companies as defined under Section 2(45) of CA 2013 are exempted from the requirement to maintain and disclose SBOs, recognizing the public sector governance framework and parliamentary oversight.
  • SEBI-Registered Investment Vehicles: Shares held by SEBI-registered investment vehicles such as mutual funds, Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs) are exempt, reflecting the comprehensive regulatory oversight exercised by SEBI.
  • Other Regulated Investment Vehicles: Investment vehicles regulated by the Reserve Bank of India, Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority are also exempt, in view of their stringent ownership, disclosure, and supervisory frameworks.

These exemptions must be understood in the context of the SBO regime’s core objective of identifying natural persons exercising ultimate control. Exemptions are granted where the exempt entity itself operates under regulatory oversight that serves the same transparency and control objectives.

10. DISTINCTION BETWEEN SBO AND RELATED CONCEPTS

Understanding SBO is enhanced by distinguishing it from related concepts under CA 2013:

  • Beneficial Interest (Section 89): While Section 89 requires disclosure of beneficial interests in shares and provides a mechanism for interested persons to declare beneficial interests to the company, it does not impose thresholds or identification obligations on companies. Section 89 is primarily a mechanism for voluntary disclosure by shareholders of beneficial interests when they exist.
  • Section 90, by contrast, imposes mandatory obligations on companies to identify SBOs meeting specified criteria.
  • Promoter Status: CA 2013 defines “promoter” as a person who has been instrumental in the incorporation of the company or has subscribed to its memorandum or contributed capital or property in kind during its establishment phase. While promoters typically hold substantial shareholding, not all promoters are SBOs (if their shareholding or control falls below thresholds), and conversely, not all SBOs are promoters (if they acquire beneficial interest post-incorporation).
  • Related Parties (Section 2(76): Related party status under CA 2013 encompasses a broader category than SBOs, including parties related by virtue of subsidiaries, associates, joint ventures, key management personnel, and relatives of key personnel. While SBOs often fall within the related party classification, the SBO regime operates independently with its own identification and disclosure mechanics.

11. PRACTICAL COMPLIANCE CHECKLIST FOR COMPANIES

To ensure comprehensive and timely compliance with SBO requirements, companies should implement the following systematic compliance framework:

11.1. Identification Phase:

  • Identify all members (including non-individual members) holding 10% or more of shares, voting rights, or dividend participation rights.
  • For each non-individual member, determine the natural person(s) behind them through the prescribed indirect holding mechanisms.
  • Identify individuals exercising control or significant influence through contractual arrangements, board composition rights, or management agreements.
  • Document and trace multi-layered ownership structures to ultimate natural persons.

11.2. Documentation Phase:

  • Maintain detailed ownership structure charts and supporting documentation.
  • Prepare communications explaining SBO status and declaration requirements.
  • Maintain copies of all Form BEN-4 notices issued along with proof of dispatch and responses received.

11.3. Declaration and Filing Phase:

  • Issue Form BEN-4 notices to all potential SBOs and non-individual members.
  • Upon receipt of Form BEN-1 declarations, file Form BEN-2 with the Registrar within 30 days
  • Ensure that Form BEN-2 filings are certified by qualified professionals (CA/CS/CMA)
  • Maintain comprehensive records for audit and regulatory purposes.

11.4. Record Maintenance Phase:

  • Prepare and maintain Form BEN-3 (Register of Beneficial Owners) with accurate and updated information.
  • File updates whenever changes occur in beneficial ownership, including changes in shareholding, control mechanisms, or SBO identity.
  • Ensure the register is preserved and available for inspection.

11.5. Ongoing Monitoring:

  • Implement systems to track shareholding changes and control arrangements.
  • Monitor board composition and director appointment arrangements.
  • Review and update SBO records annually or whenever material changes occur.
  • Maintain communication with SBOs regarding any changes affecting their status.

12. WAY FORWARD:

SBO identification in India is currently hindered more by interpretational gaps than by the bare text of section 90 and the SBO Rules. Stakeholders therefore need from MCA/ROC targeted clarifications on specific grey areas rather than fresh obligations.

Below are the key points on which a formal guidance or FAQs from the regulator would help substantially reduce disputes and compliance risk in SBO identification:

  • Individuals who do not meet the thresholds under the provisions should not be treated as SBOs. For instance – Senior management or directors of upstream non-individual members should not be automatically presumed to be SBOs unless they meet the criteria. There should be a formal guidance published which clearly states the circumstances under which an individual should, or should not, be treated as an SBO. Clarify the relationship between section 90(4A) “necessary steps” and section 90(5) “reasonable cause to believe” so companies know whether they must proactively investigate all non individual members or only where there are triggers suggesting a possible SBO. Define what constitutes sufficient “necessary steps” by a company under section 90(4A): e.g., minimum public domain checks, reliance on client KYC, use of group structure charts, and the number and form of follow up notices (BEN 4) before the company can conclude that no SBO exists or that information is not readily obtainable.
  • Confirm whether the SBO regime is strictly “twin test” (ownership threshold and control/significant influence) or whether any “control based” test (e.g., financial control, reporting channel, global group leadership) can be read in by ROCs as seen in recent orders discussed above.
  • Clarify the level of verification expected on information received in BEN 1: whether the company can rely on declarations in the absence of red flags , or must independently verify upstream ownership each time, and how far up the chain it must reasonably go.
  • Publish standardised interpretative guidance (or illustrative case studies) reflecting the tests used by ROCs in recent enforcement orders, with explicit confirmation of which tests are legally endorsed and which were fact specific, to avoid companies having to guess ROC thinking from penalty orders.

Last but not the least, an online helpdesk to give interpretative clarification such as SEBI (Informal Guidance) Scheme 2003 which will be specific to the facts and will help companies address their issues.

These focused clarifications, preferably through detailed MCA FAQs or a circular with examples, would allow companies and professionals to operationalise SBO identification with clear audit trails and substantially fewer interpretational hurdles will definitely go a long way to help companies avoid penalties.

SUMMARY

Significant Beneficial Ownership (SBO) represents a sophisticated regulatory framework designed to pierce(lift) corporate veils and identify the natural persons ultimately controlling or benefiting from Indian companies. The dual-test framework, combining quantitative thresholds (10% shareholding, voting rights, and dividend participation) with qualitative assessments (control and significant influence) ensures comprehensive coverage of diverse ownership and control structures. The regime’s extra-territorial application to foreign residents and structures reflects India’s alignment with international beneficial ownership standards and FATF recommendations.

The identification process, centered on objective tests of shareholding and voting rights alongside subjective tests of control, captures both transparent and hidden beneficial interests. Indirect holding mechanisms through corporate entities, HUFs, partnerships, trusts, and the “acting together” principle address complex corporate structures that might otherwise obscure true beneficial ownership. The declaration and filing requirements, implemented through Forms BEN-1, BEN-2, BEN-3, and BEN-4, establish a transparent record of beneficial ownership accessible to regulatory authorities and company members.

Recent regulatory developments, including the Samsung Display and LinkedIn orders, demonstrate regulatory commitment to rigorous enforcement of SBO requirements, particularly in corporate groups with multi-layered structures and foreign investors. The substantial penalties prescribed for non-compliance, ranging up to ₹50,000 plus ongoing daily penalties for individuals, ₹100,000 plus daily penalties for companies, and the severe consequences of NCLT orders imposing share restrictions, create powerful incentives for compliance.

For Chartered Accountants and compliance professionals, expertise in SBO identification and compliance has become essential as companies face increasing regulatory scrutiny. Systematic implementation of an SBO compliance frameworks, maintaining detailed documentation, and ongoing monitoring of beneficial ownership changes are critical elements of effective corporate governance and regulatory compliance. Given the evolving nature of regulatory interpretation and the expanding scope of beneficial ownership obligations, practitioners must maintain current knowledge of regulatory updates, case law developments, and amendments to the SBO framework to serve their clients effectively and ensure sustained compliance with this increasingly important statutory obligation.

From The President

My Dear BCAS Family,

As I reflect on the current global economic scenario, the world, as well as India, is at an inflexion point where the forces of globalisation and rapidly evolving geopolitical dynamics, such as the tariff wars, the Russia – Ukraine war, the Middle East Realignment, etc., are fundamentally reshaping the business landscape. In this context, BCAS’s recent participation as a support partner at a conclave on “Vasudhaiva Kutumbakam Ki Oar 4: The 12 Principles that can Shape a New World”, organised in collaboration with JYOT FOUNDATION, is timely and relevant. The lecture titled “Ancient Roots, Global Routes: Reimagining Global Leadership for the Indian CA” by CA Shaurya Doval, organised by BCAS on the sidelines of the conclave, served as a powerful reminder of the timeless relevance of Indian values in contemporary global leadership. CA Doval’s compelling observation that “there can be no global peace and no global order without India” was not an assertion of dominance, but rather a recognition of responsibility that extends to each of us as professionals. This has prompted me to focus on the theme of globalisation and geopolitical dynamics, and their impact on professionals and institutions like us.

IMPACT ON PROFESSIONALS:

The impact on professionals can be analysed broadly under the following heads:

Changing Trends in Globalisation:

The recent past has witnessed the emergence of an interconnected global economy. For professionals like us, this makes it imperative to extend our expertise beyond domestic regulations to encompass international financial reporting standards, cross-border taxation, transfer pricing complexities and multi-jurisdictional compliance frameworks. Our clients now operate across continents, making it necessary for us to possess the agility to advise on transactions spanning multiple legal and tax regimes simultaneously. This has resulted in tremendous opportunities, such as access to international markets, exposure to diverse business practices, and the ability to serve clients with worldwide operations.

Global Leadership The New Frontier for the Indian CA

Changing Geopolitical Headwinds:

The past decade, and particularly the post-pandemic era, has brought significant geopolitical complexities that directly impact professionals. Trade tensions between major economies, supply chain realignments, evolving sanction regimes, and the reconfiguration of global alliances demand utmost vigilance. The Russia-Ukraine conflict, US-China trade dynamics, Trump tariffs, and regional economic partnerships are not merely news headlines; they represent fundamental shifts in how business operates globally.

Expanding Opportunities:

The above changes have significantly expanded our role, from mere number crunchers to a much broader lens. Our professional advisory landscape now encompasses several areas, some of which are as follows:

  • Reconfiguration of Global Supply Chains – This results in a shift in priorities from “just-in-time” to “just-in-case“, causing businesses to restructure their global operations, leading to advisory opportunities in evaluating geographic concentration risks and identifying diversification strategies, amongst others.
  • Cross-Border Digital Trade and E-commerce – They enable businesses of all sizes to operate globally, resulting in advisory opportunities for digital tax compliance, transfer pricing for digital assets, VAT/GST on Digital Sales, OECD Pillar One implications, transfer pricing for digital assets, strategies for handling multiple payment gateways, currency and forex risk, amongst others.
  • ESG and Sustainability Reporting – Growing stakeholder demands for environmental, social, and governance accountability in global operations result in various advisory opportunities like carbon accounting (Scope 1, 2 and 3 computations), ESG Assurance Services, Supply Chain Due Diligence, Climate Risk Financial Impact Analysis and Integrated Reporting.
  • Cross-Border Mergers and Acquisitions and Restructuring – Companies are increasingly pursuing inorganic growth internationally or are consolidating or divesting non-core assets across borders, resulting in advisory services in areas such as International Due Diligence (Financial, Tax and Regulatory), valuation services, and post-merger integration involving the harmonisation of accounting systems, policies and reporting, amongst others.
  • Other Specialised Practice areas like IFRS Reporting and Advisory, Global Internal Audits and Internal Controls Reviews under COSO and SOX frameworks, transfer pricing and international tax advisory and forensic and investigation services under AML and Corruption Laws like FCPA, UK Bribery Act.

Challenges:

Opportunities cannot exist without their share of challenges, which can be broadly categorised as follows:

  • Digital Transformation- Whilst technology and digital transformation continue their relentless forward march with artificial intelligence, blockchain, cloud computing, and data analytics, it brings with it several challenges like data and cyber security and privacy risks, which need to be analysed and mitigated.
  • Constant Skill Upgradation and Training – For professionals to remain relevant, it is imperative for them to constantly upgrade not only their technical and regulatory skills but also their soft skills. Areas in which such upgradation and training is most required are International Tax Frameworks, Foreign Exchange Management, Data Analytics, Trade and Customs Regulations (WTO rules, FTAs, etc.), Country-Specific Sanctions Regimes, Cross-Cultural Communication, Geopolitical Awareness, Foreign Language Skills, Regional Specific Knowledge (Asia- Pacific, EU, Middle East, Africa, etc.) and Cultural Intelligence, amongst others.

BCAS’s ROLE:

BCAS is committed to equipping its members and other stakeholders in all emerging areas arising from the increasingly complex global environment by facilitating the enhancement of their technical proficiency and helping them remain globally aware. Whilst our International Tax Committee is the specialised committee that deals with international tax-related issues, other committees are also increasingly focusing on areas that are relevant to navigate the global economic and geopolitical framework, by organising programmes under various formats addressing IFRS convergence, ESG reporting, geopolitical risk management, digital transformation, forensic accounting, and international business advisory services. The upcoming 30th International Tax and Finance Conference between 9th to 12th April, 2026 at Indore which will cover a diverse set of topics ranging from Global Mobility-360 degree perspective, cross border business model structuring coupled with the highlight being a special session on “India @ 2047 – Geopolitics, Changing World Order and India’s place in a De-dollarised Globe” is a timely initiative. I would request a high level of participation to enhance your brand value on the international stage!

Indian Philosophy and Global Leadership:

To conclude, I would like to refer to a quote by the Former President of India, Dr S. Radhakrishnan, in his Writings on Indian Philosophy and Global Ethics, on the importance of the timeless Indian value of Vasudhaiva Kutumbakam in a global world, which is more relevant now.

“The world is one family- the ancient Indian wisdom of Vasudhaiva Kutumbakam is not just a philosophical concept but a practical necessity in our interconnected world.”

A big thank you to one and all!

Warm Regards,

CA. Zubin F. Billimoria

President

Increased Life Expectancy: When Life Outruns Professional Career

According to the Government of India’s Sample Registration System, average life expectancy at birth has climbed from 49.7 years in 1970–75 to 69.0 years in 2013–17, and estimates put it above 70 years for 2019–23. International projections suggest it may now be around 72.0–72.5 years, continuing a long-term upward trajectory. This statistic is merely a revalidation of a fact which we witness in our day to day lives. Thanks to the medical advancements and various other reasons, we are living longer. It is now more and more common to find people cross the age of 90 years or even approach the 100- year mark.

The above statistic brings with it reasons to cheer, but at the same time, issues to ponder upon – physical and mental health challenges, quality and dignity of life, financial independence, social relevance, etc. are issues which plague this space. This editorial does not touch upon these larger issues, but discusses the impact from the perspective of a professional’s career.

Beyond the Sixty year Stop Redesingning the Modern Career

Admittedly, our career structures were built for a time when life expectancy was shorter and retirement signalled decline in capability. Today, life extends well beyond the traditional retirement age of sixty but the model has not evolved with it. Most professionals have another twenty or even thirty years of active, intellectually sharp life pending at that point of time.

Therefore, for professionals in employment, retirement at 60 or 65 often arrives as a hard stop. One day, you lead teams, sign decisions, shape outcomes. The next, you step aside. Financial planning may be sound. Psychological planning rarely is. At the very stage when judgment is deepest and perspective widest, institutional structures declare the journey complete. The question then emerges: what fills the next 25 years? Consulting, board positions, teaching, advisory roles—each offers possibility. But each requires a shift from authority to influence, from control to contribution. That transition is not merely professional; it is personal and emotional.

For self-employed practitioners and partners, the dilemma is subtler. In many firms, there is no mandatory retirement. Stepping back and succession is emotionally complex as firm is rarely just an enterprise; it is a person’s lifetime creation. One may be tempted to continue practice indefinitely, but is it appropriate? Unfortunately, ageing of the brain has not slowed down with increases in longevity. Dementia and loss of memory have become common at an advanced age. If one carries on practice as before even in an advanced age, there is increased risk of mistakes due to decline in memory.

Despite longevity and active lifestyle, energy changes, but the complexity of the professional landscape does not, again increasing the risk of professional negligence. From the firm’s perspective, prolonged continuity at the firm also hinders growth of the team and next in line. Experience has its’ value, but also brings in rigidity and doesn’t allow for fresh ideas to emerge. The team may therefore feel stifled resulting in higher attrition or at times, internal conflicts.

In such cases, should one not consider retiring gracefully while the going is good? It may be better to be remembered for the good that one has done in one’s prime, than be remembered for mistakes made beyond one’s prime. But for many of us, the designation is not just a qualification; it is who we are. The decision of retirement therefore brings in uncomfortable questions: Who am I now, and what next?

The answers may lie in broadening identity rather than clinging to it. When the profession becomes a part of life rather than its entirety, transitions feel less like loss and more like evolution. Teaching, writing, mentoring, community engagement, vacation and travel, spiritual and other creative interests —these are not post-retirement hobbies; they can become parallel dimensions of relevance.

At the same time, the larger truth is unavoidable. If life expectancy has expanded, career design must expand with it. Retirement should not mean irrelevance. Nor should continued practice mean exhaustion or stagnation. We often design long-term financial strategies for our clients. Perhaps it is time we design long-term career strategies for ourselves. Life now extends beyond the old career model. The question is whether we are prepared to extend our thinking along with it.

Best Regards,

CA. Sunil Gabhawalla

Editor

आत्मपुण्येन भाग्यवान्

This is a very small but meaningful ‘Subhashit’. It reads like this: –

सुशीलो मातृपुण्येन पितृपुण्येन् बुद्धिमानं !

यशस्वी वंशपुण्येन आत्मपुण्येन् भाग्यवानं !

The 4 Pillars of Your Destiny

Punya is good or holy deeds. We believe that the fruit of your good deeds goes to the credit of your account. In English also, we say ‘Be Good, Do Good!

The theory of karma which is more or less universally accepted refers to the same principle.

The literal meaning: –

सुशीलो मातृपुण्येन्  You get good character thanks to the Punya of your mother.

पितृपुण्येन बुद्धिमान् You usually inherit intelligence from your father’s Punya.

यशस्वी वंशपुण्येन् ‘Vansh’ is the ‘dynasty’ i.e. your forefather’s. Family tradition from generations.

आत्मपुण्येन भाग्यवान् (But) your fortune depends on your own good deeds

There was an international conference on child’s education. The issue was as to when the education of a child should start. They felt that education is a wide concept and in true sense, it should start right from the child’s birth. That was the consensus.

However, one senior lady screamed “NO, no. It will be too late!” She said – A child’s education should start from the birth of its mother.

That is the significance of ‘sanskaras’! – the culture. The point needs no elaboration. As far as intellectual abilities are concerned, it is generally observed and also believed that it comes from one’s father. Usually, there is a family tradition of highly brilliant people for 4 to 5 generations in a family. Apart from intellectual capacity, it is the father who provides opportunities for learning.

The Vansh is your family history. We have many industrial houses who are doing good business for generation. Similarly, in politics, we observe the same thing. One gets a readymade platform for one’s growth. It is a different thing that an incapable or incompetent person may ruin it.

Finally, however, despite all this ‘inheritance’ your own deeds and efforts are more important. They decide your fate or fortune. The inheritance merely provides you a starting point. However, you have to shape your career or future by your own discipline, thinking and performance.

It must be borne in mind that these were the thoughts more prominently applicable in the old times. Now, the times have changed. There could be a few exceptions, only to prove the rule. Nevertheless, by and large, even in modern times, one can still find its relevance.

‘Deeming Fictions’ Under the Income Tax Law

Legal “deeming fictions” are assumptions treated as true by law, regardless of reality. Under the Income Tax Act, these provisions have evolved from narrow anti-abuse tools into central components governing residency, deemed dividends, and income characterization. For example, Section 50 deems gains on depreciable assets as short-term for computation purposes, though it does not alter the asset’s inherent nature. Significant contention surrounds Section 56(2)(x), which taxes property receipts for inadequate consideration, leading to debates over its application to bonus and rights issues. Furthermore, the Finance Act 2024 shifted buyback taxation from companies to shareholders, treating proceeds as deemed dividends. Complexities also arise when domestic fictions, such as indirect transfer rules, conflict with Double Taxation Avoidance Agreements (DTAAs), which generally prevail. While essential for plugging loopholes, the expansive use of these fictions increasingly triggers interpretational challenges and litigation.

INTRODUCTION

Fiction is something invented by the imagination, i.e., ‘make believe’. The term ‘legal fiction’ can in the simplest of forms be explained as an assumption believed to be true and present in the eyes of the law. Once a particular assumption by way of a legal fiction is made, it is irrelevant as to whether the same is line with the actual truth or not.1

A famous American author once remarked that “The difference between fiction and reality? Fiction has to make sense”. But do the deeming fictions under the Income Tax Act, 1961 (‘the Income Tax Act’) really make sense?

The immediate mention of the term “deeming fiction” springs to mind provisions such as section 56(2)(x), explanations 5 to 7 of Section 9(1)(i) [‘Indirect Transfer’], or the much-beleaguered section 56(2)(viib)2. Below are some examples such as residency, characterization of losses, timing of taxation, etc. illustrating the various types of deeming fictions embedded within the Income Tax Act:

  • Deemed Resident– Sub-section 1A of section 6 provides that an individual who is a citizen of India, has total income (other than income from foreign sources) exceeding INR fifteen lakh rupees during and is not liable to tax in any other country on account of certain connected factors shall be deemed to be resident in India.
  • Carry forward and set-off of losses and unabsorbed depreciation- Section 72A provides that upon satisfaction of certain conditions, in case of amalgamation3, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss and unabsorbed depreciation of the amalgamated company.4
  • Timing of taxation– Section 45(5A) of the Income Tax Act provides for determining the timing of taxation in case of a joint development agreement entered into by an individual/HUF (deemed to be taxable in the year in which the certificate of completion is issued).
  • Full value of consideration- Deeming fictions aimed at curbing tax avoidance and determining full value of consideration in case of certain transactions include section 50C (Transfer of land/building or both being capital asset), section 50CA (transfer of shares other than quoted share)
  • Deemed Dividend- Whereby the statute aims to expand the meaning of the word ‘dividend’ to curb mechanisms used by taxpayers to repatriate cash or assets to their shareholders such as by way of loans or advances (applicable for closely held companies), capital reduction or distribution of assets pursuant to liquidation.
  • Scope of total income- Clubbing provisions under section 64 of the Income Tax Act seek to expand the scope of total income of an individual to tax income arising to another individual (such as a minor child) in the hands of that particular individual.
  • Computation of tax in case of specific transactions/ instruments- Sections such as section 50 (computation of capital gains in case of sale of a depreciable asset), section 50B (computation of capital gains in case of slump sale), section 50AA (computation of capital gains in case of Market Linked Debenture) are just some examples.
1 CIT vs. Swaroop Krishan [1985] 21 Taxman 404/153 ITR 1 (Pun & Har HC)

2 Section 56(2)(viib) was introduced by the Finance Act, 2012, to tax the share premium received by closely held 
companies when issued above fair market value. It was sunset by the Finance Act, 2024, 
and has been rendered inapplicable from 1 April 2025 (Assessment Year 2025–26 onward)

3 This section is also applicable on demerger and provides that in case of demerger, 
where the loss or unabsorbed depreciation is directly relatable to the undertakings transferred same shall 
be allowed to be carried forward and set off in the hands of the resulting company. 
In case of loss and UAD not directly relatable, same is apportioned between the demerged company and 
the resulting in the ratio of assets being transferred as part of the demerger

4 Finance Act 2025 had introduced an amendment seeking to confine the carry forward of losses to a total 
of eight years from the year in which such losses arose, rather than eight years from the previous year when such merger was undertaken

The above examples illustrate how the role of deeming fictions has evolved and now serves distinct purposes under the Income Tax Act which may range from taxing a particular instrument, item or transaction, prescribe methods of computation, or restrict/ allow carry-forward of losses. Let us examine how courts have interpreted some specific deeming fictions over time and some of the challenges posed in interpreting the same.

FROM FICTION TO FUNCTION: THE EVOLVING ROLE OF DEEMING PROVISIONS IN TAX LAW

  • Decoding the section 50 conundrum:

Section 50 of the Act creates a deeming fiction that capital asset on which depreciation is allowed and it forms part of block of asset, then irrespective of definition in section 2(42A), gain from such asset would be deemed as gain from transfer of short term capital asset.

Further, section 50 prescribes a method of computation adjusting provisions of section 48 and 49. However, the provisions of section 50 do not expressly ascribe a rate of tax to the gains computed and also do not restrict the exercise of section 112.

The provisions of section 50 are relevant to be analyzed in case of itemized sale of assets on which depreciation has been allowed under the Income Tax Act. The operation of the provisions of section 50 of the Income Tax Act had rendered share sale or slump sales more attractive for tax efficiency considering possible elevated tax exposure (since section 50 would deem any gain on transfer of depreciable asset as gain from transfer of short term capital asset)

The above problem came up for consideration most recently before the special bench of the Mumbai Tribunal5 wherein the crux of the question revolved around rate of tax to be ascribed to sale of a capital asset of the nature referred to in section 50.

The Tribunal while adjudicating the matter in favour of the assessee relied on the decision of Ace Builders6 where the scope of the deeming fiction under section was interpreted by the Hon’ble Court in context of availability of benefit under section 54E of the Income Tax Act and it was observed that the deemed fiction created in sub-section (1) & (2) of section 50 is restricted only to the mode of computation of capital gains contained in Section 48 and 49 of the Income Tax Act. The judgement of the Tribunal was a majority decision and the Hon’ble Accounting Member had rendered a dissenting view holding that concessional rate under section 112 of the Income Tax Act shall not be available to the assessee inter alia for the reason that the above view would render provisions of section 50 redundant.

Conclusion:

The intent of section 50 of the Income Tax Act is to compute the capital gains in case of a depreciable asset by way of a deeming fiction overriding the provisions of section 48 and section 49. However, this insertion in section 50 does not alter the inherent nature of an asset.

The period of holding determines the inherent nature of a capital asset, i.e., whether long-term or short-term, which consequentially determines the applicable rate of tax. In my view, the above decision is correct in law and cements the settled principle that deeming fictions may be restricted to the section(s) for which they were originally intended for7.

5 SKF India Limited vs. Dy. Commissioner of Income Tax: [2025] 121 ITR(T) 307 (Mumbai - Trib.) (SB)

6 CIT vs. Ace Builders (P.) Ltd: [2006] 281 ITR 210 (Bom.)

7 CIT vs. Mother India Refrigeration Industries (P.) Ltd: [1985] 155 ITR 711 (SC); Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Taxes: Appeal (Civil) 252 of 2008 (SC)
  •  The Gift That Isn’t- Understanding section 56(2)(x) on issue of shares:

Section 56(2)(x) was introduced vide Finance Act, 2017 expanding the scope of the erstwhile anti-abuse provisions. In simple terms, section 56(2)(x) seeks to tax receipt of property (including shares) for nil or inadequate consideration.

The language of the section begins with “where any person receives” and thereafter bifurcates into specific cases of receipt of sum of money/immoveable property and any other property (including shares and securities). Thus, from a bare reading of the provisions, for a transaction to fall within ambit of section 56(2)(x) of the Income Tax Act, it should constitute a ‘receipt’.

Thus, whether fresh issue of shares constitute a ‘receipt’ and accordingly can be said to be within ambit of section 56(2)(x) of the Income Tax Act. In case of fresh issue of shares, there cannot be any ‘receipt’ since the property in question being shares are brought into existence for the first time on issue. Support for the above can be firstly drawn from the explanatory notes to finance bill at the time of including transactions involving shares within ambit of section 56(2)(viic), which sought to curb “the practice of transferring unlisted shares at prices much below their fair market value”.

Thus, it can be said that there is a difference between issue of a share to a subscriber and the purchase of a share from an existing shareholder. The first case is that of creation whereas the second case is that of transfer.8

On the contrary, it has also been argued that the exact term used in section 56(2)(vii)(c) is ‘receive’ which cannot be restricted to ‘transfer’ or ‘receipt by way of transfer’ alone.9 Accordingly, limiting the scope of ‘receipt’ to transfer would tantamount to reading down the provision.10

8 Khoday Distilleries Ltd vs. CIT: [2008] 307 ITR 312 (SC)
9 Jigar Jashwantlal Shah vs. ACIT: [2022] 226 TTJ 161 (Ahd Trib) 
(Confirmed in PCIT vs. Jigar Jaswantlal Shah: [2024] 460 ITR 628)
10 Sudhir Menon HUF vs. ACIT: [2014] 148 ITD 260 (Mum Trib)

Given that fresh issue can be undertaken by many modes, i.e., rights issue or bonus issue or preferential issue, thus, it is at this stage critical to diverge and analyze applicability of section 56(2)(x) on some of the different modes of issue of shares, viz, rights issue and bonus issue. The same has been analyzed under:

S.No Particulars Remarks
1 Applicability on section 56(2)(x) on bonus issue

A strict interpretation of law may give the impression that section 56(2)(x) is attracted in case of bonus issue considering no consideration is paid for receipt of shares.

In my opinion, the above view is incorrect and would lead to absurd consequences as bonus issue does not lead to any accretion of property held by the shareholder. In substance, when a shareholder gets a bonus shares, the value of the original share held by him goes down and the market value as well as intrinsic value of two (original and bonus) shares put together will be the same. Thus, any profit derived by the assessee on account of receipt of bonus shares is adjusted by depreciation in the value of equity shares held by him.11

Recently however, the Hon’ble Apex Court12 had admitted a SLP against the decision of the Hon’ble Madras HC on the above issue where it was held that section 56(2)(x) of the Income Tax Act would not apply in case of bonus issue.
2 Section 56(2)(x) of the Income Tax Act in case of Rights Issue

Where there is a proportionate allotment to existing shareholders, there is only apportionment of existing value of the company over larger number of shares and consequently there is no scope for any property being received by the shareholder.

However, the above view was distinguished by adoption of a stricter interpretation that rights issues are nowhere excluded from the express provisions of section 56(2)(vii)(c). The CBDT has also supported applicability of section 56(2)(vii)(c) on fresh issue of shares [Refer to Circular No. 3/2019 by withdrawing its earlier Circular 10/2018]

 
11 PCIT vs. Dr Ranjan Pai : 431 ITR 250 (Ktk High Court)
12 SLP admitted in CIT vs. M/s Tangi Facility Pvt Ltd: SLP (C) Diary No. 57035/2025 
against Madras HC order in the case of CIT vs. M/s Tangi Facility Pvt Ltd: ITA No. 259/2024

THE CASE OF SUDHIR MENON- A DISPROPORTIONATE TAX?

As can be seen above, in case of rights issue of shares leading to a proportionate shareholding, it can be argued that provisions of section 56(2)(x) of the Income Tax Act may not be attracted. But what happens in case of fresh issue of shares leading to a lopsided shareholding, i.e., the proportionate ownership among shareholders becomes uneven after the rights issue. This scenario can be better explained with the help of the below scenario of Co A which is proposing to undertake a rights issue:

S. No Name of shareholder Existing shares held Existing shares held (%) Fresh rights allotment Whether subscribed or not Shares held post rights issue Fresh shares held (%)
1 Mr. AA 1,000 25% 1,000 No- renounced in favor of Mr.AD 1,000 12.50%
2 Mr. AB 1,000 25% 1,000 1,000 12.50%
3 Mr. AC 1,000 25% 1,000 1,000 12.50%
4 Mr. AD 1,000 25% 1,000 Yes 5,000 62.50%
Total 4,000 100% 100% 8,000 100%

 

As seen above, Mr. AA, AB,AC and AD are four shareholders of Co A each holding 25% each. Co A decides to undertake a rights issue, and each shareholder is offered shares commensurate to its shareholding.

However, Mr. AA, AB and AC decide to renounce the right to subscribe to shares in favour of Mr.AD and accordingly Mr.AD subscribes to his rights shares as well as to the shares pursuant to renouncement of rights by all the other shareholders. As a result, the shareholding pre and post rights issue becomes skewed, i.e., Mr. AD’s shareholding increases from 25% to 62.50% granting him control of Co A pursuant to such allotment.

Considering that there is a shift in value in the hands of the shareholders because of the above issue, it can be said that as a result of the above allotment of shares, there is a disproportionate value shift in the hands of Mr. AD.

Thus, it can be said that if there is no disproportionate allotment, i.e., shares are allotted pro rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares.13

13 Sudhir Menon HUF vs. ACIT: [2014] 148 ITD 260 (Mum Trib)

Further, in an alternative scenario, where shares of Co A are not subscribed by Mr.AA, AB and AC but are also not renounced in favor of Mr.AD, which would still lead to increase in shareholding of Mr.AD from 25% to 40%, it maybe argued that due to non-renunciation of the rights to subscribe in favor of Mr.AD, section 56(2)(x) may not be applicable in the present case.

Conclusion:

While it may be a fresh issue of shares, the controversy around applicability of section 56(2)(x) remains age old. It can be safely said that even fresh issue is not truly out of the ambit of section 56(2)(x) of the Income Tax Act. In my view, the principle of taxing a value shift or a disproportionate allotment is not something in line with the original intent of the provisions of section 56(2)(x) of the Income Tax Act and is advocating of a ‘see-through’ approach.

While the Tribunal in the judgement of Sudhir Menon (above) has made findings to the contrary, in my view, the principles given in the above decision have lent a more investigative lens at of looking at transactions outreaching the existing provisions which brings into question even bona-fide transactions under the lens of the tax authorities.

INTERPLAY OF DEEMING FICTIONS WITH DOUBLE TAXATION AVOIDANCE AGREEMENTS (‘DTAA’):

In the foregoing sections, we had an overview of how the deeming fiction operates under the domestic Income Tax Act. But what happens in case of a transaction involving a non-resident?

THE CRUX OF THE QUESTION IS WHETHER A DEEMING FICTION UNDER THE INCOME TAX ACT CAN BE EXTENDED TO DTAA?

To answer this question, it is first important to understand the role of a DTAA. In layman’s terms, DTAA is an agreement for assigning taxing rights between two countries, while the domestic tax act (in this case the Income Tax Act) provides the rule of taxation within the jurisdiction of a nation.

In the Income Tax Act, section 90/90A provides the power to the Central Government to enter into agreements with other nations inter alia for: (i) Providing relief from the income charged in both the countries; (ii) Eliminate the double taxation in respect of income; (iii) Exchange of information for the prevention of evasion or avoidance of income tax; and (iv) For recovery of income under the ITA and corresponding law in other country.

In an ideal world, a domestic tax act and a DTAA would co-exist with the utmost harmony and there would be no contradictory provisions or need for intervention to interpret the said agreements.

Since this utopian assumption does not hold true, it becomes essential to understand that the purpose of DTAA and the Income Tax Act are overlapping and can be sometimes contradictory to each other. The Income Tax Act being an act of Parliament, while the DTAA being an agreement negotiated between two countries is not expected to be fully in harmony with each other.

Thus, what happens in case the provisions of the DTAA and the Income Tax Act are not complimentary to each other- CBDT had shed some light on the above issue in the past and stated that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act.14

14 Circular No. 333 of 1982 dt 02.04.1982

The above issue also came up for consideration before the Hon’ble SC from time to time and it has been observed that the terms of the DTAs would override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistent with the terms of the domestic tax act.15 Let us look at the below practical examples to understand the interplay between the Income Tax Act and DTAAs better.

15 [2003] UOI vs. Azadi Bachao Andolan: 263 ITR 706 (SC)
  •  Indirect transfer of shares:

Background

Perhaps the most disputed use of the deeming fiction was exercised by the legislature in 2012 by way of taxation of indirect transfers. Essentially, the Indian legislature sought to tax sale of shares between two non-residents which involved value shifting of an Indian company. The above can be better understood with the following example:

Transaction Mechanics

FCo1, FCo2 and FCo3 are foreign companies. FCo1 has only one asset which is the shares held in the Indian company, viz, ICo. Similarly, FCo2 in-turn has only one asset, viz, shares held in FCo1. FCo3, another foreign company is keen to buy out the interest of FCo2 in ICo. Therefore, it is decided to sell the shares of FCo1 to FCo3 by FCo2 as against selling shares of ICo directly.

The Revenue, in the said case advocated the application of a ‘look through’ approach and contended that if there is a transfer of a capital asset situated in India ‘in consequence of’ an action taken overseas, then all income derived from such transfer should be taxable in India. The Hon’ble Apex Court, however, held that the transfer of shares of a foreign company which had an Indian Company as its subsidiary does not amount to transfer of any capital asset situated in India.

Thus, prior to 2012, the above transaction would not lead to any adverse tax implications in India as it is essentially sale of foreign company shares from non-resident to another non-resident. To bring such apparent value shift transactions within the tax net of India, the erstwhile government moved a retrospective amendment deeming that shares of a foreign company that derive their value substantially from Indian assets (in this case FCo1) shall be deemed to have their situs in India and overruling prevailing decisions in the favor of the taxpayer16

16 Vodafone International Holdings B.V. vs. UOI: [2012] 204 Taxman 408 (SC)

TAXATION OF INDIRECT TRANSFER UNDER THE INCOME TAX ACT

For a non-resident to be taxed in India, section 5 of the Income Tax Act provides that income which accrues/arises or received or is deemed to accrue/arise or received in India shall form part of total income taxable in India.

Explanation 5 to section 9 (1)(i) of the Income Tax Act, provides for levy of tax in India on gains arising on transfer of shares of a foreign company if shares of such foreign company derive substantial value from assets located in India. Given the threshold provided under explanation 6 to section 9(1)(i) of the Income Tax Act are satisfied, the sale of the shares of FCo1 would be taxable in India as the same would be deemed to have their situs in India.

INTERPLAY WITH DTAAs

The interplay of indirect transfer provisions with the provisions of DTAA has been an intensely debated one. This question came up for consideration before the Andhra Pradesh High Court17: whether sale of shares of a French company (which derived value substantially from shares of an Indian company) to another French company would be brought to tax as per the provisions of section 9(1)(i) of the Income Tax Act read with the provisions of the India-France DTAA.

17 Sanofi Pasteur Holding SA vs. Department of Revenue: [2013] 354 ITR 316 (AP)

The Revenue had put forth an argument that the provisions of article 14(5) of the India-France DTAA be interpreted to adopt a more see through approach, however, that was swiftly rejected by the Hon’ble Court on the ground that Article 14(5) does not provide for an enabling language to effect a see through and bring the tax of the same into India.

On the contrary, such indirect transfer maybe brought to tax had the criteria laid out in article 14(4) of the India-France DTAA be fulfilled. Article 14(4) of the India-France DTAA provides for taxing the gains arising out of sale of capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in India. Similar enabling provisions are also captured in the India-UAE DTAA [Article 13(3)].

In the absence of fulfilling the above criteria, the provisions of indirect transfer would not be applicable on a foreign company. The tax authorities have also litigated the aspect of residency (which would directly impact the availability of DTAA benefit) and have urged the Courts to lift the corporate veil and differentiate between via the ‘head and brain test’. This issue has been recently adjudicated by the Apex Court18 in favour of the Revenue. The present article does not take into account the change brought in by such ruling.

18 The Authority for Advance Rulings vs. Tiger Global Internal II Holdings (Civil Appeal No. 262 of 2026)
The Authority for Advance Rulings vs. Tiger Global Internal IV Holdings (Civil Appeal No. 263 of 2026)
The Authority for Advance Rulings vs. Tiger Global Internal III Holdings (Civil Appeal No. 264 of 2026)
  •  Period of holding and grandfathering benefit:

The above issue can be better understood with the help of an example. ICo is an Indian company and the entire share capital of ICo is held by FCo1, and in turn the entire share capital of FCo1 is held by FCo2.

FCo1 and FCo2 are residents of Mauritius. The shares of ICo were acquired by FCo1 on 01.04.2015 and thus are eligible for grandfathering benefit under the India-Mauritius DTAA. The transaction structure, transaction mechanics and resulting structure are as under:

Illustrative Structure - Pre Transaction

As part of an internal group restructuring exercise undertaken on 01.04.2025, FCo1 is proposed to be amalgamated with ICo and accordingly, ICo would issue fresh shares to FCo2. The proposed transaction mechanics and resulting structure are as under:

Transaction Mechanics1

 

Let us first examine the implications under the Income Tax Act on the above transaction- In the above amalgamation, there would be no tax in the hands of FCo2, i.e., the shareholder of the Amalgamation Company, the Income Tax Act provides specific exemption under section 47(vii).

At the time of sale of shares of ICo, FCo2 would be granted the period of holding of FCo1 as well, i.e., period of holding of the previous owner by virtue of section 2(42A) r.w. section 49(1) of the Income Tax Act. Thus, considering the above, the question arises whether the period of holding in the hands of FCo2 of shares of ICo for the purposes of the India-Mauritius DTAA would be considered from 01.04.2016 or 01.04.2025.

The Indian Income Tax Act provides the continuity of period of holding in case of transfer by way of amalgamation. Thus, for the purposes of the Income Tax Act, the period of holding shall be taken from 01.04.2016, i.e., date of original acquisition by FCo1. Thus, the taxpayer can contend on these lines to argue availability of grandfathering benefit on the above shares.

While on the other hand, the tax authorities can place reliance on the provisions of article 13(3A) of the India-Mauritius DTAA, which are operative on the shares acquired on or before 01.04.2017. The tax authorities may further contend that ‘to acquire’ would mean to simply ‘be in control or possession’. In the present case, while the original shares were acquired by FCo1 prior to 01.04.2017, there being a fresh issue pursuant to the merger may result in diluting the position of the taxpayer in claiming the benefit of grandfathering.

Conclusion

Given the language used in the DTAA, the above view to avail grandfathering would in my opinion be extremely litigative considering that there is no enabling provisions replicating the benefit of period of holding granted under the Income Tax Act in the DTAAs.

  •  Section 2(22)(f)- The Buyback Maze:

Most recently, Infosys, announced a plan to buyback approx. 2.41% of its total share capital for a total consideration of ₹1,800 crores with an aim to boost EPS and market value. Let us look at the implications in the hands of the shareholder(s)/ in the hands of the company in case of a buyback from a tax point of view.

As per the Income Tax Act, buy-back means purchase by a company of its own shares. Prior to Finance Act, 2024, buyback was taxed in the hands of the company under section 115QA of the Income Tax Act. Tax was levied at 20% (plus 12% surcharge and cess) and the buyback would be exempt in the hands of the shareholder.

FINANCE ACT, 2024- POLICY SHIFT:

Finance Act, 2024 introduced a paradigm shift in buyback taxation. By way of Finance Act 2024, the government announced that buyback done post October 1, 2024 would be exempt in the hands of the company undertaking the buyback and would be taxed in the hands of the shareholder as dividend under section 2(22)(f) per their applicable slab rates.

Further, cost of acquisition of the shares would be allowed as capital loss in the hands of the shareholder. This policy shift has brought buyback on par with dividend but has taken away the sheen of buyback being a lucrative choice of cash repatriation. In many DTAAs such as the India-Netherlands DTAA, it can be argued that given the meaning ascribed to dividend, the proceeds from buyback shall fall within the ambit of the same.

CAN ANTI-ABUSE PROVISIONS SUCH AS SECTION 56(2)(x) OR SECTION 50CA BE APPLIED ON BUYBACK POST FINANCE 2024?

Section 50CA of the Income Tax Act is applicable in case of transfer of unquoted shares at a value less than the fair market value of such shares determined in accordance with the provisions of Rule 11UAA of the Income Tax Rules, 1962 (‘the Income Tax Rules’). Therefore, section 50CA provides for substituting the consideration with the fair market value (determined as per Rule 11UAA of the Income Tax Rules) for the purposes of section 48 and is applicable in the hands of the Seller.

While as discussed above, section 56(2)(x) of the Income Tax Act seeks to tax receipt of property (including shares) for nil or inadequate consideration. Therefore, a key differentiating factor is that section 56(2)(x) is applicable in the hands of the ‘recipient’ of shares (i.e., buyer in case of a transaction of sale/purchase of shares) and section 50CA of the Income Tax Act is applicable in the hands of the seller of shares (in case of a transaction of sale/purchase of shares).

In the present case, the risk of buyback being engulfed under the ambit of section 56(2)(x)/section 50CA of the Income Tax Act is enumerating from the plain reading of provisions of the said sections. The crux of the problem- can two deeming fictions be read on a conjoint basis? Or can a deeming fiction be read into another deeming fiction?

SECTION 50CA AND BUYBACK:

In case of section 50CA of the Income Tax Act, as discussed above, it is applicable in case of ‘transfer’ of unquoted shares. The term ‘transfer’ has been
defined under section 2(47) of the Income Tax Act and includes the relinquishment of any asset or extinguishment of any rights therein. In case where a company buys back its own shares for the
purpose of cancellation/extinguishment, the same can be said to fall within section 2(47) of the Income Tax Act and thus within ambit of section 50CA of the Income Tax Act.

However, since payment made a company on buyback of its own shares from a shareholder in accordance with the provisions of section 68 of the Companies Act, 2013 is covered within section 2(22)(f) of the Income Tax Act, the same may not be taxed again under the head capital gains in line with the provisions of section 46A of the Income Tax Act. Thus, where section 50CA is sought to be invoked by the tax authorities, the same may leave the provisions of section 46A (supra) otiose.

SECTION 56(2)(x) AND BUYBACK:

In case of section 56(2)(x) of the Income Tax Act, the company receives its shares from the shareholder for the purpose of cancellation of the same. At the outset, arguments can be made that receipt of shares for the purposes of cancellation may not fall within purview of section 56(2)(x) of the Income Tax Act keeping in mind the intent for which the provisions of section 56(2)(x) were introduced.

Further arguments can also be made that in case of buyback, the shares are being tendered which would constitute consideration. The action of a deeming fiction is to be restricted to the section(s) for which they were originally intended for and the extension of the said scope under the Act is not permissible.

However, alternative arguments may be advanced by the departments that on a bare reading of section 56(2)(x) of the Income Tax Act, only trigger(s) required are receipt of property (including shares) for inadequate consideration. The intent of receipt (in the present case for cancellation) may not be principally examined for application of section 56(2)(x) of the Income Tax Act.

In my view, the above anti-abuse provisions also no longer find any application in case of a buyback for the plain reason that post Finance Act, 2024, the companies undertaking a buyback would need to incentivize the shareholders to tender their shares by way of a premium on prices (as seen in the case of Infosys). Thus, there would not be any practical applicability of the above anti-abuse provisions.

CONCLUDING REMARKS

Deeming fictions under the Income Tax Act have transitioned from being narrow anti-abuse tools to becoming a cornerstone of tax legislation, influencing computation, timing, and characterisation of income.

While they serve the purpose of plugging loopholes and ensuring uniformity, their expansive use has also introduced interpretational challenges and litigation risks. Like in mathematics, in a world full of variables it is essential to introduce and keep constants as a balancing factor, likewise in law interpretation to keep up with our dynamic world, it is important to keep some constant premise for a meaningful and desired interpretation.

Statistically Speaking

TAX TRENDS IN 2025

TOP COUNTRIES WITH SPACE TECH STARTUPS

COUNTRIES WITH THE LARGEST FOREIGN EXCHANGE RESERVES

HIGHEST NATIONAL DEBT 2025 AS A PERCENTAGE OF GDP

BEST PLACES TO RETIRE IN 2026

Segment Reporting: A Window Into Business Realities

Segment reporting under IFRS 8 and Ind AS 108 adopts a “management approach,” allowing investors to view a business through the lens of its Chief Operating Decision Maker (CODM). This framework reveals how management allocates resources and assesses performance across various operating components, rather than just legal structures. Key requirements include segment-specific disclosures and entity-wide data regarding products, geography, and major customers contributing over 10% of revenue. Such insights help stakeholders map performance against peers, understand strategic direction, and evaluate exposure to geographical risks. High-quality reporting reduces information asymmetry and enhances transparency. However, common oversights include omitting major customer details or failing to provide entity-wide disclosures for single-segment entities. Ultimately, these disclosures provide a vital analytical tool for assessing enterprise resilience and long-term value creation.

INTRODUCTION: BEYOND MERE DISCLOSURE

Consolidated financial statements show the big picture. But investors want more. Earnings calls prove this every quarter. Analysts routinely break down results by business segment and evaluate key performance indicators such as segment revenues, margins, capital employed and capital expenditure—information that is primarily drawn from segment disclosures and complemented by other parts of the financial statements. Management works the same way. Key decisions on funding, marketing and cost control happen at the segment level. Investors follow product trends, geographic shifts and new business wins for this reason. These patterns point to one conclusion: segment information is not just disclosure. It reveals how the business runs and how management thinks.

USE OF ‘MANAGEMENT APPROACH’ FOR SEGMENT REPORTING:

Segment reporting under IFRS 8 and Ind AS 108 follows the ‘management approach’, introduced when IFRS 8 replaced IAS 14 and aligned with US GAAP’s SFAS 131. The management approach presents segments as management sees them, giving investors insight into how decisions are made and resources are allocated. This shift moved reporting away from predefined categories and required disclosures that reflect how management itself views and manages the business. As a result, segment information goes beyond simple product or geographic splits and provides insight into real decision-making structures. The management approach drives both segment identification and measurement, ensuring external reporting is consistent with internal performance reviews and the MD&A. Because segment results must reconcile to consolidated figures, it effectively links internal management reporting with external financial statements. This enables investors to see the business through management’s lens and assess prospects based on the performance of its key operating components. These also enable users to derive relevant segment-level ratios and performance indicators from the disclosed information, without the standard prescribing uniform ratios that may not reflect management’s internal decision-making framework.

Segment Reporting

KEY DISCLOSURE COMPONENTS UNDER IND AS 108/IFRS 8:

Broadly, the standard requires the following disclosures:

1) Segment wise disclosure

Segment reporting is fundamentally built on identifying operating segments—the level within the entity where management allocates resources and evaluates performance through the Chief Operating Decision Maker (CODM). The CODM represents a decision-making function rather than a specific designation. Identifying the CODM determines the operating segments, which in turn leads to the determination of reportable segments and the related reportable amounts and reconciliations. Each reportable segment requires disclosures such as segment revenue, results, assets, liabilities and other material items, including significant non-cash expenditures. These disclosures reflect the information provided to the CODM and are reconciled to the corresponding figures in the financial statements, thereby linking internal reporting with external reporting.

2) Entity-wide Disclosures

Even single-segment companies must provide entity-wide disclosures, which are often overlooked. Unlike reportable segments, these are simple disaggregations of financial statement amounts rather than based on the management approach. Disclosures are required for:

Products/Services External revenues disclosed by product or service (or groups of similar products/services).
Geography External revenues and non-current assets disclosed separately for the country of domicile and foreign locations (with material countries shown individually).
Major Customers Disclose revenues from customers contributing ≥10% of total revenue and the related segment(s); related customers from the same group are treated as one for the threshold.

FROM COMPLIANCE TO INSIGHT: UNLOCKING THE VALUE OF SEGMENT REPORTING

1) Mapping and Peer Comparison

Segment reporting enables stakeholders to map a company’s performance at the business level, offering a clearer view of how individual segments contribute to overall results. This enhances
transparency and supports a more informed assessment of competitive strengths and weaknesses. For investors analysing a diversified company, such information is indispensable, as each segment may have a different set of peers and competitors.

2) Understanding Strategic Direction

Disaggregated segment information also offers valuable insight into the company’s strategic direction. For diversified entities, such disclosures reveal the relative growth drivers across businesses and the areas where management is focusing its resources. Investors can thus assess whether the company’s strategy aligns with evolving market opportunities and risk exposures, rather than relying solely on consolidated results that may obscure segment-specific trends.

3) Geographical Insights and Risk Assessment

In today’s volatile geopolitical and economic environment, segment information by geography provides critical visibility into an entity’s revenue and resource dependencies. Understanding the geographic composition of revenues and assets helps stakeholders gauge exposure to regional risks — for instance, how trade policies such as U.S. tariffs on Indian pharmaceutical exports or operational dependencies in ports like Adani Ports’ overseas ventures might influence performance. These may also become a relevant consideration for policymakers while framing India’s international trade and diplomatic strategy. Such insights are not merely analytical; they can be pivotal in assessing key accounting judgments, including going concern, impairment testing, and valuation.

Together, these dimensions demonstrate that segment reporting extends well beyond compliance and serves as a practical analytical lens into how management evaluates strategy, risk and performance sustainability. For example, where an entity operates both a core manufacturing activity and a related financing operation, segment reporting reflects whether these activities are monitored together or separately for decision-making purposes. Importantly, segments are not defined by legal structure or subsidiary boundaries, but by the internal management view. Legally separate entities may form part of a single segment if managed on an integrated basis, while closely linked activities may be reported separately if performance and risks are assessed independently. Segment information should therefore be read as a reflection of how the business is actually run, rather than as a mirror of the group’s legal organisation.

LESSONS FROM PRACTICE: MISSED DISCLOSURES

Companies sometimes omit important details when complying with Ind AS 108; a few common oversights, as observed by the Financial Reporting Review Board of ICAI, are listed below:

  •  Some entities incorrectly claimed that Ind AS 108 was not applicable in cases of a single reportable segment, overlooking the requirement to provide entity-wide disclosures
  •  In several cases, segment reportingdisclosures were inappropriately included under “Significant Accounting Policies” instead of being presented separately in the Notes to Accounts.
  •  General disclosures were either missing or inappropriate, including relating to:
  1. Identification of the CODM, and
  2. Criteria and judgements applied in segment identification and aggregation
  • Information about major customers contributing 10% or more of revenue was not disclosed. For instance, media reports on an MCA probe indicated that Everfin Financial Services Private Limited did not separately disclose revenue of ₹134 crore from a single customer, BluSmart, as a major customer exposure under Ind AS 108.

CONCLUDING THOUGHTS:

Segment reporting is far more than a compliance exercise; it is a powerful tool for enhancing transparency and reducing information asymmetry. By reflecting how management views performance and allocates resources, it gives users a clear picture of risks, opportunities and strategic direction. These insights help assess the sustainability of business strategies across varied operating environments. In a period shaped by rapid technological change, geopolitical tension and shifting economic conditions, high-quality segment disclosures enable investors and policymakers to judge enterprise resilience, value creation and future performance with far greater clarity.

Beyond compliance lies clarity. Segment reporting reveals the signals that shape strategy, risk and performance.

ICAI and Its Members

I. EXPOSURE DRAFT

1. RISK MITIGATION ACCOUNTING-PROPOSED AMENDMENTS TO IFRS 9 AND IFRS 7

The Exposure Draft sets out the proposed amendments to IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB is proposing:

  • to add a risk mitigation accounting model for companies managing repricing risk on a net basis; and
  • to require a company to disclose its strategy for managing repricing risk and the effects of its risk management activities.

The IASB is also seeking feedback on the proposed withdrawal of IAS 39 Financial Instruments: Recognition and Measurement.

Public comments submission last date: May 22, 2026.

Download the Exposure Draft: https://resource.cdn.icai.org/90018asb-aps3657-1.pdf

Submit Comments:

II. ICAI ANNOUNCEMENTS

1. PEER REVIEW PHASE IV EXTENSION

The Peer Review Board of the Institute of Chartered Accountants of India has announced a deferment of Phase IV of the Peer Review mandate, originally effective from 1 January 2026, to now be applicable from 31 December 2026. This extension applies to practice units (firms) that propose to undertake audits of branches of public sector banks and to those rendering attestation services with three or more partners, for whom obtaining a valid Peer Review Certificate will continue to be a pre-requisite before accepting statutory audits under the Phase IV coverage criteria.

Read Circular at: https://resource.cdn.icai.org/90105prb-aps3736.pdf

2. CLARIFICATIONS/FAQS ON THE ISSUES ARISING OUT OF THE PEER REVIEW MANDATE

The Peer Review Board of the ICAI has issued comprehensive clarifications and FAQs addressing key aspects of the Peer Review Mandate, including its phased applicability to practice units based on audit scope and firm size, such as statutory audits of listed entities or large unlisted public companies and assurance service thresholds under different phases. The guidance clarifies timing for obtaining a valid Peer Review Certificate before acceptance and signing of statutory audits, definitions of “raised funds” for applicability, and delineation of Public Interest Entities under the mandate. It also specifies the coverage of audits under Phase IV for branches of public sector banks, the requirement (or non-requirement) of peer review for non-attestation practices, and the scope of “assurance engagements” under applicable standards, along with practical points such as partner count reckoning and conditions for new units seeking peer review.

Read FAQ at: https://resource.cdn.icai.org/83571prb67450.pdf

III. ICAI PUBLICATION

1. FAQ ON THE NEW LABOUR CODE

The Accounting Standards Board has issued FAQs on key accounting implications arising from the New Labour Code to clarify key accounting questions arising from the application of the New Labour Codes.

Link to download the same is: https://resource.cdn.icai.org/90049asb-faq-nlc.pdf

2. TECHNICAL GUIDE ON EXPATRIATES TAXATION

The revised sixth edition of the Guide provides a comprehensive and updated analysis of the taxation and regulatory framework applicable to expatriates, covering determination of residential status under the Income-tax Act, 1961 (including deemed residency and expanded stay thresholds), implications for global income taxation, and practical aspects of the default tax regime under section 115BAC on expatriate salary structures. It offers detailed guidance on withholding obligations under section 195, taxability of salaries paid abroad for services rendered in India, and social security compliance under Indian law and bilateral Social Security Agreements, including coverage, contributions, and withdrawal rules. The publication also examines FEMA exchange control provisions, recent procedural changes such as electronic filing of Form 10F for DTAA claims, and compliance under the Black Money Act, 2015, making it a holistic reference for structuring and managing compliant expatriate assignments.

The technical guide is available at https://resource.cdn.icai.org/90288cit-aps3869.pdf

IV. OPINION

Accounting treatment of interest cost and interest income relating to interest-free subordinate debt

A. FACTS OF THE CASE

The Company is a joint venture between the Government of India (GoI) and the Government of NCT of Delhi (GNCTD) and is responsible for the construction and operation of the Delhi/NCR Metro Rail project. The project is financed through equity, grants, JICA loans routed through GoI, and interest-free subordinate debt provided by GoI, GNCTD and other government agencies.

The subordinate debt is meant specifically to finance land acquisition, rehabilitation and resettlement, and payment of central and state taxes. Repayment is scheduled in five equal instalments after completion of the JICA loan repayment, i.e., after 30 years.

Earlier, the Expert Advisory Committee (EAC) had advised the Company to fair value the interest-free subordinate debt as per Ind AS 113. Accordingly, during FY 2023-24, the Company measured such debt at fair value using G-sec rates and treated the difference between carrying value and fair value as a government grant, to be amortised over project life.

The Company accounted for interest using the effective interest method under Ind AS 109 as follows:

  • For completed phases (I–III): interest charged to P&L
  • For Phase IV (under construction): interest capitalised under CWIP
  • Interest earned on temporary investment of funds in flexi deposits was recognised as income in P&L, based on earlier EAC opinion (Query 44, Vol. XXXIV)

During the supplementary audit, C&AG objected that:

  • Interest is notional and should not be capitalised
  • Interest income should be netted off against borrowing cost
  • CWIP and equity were overstated by ₹1,621.49 lakh

Management disagreed and relied on Ind AS 23 and ICAI Educational Material to justify capitalisation and separate recognition of interest income.

B. QUERY

The Company sought EAC’s opinion on:

(i) Whether the accounting treatment of interest cost arising due to fair valuation of subordinate debt is correct.

(ii) Whether the accounting treatment of interest income earned on temporary investment of subordinate debt funds is correct.

C. POINTS CONSIDERED BY THE COMMITTEE

The Committee examined only the accounting issues relating to:

  • Interest arising on fair valuation of subordinate debt
  • Interest income on temporary investment of such funds

It relied on:

IND AS 109

  • Financial liabilities to be measured at amortised cost
  • Interest to be computed using the effective interest method
  • Interest so recognised is not notional, but accounting interest

IND AS 23 – BORROWING COSTS

  • Borrowing costs include interest computed using the effective interest method
  • Costs directly attributable to a qualifying asset must be capitalised
  • Metro project qualifies as a qualifying asset
  • Investment income earned during construction must be adjusted against borrowing cost

The Committee noted that the earlier EAC opinion cited by the Company was under the old AS framework, whereas the present case is under Ind AS, and therefore required independent evaluation.

It concluded that:

  • Interest arising due to fair valuation is the actual borrowing cost under Ind AS
  • Interest earned during construction must be set-off against borrowing cost and not credited to P&L.

D. Opinion

The Committee opined:

(i) Accounting treatment followed by the Company in respect of interest cost, viz., capitalising the same as capital work-in progress, is appropriate.

(ii) Accounting treatment followed by the Company in respect of interest income earned on temporary investment of subordinate debt funds in the statement of profit and loss is not appropriate; the same is to be set-off against the borrowing costs to be capitalised as per the principles of Ind AS 23.

Read Opinion https://resource.cdn.icai.org/90204cajournal-jan2026-30.pdf

ICAI Journal January 2026 Pages 113-119

V. DISCIPLINARY COMMITTEE CASES

1. Case: ROC, Kanpur vs. CA. G.G.W.

File No.: PR/G/295/2023/DD/437/2023/DC/2059/2025

Date of Order: 15.12.2025

Particulars Details
Complainant Registrar of Companies
Nature of Case Certification of e-Form AOC-4 without due diligence – unsigned financial statements
Background MCA conducted an inspection u/s 206(5) of the Companies Act, 2013, into several Producer Companies incorporated in Uttar Pradesh. It was found that 14 Producer Companies had filed e-Form AOC-4 for FY 2021–22, where the financial statements and directors’ reports were not signed by directors. Despite this, the Respondent, who was both a statutory auditor and certifying professional, certified these forms.
Key Allegations – Certified AOC-4 forms, knowing that financial statements were unsigned by directors.

– Uploaded unauthenticated financial statements without a mandatory UDIN.

– Failed to comply with Section 134 of the Companies Act, 2013 and Rule 8 of Companies (Registration Offices & Fees) Rules, 2014.
Respondent’s Defence – Admitted that unsigned financial statements were uploaded due to staff oversight.

– Filed affidavits of directors and staff confirming inadvertent error.

– Argued it was an unintentional mistake in the early stage of his career.

– Claimed no fraud or misleading audit report was involved and sought leniency.
Findings – Respondent pleaded guilty during the hearing on 19.09.2025.

– Being a statutory auditor and certifying professional, responsibility rested solely on him.

– Uploading unsigned financials and certifying AOC-4 without verification amounts to professional negligence.

– Non-mention of UDIN further aggravated the lapse.
Charges Established Guilty under Item (7), Part I, Second Schedule – failure to exercise due diligence / gross negligence.
Punishment Reprimand under Section 21B(3)(a) of the CA Act, 1949.

2. CASE: REGIONAL DIRECTOR (ER), MCA, KOLKATA VS. CA. K.B.

File No.: PR/G/319/2020/DD/329/2020/DC/1856/2024

Date of Order: 22.12.2025

Particulars Details
Complainant Regional Director (Eastern Region), Ministry of Corporate Affairs, Kolkata
Nature of Case Statutory auditor rendering prohibited non-audit services.
Background The Respondent was a statutory auditor of Swapnabhumi Realtors Ltd. for FY 2017–18. During audit tenure, he also accepted a separate assignment for budget
preparation and variance analysis of indirect expenses, for which separate fees were charged. The MCA alleged this amounted to an internal audit/management service, prohibited under Section 144 of the Companies Act, 2013.
Key Allegations – Undertook variance analysis while continuing as a statutory auditor.

– Charged separate professional fees (₹25,000).

– Issued report containing recommendations on expense controls, amounting to an internal audit.
Respondent’s Defence – Section 144 does not define “management services.”

– Claimed analysis was done only to detect fraud and improve audit quality.

– Argued independence was maintained as the audit report was qualified.

– The stated internal auditor was already appointed, and he only used their work.
Findings – Variance analysis report contained control recommendations, clearly falling within the scope of internal audit (refer to SA-610).

– The assignment was independent of the statutory audit and carried out for separate consideration.

– Respondent failed to resign despite accepting a prohibited assignment, violating independence norms.
Charges Established Guilty under:

  • Item (7), Part I, Second Schedule – lack of due diligence
  • Item (1), Part II, Second Schedule – contravention of law/guidelines
Punishment Fine of ₹10,000 payable within 60 days

3. Case: ROC, West Bengal vs. CA. RKT

File No.: PR/G/736/2022/DD/515/2023/DC/1897/2024

Date of Order: 22.12.2025

Particulars Details
Complainant Deputy Registrar of Companies, West Bengal
Nature of Case Certification of false Form 10 – registration of charge for debentures
Background During MCA inspection of M/s SAPL., it was found that the Respondent had certified Form 10 on 26.05.2010 for creation of charge to secure ₹1 crore debentures. However, the company’s audited balance sheet as on 31.03.2010 showed no fixed assets and current assets of only ₹4.01 lakh, creating a shortfall of over ₹95 lakh in security coverage. No mortgage deed was attached to the form.
Key Allegations – Certified Form 10 without verifying ownership and adequacy of security.

– Allowed registration of a charge despite the company having no assets.

– Failed to ensure attachment of the mortgage deed.
Respondent’s Defence Claimed his digital signature was misused and he was never engaged by the company; he relied on an FIR dated 28.04.2013 filed in another matter.
Findings – FIR relied upon related to another company, and was filed 3 years after the impugned Form 10.

– Respondent filed a fresh complaint for this case only in Nov 2024, almost one year after receiving notice from ICAI – treated as an afterthought (timeline table – page 5).

– No effort was made by the Respondent to approach the company despite the alleged misuse.

– Held responsible for the safe custody of his Digital Signature.

– The committee concluded it was a clear case of negligence in certifying a false Form 10.
Charges Established Guilty under Item (7), Part I, Second Schedule – failure to exercise due diligence / gross negligence.
Punishment Reprimand and fine of ₹2,00,000 payable within 60 days.

 

Depreciation Policy Changes By Large Technology Companies: Analysis under Indian Accounting Standards

In recent years, a number of large technology firms (for example Meta Platforms, Inc., Microsoft Corporation, Alphabet Inc. (Google) and others) have announced extensions in the useful lives applied to their server and network infrastructure (data-centre hardware) for depreciation purposes. On the face of it, the accounting manoeuvre has the effect of lowering annual depreciation expense, thereby increasing recognised profit, earnings per share (EPS) and various ratios (return on assets, etc.). The key question is: does this practice align with sound accounting principles, especially when economic life (or technological obsolescence) may be much shorter than the extended depreciation period? And if not, what do the applicable Indian standards (Ind AS) say and what risks arise for investors and auditors?

This paper discusses the accounting framework under Indian GAAP / Ind AS for depreciation and useful life, elaborates the concept of “useful life” (economic life) and obsolescence, explains the practice of life-extension for server assets by large tech companies and provides a critical assessment: risks, accounting concerns and whether the practice is consistent with standards. Finally, it examines the implications for Indian-context companies, auditors, and investors.

INTRODUCTION

1. Accounting Framework under Indian GAAP / Ind AS for Depreciation

1.1 Ind AS 16 (and Companies Act Schedule II)

Under Indian accounting standards, the treatment of property, plant and equipment (PPE) is governed by Ind AS 16 “Property, Plant and Equipment”. The standard outlines recognition, measurement, depreciation, componentisation, and review of useful lives.

Key extracts:

  •  Paragraph 50 of Ind AS 16 states: “The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.”
  •  Paragraph 56 of Ind AS 16 lists the factors to be considered in determining useful life: (a) expected usage of the asset; (b) expected physical wear and tear; (c) technical or commercial obsolescence arising from changes or improvements in production or from a change in market demand; (d) legal or similar limits on the use of the asset.
  • Paragraph 51 of Ind AS 16 requires that the residual value and useful life of an asset shall be reviewed at least at each financial year-end, and if expectations differ from previous estimates, the change shall be accounted for as a change in accounting estimate in accordance with Ind AS 8.
  • Disclosure requirements: Ind AS 16 requires disclosure for each class of PPE of the depreciation method, useful lives or depreciation rates, gross carrying amount, accumulated depreciation/impairment, reconciliation of changes, etc.

Additionally, under Indian law, the Companies Act, 2013 Schedule II (Part A) states that “Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life” and that the useful life of an asset is the period over which the asset is expected to be available for use by the entity or the number of production or similar units expected to be obtained from the asset.

1.2 What constitutes a change in useful life / accounting estimate

When an entity changes its estimate of the useful life of an asset (for example, extends the life from 4 years to 6 years), this is a change in accounting estimate under Ind AS 8 — accounted for prospectively (i.e., the carrying amount of the asset is depreciated over the revised remaining useful life). Ind AS 16 para 61-62 (and Ind AS 8) require such changes to be disclosed.

1.3 Comparison to IFRS / other jurisdictions

Globally, under IAS 16 (the IFRS equivalent) similar concepts apply: useful life must reflect expected consumption of future economic benefits. For example, IAS 16 paragraph 56 outlines that “The useful life of an asset is the period over which an asset is expected to be available for use by an entity.” Moreover, many technical publications note that although US GAAP (ASC 360-10) requires depreciation over useful life, it does not specify how useful life should be determined — hence judgment is required.

In short: Indian (and IFRS) standards require that useful life be determined on the basis of expected economic benefits, usage, obsolescence etc., not simply management convenience.

Big Techs Depreciation Game

2. Useful Life, Economic Life and Obsolescence

2.1 Useful life vs physical (economic) life

A frequent misconception is to equate “useful life” with the maximum physical life of an asset. The standards clarify that the useful life is the period over which the asset is expected to be available for use by the entity, not necessarily the total physical life of the asset. Ind AS 16 para 57 states: “The useful life of an asset is defined in terms of the asset’s expected utility to the entity. … Therefore, the useful life of an asset may be shorter than its economic life.”

Hence, while a server rack might physically function for 10 years, its useful economic life (the period over which it yields future economic benefits to the entity) might be much shorter — especially in technology contexts of rapid refresh or obsolescence.

2.2 Technological and commercial obsolescence

Both Ind AS 16 and IAS 16 explicitly require entities to consider technical or commercial obsolescence when estimating useful life. For example, Ind AS 16 para 56(c) refers to “technical or commercial obsolescence arising from changes or improvements in production, or from a change in the market demand for the output of the asset.”

Technical obsolescence is especially relevant for server and networking equipment: newer generations of GPUs, faster processors, more efficient architectures mean that older hardware becomes economically unattractive even if physically operational. If a server continues to operate but its capacity, energy consumption, or performance is no longer competitive, the future economic benefits may fall significantly below initial expectations.

2.3 Review of useful life and residual value

Ind AS 16 para 51 mandates review of useful life and residual value at each reporting date (or earlier if there are indications) and adjust prospectively. Failure to do so may mean carrying amounts and depreciation charges are not updated to reflect reality.

Indeed in practice many companies manage asset refresh cycles and update useful life accordingly. For example, technical guidance notes cite as a common error: “Failing to update assessment of useful lives (depreciation rates) and residual values.”

2.4 Componentisation

Ind AS 16 para 43/46 states that if an asset has parts (components) with different useful lives, each significant part should be depreciated separately. For example, a server chassis may have a cooling unit, a storage array, a GPU blade each with different life cycles.

2.5 Impairment vs depreciation

If indicators of impairment exist (e.g., hardware assets no longer yield the expected benefits, or accelerated obsolescence), then the entity must apply Ind AS 36 (“Impairment of Assets”) and possibly write down the carrying amount. The depreciation process does not replace the requirement to test for recoverability if needed.

3. Practice of Useful Life Extension by Large Tech Companies

The occurrence of major tech companies extending the useful life of servers and network equipment — is documented publicly. I would like give below few examples.

3.1 Example: Meta Platforms, Inc.

In the 2022 annual report (Form 10-K) of Meta, the company states:

“In connection with our periodic reviews of the estimated useful lives of property and equipment, we extended the estimated average useful lives of a majority of the servers and network assets from four
years to 4.5 years, effective the second quarter of 2022, and further extended the useful lives to five years effective the fourth quarter of 2022… The financial impact of the changes in estimates was a reduction in depreciation expense of US$860 million and an increase in net income of US$693 million, or US$0.26 per diluted share for the year ended December 31, 2022.”

That disclosure appears in Note 1 (Summary of Significant Accounting Policies) in Part II, Item 8 of the 10-K (page ~67) of Meta’s 2022 report.

In the half-year (30 June 2022) Meta also reported that the change in estimate reduced depreciation expense by US$252 million and increased net income by US$206 million for that quarter.

In more recent disclosures (2023 10-K) Meta again notes the same useful life policy and that depreciation expense was US$8.50 billion in 2022 (servers and network assets ~US$5.29 billion) and details of the revisions.

3.2 Example: Microsoft Corporation

Public commentary (e.g., on the data centre industry) reports that Microsoft extended the life span of its server and network equipment from four to six years.

It is indicated that Microsoft estimated savings of ~$1.1 billion in Q1 2023 and ~$3.7 billion over full year due to the life extension.

3.3 Example: Alphabet / Google

Google (Alphabet) in 2021 adjusted the useful life of servers from 3 to 4 years and networking equipment from 3 to 5 years, which reportedly led to ~US$2 billion increase in netincome and ~US$2.6 billion reduction in depreciation expense.

3.4 Summary of impact

From the above:

  •  The companies have publicly disclosed that they have changed the estimated useful lives of their infrastructure assets (servers, network) — and have quantified the impact of those changes on depreciation and profits.
  •  The change is accounted for prospectively (i.e., future depreciation is charged over the revised remaining life).
  •  The effect is to reduce annual depreciation charges, thereby increasing reported profits, EPS, and (other things equal) ROA, asset-turnover metrics etc.

4. Critical Assessment: Are These Extensions Consistent with Sound Accounting?

4.1 Is it permitted to change useful life?

Yes — as explained above, standards permit entities to change an estimate of useful life. That by itself is not improper. Ind AS 16/IAS 16 require that the revised estimate be based on current facts and be reviewed at each year end. A change in estimate is accounted for prospectively. So if a company genuinely has evidence that its servers will deliver useful economic benefits for a longer period (e.g., due to improved cooling, better utilisation, more efficient architecture), then extending the useful life is within the accounting framework.

4.2 But the extension must reflect consumption of future economic benefits

The key question is the reasonableness of the estimate. Standards emphasise that the useful life should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. Ind AS 16 para 60 and IAS 16 para 60 require that the depreciation method (and implicitly life) reflect that pattern.

Hence, if the asset will become technologically obsolete rapidly (e.g., GPU refresh every 12-18 months, or workloads needing new hardware), then extending a depreciation life from 3 to 6 years may not reflect realistic consumption of benefits. In that sense the extension may be inconsistent with the standard. Indeed a technical article points out as a common error: “Assuming useful life is the total economic life (potential life) of the asset” rather than the period the asset will actually yield economic benefits.

4.3 Specific concerns in server / data-centre context

Above concern is especially valid for server and networking infrastructure because:

  •  The pace of hardware innovation (GPUs, accelerators, AI training hardware) is extremely rapid — product cycles may be 12-18 months.
  • Energy efficiency, performance per watt, cooling advances, and usage patterns may mean older servers provide less value (or become less competitive).
  •  Even if physically usable, the economic life (the period over which they generate net economic benefits) could be significantly shorter than physical life.
  •  If management extends useful lives but does not reflect obsolescence or reduced output potential, then depreciation expense may be understated and profits overstated.

4.4 Disclosure and transparency issues

From a governance and investor-protection angle, the extension is problematic if it is not supported by realistic assumptions or clear disclosures of key judgments. While companies like Meta have disclosed the change and the quantitative impact (which is good governance), investor vigilance is required: the note might still not show the underlying assumptions (e.g., what refresh cycle, expected capacity utilisation, residual value), and the rationale may be management¬-biased.

4.5 In India / Ind AS context — special considerations

In the Indian context:

  •  Under Schedule II to the Companies Act, if a company uses a useful life different from that prescribed, it must disclose the difference and justification (including technical advice).
  •  Ind AS entities must review useful life and residual value each year, and change must be treated as an estimate change — not a change in policy.
  •  Auditors and regulators (for Indian entities) must ensure that asset lives reflect actual usage, obsolescence and consumption of benefits, especially for high-tech assets where obsolescence is rapid.

4.6 Legal / regulatory pronouncements

From IFRS/UK/Australia commentary: for example, a BDO (Australia) article on “More common errors when accounting for property, plant and equipment” warns that failing to review useful life and residual values each year is a common error and may lead to over- or under-stated depreciation.

Therefore, while not a “legal ruling”, there is strong regulatory/standards-based expectation that life estimates reflect realistic economic lives.

4.7 Summary of whether the practices highlighted above are permissible

In summary:

  •  It is permissible for a company to extend the useful life of an asset (provided it is an estimate change, prospectively applied, and disclosures made).
  •  It is not permissible (or would be inconsistent with standards) if the extension is arbitrary, ignores the reality of obsolescence, or fails to reflect that the asset’s economic benefits will be consumed sooner than the extended life.
  •  In a rapidly evolving technology environment (servers, AI infrastructure), extending from 3 years to 6 years raises red flags: are the underlying facts (refresh cycle, performance degradation, capacity utilisation) being properly considered? If not, profits may be inflated, and depreciation understated, thereby misleading investors.
  •  From an Indian standpoint, companies using a non-prescribed life must disclose the difference and provide justification supported by technical advice. Ind AS also requires annual review of assumptions.

Hence the above concern—that companies may extend depreciation windows, thereby reducing expenses, boosting profitability and EPS, while the actual economic life may be much shorter—is a legitimate one for investors, auditors and regulators.

5. Implications for Indian Companies, Auditors and Investors

5.1 What Indian companies should do

For Indian entities investing in server/data-centre infrastructure (or any rapidly changing technology assets):

 They must assess useful life realistically, considering physical usage, technological change, output capacity, and replacement cycles.

  •  They should document the basis for useful life assumptions (e.g., refresh policy, utilisation, benchmarking).
  •  They should review the assumptions each year, and where the estimate is changed, provide adequate disclosure as required under Ind AS 8.
  • If a departure from the useful lives specified in Schedule II of the Companies Act is made, they must justify the difference and disclose it.
  •  They should ensure componentisation where relevant (e.g., major hardware components, cooling systems, GPUs) and depreciate accordingly.
  •  Auditors must challenge management assumptions especially in asset-intensive, high-technology investments, and verify whether obsolescence (technical or commercial) has been appropriately factored.

5.2 What investors should watch for

  •  Note disclosures in the “Significant Accounting Policies” or in the PPE notes: what useful lives have been assumed? Have they changed recently? If yes, what is the quantitative impact?
  •  Review the company’s hardware refresh policy, data-centre strategy, server-upgrade cycle. If management is extending lives while the industry refresh cycle is short (12–18 months), that’s a potential red flag.
  •  Check whether the residual value assumptions are realistic; whether impairment indicators exist (e.g., asset under-utilisation, new generation hardware replacing older).
  •  Compare depreciation expense / gross PPE balance / age of assets over time (e.g., is the average age of servers increasing but utilisation/capacity growth flattening?)
  •  Be alert that an extended useful life means lower annual depreciation, hence higher current profit, but it may also mean lower future capital expenditure — or an eventual impairment risk.
  •  Read the footnotes: e.g., Meta’s disclosure that changing the useful life reduced depreciation expense by US$860 million and increased net income by US$693 million in 2022.

5.3 For auditors / regulators

  •  Challenge whether management has credible evidence to support longer useful lives (e.g., improved cooling, higher workload, extension of refresh cycles).
  •  Verify that review of useful lives and residual values has been carried out at each year end.
  •  Check for indicators of impairment (older servers with significantly lower performance, being superseded by new hardware) and ensure that any impairment losses have been recognised.
  •  Confirm disclosures are adequate as per Ind AS 16 and Ind AS 8 (i.e., nature and effect of change in estimate, justification for life extension if deviation from Schedule II).
  •  Assess whether componentisation is appropriate (e.g., the server hardware may have components with different lives) and whether depreciation reflects the consumption of economic benefits.
  •  Monitor whether the company’s refresh cycle or technology lifecycle has shortened (e.g., new GPUs every 18 months) and whether the useful life assumed reflects that shortening.

CONCLUSION

In conclusion, extending depreciation lives for server and data-centre infrastructure in a rapidly evolving technology environment can materially affect profits, EPS, ratios, and investor perceptions. While the accounting standards allow for changes in useful life, the key requirement is that such estimates must be based on realistic assessment of future economic benefits, consumption patterns, technological obsolescence and usage, and be reviewed annually.

In the Indian context, under Ind AS 16 and Schedule II, these requirements are explicit (useful life must reflect consumption, changes must be accounted as estimates, disclosures must be made). If a company, for example, extends the useful life of server infrastructure from 3 years to 6 years without adequate justification in the face of rapidly renewing technology, then the depreciation expense may be understated, and profit and EPS may appear stronger than the underlying economics justify. From an investor’s point of view, that creates a risk of “earnings inflation”.

Auditors, regulators and investors must thus pay careful attention to the assumptions underlying useful lives and refresh cycles, to ensure that asset carrying amounts and depreciation charges reflect economic reality

Tax Implications U/S 56(2)(X) On Capital Asset Contributions To Partnership Firms And LLPS

This article analyses the tax implications of Section 56(2)(x) of the Income-tax Act when a partner contributes capital assets to a partnership firm or LLP. The author argues that this “gift-tax” provision, originally designed to prevent money laundering, is being incorrectly applied to bona fide business transfers where the recorded book value is less than the fair market value. Drawing on various Supreme Court precedents, the article explains that such transactions should not be taxed because the actual consideration received by a partner is legally indeterminate and only matures upon retirement or dissolution. Since the firm and its partners share a joint interest in the property, the firm cannot be viewed as a distinct recipient of a gift. Ultimately, the article concludes that without a specific legislative fiction to value these contributions, the tax charge fails due to an impossible computation mechanism. This reasoning applies equally to Limited Liability Partnerships, which are treated as traditional firms for tax purposes.

BACKGROUND

Section 56(2)(x) of the Income-tax Act, 1961 (“the Act”) — often referred to as the gift-tax provision — seeks to bring to tax, under the head Income from Other Sources, any sum or specified property received without consideration or for inadequate consideration. Section 56(2)(x)(c) provides that where any person receives any specified property (other than immovable property) for a consideration less than its fair market value (“FMV”) determined under Rule 11UA, the difference between the FMV and the consideration actually paid, if any, shall be deemed to be the income of the recipient.

Section 56(2)(x) is a successor to sections 56(2)(vii) and 56(2)(viia) of the Act. A review of the legislative history and the Explanatory Memorandum to the Finance Bill, 2010, and subsequent CBDT Circulars1 — makes it abundantly clear that these provisions were introduced as anti-abuse measures, intended to curb the laundering and circulation of unaccounted money through the guise of gifts or under-valued transfers. This legislative intent has also found judicial affirmation in several precedents2.

1 Circular No. 5 of 2005 dated 15 July 2005, Circular No. 5 of 2010 dated 3 June 2010, Circular No. 1 of 2011 dated 6 April 2011
2 Sudhir Menon HUF vs. ACIT [2014] 148 ITD 260 (Mumbai Trib.), 

Vora Financial Services (P) Ltd vs. ACIT [2018] 171 ITD 646 (Mumbai Trib.), 

ACIT vs. Subodh Menon [TS-718-ITAT-2018] (Mumbai Trib.), 

Kumar Pappu Singh vs. DCIT [TS-722-ITAT-2018] (Viz Trib.), 

Vaani Estate (P) Ltd vs. ITO [2018] 172 ITD 629 (Chennai Trib.), 

ACIT vs. Subodh Menon [2019] 175 ITD 449 (Mumbai Trib.), 

ITO vs. Rajeev Ratan Tushyan [2022] 193 ITD 860 (Mumbai Trib.)

However, in practical administration, the operation of section 56(2)(x) has often been extended beyond its intended anti-abuse scope. Rather than being confined to cases of tax evasion or money
laundering, it has increasingly been invoked as a revenue-generating provision, resulting in unintended taxation of bona fide commercial and capital transactions.

TRANSACTION UNDER EVALUATION

Consider a situation where a partner contributes a capital asset to a partnership firm as his capital contribution. In recognition of such contribution, a corresponding credit is recorded
in the partner’s capital account in the books of the firm.

For instance, assume that a partner contributes listed equity shares to the firm, the fair market value (“FMV”) of which, determined in accordance with Rule 11UA, is ₹1,000. The firm, however, records the contribution at ₹ 400 in its books of account. In such a case, the partner would be liable to capital gains tax on ₹400, being the value recorded in the firm’s books, as per section 45(3) of ITA.

While the capital gains implications in the hands of the partner are not the subject of this discussion, the issue under consideration is whether, in the hands of the firm, the provisions of section 56(2)(x) of ITA could be invoked on the premise that the consideration “discharged” by the firm, namely, the credit to the partner’s capital account, is lower than the FMV determined under Rule 11UA

Capital Contributions and The tax trap Why section 56

  • PROVISIONS OF SECTION 56(2)(X) APPLY ONLY IF THE FIRM RECEIVES THE SPECIFIED PROPERTYSection 56(2)(x) of ITA contemplates a receipt-based charge. The provision is attracted only where a person receives a specified property, either without consideration or for inadequate consideration. Accordingly, in the context of a partnership firm, it becomes crucial to examine who, in law, can be regarded as the recipient of the specified property contributed by a partner.
  • In this regard, reference may be made to the ruling of the Gujarat High Court in CIT vs. Mohanbhai Pamabhai [1973] 91 ITR 393, as affirmed by the Supreme Court in Addl. CIT vs. Mohanbhai Pamabhai [1987] 165 ITR 166 (SC). The Court held that when a partner contributes a personal asset to the partnership as capital, the partner’s exclusive ownership in that asset is converted into a shared ownership interest held jointly by all partners of the firm. Supreme Court reiterated this principle in Sunil Siddharthbhai vs. CIT [1985] 156 ITR 509 (SC), observing that when a partner introduces a personal capital asset into the firm, his individual right in the asset is substituted by a collective interest in the partnership property — an interest that extends to all partners jointly.
  • Reliance can also be placed on SC ruling in case of Addanki Narayanappa vs. Bhaskara Krishnappa [1966] 3 SCR 400, wherein SC made following observations:

“From a perusal of these provisions it would be abundantly clear that whatever may be the character of the property which is brought in by the partners when the partnership is formed or which may be acquired in the course of the business of the partnership it becomes the property of the firm and what a partner is entitled to is his share of profits, if any, accruing to the partnership from the realization of this property, and upon dissolution of the partnership to a share in the money representing the value of the property. No doubt, since a firm has no legal existence, the partnership property will vest in all the partners and in that sense every partner has an interest in the property of the partnership. During the subsistence of the partnership, however, no partner can deal with any portion of the property as his own. Nor can he assign his interest in a specific item of the partnership property to anyone. His right is to obtain such profits, if any, as fall to his share from time to time and upon the dissolution of the firm to a share in the assets of the firm which remain after satisfying the liabilities set out in clause (a) and sub-clauses (i), (ii), and (iii) of clause (b) of section 48.”

  •  Thus, the contribution of an asset by a partner results in the transformation of ownership from an exclusive individual interest to a joint partnership interest. The firm, being merely a compendious name for all partners together, cannot be regarded as a distinct recipient of such property for the purposes of section 56(2)(x) of ITA.

IN CASE CAPITAL CONTRIBUTION BY PARTNER, CONSIDERATION DISCHARGED BY FIRM IS NOT DETERMINABLE

  •  The issue concerning the transfer of a capital asset by way of capital contribution to a partnership firm, and the consequent chargeability of capital gains, has long been a matter of significant judicial deliberation. The controversy was conclusively addressed by the Supreme Court in Sunil Siddharthbhai vs. CIT [1985] 156 ITR 509 (SC). In that case, the Court held that when a partner contributes a personal asset to the partnership as capital, such contribution constitutes a transfer within the meaning of section 2(47) of ITA, since the partner’s exclusive ownership in the asset is replaced by a shared interest held jointly by all partners. However, the Supreme Court held that the consideration received by the partner (transferor) in such a transaction is not capable of determination. The credit to the partner’s capital account is merely a notional entry, recorded for the purpose of adjusting partners’ mutual rights, and cannot be regarded as the full value of consideration for the transfer. Relevant observations from SC ruling are as under:

“It is apparent, therefore, that when a partner brings in his personal asset into a partnership firm as his contribution to its capital, an asset which originally was subject to the entire ownership of the partner becomes now subject to the rights of other partners in it. It is not an interest which can be evaluated immediately, it is an interest which is subject to the operation of future transactions of the partnership, and it may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. The evaluation of a partner’s interest takes place only when there is a dissolution of the firm or upon his retirement from it.”

“The consideration, as we have observed, is the right of a partner during the subsistence of the partnership to get his share of profits from time to time and after the dissolution of the partnership or with his retirement from the partnership, to receive the value of the share in the net partnership assets as on the date of dissolution or retirement after deduction of liabilities and prior charges. When his personal asset merges into the capital of the partnership firm, a corresponding credit entry is made in the partner’s capital account in the books of the partnership firm, but that entry is made merely for the purpose of adjusting the rights of the partners inter se when the partnership is dissolved or the partner retires. It evidences no debt due by the firm to the partner. Indeed, the capital represented by the notional entry to the credit of the partner’s account may be completely wiped out by losses which may be subsequently incurred by the firm, even in the very accounting year in which the capital account is credited.”

It is evident from the above judicial extracts that the measure of consideration flowing from the firm to the partner, upon contribution of a capital asset, is inherently indeterminate and incapable of valuation. The amount credited to the partner’s capital account does not represent an enforceable debt due from the firm to the partner; it is merely a notional adjustment reflecting the partner’s participation in the firm. Consequently, where the consideration is not capable of being quantified, the computation mechanism prescribed under section 48 of ITA fails. As laid down by the Supreme Court in CIT vs. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC), when the computation provision cannot be applied, the charging provision itself collapses. This principle applies with equal force in the context of section 56(2)(x)(b) / (c) of ITA. In the absence of a determinable measure of consideration discharged by the firm, the comparison between such consideration and the fair market value under Rule 11UA becomes impossible. Accordingly, just as the capital gains charge failed prior to the introduction of section 45(3), the charge under section 56(2)(x) too must fail for want of a workable computation mechanism

  • When an asset is contributed to a partnership firm, the actual consideration paid by the firm to the partner—whether in money or money’s worth—is fundamentally different from a mere notional credit entry made to the partner’s capital account. For the purposes of section 56(2)(x) of ITA, consideration which is discharged by the firm ought to be determined having regard to the obligation that the firm has to hand over share of profit from time to time over the life of the firm and to pay the value on retirement or dissolution. The money value of such obligation will equate the present fair value of the property. Refer, in this behalf extracts from Gujarat HC ruling in case of Mohanbhai Pamabhai [1973] 91 ITR 393 as approved in SC ruling in case of CIT vs. Mohanbhai Pamabhai [1987] 165 ITR 166

“…..interest of a partner in the partnership is not interest in any specific item of the partnership property, but as pointed out by the Supreme Court and the Full Bench of this court, it is a right to obtain his share of profits from time to time during the subsistence of the partnership and on dissolution of the partnership or his retirement from the partnership, to get the value of his share in the net partnership assets which remain after satisfying the debts and liabilities of the partnership. When, therefore, a partner retires from a partnership and the amount of his share in the net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on the footing of notional sale of the partnership assets and given to him, what he receives is his share in the partnership and not any consideration for transfer of his interest in the partnership to the continuing partners…..It is impossible to contend, in view of this decision of the Supreme Court, that when a partner retires from the partnership, there is relinquishment or extinguishment of his interest in the partnership assets. We must, therefore, hold it to be clear beyond doubt that, even if goodwill be assumed to be capital asset within the charging provision enacted in section 45, there was, in the present case, no transfer of interest of any assessee in the goodwill within the meaning of section 2(47) when the assessee retired from the firm. Each assessee, undoubtedly, received certain amount on retirement, but this amount represented his share in the net partnership assets after deduction of liabilities and prior charges and it was received in satisfaction of his share in the partnership”

Considering the above, even in case where the consideration discharged by the firm is determinable on contribution of asset by partner, such consideration cannot be equated with the credit entry passed in the books of firm but it shall be equal to right of a partner to obtain his share of profit from time to time and to get value of his interest at the time of retirement or dissolution. Accordingly, the acquisition of asset / receipt of asset is for adequate consideration.

Under erstwhile Gift Tax Act, 1957 also, it has been held that on contribution of asset by partner to firm, consideration payable by partner cannot be determined and hence there cannot be any Gift tax liability.

  • Section 4(1)(a) of the Gift-tax Act reads as under:

“For the purposes of this Act, where the property is transferred otherwise than for adequate consideration, the amount by which the market value of the property at the date of transfer exceeds the value of the consideration shall be deemed to be a gift made by the transferor to the transferee.

In order to trigger provisions of Gift-tax Act, the property was to be transferred otherwise than by adequate consideration.

  • The erstwhile provisions of the Gift Tax Act do also bear out (a) that conversion of personal asset into asset of the firm can involve a transfer only to the extent of diminution of exclusive interest into a shared interest without consideration; (b) that, the value of inadequacy, if any, of such transfer is incapable of determination. The issue under consideration i.e. when the asset is contributed by the partner to firm whether such transaction involves adequacy of consideration has been examined by the Court. Reference may be made to CIT vs. Marudhar Hotel (P) Ltd. [2004] 269 ITR 310. This judgement is directly an authority on the proposition that for Gift Tax Act also consideration accruing from firm to partner on contribution of asset was held to be not determinable (refer following extracts from the said judgement). Similar conclusion shall apply with equal force in the context of section 56(2)(x)(b) / (c) of ITA.

“It is only where a transfer of property is for ‘inadequate consideration’, than only the question of finding market price can arise. As noticed above when an asset is brought in partnership the contributor partner acquires in consideration right to obtain his share in profits from time to time and also right to share in the net assets of the firm on its dissolution or on his retirement in accordance with the provisions of Partnership Act and terms of partnership agreement. All these rights fructify in future. The credit to his capital account is only notional value and not the value of consideration as the same is incapable of determination.”
……………………………

The Court clarified that the notional amount credited to the account of capital of the firm as contribution by partner as a value of asset brought into the firm account does not represent the correct and true value of consideration because on that date, it is impossible to determine the value of consideration, which lies in the womb of future. This value can only be computed in future when the partnership is dissolved or the partner retires and the asset of the firm are distributed to the partners on a future date.”

  • This decision of the Rajasthan HC was also followed by the Karnataka HC in the case of CIT and Anr. vs. Jayalakshmamma, N. Dayanand Reddy and N. Shamalamma [2011] 339 ITR 546. In this case, assessee entered into a partnership with nine other partners. Partnership was constituted on 1-4-1993. Each of the assessee contributed the land owned by him/her into the partnership firm as his/her contribution. After five months, i.e., on 31-8-1993 three assessee partners retired from the firm receiving certain amounts as their share in the interest of the firm. The amount standing in the capital account of each of the partner was much lower than amount received on retirement. In other words, the retiring partner received excess amount as compared to book value. The Assessing Officer proceeded to hold that the assessee had adopted a device in order to avoid tax. Assessing officer held since the contribution value was less than the amount at which partners retired from firm, the difference in the aforesaid amount was held to be a deemed gift under section 4(1). Karnataka HC held that at time of transfer of property by assessees into partnership firm, there was no consideration and book value mentioned was a notional value, in such circumstances, in absence of any monetary consideration, question of deemed gift under section 4(1)(a) did not arise. Relevant observations from HC ruling are as under:

“When a partner brings in his asset into a partnership firm by way of contribution it amounts to transfer of property as defined under the Act. Though it amounts to transfer of property, yet as a consideration for that transfer, he becomes entitled to the profits in the partnership firm. It is not a case of complete divesting of his interest in the property brought in as capital asset. Partially, the property is transferred and as a partner he continues to have interest in the said partnership asset. Not only he continues to have interest in the property brought by him to the partnership firm as a partner but if there are other partners who have brought in similar properties into the firm by way of assets, he will also have an interest in those properties. If at the time of constitution of partnership or at the time of his entry into the partnership, if a value is mentioned in the books of the partnership firm representing the interest he has brought into the partnership, it does not truly reflect the market value of the property which he has brought into the partnership firm. It is purely a notional value. The said notional value is only for the purpose of distributing the profits of the said partnership firm, either at the time of dissolution or at the time of retirement. When a partner brings his property into the partnership firm, though the consideration is that he will acquire the status of a partner and he continues to have interest in the partnership assets, yet there is no monetary consideration for such a transfer of the property and the book value mentioned is not the consideration for such a transfer. Section 4(1)(a) is attracted only in a case where there is a monetary consideration for transfer and that consideration is less than the market value of the property. In such a case, difference in the amount is treated as a deemed gift under section 4(1)(a). The share to which a partner is entitled to at the time of dissolution or retirement has no bearing on the question regarding the value of the property which he would have brought into the partnership at its inception. In that view of the matter, when there is transfer of property into a firm there is no consideration and the book value mentioned is a notional value. The share to which a partner is entitled to at the time of retirement or a dissolution of a partnership firm depends upon various other factors. The quantification of a partner’s share cannot by any stretch of imagination be taken into consideration to hold that there is inadequacy of consideration at the time of the partner bringing in the property into the partnership firm. On that basis, it cannot be held that the difference in the consideration constitutes a consideration for the deemed gift.”

  • The Kerala HC in the case of CGT vs. A.C. Raghava Menon [2000] 243 ITR 167, in the context of Gift-tax Act also held that the credit entry in the capital account does not represent the true value of the consideration and that such entry simply represents the notional value of the asset. Inadequacy of consideration cannot be judged vis-a-vis a credit entry made in the capital account of the books of the firm. Except the credit entry made in the capital account, there was nothing also on record to conclude that the assessee had transferred the asset to the firm for inadequate consideration. This judgment also supports that unless a fiction similar to section 45(3) of ITA is brought into section 56(2)(x) of ITA, the consideration discharged by firm to partner cannot be determined and hence the charge cannot survive. Relevant observations from HC ruling are as under:

“The credit entry in the capital account does not represent the true value of the consideration and that such entry simply represents the notional value of the asset. Inadequacy of consideration cannot be judged vis-a-vis a credit entry made in the capital account of the books of the firm.

Except the credit entry made in the capital account, there was nothing else on record to conclude that the assessee had transferred the asset to the firm for inadequate consideration. In order to attract the provisions of section 4(1) (a) several conditions have to be fulfilled, i.e., (a) there must be a transfer of property; (b) consideration for the transfer must be inadequate; and (c) the market value of the property should be more than the consideration for which the transfer was effected. Only one factor seemed to have been stressed upon by the revenue, i.e., that there had been a transfer, but the remaining ingredients had not been established. That being the position, section 4(1) (a) could not be applied and no inference of deemed gift could be drawn.

Consideration for a transfer is unascertainable until dissolution of the partnership.”

In the context of section 56(2)(viia) (predecessor of section 56(2)(x)), it has been held that the in respect of asset contributed by partner to firm, no consideration can be determined and hence the charge fails

  • Hyderabad Tribunal in the case of ITO vs. Shrilekha Business Consultancy (P.) Ltd [2020] 121 taxmann.com 150, section 56(2)(x) held that provisions of section 56(2)(viia) can apply only in a case where a transaction envisages payment of consideration as part of a contract. The amount can constitute consideration if it is payable as a debt due to the transferor and there is enforceable right with transferor to recover enforceable debt from the transferee. Unlike that, as held by Supreme Court in Sunil Siddharthbhai (supra), credit to account of a partner evidences no debt due by the firm to the partner. The amount credited to capital account is not recoverable as an enforceable debt by a partner. According to the Tribunal, such a notional credit would not at all answer to the description of consideration in the nature of a debt due to the transferor.
  • Tribunal also held that, at the stage of formation of the partnership, the firm is not yet in existence. There can be no transaction which a firm can have with a prospective partner. Absent the possibility of a contract, the notion of consideration cannot exist inasmuch as that the element of consideration is connected with contractual relationship of whose consideration is a requisite element

The measure of consideration on contribution of capital asset by partner to firm is restricted to section 45(3) of ITA only. Measure of consideration by way of book entry provided in section 45(3) of ITA cannot be extended to section 56(2)(x) of ITA.

  • Despite being aware that the value of consideration received by a partner in lieu of contribution of his asset is not measurable, the Legislature has, unlike in case of section 45(3) of ITA made no fiction with regard to yardstick of measurement applicable to section 56(2)(x) of ITA. In this regard, it is important to understand the intention behind introduction of the section 45(3) which is explained in Circular No. 495 dated 22 September 1987.

Capital gains on transfer of firms’ assets to partners and vice versa and by way of compulsory acquisition:

One of the devices used by assessees to evade tax on capital gains is to convert an asset held individually into an asset of the firm in which the individual is a partner. The decision of the Supreme Court in Kartikeya V. Sarabhai vs. CIT [1985] 156 ITR 509 has set at rest the controversy as to whether such a conversion amounts to transfer. The court held that such conversion fell outside the scope of capital gain taxation. The rationale advanced by the court is, that the consideration for the transfer of the personal asset is indeterminate, being the right which arises or accrues to the partner during the subsistence of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get his share of the profits from time to time and on dissolution of the partnership to get the value of his share from the net partnership assets.

With a view to blocking this escape route for avoiding capital gains tax, the Finance Act, 1987, has inserted new sub-section (3) in section 45. The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner’s income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset.”

The Circular does also acknowledge that no debt becomes due from a firm to a partner in lieu of contribution of asset by a partner by way of capital and that the consideration payable is indeterminate. Indeed, there is no back up provision forming part of section 56(2)(x) of ITA which bridges the gap of indeterminate consideration.

  • The provisions of section 45(3) of ITA are restricted in its application to determination of capital gains tax liability of a partner contributing asset to the firm; the fiction is limited in its application to the purpose of determining consideration received by a contributing partner for the purposes of section 48 of ITA and can have no influence whatever on text or interpretation of section 56(2)(x) of ITA
  • It is a trite law that a deeming fiction cannot be extended beyond its legitimate field. It can merely be applied in determination of capital gains income in the hands of partner. But, in our view, it would be incorrect to apply the fiction for any other purpose3.
3 Reference may be made to SC ruling in case of CIT vs. V S Dempo Company Ltd [2016] [2016] 387 ITR 354 (SC) 
wherein SC held that the fiction created for the purpose of section 50 of ITA 
cannot be extended to any other provisions of capital gains chapter also.

SUMMATION OF THE CONTENTIONS:

  • In order to create an effective charge under section 56(2)(x) of ITA, (a) there should be receipt of asset, (b) the receipt of asset should be without consideration or inadequate consideration. In section 56(2)(x) of ITA, the determination of consideration is necessary as same is required to be compared with Rule 11UA value. Only when the consideration can be effectively determined, it can be compared with Rule 11UA value. In the context of capital gains, Gift-Tax Act and section 56(2)(viia) of ITA, which have consistently held that when the partner contributes an asset to firm, consideration cannot be determined. Once an element of charging provision is absent (consideration in present case), the charge fails.
  • Reference may also be made to SC ruling in case of Govind Saran Ganga Saran vs. CST [1985] 155 ITR 1444 rendered under Bengal Finance (Sales Tax) Act, 1941 (‘Sales Tax Act’) as applied to the Union Territory of Delhi. The case revolved around the interpretation of sections 14 and 15 of the Sales Tax Act. Cotton yarn was classified as one of the goods of special importance in inter-state trade or commerce as envisaged by section 14 of the Sales Tax Act. Section 15 of the Sales Tax Act provided that sales tax on goods of special importance should not exceed a specified rate and further that they should not be taxed at more than one stage. The issue arose because the stage itself had not been clearly specified, and accordingly, it was not clear at what stage the sales tax shall be levied. The Financial Commissioner held that in the absence of any stage, there was a lacuna in the law and consequently, cotton yarn could not be taxed under the sales tax regime. The Delhi High Court reversed the decision of the Financial Commissioner. However, SC held that the single point at which the tax may be imposed must be a definite ascertainable point, and in the absence of the same, tax shall not be levied. SC ruling in the case of Govind Saran Ganga Saran (supra) has been quoted with approval by the Constitution Bench of SC in case of CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466.
  • In view of the above discussion, in absence of determination of consideration payable by firm where partner contributes an asset to firm, there cannot be comparison between consideration discharged and Rule 11UA value. In absence thereof, there is no effective charge and accordingly, firm cannot be liable / subjected to tax under section 56(2)(x)(c) of ITA.
4 Approved by the Constitution Bench of SC in case of CIT vs. Vatika Township (P.) Ltd. [2014] 367 ITR 466

In view of the above discussion, in absence of determination of consideration payable by firm where partner contributes an asset to firm, there cannot be comparison between consideration discharged and Rule 11UA value. In absence thereof, there is no effective charge and accordingly, firm cannot be liable / subjected to tax under section 56(2)(x)(c) of ITA. Additional issue which requires examination is whether conclusion drawn in the context of firm can equally apply for LLP.

On a holistic reading of the LLP Act, 2008 and ITA, an LLP is intended to be treated as substantially equivalent to a partnership firm for tax purposes, notwithstanding its separate legal personality under general law. The legislative intent behind introducing the LLP structure was not to alter the scheme of taxation applicable to partnerships, but merely to provide a business form with limited liability while retaining partnership-style mutual rights and obligations. This is evident from the core features of an LLP: it is constituted by partners associating with a common profit motive; partners enjoy management rights and stand in an agency relationship vis-à-vis the LLP; their mutual rights and duties are governed by a partnership agreement that is statutorily recognised and enforceable; and, upon cessation, a partner is entitled as of right to capital and his right to share in accumulated profits and surplus. Crucially, section 2(23) of the ITA expressly equates an LLP with a “firm” and an LLP partner with a “partner” for all purposes of the Act, a position reinforced by CBDT Circular No. 5 of 2010 and the Explanatory Memorandum, which clarify that LLPs and general partnerships are to be accorded the same tax treatment, except for recovery provisions. The Circular further confirms that even conversion of a firm into an LLP carries no tax consequences, underscoring that the separate legal entity character of an LLP is not determinative for income-tax purposes. Therefore, for purposes of interpreting charging, computation, and incidence provisions under the ITA, including those relating to partners’ rights and firm-level taxation, an LLP must be read harmoniously and fictionally as a partnership firm.

From Published Accounts

COMPILER’S NOTE

In the last few months, a large bank in the private sector has been in the news for alleged management-driven ‘improper’ entries passed in the books to overstate incomes and understate liabilities. Several internal reviews were carried out, and external agencies were appointed to investigate these allegations. The new management also gave impact on these ‘improper’ entries in the financial statements, which were then adopted by the Board of Directors.

Given below are disclosures in the financial statements and the report of the joint auditors for the same.

INDUSIND BANK LIMITED (YEAR ENDED 31ST MARCH 2025)

From Notes forming part of the Standalone Financial Statements

Note 17: Significant Matters and its impact

1. On March 10, 2025, the Bank filed a disclosure under Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 stating that it had, during an internal review of process relating to other assets and other liabilities of derivative portfolio, noted discrepancies in these account balances, consequent to which an external firm appointed by the management had carried out an independent review to validate its internal findings. On March 20, 2025, the Board decided to appoint another independent professional firm to conduct a comprehensive investigation, amongst others, to identify the root causes of discrepancies, assess the correctness of accounting treatment and its impact on the financial statements, identify any lapses therein and establish accountability of persons involved. The Bank has since received reports from both the firms. The investigation indicated that from FY 2016 to FY 2024, the Bank entered into several derivative transactions referred to as internal trades, wherein the accounting followed was improper and not in consonance with the accounting guidelines. This incorrect accounting resulted in recognition of notional income in the Profit and Loss Account with a corresponding balance in the other assets account over the years till FY 2023-2024. Based on quantification of accounting discrepancies that were identified and confirmed in the investigation report, other assets amounting to ₹1,959.98 crores, being accumulated notional profits since FY2016, have been written off/ derecognised by way of reduction from other income under Schedule 14 (V) as a prior period item in the current financial year.

2. During the review of other assets and other liabilities by the Internal Audit Department (IAD) of the bank, it was noted that certain incorrect manual entries resulted in an unsubstantiated increase in other assets and other liabilities amounting to ₹595.00 crores. The Bank has determined that these assets need to be set off against corresponding other liabilities. The rectification of these has been carried out. This has no impact on the profit of the Bank for the year ended March 31, 2025.

3. In conducting a review of the Bank’s microfinance portfolio for the nine-month period ended December 31, 2024, the IAD of the Bank noted incorrect recording of cumulative interest income of ₹673.82 crores and fee income of ₹172.58 crores for the said period. This incorrect interest and fee income (net of an interim provision of ₹322.43 crores and actual interest income for this period of ₹101.41 crores) aggregating to ₹422.56 crores has been reversed during the fourth quarter of the current year. This has, however, no impact on the profit of the Bank for the year ended March 31, 2025.

4. In respect of the above matters mentioned in note 17.1, 17.2 and 17.3, the auditors have filed letters u/s 143(12) of the Companies Act, 2013 read with Rule 13(1) to (4) of the Companies (Audit and Auditors) Rules, 2014 with the Bank, followed by Form ADT-4 along with the Bank’s reply to the Central Government, for suspected offence involving fraud. Further, with respect to these matters, the Board of Directors of the Bank suspects the occurrence of fraud against the Bank and the involvement therein of certain employees having a significant role in the accounting and financial reporting of the Bank. Accordingly, the Bank has made a filing to this effect with the stock exchanges on May 21, 2025.

5. The Bank, during its internal review, noted misclassification of certain microfinance loans as ‘standard assets’ along with accrual of interest income based on auditors’ observations. The Bank corrected this classification, resulting in an additional recognition of Non-Performing Advances aggregating to ₹1,885.19 crores. The Bank provided for these at a rate of 95% aggregating to ₹1,791.08 crores. This provision, together with a reversal of interest income of ₹178.12 crores, resulted in an adverse impact of ₹1,969.20 crores on the Profit & Loss Account of the Bank for the fourth quarter of the year ended March 31, 2025.

6. Through its internal financial review, the Bank also identified other instances of incorrect accounting that required rectification and have been rectified during the fourth quarter of the year ended March 31, 2025. These include the following:

  • Interest payment of ₹99.97 crores on certain borrowing instruments was not recognised in the Profit & Loss Account in earlier years.
  • A provision of ₹133.25 crores in respect of balances in Other Assets that are not expected to be realised.
  • Prior period operating expenses of ₹206.00 crores and income of ₹126.75 crores.
  • The Bank reviewed groupings and classification of the Profit & Loss items to assess compliance with prevailing guidelines. Based on the review, the Bank reclassified the following for the financial year ended March 31, 2025.
  • ₹760.82 crores from interest income to other income.
  • ₹157.90 crores from Provision (other than tax) & Contingencies to Other Operating Expense.

7. As a result of the above matters mentioned in note 17.1 to 17.6, any financial implications arising from past inaccurate regulatory submissions, including those to SEBI, Income Tax authorities, and the RBI, are currently unascertainable.

8. The Whole Time Director & Deputy CEO and Managing Director & CEO of the Bank resigned with effect from close of business hours on April 28, 2025 and April 29, 2025, respectively. The RBI vide its letter dated April 29, 2025, has approved the constitution of a “Committee of Executives” comprising of the Head – Consumer Banking and Chief Administrative Officer as members of the said Committee, to oversee the operations of the Bank under the oversight and guidance of an oversight committee of the Board. Accordingly, the Board appointed the said Committee on April 30, 2025. The Bank has made necessary filings with the stock exchanges in respect of the aforesaid matters.

9. The Board of Directors has taken necessary steps in addressing all the areas of concern and disclosing transparently at the appropriate stage. The Board of Directors initiated a comprehensive internal financial review of all the material financial statement balances. The Bank has given necessary accounting effects for all the identified discrepancies in the accounts and ensured that the financial statements for the current year give a true and fair view and are free from material misstatements, whether due to fraud or error. In this regard, the Bank has received recommendations from various internal and external agencies involved. These recommendations include strengthening policy and procedures, preparation and approval of accounting analysis, control and discipline over reconciliations, minimising manual accounting entries, automating processes, addressing manual overrides of control, etc. These shall be reviewed and implemented under the oversight of the Board.

Also, the Bank is in the process of taking necessary steps to assess roles and responsibilities and fix accountability for persons involved in any of these lapses. The Bank is fully committed towards taking these matters to their conclusion under applicable laws.

EXTRACTS FROM INDEPENDENT AUDITORS’ REPORT

Emphasis of Matters:

We draw attention to schedule 18(17.1) to 18(17.6) to the standalone financial statements, which explain that the Board commissioned an investigation/ review into the alleged discrepancies, covering the following significant matters:

a. Internal Trades Derivative Accounting under the head ‘Other Assets’ amounting to ₹1,959.98 crores, being accumulated notional profits since FY 2015-16, have been written off as a prior period item in the current financial year;

b. Incorrect accounting and subsequent reversal of cumulative interest income of ₹673.82 crore and Fee Income of ₹172.58 crores within the current financial year;

c. Certain incorrect Manual Entries posted in the ‘Other Assets’ and ‘Other Liabilities’ pertaining to prior years amounting to ₹595 crores have been set off during the current financial year.

The resultant findings from the investigation / review reports, in summary, revealed an involvement of senior Bank officials, including former Key Management Personnel (KMP), in overriding key internal controls across the aforesaid functions/ areas, and a concealment from the Board and the statutory auditors of the wrongful accounting practices adopted, over such period of time, as indicated in the respective investigation/ review reports.

Basis our evaluation of the findings in the above mentioned reports, in particular the likely involvement of senior management in the above matters, we have reasons to believe that suspected offences involving fraud may have been committed and thereby we have reported these matters to the Central Government under Section 143(12) of the Companies Act, 2013 read with Rule 13(1) to (4) of the Companies (Audit and Auditors Rules), 2014.

We draw attention to schedule 18(17.9) to the standalone financial statements, which explains that in light of the findings and adjustments noted above, in particular the override of management controls by KMPs, the Board of Directors initiated an internal review of material financial statement account captions and directed the Management and the Internal Audit Department to perform additional procedures such as reconciliations of system reports and listings with balances reflected in general ledger, test checks over such items in the listing and certain digital procedures over and above. Based on the above review, rectifications/ reclassifications, including those relating to prior-period items, were made to the accompanying standalone financial statements.

We draw attention to schedule 18(17.7) and 18(17.9) to the standalone financial statements, which state that the Bank is currently in the process of determining the accountability of the persons involved in the discrepancies and irregularities mentioned in the Emphasis of Matter paragraphs with reference to schedule 18(17.1) to 18(17.6) above and assessing the resultant legal or penal implications, if any, that may arise thereon.

Our opinion on the standalone financial statements is not modified with respect to these matters.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the standalone financial statements for the year ended March 31, 2025. These matters were addressed in the context of our audit of the standalone financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be communicated in our report. (extracts)

Key Audit Matters How Was the Key Audit Matter Addressed in our Audit
Detection of Management Override of Controls identified in the investigation/ reviews carried out based on the decision by the Bank
The investigations/ reviews initiated by the Bank during the year identified override of key internal controls by senior management, including Key management personnel, and other material prior period errors. These events raised significant concerns regarding the financial reporting and governance of the Bank. Although the Bank has initiated corrective actions for the identified discrepancies, there remains a risk of unidentified matters due to potential management override of controls. Our audit procedures included, but were not limited to, the following:

  • Reviewed Board and Audit Committee minutes to understand management and governance responses to identified control breaches.
  • Assessed the appropriateness of the scope and coverage of the investigations/ reviews initiated by the Bank in derivative transactions, micro finance loans and related accounts and Other Assets and Other Liabilities.
  • Evaluated the scope of audit, independence, and competence of the external forensic experts engaged by the management to perform select procedures.
In view of the above, we considered the risk that the management may override system-based/ manual internal controls/ procedures as a Key Audit Matter for the financial year 2024-25.
  • Obtained a copy of the investigation/ review reports and verified whether the discrepancies noted therein have been rectified in the standalone financial statements as per the applicable Accounting Standards.
  • Basis perusal of the aforesaid reports, we had a discussion with the external forensic expert and the Bank’s Head – Internal Audit for matters requiring clarification in the investigation report and internal review reports respectively.
  • Reassessed audit risks on account of the findings in the external forensic investigation report and internal review reports.
  • Performed enhanced / additional audit procedures, including sending out incremental balance confirmations, performing additional tests of details in response to the reassessed risks.
  • Performed journal entry testing using specific risk-based criteria, with a specific focus on manual entries or involving high-risk accounts to identify material misstatements.
  • Performed an independent reassessment of the valuation of derivatives in respect of additional samples to ensure compliance with the relevant RBI regulations.
  • Perused the confirmations obtained by the Bank from the heads of the various functions/areas within the Bank on verification of certain aspects with respect to the financial reporting to mitigate the risk arising from potential management override of controls.
  • Evaluated the adequacy of disclosures made in the standalone financial statements.
  • The aforesaid audit procedures were inter alia explained as part of our presentation to those charged with the governance.

ANNEXURE A TO THE INDEPENDENT AUDITORS’ REPORT

Report on the Internal Financial Controls with reference to Standalone Financial Statements under Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013 (‘the Act’)

Adverse Opinion

In our opinion, because of the possible effects of the material weaknesses described below on the achievement of the objectives of the control criteria, the Bank has not maintained adequate and effective internal financial controls with reference to the standalone financial statements as at March 31, 2025, based on the internal control with reference to financial statements criteria established by the Bank considering the essential components of internal control stated in the Guidance Note on Audit of Internal Financial Controls over Financial Reporting (‘Guidance Note’)
issued by the Institute of Chartered Accountants of India (‘ICAI’).

We have considered the material weaknesses identified and reported below in determining the nature, timing, and extent of audit tests applied in our audit of the standalone financial statements of the Bank for the year ended March 31, 2025, and these material weaknesses do not affect our opinion on the standalone financial statements of the Bank.

Basis for Adverse Opinion:

As explained in schedule 18(17) on the standalone financial statements for the year ended March 31, 2025, particularly override of controls by erstwhile Key Managerial Personnel and senior bank personnel, the Bank had initiated investigations/ reviews, which led to identification of several deficiencies in the internal controls with reference to maintenance of books of account and preparation of standalone financial statements. These indicate that the control environment was ineffective as of March 31, 2025.

A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with reference to standalone financial statements, such that there is a reasonable possibility that a material misstatement of the Bank’s annual or interim standalone financial statements will not be prevented or detected on a timely basis.

EXTRACTS FROM DIRECTOR’S REPORT:

Financial performance and state of affairs of the Bank:

The Board and the Management set forth their desire of maintaining trust in the institution by aspiring for and implementing higher standards of transparency and compliance. In particular, the Bank has taken several measures to understand the root cause of the identified irregularities, ascertain the financial impact and take corrective actions, as well as fix accountability, etc.

Some of the significant matters during the year are listed below:

  • Internal Trades Derivative Accounting under the head ‘Other Assets’ amounting to ₹1,959.98 crores, being accumulated notional profits since FY 2015-16, have been written off as a prior period item in the current financial year.
  • In conducting a review of the Bank’s microfinance portfolio for the period ended December 31, 2024, the Internal Audit Department (‘IAD’) of the Bank noted incorrect accounting and subsequent reversal of cumulative interest income of ₹673.82 crore and Fee Income of ₹172.58 crores within the current financial year.
  • Certain incorrect Manual Entries posted in the ‘Other Assets’ and ‘Other Liabilities’ pertaining to prior years amounting to ₹595 crores have been set off during the current financial year. This has no impact on the financial results of the Bank for the year ended March 31, 2025.
  • During the internal review, it was noted that misclassification of certain microfinance loans as crop loans has resulted in incorrect classification of such loans as ‘standard assets’ along with accrual of interest income. The Bank has corrected this classification, resulting in an additional recognition of Non-Performing Advances aggregating to ₹ 1,885.19 crores. The Bank made a provision for these at a rate of 95% aggregating to ₹1,791.08 crores and reversed interest of ₹178.12 crores.

System for Internal Financial Controls and its Adequacy:

The Bank operates in a computerised environment with a Core Banking Solution system, supported by diverse application platforms for handling specific business areas such as Treasury, Trade Finance, Credit Cards, Retail Loans, etc.

The process of recording transactions in each of the application platforms is subject to various forms of controls, such as in-built system checks, maker–checker authorisations, independent post-transaction reviews, etc.

Financial statements are prepared based on computer system outputs. The responsibility of preparation of Financial Statements is entrusted to a dedicated unit that is completely independent. This unit does not originate accounting entries except for limited matters such as share capital, taxes, transfers to reserves and period-end closing entries.

Based on the investigation carried out by internal/external agencies of significant matters stated in note 18.17 of the standalone financial statements, override of controls by erstwhile Key Managerial Personnel and senior bank personnel was observed, which led to the identification of several deficiencies in the internal controls with reference to the maintenance of books of account and the preparation of the financial statements. Basis above, the joint statutory auditors have given an adverse opinion on the internal financial controls with respect to the financial statements. The joint statutory auditors have performed audit tests considering the reported weaknesses and basis the tests performed, have opined in their audit report that this has no impact on the true and fair view of the Standalone Financial Statement for the year ended March 31, 2025.

The Board of Directors has taken necessary steps in addressing the areas of concern raised in the various external/internal reports. To further strengthen the internal control environment, the Board of Directors of the Bank has set up a project management office to ensure that necessary steps including strengthening of policy and procedures, preparation and approval of accounting entries & analysis, control and discipline over reconciliation, minimising manual accounting entries, automated process to enhance the design and operating effectiveness controls and report to the Board on an ongoing basis. The Board of Directors has also taken steps to fix the staff accountability

Article 12 of India-Canada DTAA – Provision of repairs and maintenance services for aircraft engines to Indian customers did not constitute ‘making available’ technical knowledge which enabled customer to undertake such services in future on its own; hence the payments received were not taxable in India

18. [2025] 179 taxmann.com 278 (Delhi – Trib.)

Pratt & Whitney Canada Corp. vs. DCIT (IT)

IT APPEAL NOS. 620, 626, 665 & 666 (DELHI) OF 2025

A.Y.: 2018-19 & 2022-23

Dated: 06 October 2025

Article 12 of India-Canada DTAA – Provision of repairs and maintenance services for aircraft engines to Indian customers did not constitute ‘making available’ technical knowledge which enabled customer to undertake such services in future on its own; hence the payments received were not taxable in India

FACTS

The Assessee was a tax resident of Canada and was engaged in business of manufacturing and servicing of aircraft gas turbine engines and auxiliary power units. During the relevant year, it provided repair and maintenance of aircraft services to Indian customers under (i) a pay-per-hour maintenance programme, or (ii) repairs on a need basis. The Assessee received consideration amounting to ₹242.65 crores towards such services. It did not file a return of income (“ROI”) in India for the relevant year.

Based on the information available, the AO issued notice under section 148A(b) of the Act. In response, the Assessee filed its ROI declaring ‘nil’ income, contending that the services provided did not constitute making available technical knowledge within the meaning of Article 12 of India-Canada DTAA.

The AO held that the consideration received for such services constituted fees for technical services (“FTS”) under the Act as well as the DTAA and accordingly brought the receipts to tax. The DRP upheld the action of the AO.

Aggrieved by the final order, the Assessee appealed before the ITAT.

HELD

In Goodrich Corporation [2025] 175 taxmann.com 177/305 Taxman 518 (Delhi), relying on the decision in De Beers India (2012) 346 ITR 467, the Delhi High Court had explained the meaning of the term ‘make available’ , holding that it requires transmission of technical knowledge enabling the recipient to use such know-how independently in future without assistance from the service provider.

The Coordinate Bench in Goodrich Corporation [ITA no 988/Del/2024] held that repairs and maintenance of aircraft equipment did not make technical knowledge available, as it did not enable customers to undertake such repairs independently in future.

In Global Vectra Helicorp Ltd vs. Dy. CIT [2024] 159 taxmann.com 282 (Delhi – Trib.), the Coordinate Bench of the Tribunal held thatin the absence of satisfaction of the ‘make available’ condition under the DTAA, payments towards repair services could not be characterised as FTS Global Vectra Helicorp Ltd was one of the customers of the Assessee.

The AO had not established that the Assessee ‘made available’ technical knowledge to its customers while rendering the services.

Accordingly, the ITAT held that the payments received by the Assessee did not constitute FTS under Article 12 of the India-Canada DTAA and were taxable only in Canada.

Article 13 of India-Singapore DTAA – In absence of indirect transfer provisions in India-Singapore DTAA, gains from alienation of shares of a Singapore Company were taxable only in the state of Residence under Article 13(5)

17. [2025] 179 taxmann.com 346 (Mumbai – Trib.)

eBay Singapore Services (P.) Ltd. vs. DCIT

ITA No: 2378 (Mum.) of 2022

A.Y.: 2019-20 Dated: 30 September 2025

Article 13 of India-Singapore DTAA – In absence of indirect transfer provisions in India-Singapore DTAA, gains from alienation of shares of a Singapore Company were taxable only in the state of Residence under Article 13(5)

FACTS

The Assessee, a tax resident of Singapore, was incorporated in 2003 and was engaged in e-commerce activities. The Singapore tax authorities had granted a Tax residency certificate (“TRC”) to the Assessee. The Assessee also acted as an investment vehicle for the eBay Group and held several investments in India, including in eBay India. In April 2017, the Assessee sold its entire shareholding in eBay India to Flipkart Singapore, in consideration of shares of Flipkart Singapore were issued to it. July 2017, the Assessee subscribed to the additional capital of Flipkart Singapore. The majority shares of Flipkart Singapore were held by Walmart Singapore.

In 2019, the Assessee sold its stake in Flipkart Singapore to Walmart Singapore and claimed that the gains arising from the sale of shares were taxable only in Singapore under Article 13(5) of India-Singapore DTAA.

Acccording to the AO, the control and management of the Assessee were vested in eBay Inc., USA, and therefore treaty benefits under the India-Singapore DTAA were denied. Accordingly, the AO computed short-term capital gains of ₹2,257.91 Crores from the sale of shares and charged them to tax. The DRP upheld the order of the AO.

Aggrieved by the final order, the Assessee appealed before the ITAT.

Before ITAT, it was argued that under the DTAA, India had right to tax income from transfer of shares of an Indian company and the transfer under reference was not covered. Even under Article 13(4B), the taxation rights shared with India were limited to the transfer of shares of an Indian Company acquired on or after 01 April 2017.

HELD

All the directors of the Assessee were residents of Singapore and Hong Kong. None of the directors held any postion in eBay Inc., USA, nor, were any directors appointed to the Board of Singapore as a representative of eBay Inc., USA.

The Board resolutions of the Assessee supported the fact that decisions relating to the Assessee were taken by the Board of Directors in Singapore. The DRP or AO neither countered these facts nor placed any concrete evidence to the contrary. Accordingly, the benefit of the DTAA could not be denied to the Assessee..

Article 13(4B) applies only in cases of alienation of shares wherethe company whose shares are alienated is a resident of otherr contracting state and not the same state as transferor. Since the shares alienated were of Flipkart Singapore, Article 13(4B) did not apply.

The Article in the India-Singapore DTAA dealing with Capital Gains does not contain any look-through provision, unlike certain other DTAAs. Having regard to Section 90(2) of the Act, the provisions of the DTAA prevail over domestic law.

Based on the above, the ITAT held that the alienation of shares of a Singapore Company was covered underthe residuary clause of Article 13. Accordingly, the right to tax gains from alienation vested only with Singapore.

Sec. 69A – Unexplained money – Cash deposits in bank account standing in assessee’s trade name but operated by third parties – Protective addition made though substantive additions already made in hands of actual beneficiaries – Addition held not legally justified and deleted

84. [2025] 126ITR(T) 240 (Amritsar- Trib.)

Mandeep Singh vs. ITO

ITA NO.:645 (ASR.) OF 2024

A.Y.: 2012-13 DATE: 30.06.2025

Sec. 69A – Unexplained money – Cash deposits in bank account standing in assessee’s trade name but operated by third parties – Protective addition made though substantive additions already made in hands of actual beneficiaries – Addition held not legally justified and deleted.

FACTS

The assessee was a retailer of alcoholic liquor and on the basis of departmental information, it was noticed that cash deposits aggregating to about ₹15 crores had been made during a short period in March 2012 in a current account maintained with Oriental Bank of Commerce in the trade name of assessee. In the absence of any regular return on record and due to non-compliance with notices issued under section 133(6) of the Income-tax Act, 1961, proceedings under section 147 were initiated. Pursuant thereto, the assessee filed a return of income declaring total income of about ₹1.66 lakhs on a disclosed turnover of about ₹83.36 lakhs.

The bank statement revealed that the entire cash deposited in the said bank account during the short period was immediately transferred by cheques to two concerns. During the course of investigation, the statement of the assessee was recorded under section 131 of the Act, wherein the assessee categorically denied having opened or operated the bank account with Oriental Bank of Commerce.

The material on record showed that the bank account was operated by the said concerns through the authorised signatory, that the assessee neither made any deposits nor withdrawals from the account and had no control over its operation. It was further noted that the assessee had not claimed any credit of tax collected at source under section 206C in respect of purchases reflected in Form 26AS which were linked to transactions routed through the disputed bank account.

The Assessing Officer treated the cash deposits of ₹15 crores as unexplained money under section 69A of the Act on a protective basis in the hands of the assessee, while accepting the returned income as such. It was also noted that the Assessing Officer had already made substantive additions of ₹15 crores under section 69A in the hands of beneficiaries, treating them as the actual beneficiaries of the transactions.

On appeal, the Commissioner (Appeals) rejected the submissions of the assessee and upheld the assessment by sustaining the protective addition made under section 69A. Aggrieved, the assessee carried the matter in appeal before the Tribunal.

HELD

The Tribunal observed that the assessee was a licensed retail trader of alcoholic liquor and that the gross turnover of ₹83.36 lakhs declared by the assessee in the return of income duly matched with the purchases reflected in Form 26AS. It was also noted that the assessee had restricted his claim of tax collected at source under section 206C only to the extent of actual purchases made by him from authorized distributors of alcoholic liquor.

The Tribunal found merit in the assessee’s contention that it would not have been humanly possible for a retail trader, operating under a licence permitting sale only to actual consumers over the counter, to execute a turnover of ₹15 crores within a short span of fourteen days. The Tribunal further noted that upon coming to know of the fraudulent activities carried out in his name, the assessee had lodged an FIR and appropriate legal proceedings were already underway.

The Tribunal further observed that the Assessing Officer had conducted proper enquiries and had reached a logical conclusion that the transactions in question were carried out by beneficiaries, against whom substantive additions under section 69A had already been made.

Considering the totality of facts and circumstances, the Tribunal held that the protective addition of ₹15 crores made under section 69A in the hands of the assessee was not legally justified. Accordingly, the Tribunal directed deletion of the protective addition and allowed the appeal of the assessee.

Sec. 153D r.w.s. 153A – Search assessment – Prior approval of Additional Commissioner – Single common approval for multiple assessment years and without examination of assessment records or seized material – Approval held to be mechanical and without application of mind – Assessments framed under section 153A r.w.s. 143(3) quashed

83. [2025] 127ITR(T) 482 (Delhi – Trib.)

Dheeraj Chaudhary vs. ACIT

ITA NO.: 6158 (DEL) OF 2018

A.Y.: 2009-10 DATE: 10.09.2025

Sec. 153D r.w.s. 153A – Search assessment – Prior approval of Additional Commissioner – Single common approval for multiple assessment years and without examination of assessment records or seized material – Approval held to be mechanical and without application of mind – Assessments framed under section 153A r.w.s. 143(3) quashed.

FACTS

A search and seizure operation under section 132 of the Income-tax Act, 1961 was conducted in the case of the K Group, during the course of which certain incriminating documents and information relating to the assessee were claimed to have been found and seized.

Subsequently, a notice under section 153A of the Act was issued to the assessee. During the course of assessment proceedings, the Assessing Officer prepared draft assessment orders and sought prior approval under section 153D of the Act from the Additional Commissioner of Income Tax. After obtaining such approval, the Assessing Officer completed the assessments under section 153A read with section 143(3) and made additions for the respective assessment years.

On appeal, the Commissioner (Appeals) upheld the assessment orders. When the matter came up before the Tribunal, the assessee raised an additional legal ground challenging the validity of the approval granted under section 153D on the ground that the same was mechanical and without application of mind.

The Judicial Member held that the approval granted by the Additional Commissioner was invalid, as it neither reflected movement of any assessment records nor granted separate approval for each assessment year. It was held that the approval was a result of total non-application of mind and, therefore, being mechanical in nature, was invalid, rendering the assessments liable to be quashed. However, the Accountant Member held that while granting approval under section 153D, the Additional Commissioner does not enter into the realm of adjudicating the legal sustainability of the additions proposed by the Assessing Officer. It was further held that supervision over search assessments is a continuous process involving internal correspondence, order-sheet noting, meetings and discussions and, therefore, the approval granted could not be regarded as invalid. Owing to this difference of opinion, the matter was referred to a Third Member.

HELD

The Third Member noted that it was an admitted position on record that for all the relevant assessment years, only a single approval had been granted by the Additional Commissioner. A careful reading of section 153D, in the context of the scheme of assessments under section 153A, shows that the provision specifically employs the expression “each assessment year”, which clearly mandates that separate approval of the draft assessment order is required for each assessment year.

The Third Member observed that the approval granted by the Additional Commissioner covered all six assessment years through a single approval and, therefore, even on this count alone, the approval was bad in law, rendering the consequential assessment orders for all the six assessment years invalid.

It was further observed that while seeking approval under section 153D, the Assessing Officer had not forwarded the assessment folders, seized material, or other relevant records, including replies filed by the assessee, to the approving authority. The Third Member emphasized that assessment proceedings under the Act are quasi-judicial in nature and that once a draft assessment order is prepared, the process of approval under section 153D commences, wherein the approving authority is required to apply its independent mind after examining the assessment records, seized material and other relevant documents.

Relying upon the decisions of the Orissa High Court in ACIT vs. Serajuddin& Co., the Delhi High Court in Pr. CIT (Central) vs. Anuj Bansal and the Allahabad High Court in Pr. CIT vs. Sapna Gupta, the Third Member observed that the requirement of prior approval under section 153D is an in-built statutory protection against arbitrary exercise of power and cannot be reduced to an empty formality. The approval must reflect due application of mind and must be granted after examining the relevant material.

In view of the above, the Third Member held that the approval granted under section 153D in the present case was mechanical and without application of mind. Concurring with the view of the Judicial Member, it was held that the assessments framed under section 153A read with section 143(3) were invalid in law and liable to be quashed.

Once the assessee had invested the entire capital gain in a new residential house within the period stipulated under section 54(1), the benefit of deduction cannot be denied merely for non-compliance with the requirement of depositing unutilised amount in Capital Gain Account Scheme (CGAS) before the due date of filing of return of income under section 54(2).

82. (2025) 181 taxmann.com 971 (Hyd Trib)

Nitin Bhatia vs. ITO

A.Y.: 2018-19 Date of Order: 24.12.2025

Section : 54

Once the assessee had invested the entire capital gain in a new residential house within the period stipulated under section 54(1), the benefit of deduction cannot be denied merely for non-compliance with the requirement of depositing unutilised amount in Capital Gain Account Scheme (CGAS) before the due date of filing of return of income under section 54(2).

FACTS

The assessee was an individual. During the relevant previous year, the assessee along with his spouse sold a jointly owned residential house property. The long-term capital gain (assessee’s share) on the said transfer was computed to ₹66,91,617. Thereafter, he purchased a new residential house for a total consideration of ₹4,44,00,000 by a registered sale deed dated 24.10.2019, which was within two years from the date of transfer of the original residential house. Out of the total consideration of ₹4,44,00,000, the assessee had made payments aggregating to ₹44,40,000 up to the due date of filing of the return of income under section 139(1). The balance amount was not deposited in Capital Gain Account Scheme (CGAS) before the due date of filing of return of income as required under section 54(2). The assessee claimed deduction under section 54 on the entire long term capital gain in his return of income filed on 20.9.2018.

During scrutiny proceedings, the AO allowed the deduction under section 54 for the amount which was actually paid by the assessee till the due date of filing the return under section 139, i.e.,, ₹44,40,000. However, he disallowed the balance amount of deduction under Section 54 of ₹22,51,617 contending that the assessee had not deposited the said amount in Capital Gain Account Scheme (“CGAS”) in accordance with section 54(2).

Aggrieved, the assessee went in appeal before CIT(A) who upheld the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Following the decision of Madras High Court in Venkata Dilip Kumar vs. CIT, (2019) 419 ITR 298 (Madras) which elaborately examined the interplay between section 54(1) and section 54(2), the Tribunal observed that once the assessee had invested the capital gain in a new residential house within the period stipulated under section 54(1), the benefit of deduction cannot be denied merely for non-compliance with section 54(2). Accordingly, the Tribunal held that the assessee was entitled to deduction under section 54 for the entire capital gain of ₹66,91,617.

In the result, the appeal of the assessee was allowed.

Where the object of the not-for-profit company was to build an overall environment securing the interests and wellbeing for/of European Union business community so that they have ease of doing business in India, its activities could be regarded as promoting an object of general public utility under section 2(15), and therefore, such company was eligible for registration under section 12A.

81. (2025) 181 taxmann.com 303 (Del Trib)

Federation of European Business in India vs. CIT

A.Y.: N.A. Date of Order: 03.12.2025

Section: 2(15), 12A

Where the object of the not-for-profit company was to build an overall environment securing the interests and wellbeing for/of European Union business community so that they have ease of doing business in India, its activities could be regarded as promoting an object of general public utility under section 2(15), and therefore, such company was eligible for registration under section 12A.

FACTS

The assessee was a non-profit company registered under section 8 of the Companies Act, 2013, formed with the objects of promoting commerce in India with the European Union business community and to protect and facilitate the interest of European Union business community in India by advocacy of policy between the European Union business community and the Indian public authorities regarding trade policy, ease of doing business, intellectual property right protection and European union investment protection in India. After obtaining provisional registration under section 12A for AYs 2024-25 to 2026-27, it filed Form No. 10AB for regular registration under section 12A(1)(ac).

The CIT(E) rejected the application for regular registration (and also cancelled the provisional registration) on the ground that the applicant was incorporated for policy advocacy to promote, protect and facilitate the interests of its members in India and working for the benefit of its members could not be regarded as a “charitable purpose” under section 2(15).

Aggrieved, the assessee filed an appeal before ITAT.

HELD

Considering the fact that object of the applicant-assessee was to build an overall environment securing the interests and wellbeing for/of European Union business community so that they have ease of doing business in India, the Tribunal held that such activities qualify as objects of general public utility under section 2(15) and therefore, the CIT(E) was not justified in rejecting the registration application under section 12A.

In the result, the Tribunal allowed the appeal of the assessee and directed the CIT(E) to grant registration to the assessee under section 12A forthwith.

Activity of nurturing entrepreneurship through educational, networking and mentoring assistance / events cannot be regarded as “education” but falls within the limb of “advancement of object of general public utility” under section 2(15). Fees from events organised for entrepreneurs could be regarded as business receipt which was subject to the threshold of 20% under proviso to section 2(15); however, membership fees received from members could not be regarded as business receipt.

80. (2025) 181 taxmann.com 318 (Hyd Trib)

Indus Entrepreneurs vs. DCIT

A.Y.: 2018-19 Date of Order : 02.12.2025

Section: 2(15)

Activity of nurturing entrepreneurship through educational, networking and mentoring assistance / events cannot be regarded as “education” but falls within the limb of “advancement of object of general public utility” under section 2(15).

Fees from events organised for entrepreneurs could be regarded as business receipt which was subject to the threshold of 20% under proviso to section 2(15); however, membership fees received from members could not be regarded as business receipt.

FACTS

The assessee was a registered society under the A.P. Societies Registration Act, 2001 with the main objects of encouraging entrepreneurship by providing educational, networking and mentoring assistance to existing and potential entrepreneurs and professionals in all areas, supporting entrepreneurs for exploring new areas of business, building network bridges between enterprises and individuals, corporate and other entities in India and abroad, and organising events and informal mentoring activities constantly for exploring professional ideas and achieving higher business goals etc. It was one of the chapters of TIE Global, a global non-profit organisation devoted to the entrepreneurs in all industries, at all stages, from incubation, throughout the entrepreneurial life cycle. It was registered under section 12A of the IT Act. It filed its return of income admitting total income of ₹Nil after claiming exemption under section 11.

The case was selected for scrutiny under CASS. The AO contended that the assessee-society was not a charitable organisation going by its aims and objects, but, was a commercial entity engaged in business, trade, etc. He also noted that the assessee received 48% of its total income from the business activities; further, it derived around 22% of the profit from its activities and, therefore, he denied exemption under section 11 and assessed the excess of income over expenditure of ₹33,80,537 as ‘Income from Business and Profession’.

Aggrieved, the assessee filed an appeal before CIT(A) who concurred with the AO on different grounds, namely, non-filing of Form 10 as required under Rule 17 of I.T. Rules, 1962.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed as follows:

(a) Considering the main aims and objects of the society and its activities, the objects / activities do not fall within the definition of “education” in light of the decision of Supreme Court in ACIT vs. Ahmedabad Urban Development Authority, (2022) 449 ITR 389 (SC) but fall under the last limb of “charitable purpose”, i.e., “advancement of any other objects of general public utility” and, therefore, claim of exemption under section 11 should be examined in light of definition of “charitable purpose” under section 2(15) and proviso provided therein.

(b) The assessee reported gross income of ₹1,53,69,214 which included fees from associated members / student members / short term members and event fees. So far as the event fees of ₹20,60,655 were concerned, they were in the nature of rendering services to trade, commerce or business. However, since such receipts were within the prescribed limit of 20% of gross receipts under proviso to section 2(15), the assessee was entitled to exemption under section 11.

(c) The AO had wrongly considered membership fees received from members, student members and charter members as business receipts since such receipts were not in relation to carrying out trade, commerce or business.

(d) On the AO’s finding that the assessee had earned 22% profit from its gross receipts, the Tribunal observed that if a trust earned profit in the course of carrying out general public utility, the same cannot be a ground for rejecting exemption under section 11 as held by the Supreme Court in New Noble Educational Society vs. CCIT, (2022) 448 ITR 594 (SC).

(e) On the issue of CIT(A) denying exemption on the ground of non-filing of Form 10, the Tribunal observed that the society had filed relevant Form 10 along with the return of income on 05.10.2018 on or before the due date provided under section 139 and therefore, on this ground also, denying the exemption by CIT(A) cannot be upheld.

Accordingly, the Tribunal allowed the appeal of the assessee, set aside the order of CIT(A) and directed the AO to allow exemption under section 11.

If proceedings were initiated invoking S. 270A(8), which is an aggravated form of fiscal violation, and the notice is for a lighter form, then penalty could not have been levied for the aggravated violation. CIT(A) cannot substitute the charge and modify the penalty order.

79. TS-1728-ITAT-2025 (Delhi)

Umri Pooph Pratappur Tollway Pvt. Ltd. vs. ACIT

A.Y.: 2018-19 Date of Order : 31.12.2025

Section: 270A

If proceedings were initiated invoking S. 270A(8), which is an aggravated form of fiscal violation, and the notice is for a lighter form, then penalty could not have been levied for the aggravated violation. CIT(A) cannot substitute the charge and modify the penalty order.

FACTS

The assessee, engaged in development of roads, on build-operate-and transfer basis in Madhya Pradesh, claimed depreciation @ 25% on `Right under service agreement’ as an intangible asset. However, AO considered it not to be an asset and allowed the project to be amortised. In Para 2 of the assessment order, the AO mentioned that since the assessee `under-reported’ his income in consequence of misreporting within the meaning of section 270A of the Act, penalty proceedings u/s 270A of the Act were initiated for under-reporting of income in consequence of misreporting.

The notice of penalty issued under section 274 r.w.s. 270A alleged that the assessee `under-reported’ the income.

The Order levying penalty was passed by invoking section 270A(8) and penalty was imposed for `under reporting income in consequence of misreporting thereof’ and penalty equal to 200% of the amount of tax payable on under-reporting income was imposed.

Aggrieved, the assessee preferred an appeal to CIT(A) who sustained the penalty but directed the AO to impose penalty equal to 50% of the amount of tax payable on under rejected income and rejected the contention regardinginconsistency in the notice and the order.

Aggrieved, the assessee preferred an appeal before the Tribunal, where the primary contention was that there is a grave variance in the reason for initiating the penalty as mentioned in assessment order, show cause notice for levy of penalty and the impugned penalty order.

HELD

The Tribunal held that if proceedings were initiated invoking sub-section (8) of section 270A of the Act, which is an aggravated form of fiscal violation, and notice is for lighter form, then the penalty could not have been levied for aggravated violation. It further observed that “though vice versa may be legal”. It further held that the first appellate authority, CIT(A), while dealing with the allegation and ground of challenge of levy of penalty under wrong charge, cannot substitute the charge and modify the penalty order as has been done in the present case.

Interest component of payment made under One Time Settlement Scheme with a bank is allowable under section 43B.

78. TS-1658-ITAT-2025 (Delhi)

Bharatiya Samruddhi Finance Ltd. vs. DCIT

A.Y.: 2017-18 Date of Order : 10.12.2025

Section: 43B

Interest component of payment made under One Time Settlement Scheme with a bank is allowable under section 43B.

FACTS

The assessee, a non-banking financial Company duly registered with the RBI, and categorized as a micro finance institution, was engaged in the business of borrowing loans from banks and financial institutions and advancing the same to microfinance customers. The assessee had availed term loans from banks, and interest on such term loans, which was not paid actually by the assessee, was voluntarily disallowed by the assesseein the return of income in earlier years. The amount of disallowances made in earlier years was ₹25,49,22,936/-.

During the year under consideration, the assessee entered into One Time Settlement (OTS) with banks and financial institutions and obtained a waiver of substantial sums.. The assessee had 17 lenders consisting of one financial institution (SIDBI) and 16 banks. Since, the assessee company became a sick company and its net worth eroded, the financial institution and 14 banks formed a consortium and entered into a Corporate Debt Restructuring (CDR) arrangement with the assessee, followed by OTS.

The total dues to the bank at that point of time was ₹2,14,52,26,858/-. Four banks did not join the consortium and entered into OTS arrangement with the assessee separately. Out of the total amount settled under OTS of ₹67,05,45,091/-, a sum of ₹23,75,55,144/- was apportioned towards interest outstanding and the remaining sum of ₹43,29,89,947/- was apportioned towards prinicpal outstanding. The assessee submitted that the differential sums between the loan outstanding as per books and the amount settled under OTS were credited to the profit and loss account by the assessee in the sum of ₹147,46,81,767.

The issue, in assessee’s appeal before the Tribunal was allowability under section 43B, of the Act of the interest component contained in the payment made pursuant to OTS.

The contention of the assessee was that, as and when the assessee made provision for interest payable to banks and financial institutions it had duly disallowed the provision under section 43B of the Act in earlier years. Pursuant to the OTS and waiver obtained thereunder, the waiver amounts were written back and credited to profit and loss account, comprising of both principal and interest portion. The interest portion was not liable to be taxed again as it had already been disallowed in the year in which provisions were made by the assessee. Accordingly, , the assessee claimed deduction under section 43B of the Act, on a payment basis, to the extent of the interest component of ₹23,75,55,144 during the year under consideration.This fact was disclosed in tax audit report vide reply to clause 26(i)(A)(a) & (b) of from 3CD.

HELD

The Tribunal found that assessee in the earlier years had voluntarily disallowed the unpaid interest on term loans payable to banks and financial institutions under section 43B of the Act in the return of income. During the year under consideration, it reached a OTS with Bank and financial institutions to the tune of ₹67,05,45,091/- out of this, a sum of ₹23,75,55,144/- was apportioned towards the interest component. Since this interest component has been duly paid by the assessee during the year under consideration, the assessee had merely claimed the sum as deduction on payment basis.

The Tribunal held that the assessee is entitled for deduction of the same u/s 43B of the Act. It observed that denial of such deduction would result in double taxation, as the interest had already been disallowed in earlier years and was being subject to tax on payment under OTS. Accordingly, to avoid such double addition, the assessee was entitled to deduction u/s 43B of the Act for ₹23,75,55,144/-.

Accordingly, the ground raised by the assessee was allowed.

Order giving effect is nothing but finalisation of assessment proceedings. Claim for TDS credit, on the basis of Form 26AS, in proceedings to give effect to an appellate order is a claim made during the assessment proceedings which the AO is duty bound to consider and allow the credit for TDS claimed.

77. TS-1657-ITAT-2025(Mum.)

Daiwa Capital Markets India Pvt. Ltd. vs. ACIT

A.Y.: 2013-14 Date of Order : 20.11.2025

Section: 199, Rule 37BA

Order giving effect is nothing but finalisation of assessment proceedings. Claim for TDS credit, on the basis of Form 26AS, in proceedings to give effect to an appellate order is a claim made during the assessment proceedings which the AO is duty bound to consider and allow the credit for TDS claimed.

FACTS

The assessee, in the original return of income filed by it on 22.11.2013, claimed TDS credit of ₹1,78,80,099 being the amount reflected in its Form No. 26AS at that point of time. Subsequently, assessee filed a revised return of income on 2.3.2015. In the interim period between the date of filing of original return of income and the revised return of income, a party M/s Prime Focus Ltd. deducted and deposited with the Government a sum of ₹73,24,074, being the amount of TDS. However, it did not inform the assessee about the same.

Thus, in the revised return of income the assessee missed claiming credit for TDS of ₹73,24,074, though the corresponding income was offered for tax in the original return of income itself. During the course of assessment proceedings as well, the assessee did not claim the credit for TDS of ₹73,24,074 since it was not aware of the same. However, while making an application to the Assessing Officer (AO) to pass an order giving effect to the order of CIT(A), the assessee requested the AO to grant further credit of ₹73,24,074 on the ground that the same was not claimed in the return of income. The AO did not grant credit for this sum of ₹73,24,074 while passing the order to give effect to the order of CIT(A).

Aggrieved, the assessee preferred an appeal to CIT(A) who rejected the plea of the assessee and upheld the order of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that, based on the observations of the AO and CIT(A), it is evident that the claim of TDS credit was denied primarily because the procedure prescribed by Rule 37BA of the Income-tax Rules, 1962 (“Rules”) was not followed by the assessee and further that the claim has not been made within a period of five years pursuant to Circular No. 11/2024 dated 1.4.2024 and no steps have been taken by the assessee to seek condonation for the delay.

The Tribunal further observed that the question which arose before it were (i) whether there was any dispute with regard to the TDS claim of ₹73,24,074, if the same was duly deposited or not; and (ii) whether an admitted claim of deposit of TDS on behalf of the assessee and corresponding income having been offered in the same assessment year, could be denied due to procedural lapse, as credit for TDS had not been claimed in the ITR.

The Tribunal noticed that both the lower authorities had proceeded on the premise that the procedural requirement under Rule 37BA of the Rules for claiming TDS credit had not been followed, that the claim was not made in the ITR, and also not within a reasonable period, as the same has been made after a period of nine years and therefore, as per settled legal precedents the claim of the assessee was required to be denied. It held that it is a settled law that rules and procedures are handmaids of justice. When substantial justice is required to be done,rules and procedures should not come in the way of upholding the principle of natural justice for imparting substantial justice.

It further held that deduction and deposit of TDS is a form of deposit of advance tax for which the assessee is lawfully entitled to credit, failing which retention of such amount would amount to unjust enrichment and would be in violation of Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by authority of law. If tax has been paid in excess of tax specified, the same has to be refunded. It was held that it is a statutory and constitutional obligation of the revenue to grant TDS credit duly reflected in Form 26AS, and the claim of the assessee cannot be denied merely due to a procedural lapse. The Assessee is entitled to be granted credit for TDS deducted and deposited before finalisation of the assessment. Passing of an order giving effect to an appellate order is nothing but the finalisation of original assessment proceedings.

The Tribunal held that the assessee had made the claim during the assessment proceedings, which the AO was duty bound to consider and allow the credit therefor.

Accordingly, this ground of appeal of the assessee was allowed.

Learning Events at BCAS

1. Suburban Study Circle Meeting on Application of Excel in Professional Practice held on Friday, 16th January 2026 @ SHBA & Co LLP.

  •  Suburban Study Circle organised a hands-on technical session on “Application of Excel in Professional Practice” on Friday, 16th January 2026 and lead by CA Yashesh Jakhelia & CA Vivek Gupta.
  •  The session focused on Excel 365 dynamic array functionalities with specific applications in GST reconciliation and data analysis.
  •  Key Excel functions such as XLOOKUP, FILTER, UNIQUE, SORT and GROUPBY were demonstrated through live, practice-oriented illustrations.
  •  Participants were guided on practical structuring of data for reconciliation, validation and reporting requirements.
  •  The session emphasised improving efficiency, accuracy and turnaround time in professional assignments using Excel tools.
  •  The program was conducted as an interactive, laptop-based workshop enabling participants to practice alongside demonstrations.
  • Members actively participated and appreciated the practical relevance of the session for day-to-day professional work.
  •  The session witnessed participation from members as well as a few CA trainees, who benefited from the practical orientation of the program.

2. BCAS Cricket Tournament 2026 (2nd Edition) held on Sunday, 11th January 2026 @ Gallant Sports Club (TurfStation – Juhu).

BCAS Cricket Tournament 2026

  •  The Second Edition of the BCAS Turf Cricket Tournament was successfully conducted on 11th January 2026 at TurfStation, JVPD, Andheri (West), featuring 12 Men’s Teams and 2 Women’s Teams. The event showcased competitive cricket in a vibrant atmosphere of sportsmanship and camaraderie, with the participation of 140 players.
  •  The tournament was exclusively open to Chartered Accountants and witnessed an enthusiastic response with overwhelming registrations.
  •  In the Men’s category, the tournament followed a four-group league format (three teams per group), culminating in Quarterfinals (8 teams), Semi-Finals (4 teams), and the Final, ensuring a structured and competitive progression.
  •  The event witnessed participation from both returning firms from the previous edition and first-time participating firms, reflecting the growing acceptance of the tournament as a platform for professional engagement and networking.
  •  The matches were marked by notable individual performances, engaging live commentary, and enthusiastic spectator support, contributing to an energetic and engaging sporting environment.
  •  After a series of closely contested matches, Fiscal Fireballs emerged as the Men’s Champions, while NPV Chak De Girls secured the Women’s Title, following several thrilling encounters throughout the day.
  •  The tournament successfully reinforced its objective of informal networking and community engagement among CA firms, and left a strong impression on participants, setting a solid foundation for future editions of the event.3. Women’s Study Circle meeting – SAKHI CIRCLE! held on Friday, 9th January 2026 @ Virtual.

The Women’s Study Circle organised a session on “The Power of First & Lasting Impressions – Your Soft Skills Advantage,” focusing on the role of communication and presence in professional interactions. In this session, CA Renu Shah, highlighted how first impressions influence engagement, credibility, and long-term perception. It was explained that impressions are often formed through subtle behavioural cues such as posture, tone, pace of speaking, and clarity of thought, rather than credentials alone.

Common communication behaviours that can dilute impact—such as over-explaining, excessive fillers, lack of eye contact, and digital distractions—were discussed through practical examples. The session introduced structured communication frameworks, including WHY–WHAT–HOW and Present–Past–Future, to help professionals articulate their thoughts with clarity and confidence.

Participants were also introduced to the “Remember Me” formula, emphasising posture, structured thinking, power words, and the effective use of pauses. Practical power phrases for professionals were shared to enhance clarity and impact in everyday interactions. The session reinforced that conscious communication and small behavioural shifts can significantly strengthen professional presence and leave lasting impressions.

4. AI and Technology ki Pathshala: A Technology Orientation Program for CA Students” held on Saturday, 20th December 2025 and Sunday, 21st December 2025@ Virtual.

The Human Resource Development Committee of BCAS organised a two-day technology orientation program titled “AI and Technology Ki Pathshala” for CA students.

Day 1 commenced with an inspiring keynote address by CA Rahul Bajaj on understanding technology and its impact on the CA profession. This was followed by an insightful session by CA Rahul Dharne, who demonstrated the practical use of AI tools such as GPTs and automation to simplify work and draft professional reports more efficiently, and also shared AI techniques for exam preparation.

The Day 1 program concluded with a session by CA Shyam Agrawal, who demonstrated tools for enhancing productivity using MS Office 365, Zoho, and Google applications.

Day 2 began with a session by CA Rahul Gabhawala, who explained how advanced Excel formulas and macros can automate tax reconciliations and improve accuracy in professional work. This was followed by a session by CA Chinmay Pathak, who introduced participants to the basics of vibe coding, website development, tools for sending multiple emails to clients, and techniques for identifying plagiarism.

Overall, the students gained a practical understanding of how technology can be effectively used in both professional and academic work. More than 100 students from across India benefited from this two-day technology orientation program.

Scan to watch online at BCAS Academy

5. DIRECT TAX RETREAT 1.0 held on Thursday 18th December 2025 to Sunday 21st December 2025 @ Taj Vivanta, Dwarka, New Delhi

The Direct Tax Committee of BCAS successfully organised Direct Tax Retreat 1.0 from 18th to 21st December 2025 at Taj Vivanta, Dwarka, New Delhi. Envisioned as a residential retreat rather than a routine conference, the program was designed to create a space where learning could happen through discussion, debate, reflection and shared experience. Over four days, tax professionals from across the country came together for meaningful engagement on contemporary direct tax issues in an environment that encouraged participation and open dialogue.

The Retreat began with an inspiring Inaugural Session by Mr Raman Chopra, Former Joint Secretary (Tax Policy), who addressed the gathering on “Where Policy Meets Practice: Creating an Efficient Tax Eco-System for the Next Decade.” Drawing from his extensive experience in policy-making, he shared valuable insights into how tax laws are conceptualised, the intent behind legislative changes, and the practical challenges faced during implementation. His address helped participants better understand the broader policy framework within which tax professionals operate and set a thoughtful tone for the technical discussions that followed.

Direct Tax 1

The first technical session on Day 1 featured a Panel Discussion on “Reconstitution of Firms – Sections 45(4) and 9B: Contrasting Perspectives.” CA Bhadresh Doshi and Adv. Dharan Gandhi presented differing viewpoints on interpretation, recent judicial developments and practical structuring concerns, while CA Pinakin Desai ably chaired the session. The discussion was intense, lively and informative, offering practical takeaways for professionals dealing with partnership restructurings and related tax implications.

Day 2 commenced with Group Discussions on Assorted Case Studies, a format that encouraged delegates to actively engage with complex factual situations and share their practical experiences. The group discussion model allowed participants to appreciate multiple viewpoints and sharpen their analytical approach through peer learning.

A standout feature of Direct Tax Retreat 1.0 was the guided visit to the New Parliament of India. For many delegates, this was a deeply enriching and memorable experience. Walking through the corridors of the institution where tax laws are debated and enacted offered a unique perspective on the legislative process. The visit helped connect the technical discussions in the conference hall with the constitutional and institutional framework of taxation, reminding participants of the larger system within which tax laws evolve.

The day concluded with Replies by the Paper Writer, CA Yogesh Thar, who addressed the key issues raised during the group discussions. His responses provided clarity on practical concerns and helped participants consolidate their learning from the day.

On Day 3, the Retreat continued with Group Discussions on Deeming Fictions and Valuation Changes, topics that often present significant challenges in practice. This was followed by a presentation by CA Rahul Bajaj on “Tax & Tech – The New Frontier,” which highlighted the increasing role of technology in tax administration, compliance, and advisory work. The session offered valuable insights into how professionals must adapt to a rapidly changing digital environment.

The afternoon featured concise and focused Tax Capsules, covering Tax Insurance by CA Upamanyu Manjrekar and Rewarding Employees – Local & Global by CA Mahesh Nayak. These short sessions delivered high-impact learning and were well appreciated for their practical relevance. The day’s technical sessions concluded with Replies by the Paper Writer, CA Pradip Kapasi, on “Navigating Deeming Fictions & Vexatious Valuations,” where he addressed key interpretational and litigation-related concerns.

Adding a refreshing balance to the intensive technical sessions, the Saturday evening Bingo game provided delegates an opportunity to unwind and interact informally. The specially curated game created an atmosphere of camaraderie and laughter, strengthening connections among participants and reinforcing the idea that learning is most effective when combined with meaningful human interaction.

The final day of the Retreat featured a much-anticipated Brain Trust Session and Open Mic, with Senior Advocate Shri S. Ganesh and Shri G. S. Pannu, Former President of the ITAT. The session allowed delegates to ask questions, benefiting from insights drawn from decades of experience at both the Bar and the Bench. The candid and practical nature of the discussion made this session particularly engaging and valuable.

The Retreat concluded with a Valedictory Session, during which appreciation was expressed to all those who contributed to the success of the program, including the speakers, paper writers, group leaders, mentors, organisers, hospitality team and the BCAS team whose collective efforts ensured a seamless and enriching experience for all participants.

Overall, Direct Tax Retreat 1.0 was widely appreciated for its depth of content, interactive formats and emphasis on participative learning. By successfully combining rigorous technical discussions with institutional exposure, informal interaction, and community building, the Retreat set a new benchmark in professional tax education and laid a strong foundation for future editions.

Direct Tax 2Direct Tax 3

6. Webinar on Mastering Compliance with India’s DPDP Act, 2023 held on Monday, 15th December 2025 @ Virtual.

In this session, Mr Shrikrishna Dikshit provided a practical overview of the Digital Personal Data Protection (DPDP) Act, 2023 and the intent behind its key provisions. It covered the implications of the draft rules and how organisations should interpret them for operational compliance. The roles and responsibilities of Data Fiduciaries and Data Processors were explained with emphasis on accountability and governance. Key aspects such as consent management, cross-border data transfers, and grievance redressal mechanisms were discussed.

The session also highlighted risks arising from third-party vendors and the importance of managing vendor ecosystems effectively. Sector-specific insights were shared for BFSI, healthcare, e-commerce, and manufacturing sectors. Overall, the session enabled participants to understand compliance expectations and practical steps for strengthening data protection frameworks under the DPDP Act.

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Webinar on Mastering Compliance with India’s DPDP Act

7. Webinar on BHARAT CONNECT FOR BUSINESS (BCB) held on Saturday, 13th December 2025 @ Virtual

The Technology Initiatives Committee of the Bombay Chartered Accountants’ Society successfully hosted a webinar on “Bharat Connect for Business (BCB)” on 13 December 2025, which witnessed enthusiastic participation from members across age groups and practice profiles.

The webinar focused on the evolving landscape of connected accounting for MSMEs, highlighting how Bharat Connect for Business aims to seamlessly integrate invoices, payments, and reconciliations across accounting platforms. The session provided valuable insights into how automation and interoperability between systems can significantly enhance efficiency, accuracy, and turnaround time for businesses and their advisors.

Eminent speakers Mr Rupesh Thakkar (Tally Solutions), Mr Vignesh RV (Zoho), and Mr Vipul Arun (NPCI Bharat BillPay Limited) shared practical perspectives on the concept, functionalities, and real-world impact of BCB. A key highlight of the webinar was a live demonstration of transaction flow between Zoho and Tally, which was particularly well appreciated by the participants for its practical relevance.

The session concluded with an engaging Q&A, reflecting keen interest among members in adopting connected and automated solutions in their professional practice. Overall, the webinar was well-received and reinforced BCAS’s continued commitment to keeping its members abreast of emerging technological developments impacting the profession.

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Webinar on BHARAT CONNECT FOR BUSINESS (BCB)

II. REPRESENTATIONS

1. Representation on Section 12A Registration Renewal Requirements

BCAS submitted a representation on January 7, 2026, to the Revenue Secretary, Chairman of CBDT, and the Principal Chief Commissioner of Income Tax (Exemptions), highlighting issues faced by public charitable trusts in the renewal of registration under Section 12A. The Society opposed the insistence on an express irrevocable clause in trust deeds for Form 10AB, citing judicial precedents and state trust laws which establish irrevocability in law even without such clauses. BCAS requested the issuance of suitable clarifications to avoid unnecessary amendments to trust deeds.

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Representation on Section 12A Registration Renewal Requirements

2. Representation on GSTR-9 and GSTR-9C Filing Challenges

BCAS submitted a representation on December 29, 2025, to the Hon’ble Finance Minister, CBIC Chairperson, and GST Council Secretariat seeking extension of the due date for filing Forms GSTR-9 and GSTR-9C for FY 2024-25. The Society highlighted difficulties arising from enhanced ITC reporting requirements, revised GSTR-9 auto-population, delayed availability of audited financials due to extended tax audit timelines, and overlap with adjudication deadlines under the CGST Act. BCAS requested suitable relaxation to enable accurate compliance.

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Representation on GSTR-9 and GSTR-9C Filing Challenges

Readers can read the full representation by scanning the QR code or visiting our website www.bcasonline.org

III. BCAS IN NEWS & MEDIA

  •  BCAS has been featured in several news and media platforms, showing our active involvement, professional contributions, and commitment to the field. This reflects the growing recognition of BCAS in the public and professional space.

Link: https://bcasonline.org/bcas-in-news/

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BCAS IN NEWS & MEDIA

Intent vs. Action – When Does Investment Education End and Investment Advice Begin?

The distinction between Investment Education and regulated Investment Advice lies in the activity’s impact rather than its label: education imparts conceptual understanding, while advice influences specific execution. SEBI regulations mandate registration for anyone providing advice or research for consideration, whereas “pure education” must exclude specific recommendations, performance claims, and the use of live market data to predict prices. To remain compliant, educators generally must utilize data with a three-month lag, ensuring they do not analyze current market trends to prompt trades. Recent SEBI orders against entities like Avadhut Sathe Trading Academy highlight that substance prevails over form; using “educational purpose” disclaimers offers no protection if the content involves live chart analysis, specific stock discussions, or misleading profit testimonials. Ultimately, if communication uses live data to direct investment decisions on identifiable securities, it crosses into regulated territory.

INTRODUCTION

The Indian securities market has witnessed a rapid expansion of stock market educators, trading academies and financial influencers offering structured learning programmes to retail participants. With increased access to technology, live trading platforms and social media reach, market education has transformed into a full fledged commercial ecosystem. While such initiatives contribute positively to financial literacy, they also raise significant regulatory concerns when educational content begins influencing real time investment decisions.

Advisory begins when education is applied to identifiable securities in a manner capable of influencing investment behaviour. Explaining that a particular stock is showing “bullish technical indicators” or that a “breakout appears” moves beyond the educational intent. Even without the usage of explicit words such as “buy” or “sell”, such communication starts influencing investor decision making.

Education intends to disseminate conceptual knowledge, and investment advice cannot come under the garb of educational activities.

RELEVANT REGULATORY FRAMEWORK

The SEBI (Investment Advisers) Regulations, 2013 defines “Investment Advice” as an advice relating to investing in, purchasing, selling or otherwise dealing in securities and advice on investment portfolio containing securities whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning however, investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.

The regulation further defines “Investment Adviser” as any person who, for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes a part-time investment adviser or any person who holds out himself as an investment adviser, by whatever name called;

Any person acting as an investment adviser or holding itself out as an investment adviser shall obtain a certificate of registration from the Board (SEBI) under these regulations.

Further, Regulation 2(1)(q) of SEBI (Research Analyst) Regulations, 2014 defines “Research Analyst” as a person who, for consideration, is engaged in the business of providing research services and includes a part-time research analyst.

Services such as preparation or publication of the research report or content of the research report, providing or issuing research report or research analysis, making ‘buy/sell/hold’ recommendation, giving price target or stop loss target; offering an opinion concerning public offer, recommending model portfolio; or providing trading calls; or any other service of similar nature or character are defined as research service in the regulations.

“No person shall act as a research analyst or research entity or hold itself out as a research analyst unless he has obtained a certificate of registration from the Board (SEBI) under these regulations.”

 

The Thin line Investment Education vs Investment Advice

A person engaged solely in education shall mean that such person is not engaged in any of the two prohibited activities, i.e.

(i) providing advice or any recommendation, directly or indirectly, in respect of or related to a security or securities, without being registered with or otherwise permitted by the Board to provide such advice or recommendation; and

(ii) making any claim, of returns or performance, expressly or impliedly, in respect of or related to a security or securities, without being permitted by the Board to make such a claim.

One of the essential elements distinguishing investor education from advice/recommendation is the market data based on which educational contents are being developed. Using live data for educational purposes is clearly outside the scope of pure educational activity as it involves analysing current data to predict future prices, which falls under the definition of Investment Advisory (IA)/ Research Analyst (RA) activity. Such a person should not be using the market price data of the preceding three months to speak/talk/display the name of any security, including using any code name of the security, in his/her talk/speech, video, ticker, screen share, etc., indicating the future price, advice or recommendation related to security or securities.

Under the extant regulatory framework, a pure educational institute can have data with a one-day lag so that it can use this for preparing educational content. However, it can only use three-month-old data for educational purposes in the class or through any media, without falling within the scope of IA/RA activities.

The one-day lag for providing price data for educational purposes is the minimum technical delay to be adhered to by MIIs and market intermediaries, while the three-month lag criteria is a content-based condition to be adhered to by educators for their content to be regarded as purely educational.

Further, it is proposed vide SEBI Consultation Paper dated 06th Jan 2026, that a uniform lag of 30 days for both sharing and usage of price data may be made applicable for educational and awareness activities.

UNDERSTANDING FROM THE REGULATOR’S LENS

Recently, the Securities and Exchange Board of India (SEBI), through its interim ex parte order issued in December 2025 in the matter of Avadhut Sathe Trading Academy Private Limited*, has delivered one of the most detailed regulatory examinations distinguishing Securities Market Education & Investment Advice. The order does not merely penalise a single entity; it clarifies fundamental principles governing the boundary between market education and regulated investment advisory and research activity.

SEBI initiated an examination into the activities of Avadhut Sathe Trading Academy Private Limited and its promoters following multiple complaints received from course participants and also on account of any serious action taken by the company based on the administrative warning given by SEBI in the Financial Year 2023-24. The academy offered various stock market training programmes, ranging from introductory webinars to advanced mentorship courses, for which substantial fees were charged. These programmes were marketed as educational in nature and were promoted across digital platforms.

At the outset, it was observed that neither the academy nor its promoters were registered with SEBI as investment advisers or research analysts. Despite operating within the securities market ecosystem and charging consideration for market related instruction, no regulatory registration had been obtained.

*Source: SEBI Interim Order cum Show Cause Notice in the matter of Avadhut Sathe Trading Academy Private Limited, Order No. QJA/KV/MIRSD/MIRSD-SEC-1/31823/2025–26

Key Findings of SEBI
Upon examination of the session recordings, SEBI noted repeated instances where identifiable securities were discussed using live market data. Trainers were found predicting future price movements, suggesting directional bias and explaining trading setups with precise stop loss and target levels.

In several sessions, participants confirmed during live interaction that trades were executed based on the guidance provided. These statements were treated as corroborative evidence of inducement for carrying out trading activities. The complaints indicated that live market sessions were conducted during paid courses, wherein specific stocks and derivative instruments were discussed. Participants alleged that trainers frequently referred to entry prices, target levels, and stop loss points while analysing live price charts. In several instances, the trainers displayed their own trading terminals, open positions and mark to market profits during sessions.

It was further alleged that trade related discussions were continued through closed WhatsApp groups accessible only to paid participants. Promotional videos and testimonials selectively showcased profitable trades, creating an impression of assured or consistent returns.

In view of the above, SEBI concluded on a prima facie basis that the activities went beyond academic insights and amounted to investment advisory services under the Investment Adviser Regulations, 2013. The regulator observed that disclaimers stating the sessions were “only for educational purposes” could not negate the actual substance of the conduct.

Accordingly, SEBI issued an interim ex parte order restraining the entities from providing investment advice, restricting access to the securities market and directing cessation of unregistered advisory activities pending final adjudication.

The interim order also invokes the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations), which apply to all persons influencing the securities market.

Apart from carrying out unregistered Investment Advisory/Research Analyst activities, the entities have also disseminated false and misleading information through social media in a reckless or careless manner to influence the decision of investors dealing in securities. The entity circulated testimonials of participants through its social media channels; it falsely advertised that participants were able to generate supernormal profits. SEBI investigation found that the participants had actually suffered net losses and such testimonial videos have been recklessly circulated on social media to induce unsuspecting and gullible investors to enroll for the entity’s programs/advisory/analyst services, thus SEBI found such acts to be, prima facie, in violation of Regulation 4(2)(k) of the PFUTP Regulations.

Similar orders have also been passed by SEBI in December 2024 in the matter of “Baap of charts” for selling educational courses where direct buy/sell recommendation were provided in the disguise of investment advisory activities and in the matter of Asmita Patel Global School of Trading (APGSOT) in February 2025 wherein they offered unauthorised, high-fee investment advice disguised as education, leading to significant financial penalties and market restrictions.

THE THIN LINE BETWEEN INVESTMENT EDUCATION AND INVESTMENT ADVICE

The distinction between them is not based on terminology but on impact. Education imparts understanding, and investment advisory influences thinking that directs execution. The regulatory framework is not decided by the tools used—charts, indicators or data—but by the manner in which they are applied. Use of live market data, identifiable securities, predictive commentary, specific price levels, collective language and real-time demonstrations progressively converts education ultimately into investment advice.

Disclaimers cannot neutralise this transformation. As consistently observed by SEBI, substance prevails over caption, and labelling content as “educational” cannot override conduct that effectively instructs investors on what trades to execute. Live market sessions further intensify this risk due to immediacy and replicability, particularly when combined with paid mentorship or performance-oriented models, where investor expectation naturally shifts from learning outcomes to trading results.

This requires revisiting the role of many people involved in this ecosystem, one of them being professionals who have an edge over others in understanding the implications of the regulatory framework governing financial market activities.

ROLES OF PROFESSIONALS

The role of professionals guiding, advising and auditing the companies should act as the first line of proactive compliance for individuals/companies engaged in securities market education and digital content creation.

In advising such clients, the evaluation must focus on substance rather than labels and examine whether identifiable securities are discussed, consideration in any form is received, future price movement is predicted, live market data other than what is allowed is used, or promotional content creates inducement through selective profitability or testimonials.

Where these elements exist cumulatively, the activity may cross the fine line of difference from education into regulated advisory requiring registration under SEBI regulations, while misleading representations may independently attract scrutiny under the PFUTP framework.

By identifying these trigger points at an early stage, professionals can help prevent inadvertent regulatory violations that commonly arise from misunderstanding the narrow boundary between permissible education and the regulated advisory framework on the securities market.

In case of a professional, say a Chartered Accountant (CA) provides advice/recommendation on securities as an asset class for the purpose of tax planning/tax filing, he is not required to get registered as a part-time IA/RA. However, if a CA is providing security-specific advice/recommendation to its client, even though as part of tax planning/tax filing, he is required to seek registration as part-time IA/RA.

If a person is engaged in, an educational activity or is employed as a professor and as part of employment/business, is providing security-specific information/recommendation, he is required to seek registration as IA/RA.

CONCLUDING REMARKS

As market innovation continues to reshape how knowledge is delivered, regulatory interpretation cannot be misconstrued to operate in an unregulated manner. The challenge lies not in restricting educational activities, but in ensuring it operates within the true spirit of the law, with a transparent and accountable framework. In this evolving balance, clarity of intent, structure and compliance will decide whether it is investment education or investment advice.

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.19/2025-Central Tax dated 31.12.2025

By above notification, certain tobacco products are notified for declaration of Retail Sale Price under section 15(5) of CGST Act.

ii) Notification No.20/2025-Central Tax dated 31.12.2025

By above notification, the CBIC seeks to notify Central Goods and Services Tax (Fifth Amendment) Rules, 2025 as operative from 1.2.2026.

B. NOTIFICATION RELATING TO RATE OF TAX

i) Notification No.19/2025-Central Tax (Rate) dated 31.12.2025

The above notification seeks to amend Notification 09/2025- Central Tax (Rate), to prescribe GST rates on tobacco products.

C. OTHERS

i) GSTN has issued consolidated FAQ on GSTR-9/9C for financial year 2024-25, dated 17.12.2025.

ii) The order about filing of appeals before GSTAT in staggered manner is withdrawn vide order No.315/3025 dated 16.12.2025.

iii) GSTN has also issued Advisory and FAQ on Electronic credit reversal and Reclaimed Statement and RCM liability/ITC statement dated 29.12.2025.

D. ADVANCE RULINGS

7. Manav Seva Charitable Trust (AAR Order No. 2025/AR/28 dt.23.12.2025)(Guj)

Plantation of trees – Exemption as Charitable activity

FACTS

The facts are that the applicant is a registered Charitable Trust duly recognised by way of Registration u/s 12AB of Income-tax Act, 1961. They are engaged in charitable activities, including preservation of environment by way of plantation of trees and maintenance of trees. The activity of plantation and maintenance of Trees, inter alia, involves, avenue plantation, its required maintenance, application of pesticide/insecticide/anti-termite and generally to do anything incidental, ancillary or subservient to the principal object of plantation of trees and post-plantation maintenance.

The main object of applicant, as contained in Trust Deed, was also “Tree Plantation and Maintenance”.

Following questions were raised for ruling by AAR.

“1. Whether, in the facts and circumstances of the case, the entry no. 1 of Notification No. 12/2017 (as amended from time to time) applies to the charitable activity of plantation and maintenance of tree (more particularly described in the Statement of Relevant Facts), by the applicant being a Charitable Institution, duly recognized u/s. 12AA of the Income-tax Act, 1961 for Preservation of Environment?

2. Whether, in the facts and circumstances of the case, the applicant being a Charitable Institution, duly recognized u/s. 12AA of the Income-tax Act, 1961, is liable to pay tax on charitable activity of plantation and maintenance of tree? If yes, then to what extent and at what rate?”

In application, applicant highlighted the importance of activity including supported by State of Gujarat and implication of various policies formulated by Government, including National Forest Policy,1988. Applicant relied on Entry no. 1 of Notification No. 12/2017 (as amended from time to time), which describes that “Services by an entity registered under section 12AA or 12AB of the income-tax Act, 1961 (43 of 1961) by way of charitable activities.”- shall be taxable at Nil Rate. The term “Charitable Activities”, as defined in the said notification includes activities relating to preservation of environment including watershed, forests and wildlife and therefore, applicant submitted to give ruling in its favour, declaring its above activity as exempt under above entry.

HELD

The ld. AAR narrated features about Government’s forest policy and scope of entry 1 of Notification no.12/2017. The ld. AAR, observed that for being covered under the said entry, following conditions have to be fulfilled:

“(a) The entity should be registered under Section 12AA or 12AB of the Income Tax Act, 1961.

(b) the services provided should fall under the definition of charitable activities as defined in the notification.”

The ld. AAR concurred with applicant and observed that as per the definition of charitable activities mentioned in Clause 2(r) of the notification No.12/2017-CT(R) dtd. 28.6.2017, activities related to preservation of environment including watershed, forests and wildlife fall under the ambit of charitable activities.

The ld. AAR further observed that the objective of the schemes is for preservation of environment and therefore the activity of applicant falls under the definition of charitable activities mentioned in Notification No. 12/2017-CT(R) dated 28.06.2017 and eligible for exemption.

8. Advanced Hair Restoration India Pvt. Ltd. (AAR Order No. 37/2025 dt.24.11.2025)(Ker)

Specified Healthcare Services – AAR held the activity of applicant as exempt under above entry 74 of Notification no.12/2017-CT (R) dt.28.6.2017.

FACTS

The applicant submitted that it is engaged in rendering healthcare services in connection with the treatment of psoriasis affecting the skin and scalp, dandruff, dermatitis, anti-fungal infections, folliculitis, and other related ailments. Applicant has its principal place of business at Ernakulam and maintains additional places of business across the State. It is also submitted that the applicant is duly authorised to carry out the aforesaid service activities under the licences issued by the respective local authorities, including the paramedical licence granted by the Health Services Department.

It was further explained that for providing such services, the applicant has appointed around 80 qualified medical officers, dental surgeons, and dermatologists across its various centres. It was elaborated that with the professional expertise of these doctors, including skin specialists and dermatologists and with the assistance of paramedical staff such as nurses, the applicant has been providing systematic and effective treatment for the aforesaid ailments across its establishments in the State.

The applicant maintains necessary records, including details of service recipients, nature of ailments treated, treatments administered, and particulars of the doctors concerned. The applicant contended that the services rendered in connection with the aforesaid healthcare activities are squarely covered under Sl. No. 74 of Notification No. 12/2017 – Central Tax (Rate) dated 28.06.2017, thereby entitling the applicant to exemption from GST.

HELD

The ld. AAR analysed the scope of above entry 74 in Notification no.12/2017 and noted that the said entry prescribed NIL rate for-

“(a) Healthcare services by a clinical establishment, an authorised medical practitioner or para-medics;

(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above.”

The ld. AAR also observed that healthcare services should fall within ambit of para 2(zg) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. AAR noted that the essential element of “healthcare services” is that the treatment should relate to an illness or abnormality and should be provided under a recognized medical system.

Applying above criteria the ld. AAR held that the applicant’s activity of rendering hair treatment described above clearly falls within the scope of “illness” or “abnormality” as contemplated in the Notification.

It was also noted that the applicant holds statutory licences issued under section 447 of the Kerala Municipality Act, such as the IFTE and OS licences, which describe the establishments as “skin clinics” which further strengthens the case that the applicant falls within the statutory meaning of a “clinical establishment”.

Accordingly, the ld. AAR held the activity of applicant as exempt under above entry 74 of Notification no.12/2017-CT (R) dt.28.6.2017.

9. Goexotic Plus91 Motors Pvt. Ltd. (AAR Order No. 42/2025 dt.11.12.2025) (Kerala)

Admissibility of Input Tax Credit (ITC) on Direct Expenditures for Second-Hand Vehicles – held that ITC is eligible on other items as well as capital goods also.

FACTS

The facts are that the applicant is a registered Tax Payer under GST regime and is engaged in the business of buying and selling second hand motor vehicles, primarily old and used luxury cars. These vehicles are procured from both registered and unregistered persons.

The applicant, before supplying these vehicles to customers, undertakes minor processing activities such as repairs and refurbishment, including the replacement of spare parts. These activities are undertaken to enhance the resale value of the vehicles but do not alter their fundamental nature. The said repairs and refurbishments are either carried out at the applicant’s own service station or through external service stations.

For the purpose of valuation and taxation under GST, the applicant proposes to adopt the special valuation mechanism as laid down under Rule 32(5) of the CGST Rules, 2017, which permits payment of GST only on the margin (i.e., the difference between selling price and purchase price), provided that no input tax credit (ITC) is availed on the purchase of the second-hand motor vehicles.

In the course of business, the applicant incurs various common business expenses such as office/showroom rent, telephone expenses, advertising costs, professional fees, and also procures capital goods such as workshop machinery, office equipment, computer systems, and demo cars, which are utilized in the business operations.

The application is filed to seek ruling on below questions:

“Question 1- Admissibility of Input Tax Credit (ITC) on Direct Expenditures for Second-Hand Vehicles: In view of the Notification No. 8/2018-Central Tax (Rate) dated 25th January 2018, the applicant would like to get clarification as to whether the input tax credit would be available on inward supplies of goods or services which are in the nature of direct expenditures like spare purchases, repairs and refurbishment costs of vehicles, etc., except on purchase of old or used motor vehicles as mentioned in para 2 of the notification?

Question 2– Admissibility of Input Tax Credit (ITC) on Other Common Business Expenses and Capital Goods: In view of the Notification No. 8/2018-Central Tax (Rate) dated 25th January 2018, the applicant would like to get clarification as to whether the input tax credit would be available on inward supplies of other goods or services except on purchase of old or used motor vehicles as mentioned in para 2 of the notification. That is, whether credit of input tax available on inward supplies of goods or services like office/showroom rent, telephone, advertisement, professional charges, capital goods, etc., except that on inward supply of old or used motor vehicles.”

The applicant submitted that it is eligible to ITC on other items as it complies with condition of section 16(1).

The ld. AAR referred to text of Notification no. 8/2018-Central Tax (Rate) dated 25th January 2018 and observed that the benefit of paying tax on the margin basis is not available in cases where input tax credit (ITC) has been availed on “such goods.” The ld. AAR held that, the restriction on availing ITC appears to be limited to the inward supply of the used vehicles themselves and there is no bar under the notification on claiming ITC on other inward supplies, including but not limited to spare parts, repair and refurbishment services, rent, advertising, professional services, or capital goods utilized in the course of business.

The ld. AAR also observed that in present case the applicant has applied minor modifications, repairs and refurbishments on the vehicles to enhance their market value without altering their essential character and accordingly held that the applicant’s activity qualifies under the provisions of Rule 32(5) for determination of value on the margin basis.

The ld. AAR also concurred with view of applicant that even where the margin is Nil, it cannot be classified as an exempt supply and such supply will not trigger reversal of common input tax credit under Rule 42 or 43.

Accordingly, the ld. AAR answered both questions in favour of applicant and held that ITC is eligible on other items as well as capital goods also.

10. Premlata Rakesh Jain (Sambhav Warehousing) (AAR Order No. 2025/62 dt.23.12.2025)(Guj)

ITC vis-à-vis Construction of warehouse – held that no ITC is permissible on goods/services used for construction of warehouse.

FACTS

The facts narrated by applicant are that it is a provider of Storage and Warehouse services and he is constructing a warehouse and therefore, needs to purchase cement, steel, beam, column etc. for construction of the warehouse. Applicant would also be availing the construction services for the same. It was explained that ITC on construction related material or services were covered under block credit under Section 17(5) of the CGST Act, 2017 and cannot be claimed even though the same was used for the furtherance of business. However, subsequent to the judgement of the Supreme Court in the case of Chief Commissioner of Central Goods and Services Tax Vs Safari Retreats Pvt. Ltd. [2024 (90) G.S.T.L. 3 (S.C.) – 2024-VIL-45-SC] (Safari Retreats) and the Supreme Court’s interpretation of Section 17(5) on the issue, the applicant felt that ITC can be eligible and hence approached AAR. Accordingly, the applicant has sought an advance ruling on the following question: –

“Whether ITC is admissible for the goods or services utilised for the construction of warehouse or shed from which storage and warehousing services are provided as furtherance of business or provided on rent.”

It was submission that ITC would be allowable on construction expenses for building intended for leasing, treating such building as plant, based on their functional use, in view of the judgement of the Supreme Court in the case of Safari Retreats.

Since the whole basis of applicant was on the judgment of the Supreme Court in the Safari Retreats, ld. AAR went through said judgment and analysed fully.

The ld. AAR noted distinction made by Supreme Court between the expression “plant and machinery” used in Section 17(5)(c) and ‘plant or machinery’ used in Section 17(5)(d).

The ld. AAR noted that based on above distinction, Supreme Court has come to conclusion that blockage u/s.17(5)(d) is not applicable when warehouse is plant or machinery.

The ld. AAR observed that though there may be scope to apply such interpretation, now it is not possible due to fact that subsequent to the judgment of Safari Retreats, the Legislature, vide Section 124 of the Finance Act, 2025 has amended Section 17(5)(d) and substituted the words ‘Plant or Machinery’ with the words ‘Plant and Machinery’ with effect from 01.07.2017. It is also noted that another explanation is added in Section 17(5)(d), as per which, for the purpose of clause (d), anything contrary contained in any judgment, decree or order of any court, tribunal, or other authority, any reference to “plant or machinery” shall be construed and shall always be deemed to have been construed as a reference to “plant and machinery. The ld. AAR held that the amendment read with the new explanation has basically nullified the effect of the judgement of the Supreme Court in Safari Retreats as far as the interpretation of Section 17(5)(d) is concerned.

In view of above latest position, the ld. AAR ruled in negative and held that no ITC is permissible on goods/services used for construction of warehouse.

11. Medtrainai Technologies P. Ltd. (AAR Order No. 25/WBAAR/2025-26 dt.24.12.2025)(WB)

Pure Agent Conditions – AAR ruled that the supply received by the applicant from the foreign attorneys is a taxable service and accordingly liable to tax under RCM.

FACTS

The facts are that the applicant wanted to file patent in Japan (and later in USA and UK) and also allotted the task to one Indian concern viz: M/s. Seenergi IPR (GSTIN 19ABLFS2275H1ZR). M/s. Seenergi IPR, on completion of the task in Japanese patent office, raised the invoice which is fully paid by the company. M/s.Seenergi IPR did not collect GST and directed the company to pay tax under reverse charge mechanism (RCM) for total invoice amount. The invoice has two parts. Part-A is reimbursement of payment to Japanese attorney at Japan and Part-B is Seenergi IPR’s own fee. The applicant had reservation about paying RCM on Part A as it envisaged no benefit out of such payment.

The applicant raised following questions:

“(i) Whether the company needs to pay GST towards reimbursement of expenses Japanese patent attorney has done towards filing a patent in Japanese patent office. The company is filing the patent in favour of Nilanhra Banerjee, one of the directors. The company is not planning to do business in Japan.

(ii) Same question remains for any other patent office on foreign soil as the company has submitted patents in USA and UK.”

The main contention of applicant was that Part A in invoice is a reimbursement of expenditure done by Japanese patent lawyers in Japan and therefore, the actual transaction was done on the company’s behalf in Japan and applicant derives no benefit, whatsoever, from the given transaction in India. The company is only reimbursing the money and transaction is outside the jurisdiction of GST law of the country. Accordingly, it was submitted that GST is not applicable on said Part A.

The ld. AAR examined the meaning of ‘reimbursement’ as per different dictionaries and derived meaning that the reimbursement is repayment of what has already been spent or incurred for the restoration of the spent or incurred amount and it is not a consideration for a service rendered.

The ld. AAR also referred to section 15 of the CGST Act,2017 which provides for value of supply and laid stress on language of section 15(2)(c) which reads as under:

“15. (2) The value of supply shall include—

(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;”

HELD

The ld. AAR also referred to Rule 33 where requirements for being ‘pure agent’ are mentioned.

Analysing fact position that there is no contract or signed agreement between applicant and M/s. Seenergi IPR, the ld. AAR observed that M/s. Seenergi IPR never acted as a ‘pure agent’ as per Rule 33. The claim of being reimbursement was also turned down as the amount was paid in advance.

Based on above finding the ld. AAR concluded that the applicant has received service of filing patent application from foreign companies situated outside India and covered under SAC 9982 as legal and accounting service at Serial No.20 of Notification no.11-Central Tax (Rate) dated 28.6.2017.

Referring to section 13 about place of supply, the ld. AAR held that legal services do not fall in sub-sections (3) to (13) of section 13 and hence the place of supply for service received by the applicant in Japan is the location of the applicant i.e. West Bengal.

The argument of exempt service for Advocate or Senior Advocate also rejected as the foreign service provider do not fall under the Advocate Act,1961.

Accordingly, the ld. AAR ruled that the supply received by the applicant from the foreign attorneys is a taxable service and accordingly liable to tax under RCM. The ld. AAR answered the issue against applicant.

Goods And Services Tax

HIGH COURT

93. (2025) 31 Centax 53 (Del.) Om Prakash Gupta vs. Principal Additional Director General, DGGI dated 14.05.2025.

Provisional attachment of a bank account under Section 83 of the CGST Act automatically lapses upon culmination of proceedings under Section 74.

FACTS

The petitioner was investigated by the respondent for alleged wrongful availment and passing of ITC, during which the respondent provisionally attached the petitioner’s bank account under SSection 83 of the CGST Act, 2017. Thereafter, a SCN under SSection 74 of the CGST Act was issued by the respondent. Aggrieved by the provisional attachment and the issuance of the SCN, the petitioner approached the Hon’ble Delhi High Court. During the pendency of the writ petition, the respondent passed a final adjudication order under Section 74 of the CGST Act. However, notwithstanding the culmination of proceedings and the petitioner having availed the statutory appellate remedy under Section 107 of the CGST Act, the petitioner’s bank account continued to remain frozen, thereby compelling the petitioner to approach the Hon’ble High Court seeking relief for lifting of the provisional attachment.

HELD

The Hon’ble High Court held that provisional attachment of a bank account under Section 83 of the CGST Act is temporary and cannot continue once proceedings under Section 74 culminate and the assessee avails the statutory appellate remedy under SSection 107. Placing reliance on the Supreme Court’s decision in Radha Krishan Industries vs. State of Himachal Pradesh [48 G.S.T.L. 113 (SC)], the Court observed that upon conclusion of proceedings under Section 74, the provisional attachment automatically ceases to operate. Accordingly, since the petitioner had already challenged the final order in appeal, the Court directed that the provisional attachment of the petitioner’s bank account shall stand lifted.

94. (2025) 37 Centax 400 (Mad.) TVL. Voylla Fashions (P) Ltd. vs. Assistant Commissioner (ST) (FAC), Chokkikulam Assessment Circle, Madurai dated 17.12.2025.

Assessment or adjudication orders passed relying on invalid or quashed notifications under Section 168A of the CGST Act are unsustainable in law and liable to be set aside.

FACTS

The Petitioner was issued assessment and adjudication orders by the respondent. These orders relied on Notification No. 09/2023–Central Tax dated 31.03.2023 and Notification No. 56/2023–Central Tax dated 28.12.2023. Both notifications were issued under S Section 168A of the CGST Act, 2017 and extended the limitation period for passing adjudication orders. Aggrieved by the notifications and the consequential orders, the petitioner approached the Hon’ble High Court by way of the present writ petition.

HELD

The High Court held that Notification Nos. 09/2023–Central Tax dated 31.03.2023 and 56/2023–Central Tax dated 28.12.2023 were issued under Section 168A of the CGST Act, 2017 to extend the limitation period. These notifications were vitiated and illegal, as already held in Tata Play Ltd. vs. Union of India [(2025) 32 Centax 318 (Mad.)]. The Court observed that any assessment or adjudication orders relying on such invalid notifications could not be sustained in law. Consequently, the order passed against the petitioner was quashed.

95. (2025) 37 Centax 132 (Ker.) K.V. Joshy & C.K. Paul vs. Assistant Commissioner of Central Tax and Central Excise, Chalakudy dated 27.10.2025.

A purchaser who has claimed ITC in good faith and paid tax to the suppliers cannot be held liable for the suppliers’ defaults, unless there is evidence of collusion or failure by the suppliers to rectify the discrepancy after notice.

FACTS

The Petitioner purchased goods from two registered suppliers during the financial year 2019–20 and paid the full tax to them. ITC was claimed in the petitioner’s GST returns based on proper invoices and E-way bills. However, the suppliers failed to deposit the tax and did not report the supplies in their GST returns. Despite this, the respondent issued a SCN under Section 73 of the CGST Act, 2017, demanding reversal of ITC along with payment of tax and penalty from the petitioner. Aggrieved, the petitioner approached the Hon’ble High Court challenging the SCN.

HELD

The Hon’ble High Court held that the SCN under Section 73 issued to the petitioner was unsustainable and illegal, as the petitioner had availed ITC in good faith, paid tax to the suppliers, and produced proper invoices. The Court observed that under Sections 16 and 42 of the CGST Act, proceedings against a purchaser can only be initiated after issuing notice to the defaulting suppliers and if the suppliers fail to rectify the discrepancy or in cases of collusion, which was absent in the present case. Relying on Assistant Commissioner of State Tax vs. Suncraft Energy Pvt. Ltd. (2023) 13 Centax 189 (SC), Commissioner Trade and Tax vs. Shanti Kiran India Pvt. Ltd. (2025) 35 Centax 222 (SC) and Lokenath Construction Pvt. Ltd. vs. Tax/Revenue, Government of West Bengal [ (2024) 18 Centax 97 (Cal.)], the Court held that a purchaser cannot be penalized for suppliers’ defaults in absence of collusion. Accordingly, the SCN against the petitioner was quashed.

96. (2025) 37 Centax 225 (P&H.) Abhishek Goyal vs. Union of India, dated 21.11.2025.

Rule 86A empowers authorities only to restrict utilisation of existing ITC and does not authorise a negative balance or blocking credit beyond what is available in the Electronic Credit Ledger.

FACTS

The Petitioner’s Electronic Credit Ledger (ECL) entries were blocked by the respondent under Rule 86A of the CGST Rules, 2017. This resulted in a negative balance exceeding the ITC actually available. Consequently, the petitioner was prevented from utilising legitimately available credit to discharge GST liabilities. Aggrieved, the petitioner challenged the blocking before the Hon’ble High Court.

HELD

The Hon’ble High Court held that Rule 86A of the CGST Rules, 2017 does not authorise blocking of ITC beyond the credit actually available in the ECL. The Court observed that Rule 86A is a temporary, restrictive measure to block utilisation of existing credit and cannot be used as a recovery mechanism. Relying on Shyam Sunder Strips vs. Union of India (2025) 37 Centax 65 (P&H), the Court held that such negative blocking is without legal authority. Consequently, the impugned blocking entries were set aside.

97. (2025) 37 Centax 120 (Kar.) H.R. Carriers vs. State of Karnataka dated 04.11.2025.

Bona fide clerical errors in GSTR-1, such as incorrect GSTINs, are curable even beyond statutory timelines where tax is paid and no revenue loss is caused.

FACTS

The Petitioner filed GSTR-1 returns but inadvertently mentioned the GSTIN of the Kerala branch of its customer instead of the correct GSTIN of the customer’s Tamil Nadu branch. The recipient was unable to avail ITC despite the tax having been duly paid by the petitioner. The mistake came to light only when the recipient informed the petitioner and withheld subsequent payments on the ground of denial of ITC. Upon discovering the error, the petitioner requested the respondent to permit rectification of the GSTR-1 returns, either through the GST portal or by manual means. However, no action was taken by the respondent. Aggrieved thereby, the petitioner approached the Hon’ble High Court seeking permission to amend the returns to enable the recipient to claim ITC in accordance with law.

HELD

The Hon’ble High Court held that a bona fide clerical error in GSTR-1, such as mentioning an incorrect GSTIN, which resulted in denial of ITC despite tax having been duly paid with no loss to revenue, cannot defeat substantive rights. Relying on NRB Bearings Ltd. vs. Commissioner (2024) 15 Centax 444 (Bom.), Sun Dye Chem vs. Assistant Commissioner 2021 (44) G.S.T.L. 358 (Mad.) and Pentacle Plant Machineries Pvt. Ltd. vs. Office of the GST Council 2021 (52) G.S.T.L. 129 (Mad.), the Court directed the respondent to permit rectification of GSTR-1, either online or manually, to enable the recipient to avail ITC, while keeping all inter se disputes open.

98. (2026) 38 Centax 53 (All.) Raghuvansh Agro Farms Ltd. vs. State of U.P. dated 17.12.2025.

Section 74 proceedings are invalid without jurisdiction or specific findings of fraud, wilful misstatement, or suppression and cannot override documentary evidence of genuine transactions.

FACTS

The Petitioner was subjected to a survey by the respondent, pursuant to which a notice under Section 74 was issued alleging circular trading and wrongful availment of ITC. In response, the petitioner filed detailed submissions supported by documentary evidence establishing that all purchases and sales were genuine, payments were made through banking channel, and actual physical movement of goods had taken place. The petitioner further contended that the proceedings were initiated without granting any personal hearing and were without jurisdiction, as the petitioner was under Central GST jurisdiction and no cross-empowerment notification had been issued authorising the State GST authorities (respondent). However, disregarding documentary evidence on record, the respondent proceeded solely on the basis of survey observations. Being aggrieved, the petitioner approached Hon’ble High Court.

HELD

The Hon’ble High Court held that the demand raised under Section 74 was unsustainable, as the proceedings were initiated by the State GST authority (respondent) despite lack of jurisdiction and in the absence of any cross-empowerment notification. The Court further observed that neither the SCN nor the adjudication order recorded any finding of fraud, wilful misstatement or suppression of facts, which are mandatory pre-conditions for invoking Section 74. It was held that mere survey-based allegations of circular trading, without disproving the actual movement of goods or rebutting the documentary evidence on record, were insufficient in law. Accordingly, the impugned orders were quashed and the respondent were directed to refund the amount deposited.

99. (2025) 36 Centax 226 (All.) B.P. Oil Mills Ltd. vs. Additional Commissioner Grade-2 dated 17.11.2025.

Penalty under Section 129(3) of the CGST Act cannot be imposed merely for non-generation of Part-B of the e-way bill when goods are accompanied by valid documents and there is no intention to evade tax.

FACTS

The Petitioner was subjected to investigation and proceedings under Section 74 of the CGST Act on the allegation that the supplier was a bogus dealer due to cancellation of its GST registration. Consequent thereto, a demand of tax along with penalty was raised by the adjudicating authority and was subsequently upheld in appeal by the respondent. During the pendency of these proceedings, the supplier’s cancelled GST registration was restored by the competent authority, and there was no material on record indicating absence of physical movement of goods or any discrepancy in the supporting documents or payments. Aggrieved by the initiation and continuation of such proceedings, the petitioner approached the Hon’ble High Court.

HELD

The Hon’ble High Court held that invocation of proceedings under Section 74 of the CGST Act was unsustainable in absence of any finding or material establishing fraud, wilful misstatement, or suppression of facts with intent to evade tax. It was observed that once the supplier’s GST registration, which had been cancelled, stood restored, the transactions could not be treated as having been made with a bogus or unregistered dealer. The Court further noted that actual physical movement of goods was duly established through contemporaneous documentary evidence and banking records, and no discrepancies therein were pointed out by the respondent. Accordingly, the impugned orders passed by the adjudicating authority and respondent were quashed.

100. [2026] 182 taxmann.com 432 (Bombay) Aerocom Cushions (P.) Ltd. vs. Assistant Commissioner (Anti-Evasion), CGST & CX, Nagpur-1 dated 09-01-2026.

Assignment by sale and a transfer of leasehold rights of the plot of land allotted by the Corporation, like GIDC or MIDC to the lessee in favour of a third-party assignee shall be an assignment/sale/transfer of benefits arising out of immovable property by the lessee-assignor and would not be subject to the levy of GST.

FACTS

The petitioner received a show cause notice alleging suppression and non-payment of GST on a transaction wherein it had assigned his leasehold rights in the plot belonging o Maharashtra Industrial Development Corporation (MIDC) to a third person. The department contended that the transaction of seeking compensation towards transfer of such rights amounted to a service classifiable under “other miscellaneous services” and is taxable at 18% under Sr. No. 35 of the Notification No.11/2017 -CT (Rate) dated 28-06-2017.

HELD

The Hon’ble Court noted that the transaction under question was an assignment of leasehold rights and was admittedly not a case of lease or sub-lease. The Court further noted that the category under which the department sought to tax the subject transaction includes miscellaneous services like washing, cleaning, dyeing, beauty, physical well-being, etc. which could not be extended to assignment of leasehold rights in an immovable property and held that the notice was bad-in-law on this count alone. Without prejudice,, the Hon’ble Court further held that holding of lease for 95 years amounts to long term lease and in that sense constituted leasehold ownership property. These rights are transferable in terms of lease deed with MIDC and were transferred by the petitioner accordingly. The transaction, thus, on the face of the record, constituted a transfer of immovable property by the petitioner to a third person with consent of MIDC. The Court held that the transaction pertained exclusively to the transfer of benefits arising out of immovable property and had no nexus whatsoever with the business of the petitioner. Consequently, an essential element of the supply of service in the course of business or in furtherance of business was completely absent.

The Hon’ble Court relied upon and subscribed with the view expressed in the judgment of Hon’ble Gujarat High Court, in Gujarat Chamber of Commerce and Industry vs. UOI [2025] 170 taxmann.com 251/94 GSTL 113 (Gujarat), and held that the assignment by sale and transfer of leasehold rights of the plot of land allotted by the Corporation like GIDC or MIDC to the lessee in favour of a third-party assignee for consideration would not be subject to levy of GST.

Referring to the CIT vs. Smt. Godavari Devi Saraf [1978] 113 ITR 589 (Bombay), the Hon’ble Court also held that until a contrary decision is rendered by any other competent High Court, authorities are bound to follow the law declared by a High Court, even if of another State.

101. All Cargo Logistics Ltd. vs. State of Gujarat [2026] 182 taxmann.com 49 (Gujarat) dated 22.12.2025.

The order under Section 129(1) cannot be passed beyond the prescribed period of seven days from the date of service of the Notice under Section 129(3).

FACTS

The petitioner’s consignment and the vehicle were intercepted by the authorities and GST MOV 01 and GST MOV 02 were issued on 05.11.2025, alleging that multiple E-Way Bills, accompanied the consignment and that the vehicle number mentioned therein did not match the vehicle actually transporting the goods. The petitioner rectified the error in the E-way Bills; however, a Notice in Form GST MOV-07 under Section 129(3) of the CGST Act was issued on 10.11.2025 which was not served upon the petitioner through any prescribed modeIt appears that the petitioner visited the department, where the notice was handed over to him. The Proper Officer passed an order in Form MOV-09 on 19.11.2025 i.e. after the expiry of 7 days.

HELD

The Hon’ble Court set aside the order, holding that there was a violation of provisions of Section 129(3) of the CGST Act, as the order dated 19.11.2025 was been passed beyond the period of 7 (seven) days from the date of service of notice.

102. State of Jharkhand vs. BLA Infrastructure (P.) Ltd [2026] 182 taxmann.com 405 (SC) dated 09.01.2026.

The High Court held that the refund of the pre-deposit paid at the time of filing appeal is governed by Section 107(6) read with 115 and not with Section 54 and hence the Single Member’s exercise of interpreting Section 54 for the grant of such a refund was held unnecessary and was set aside.

FACTS:

The assessee appealed against the order issued under Section 74 of the GST Act, which was allowed in its favour of the assessee. Thereafter, the assessee filed a refund application for the amount pre-deposited at the time of filing the appeal, the appeal was rejected by issuance of a deficiency memo on the ground that the refund application was filed beyond the period prescribed under Section 54(1) of the Goods & Services Tax Act. Aggrieved, the assessee approached the Hon’ble High Court.

The Hon’ble Court examined the scope and interpretation of Section 54 of the CGST Act and held that once refund is by way of statutory exercise, the same cannot be retained either by the State or by the Centre, that too by taking aid of a provision which on the face of it is directory, in as much as, the language couched in Section 54 is “may make an application before the expiry of 2 years from the relevant date”. The Hon’ble Court relied upon the decision in the case of Lenovo (India) (P.) Ltd. vs. Jt. Commissioner of GST [2023] 156 taxmann.com 467/79 GSTL 299/[2024] 101 GST 4 (Mad.), Muskan Enterprises vs. State of Punjab 2024 online SC 4107 and Rakesh Ranjan Shrivastava vs. State of Jharkhand [2024] 160 taxmann.com 479/183 SCL 311 (SC) as also, taking into consideration that the refund of statutory pre-deposit is a right vested on an assessee after an appeal is allowed in its favour, held that the action of the department in rejecting the refund application considering it as time barred has no legs to stand in law and accordingly, the rejection order by way of deficiency memo was quashed and set-aside. The department challenged this order before the Division Bench.

HELD:

The Hon’ble Court upheld the decision in favour of the assessee but clarified that the refund of statutory pre-deposit is governed by Section 107(6) read with Section 115 of the Jharkhand Goods and Services Tax Act, 2017 and not by Section 54.The High Court erred in interpreting Section 54 for this purpose. Accordingly, the interpretative exercise undertaken by the Single-Member Bench was set aside, and the department was directed to grant refund of the pre-deposit along with applicable interest.

Miscellanea

1. ARTIFICIAL INTELLIGENCE

#Even the Sky May Not Be the Limit for A.I. Data Centers

As artificial intelligence continues to expand rapidly, tech leaders are warning that Earth’s land and energy resources may soon be insufficient to support the massive data centers required to power it. Earthbound facilities are already facing significant constraints, including power shortages, rising utility costs for consumers, water scarcity issues from cooling needs, and growing local opposition to new constructions. In response, prominent figures in AI and space industries are proposing a bold solution: building giant orbital data centers that could float in space, powered by abundant solar energy and naturally cooled by the vacuum, potentially becoming visible from Earth like bright planets in the night sky.

While some experts believe versions of space-based data centers could become feasible within decades, the idea has gained traction among high-profile supporters including Elon Musk, who predicted they could be the cheapest option for AI training within five years, as well as Jeff Bezos, Sam Altman, and Jensen Huang. Companies like SpaceX have referenced funding such projects through future IPOs, and startups like Starcloud envision modular orbital facilities rebuilt every five years to update hardware. However, the concept remains highly speculative, blending financial incentives from the booming AI and space sectors with substantial technical and economic challenges ahead.

(Source: nytimes.com dated 1 January 2026)

# New Billionaires of the A.I. Boom

The artificial intelligence surge in 2025 has minted a new class of billionaires, primarily through skyrocketing valuations of private startups rather than public markets, echoing the dot-com boom of the late 1990s. While established figures like Nvidia’s Jensen Huang and OpenAI’s Sam Altman saw their wealth grow further, the spotlight fell on founders of lesser-known AI companies whose equity turned into billions on paper. These emerging tycoons, positioned to become influential Silicon Valley players, amassed fortunes as investors poured funds into data-labelling, coding tools, search engines, robotics, and specialized AI labs.

Notable new billionaires include Alexandr Wang and Lucy Guo of Scale AI (boosted by a major Meta investment leading to a $14.3 billion valuation), the four founders of Cursor—Michael Truell, Sualeh Asif, Aman Sanger, and Arvid Lunnemark—whose AI coding startup reached a $27 billion valuation, and Brett Adcock of humanoid robot maker Figure AI. Others hail from Perplexity, Mercor (Adarsh Hiremath, Brendan Foody, and Surya Midha), Safe Superintelligence, Harvey (Winston Weinberg and Gabriel Pereyra), and Thinking Machines Lab. However, venture capitalists caution that much of this wealth remains “on paper” and could evaporate if the startups fail to deliver sustained success, drawing parallels to historical tech bubbles like the 1890s railroad barons.

(Source: nytimes.com dated 1 January 2026)

2. WORLD NEWS

#Australia Enforces World-First Under-16 Social Media Ban, Deactivating Millions of Accounts

In December 2025, Australia implemented the world’s first nationwide ban on social media for users under 16, with the law taking effect on December 10. The Online Safety Amendment (Social Media Minimum Age) Act requires major platforms—including TikTok, Instagram, Facebook, X (formerly Twitter), YouTube, Snapchat, Reddit, Threads, Twitch, and Kick—to take reasonable steps to prevent children under 16 from creating or maintaining accounts. Platforms face fines of up to A$49.5 million (approximately $32 million USD) for non-compliance, but there are no penalties for young users or their parents. The measure, championed by Prime Minister Anthony Albanese, aims to protect children from online harms, despite ongoing debates about its effectiveness and enforcement methods, such as age verification technologies.

In the weeks following implementation, social media companies reported deactivating or restricting approximately 4.7 million accounts identified as belonging to Australian users under 16, significantly impacting millions of children and teenagers. While supporters praise the swift action as a global precedent for child online safety, critics highlight implementation challenges, including inaccurate age verification that allowed some under-16s to retain access while incorrectly blocking others.

(Source: theguardian.com – dated 16 January 2026)

3. ENVIRONMENT

#2025 Confirmed as One of the Three Hottest Years on Record

In January 2026, the World Meteorological Organization confirmed that 2025 was among the three warmest years on record, with a global average surface temperature of 1.44 °C above the pre-industrial baseline. Despite the cooling influence of La Niña, 2025 ranked second or third in most datasets, behind only 2024 and 2023,
underscoring the dominant role of human-caused greenhouse gases.

The years 2023–2025 now form the warmest three-year period ever recorded, with their combined average exceeding 1.5 °C above pre-industrial levels in some analyses. The last 11 years are the 11 hottest on record, and these persistent high temperatures have driven more intense extreme weather events, including heatwaves, floods, and cyclones, highlighting the need for urgent emission reductions.

(Source: returns.com – 14 January 2026)

Probate – No Longer Required, Or Is It?

A probate is a court-certified copy of a Will that establishes its authenticity and validates the executor’s authority. Historically, the Indian Succession Act mandated probate for specific communities (e.g., Hindus, Parsis) residing in or holding assets in Mumbai, Chennai, or Kolkata. Significantly, the Repealing and Amending Act 2025 removes this mandatory requirement effective January 1, 2026, aiming to unify legal provisions across communities. While this amendment is prospective and does not affect pending proceedings, practical challenges likely persist. Institutions like housing societies may still insist on probate or indemnity bonds to avoid liability in family disputes. Furthermore, while the right to apply for probate is viewed as “continuous” courts generally apply a three-year limitation period from when the right accrues. Consequently, Living Trusts are recommended as a safer alternative to unprobated Wills.

INTRODUCTION

“Where there is a Will, there is a Relative,

Where there is a Relative, there is a Dispute,

And where there is a Dispute, there is a Probate.”

The above quote is the reality of several succession/inheritance cases. A probate is a copy of the Will certified by the seal of a Court. The probate of a Will establishes the authenticity and finality of a Will and validates all the acts of the executors. It conclusively proves the validity of the Will, and after a probate has been granted, no claim can be raised about the genuineness of the Will. A probate is different from a succession certificate. A succession certificate is issued by a Court when a person dies intestate, i.e., without making a valid Will. Thus, a probate is granted by a Court only when a valid Will is in place, while a succession certificate is granted only if a Will has not been made.

PROBATE WAS MANDATORILY REQUIRED

According to the Indian Succession Act, 1925 (‘the Act”), no right as an executor or a legatee can be established in any Court unless a Court has granted a probate of the Will under which the right is claimed. This provision applied only to certain communities:

(a) To those Hindus, Sikhs, Jains and Buddhists who were residing within the territory which on September 1870, was subject to the Lieutenant Governor of Bengal (Kolkata) or within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay.

(b) To those Hindus, Sikhs, Jains and Buddhists who were residing elsewhere, but who had immovable properties situated within the above territories. Thus, for Hindus, Sikhs, Jains and Buddhists who were residing or whose immovable properties were situated outside the territories of West Bengal or the Presidency Towns of Madras and Bombay, a probate was not mandatorily required. The requirement of probate also applied to Parsis who were residing or whose immovable properties were situated within the limits of the High Courts of Calcutta, Madras and Bombay.

Thus, the Act had a unique situation where a combination of certain communities and locations mandatorily required probate.

PROCEDURE

To obtain a probate, an application needs to be made to the relevant court along with the Will. The executor has to disclose the names and addresses of the heirs of the deceased. Once the Court receives the application for a probate, it invites objections, if any, from the relatives of the deceased.

The Court also places public notice for public comments. The petitioner must satisfy the Court about the proof of death of the testator and the proof of the Will. Proof of death could be in the form of a death certificate. However, in the case of a person who is missing or has disappeared, it may become difficult to prove the death. Under Section 108 of the Indian Evidence Act, 1872, any person who is unheard of or missing for a period of seven years by those who would have naturally heard of him if he had been alive, is presumed to be dead unless otherwise proved to be alive.

On being satisfied that the Will is indeed genuine, the Court grants a probate (a specimen of the probate is given in the Act) under its seal. The probate is granted in favour of the Executor/s named under the Will. The Supreme Court has held in the cases of Lalitaben Jayantilal Popat vs. Pragnaben J Kataria (2008) 15 SCC 365 and Syed Askari Hadi Ali vs. State (2009) 5 SCC 528, that while granting a probate, the Court must not only consider the genuineness of the Will but also the explanation given by the parties to all suspicious circumstances surrounding thereto along with proof in support of the same. The onus of proving the Will is on the propounder. The propounder has to prove the legality of the execution and genuineness of the Will by proving the absence of suspicious circumstances and surrounding the said Will and also by proving the testamentary capacity and the signature of the testator. When there are suspicious circumstances, the onus is also on the propounder to explain them to the court’s satisfaction and only when such onus is discharged would the court accept the Will – K. Laxmanan vs. T. Padmini (2009) 1 SCC 354.

It may be noted that the mere fact that a nomination has been made would have no impact on the Probate since the nominee is only a stop-gap arrangement till the actual legal heir is given the estate of the deceased.

The Evolutiom of Probate understanding the 2025 legal shift

OPPOSITION

If any relative, heir of the deceased, or other person feels aggrieved by the grant of a probate, then he must file a caveat before the Court opposing the granting of the probate for the Will. Once a caveat has been filed, the Court hears the aggrieved party. The aggrieved party has to prove that he would have a share in the estate of the testator if he (testator) had died intestate, i.e., without leaving a Will.

WHY DOES ONE NEED A PROBATE?

One of the questions that almost always arises in the case of a Will, is “why is the probate required?” A probate is a certificate from the High Court certifying the genuineness and finality of the Will.

Some of the reasons why a probate is obtained (even in cases/cities where not mandatorily required) are as follows:

(a) It is necessary to prove the legal right of a legatee under a Will in a court.

(b) Some listed / limited companies insist on a probate for the transmission of shares.

(c) Similarly, some co-operating housing societies insist on a probate for the transmission of a flat.

(d) The Registrar of Sub-Assurances usually insists on a probate for the registration of immovable properties/lands.

However, it would not be correct to say that no transfer can take place without a probate. There are several companies, societies, etc., which do transfer shares, flats, etc., even in the absence of a probate. They may, as a precaution, insist upon a release deed from the other heirs in favour of the legatee who is the transferee. Sometimes, the company/ society also asks for an indemnity from the legatee in its favour against any possible claims/lawsuits from the other heirs of the deceased.

SPECIAL FACTORS

Some of the rules in respect of obtaining a probate are as follows:

a) For obtaining a probate, the applicable court fee stamp is payable as per the rates prescribed in different States. For instance, to obtain a probate in the city of Mumbai, the application has to be made to the Bombay High Court and the court fee rates prescribed under the Bombay Court-Fees Act, 1959 would apply which are as follows:

Situation                                                     Court fees

(a) If the Property value               2% of the property value
exceeds ₹1,000 but is
lower than ₹50,000
(b) If the Property value              4% of the property value
exceeds ₹50,000 but is
lower than ₹2,00,000
(c) If the Property value              6% of the property value
exceeds ₹200,000 but
is lower than ₹300,000
(d) If the Property value            7.5% of the property
exceeds ₹300,000                      value, subject to a maximum of ₹75,000

 

(b) A probate cannot be granted to a minor or a person of an unsound mind.

(c) If there is more than one executor, then the probate can be granted to all of them simultaneously or at different times.

(d) If a Will is lost since the testator’s death or it has been destroyed by accident and not due to any act of the testator and a copy of the Will has been preserved, then a probate may be granted on the basis of such a copy until the original or an authenticated copy has been produced. If a copy of the Will has not been made or a draft has not been preserved, then a probate can be granted of its contents or of its substance, if the same can be proved by evidence.

(e) A probate petition requires the following contents:

        (i) A copy of the Will or the contents of the Will in case the Will has been lost, mislaid, destroyed, etc.

        (ii) The time of the testator’s death – a proof of death would be helpful.

       (iii) A statement that the Will is the last Will and testament of the deceased and that it was duly executed.

       (iv) The details of assets which may come to the petitioner and the value for the purposes of computing the Court Fees.

       (v) A statement that the petitioner is the executor of the Will.

       (vi) That the deceased had a fixed place of residence or some immovable property within the jurisdiction of the Judge where the application is made.

      (vii) It must be verified by at least one of the witnesses to the Will in the manner prescribed. It must be signed and verified by the petitioner and his lawyer.

2025 AMENDMENT

In light of the above position, the Repealing and Amending Act 2025 has removed the mandatory requirement of obtaining a probate in case of certain communities. As of 1st January 2026, a probate would not be mandatory even for Hindus and Parsis residing in Mumbai, Chennai, or Kolkata, or for those having immovable properties in these locations. The amendment aims to bring about uniformity in the provisions of the Act for all communities. However, this amendment does not alter the position in respect of a Will for which a probate petition is pending before any Court. The repeal will not affect existing rights, acts, obligations, liabilities, or proceedings. Thus, the amendment is not retrospective but is prospective from 1st January 2026. The amendment does not invalidate existing probates or automatically terminate pending existing probate proceedings. In the author’s view, even if a person resident in Mumbai, Chennai or Kolkata has died before 1st January 2026, but his Will is executed after this date, then a Probate would not be required.

IS NO PROBATE PRACTICALLY POSSIBLE?

While the Amending Act 2025 removes the mandatory requirement of a probate, in practice it may still be required. Without a probate the executor would immediately divide the estate among the beneficiaries under the Will. What happens in case of a subsequent challenge to the Will? What if the Will is challenged after many years? In case of disputes among family members, a probate may yet be insisted upon by the sub-registrar / company. As explained above, even today in places where a probate is not mandatory under the Act, many agencies insist upon the same. A similar scenario is likely to unfold even in Mumbai, Chennai and Kolkata. Some co-operative housing societies have taken a stand that even after the above Repealing Act, they would insist on a probate since the Managing Committee does not want to be caught up in the cross -fire of an unprobated Will.

WHEN CAN AN UNPROBATED WILL BE CHALLENGED?

One of the important questions which often arises in relation to a probate is, until when can the probate petition be lodged? Thus, is there a maximum time limit after the death of the testator within which the executors must lodge the petition before the Courts? In Vasudev Daulatram Sadarangani vs. Sajni Prem Lalwani, AIR 1983 Bom 268, the Court dealt with the issue of whether Article 137 was applicable to applications for probate, letters of administration or succession certificate? The Court held that there was no warrant for the assumption that this right to apply accrued on the date of death of the deceased. It held that the right to apply may therefore accrue not necessarily within 3 years from the date of the deceased’s death but when it becomes necessary to apply, which may be any time after the death of the deceased, be it after several years. However, reasons for delay must be satisfactorily explained to the Court. Further, such an application was for the Court’s permission to perform a legal duty created by a Will or for recognition as a testamentary trustee and was a continuous right which could be exercised any time after the death of the deceased, as long as the right to do so survived. This view of the High Court was approved by the Supreme Court in Kunvarjeet Singh Khandpur vs. Kirandeep Kaur &Ors(2008) 8 SCC 463. However, the Supreme Court also held that the application for the grant of a probate or letters of Administration was covered by Article 137 of the Limitation Act.

In Krishna Kumar Sharma vs. Rajesh Kumar Sharma (2009) 11 SCC 537 the Supreme Court once again reiterated this view and also held that the right to apply for a probate was a continuous right.

The Bombay High Court had an occasion to consider this question in the case of Suresh Manilal Mehta vs. Varsha Bhadresh Joshi, 2017 (1) AIR Bom R 487. The Court held that the only consistent view was that the right to apply for a probate was a continuing right and the application must be made within three years of the time when the right to apply accrued. An executor named in the Will could apply for probate at any time so long as the right to do so survived.

The next issue that arises is whether there is a time limit within which the unprobated Will can now be challenged? The Law of Limitation provides for a three years for filing a suit. However, it is important to note that the three-year period would commence from the time of the petitioner coming to know of the Will and not from the date of the death of the testator.

EPILOGUE

Removing the mandatory filter of a probate for certain communities and cities is a good move. However, one needs to tread with a great deal of care and caution in case of an unprobated Will. The risk of passing off a fraudulent /forged Will without the scrutiny of a Court will now be higher and could lead to higher hazards for families. A living Trust could be a better solution in such cases since it constitutes a transfer inter vivos rather than one that takes place on death.

Accounting Treatment Of Expenditure Incurred On Development Of A Pilot / Model Factory Under Ind As 16

The accounting treatment of expenditure incurred on pilot or model factories hinges on whether such costs are “directly attributable” under Ind AS 16 or constitute revenue expenditure. Unlike commercial facilities, pilot plants are often essential for technical validation, testing machinery configuration, and ensuring safety prior to full-scale production. Ind AS 16 (Paragraphs 16(b) and 17(e)) supports capitalising costs necessary to bring an asset to its intended condition, specifically including costs for testing whether the asset is functioning properly. While ICAI EAC opinions vary based on specific facts—rejecting capitalization if assets are already operable—global IFRS guidance clarifies that “functioning properly” denotes technical readiness rather than commercial optimization. Consequently, pilot-phase costs required to resolve technical uncertainties and establish operability should be capitalised, while subsequent costs for fine-tuning or scaling must be expensed once the asset is technically ready.

INTRODUCTION – THE CONCEPT OF A PILOT / MODEL FACILITY

In several capital-intensive and process-driven industries, entities often establish a pilot plant or model factory prior to commissioning a full-scale commercial production facility. Such pilot facilities are not intended for routine commercial exploitation. Rather, they serve as a technical and operational validation mechanism to test machinery configuration, process integration, design assumptions, safety parameters and operational stability.

The costs incurred during this pilot phase are often significant and raise an important accounting question, whether such expenditure represents directly attributable costs necessary to bring an asset to its intended operating condition, warranting capitalisation, or whether they constitute pre-operative or start-up expenses to be charged to profit and loss. This article analyses this issue under Ind AS 16, Property, Plant and Equipment, supported by ICAI Expert Advisory Committee (EAC) opinions and global IFRS interpretative discussions.

2. THE ACCOUNTING ISSUE

The central issue is whether expenditure incurred on the development and operation of a pilot or model factory, such as employee costs, utilities, consumables, trial-run materials, calibration expenses and technical testing costs meets the definition of “directly attributable costs” under Ind AS 16.

The complexity arises particularly where:

(i) The pilot phase is integral to determining whether the production assets can operate as intended;

(ii) The outcome of the pilot directly influences final plant design, configuration, or acceptance of machinery; and

(iii) Commercial production is not feasible or intended until the pilot phase is successfully completed.

3. RELEVANT ACCOUNTING LITERATURE

3.1 Ind AS 16 – Property, Plant and Equipment

Paragraph 7 of Ind AS 16 provides that the cost of an item of PPE shall be recognised as an asset if it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.

Paragraph 16(b) provides that the cost of PPE includes “any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.”

Paragraph 17(e) specifically includes “costs of testing whether the asset is functioning properly” as directly attributable costs. Conversely, paragraph 19 excludes costs of opening a new facility, introducing a new product, or conducting business in a new location.

3.2 ICAI Expert Advisory Committee (EAC) Opinions

In addition to the December 2025 EAC Opinion on capitalisation of employee and trial costs incurred prior to opening of a restaurant outlet, the ICAI EAC has, in earlier opinions, articulated a broader principle relevant to cost incurred for bringing an asset to its present location and condition.

An EAC opinion published in The Chartered Accountant, July 2021 (Volume 70, No. 1) and compiled in the ICAI Compendium of EAC Opinions discusses the accounting treatment of costs incurred on a configuration design study for a plant / project, and directly addresses whether such costs can be capitalised as part of Property, Plant and Equipment under Ind AS 16.

Key points from the Opinion:

  •  The Committee was asked whether expenditure incurred for a configuration design study could be capitalised as part of capital work-in-progress under Ind AS 16.
  • The EAC held that such costs should be capitalised only if they are directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
  • The Opinion specifically notes that the costs must be directly attributable to construction and not research or held for some other purpose.
  • The Committee referenced the Ind AS 16 definitions of directly attributable costs (such as installation, assembly and testing whether the asset is functioning properly) when forming its view.

By contrast, in the December 2025 restaurant-industry opinion, the EAC rejected capitalisation primarily because the assets were already capable of operating and the trials were conducted to achieve consistency of output and customer experience rather than to establish asset operability. This distinction is critical when analysing pilot factories.

(All EAC opinions are advisory in nature and must be read in the context of the specific facts presented.)

3.3 Global IFRS Guidance – IASB and IFRIC Discussions

Although IAS 16 itself mirrors Ind AS 16, the IASB and IFRS Interpretations Committee (IFRIC) have, through agenda decisions and Board discussions, clarified the meaning of “testing whether an asset is functioning properly” and “ready for intended use.”

During IFRIC deliberations on IAS 16, the Committee observed that:

  • “Functioning properly” refers to technical and physical performance, not to the achievement of targeted production volumes, margins, or commercial optimisation.
  • Testing activities undertaken to determine whether an asset can operate in accordance with its design specifications form part of bringing the asset to its intended condition.

Further, in the context of the IAS 16 amendments on proceeds before intended use, the IASB reiterated that:

  •  Only costs that are necessary to bring the asset to the condition required for its intended technical operation qualify for capitalisation.
  • The point at which an asset becomes “available for use” is a matter of substance and technical capability, not merely completion of installation or commencement of output.

While these discussions primarily addressed accounting for proceeds from items produced during testing, the conceptual emphasis remained firmly on technical readiness, reinforcing the boundary between capitalisable testing costs and non-capitalisable operational or optimisation costs.

Given that Ind AS 16 is broadly aligned in principle with IAS 16 , the same interpretative emphasis supports the application of Ind AS 16, particularly paragraph 16(b) (directly attributable costs to bring the asset to the condition necessary to operate as intended) and paragraph 17(e) (costs of testing whether the asset is functioning properly).

4. ANALYSIS – APPLICATION TO A PILOT / MODEL FACTORY

4.1 Pilot Factory as a Technical Necessity

A pilot or model factory is not established to introduce a product to the market or to commence commercial operations in a new location. Its primary objective is to determine whether the production assets, individually and collectively are capable of operating in the manner intended by management.

In many industries, the pilot phase:

  •  Reveals design flaws requiring modification of equipment or layout;
  • Determines operating tolerances and safety parameters;
  • Establishes process sequencing and automation logic.

Until these activities are completed, the assets cannot be said to be technically ready for intended use, even if they are physically installed.

4.2 Alignment with Ind AS 16 and IFRS Interpretations

Applying paragraphs 16 and 17 of Ind AS 16, costs incurred during the pilot phase are capitalisable where they:

  • Are directly attributable to resolving technical uncertainties:
  •  Are necessary to confirm that the asset functions in accordance with its intended design; and
  •  Cease once the asset achieves technical operability, even if further optimisation is undertaken.

The IFRIC discussions reinforce that technical operability and not commercial readiness is the relevant threshold. Accordingly, pilot-phase costs that establish whether the plant can operate as designed fall squarely within the ambit of directly attributable costs.

4.3 Distinguishing from Non-Capitalisable Expenditure

Costs incurred after the pilot phase, such as:

  • Fine-tuning output quality to meet market preferences
  • Training production staff for efficiency,
  • Scaling output to targeted capacity levels,

would fall within paragraphs 19 and 20 of Ind AS 16 and must be expensed. However, this does not negate capitalisation of earlier pilot-phase costs that are essential to asset readiness.

5. CONCLUSION AND VIEW

On a combined reading of Ind AS 16, ICAI EAC opinions and IASB / IFRIC interpretative discussions, the following conclusions emerge:

  • Expenditure incurred on a pilot or model factory should be capitalised where such expenditure is demonstrably necessary to bring the related assets to the condition required for their intended technical operation.
  • The restrictive conclusions in certain EAC opinions are fact-specific and do not override the broader principle that technically indispensable testing and validation costs, where directly attributable, should be capitalised.
  • Global IFRS discussions strongly support a substance-based assessment of technical readiness, rather than a mechanical focus on commencement of output or passage of time.

Accordingly, where a pilot facility is an essential precursor to commissioning the final production plant, capitalisation of pilot-phase expenditure is both conceptually sound and fully aligned with Ind AS 16.

Re-opening of assessment — Re-assessment in respect of transactions which were not mentioned in the show cause notice u/s. 148A — Explanation to section 147 — Re-assessment on a different transaction which was not intimated to the assessee in the show cause notice — Reassessment on issues which come to notice of the AO subsequently — AO can make assessment of such issues only after the re-assessment proceedings have commenced — Since the AO proceeded to issue notice u/s. 148 on an issue other than the issue mentioned in the show cause notice, re-opening held to be bad in law and the order u/s. 148A(3) and notice issued u/s. 148A quashed and set-aside.

60. Balmer Lawrie and Company Limited vs. UOI

2026 (1) TMI-628-(Cal.)

A. Y. 2019-20: Date of order 09/01/2026

Ss. 148 and 148A of ITA 1961

Re-opening of assessment — Re-assessment in respect of transactions which were not mentioned in the show cause notice u/s. 148A — Explanation to section 147 — Re-assessment on a different transaction which was not intimated to the assessee in the show cause notice — Reassessment on issues which come to notice of the AO subsequently — AO can make assessment of such issues only after the re-assessment proceedings have commenced — Since the AO proceeded to issue notice u/s. 148 on an issue other than the issue mentioned in the show cause notice, re-opening held to be bad in law and the order u/s. 148A(3) and notice issued u/s. 148A quashed and set-aside.

The assessee, a Government Company, was engaged in several businesses which the company conducts, one such business being to provide travel facilities, including air travel services, to its customers. In the course of its air travel services, the petitioner’s customers often seek air travel insurance, which is facilitated by the assessee through empanelled insurers, one such insurer being Reliance General Insurance (Reliance). Apart from this, the assessee also has hoardings and other spaces at its premises for putting up marketing banners or advertisement material, and the assessee uses the same for generating revenue.

During the F. Y. 2018-19, relevant to A. Y. 2019-20, the assessee received a sum of ₹1,10,33,116/- towards commission for insurance from Reliance and offered the same to tax, while filing its return of income for the said A. Y. on 31/10/2019. The return was processed u/s. 143(1) of the Income-tax Act,1961 and the return of income was accepted.

On 30/03/2025, a show cause u/s. 148A(1) of the Act was issued stating that there was information suggesting that income chargeable to tax had escaped assessment within the meaning of section 147 of the Act. Along with the said notice, information was supplied which, inter alia, contained Case Related Information Detail, Dissemination Note and certain other documents, including Excel sheets, relevant chapters of appraisal report pertaining to the search operation conducted in respect of Shri Ajay Mehta and Others and relevant statements recorded during such search operation. By the said notice, the petitioner was asked to show cause as to why a notice u/s. 148 of the Act should not be issued.

In response to the said notice, the assessee furnished its reply and submitted various details, such as details of payments received from Reliance, including UTR numbers and sample policy issued to customers and requested for dropping the reassessment proceedings.

Upon receipt of the said reply, the revenue authorities issued another notice dated 14/06/2025 u/s. 148A(1) of the Act. The annexure to the said notice referred to the earlier notice dated 30/03/2025 issued u/s. 148A(1) of the Act and indicated that the issuer of the fresh notice had taken over charge of Circle 5(1), Kolkata, on 16/05/2025 and had considered the submissions made by the assessee on 09/04/2025. Further, the assessee was requested to furnish further submission/document, if any, on or before 20/06/2025. The said notice was followed by another notice dated 16/06/2025 again u/s. 148A(1) of the Act, along with an annexure, whereby the assessee was informed that the reply dated 09/04/2025 did not correlate with the notice and information shared with the assessee and that the information was therefore once again being shared with the petitioner.

The assessee furnished its fresh reply to the said show cause notice on 20/06/2025, thereby objecting to the impugned proceedings for reassessment on similar lines as done in its earlier reply and prayed to drop the reassessment proceedings.

Thereafter, an order u/s. 148A(3) of the Act was passed by the AO on 28/06/2025, holding the case to be fit for issuance of notice u/s. 148 of the Act. In the said order, the Assessing Officer referred to the transactions of the assessee with one Prudent Insurance Brokers (Prudent) and held that income had escaped assessment insofar as transactions with Prudent were concerned, as there was an unaccounted receipt. Immediately after the said order, notice u/s 148 of the Act was issued on 30/06/2025.

Against the said order and notice, the assessee filed a writ petition before the High Court. The Calcutta High Court allowed the petition and held as follows:

“i) The impugned order passed u/s. 148A(3) of the said Act of 1961, reveals that the relevant Assessing Officer has proceeded to reopen the petitioner’s case on a ground that did not find mention in the notice to show cause issued u/s. 148A(1) of the said Act of 1961. In the notice to show cause issued u/s. 148A(1) of the said Act of 1961, the Assessing Officer has flagged the transactions between the petitioner and Reliance, in the order u/s. 148A(3) of the said Act of 1961, the Assessing Officer has changed the basis of reopening from the transaction between the petitioner and Reliance to transaction between the petitioner and Prudent. If the explanation sought from the petitioner by the notice issued u/s. 148A(1) of the said Act of 1961 was in respect of its transactions with Reliance, then the order u/s. 148A(3) of the said Act of 1961 could not have rolled on a different turf. It is very well settled now that an order cannot travel beyond the confines of the notice to show cause.

ii) By proceeding on a ground different than the one urged in the notice u/s. 148A(1) of the said Act of 1961, the Assessing Officer has indirectly accepted the petitioner’s contentions in response to the said notice. That being the position, the defence of the petitioner against reopening of proceedings for assessment of its income could not have been trumped by the Assessing Officer by relying on a ground that was never put to the petitioner.

iii) Information provided to the petitioner and relied on by the Assessing Officer does not suggest that the petitioner’s income has in any manner escaped assessment at least on the basis of the material presently on record. The legal principles established by the Hon’ble Supreme Court in the case of Lakhmani Mewal Das (supra) still remain foundational to the income tax jurisprudence. The requirement of “rational connection” which in terms of the said judgment “postulates that there must be a direct nexus or live link between the material coming to the notice of the Income Tax Officer” cannot be given a go-by. Thus direct nexus or live link between the information and the Income Tax Officer’s opinion that income has escaped assessment will have to be established. Indeed at the stage of issuance of notice u/s. 148 the Assessing Officer is not required to conclusively prove that income has escaped assessment but then the information must suggest that there is income has escaped assessment. In the case at hand there is no such suggestion at all.

iv) It must be kept in mind that reopening of assessment is a serious action and it must be done strictly in accordance with law. In the case at hand at least two conditions justifying invocation of writ powers stand satisfied – arbitrariness in changing the ground of reopening indicated in the show cause notice and consequential violation of principles of natural justice in passing an order against the petitioner based on a ground which the petitioner had no opportunity to deal with.

v) A meaningful reading of the provisions of Section 147 of the Act would make it clear that the same would get activated only after completing the drill in Section 148 and 148A (where applicable) and not before that. The power of the Assessing Officer to assess or reassess income in respect of issues which come to his notice subsequently can be exercised only after the assessment or reassessment proceedings have commenced. The emboldened and underscored portion of the Explanation to Section 147 of the said Act of 1961 makes the said aspect very clear.

vi) For all the reasons aforesaid, the order impugned dated June 28, 2025 passed u/s. 148A(3) of the said Act of 1961 and the consequential reopening notice dated June 30, 2025 issued u/s. 148 of the said Act of 1961 in respect of A. Y. 2019-20 fail to withstand judicial scrutiny. The same are set aside.”

Re-opening of assessment — Findings given in Suspicious Transaction Report (STR) — No material or evidence to suggest escapement of income — No infirmity in documentary evidence furnished by the assessee — Re-opening of assessment merely on the basis of STR report is bad-in-law.

59. Vivaansh Eductech (P.) Ltd. vs. ACIT

(2025) 181 taxmann.com 873 (Guj.)

A. Y. 2021-22: Date of order 16/12/2025

Ss. 147, 148 and 148A of ITA 1961

Re-opening of assessment — Findings given in Suspicious Transaction Report (STR) — No material or evidence to suggest escapement of income — No infirmity in documentary evidence furnished by the assessee — Re-opening of assessment merely on the basis of STR report is bad-in-law.

A notice u/s. 148A(1) of the Income-tax Act, 1961, dated 31/03/2025, was issued upon the assessee for AY 2021-22, requiring the assessee to show cause why the case of the assessee should not be re-opened u/s. 148 of the Act. In response to the notice, the assessee furnished a detailed reply objecting to the reopening of the assessment. Thereafter, vide order dated 19/06/2025, it was concluded that the income of ₹12,16,51,000 had escaped assessment and that the case of the assessee was fit for re-opening of assessment.

The assessee filed a writ petition and challenged the said order. The Gujarat High Court allowed the petition of the assessee and held as follows:

“i) A perusal of the impugned notice as well as the impugned order reveals that the respondent has formed such an opinion primarily on the allegation that the petitioner had entered into “circuitous” transactions with related parties. However, we do not find any material or evidence worth the name on record to suggest that there was any escapement of income on account of such transactions, which would invite the rigours of Section 148 of the Act. No finding has been recorded by the respondent-authorities with regard to any exchange of cash or any return of money after the execution of the transactions in question.

ii) The assessment has been re-opened merely on the basis of the findings emerging from the STR (Suspicious Transaction Report), without duly considering the submissions and explanations tendered by the petitioner. We also find that the petitioner had fully disclosed the income and had justified the same in the reply filed before the authorities

iii) The respondent has neither doubted the documentary evidence produced by the petitioner nor pointed out any infirmity in the material furnished in relation to the transactions reflected in the petitioner’s bank account. The said documentary evidence has neither been dealt with nor even considered by the respondent while passing the impugned order.

iv) In such circumstances, the impugned Notice dated 31/03/2025 as well as the impugned Order dated 19/06/2025 cannot be sustained and deserve to be quashed and set aside.”

Offences and prosecution — Criminal prosecution — Income surrendered during the assessment — Tax paid to buy peace and avoid further litigation — Penalty u/s. 271(1)(c) levied — Concealment of income — Appeal of the assessee allowed by the CIT(A) and ITAT — Department’s appeal before the High Court dismissed — Order of penalty does not exist — Criminal proceedings cannot be allowed to continue in such case.

58. Shiv Kumar Jaiswal vs. The State of UP

2026 (1) TMI 371 (All.)

Date of order 05/01/2026

S. 276C(1) and 277 of ITA 1961

Offences and prosecution — Criminal prosecution — Income surrendered during the assessment — Tax paid to buy peace and avoid further litigation — Penalty u/s. 271(1)(c) levied — Concealment of income — Appeal of the assessee allowed by the CIT(A) and ITAT — Department’s appeal before the High Court dismissed — Order of penalty does not exist — Criminal proceedings cannot be allowed to continue in such case.

The assessee and his wife jointly owned a hotel and gifted the said hotel, out of love and affection, to one Mr. Raj Kumar, who was one of their family friend, vide a registered gift deed. Subsequently, the said Mr. Raj Kumar gifted ₹75 lakhs to the minor son of the assessee through a registered gift deed. In the assessment, the assessee voluntarily surrendered the capital gains and paid tax thereon so as to avoid further litigation and buy peace on the condition that no penalty proceedings be initiated u/s. 271(1)(c) of the Income-tax Act, 1961, in respect of the aforesaid surrender of income.

However, the Assessing Officer subsequently confirmed the levy of penalty u/s. 271(1)(c) of the Act by treating the capital gains as the concealed income. On appeal before the CIT(A), the appeal of the assessee was allowed, and the penalty was deleted. On the Department’s appeal before the Tribunal, the appeal was dismissed, and the issue was decided in favour of the assessee. On further appeal before the High Court, the High Court dismissed the appeal of the Department.

Despite the pendency of the appeal before the CIT(A), the Assessing Officer applied for sanction for criminal prosecution u/s. 276C(1) and 277 of the Act before the competent authority. The competent authority granted sanction to file a complaint against the assessee, and the complaint was filed.

Against this, the assessee filed a Criminal Writ Petition before the High Court seeking quashing of proceedings pending before the court of Special Chief Judicial Magistrate (Economic Offence), Lucknow and the summoning order passed by the Special Chief Judicial Magistrate (Custom), Lucknow. The Allahabad High Court allowed the petition and held as follows:

“i) The subject matter of penalty is the same by which, criminal proceedings have been launched. Once the Tribunal has set aside the penalty order, at this juncture, it would not be appropriate to allow criminal proceedings against the applicant. The first appellate Tribunal, the second appellate Tribunal and the High Court have not interfered in the order of penalty and the department could not succeed. Thus, the fact has come on record that the order of penalty does not exist.

ii) The Supreme Court in the case of G.L Didwania AIROnline 1993 SC 421 has considered the aspect of penalty and launching of criminal proceedings. In the said case, the Supreme Court has observed that in the order of the Appellate Tribunal, those conclusions reached by the assessing authority have been set aside and consequently, the very basis of the complaint is knocked out and, therefore, in the interest of justice, proceedings ought to have been quashed by the High Court.

iii) In the case of K.C. Builders AIROnline 2004 SC 638 wherein the Supreme Court has observed that the Assistant Commissioner of Income Tax cannot proceed with the prosecution even after the order of concealment has been set aside by the Tribunal. When the Tribunal has set aside the levy of penalty, the criminal proceedings against the appellants cannot survive for further consideration. In the opinion of the Supreme Court, if the trial is allowed to proceed further after the order of the Tribunal and consequent cancellation of penalty, it will be an idle and empty formality to require the appellants to have the order of Tribunal exhibited as a defence document inasmuch as the passing of the order as aforementioned is unsustainable and unquestionable.

iv) In view of the aforesaid factual and legal position, the application is allowed and the entire as well as all consequential proceedings of complaint pending before the court of Special Chief Judicial Magistrate (Economic Offence), Lucknow, are quashed.”

Non-resident — Income deemed to accrue or arise in India — Amounts paid by Indian affiliates on account of marketing, distribution marketing and frequency marketing programme treated by AO as royalty — American company receiving payments from Indian affiliate for marketing and reservation services in hotel — AO held receipts taxable as royalty under I T Act and under DTAA and alternatively as fees for included services u/s. 9(1)(vii) and article 12(4)(a) and (b) of DTAA between India and US — DRP rejecting assessee’s objections holding that mere changing of business model did not change nature of receipts chargeable to tax — High Court held that the receipts neither taxable as royalty nor fees for technical services — Not taxable under DTAA as fees for included services

57. CIT(International Taxation) vs. Six Continents Hotels Inc.: (2025) 480 ITR 14 (Del): 2025 SCC OnLine Del 2744

A. Y. 2020-21: Date of order 17/04/2025

Ss. 9(1)(vii), 143(3) and 144C of ITA 1961: Art. 12(4)(a) and (b) of DTAA between India and the USA

Non-resident — Income deemed to accrue or arise in India — Amounts paid by Indian affiliates on account of marketing, distribution marketing and frequency marketing programme treated by AO as royalty — American company receiving payments from Indian affiliate for marketing and reservation services in hotel — AO held receipts taxable as royalty under I T Act and under DTAA and alternatively as fees for included services u/s. 9(1)(vii) and article 12(4)(a) and (b) of DTAA between India and US — DRP rejecting assessee’s objections holding that mere changing of business model did not change nature of receipts chargeable to tax — High Court held that the receipts neither taxable as royalty nor fees for technical services — Not taxable under DTAA as fees for included services.

The assessee was a non-resident, entitled to the beneficial provisions of the DTAA between India and the USA. During the financial year 2019-2020, the assessee had received a sum of ₹28,11,42,298 which comprised of marketing contribution, priority club receipts and reservation contribution aggregating to ₹21,22,52,199; and the Holidex fees amounting to ₹6,88,90,099 from Indian affiliate being InterContinental Hotels Group (India) Private Limited (IHG India) towards the centralised marketing and reservation related services. The assessee filed its revised return of income for the A. Y. 2020-2021 on March 31, 2021, declaring a total income of ₹1,05,20,740, which was picked up for scrutiny.

The Assessing Officer passed a draft assessment order dated September 15, 2022. The Assessing Officer held that the amounts paid by the Indian hotels for marketing contribution and reservation fees were taxable as royalty under the Act as well as under the India-USA Double Taxation Avoidance Agreement (DTAA) ((1991) 187 ITR (Stat) 102). In the alternative, the Assessing Officer held that the same would be taxable as fees for included services under section 9(1)(vii) of the Act as well as under article 12(4)(a) and article 12(4)(b) of the DTAA, the Assessing Officer determined the total taxable income at ₹39,19,56,083 after making an addition of ₹28,11,42,298 on account of marketing, distribution marketing and frequency marketing programme along with an addition of ₹10,02,93,045 on account of fees for included services/fees for technical services held as chargeable to tax under the Act as well as under the provisions of the DTAA.

The assessee filed objections to the said decision before the Dispute Resolution Panel (DRP). The DRP did not accept the assessee’s contentions that the receipts were not in the nature of royalty and concluded that the said fees were in connection with the grant of a licence for the brand for which separate fees was also charged. Thereafter, the Assessing Officer passed the final assessment order dated June 27, 2023.

The assessee carried the matter in appeal before the Tribunal. The Tribunal allowed the said appeal following the decision in the assessee’s case in the earlier assessment years. To be noted that the assessee’s contention that the receipts, as mentioned above, are not taxable by virtue of the DTAA has been sustained for the past fifteen assessment years.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) The principal question that is required to be addressed is whether the payments received by the assessee on account of providing certain centralised services including marketing services and reservation services can be construed as fees for technical services as defined under section 9(1)(vii) of the Act or fees for included services as covered under article 12(4)(a) of the DTAA. Admittedly, the said issue is covered in favour of the assessee and against the Revenue by several decisions of this court including DIT vs. Sheraton International Inc. [(2009) 313 ITR 267 (Delhi); 2009 SCC OnLine Del 4231.], CIT (International Taxation) vs. Sheraton International LLC [2023:DHC:4261-DB.], CIT (International Taxation) vs. Westin Hotel Management LP [ I.T.A. No. 213 of 2024 decided on April 10, 2024 (Delhi).] and CIT (International Taxation) vs. Shangri-La International Hotel Management Pte. Ltd. [ I.T.A. No. 532 of 2023 decided on September 18, 2023 (Delhi).]

ii) In the case of the CIT (International Taxation) vs. Radisson Hotel Interaction Incorporated [(2023) 454 ITR 816 (Delhi); 2022 SCC OnLine Del 3713; 2022: DHC: 004791.], this court had referred to the earlier decisions and dismissed the case, holding that no substantial questions of law arise for consideration by this court. The present appeal must bear the same fate.

iii) In view of the above, no substantial questions of law arise for consideration before this court. Thus, the appeal is dismissed.”

Section 144B – faceless assessment – breach of principles of natural justice – opportunity of personal hearing through video conference – order was passed without providing details on the basis of which the SCN was issued, pointing out the difference between the purchase value and the import invoice value.

22. JSW MINERALS TRADING PRIVATE LIMITED vs. ASSESSMENT UNIT, INCOME TAX DEPARTMENT, NATIONAL FACELESS ASSESSMENT CENTRE & ORS.

[WRIT PETITION NO. 3683 OF 2023 (BOMBAY) DATED: JANUARY 13, 2026]. Assessment Year 2020-21

Section 144B – faceless assessment – breach of principles of natural justice – opportunity of personal hearing through video conference – order was passed without providing details on the basis of which the SCN was issued, pointing out the difference between the purchase value and the import invoice value.

The Petitioner filed its return of income for Assessment Year 2020-21 on 16th January 2021, declaring its total income as ₹Nil (having incurred a loss of ₹37,08,74,848/). The case of the Petitioner was picked up for scrutiny under the faceless assessment provisions set out in Section 144B of the Act.

During the year under consideration, the Petitioner had entered into various international transactions, including the ‘purchase of finished goods’ amounting to ₹1041,48,67,611/- with its associated enterprises, namely JSW International Trade Corp Private Limited. The case of the Petitioner was referred to the Transfer Pricing officer, to determine the arm’s length price with reference to the said international transactions. The TPO vide its order dated 12th May 2023, passed under Section 92CA(3) of the Act, accepted that the international transactions as reported by the Petitioner in Form 3CEB are at an arm’s length price.

Notice under Section 142(1) was issued by Respondent No. 1 on various issues, including the following:

“7. As per the ITR, purchases shown by you is ₹1,218,03,15,231/-. However, as per the data with us, the imports made by you is ₹1,520,29,89,300/-during the year. Reconcile the difference along with necessary documentary evidences”.

The said notice was duly dealt with by the Petitioner, who requested details/data on the basis of which the aforesaid difference in import purchases had been alleged/computed by Respondent No.1. The Petitioner also stated that it could not find any discrepancies as per the audited books of accounts and the return filed. The Petitioner filed another reply, resubmitting the details filed earlier, including a request for the details/data on the basis of which the aforesaid difference in purchases had been computed by Respondent No. 1. It once again reiterated that it could not find any discrepancies as per the audited books of accounts and the return filed.

Respondent No. 1 thereafter issued a show cause notice proposing interalia an addition of ₹302,26,74,069/- under Section 69A of the Act (Unexplained Money) based on the difference between the invoice value of imports as per the data received from CBEC (₹1520,29,89,300/-) and the purchase value shown in the ROI (₹1218,03,15,231/-).

The Petitioner objected to the proposed variations and again requested inter alia that the breakup of the alleged difference in purchase value of ₹302,26,74,069/- be provided The Petitioner also submitted reconciliation (to the best of its ability, with the limited data available) for purchases worth ₹270,94,21,668/- out of the alleged difference of ₹302,26,74,069/- as stated by Respondent No. 1.

Instead of providing the breakup of the purchase value as repeatedly requested by the Petitioner , without providing an opportunity of personal hearing through video conference, and without considering the Petitioner’s request for additional time, Respondent No. 1 passed the impugned assessment order dated 29th September 2023 under Section 143(3) read with Section 144B, and, interalia made an addition of ₹302,26,74,069/- under Section 69 (Unexplained Investment) – notably different from the show cause notice, which proposed an addition under Section 69A (Unexplained Money) on account of difference between purchase values as shown by the Petitioner and the invoice value of imports as per import-export data received from the CBEC.
The Petitioner challenged the said assessment order primarily on the ground that it had requested full details of the import-export data allegedly received by / available to Respondent No.1 from the CBEC, which was in the exclusive knowledge and possession of Respondent No. 1, and which formed the sole basis for the addition of ₹302,26,74,069/-, but the same was never provided. The Petitioner pointed out that it would be impossible for it to explain/reconcile the alleged variation in the value of imports without full details of the invoice value of imports as per the CBEC data. Respondent No. 1 also failed to consider that partial reconciliation was provided by the Petitioner.

The Petitioner argued that though The TPO accepted the purchase value in the transfer pricing assessment, however, Respondent No. 1 denied the purchase values in the assessment.

The Court held that there was a violation of the principles of natural justice, as in the notice dated 18th November 2021, Respondent No. 1 required the Petitioner to reconcile the stated difference between purchases shown by the Petitioner in its return of ₹1218,03,15,231/- and the “data with us” ₹1520,29,89,300/-. Other than this aggregate figure, no details were set out in the notice.

The Hon. Court observed that it was impossible for the Petitioner to reconcile and/or explain the alleged difference between the figures of imports as per the ITR/accounts of the Petitioner and the data of the CBEC, in the absence of complete details of the break-up of the CBEC data being furnished to the Petitioner. Further, the impugned order clearly indicates that Respondent No. 1 proceeded to make an addition without providing or even referring to the breakup or details of the difference in the alleged purchase value of imports of the assessee/Petitioner. In the transfer pricing proceedings, these very purchases were scrutinised and held to be at arm’s length price.

The Hon. Court held that there has been a breach of principles of natural justice and that, on this count alone, the entire addition made and the assessment proceedings are vitiated. Respondent No. 1 simply relied upon the information provided by the CBEC on the assumption that the figure mentioned by the CBEC was the actual figure of imports required to shown by the Petitioner in its ITR, notwithstanding that it had not disclosed the details of any import bills and that no break-up value of the import purchases was given, and further by not even providing the information as received from the CBEC to the Petitioner, before passing the assessment order under Section 143(3) read with Section 144B of the Act.

In view of the above , the Impugned Order and the Impugned Demand Notice were unsustainable and has been passed in violation of the principles of natural justice. The Court further observed that Respondent No. 1 must disclose complete details of any material it is relying upon to hold that additional purchases have been made over and above the disclosed purchases, and the legal basis to make such an addition. In the present case, the only basis for the addition is the aggregate purchase figures communicated by the CBEC, which did not disclose any particulars of import bills or details of additional purchases made. Such general information, without details, without a proper opportunity to set out a reconciliation, and without any supporting evidence, could not constitute valid material for the purpose of making an addition under the Act.

The Hon. Court remanded the matter back to the file of Respondent No.1 to issue a fresh Show Cause Notice to the Petitioner with respect to the addition of ₹302,26,74,069/-, clearly bringing out the provision(s) under which the addition was proposed, providing a the detailed break-up of the import value of purchases including a copy of the information as received from CBEC, and grant sufficient time of at least 15 working days to file a reply to the notice.

Direct Tax Vivad se Vishwas Act 2020 – grant credit for taxes paid and refund/release of cash seized, in the computation of the Petitioner’s liability / refund.

21. SUNITA SAMIR SAO vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX -20 & ORS.

[WRIT PETITION NO. 1479 OF 2025 (BOMBAY) DATED: JANUARY 14, 2026]

Direct Tax Vivad se Vishwas Act 2020 – grant credit for taxes paid and refund/release of cash seized, in the computation of the Petitioner’s liability / refund.

The Petitioner is an individual and the ‘Legal Representative’ of her father, one Late Shri Bhalchandra Bhaskar Thakoor. The Petitioner’s deceased father was subjected to a ‘search & seizure’ action under section 158BC read with Section 132 of the Act’ in the year 1997, along with some of his family members. In the course of the search action, some cash was seized, along with certain
jewellery, from the persons put to search. In the case of the Petitioner (her deceased father), cash of ₹11,50,000/- was seized and an assessment was made by passing an Assessment Order under Section 158BC of the Act.

The said block assessment was carried out in appeal before the Appellate Tribunal. Against the Order of the ITAT, the Petitioner (the deceased father) filed an Appeal before the High Court, and the said Appeal, being ITXA/31/2006, was admitted. Similarly, penalty under Section 158BFA(2) of the Act was also levied and confirmed by the ITAT, against which an Appeal was filed before the Court, being ITXA/456/2015. The said Appeal against the levy of penalty was also admitted.

In the meantime, the then Assessing officer issued Notice dated 20th October 1999 to the Petitioner, stating that the cash seized of ₹11,50,000/- was contemplated to be adjusted against the demand arising out of the said assessment and called upon the Petitioner (the Petitioner’s deceased father) to give his consent for the same. The Petitioner (the deceased father), vide letter dated 1st November 1999, accorded consent for adjusting the said cash against the demand, during the pendency of the appeal against the assessment.

During the pendency of the appeals, the Petitioner paid some amount of taxes ₹7,35,049/-, arising out of the assessment, by way of challans, which were independent of the cash seized during the search action. Thereafter, the Petitioner availed of the scheme under the DTVSV Act, and also withdrew her appeals filed before the Court, in pursuance of her application under the DTVSV scheme. The Petitioner filed the necessary forms under the DTVSV Scheme (Form 1 & 2) and claimed credit for taxes paid by way of challans as well as credit for the cash that was seized and adjusted against the demand. In Form No.3 dated 27th February 2021, issued by Respondent No.1 under the said DTVSV scheme, credit was neither given for taxes paid by way of challans nor for the cash seized during the search.

The Petitioner followed/pursued the issues with the Respondents and pointed out the errors in Form-3, including non-granting of credit for cash seized of ₹11,50,000/- and raised her grievances. Having received no response from the Respondents, the Petitioner approached the Hon. Court, (being WP/836/2022), raising grievances and contending that she was entitled to the credit of the cash seized during the search action. The Court, vide its order dated 3rd March 2022, was pleased to set aside Form No.3 and directed the Respondents to grant a personal hearing to the Petitioners and also consider the Petitioner’s claim for credit of the cash seized.

The Court noted that since other family members of the Petitioner were also subjected to the search action, cash was also seized in their respective cases. The said family members had also availed of the DTVSV scheme, and the issue of non-granting of credit for cash seized had also cropped up in their cases (being WP/3850/2021 and WP/3849/2021).

The said family members had filed similar Petitions before the Hon Court, and the Court had directed the Respondent-Department to consider the claim of credit for the cash seized. The Department has released the cash seized along with interest in case of the said family members, by the Respondents.

The Respondents contended that the records pertaining to the seized cash were unavailable and, consequently, the requisite credit could not be extended. The Petitioner, in the alternative, sought release of the seized cash in accordance with Section 132B of the Act. The Hon Court noted that the Respondent-Department had adopted an identical stand in the case of a particular family member (Vasant Thakoor WP(L)/33180/2023) of the Petitioner, who was also subjected to the search action, and cash was seized in his case. The said family member had also availed of the DTVSV scheme, and the issue of non-granting of credit for cash seized had also cropped up in his case. The said family member (Shri Vasant Thakoor- WP(L)/33180/2023) had filed a similar petition before the Court wherein the Respondent-Department had conceded that cash had to be released with accumulated interest and credit had to be allowed for payments made through challans.

The Court noted that the, parties agree that the present case is identical to the facts in petition WP(L)/33180/2023.

The Hon Court observed that the Respondents have filed their reply dated 15th December 2025, wherein the fact of seizure of cash by the Department has been accepted. The Respondents state that the record of cash that was seized, was supposed to be with some other ward/circle, and there was no confirmation forthcoming from the said ward/circle despite making efforts towards the same, and hence the record/accounting treatment of the cash seized could not be ascertained.

The Hon Court, allowing the petition, directed the Respondents/Department release the cash seized and refund the cash along with accumulated interest, within 30 days from the date of order, on similar lines as in Writ Petition No. 33180/2023. The Hon. Court noted that the Respondents had called for an Indemnity Bond from the Petitioner, which the Petitioner has filed with the Respondents’ office.

Accordingly, the Respondents were directed to issue a refund of cash seized of ₹11,50,000/-, along with accumulated interest, and the CPC was further directed to issue a refund arising out of Form No.5 dated 11th December 2025, which was towards taxes paid by way of challans by the Petitioner, within 30 days.

Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is a business trust that owns or finances income-producing real estate, such as commercial offices or malls, functioning similarly to a mutual fund. Investors purchase units, and the capital is used to invest in properties directly or through Special Purpose Vehicles (SPVs), with generated rent distributed as dividends. Key parties include the sponsor, manager, trustee, and unit holders. While established globally since 1960, India’s REIT market is transitioning from a “nascent” to a “growth” stage. As of 2025, India has five listed REITs covering 175 million square feet of assets. A significant regulatory shift occurred in September 2025 when SEBI reclassified REITs as equity instruments, removing previous allocation caps and enabling wider institutional participation. REITs provide developers with liquidity and an “asset-light” model, while offering investors stable income, high-yield returns (6%–10%), and transparency. Taxation has also evolved; the 2024 Union Budget aligned REITs with equity funds, setting capital gains tax at 12.5% for long-term and 20% for short-term holdings. Additionally, “atypical” distributions, such as debt repayments, now reduce the cost of acquisition or are taxed as “income from other sources” if they exceed the original issue price.

OVERVIEW – WHAT ARE REITs

A REIT is a business trust that owns or finances income-producing real estate which may be in the form of a commercial or any other rent generating property (malls, residential projects, etc).

The basic model of REIT can be considered as similar to a mutual fund wherein the investors shall buy REIT units based on an offer document and the REIT shall then list on the stock exchange. The money so raised would be used by the REIT either to buy into Special Purpose Vehicles (SPVs) which invest in property or the REIT may directly invest in real estate projects.

The rent income generated from the properties shall be distributed as dividend to the REIT unit holder. REITs would be traded on a stock exchange and just like shares, REIT units may trade at a discount or premium to the company’s intrinsic value.

As can be seen from the above, a REIT shall consist of a Sponsor, Manager, Trustee, SPV and unit holder which are defined in the SEBI regulations for REITs as “parties to the REIT”. Additionally, a REIT shall have a valuer and an auditor. The meaning of the aforementioned terms is summarized hereinbelow:

  • Sponsor(s): Who set(s) up the REIT and is designated as such at the time of application to SEBI. Sponsor is mandated to hold minimum prescribed stake of the REIT units.
  • Manager : One who holds the operational responsibility of the REIT
  • Trustee : Holds the assets of the REIT on behalf of the investor
  • Unit holders: Investors (including Sponsors) who hold REIT units. Unit holders could be either resident or nonresident unit holders.
  • Special Purpose Vehicle [‘SPV’]: Holds the real estate properties and is engaged in incidental activities. SPV is held by REIT directly or through a Holding Company
  • Real Estate property: Real estate properties that a REIT is permitted to hold

Global Scenario

Globally, REITs have been in existence since decades. The Dutch regime was the first REIT look alike regime in the Euro region. Further, the United States boasts of the oldest formal REIT regime, having been enacted in 1960 and effective from 1961.

Over the last decade, REITs have developed into a mature market world over, providing easy access to high-quality assets and enabling a stable return on investments.

The number of countries offering REITs as an investment vehicle has increased manifold. Several countries worldwide such as USA, UK, Australia, Malysia, Hong Kong, Singapore, Japan and Germany are said to have established REIT markets. With REIT’s introduction in the United States in 1960, it can be said to have a ‘mature’ REITs market.

India Story

India can be considered as a late entrant in the REIT market with its introduction by the SEBI in 2014.  when Securities and Exchange Board of India (SEBI) enacted Real Estate Investment Trusts Regulations, 2014 (REIT Regulations) on 26th September 2014 and the first REIT being listed in India in March 2019.However, thereafter the REIT theme in India has picked up with multiple listings like Embassy REIT, Mindspace REIT, Brookfield India REIT, Nexus Select Trust and Knowledge Realty Trust between 2019 to 2025.

India’s Real Estate Investment Trust (REIT) market is steadily progressing from a “Nascent” to “Growth” stage, with close to 175 million sq ft of real estate assets including office and retail spaces already getting listed through the above mentioned five listed REITs. Additionally, about 371 million sq ft of office assets, accounting for about 46% of the existing Grade A stock, can potentially come under future REITs. Overall, Indian REITs continue to pick pace, especially in the office sector, supported by new listings, broadening of occupier base and growing institutionalization in the segment.

Below is a chart depicting the Indian REIT performance against global peers1

1.Source -0020CREDAI and Anarock report on Indian REITs – September 2025

EASE OF STRUCTURAL NORMS OVER A PERIOD OF TIME

In the beginning, REITs were only permitted to raise funds via ECBs which had many end use restrictions. The Indian real estate sector had for long demanded opening up multiple routes for investment in REITs.

This demand from the industry finally saw the light of the day in September 2017 when the SEBI allowed REITs to raise funds via debt securities. Besides this, SEBI also allowed strategic investors such as banks, NBFCs, international financial institutions to participate in the public issue of REITs. This was followed by many further relaxations by the regulator including the latest relaxation in Union budget 2021-22. Per the said relaxation through an amendment in FPI regulations, FPIs were enabled to subscribe to debt instruments issued by a REIT. Earlier, FPIs were allowed to invest in non-convertible debentures (NCDs) issued only by a corporate entity.

Recently, in September 2025, SEBI reclassified REITs as equity instruments marking a significant shift in India’s capital markets. Earlier treated as hybrids, REITs were constrained by allocation caps that limited mutual fund and institutional participation. The move to equity classification enabled wider participation, paving the way for index inclusion, and providing institutions with the clarity to allocate at scale

These steps taken by SEBI broadened the fund raising options for REITs. As a result, fund raising in REITs has increased substantially, from ₹950 crores in FY 2021-22 to ₹4,727 crore in FY 2024-25 and ₹5,800 crores between April 2025 to August 20252. It is expected that further fresh investments in REITs shall take place which will not only provide ample real estate investment opportunities to developers but also help boost confidence of retail investors.

2. Source : Fund raising by REITs and InvITs https://www.sebi.gov.in/statistics/reitsinvits/funds-raised-reits-invits.htm

ADVANTAGES OF REITs

REITs allow tremendous advantages to multiple stakeholders and hence have been recently gaining popularity in the Indian markets. Some of the advantages to the stakeholders are captured below:

For real estate developers :

  • Business model: Transformation of business from a asset heavy model to a asset light model
  • Liquidity: Access to alternate fund raising mechanisms and resultant liquidity to carry out projects

For investors / unit holders:

  • Easy participation by small retail investors : Opportunity to invest in portfolios of large-scale properties the same way they invest in listed stocks. Low liquidity requirement compared to a direct investment in real estate
  • Income stability : Regular income in the hands of unit holders through SEBI mandated distribution criteria
  • High yield returns and capital appreciation : Returns in the range of 7% – 10% which is higher than the deposit rates coupled with long term capital appreciation
  • Hedge against inflation : REITs income primarily include lease rentals from tenants, the terms of which tend to protect REIT’s margins from effects of inflation
  • Transparent structure : REIT industry is highly transparent due to high scrutiny of publicly traded firm and mandatory disclosure requirements

For the macro economy

  • Better corporate governance : Improvement in transparency and professionalism in a highly unorganized sector
  • Employment opportunities : Direct and indirect employment opportunities through the following:

– Project management operations
– Fund management services
– Assurance services
– Valuation and trusteeship services

Considering the above it could be construed that the REIT market in India has significant scope for an upper thrust and we might see a lot of new REIT listings as well as additional funding in the Indian REIT market.

TAXATION ASPECTS OF A REIT

On the tax front, considering the relevance of the role played by taxation, in the case of Real Estate Investment Trusts (‘REITs’), a special tax regime was announced vide Finance Act 2014, even prior to the introduction of the REIT Regulations. There have been continuous attempts to provide for additional concessions in the subsequent finance budget announcements to make REIT structure more acceptable from a tax perspective.

EVOLUTION OF THE TAX LAW ON REITs IN INDIA

Before 2020: Tax-free for investors

When REITs were first introduced in India, the tax setup was pretty favourable for investors. The dividends received by unitholders from the REITs were totally tax-free, thanks to the pass-through status. It meant that Special Purpose Vehicles (SPVs) had already paid corporate tax, avoiding double taxation.

After 2020: Dividend taxes for unitholders comes into play

The Finance Act of 2020 introduced amendments to the Income Tax Act, 1961, where the REIT income received by unitholders becomes taxable, if SPV opts for concessional tax regime under Section 115BAA of the Act. Resultantly, dividends distributed by SPVs to REITs (and subsequently to unitholders) are added to the unitholder’s income and taxed according to their individual slab rates.

Year 2023 – Unitholder’s taxability of certain atypical distributions introduced

The Finance Act of 2023 introduced amendments to Section 48 and Section 56(2)(xii) to address tax avoidance involving certain REIT distributions. The non-income REIT distributions (capital repayments or amortization of SPV level debt) were previously not taxed in the hands of unitholders. Under the new provision, such distributions are now taxable as “Income from Other Sources” in the hands of unitholders as per the prescribed mechanism in the said section. We have discussed this in detail in the ensuing paragraphs.

Year 2024 – Bringing the taxability at par with equity oriented funds

The Union Budget 2024 aligned REITs with equity funds, changing its taxation aspect. The tax rates and holding period were revised in the said budget. Unitholders were now taxed @ 12.5% / 20% [Long-term / Short-Term] on the capital gains earned on sale of REITs depending on the holding period [i.e. more than 12 months for long-term]. The holding period prior to the said budget amendment was 36 months and tax rate was 10% / 15%

Year 2025 – Filling-in the loopholes

Prior to Budget 2025, income earned under Sec. 111A [Short-term Capital Gain tax] and Sec. 112 [Long-Term Capital Gain tax] was taxed as per the tax rates prescribed therein and all other income was taxed at Maximum Marginal Rate. However, the reference of income under the head ‘capital gains’, under section 112A [Long-Term Capital Gain tax in certain cases] of the Act was missing. The said reference was introduced by amendment of section 115UA in Finance Act 2025. Now, the income of Business Trusts, chargeable under section 112A, shall also be charged at the rate provided under said section and not at maximum marginal rate

TAX RATES ON TYPICAL INCOME STREAMS IN THE HANDS OF SPV, REIT AND UNITHOLDERS

The incomes which typically a business trust is allowed to pass through to its unit-holders are as follows:

  • Dividend received from special purpose vehicle (SPV);
  • Interest received from SPV; and
  • Rental income from real estate properties either directly owned by REITs or through SPVs.

The pass-through status is provided to the business trust only in respect of the aforesaid incomes and all other incomes are chargeable to tax in the hands of the business trust. Such other income is taxable under Section 115UA at a maximum marginal rate (i.e. 30%3) except the capital gains covered under Section 111A, Section 112, Section 112A.

Section 111A, Sec. 112 and Sec. 112A provide for taxability in case of short term capital gains and long term capital gains arising from units of business trust

The taxation of the abovementioned three streams of income and certain other tax aspects in the hands of various parties to a REIT tabulated below:

DIVIDEND

Particulars In the hands of REIT In the hands of SPV
From SPV to REIT
If SPV is a Wholly Owned Subsidiary No tax [Sec. 115-O(7) r.w.s 10(23FC)] No Withholding Tax (WHT) [Sec. 194 as amended by Finance Act, 2021]

 

Particulars In the hands of Unit holder In the hands
of REIT
From REIT to unitholder
If SPV has not exercised the option to pay corporate tax under Sec. 115BAA No tax [Sec. 10(23FD)] No WHT
If SPV has exercised the option to pay corporate tax under Sec. 115BAA Tax at rates applicable to unit-holder depending on the type of unitholder

– If resident : Highest tax @ 30%

– If non-resident: Tax @ 20% or as per DTAA whichever is lower

 WHT @ 10%

In case of non-resident unitholders, a lower WHT rate as per DTAA may apply depending on the jurisdiction

 

INTEREST

Particulars In the hands
of REIT		 In the hands
of SPV
From SPV to REIT No tax [Sec. 10(23FC)] No WHT [Sec. 194A(3)(xi)]

 

Particulars In the hands of Unitholder In the hands of REIT
From REIT to unitholder Tax at prevailing rate [Sec.115A(1)(a)(iiac)] WHT as follows:

  • For resident : 10%
  • For non-resident : 5%

[Sec. 194LBA]

RENT

Particulars In the hands of REIT / SPV In the hands of Tenant
From Tenant to REIT

[Applicable in a scenario where assets are directly held by REIT and not through SPV]

 No tax [Sec. 10(23FCA)] No WHT by tenant  [Sec. 194I]

 

Particulars In the hands of Unitholder In the hands of REIT
From REIT to unitholder Tax at rate applicable to unitholder depending on the type of unitholder WHT as follows:

For resident : 10%

For non-resident :  30%

[Sec. 194LBA]

Capital Gains

Particulars Unitholder
From REIT to unitholder
Sale of listed units of business trust – LTCG4 Resident unit holder :

Tax @ 12.5% without indexation

Non-resident unitholder

Tax @ 12.5% without indexation

However, tax rate may reduce under DTAA
Sale of listed units of business trust – STCG Resident unit holder :

Tax @ 20% without indexation – Sec 111A

Non-resident unitholder

Tax @ 20% without indexation

However, tax rate may reduce under DTAA

INCOME AS REFERRED UNDER SEC. 115UA OTHER THAN THE ABOVE

Particulars Unitholder REIT
From REIT to unitholder No tax

[Sec 10(23FD)]

 No WHT 
4. Period of holding to be considered at 12 months or more for LTCG. Assuming STT has been paid by the unit holder upon acquisition of units.

Taxability of certain other distributions by REIT to unitholders

While the abovementioned items are typical streams of income distributed to unitholders, certain REITs also distribute an atypical item which is in the nature of proceeds from repayment of SPV level debt. The tax treatment of the same was clarified vide Finance Act, 2023 and the same is captured hereinbelow

PROCEEDS FROM REPAYMENT OF SPV LEVEL DEBT BY REIT

Particulars In the hands of Unitholder In the hands of REIT
From REIT to unitholder Reduce the cost of acquisition of Units and in turn will be taxable under the head Capital gain when the unit(s) are sold

[Amendment in Section 48 (cost of Acquisition)] – Finance Act, 2023

 

Will be taxable under the head Income from other source when the sum received exceeds the issue price

[Sec.56(2)(xii) – Finance Act, 2023

[Refer detailed explanation below with illustration]

 Debt repayment by SPVs to REIT is not taxed in the hands of REIT, since the same is on account of repayment of principal portion of Loan

Per the explanation to Section 48, of the Act, any amount received except following will be considered as reduction in cost of acquisition of units of REITs:

  • Interest – As per Section 10(23FC); or
  • Dividend – As per Section 10(23FC); or
  • Rental income (in case of REITs) – As per section 10(23FCA); or
  • Debt repayment portion upto the amount at which such units was issued by the trust [Amount not chargeable to tax u/s 56(2)(xii)]
  • Income Chargeable to tax in the hands of the business trust under section 115UA(2) (i.e. Interest income and capital gains)

Per Sec. 56(2)(xii) any “specified sum” received by a unit holder from a business trust during the previous year, with respect to a unit held by him at any time during the previous year

“Specified sum” has been defined under the Act to as follows:

Specified Sum means: A-B-C (which shall be deemed to be zero if sum of B and C is greater than A), where—

  • A = Aggregate of sum distributed by the business trust during the previous year or during any earlier previous years to unit holders, not in the nature of Interest / dividend exempt u/s 10(23FC) or rental income exempt u/s 10(23FCA) or Capital Gains u/s 111A, 112 and 112A
  • B = Issue price of the REIT/InvIT unit
  • C = Amount offered to tax as IFOS in preceding previous years

Thus, debt repayment must be reduced from cost of acquisition at the time of sale of units. As a consequence, the amount received as debt repayment will in turn taxed as Capital gain at the time of transfer/sale of unit.

Example: Mr. X bought one unit of InvIT at ₹200 and selling it after 3 years at ₹300 in the open market. During this period REIT distributed ₹20 as debt repayment. To calculate Capital Gain Mr. X needs to reduce ₹20 from the cost of acquisition. Thus the net cost of acquisition is ₹180 (₹200 – ₹20) and the capital gain is ₹120 (₹300 – ₹180). Thus, the debt repayment portion is taxed under the head Capital Gain at the time of sale of Unit in the hands of unit holder.

Further, the amendment in Finance Act, 2023 provided for the chargeability of Debt repayment component of distribution under the head Income From Other Source based on certain formula

Example: Mr X bought one unit of REIT from primary market for ₹200/- on Year-1. Mr. X received debt repayment as a component of distribution from REIT as per following:

Year(s) Amount of debt repayment Tax treatment
Year 1-10 ₹180/- (From Year-1 to year-10 Mr. X received ₹180/- as Debt repayment)
  • ₹180 will be reduced from cost of acquisition as per Explanation to Section 48 of the Act and will be taxed under the head Capital gain at the time of sale of unit.
  • Income From Other Source = Zero (based on Formula provided in Section 56(2)(xii)

Calculation of Specified Sum [Section 56(2)(xii)]:

A = Aggregate amount received: ₹180.4
B = Amount at which such units was issued by Trust = ₹200C = Amount charged to tax in earlier year = Nil Specified Sum: A – B – C = ₹180 – ₹200 – Nil = 0
Year 11 ₹30/-
  • ₹20 will be reduced from cost of acquisition as per Explanation – 1 to Section 48 and will be taxed under the head Capital gain at the time of sale of unit.
  • ₹10/- will be treated under the head Income from Other Source (based on Formula provided in Section 56(2)(xii).
Calculation of Specified Sum [Section 56(2)(xii)]:

  • A =  Aggregate amount received: ₹210 (₹180 + ₹30)
  • B = Amount at which such units issued by Trust = ₹200
  • C = Amount charged to tax in earlier year = Nil

Specified Sum: A-B-C = ₹210 – ₹200 – NIL= ₹10
Year 12 ₹20
  • ₹20/- will be treated under Income from Other Source (based on Formula)Calculation of Specified Sum: [Section 56(2)(xii)]:4

A. Aggregate amount received : ₹230 (₹180 + ₹30 + ₹20)

B. Amount at which such units was issued by Trust = ₹200

C. Amount charged to tax in earlier year = ₹10

Specified Sum: A – B – C = ₹230 – ₹200 – ₹10= ₹20/-

As can be seen from the above, out of the total debt repayment component of ₹230/-, ₹200/- is reduced from the cost of acquisition/issue price of the units and the balance ₹30/- is being taxed as Income from other sources, based on the prescribed formulae.

CONCLUSION AND WAY FORWARD

REITs could be a game changer for the Real Estate sector in India. It could redefine the funding strategies and provide a lucrative platform for retail and institutional investors to reap benefits. With the Government giving REITs a much-needed boost in the regulatory and tax field, the market for these investment vehicles has grown substantially and is expected to grow at a rapid pace in the future, helping to accelerate growth in the Indian economy.

While both institutional and retail investors’ interest in REITs have increased in the recent past, India still has a long way to go considering its real estate funding requirement through instruments like REITs and tap the related growth opportunities.

Glimpses of Supreme Court Rulings

12. Director of Income Tax (IT)-I, Mumbai vs. American Express Bank Ltd.

(2025) 181 Taxmann.com 433(SC)

Deduction of head office expenditure in case of non-residents – Section 44C applies to ‘head office expenditure’ regardless of whether it is common expenditure or expenditure incurred exclusively for the Indian branches – Section 44C is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident Assessee that qualifies as ‘head office expenditure’ – For an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The Assessee claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of ‘head office expenditure’ as provided in the Explanation to the Section – The Explanation prescribes a tripartite test to determine if an expense qualifies as ‘head office expenditure’ – (i) The expenditure was incurred outside India; (ii) The expenditure is in the nature of ‘executive and general administration’ expenses; and (iii) The said executive and general administration expenditure is of the specific kind enumerated in Clauses (a), (b), or (c) respectively of the Explanation, or is of the kind prescribed under Clause (d) – Once the conditions in (b) referred to above are met, the operative part of Section 44C gets triggered. Consequently, the allowable deduction is restricted to the least of the following two amounts: (i) an amount equal to 5% of the adjusted total income; or (ii) the amount of head office expenditure specifically attributable to the business or profession of the Assessee in India.

(i) Civil Appeal No. 8291 of 2015

M/s. American Express Bank, the Assessee, a non-resident banking company, is engaged in the business of providing banking-related services. The Assessee filed its income tax return on 01.12.1997 for AY 1997-1998, declaring an income of ₹79,45,07,110. In the said return, the Assessee claimed deductions for the following expenses under Section 37(1) of the Act, 1961: (i) ₹6,39,13,217 incurred for solicitation of deposits from Non-Resident Indians; and (ii) ₹13,50,87,275 incurred at the head office directly in relation to the Indian branches.

The Assessee, vide notice dated 21.10.1999, was asked to explain why the expenses in question should not be subjected to the ceiling specified in Section 44C of the Act, 1961, and thus be disallowed.

The Assessee, in its reply to the notice referred to above, clarified that the expenses in question could not have been classified as head office expenditure for the reason that Section 44C of the Act, 1961 presupposes that at least a part of the expenditure is attributable to the business outside India. If this presumption does not hold true, and the entire expenditure is incurred solely for the business in India, then Clause (c) does not apply. Consequently, Section 44C would not be applicable to such expenses.

The Assessing Officer, vide its Assessment Order dated 08.02.2000, limited the deduction to 5% of the gross total income by applying Section 44C of the Act, 1961, having regard to the view taken by the Income Tax Appellate Tribunal in the Assessee’s own case for AY 1987-88. The decision of the Assessing Officer was also based on the following reasons:

a) Section 44C is a non-obstante provision that begins with the words ‘notwithstanding anything to the contrary contained in Section 28 to 43A,’ and therefore, the head office expenses allowable to the Assessee are subject to the limits set out under Section 44C.

b) The purpose of inserting Section 44C was to address the difficulties encountered in scrutinising the books of account maintained outside India. Therefore, the Assessee could not have claimed that the expenses incurred outside India should have been allowed beyond the ceiling prescribed under Section 44C. If such a plea were permitted, Section 44C would become redundant and otiose.

c) The definition of head office expenditure is clear, and the same includes all kinds of expenses of any office outside India.

Aggrieved by the aforesaid order of the Assessing Officer, the Assessee filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner vide Order dated 26.09.2000 affirmed the decision of the Assessing Officer.

Thereafter, the Assessee filed an appeal before the Income Tax Appellate Tribunal, Mumbai. The Income Tax Appellate Tribunal, Mumbai, vide Order dated 08.08.2012, allowed the appeal of the Assessee by relying upon the Bombay High Court’s decision in Commissioner of Income Tax vs. Emirates Commercial Bank Ltd., reported in (2003) 262 ITR 55 (Bom).

The Revenue challenged the order passed by the Tribunal referred to above before the Bombay High Court by way of Income Tax Appeal No. 1294 of 2013. However, before the High Court, the Revenue’s counsel conceded that the question regarding the application of Section 44C for the exclusive expenditure incurred by the head office for the Indian branches had been decided against the Revenue by a division bench of the High Court in Emirates Commercial Bank (supra). As a result, the High Court, by way of its impugned order dated 01.04.2015, dismissed the Revenue’s appeal on the said issue.

(ii) Civil Appeal No. 4451 of 2016

M/s. Oman International Bank, the Assessee, filed its return of income for AY 2003-04 on 28.11.2003, declaring a loss of ₹71,79,69,260. In the return, the Assessee claimed a deduction of ₹21,63,436 towards expenses specifically incurred by the head office for the Indian branches. The Assessee was asked to justify such a claim for deduction.

The Assessee vide letter dated 16.03.2006 provided the following details with regard to the expenditure incurred by the head office specifically for the Indian branches.

The Assessee claimed that the travelling expenses included travel fares, hotel charges, and other costs incurred by the head office for staff travelling to India for various purposes, such as local advisory board meetings, training, internal audits, staff meetings, etc. Additionally, the certification fees were for the charges paid to auditors for issuing certificates of expenses incurred by the head office chargeable to the Indian branches of the bank, for the year ending March 31, 2003.

The stance of the Assessee was that since the expenses referred to above were incurred specifically for the Indian branches, they would fall outside the scope of Section 44C of the Act, and were allowable as deductions under Section 37 of the Act, 1961. It claimed that the deduction under Section 44C applies to common head office expenses attributable to Indian branches.

The Assessing Officer, vide its Order dated 20.03.2006, disagreed with the explanation offered by the Assessee and held that both the above-mentioned expenses fell within the purview of Section 44C and thus are bound by the ceiling limit set thereunder.

Aggrieved by the Order of the Assessing Officer referred to above, the Assessee appealed to the Commissioner of Income Tax (Appeals). The Commissioner allowed the Assessee’s appeal by relying on its previous years’ decisions for AY 2001-2002 and 2002-2003, respectively, where an identical question was decided in favour of the Assessee, consistent with the Bombay High Court’s decision in Emirates Commercial Bank (supra). Subsequently, the Revenue’s appeal to the Income Tax Appellate Tribunal on the said issue also came to be dismissed based on the decision in Emirates Commercial Bank (supra).

Finally, by the impugned order dated 28.07.2015, the Bombay High Court also ruled against the Revenue on the aforementioned issue.

According to the Supreme Court, the following question fell for its consideration:

“Whether expenditure incurred by the head office of a non-resident Assessee exclusively for its Indian branches falls within the ambit of Section 44C of the Act, 1961, thereby limiting the permissible deduction to the statutory ceiling specified therein?”

Having regard to the rival contentions canvassed on either side, the Supreme Court observed that the core of the disagreement concerns the scope of Section 44C of the Act, 1961. The Appellant-Revenue seeks to interpret it more broadly, encompassing not only the expenditure incurred by the head office attributable to various foreign branches, i.e., ‘common’ expenditure, but also the ‘exclusive’ expenditure incurred specifically for the Indian branches. The Respondent-Assessee, however, aim to restrict the scope of Section 44C to include only ‘common’ expenditure. According to the Supreme Court, this was best illustrated by the example provided by the Respondents. If a general counsel is appointed by the head office solely to handle Indian matters, it constitutes exclusive expenditure. However, if a general counsel is appointed by the head office to handle matters in branches across the globe (including India), it constitutes common expenditure. The Appellant contends that Section 44C applies in both cases, whereas the Respondents argue that it is only applicable in the latter scenario. In other words, the Respondents argue that for exclusive expenditure, Section 44C is wholly inapplicable, and therefore, the deduction of the expenditure is not subject to the ceiling limit set out therein.

According to the Supreme Court, Section 44C of the Act, 1961 could be divided into two separate but interconnected parts. The first is the operative or substantive provision, which outlines the conditions for applying the Section and details the computation mechanism. The second is the definitional provision in the Explanation, which clarifies the scope of the term ‘head office expenditure’. The meaning given under the Explanation serves as the statutory trigger, as only when an expense falls within the ambit of this meaning does the operative framework of Section 44C come into effect.

The Supreme Court observed that the operative part of Section 44C could be divided into the following distinct components:

a) Section 44C applies specifically to non-resident Assessees.

b) Section 44C governs the computation of income chargeable under the specific head ‘Profits and gains of business or profession”.

c) Section 44C mandates that no allowance under the aforementioned head shall be made in respect of ‘head office expenditure’ to the extent that such expenditure is in excess of the lesser of the following two amounts: (a) an amount equal to five per cent of the adjusted total income; or (b) the amount of head office expenditure attributable to the business or profession of the Assessee in India.

d) Section 44C is a non-obstante provision as it starts with a phrase: notwithstanding anything to the contrary contained in Sections 28 to 43A. Consequently, it has an overriding effect on Sections 28 to 43A for the specific purpose of computing head office expenditure of a non-resident Assessee.

According to the Supreme Court, for an expense to be governed by the tenets of Section 44C of the Act, 1961, two conditions must be fulfilled: (i) the Assessee should be a non-resident, and (ii) the expenditure should be a ‘head office expenditure’. If both conditions are met, then Section 44C, being a non-obstante provision, will apply regardless of whether its principles contravene Sections 28 to 43A respectively.

According to the Supreme Court, the Respondents may therefore be correct in stating that for an expenditure to be deductible under Section 37(1), it does not necessarily have to have been incurred in India. Furthermore, they are also correct in stating that Section 44C only seeks to put a ceiling on the ‘head office expenditure’ that can be allowed as a deduction. However, according to the Supreme Court, their argument that Section 44C cannot restrict deductions that are otherwise allowable under Section 37(1) was misplaced. If the expenditures meet the above two conditions, Section 44C governs the quantum of allowable deduction. This means that even if such head office expenditure can be allowed as a deduction under Section 37(1), it would not be permitted if it exceeds the ceiling limit set under Section 44C. To decide otherwise would be to overlook the non-obstante nature of Section 44C.

However, according to the Supreme Court, it was necessary to closely examine and understand the meaning attributed to the term ‘head office expenditure’ under Section 44C. This was because, in the context of the question under consideration, if the meaning assigned to ‘head office expenditure’ under Section 44C is taken to suggest that it only includes common expenditure incurred by the head office, then the issue would stand resolved in favour of the Respondents. Consequently, as contended by the Respondents, for exclusive expenditure incurred by the head office for the Indian branches, Section 44C would not apply, and a deduction could be claimed under other sections, including Section 37, without adhering to the ceiling limits set under Section 44C.

Upon close analysis of the meaning assigned to the words ‘head office expenditure’ under Section 44C of the Act, 1961, the Supreme Court was of the view that the legislature had not limited the scope to cover only common expenditure incurred by the head office for the benefit of various branches, including those in India. In fact, the Explanation, according to the Supreme Court, was unambiguous in stating that for an expenditure to be considered as head office expenditure, it must meet two conditions only: (i) it has to be incurred outside India by the Assessee, (ii) it must be expenditure of a nature related to executive and general administrative expenses, including those specified in Clauses (a) to (d), respectively, of the Explanation.

Thus, the Explanation focused solely on two aspects: where the expense was incurred and the nature of that expense. It did not matter whether the expense was a common expense or an expense exclusively for the Indian branch, so long as the expense incurred was for the business or profession. According to the Supreme Court, the text provided no indication that the expenditure must be of a common or shared nature. Therefore, the meaning of the Explanation was clear, straightforward, and unambiguous. According to the Supreme Court if it were to accept the Respondents’ contention, it would be forced to add words to the statute that simply did not exist. It is well settled that adding words is generally not permissible, especially when the plain meaning of the statute is unambiguous.

According to the Supreme Court, the necessary corollary of the aforesaid discussion was that, irrespective of whether the expenditure was ‘common’ or ‘exclusive’, the moment it is incurred by a non-resident Assessee outside India and falls within the specific nature described in the Explanation, then Section 44C would come into play and become applicable.

At this juncture, the Supreme Court felt that it was essential to consider and evaluate the Respondents’ contention that an additional condition must be fulfilled for Section 44C to apply.

The Supreme Court noted that, according to the Respondents, by virtue of Clause (c) of Section 44C of the Act, 1961, only when the expenditure is of a common nature, and not exclusive expenditure incurred for the Indian branches, would the Section become applicable.

Respondents placed reliance on the following decisions to support their argument –

1. Rupenjuli Tea Co Ltd vs. CIT (1990) 186 ITR 301 (Cal).

2. Commissioner of Income Tax vs. Deutsche Bank A.G. (2006) 284 ITR 463 (Bom)

3. Director of Income-tax (International) vs. Ravva Oil (Singapore) Pte Ltd

4. Commissioner of Income Tax vs. Emirates Commercial Bank Ltd., reported in (2003) 262 ITR 55 (Bom)

According to the Supreme Court, a close examination of the rulings in Rupenjuli Tea (supra) and Emirates Commercial Bank (supra), respectively, revealed that, while both held that Section 44C was not applicable to their facts, their reasoning differed significantly. For the Calcutta High Court in Rupenjuli Tea (supra), the decisive factor was the absence of any business operations outside India by the non-resident Assessee, including at its head office in London. On the other hand, the Bombay High Court in Emirates Commercial Bank (supra) proceeded on the premise that Section 44C covers only common expenditure and not expenditure incurred exclusively for the Indian branches.

But the Bombay High Court in Emirates Commercial Bank (supra) provides no basis whatsoever as to how it concluded that the expenditure which is covered by Section 44C is of a common nature, incurred for the various branches or for the head office and the branch.

The Supreme Court observed that clause (c) of Section 44C allows for the computation of head office expenditure on an actual basis, wherein all the head office expenditure that is attributable to the business in India is taken into account. A plain reading of the Clause in no way indicates that the legislature envisaged taking into account only ‘common’ head office expenditure while excluding ‘exclusive’ head office expenditure under the clause. The text of the provision is broad and unqualified. It employs the phrase ‘head office expenditure incurred by the Assessee as is attributable to the business or profession of the Assessee in India,’ without carving out any exception for expenses incurred exclusively for Indian branches.

The Supreme Court thus concluded that Section 44C does not create a distinction between common and exclusive head office expenditure. The Supreme Court found no merit in the contention of the Respondents that exclusive expenditure falls outside the purview of this section. Consequently, it held that the view expressed by the Bombay High Court in Emirates Commercial Bank (supra) regarding the applicability of Section 44C was incorrect and did not declare the position of law correctly.

The Supreme Court further addressed the ancillary issue. The Appellant claimed that the definition of ‘head office expenditure’ in the Explanation to Section 44C is inclusive and has a wide scope and illustratively includes rent, taxes, repairs or insurance of premises abroad; salaries and other emoluments of staff employed abroad; travel by such staff; and other matters connected with executive and general administration.

According to the Supreme Court, such an interpretation was impermissible as the Appellant had failed to consider Clause (d) of the Explanation in its entirety. Clause (d) to the Explanation reads as follows: ‘such other matters connected with executive and general administration as may be prescribed’. Thus, Clause (d) stands as a clear statutory indicator that the Explanation would cover ‘executive and general administration’ expenditure only of the kind mentioned in Clause (a), (b) and (c) or of the kind prescribed under (d). If the Explanation were to be interpreted as broadly inclusive, covering all kinds of executive and general administration expenses without restriction, it would render the words ‘as may be prescribed’ in Clause (d) otiose and redundant. Such a restrictive interpretation of the term ‘head office expenditure’ was also supported on the basis of legislative intent.

Lastly, it was argued on behalf of the Respondents that the Bombay High Court’s decision in Emirates Commercial Bank (supra) was challenged by way of appeal to the Supreme Court in CIT vs. Emirates Commercial Bank Ltd. (Civil Appeal No. 1527 of 2006) and the Supreme Court by its judgement dated 26.08.2008 had dismissed the appeal following the view taken by it in the case of CIT vs. Deutsche Bank A.G. (Civil Appeal No. 1544 of 2006). Consequently, the principle of law that stood approved by the Supreme Court was that if expenditure is incurred by the head office outside India, which is incurred exclusively for the Indian operations of a non-resident entity, then such expenditure cannot be brought within the ambit of the term ‘head office expenditure’ provided in Section 44C of the Act.

The Supreme Court, after noting all the orders passed in the matters, observed that orders of the Supreme Court could in no manner be said to lay down and operate as a binding precedent on the principle of law that exclusive expenditure cannot be brought within the ambit of Section 44C of the Act, 1961. The said orders, however, were indicative of one aspect only: the decision in Rupenjuli Tea (supra) stood finalised and accepted by the Revenue.

According to the Supreme Court, the pivotal question involved in these appeals had been answered in favour of the Revenue. However, it remained to be seen whether, on merits, the entire expenditure that the Respondents claimed as deductible under Section 37 would fall within the ambit of Section 44C. There was no dispute that the Respondents were non-residents and the expenditure was incurred outside India. However, there seemed to be disagreement with regard to the fact whether or not certain expenditures could be of an ‘executive and general’ nature as specifically enumerated in the Explanation. In fact, the Respondents had contended that a part of the expenditure incurred by them would not be in the nature of head office expenditure as described under Section 44C.

The Supreme Court, therefore, remanded these matters to the Income Tax Appellate Tribunal, Mumbai, on this limited issue. The Tribunal was directed to examine the expenses afresh in light of the legal principles enunciated hereinabove, more particularly to verify whether the disputed expenditures satisfy the tripartite test necessary to qualify as ‘head office expenditure’ under the Explanation to Section 44C. With respect to the expenditure which the Respondents do not wish to dispute, the same would fall under the ambit of Section 44C, and thereby their deduction will be governed by the limits set out therein

From The President

My Dear BCAS Family,

As I begin to write, I would like to reflect on my visit to the new Parliament Building during the Direct Tax Residential Retreat in Delhi, which was a first in the history of BCAS. Being within the hallowed precincts of the “temple of democracy” gave us a glimpse of the magnificent halls where laws are debated and enacted. Each piece of legislation that emerges from there affects our economy, our businesses, and our professional practice. Further, it stands as a symbol of democratic deliberation and legislative wisdom. Also, by the time you read this, the Union Budget, which plays a pivotal role in shaping our professional landscape, will have been presented by the Hon. Finance Minister. This has prompted me to focus on the theme of legislation and its impact on professionals and institutions like us.

Legislation is not merely a tool of governance but also a means of social order, justice, and economic growth, and the foundation of our professional journey.

IMPACT ON PROFESSIONALS:

The impact of legislation on our profession can be viewed under various lenses as follows:

Collective Regulatory Functioning:

The Chartered Accountants Act, 1949, is one of the earliest laws of independent India, laying the foundation for a self-regulated profession with high ethical standards. The regulations governing the same have evolved to keep pace with changing times, as evidenced by recent networking and advertising guidelines. These empower the ICAI not only to educate and examine, but also to regulate, discipline, and uphold public interest. Accordingly, every member acts as a bridge between the legislature’s intent and society’s compliance.

The Evolving Professional Navigating the Future of Law

Advisory and Interpretative Role:

The pace of legislative change over the past few decades, especially in financial and economic domains, has accelerated significantly and fundamentally transformed our role as professionals, whether in practice, industry, or entrepreneurship. Whether it is the evolution from the Companies Act, 1956, to the Companies Act, 2013; the Income-tax Act, 1961, to the Income Tax Act, 2025; GST 1.0 to 2.0 or other legislations on IBC, Money laundering, SEBI LODR guidelines, Labour Codes, Digital Personal Data Privacy Act; the list is endless. Furthermore, as we move toward becoming a $5 trillion developed economy, new areas of legislation related to ESG Frameworks, climate change, AI regulation, Cyber and Data Security, and the Work-Life Balance (Right to Disconnect Bill) are likely to emerge. Our role to our clients and employers is not just to interpret laws, but also to provide constructive feedback to improve compliance. Whilst we have kept pace with the changes, certain challenges as follows need to be kept in mind:

  •  Retrospective amendments and frequent clarifications create uncertainty.
  •  Navigating through ambiguous provisions and evolving interpretations.
  • Frequent changes in rules and the addition of explanations, especially in tax and corporate laws.

This will require us to adapt, upskill, and remain proactive. The mantra is to learn, unlearn, and relearn!

Guardians of Legislative Integrity:

Legislation brings structure to governance and provides the framework within which economic activity takes place, disputes are resolved, and compliance is measured. Whilst legislation sets the minimum parameters, ethics sets the ideal standards for implementation. Whilst legislation may not always codify every situation or intent, we need to act in a manner that is not only legally compliant but morally and ethically sound.

The profession’s deep engagement with legislation is both a privilege and a responsibility. With the Accounting Standards now having the force of law for the last two decades, our audit report is not merely a procedural requirement, but a legal document which is relied upon by regulators, investors, lenders, and the public at large.

BCAS’s ROLE

BCAS plays a critical role in the legislative ecosystem by representing the collective voice of practitioners who implement legislation in practice. Our responsibility extends beyond continuing education to active engagement in the legislative processes. We represent practitioners’ concerns to regulatory authorities, provide platforms for knowledge dissemination, and facilitate dialogue between practitioners and policymakers. Our pre-budget memoranda, representations on both proposed and enacted legislation, and technical seminars serve as vital touchpoints in the legislative cycle. Recently, we have taken steps to strengthen our research capabilities, enhance our advocacy efforts, and ensure that practitioners’ practical challenges are communicated effectively to lawmakers.

RECENT INITIATIVES AT BCAS

Before concluding, I would like to touch on a couple of recent initiatives: Corporate Membership and the “Women’s RefresHER” Course.

Corporate Membership:

We have recently extended Corporate Membership benefits to LLPs. I would appeal to all members connected with LLPs to urge their firms to convert to Corporate Membership by nominating CAs to access membership benefits for the next three years at reduced fees, before March 2026, as Corporate Membership fees are proposed to increase from April 2026. The membership would allow you to claim the GST Input Tax Credit, which is not otherwise available to a firm for individual membership enrolment, as well as the flexibility to change nominees each year. For details, you may refer to our website.

Women’s RefresHER Course:

This is a unique course, “for women and by women,” as part of the “Nari Shakti” initiative, comprising 14 sessions and aimed at Women CAs. Non-members who have enrolled will receive a six-month journal subscription. I would like to warmly welcome all our new subscribers and urge you to become regular members soon!

Adaptability and Learning:

To conclude, I would like to refer to a profound quote by author Alvin Toffler in his book “Powershift: Knowledge, Wealth and Power at the Edge of the 21st Century,” where he places emphasis on adaptability to continuous learning to remain up to speed in the context of evolving legislation for professionals and institutions like BCAS to remain relevant.

“The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.”

A big thank you to one and all!

Warm Regards,

CA. Zubin F. Billimoria

President

Burden of Proof

Under GST law, the “Burden of Proof” (a static legal obligation) is distinguished from the “Onus of Proof” (a shifting evidentiary duty). Generally, the Revenue bears the burden of proving taxability, correct classification, and valuation, including establishing that a transaction constitutes a “supply”. Conversely, for exemptions and refunds, the burden lies with the claimant to prove eligibility and the absence of unjust enrichment. Notably, Section 155 specifically casts the burden of proving Input Tax Credit (ITC) eligibility on the taxpayer. However, this obligation is not absolute; once the taxpayer provides reasonable evidence (e.g., proof of receipt), the onus shifts to the Revenue to rebut it. The required standard of proof varies from a “preponderance of probability” in tax proceedings to “beyond reasonable doubt” in prosecution.

The maxim “Ei qui affirmat non ei qui negat incumbit probation” embodies the principle that the party asserting a fact must prove it. Disputes under the GST law invariably require the establishment of facts through corroborative evidence and their application to statutory provisions. In this context, the concept of “burden of proof” plays a pivotal role in determining the respective obligations of the taxpayer and the revenue.

BURDEN OF PROOF – SECTIONS 104 AND 105

Section 2 of the Bharatiya Sakshya Adhiniyam, 2023 (“BSA”) (replacing the Indian Evidence Act, 1872) defines a fact as “proved” when the Court believes in its existence or considers it sufficiently probable, and “disproved” when its non-existence is similarly established. A fact remains “not proved” when neither conclusion can be drawn. Proof or disproof of any fact, therefore, necessarily rests upon admissible evidence.

Whenever it is necessary to prove a fact, the party who is bound to establish the evidence bears the burden of proof. Section 104 states that the burden of proof of establishing a fact is on the person who asserts a legal right based on the existence of the said fact. Section 105 states that the burden of proof in a suit or proceeding would be on the person who would fail if no evidence were given on either side. Though both provisions refer to “burden of proof”, they operate in distinct senses, as succinctly stated by the Supreme Court in Rajesh Jain vs. Ajay Singh:1

“29. There are two senses in which the phrase ‘burden of proof ’ is used in the Indian Evidence Act, 1872 (Evidence Act, hereinafter). One is the burden of proof arising as a matter of pleading and the other is the one which deals with the question as to who has first to prove a particular fact. The former is called the ‘legal burden’ and it never shifts, the latter is called the ‘evidential burden’ and it shifts from one side to the other….”

1. Rajesh Jain vs. Ajay Singh on 9 October, 2023 SLP (Crl.) No.12802 of 2022

DIFFERENCE BETWEEN BURDEN OF PROOF AND ONUS OF PROOF

Though often used interchangeably in common parlance, “burden of proof” and “onus of proof” are distinct legal concepts. As stated above, burden of proof (Latin: onus probandi) is a fixed legal obligation that rests upon a party to prove a particular fact or set of facts in dispute. It is a foundational duty and, importantly, it never shifts from the party upon whom it initially lies. This means that the party asserting a fact or making an allegation must ultimately convince the adjudicating authority of the truth of that fact. Conversely, the onus of proof refers to the duty of adducing evidence. Unlike the burden of proof, the onus of proof is dynamic and shifts at every stage in the process of evaluating evidence. It indicates which party has the obligation to present evidence at a given point in a proceeding to avoid an adverse ruling. For instance, if one party presents evidence supporting their claim, the onus might shift to the opposing party to rebut that evidence. If the opposing party successfully rebuts, the onus might shift back. This continuous shifting is central to the procedural aspect of evidence presentation and explained in Ajay Singh’s case (supra):

“30. The legal burden is the burden of proof which remains constant throughout a trial. It is the burden of establishing the facts and contentions which will support a party’s case. If, at the conclusion of the trial a party has failed to establish these to the appropriate standards, he would lose to stand. The incidence of the burden is usually clear from the pleadings and usually, it is incumbent on the plaintiff or complainant to prove what he pleaded or contends. On the other hand, the evidential burden may shift from one party to another as the trial progresses according to the balance of evidence given at any particular stage; the burden rests upon the party who would fail if no evidence at all, or no further evidence, as the case may be is adduced by either side (See Halsbury’s Laws of England, 4th Edition para 13). While the former, the legal burden arising on the pleadings is mentioned in Section 101 of the Evidence Act, the latter, the evidential burden, is referred to in Section 102 thereof.”

The difference can be appreciated in a table form:

Feature Burden of Proof Onus of Proof
Section Section 104 of BSA (Legal Burden) Section 105 of BSA (Evidentiary Burden)
Definition The obligation to prove the main facts that establish a legal right or liability. The duty to produce evidence to introduce or rebut a specific fact during the trial.
Nature Static. It generally never shifts. It remains on the party who asserted the affirmative case from start to finish. Shifting. It swings back and forth between parties like a pendulum as evidence is introduced.
Example Burden is to be understood as the first serve by the assessee to claim the point. Onus is the tennis rally between the parties, and the one who fails loses the rally.

LEVELS OF BURDENS/ONUS OF PROOF

The degree of proof required under GST Laws varies depending on the nature of proceedings (prosecution, penalty or tax proceedings). The various standards of proof can be graded as follows:

  • “Preponderance of evidence/probability”, which requires a plaintiff to show that a particular fact/event is more likely than not to have occurred (say, tax proceedings).
  • “Clear and convincing evidence”, which requires the plaintiff to prove that a particular fact is substantially more likely than not to be true (say, penalty proceedings).
  • “Beyond reasonable doubt”, which is the highest standard of proof and which requires the prosecution to show that the only logical explanation that can be derived from the facts is that the defendant committed the crime and no other logical explanation can be inferred or deduced from the evidence (say, prosecution proceedings).

APPLICABILITY OF BURDEN OF PROOF TO GST

As stated above, questions of taxability, exemption, input tax credit, place of supply, valuation, etc would involve bringing certain facts to the forefront and the concerned person ought to discharge the due burden unless otherwise stated in law.

BURDEN OF ESTABLISHING TAXABILITY OF A TRANSACTION

A cardinal principle established by the judiciary is that the burden of proof lies on the taxing authorities to demonstrate that a particular case or item is taxable in the manner claimed by them2. In the context of service, the revenue quite frequently presumes that the transaction is taxable. Transfer of development rights is being taxed on the premise of an RCM entry. This is being done without discharging the burden of whether the development rights are taxable as ‘supply’ u/s 7. Similarly, the burden of proof of establishing the supply of goods is on the revenue. In clandestine cases, revenue can collate facts based on statements, external evidence (such as electricity bills, digital records, banking transactions, electricity/ freight costs, inventory correlation, counterparty evidence, etc). Once this is discharged and there is a reasonable probability of the occurrence of the event, then the onus shifts onto the assessee to establish the contrary. The primary discharge is called the burden of proof, and the counter is the onus of proof.

2. UOI vs. Garware Nylons Ltd. [1996 (10) SCC 413], HPL Chemicals vs. CCE [2006 (5) SCC 208], Ponds India vs. CTT [2008 (8) SCC 369], Voltas Ltd. vs. State of Gujarat [2015 (7) SCC 527], and CCE vs. Hindustan Lever Ltd. [2015 (10) SCC 742].

Similarly, revenue issues presumptuous notices on differences in revenue based on ITR/26AS and GST data. Strictly speaking, the scope of Income in ITR returns cannot be said to be equivalent to the scope of supply in GST, and this by itself cannot be considered as evidence of a supply. Values reported in the TDS credit statement (in Form 26AS) merely affirm receipt or accrual. Once the income is reported as ‘sale’ or ‘services’ either in the ITR or TDS statement, it can at most be the basis of initiation of an investigative proceeding. But whether this data by itself would be adequate for the issuance of the SCN and consequently into confirmatory orders is questionable (especially in the absence of best judgement provisions for registered persons). Whereas, in case of data mismatch in GSTR-1/3B, E-way bills, TCS/TDS statements, etc there could be a different answer since these are reported values under the GST domain. Here, the existence of a difference in data by itself may suggest a probability of under-reporting resulting in the discharge of the revenue’s primary burden to establish a supply, and hence the onus shifts on the taxpayer to establish the reasons for short payment (if any). In essence, section 73/74 does not permit SCNs to be issued on presumptuous grounds, and the clear burden of establishing the ingredients of the charging section rests upon the revenue.

BURDEN OF PROOF FOR SUPPLY, IN THE COURSE OF BUSINESS, CONSIDERATION: COMPONENT OF TAXABLE SUPPLY

The levy of GST is predicated on a “transaction-based tax” model involving a “supply”. Section 7 of the GST law outlines four critical pillars for a transaction to constitute a supply: (a) an act of supply of goods/service; (b) supplier-recipient relationship; (c) consideration for such supply; and (d) supply being in the course or furtherance of business.

  • Supply: The “activity of supply” should generally emanate from an “enforceable contract” between the contracting parties. The essential elements of a contract, such as explicit terms for the supplier (promisor), recipient (promisee), the act of supply (promise), and consideration, should be clearly reflected. The Bombay High Court in the case of Bai Mamubai Trust emphasised the requirement of an enforceable contract and contractual reciprocity as quintessential for a taxable supply, distinguishing payments for restitution or damages for an illegal act from reciprocal obligations. Thus, the burden to prove that a transaction constitutes a “supply” rests with the revenue authorities initially. Similarly, where rent-free accommodation is being provided to the members of a cooperative society as part of the redevelopment of a project, the question of whether there is a distinct supply beyond the rendition of construction services by the developer is to be answered by the revenue. The revenue may not be permitted to presume that rent-free accommodation is a separate supply to the occupants. It would have to establish the burden of it being a service in terms of Section 7 of the GST law.
  • In the Course or Furtherance of Business: Section 7 requires a supply to be “in the course or furtherance of business” to be taxable, with specific exceptions like import of services, which are taxable whether or not in the course of business. The interpretation and evidence of this aspect would lie with the party asserting or denying its business nature. The Government has emphasised the requirement of examining the business character of the supply vide its press release dated. 13.07.2017. Accordingly, the revenue cannot presume that all income generating transaction are in the course of business and must discharge the burden that the transaction being brought to tax is a business activity. Similarly, the burden to prove that a religious or charitable trust is engaged in business activity is on the revenue.
  • Consideration: “Consideration” is a core element of supply, as defined under Section 7, read with the definition of ‘consideration’. In cases involving related parties, Entry 2 or 4 of Schedule I of the CGST Act excludes the requirement of ‘consideration’ for an activity to constitute a supply. This means that transactions between related parties, even without explicit consideration, can be deemed as a supply. For transactions involving compensation for non-performing contractual obligations or breach of contract (e.g., liquidated damages), these amounts can be treated as consideration for a supply, particularly if there is a clear formula for calculation and the payment is for a “certain advantage derived or to ward off any disadvantage incurred”. The CBIC Circular No. 178/10/2022-GST clarifies that payments towards damages are incidental to the main supply and their taxability depends on the taxability of the principal supply. The burden to prove whether such amounts constitute consideration for a supply would typically fall on the revenue.

BURDEN OF PROOF OF TAX RATES/ CLASSIFICATION AND EXEMPTIONS AND VALUATION

Disputes concerning classification, applicability of exemptions, correct tax rates, and valuation often arise under GST. The burden of proof in these areas is generally on the taxing authority, with specific exceptions or nuances.

  • Tax Rates & Classification: In a self-assessment scheme, the tax rates and classification reported by the assessee are considered final unless questioned by the revenue. The burden of proof of attributing an alternative classification/ rate of tax on a product under a particular tariff head rests with the revenue. The revenue must discharge this burden by proving that the product is understood as such by consumers in common parlance. This principle was affirmed by the Supreme Court in CCE vs. Vicco Laboratories [2005 (179) ELT 17 (SC)]. For example, printing of books (service, Heading 9989, 5% tax) versus supply of printed envelopes (goods, Chapter 48 or 49, different rates). Circulars from the Board aim to clarify these distinctions, but their interpretation might be challenged if they contradict established principles, as seen with the Prestige Engineering (India) Ltd. vs. CCE Meerut [1994 (73) ELT 497 (SC)] case concerning job work. The burden to prove the correct tax rate would typically fall on the revenue if they are alleging a higher rate, but on the taxpayer if they are claiming a lower rate or exemption.
  • Exemptions: When a person claims eligibility for an exemption under a notification, the burden of proving compliance with the conditions of that exemption notification lies on the taxpayer. For example, an assessee asserting eligibility for exemption in respect of a residential dwelling under Notification 12/2017-CT(R) is obligated to establish that the dwelling is residential in nature. Once the assessee establishes residential use in the form of occupancy and municipal records, the onus shifts onto the revenue to prove otherwise. The revenue cannot merely allege a strict interpretation of the exemption notification and deny exemption on the ground of ‘unsatisfactory proof of residential use’ to the assessee. The scope of the term residential dwelling is a domain of interpretation and not factual examination. Once the assessee submits the rental agreements and municipal records, it is for the revenue to discharge the onus of negating this fact. Otherwise, it would amount to revenue failing to discharge its obligation, and the SCN would stand as being unsustainable for failure to discharge the burden. The Supreme Court has taken contextual views on this subject, leading to some controversy: In Dilip Kumar & Company’s3 case, it was held that the burden of proof is on the taxpayer availing the exemption and in case of any ambiguity, the benefit should go to the revenue. But in Mother Superior Convent5 & in Taghar Vasudeva Ambreesh5 the Court emphasised that the exemption should be driven by the intention of the legislature. This throws up the debate open on whether the burden of proof for exemption is static on the assessee or the revenue would also have to establish its case on whether the assessee has violated the intent of the exemption notification.
  • Valuation: Section 15 of the CGST Act, read with Rule 27 of the CGST Rules, addresses valuation. For instance, the value of free-of-cost (FOC) material (e.g., diesel) provided by the service recipient is not includable in the value of GTA service if the contractual liability for such cost is not that of the supplier (Section 15(2)(b)). The revenue ought to establish that the FoC material is contractually an obligation of the supplier but incurred by the recipient before adding the same to the transaction value. Unless this burden is sufficiently discharged from the contract, the value as self-assessed by the assessee would prevail, and the SCN cannot be issued on the mere element of use of FoC goods. It is settled law that revenue must discharge its burden of undervaluation with contemporaneous information before making an addition to the reported taxable value of the supply.
3. 2018 (361) E.L.T. 577 (S.C.); 2021 (376) E.L.T. 242

BURDEN OF PROOF FOR POS, EXPORTS AND REFUNDS

The determination of the Place of Supply (POS), the nature of exports, and the eligibility for refunds are critical areas in GST where the burden of proof plays a significant role.

  • Place of Supply (PoS): The place of supply dictates whether a transaction is an intra-state, inter-state, import, or export supply, consequently determining the type of GST (CGST/SGST or IGST) to be levied. PoS is a jurisdictional aspect for the applicability of tax under a particular enactment. Being part of the charging provisions, the revenue must discharge the burden of PoS before even acquiring jurisdiction to tax under a particular enactment. In respect of detention of goods under movement from one state to another, for any intermittent state to impose a local tax liability, it is important to establish that the goods were meant for termination/ delivery in the detaining state (i.e. PoS in that state). Unless this burden is discharged, the jurisdiction to tax the transaction cannot be acquired. For services, in case of performance-based services of actual testing process of goods is carried out in India, the place of supply is deemed to be in India as per Section 13(3)(a) of the IGST Act, even if the service recipient is located outside India. In such a scenario, the service would not qualify as an “export of service”. The party asserting a particular place of supply bears the burden to substantiate its claim of place of performance in India. For example, if the revenue alleges that the repair services were performed in India, it must establish that the goods were physically made available in India for repairs and the services were indeed performed on such physically available goods. Unless this burden is discharged, the revenue cannot alter the self-assessment of the assessee.
  • Exports: Exports are typically zero-rated under GST. Being an exception to the general rule of full rate of tax, the exporter claiming the export benefit ought to establish satisfaction of the conditions of export of goods or services. In the context of goods, the assessee is under the burden to establish the physical movement of goods outside India, irrespective of the location of the buyer. Consequently, the burden of proving that the export benefits of refund, rebate, etc. are available to the taxpayer, the threshold test of being export must be factually discharged by the taxpayer. In the context of services, the definition of export of services provides certain factual parameters to be complied with for the services to be granted the zero-rating benefits. In such cases, the burden to prove the fulfilment of export conditions, including receipt of payment in convertible foreign exchange and the service being used outside India (for export of services as per Section 2(6) of the IGST Act), rests on the exporter. Once the exporter discharges the burden by proving receipt of convertible foreign exchange through RBI approvals / CA certificates, etc, the onus shifts to the Revenue to disprove this fact. The court in Kuehne Plus Nagel vs. UOI4 granted the benefit of export based on certain factual documents and rejected the insistence of FIRC for the claim of export benefits, implying that the burden of proof is not solely on the exporters.
  • Refunds:  The burden of proving refund entitlement is on the claimant For refund claims, the claimant must produce the prescribed documents to establish the eligibility. Once the initial burden of submission and eligibility of refund is discharged, the onus shifts over to the revenue if it were to reject the claim of refund. The practice of returning refund applications through deficiency memos on grounds of eligibility is squarely derogatory to the legal process. For inverted refund applications, the burden is cast on the claimant to establish the accumulation of input tax credit on account of the higher rate of goods and the lower rate of output supplies. This is a question of fact and is fixated on the claimant. But once this burden is fulfilled, the onus shifts onto the revenue to deny refund eligibility either on account of non-accumulation or lack of inversion.
  • Refund of Wrongly Deposited Amounts: If an amount is deposited under coercion or protest, the petitioner can seek a refund in accordance with the law, but an inquiry may be needed to determine if the payment was voluntary or coerced. In Bundl Technologies5, recovery of taxes at the late hours when the office is not operating was considered as coercive and hence violative of the taxpayer’s rights. This was possible only after the assessee, alleging coercion, discharged its burden by submitting proof of time of payment at an irregular hour of the day.
  • Unjust Enrichment: Refund provisions are framed with the presumption that the incidence of duty has been passed on unless otherwise proved. Section 49(9) also states that taxes paid to the Government are deemed to have been passed on. With this presumption in place, all refund applications (except those specifically excluded in terms of sub-clauses of 54(8)) would have to undergo the rigour of establishing that the duty benefit has not been passed onto the recipient. Unless this burden is discharged, the revenue is under no obligation to credit the refund to the claimant. But once the claimant establishes through cost structures, price impact, invoice disclosures, counterparty declarations, etc, giving reasonable affirmation on unjust enrichment, the onus shifts upon the revenue to disprove the same. The revenue cannot reject a refund on grounds of lack of satisfactory documents without countering the primary evidence submitted by the claimant.
4. R/SPECIAL CIVIL APPLICATION NO. 13427 of 2024- Gujarat High Court
5. [2022] 136 taxmann.com 112 (Karnataka)

BURDEN OF PROOF FOR INPUT TAX CREDIT

One of the most litigated areas under the GST law concerning the burden of proof is the Input Tax Credit (ITC). Section 155 of the CGST Act, 2017, explicitly places the burden of proving eligibility for ITC on the person claiming such credit. This provision is notable as it deviates from the general legal principle that the burden of proof for any charge or allegation lies on the person making it, effectively placing a specific and significant onus on the assessee. While applying section 155 and revenue has strictly fixed the ‘burden of proof’ onto the assessee and disregarded that the evidentiary burden (i.e. onus) is still variable depending on the progression of evidence. Let us consider a case where the dispute is whether the input tax credit is claimed within the time prescribed by the law or not. This dispute is based on facts, and the burden of proof lies on the taxpayer to prove that the credit is claimed within the specified time limit. However, if the dispute is about the non-applicability of the timeline itself (let’s say whether section 16(4) applies to tax discharged under the reverse charge mechanism), the dispute pertains to a legal interpretation and the department cannot cite section 155 to cast an exclusive burden of proof on the taxpayer. Therefore, section 155 should be applied in relative terms rather than absolute fixation on the assessee.

  • Eligibility and Correctness: The burden of proving the correctness and eligibility of any ITC claim rests entirely with the taxable person. This extends to proving the actual physical movement of goods or receipt of services, holding of the tax invoice, reporting of the invoice on the GST portal, and payment of tax to the Government. The assessee may furnish details such as the name and address of the selling dealer, vehicle details, payment of freight charges, and acknowledgement of delivery for proof of receipt of goods. But freight payment, vehicle details, lorry receipts, E-way bills are not the only tests for proof of receipt of goods (though directed by the Supreme Court in Ecom Gill Coffee Trading Private6 case). There may be other alternative ways of establishing receipt of goods (say, video/ inventory records, counterparty declarations, etc) which could also grant reasonable certainty of receipt of goods. But section 155 should not be interpreted to mean that the revenue can decide the standards of evidence required for proving receipt of goods or services and mandate the taxpayer to meet those standards. In the absence of a defined statutory mechanism, the burden of proof of establishing receipt of goods is on the assessee through reasonable means. Where the revenue cites insufficiency of evidence, the onus shifts upon the revenue to establish the unsatisfactory nature of the evidence.
  • Elaborating this further, say the assessee proves that goods have been received by the recipient. Once the assessee submits evidence such as a goods receipt note, accounting records, etc before the adjudicating authority, then the onus shifts upon the said authority to disprove the fact by placing evidence. When contrary evidence is brought on record and confronted (say, non-passing of regular tolls), then the onus shifts back upon the assessee. If the assessee fails to convincingly establish the possibility of alternative routes, then the case of the assessee fails, but if such routes are comprehensively established, then the case of the revenue fails. Thus, the onus is oscillating obligation during discharge of the burden of eligibility for ITC. This process would continue until the other party cannot produce any contrary evidence, in which case, the court would, based on the adequacy of evidence (discussed above), decide if the fact has been proved or disproved, or neither proved nor disproved.
  • Tax Paid to Government – The same goes for the debate on whether tax has been paid to the Government. The law requires the assessee to prove that tax charged on the input invoice has been paid to the Government. The mechanism to verify this is through the process of reflection of the invoice in GSTR-2B and GSTR-3B filings. To this extent, the assessee is under the obligation to establish reasonable evidence of proof of tax payment to the Government. The question of sufficiency of such proof would once again become an evidentiary debate, which does not fall within the domain of section 155. For example, an assessee claims ITC after complying with all conditions of section 16(2) (incl. reporting in GSTR-2B) and the registration of the supplying dealer is cancelled retrospectively on any ground; the revenue ought to discharge the burden of not receiving the tax on the invoice from the supplier on the particular invoice.
  • Bona Fide Transactions vs. Fake Invoices: When there are allegations of fake or false invoices, or the non-existence of the consignor/consignee, the burden shifts heavily onto the person claiming the transaction to be fake to demonstrate the mala fide in the transaction. The assessee cannot be asked to unilaterally establish the bona fide of the ITC u/s 155 without being confronted with adverse material from the revenue. Once the revenue establishes with reasonable probability that there was a fake transaction, then the assessee, as part of the onus, must prove that he acted with due diligence.
6. CIVIL APPEAL NO. 230 OF 2023 Supreme Court

CONCLUSION

In conclusion, the “Burden of Proof” under GST Law is a multifaceted concept that dictates the obligations of both the taxpayer and the tax authorities at various stages of assessment, audit, demand, and prosecution. While specific statutory provisions like Section 155 place the burden squarely on the claimant for ITC, general legal principles often mandate the Revenue to establish its claims, particularly regarding taxability, classification, and penalties. Diligent record-keeping and a thorough understanding of these principles are paramount for compliance and effective dispute resolution in the GST regime.

Co-Operative Societies

Shrikrishna:  Arey Arjun, for a change, you are looking in a cheerful mood today. What is the secret?

Arjun:     Nothing, Bhagwan. Just enjoying the pleasant climate. And a little relaxed from the deadlines.

Shrikrishna:     I understand. From July to December, every month end is a nightmare for CAs.

Arjun:    Very true. In the housing society where I stay, there were celebrations for new year, Makar Sankranti and the Republic Day.

Shrikrishna: Oh, Great! So your society members must be good and friendly with each other.

Arjun:      Yes. But……….

Shrikrishna:  But there are a couple of trouble makers, Right?

Arjun:  Absolutely, Lord. I have observed that by and large in all co-operative housing Societies, there is nothing but non-cooperation!

Shrikrishna: Unfortunate!

Arjun: No one voluntarily comes forward for work. They consider managing committee members as their servants! Sometimes, committee members are also a little too smart. There is some friction or the other among members.

Shrikrishna: And one or two members are a bit too smart! They feel that they know everything; and they alone know the laws and regulations!

Arjun: Bhagwan, how do you know all these things?

Shrikrishna: Arjun, this is kaliyug. Even in previous Dwapar yuga, there were disputes among cousins and close relatives.

Arjun: The one or two trouble making members disturb the peace of all. They rake up disputes with the managing committee and all other members. They keep on filing complaints to all authorities – Registrar, Police, Courts, and so on!

They often refuse to pay the dues to the society.

Shrikrishna: And also to your Institute!

Arjun:  Yes, I was coming to that. It is there hobby to create unrest and make the Auditor as a scapegoat.

Shrikrishna: But Arjun, you must admit that you CAs also take the society’s work rather lightly. Don’t you?

Arjun:  Agreed. Our CAs are not careful and they unnecessarily invite trouble for themselves. Most common points are – These non-profit organisations cannot afford a proper accountant. So, the CAs themselves render accounting services either themselves or through their articles or employees or through their relatives.

Shrikrishna: Yes. And they raise the invoice also, mentioning as ‘Accounting and Audit Services”!

Arjun:  True! That is very common biggest blunder.

Shrikrishna:  Then you people never examine and insist on secretarial record – like minutes, notices, attendance record and so on. So also, the various registers which are required to be maintained, are never updated.

Arjun: And our CAs do not sign them even if they see. There should be an evidence of their verification. There should be working papers, correspondence and so on.

Shrikrishna: I have always been warning. In kaliyuga, ‘good faith’ is always very dangerous.

Arjun: Managing Committee people are not always qualified and experienced. Actually, they should attend the training programmes organised by the Federation of housing societies. But they take it lightly.

Shrikrishna: If there is some large capital expenditure or heavy repairs, the auditor has to be extra careful.

Arjun:  Moreover, Bhagwan, today redevelopment of societies’ buildings is very common. There, lot of paper work is required apart from accounting and tax issues. An average auditor not having the necessary exposure and expertise should either leave the assignment or seek proper expert advice.

Shrikrishna:  I have heard that many CAs are being dragged into disciplinary proceedings for the lacunae in audits of co-operative societies.

Arjun: Yes. As it is, these audits are not at all remunerative. But CAs do not take it seriously and invite disciplinary complaints.

Shrikrishna: One more aspect is of verification of original bank deposit receipts; and confirmation from banks. There have been many instances of misappropriation of money by fraudulently encashing the FDs.

Arjun: Yes. I am aware of many such complaints in the context of societies and Charitable trusts.

Shrikrishna: In short, CAs should not neglect the assignments merely because these are Non-profit organisations and not very remunerative.

Arjun: I entirely agree, Bhagwan.

OM SHANTI

(This dialogue is based on the general scenario in the audit assignments of co-operative societies and other NPOs.)

Corporate Law Corner

22. Tictok Skill Games Private Limited

Petition No: CP -83 / ND/2021

Before, National Company Law Tribunal,

New Delhi Bench

Date of Order: 18th December, 2025

Capital Reduction must fall under four corners of Section 66(1) of the Companies Act, 2013

Facts

1. Parties and proposal

  •  Petitioner: Tictok Skill Games Pvt Ltd (now WinZO Games Pvt Ltd), an e-sports gaming platform company, incorporated in 2016, later renamed in 2022.
  • Relief sought: Confirmation under section 66 of the reduction of issued, subscribed and paid-up equity capital from 3,00,000 equity shares of ₹100 each (₹3 crore) to 3,00,000 equity shares of ₹10 each (₹30 lakh) by paying ₹90 per share (total ₹2.7 crore) to certain equity shareholders.
  • Basis stated: The company wanted to bring the face value of all equity shares at par and claimed to have sufficient funds, invoking section 66(1)(b)(ii) (payment of paid-up capital in excess of the wants of the company).

2. Key facts and procedural history

  • Board resolution dated 28.01.2021 and special resolution in EGM on 19.02.2021 approved the capital reduction and authorised necessary steps, including NCLT petition and deposit of payout amounts.
  • Auditor’s certificate dated 17.03.2021 filed, stating that accounting treatment for the reduction conforms with the Companies Act and Ind AS.
  • Petition originally proceeded on a particular capital structure. However, during pendency, the supplementary affidavit (July 2021) disclosed significant changes, namely additional funding, entry of a new shareholder, altered authorised and paid-up share capital and multiple series of CCPS.
  • NCLT issued notices to ROC, Regional Director (RD), and Income Tax Department. The IT Department reported nil outstanding demand and no objection.
  • NCLT directed notice to all creditors in Form RSC 3 and publication in English and vernacular newspapers (Financial Express and Jansatta), which was done.

3. Objections of ROC/RD and the company’s response

ROC/RD filed reports pointing out, inter alia:

  •  Mismatch between authorised/paid-up capital figures in the petition and MCA master data. Petitioner explained that subsequent allotments (including CCPS and ESOP equity) after the supplementary affidavit caused differences and termed the mismatch as inadvertent oversight.

  • Existence of active/open charges created on 23.03.2022 despite the petition stating nil secured creditors. The company stated these were bank guarantees backed by fixed deposits, treated by the bank as charges and later satisfied, with CHG‑4 filed.

  •  Auditor’s “Emphasis of Matter” on Covid 19 and minor delays in statutory dues. These were flagged but not treated as determinative by NCLT.

  • FEMA compliance in relation to payout to foreign shareholder, The Stuart Partners LLC. Company undertook that it has been and will remain FEMA-compliant for any outflow under the scheme
  • Creditor protection: RD noted substantial current and non-current liabilities and the absence of “no objection” letters from creditors. The company argued that the statutory regime only requires notice and opportunity to object (RSC 3/RSC 4 and RSC 5 affidavit), not individual NOCs, and claimed full procedural compliance.

Critically, RD also objected on a substantive ground, stating that financials for FY 2019 20 did not indicate excess capital/free reserves, and the proposed reduction did not fall within section 66(1)(b)(ii). RD thus sought rejection of the scheme.

Conclusion of the Tribunal and reasoning

1. No proof of “excess capital” at the relevant time

  •  The reduction was anchored in the February 2021 special resolution, so the relevant time to test the availability of surplus/excess capital was when the scheme was conceived and approved.
  •  Although later balance sheets for FY 2021 22 and 2022 23 were filed, NCLT held that subsequent financials cannot cure a foundational defect regarding the absence of demonstrable excess capital or free reserves at the time of the resolution.
  • NCLT accepted RD’s objection that the financial statements did not show surplus capital/free reserves sufficient to justify a pay off to shareholders under section 66(1)(b)(ii), holding that in the absence of “clear and cogent material” of such surplus, the proposal was not in conformity with that provision.

2. Defective creditor notice compliance

  •  The company had 66 unsecured creditors and claimed to have served RSC 3 notices and published RSC 4 notices. Affidavit in Form RSC 5 was filed.
  • On examining dispatch proofs, NCLT noted a discrepancy (65 names vs 66 creditors) and the absence of tracking/delivery reports for all creditors.
  • NCLT held that compliance with section 66(2) and the 2016 Rules is mandatory. The notice mechanism is to ensure creditors have a real opportunity to object.
  • Without conclusive proof of service, the Tribunal refused to presume compliance or accept that creditors’ interests were adequately safeguarded, particularly in the light of sizeable current and non‑current liabilities.

3. Unstable capital and shareholding structure

  •  During pendency, the company undertook multiple capital actions, i.e. issue of new preference shares, ESOP equity, induction of new shareholders and changes to capital structure versus the position at the time of the original resolution.
  •  NCLT held that such changes “materially alter” the factual matrix on which the scheme was premised, emphasising that a capital reduction scheme must be evaluated against a clear and stable capital structure.
  •  Repeated changes were seen as undermining the transparency and certainty required for confirmation under section 66.

Decision :

• NCLT concluded that the petitioner had failed to:

  • Show that the reduction falls squarely under section 66(1)(b)(ii) of CA 2013
  • Satisfactorily demonstrate financial capacity at the relevant time to effect the payout.
  • Prove mandatory procedural compliance regarding notice to all creditors; and
  •  Adequately safeguard creditors’ interests.

• Accepting the RD’s objections, NCLT rejected confirmation of the proposed reduction and dismissed the company petition with no order as to costs.

23. Biju Scaria & Tessy Scaria vs.

Media Team Solutions (I) Pvt. Ltd. and others

Company Appeal (AT) (CH) No.123/2025

(IA Nos. 1365 & 1366/2025)

National Company Law Appellate Tribunal (Chennai)

Date of Order: 13th October, 2025

NCLAT upheld the exercise of power/ decision taken by Majority Shareholders, which reflects Corporate Democracy with regard to the right to remove a Director under Section 169 of the Companies Act, 2013, which is absolute and cannot be diluted by judicial interference, unless there is illegality or malicious intent.

FACTS

Mr. BJ and Ms. TS, had filed Petition before National Company Law Tribunal (NCLT) Kochi under Sections 241–242 alleging oppression and mismanagement in M/s MTSPL and also sought various interim reliefs, including to stay an Extraordinary General Meeting (EGM) scheduled on 01st July, 2025 which proposed removal of Whole Time Director by resolution under Section 169 of the Companies Act, 2013 and to restrain M/s MTSPL from taking corporate actions in the matter and also status quo be maintained with respect to the management and operations of the Company.

After hearing, NCLT in its order had declined to stay the EGM, observing there was no procedural anomaly or legal lapse in calling the EGM and also held that staying the EGM would interfere in the company’s day-to-day functioning as the motion carried under Section 169 of the Companies Act, 2013 Shareholders holding more than 66.64% voting power had floated the special notice with regards to removal of director.

Further, NCLT observed that the shareholders’ right to remove a director under Section 169 of the Companies Act, 2013, is absolute and cannot be diluted by judicial interference on equity, unless there is illegality or mala fide intent.

Thereafter, EGM was held on 01st July, 2025, where Ms. TS was removed as Whole-Time Director under Section 169 of the Companies Act, 2013. An appeal against the order of NCLT was filed before the National Company Law Appellate Tribunal (Chennai), NCLAT.

ORDER

The NCLAT upheld the NCLT order and affirmed that the Right to remove a Director under Section 169 of the Companies Act, 2013 is absolute and cannot be diluted by judicial interference, unless there is illegality or mala fide intent and as the action taken was within the statutory framework of the Companies Act, 2013.

Further, the nature of the interim relief sought in the IA has been rendered redundant because the EGM has already been held.

Then NCLAT dismissed the appeal, holdingthat the NCLT’s refusal to grant interimrelief was correct, and no interference waswarranted.

Number of Days Stay For Residence under Section 6

Determining an individual’s residential status under Section 6 of the Income Tax Act depends on the specific duration of their stay in India, yet the method for calculating this period remains highly contentious,. A significant dispute exists regarding whether to include the days of arrival and departure in the total count.

While the Authority for Advance Rulings (AAR) and the tax department argue that both days must be included—reasoning that presence for any part of a day constitutes a stay—various Tribunals and the Karnataka High Court have held otherwise. These rulings often rely on the General Clauses Act and the legal principle that the “law disregards fractions of a day,” thereby justifying the exclusion of the arrival date. Given these conflicting interpretations, appellate authorities typically adopt the view most beneficial to the taxpayer, though the ambiguity continues to trigger litigation.

ISSUE FOR CONSIDERATION

An individual is said to be a resident in India where he is in India in a year for 182 days or more, or, in the alternative, where he was in India for 365 days or more during the 4 years preceding the previous year and is in India for 60 days or more in the previous year. This period of 60 days for compliance of alternate condition is extended to 120 days or 182 days in certain cases, like seafarers, persons visiting India or leaving India for the purposes of employment. A similar condition relating to the number of days is found in respect of a person claiming the status of resident but not ordinarily resident. These provisions found in s.6 of the Act of 1961 are materially retained in the corresponding s.6 of the Act of 2025.

Determination of the number of days of stay for ascertaining the residential status is crucial on various counts and has become highly contentious. Over a period, conflicting decisions on the inclusion of the dates of arrival and/or departure and the time of arrival have been delivered on the subject. While the Authority for Advance Ruling has held that the prescribed number of days would include the days of arrival and departure, the different benches of the ITAT, in particular Jaipur, Delhi, Mumbai, Kolkata, Ahmedabad and Bangalore have held otherwise. Appeal against the decision of the Bangalore Bench has been dismissed by the Karnataka High Court.

AAR IN PETITION NO. 7 OF 1995, IN RE

In this case reported in 223 ITR 462 (AAR), the petitioner applicant claimed to be a non-resident and the sole shareholder of an unregistered company in the UAE. He opted for an advance ruling u/s. 245Q (1) of the Income Tax Act and claimed the benefit under Article 10(2)(a) of the Indo-UAE, DTAA. One of the issues relevant to our discussion, in the petition, related to the determination of the number of days of stay for ascertaining the residential status of the petitioner applicant.

The question before the Authority was whether for calculating period of stay in India, for the purposes of determining residential status of an individual under section 6(1), number of days during which he was present in India in a previous year, included the days of arrival and departure, and which therefore have to be taken into account for determination of his stay in India and not the number of days that the individual was out of India.

The Applicant submitted that he had been in and out of India on 22 occasions during the relevant financial year. According to the statement furnished by the applicant, he had been present in India for 198 days, including the days of his arrival and departure. However, by excluding the days of arrival and departure in and from India, the number of days of stay in India was 178 days only, and such stay being for less than 182 days in the financial year 1994-95, he was a non-resident and, therefore, was entitled to maintain the application under section 245Q(1).

In contrast, the case of the Income-tax Department was that the days of arrival and departure should not be excluded in counting the number of days of stay in India, but should be included in the number of days of stay in India, and as such, the applicant was a resident of India, and his application for the Advance ruling was not maintainable.

Counting the Days Navigating India's Tax Residency Rules

The additional contention of the applicant was that he was out of India for more than 187 days and, if so, he could be said to be in India for 178 days only, and as such, his stay in India could not have exceeded 181 days.

The Authority dismissed the application of the petitioner on the ground that he was a resident and not a non-resident, and his petition was not maintainable, and held as under: “Further, in order to be able to maintain the application, the applicant should have been non-resident in financial year 1994-95 as the application was preferred in 1995. Under section 6(1)(a), the applicant would have been non-resident in India for that financial year if his stay in India during that period was less than 182 days. But, according to the statement furnished by the applicant, he had been in India for 198 days. It was, however, contended that the applicant was present in India for 178 days. He arrived at this figure by computing the period during which he had been out of India in the said financial year and deducting it from 365 days. However, the calculation relevant for the purposes of section 6(1)(a) is that of the number of days during the previous year on which the applicant was present in India. For this purpose, the days on which the applicant entered India as well as the days on which he left India have to be taken into account. It is no doubt true that for some hours on these dates the applicant could be said to have been out of India also but, equally, it could not be doubted that the applicant was in India on these dates for howsoever short a period it may be. There was, therefore, really no absurdity in the computation worked out as 198 days. It was suggested that the actual number of hours during which the applicant was present in India should be found out and the number of days calculated accordingly. That idea seemed impractical but, assuming that this was a correct argument, no data had been furnished on the basis of which the stay of the applicant in India in terms of hours could be worked out. Therefore, the applicant was not a non-resident assessee entitled to maintain the application under section 245Q(1). The application was, therefore, to be rejected as non-maintainable.”

PRADEEP KUMAR JOSHI’S CASE,

The issue under consideration was also examined by the Ahmedabad Bench of the tribunal reported in 192 ITD at Page 577. In this case, the tribunal was asked to examine whether, while counting the number of days of stay in India for considering whether an individual was a resident or not, the day of arrival on a visit was to be excluded or not.

The question before the tribunal was, whether in determining the residential status of an individual assessee u/s 6 of the Income-tax Act for assessment year 2016-17, while counting the number of days of stay in India for determining the status of ‘resident’, the day of arrival had to be excluded and whether the assessee, having stayed in India during the year under consideration for less than 182 days, could not be considered as resident of India in the year under consideration.

The assessee, an individual, filed his return of income in the status of a non-resident, disclosing the income from other sources, being interest from REC Bonds, FDR, NRE Account, savings bank and dividend income. He also had income from salary earned from overseas employment with Oil Support Services, Dammam (outside India) and long-term capital gains, which were claimed as exempt from income tax. In the assessment, on the basis of verification of the passport, the AO held that the assessee was a resident, considering the calculation of days of stay in India. It was claimed by the assessee that he stayed in India during the year under consideration for 175 days, whereas the case of the AO was that the assessee had stayed in India for 184 days.

According to the assessee, the inclusion of both the days of arrival and of departure from India by the AO in counting the number of days of stay in India was not correct. The assessee relied upon the ruling of the Authority for Advance Rulings, vide an order dated 8-2-1996 in Petition No. 7 of 1995, In re (supra). In support of the case for excluding the date of arrival in India, the assessee further relied upon the order passed by the Mumbai bench of the Tribunal in the case of Fausta C. Cordeiro, 53 SOT 522.

The AO, however, held that the assessee was a resident u/s 6 of the Act and his income was taxable under the Act. The appeal of the assessee to the CIT(Appeals) was dismissed by him by a detailed order holding as follows:

‘5.4 However, it is seen that the appellant himself has computed a stay in India of 175 days as given in the return of income, 179 days as per the paper book and finally 176 days following the judgment of the ITAT Mumbai in ITA Nos.4933 & 4934/Mum/2011in the case Fausta C. Cordeiro. The said judgment has been perused, where the facts were as under:

“Briefly stated assessee has claimed status of Non Resident in India having worked as employee of M/s Transocean Discoverer and worked on rig Discoverer outside India. Assessee’s passport was examined to verify the number of day’s assessee was in India and AO noticed that assessee arrived seven times to India for varying periods and listed out them in a table and found that assessee had stayed in India for 187 days and accordingly he considered assessee as Resident and brought the salary to tax. The learned CIT (A) after considering the submissions of assessee accepted assessee’s contentions that assessee generally arrived late in the night after completing his work from abroad and attended to the work next day and generally left early in the morning so as to attend the work again after arriving at the destination. Then he analysed the General Clauses Act and the decision of the ITAT Bangalore in the case of Manoj Kumar Reddy vs. Income-tax Officer (IT), [2009] 34 SOT 180 and allowed assessee’s contention that his stay was less than 180 days in India during the relevant period.

The Hon’ble ITAT, Mumbai held that “We have considered the rival contentions and examined the facts. As rightly pointed out by the CIT (A), there was a mistake of taking number of days at Item No. 3. Therefore, according to AO’s own method it should be 186 days. If we exclude the date of arrival as it is not a complete day, the stay of assessee is less than 182 days. Accordingly there is no merit in Revenue appeal. The case law relied is in support of the contention that day of arrival, particularly late in the day should be excluded. If that day was excluded the stay in India by assessee was less than 180 days. Therefore, the grounds raised by the Revenue are dismissed and accordingly the appeal is dismissed.”

5.5 In this regard it is noted that the date of arrival and date of departure are stamped by the immigration Authorities at the Airports on the passport of the person travelling but the time of arrival and time of departure are not mentioned otherwise also the stamping by the Immigration Authority will be few hours after the arrivals (due to deplaning, arrival at lounge & queuing) and few hours before the departure (as passengers arrive about 3 hours before the scheduled departure of plane) and therefore for the purpose the expected time of arrival (ETA) and the standard time of departure (STD) in the tickets have to be taken. As per the relied upon judgement of the ITAT, Mumbai the days of arrival in India has to be ignored for counting of the period of stay in India if the arrival is in the late night. It is seen in the table as 5-2-3 that as the appellant is arriving early in the morning, typically around 8 AM to 9 AM and thus the day of arrival cannot be ignored and thus the number of clays of stay in India comes to 182 days as under: Table not printed.

5.6 It is worth noting that in general the appellant has taken flights from Bahrain for India (Bangalore or Ahmedabad or Mumbai) but the departure on 5-3-2016 from Mumbai is to Bangkok and the arrival on 18-3-2016 is from Bangkok i.e. the absence in India for the period from 5-3-2016 to 18-3-2016 was not for the purpose of work (the place of work being Dammam in Saudi Arabia) but has been undertaken for other purposes and managed for the purpose of reducing the stay of India below 182 days to avoid becoming the resident of India in the said financial year. In this regard it is noted that as per the existing provisions of Section 6 as applicable in the case no adverse view as to the visit to Bangkok for the purpose other than for the purpose of employment can be drawn because the conditions of maintenance of a dwelling place in India has been done away with.”

The Ahmedabad bench of the tribunal noted the observations of the CIT(A), who had found that the Mumbai bench, in the case of Fausta C. Cordeiro(supra), excluded the date of arrival, since it was not a complete day, and that while doing that, the Mumbai bench had relied upon the decisions of the co-ordinate benches of the tribunal in the cases of R. K. Sharma, (1987) SOT 1.127 (Jp.)Manoj Kumar Reddy(supra) and Gautam Banerjee (ITAT L. Bench Mumbai) in ITA No. 2374/Mum/2004 dated 18-6-2008). The bench also took note of the decision placed on record of the Karnataka High Court in the case of DIT International Taxation vs. Manoj Kumar Reddy Nare 12 taxmann.com 326, wherein the order of the tribunal on facts and findings was accepted.

The Ahmedabad bench took note of the contentions of the Departmental Representative, who, besides relying on the orders of the A.O. and the CIT(A) and the findings hereinabove, contended that ‘there is no provision under the Act that fraction of a day is to be excluded. Section 6(l)(c) provides that he should be in India for a period or period amounting in all to 60 days or more in that year. In case the fraction of a day is to be ignored when a person who is coming to India on different occasions during the previous year, then such fraction of day. i.e., day of arrival and day of departure will have to be excluded. This is not the case and the intention of the Legislature when it has provided the period or periods amounting in all to 60 days or more”

The Ahmedabad bench took note of the fact that the co-ordinate bench in the case of Manoj Kumar Reddy (supra) has relied on the decision of the Hon’ble Delhi High Court in the case of Praveen Kumar vs. Sunder Singh Makkar AIR 2008(NOC) 1099(Del.) delivered in the context of the performance of a suit by relying on the General Clauses Act.

The Ahmedabad bench held that the CIT(A), while counting the number of days of stay in India, purportedly counted the date of arrival of the assessee in India, without giving any cogent reason thereon, which, in the considered opinion of the bench, had no basis, more so when it had already been held by different benches that while counting the number of days of stay in India for considering the status of “Resident”, the days of arrival have to be excluded. The bench did not find any reason to deviate from the ratio laid down by the Bangalore bench with the identical facts in the case in hand. The bench ordered the exclusion of the date of arrival in counting the days of stay in India in the case of the assessee.

The bench thus held that the assessee stayed in India during the year under consideration for less than 182 days and could not be considered as a resident of India in the year under consideration. In that view of the matter, the impugned assessment made against the assessee, considering him as a resident of India, was held to be not sustainable in the eyes of law, and the overseas income assessed was deleted. As a result, the appeal preferred by the assessee was allowed, holding that in calculating the number of days of stay in India, the days of arrival were to be excluded.

OBSERVATIONS

s.6(1) of the Act reads as

For the purposes of this Act,-

(1) An individual is said to be resident in India in any previous year, if he-

(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more; or

(b) ***

(c) having, within the four years preceding that year, been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

The main provision is followed by Explanations 1 and 2, which are not reproduced here for the sake of brevity. Both the Explanations are inserted at a later date to relax the rigours of clause (c) prescribing the period of stay in India of 60 days. Clause (c), which is an alternative to clause (a), provides that a person would be said to be a resident in India where his stay in a year is of 60 days or more, provided also that his stay during the preceding 4 years is of 365 days or more. On cumulative satisfaction of the twin conditions of clause (c), an individual is said to be resident in India, even where his stay in India does not exceed 181 days. The condition of stay of 60 days in clause (c) is relaxed in three situations narrated in clauses (a) and (b) of Explanation 1 to s.6(1) of the Act, which cases are the cases of seafarers, a person leaving India for employment outside India and a person who comes on a visit to India.

The issue for consideration here revolves in a narrow compass about how to determine whether an individual is said to be in India in any previous year for the prescribed period or periods. A person can be in India and also out of India on a given day, especially on the day of his departure and of the day of his arrival, unless the event happens exactly at midnight, when the day and the date change. The issue is about whether to include such days or to exclude them, while determining the number of days of stay in India. The Act does not prescribe any methodology for calculating the number of days in a year, nor do the rules prescribe the manner for calculating the number of days. No guidance is available in the context of s.6 of the Act. The Directorate of Income Tax (Public Relations, Publications and Publicity), in its brochure on “Determination of Residential Status under Income-tax Act, 1961” has stated that “For the purpose of counting the number of days stayed in India, both the date of departure as well as the date of arrival are ordinarily considered to be in India”.

In a general sense, a ‘day’ is the time when there is light and, in that sense, the day starts with sunrise and ends with sunset. At times, a day is taken to be a period of 24 hours. A solar day begins with midnight and ends with the following midnight; a period of 24 hours, from 12:00 midnight to 12:00 midnight of the next night. A day is usually a 24-hour period, connoting the length of time it takes the earth to rotate fully on its axis.

S.2(35) of the General Clauses Act, 1897 defines a ‘month’ to mean the period to be reckoned according to the British Calendar and s. 2(66) of the said Act defines a “Year” to mean a year according to the British Calendar. Even the General Clauses Act does not define a “day”.

The expression ‘day’ has been understood in different ways by different nations at different times. In case of Frank Anthony Public School vs. Smt. Amar Kaur, 1984 (6) DRJ 47, the Delhi High Court quoted with approval the words of Lord Coke; The Jews, the Chaldeans and Babylonians begin the day at the rising of sun; The Athenians at the fall; the Umbri in Italy begin at midday; The Egyptians and Romans from midnight; and so doth the law of Englans in many cases. The English day begins as soon as the clock begins to strike twelve p.m. of the preceding day. Williams vs. Nash, 28 L.J.Ch. 886.

In Halsbury’s Laws of England, third edition, Vol.37, pg. 84, it is said, the term ‘day’ is like the terms ‘year’ and ‘month’ used in more senses than one. A day is strictly the period of time which begins with one midnight and ends with the next. It may also denote any period of twenty-four hours, and again it may denote the period of time between sunrise and sunset.

The meaning assigned by the courts, in the context, to the word ‘day’ has been explained in the Law Lexicon by Venkatramaiah’s 1983 Edition to mean: “Day, generally speaking, is the period from midnight to midnight: the law admits not of fractions in time but, in case of necessity. [Louis Dreyfus & Co. vs. Mehrchand Fattechand ’61.C. 886]. ….The day on which a legal instrument is dated begins and ends at midnight. It is not necessary to consult the calendar to ascertain when it commences and ends. [Anderson: Law Dictionary]….”

It is settled that the law disregards fractions. In the space of a day, all the twenty-four hours are usually reckoned; the law rejects all fractions of a day to avoid disputes. Counting the date of service, which takes place in any part of the day as a day, would result in a fraction being included, and since a fraction of a day is not to be included, the limitation would begin from the next date. A day, it emerges, should be taken as a period of 24 hours and that too continuous twenty-four hours; In counting the number of days, the fraction of the day should be excluded in computing the number of days.

Section 12(1) of the Limitation Act reads as follows;

12. Exclusion of time in legal proceedings (1) In computing the period of limitation for any suit or application, the day from which period is to be reckoned shall be excluded (2) ……. Section 12(1) itself specified that for the computation of the period of limitation, the day from which the said period is to be reckoned should be excluded.

Possibilities that emerge are to exclude the days when a person arrives in India, and also the days when he departs from India. Alternatively, to include both such days on the ground that the person was in India even for a part of the day. Then there is a possibility to exclude one of these days, and yet one more is to divide the day into the number of hours and take a mean thereof and apply the test of 12 hours stay in India. There is also a possibility of excluding the day when a person has come to India after sunset and the day when he has left India before sunrise, or where he was in India for less than 12 hours.

Section 9 of the General Clauses Act, 1897 is as under —

“(1) In any (Central Act) or Regulation made after the commencement of this Act, it shall be sufficient, for the purpose of excluding the first in a series of days or any other period of time to use the word “from”, and, for including the last in a series of days or any other period of time, to use the word “to”.

(2) This section also applies to all (Central Acts) made after the third day of January 1868. and to all Regulations made on or after the fourteenth day of January, 1887.”

The Delhi High Court in the case of Praveen Kumar (supra) had an occasion to consider whether the suit before the court was filed in time. In that case, the deed of performance of the agreement dated 10.03.2002 was stipulated to take place on 30.7.2002, failing which the suit was filed on 30.07.2005 for specific performance. The suit was challenged on the ground that it was barred by time and was not maintainable. It was contended that the last date for filing the suit was 29.07.2005, and the suit was filed late by one day. In defense, the plaintiff argued that the suit was filed in time and the same was in accordance with the Order 7 Rule 11 of the Civil Procedure Code, and the Limitation Act and the General Clauses Act. In case the date set for performance, i.e., 30.7.2002, was excluded, then the limitation will commence from the next date, i.e., 31-7-2005.

The Delhi High Court referred to section 9 of the General Clauses Act to hold that, if the word ‘from’ is used, then the first day in a series of days will stand excluded, and if the word ‘to’ is used, then it will include the last day in a series of days or any other period of time. The Delhi High Court at para 28 observed that: “It is well-known maxim that the law disregards fractions. By the Calendar, the day commenced at midnight, and most nations reckon in the same manner. The English do it in this manner. We too have adopted the same. In the space of a day all the twenty four hours are usually reckoned, the law generally rejecting all fractions of a day, in order to avoid disputes. If anything is to be done within a certain time of, from, or after the doing or occurrence of something else, the day on which the first act or occurrence takes place is to be excluded from computation. (Williams vs. Burzess [1840] 113 E.R. 955) unless the contrary appears from the context. (Hare vs. Gocher F1962I2 Q.B. 641). The ordinary rule is that where a certain number of days are specified they are to be reckoned exclusive of one of the davs and inclusive of the other (R.V. Turner,(supra) p. 359).”

As per the General Clauses Act, the first day in a series of a day is to be excluded if the word from is used. Since for computation of the period, one has to necessarily import the word ‘from’ and, therefore, accordingly, the First day is to be excluded.

It is relevant to note that the ruling of the AAR is assessee-specific and is not binding on other assesseees and does not have a value of precedent. Secondly, the Authority did not have an occasion to examine the implication of s.9 of the General Clauses Act and the decision of the Delhi High Court in Praveen Kumar’s case (supra). It also did not consider the possibility of inclusion or exclusion about the number of hours and the fraction of a day, simply for the reason that such data was not made available by the petitioner applicant.

The Karnataka High Court, while dismissing the appeal of the revenue against the order of the tribunal in Manoj Reddy’s case (supra), did note the facts of the case and the findings of the tribunal and this decision of the High Court is referred to by the subsequent decisions of the tribunal.

For records, it is noted that s.32(1) granting depreciation, vide second proviso, restricts the benefit of depreciation to 50% in cases where the asset in question is put to use for a period of less than 180 days in the previous year. Likewise, the Act has many provisions that provide for limitations with reference to the number of days.

It appears that the exclusion of one of the days is not difficult and does not need extra persuasion, though the view that both days are to be included is held by the AAR and the Income Tax Department. The challenge, therefore, for an assessee is to examine whether both the days can be excluded or not. There is a good possibility of exclusion in cases where the hours of stay in India on any of these days are less than twelve hours. In such a case, applying the theory of excluding the ”fraction of the day”, such a day may be excluded.

One may also be careful to ensure that the customs authorities, in stamping the passport puts the date of actual arrival and departure to eliminate the confusion arising on account of the stamping prior to the actual time of the event.

Applying the General Clauses Act, 1897, the first date in line should be excluded in computing the number of days. Most of the cases considered by the tribunal are the cases of ”visit” to India, and therefore, in these cases, the tribunal has held that the date of arrival, being the first in line, should be excluded. Applying the principle supplied by the tribunal, basis the General Clauses Act, in computing the number of days in cases where the person leaves India for the purposes of employment, or otherwise, the date of departure should stand excluded.

One may note that the words ‘from’ and ‘to’ are not found in s. 6 of the Act and are read into the section by the courts by relying on the General Clauses Act, which inter alia does provide so in s. 9 of the said Act, relied upon by the tribunal.

While it may be true that s.6 requires one to examine the number of days stay in India and not out of India, it is also not appropriate to altogether rule out the calculation of days in India by excluding the number of days of stay outside India. In case of a person who is admittedly out of India for more than the prescribed number of days, it would not be inappropriate to derive his number of days of stay in India by excluding the number of days outside India from 365 days.

It seems that the case of the revenue for inclusion of both the days is misplaced, and even for inclusion of one of the days is debatable and is capable of two views. Under such circumstances, the view beneficial to the taxpayer should be adopted.

The issue under consideration has a very wide application and can seriously damage the cases of many taxpayers who are not vigilant about the implications of the number of days of stay in a year or years. The taxpayers, in general, are advised not to take chances and to avoid unwarranted litigation, at least in cases where it is possible for them to monitor the number of days of their stay in India. Better is for the Parliament, if not the Government, to lay down clear-cut rules to avoid any harm to unsuspecting taxpayers.

Allied Laws

48. Rajani Manohar Kuntha & Ors vs. Parshuram Chunilal Kanojia & Ors

2025 LiveLaw (SC) 1253

December 02, 2025

Tenancy – Eviction – Tenant cannot dictate – Bona fide Requirement – Scope of Revisional Jurisdiction is narrow – The bona fide requirement has to be assessed from the landlord’s perspective and not from the tenant’s convenience.

FACTS

The Appellants (Landlords) instituted a suit seeking eviction of the Respondents (Tenants) from a commercial Premises. The eviction was sought on the grounds of bona fide requirement for commercial use. The Trial Court, upon appreciation of the pleadings and evidence, decreed the suit for eviction, holding that the requirement was genuine and bona fide. The First Appellate Court confirmed the findings and decree of the Trial Court. In revision, the Bombay High Court set aside the concurrent findings of the Trial Court and the First Appellate Court. The High Court undertook a detailed scrutiny of the pleadings and evidence and held that the landlord’s bona fide requirement was not established, inter alia, relying on the existence of other premises and the obtaining of a commercial electricity connection during the pendency of proceedings.

On an appeal to the Supreme Court:

HELD

The High Court exceeded its revisional jurisdiction by re-appreciating evidence and conducting a microscopic scrutiny of facts, despite the concurrent findings of fact recorded by the Trial Court and the First Appellate Court. Revisional jurisdiction can be exercised only when the findings of the courts below are ex facie perverse or without jurisdiction. Further, the Supreme Court observed that a tenant cannot dictate to the landlord as to the suitability of alternative accommodation or how the landlord should conduct his business. The bona fide requirement has to be assessed from the landlord’s perspective and not from the tenant’s convenience. Relying upon settled principles of law, the Court reaffirmed that the concurrent findings of fact should not be interfered with in revision, and the High Court’s interference was held to be without jurisdiction.

Accordingly, the judgement of the High Court was set aside, and the Trial Court and First Appellate Court decrees of eviction were restored.

49. Cement Corporation of India vs. ICICI Lombard General Insurance Company Limited

2025 INSC 1444

December 15, 2025

Insurance Law – Fire Insurance – Proximate Cause – Exclusion Clause – Theft preceding Fire – Interpretation of Fire and Special Perils Policy [Indian Contract Act, 1872]

FACTS

The Appellant, Cement Corporation of India, a Government company, obtained a Standard Fire and Special Perlis (Material Damage) Insurance Policy from the Respondent insurer covering its Cement Factory. An unknown miscreant entered the factory premises during the night and attempted theft of copper windings and transformer oil using blow torches and gas cutters. During the course of such attempted theft, a transformer caught fire, resulting in extensive damage to the insured property. An FIR was registered, and the Appellant lodged an insurance claim. The Surveyor appointed by the insurer opined that the fire resulted from the attempted theft and recommended repudiation of the claim by invoking the Riot, Strike, Malicious Damage (RSMD) exclusion clause, treating burglary as the proximate cause. Relying on the survey report, the Respondent repudiated the cause and the claim. Aggrieved, the Appellant filed a consumer complaint before the National Consumer Disputes Redressal Commission (NCDRC). The NCDRC dismissed the complaint, holding that burglary/theft was the proximate cause of loss and that theft was not a covered peril under the policy.

HELD

The Supreme Court held that a fire insurance policy is a contract of indemnity against the loss caused by fire, and once it is established that the damage occurred due to fire, the cause that ignited the fire becomes immaterial unless it is specifically excluded under the policy or is attributable to fraud or wilful misconduct of the insured. The Court observed that burglary/theft was not an exclusion under the specific peril of “Fire” in the policy. The RSMD exclusion could not be invoked to defeat a claim where the loss was directly attributable to fire, an insured peril with its own distinct exclusions. The Court further held that the doctrine of proximate cause had been wrongly applied by the NCDRC, as the immediate and effective cause of loss was fire, while theft merely preceded the incident.

Accordingly, the Supreme Court allowed the appeal and set aside the repudiation of the claim as well as the order passed by the NCDRC.

50. Apsara Co-operative Housing Society Ltd. vs. Vijay Shankar Singh

WP 3908 of 2025 (Bom)(HC)

January 05, 2026

Cooperative Housing Society – Housing Society formed for collective management is neither “industry” nor “establishment” – Proceedings not maintainable – Gratuity Act, 1971 is inapplicable – irrespective of earning income through installation of telecommunication towers/antennas. [S. 2(j), Industrial Disputes Act, 1947; S. 1(3)(b), S. 2(4) Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017]

FACTS

The Petitioner is a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act, 1960. The Respondent was appointed as Building Manager in 2013, and his services were terminated in 2022.

The Respondent filed claim before the labour court for bonus, leave wages and gratuity before the Controlling Authority. The Petitioner opposed the maintainability by filing applications seeking dismissal of both proceedings, contending that it is neither an “industry” within Section 2(j) of the Industrial Disputes Act, 1947 (ID Act) nor an “establishment” within Section 2(4) of the Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017. (MSE Act)

The Labour Court/Controlling Authority dismissed applications, holding that the Respondent should be permitted to lead evidence. Aggrieved, the Petitioner filed writ petitions challenging the said orders.

HELD

The Bombay High Court held that for invoking provisions of the ID Act, the Respondent (Original Applicant) must establish that the employer is an “industry” within Section 2(j) of the ID Act. A co-operative housing society formed by flat owners only for collective management of the building does not carry on any systematic trade, business or commercial activity and therefore cannot be treated as an “industry”. The Court further held that the mere existence of facilities such as a clubhouse or earning income through the installation of telecommunication towers/antennas does not, by itself, convert the society’s activities into a systematic commercial activity. Such incidental income is aimed at reducing maintenance contributions and does not constitute trade/business. Thus, the Labour Court erred in rejecting the dismissal application and in posting the issue for evidence, since the Respondent would not be able to demonstrate any industrial activity even upon leading evidence.

On the gratuity claim, the Court held that the applicability of the Payment of Gratuity Act (Section 1(3)(b) depends upon whether the entity is a shop/establishment within the meaning of the MSE Act. Under Section 2(4) of the Maharashtra Shops Act, an “establishment” contemplates an entity carrying on business/trade/profession or incidental or ancillary activities thereto. A cooperative housing society, managing residential premises for members’ personal use, does not carry on business/trade/profession and therefore is not an “establishment”.

Accordingly, the Court concluded that the Petitioner Society is neither an “industry” under the ID Act nor an “establishment” under the Maharashtra Shops Act and therefore both the proceedings were not maintainable.

51. Kanchana Rai vs. Geeta Sharma & Ors.

2026 LiveLaw (SC) 41

January 13, 2026

Hindu Law – Maintenance – Dependents –“Any widow of his son” – Widowhood after father-in-law’s death – Right to claim maintenance from estate of father-in-law. [S. 21(vii), Hindu Adoptions and Maintenance Act, 1956]

FACTS

The dispute arose inter se among heirs/family members of the late Dr. Mahendra Prasad, who died on December 27, 2021. He had three sons: (i) Ranjit Sharma (who later died on March 02, 2023), (ii) Devinder Rai (husband of Appellant Kanchana Rai, predeceased), and (iii) Rajeev Sharma.

Respondent No.1 Geeta Sharma, wife of Ranjit Sharma, filed proceedings before the Family Court seeking maintenance from the estate of her father-in-law under the Hindu Adoptions and Maintenance Act, 1956.

The Family Court dismissed the petition as not maintainable, holding that Respondent No.1 was not a widow on the date of death of the father-in-law, since her husband was alive at that time.

In appeal, the High Court set aside the Family Court order and held that the petition was maintainable as Respondent No.1 was the widow of the son of the deceased and thus a dependant, and directed the Family Court to decide the matter on merits and quantum. On appeal to the Supreme Court.

HELD

The Court analysed Chapter III (Sections 18–28) of the Act and especially Section 21(vii), which defines “dependants” to include “any widow of his son” so long as she does not remarry, subject to inability to obtain maintenance from husband’s estate/children, etc. The Court held that the language is clear and unambiguous and does not permit reading the words as “widow of his predeceased son”. The legislature consciously used “any widow of his son”, and the time of becoming a widow is immaterial.

The Court reiterated the literal rule of interpretation, holding that courts cannot add or subtract words from statutes. The Court further observed that restricting maintenance only to widows whose husbands died during the lifetime of the father-in-law would create an arbitrary classification violating Article 14 and would also offend Article 21 by exposing widowed daughters-in-law to destitution.

The Appeal was dismissed.

52. UOI . vs. Paresh Chandra Mondal

2026 LiveLaw (SC) 42

January 07, 2026

Nomination – Provident Fund – Succession Certificate/Probate – Nominee’s primacy – Harmonious construction – Government should not insist on succession certificate where valid nomination exists – Nominee as trustee (not beneficial owner). [S. 4(1)(c)(i), S. 5(1), Provident Funds Act, 1925; R. 33(ii), GPF (Central Services) Rules, 1960]

FACTS

The Petitioners filed a Special Leave Petition challenging the judgment passed by the Calcutta High Court whereby the High Court dismissed the writ petition filed by the Union of India against an order of the Central Administrative Tribunal,

The Tribunal had allowed the application filed by the Respondent seeking release of amounts lying in the General Provident Fund (GPF) of his deceased brother, holding that the Respondent was the only valid nominee and entitled to receive the amount under Rule 33(ii) of the General Provident Fund (Central Services) Rules, 1960.

The Union of India contended that since objections were raised by nephews of the deceased, and as the amount exceeded Rs.5,000/-, Section 4(1)(c)(i) of the Provident Funds Act, 1925 required production of succession certificate/probate/letters of administration for release of such amount, and that Rule 33(ii) could not override the statutory mandate. It was also argued that, though the Respondent produced a succession certificate, the GPF amount was not mentioned in its schedule.

HELD

The Supreme Court declined to entertain the SLP and upheld the approach of the Tribunal and the High Court, holding that Rule 33(ii) of the GPF (Central Services) Rules, 1960 provides that where the subscriber leaves no family and a valid nomination subsists, the amount standing to his credit shall become payable to the nominee.

Further, if succession certificates/probates were insisted upon even in valid nomination cases, it would render nominations otiose and defeat their object. The Court relied upon Section 5(1) of the Provident Funds Act, 1925, which begins with a non-obstante clause and confers entitlement upon the nominee to the exclusion of all other persons, thereby giving primacy to a valid nomination. The Court further observed that the Government should avoid becoming party to private inheritance disputes, which would inevitably occur if succession certificates were insisted upon even in nomination cases.

SLP of the Petitioner was dismissed.

Generational Shifts

Recently, I was with a senior partner of a mid-sized firm who had a simple, but telling story. A junior colleague had texted him at 9 p.m. with the message: “Tomorrow, I’ll be on leave.” No explanation. No apology. Just a fact. When he asked why it was shared so abruptly, the response came: “No need to overcomplicate it.” To the senior, this felt like a breach of etiquette, a lack of respect, unprofessional. To the junior? It was just communication.

Such interactions pointing to generational shifts are increasingly common, not only in accounting firms, but across industries—from accounting and law to tech to consulting—you’ll find these micro-conflicts: senior leaders baffled by juniors who decline to work late without guilt, or young professionals puzzled by the “culture of presence” that glorifies late-sitting.

The clash isn’t about right or wrong, but a signal of a deeper shift in how different generations understand work, authority, and obligation. The discomfort is real—and it exists on both sides. Every generation believes it worked harder than the next. History suggests this belief is universal—and consistently misplaced. The way forward therefore is not to defend old norms reflexively, nor to adopt new ones uncritically, but to translate enduring values into contemporary forms by understanding these generational shifts with empathy.

Bridging the Professional Divide

For many senior professionals, professionalism was forged in an environment of scarcity and uncertainty. Long hours were not a choice but a necessity. Staying back late, deferring personal plans, and placing work above all else were ways of demonstrating seriousness and reliability. These habits were not arbitrary; they were survival mechanisms in a competitive and less forgiving professional landscape. Over time, they also became cultural norms—transmitted quietly from one generation to the next.

There is, undeniably, value in this legacy. Endurance builds resilience. Availability builds trust. Unstructured time spent observing seniors at work often imparted lessons no formal training could. Many of today’s leaders owe their professional depth to precisely this immersion. When seniors worry that something essential is being lost, the concern is neither nostalgic nor unfounded.

At the same time, younger professionals are entering a very different world – the world of abundance and technology. Work is more codified, timelines are compressed, and technology has reduced the need for physical presence. They have grown up in an environment that openly discusses mental health, personal boundaries, and sustainability. For them, clarity and planning are not luxuries but expectations. When leave is communicated as a matter of fact, it reflects not entitlement, but a belief that personal time and professional responsibility can coexist without apology.

This difference in approach often gets misinterpreted. Seniors may see a lack of commitment; juniors may experience unspoken expectations as arbitrary or inefficient. In reality, both are reacting rationally to the conditions that shaped them.

A similar tension is visible in ideas of loyalty. Earlier generations invested decades in one firm, trusting that patience and perseverance would be rewarded in time. Younger professionals, however, operate in a world of rapid change. They value learning velocity, relevance, and optionality. Shorter tenures are not necessarily signs of disloyalty, but reflections of a marketplace where skills, not institutions, offer security. Yet, from a firm’s perspective, this increased attrition and frequent job-hopping creates real challenges—continuity, succession planning, and cultural transmission all suffer when attrition is high.

Authority presents another point of divergence. Seniority once commanded automatic deference. Today, authority is often filtered through competence and explanation. Juniors are more willing to question—not to undermine, but to understand. This can feel destabilising to those accustomed to hierarchy, just as unexplained instructions can feel unsatisfactory to those trained to evaluate systems critically.

Technology further complicates the picture. Manual processes that once built discipline now appear inefficient to a generation raised on automation. Seniors may see impatience; juniors see avoidable waste. Here again, both perspectives contain truth.

And finally, there’s identity. For many seniors, the profession is the identity. “I’m a senior partner. That defines me,” said 60-year-old Ravi. But for younger professionals, work is just one thread in a tapestry of interests, hobbies, and family roles. “I’m a chartered accountant, part-time DJ, and owner of an e-commerce startup in customised birthday cakes” said 28-year-old Nia.

So, for seniors, where do we go from here? The answer isn’t choosing between “the way we did it” and “the way you want to do it.” It’s about building bridges. This isn’t a war of generations. It’s a translation. The wisdom of the past isn’t outdated, but it needs to be spoken in a language the next generation can speak. Are we ready to adapt and speak that language?

Best Regards,

CA. Sunil Gabhawalla

Editor

त्रिपीडाSस्तु दिने दिने !

This is an interesting thought. It says, every day three types of troubles are welcome. पीडा means trouble. The shloka reads as follows: –

प्रदाने विप्रपीडाSस्तु          While doing charity, a learned person (Brahman) is welcome to trouble us.

पुत्रपीडा तु भोजने            While having our meals, our son (children) should be around. to trouble us.

शयने दारपीडाSस्तु         In the bed, the wife should be there to ‘trouble’ a man. दार means wife.

(त्रिपीडाSस्तु दिने दिने)

The Sweet Burden 4 Troubles to welcome Daily

In our culture, doing charity or giving help to the deserving person is of utmost importance. It is called ‘Satpatri daan’ – charity to a deserving person. विप्र means a learned and pure person. In those days, at the time of lunch, people used to wait for some good guest (Atithi) to join us for food! Without giving to an Aththi, they did not consume food! Therefore, when we wish to give something for a good cause or to a deserving man, such person is welcome. Hunting for such a good person is also a welcome task.

Today many good charitable institutions find it difficult to get deserving donees or deserving students/organisations as beneficiaries.

Further, if our children are around us while having meals, it is a pleasure. Today, our family system is collapsing. There are nuclear families.

When a parent is eating, small kids sharing the food from his plate is a pleasurable scene. One enjoys feeding one’s small kids who play or dance around and get fed! Even their trouble is enjoyable.

Similarly, when in bed, the company of your spouse is very enjoyable! Her company may be ‘troublesome’ in the good sense of the term.

I heard this shloka from a very learned scholar. He was teaching something. He added a very meaningful line –

पाठने छात्रपीडाSस्तु !

Meaning, while teaching there should be inquisitive students with intense desire and curiosity for acquiring knowledge. Such students’ ‘trouble’ is welcome. That is the ideal relationship between Guru and Shishya (mentor and disciple) This fun is not available in online teaching! Students should raisequestions, doubts and queries to understand the subject better.

In this verse, the word or trouble should be taken in the right sense with a positive meaning.

Section 143(2) read with section 120 – Assessment framed by non-jurisdictional Assessing Officer

76. [2025] 126 ITR(T) 664 (Delhi – Trib.)

Arjun Rishi vs. ITO

ITA NO: 3020 (DEL.) OF 2023

A.Y.: 2017-18

DATE: 09.07.2025

Section 143(2) read with section 120 – Assessment framed by non-jurisdictional Assessing Officer

FACTS

The assessee filed his return of income for the AY 2017–18 on 31.03.2018 declaring total income of ₹91,05,020. The case was selected for limited scrutiny under CASS on issues relating to cash deposits, capital gains/loss on sale of property, and investment in immovable property.

Notice under section 143(2) was issued and served upon the assessee by the Income-tax Officer (ITO), followed by notice under section 142(1). The assessee complied and furnished the requisite details electronically. Thereafter, the assessment was completed by the ITO vide order dated 30.12.2019.

Before the Commissioner (Appeals), the assessee raised a jurisdictional objection contending that, in view of CBDT Instruction No. 1/2011 dated 31.01.2011, the pecuniary jurisdiction to assess cases where returned income exceeds ₹30 lakhs in metro cities lies with the Assistant/Deputy Commissioner of Income-tax and not with an ITO. Since the assessee had declared income exceeding ₹90 lakhs, the ITO lacked jurisdiction. It was further contended that no order under section 127 transferring jurisdiction had been passed.

The Commissioner (Appeals) rejected the jurisdictional objection and upheld the assessment as well as the additions made therein.

Aggrieved, the assessee preferred an appeal before the Tribunal.

HELD

The Tribunal observed that the assessee had declared income of ₹91.05 lakhs and, as per CBDT Instruction No. 1/2011 issued under section 119, cases where declared income exceeds ₹30 lakhs in metro cities fall within the jurisdiction of ACs/DCs and not ITOs. The Instruction is binding on the Department and must be strictly followed.

The Tribunal further noted that the Revenue failed to place on record any order passed under section 127 transferring jurisdiction from the competent AC/DC to the ITO. In the absence of such an order, the ITO could not have assumed jurisdiction merely on the basis of PAN allocation.

The Tribunal held that since the assessment was framed by an Assessing Officer who lacked pecuniary jurisdiction, the notice issued under section 143(2) was invalid, and consequently, the entire assessment proceedings were vitiated. An assessment framed by a non-jurisdictional Assessing Officer is bad in law and liable to be set aside.

Accordingly, the assessment order was quashed, and the appeal of the assessee was allowed.

Section 271(1)(c) read with section 54F – Penalty – Wrong claim of exemption – Bona fide explanation due to builder’s default

75. [2025] 126 ITR(T) 172 (Delhi – Trib.)

DCIT vs. Sahil Vachani

ITA NO.: 2604 (DEL) OF 2023

A.Y.: 2016-17

DATE: 23.06.2025

Section 271(1)(c) read with section 54F – Penalty – Wrong claim of exemption – Bona fide explanation due to builder’s default

FACTS

The assessee sold shares during the relevant previous year and earned long-term capital gains of ₹9.01 crore. In the return of income, the assessee claimed exemption of ₹6.31 crore under section 54F, contending that he had invested the sale consideration in a residential property.

During assessment proceedings, the Assessing Officer noted that although the assessee had entered into an agreement and made substantial payments towards the proposed residential property, the new residential house did not come into existence within the time prescribed under section 54F. The assessee accepted the disallowance of exemption and offered the amount to tax.

The Assessing Officer, thereafter, levied penalty under section 271(1)(c) on the ground that the assessee had furnished inaccurate particulars of income.

On appeal, the Commissioner (Appeals) deleted the penalty holding that the assessee had disclosed all material facts, furnished supporting documents, and the failure to complete construction was attributable to the builder and beyond the assessee’s control.

Aggrieved, the Revenue preferred an appeal before the Tribunal. Due to a difference of opinion between the Judicial Member and the Accountant Member, the matter was referred to a Third Member for resolution.

HELD

The Tribunal observed that the assessee had placed on record complete documentary evidence in support of the claim under section 54F, including agreements with the builder, bank statements evidencing payments, and TDS certificates. The assessee had also explained during assessment proceedings that the construction could not be completed within the statutory period due to reasons attributable to the builder.

It was further observed that the assessee did not suppress the long-term capital gains, nor did he furnish any false particulars. The claim under section 54F was made on the basis of disclosed facts and supporting documents. Merely because the claim was ultimately found to be unsustainable in law does not automatically attract penalty under section 271(1)(c).

The Third Member placed reliance on the decision of the Supreme Court in CIT vs. Reliance Petroproducts (P.) Ltd., holding that making an incorrect claim in law, by itself, does not amount to furnishing inaccurate particulars, when all material facts are disclosed.

The Tribunal held that the explanation offered by the assessee was bona fide, supported by evidence, and the assessee had voluntarily offered the amount to tax once the exemption was disallowed. There was no finding that the explanation was false or lacking in good faith.

Accordingly, it was held that the penalty under section 271(1)(c) was not leviable, and the order of the Commissioner (Appeals) deleting the penalty was affirmed. The Revenue’s appeal was dismissed.

Merely because the assessee jointly owned another property as on the date of transfer of the asset, his claim for deduction under section 54F could not be rejected.

74. (2025) 180 taxmann.com 720 (Del Trib)

Kusum Sahgal vs. ACIT

A.Y.: 2016-17

Date of Order: 21.11.2025

Section : 54F

Merely because the assessee jointly owned another property as on the date of transfer of the asset, his claim for deduction under section 54F could not be rejected.

FACTS

During the relevant previous year, the assessee received full value of consideration with respect to transfer of shares aggregating to ₹118 crores and, inter alia, claimed deduction under Section 54F for ₹21.28 crores on account of investment in residential property in Gurgaon. The case was selected for scrutiny assessment under CASS for limited scrutiny. The AO contended that since the assessee jointly owned more than one residential property on the date of transfer of shares, he was not entitled to claim deduction under section 54F and therefore, made an addition of ₹21.28 crores.

Aggrieved, the assessee went in appeal before CIT(A) who upheld the action of the AO in disallowing deduction under section 54F.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal noted that the assessee claimed deduction under section 54F for investment made in purchase of residential property at the Camellias, Golf Drive DLF-5, Gurgaon which was an ongoing project of Camellias under construction by DLF. Additionally, as on the date of sale of the shares / original asset, the assessee had a commercial flat at Rajendra Place, an agricultural property (under which there was no ownership of the assessee in possession of the land) at Mehrauli and one residential flat at Greater Noida which was owned to the extent of 50% by the assessee.

Following the order of Mumbai ITAT in ITO vs. Sheriar Phirojsha Irani [IT Appeal No. 2835/Mum/2024, dated 27-09-2024] and other judicial precedents, the Tribunal held that joint ownership at the time of sale of original asset does not disentitle the assessee to claim deduction under section 54F.

In the result, the orders of the AO and CIT(A) were set aside and the appeal of the assessee was allowed.

Where the amount received by the assessee from milk supplying societies was not a voluntary contribution but a compulsory levy linked to the quantity of milk fat supplied, it could not be regarded as a corpus donation exempt under section 11(1)(d).

73. (2025) 180 taxmann.com 641 (Ahd Trib)

Dudhsagar Research and Dement Association vs. DCIT

A.Y.: 2016-17 and 2017-18

Date of Order: 17.11.2025

Section: 11(1)(d)

Where the amount received by the assessee from milk supplying societies was not a voluntary contribution but a compulsory levy linked to the quantity of milk fat supplied, it could not be regarded as a corpus donation exempt under section 11(1)(d).

FACTS

The assessee-trust was registered under section 12A since 1975 and was engaged in activities of medical relief to animals, progeny testing, vaccination, artificial insemination, bull rearing, and education in dairy technology. It received ₹7.23 crores from milk supplying societies as corpus donations which were exempt under section 11(1)(d).

The case was selected for scrutiny. The AO held that the corpus donation of ₹7.23 crores received from milk supplying societies was not a voluntary contribution but a compulsory levy linked to the quantity of milk fat supplied and hence did not qualify as a corpus donation under section 11(1)(d). Accordingly, he treated the said amount as income under section 2(24)(iia). He also invoked proviso to section 2(15) on the ground that the assessee was engaged in activities which fell within “advancement of any other object of general public utility” and its main source of income was sale of frozen semen doses which were in the nature of business, etc. and thereby, denied exemption under section 11.

The assessee filed an appeal before CIT(A) who confirmed the action of the AO; but following the order of ITAT in assessee’s own case for AY 2014-15, he allowed statutory deduction of 15% on the receipts treated as revenue income.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

On the issue of nature of amount received by the assessee from milk supplying societies, following the order of ITAT in assessee’s own case for AY 2014-15 in Dudhsagar Research & Development Association v. ACIT, (2024) 159 taxmann.com 1465 (Ahd Trib), the Tribunal upheld the finding of the AO and CIT(A) that the donations received from milk supplying societies, being compulsorily collected and linked to the quantity of milk fat supplied, did not satisfy the condition of being “voluntary contributions” with “specific direction” as required under section 11(1)(d) and therefore could not be treated as corpus donations.

However, on the alternative claim raised by the assessee of allowing statutory deduction of 15% on such amount, the Tribunal held that this issue was covered in favour of the assessee by the decision of the coordinate Bench in assessee’s own case for AY 2014-15 (supra) wherein it was held that once the corpus donation was treated as revenue receipt, the said receipts were liable to be governed by sections 11 and 12 and the assessee was eligible for deduction in accordance with law including the statutory deduction of 15%.

In the result, the Tribunal partly allowed the appeal of the assessee.

Where milk procurement from farmers was not a standalone profit-oriented business, but an incidental and inseparable activity directly connected to the charitable object of the assessee-society of providing fair and remunerative prices to small and marginal farmers and thereby protecting them from exploitation by middlemen, the activities of the assessee fell within “relief of poor” under section 2(15) and exemption under section 11 could not be denied to it on the ground that it was carrying on commercial activity.

72. (2025) 180 taxmann.com 722 (Cochin Trib)

Malanadu Farmers Society vs. DCIT

A.Ys.: 2016-17 and 2022-23

Date of Order : 19.11.2025

Section: 2(15)

Where milk procurement from farmers was not a standalone profit-oriented business, but an incidental and inseparable activity directly connected to the charitable object of the assessee-society of providing fair and remunerative prices to small and marginal farmers and thereby protecting them from exploitation by middlemen, the activities of the assessee fell within “relief of poor” under section 2(15) and exemption under section 11 could not be denied to it on the ground that it was carrying on commercial activity.

FACTS

The assessee was a charitable society registered under the Travancore-Cochin Literary, Scientific and Charitable Societies Registration Act, 1955 and also registered under section 12A of the Income-tax Act, 1961. The primary object of the assessee was to conduct social activities aimed to for improving the living conditions and welfare of the poor and marginal section of the society. It was engaged in procurement, chilling, processing and sale of milk sourced from small and marginal farmers. It filed its return of income declaring Nil income after claiming exemption under section 11.

The AO issued notice under section 148A on the ground that the assessee was not a charitable organisation but a business community where the major activities of the assessee were trading and processing of milk. He further held that the assessee’s activities cannot be regarded as “relief of poor”. Accordingly, the AO denied exemption under section 11 and an addition of ₹13.93 crores was made relating to the profit earned by trading milk.

Being aggrieved, the assessee filed an appeal before CIT(A) who confirmed the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed as follows:

(a) The assessee had consistently carried out activities such as farmer-training programmes, cattle-rearing demonstrations, financial assistance, welfare schemes, subsidies, and other public-oriented initiatives aimed at improving the livelihood of economically weaker farming communities.

(b) CBDT Circular No. 11/2008 dated 19.12.2008 categorically clarifies that proviso to Section 2(15) does not apply to the first three limbs of the definition of “charitable purpose”—namely (i) relief of the poor, (ii) education, and (iii) medical relief. This circular further clarifies that “relief of the poor” includes a wide range of welfare activities benefiting small and marginal farmers, and that entities engaged in such objects are not disentitled merely because they incidentally carry-on commercial activities, provided the conditions of Section 11(4A) are satisfied.

(c) In view of the consistent judicial position, binding ITAT order in assessee’s own case for AY 2017-18 [Malanadu Farmers Society v. DCIT, IT Appeal Nos. 632 and 633 (Coch) of 2022, date of pronouncement 08.03.2023], CBDT Circular 11/2008 dated 19.12.2008, and holistic appreciation of facts, the assessee’s activities fell squarely within the definition of “relief of the poor” under section 2(15).

(d) The assessee had demonstrated with supporting documents that milk procurement was not a standalone profit-oriented business, but an incidental and inseparable activity directly connected to its charitable object of providing fair and remunerative prices to small and marginal farmers, thereby protecting them from exploitation by middlemen.

(e) The dominant purpose of the assessee was relief of poor, small and marginal farmers; milk procurement and processing activities were merely incidental and inseparable from its charitable objectives. Farmers received higher prices compared to cooperative benchmarks, which directly contributed to their upliftment.

The Tribunal also noted that the assessee had also complied with the conditions under section 11(4A).

Accordingly, the Tribunal held that the denial of exemption under section 11 to the assessee was unjustified and deserved to be deleted.

Assessment order passed u/s 143(3) by ACIT is valid despite notice u/s 143(2) having been issued by ITO and ACIT since the territorial jurisdiction of the ITO and the ACIT/DCIT working in the same Range is common and within the common jurisdiction, the cases are assigned to the ITO and to the ACIT/DCIT on the basis of the monetary limit.

71. TS-802-ITAT-2025 (Ahd. Trib.)

Rupen Marketing Pvt. Ltd. vs. DCIT

A.Y.: 2015-16

Date of Order: 18.6.2025

Sections: 143(2)

Assessment order passed u/s 143(3) by ACIT is valid despite notice u/s 143(2) having been issued by ITO and ACIT since the territorial jurisdiction of the ITO and the ACIT/DCIT working in the same Range is common and within the common jurisdiction, the cases are assigned to the ITO and to the ACIT/DCIT on the basis of the monetary limit.

In an assessment, selected for limited scrutiny, merely because the AO had exceeded his jurisdiction in making certain additions, the entire assessment cannot be held as void ab initio. The additions made in excess of the issues under consideration can only be held as illegal.

FACTS

For AY 2015-16, the assessee filed its return of income declaring total income of ₹30,11,970. The case was selected for limited scrutiny to examine 4 issues viz. (i) import turnover mismatch; (ii) customs duty payment mismatch; (iii) payment to related persons mismatch; and (iv) duty drawback received / receivable.

In the course of assessment proceedings, there was no compliance to notices issued under section 143(2) as well as section 142(1) of the Act by DCIT-Circle 3(1)(2), Ahmedabad. The details requisitioned were not furnished. The AO having noticed various discrepancies between data reported in return and information as per ITS recorded a finding that correctness and completeness of accounts was not verifiable and that the assessee had not followed the method of accounting in accordance with the accounting standard stipulated under section 145(2) of the Act. The AO completed the assessment under section 144 of the Act by making an ad hoc addition of ₹2,50,00,000 to the returned income.

Aggrieved, the assessee preferred an appeal to the CIT(A) who set aside the assessment to the file of the AO with a direction to make a fresh assessment after providing opportunity of being heard to the assessee and after verification of the facts of the case.
Aggrieved by the order of CIT(A), the assessee preferred an appeal to the Tribunal contending that the CIT(A) erred in not appreciating that the assessment order was bad in law and was required to be quashed as void ab-initio and bad in law since DCIT-Circle 3(1)(2), Ahmedabad did not have jurisdiction over the case of the assessee, the AO exceeded his jurisdiction and assessed income as if the case was selected for complete scrutiny.

HELD

The Tribunal observed that the ground of jurisdiction of DCIT, Circle 3(1)(2) over the case of the assessee pertaining to jurisdiction needs to be adjudicated first since it goes to the root of the matter. It noted that the assessee contended that the DCIT did not have correct and proper jurisdiction to pass the impugned assessment order since the notice dated 04.07.2017 was issued by the ITO, Ward 3(1)(3), Ahmedabad under Section 142(1) r.w.s 129 of the Act. The Tribunal noticed that identical computer generated notice under Section 143(2) of the Act was issued by the ITO, Ward – 3(1)(3), Ahmedabad as well as by the ACIT, Circle – 3(1)(2), Ahmedabad on 26.07.2016.

The Tribunal held that merely because the notices were issued both by the ITO as well as by the ACIT, it can’t be concluded that the ACIT was having no jurisdiction over the case. The territorial jurisdiction of the ITO and the ACIT/DCIT working in the same Range is common. Within the common jurisdiction, the cases are assigned to the ITO and to the ACIT/DCIT on the basis of the monetary limit. The CBDT vide INSTRUCTION NO. 1/2011 [F. NO. 187/12/2010-IT(A-I)], DATED 31 1-2011 had fixed pecuniary limit for purpose of distribution of work between officers.

It held that since the income declared by the assessee in the current year was above ₹30 lacs and the jurisdiction over the case was with the ACIT/DCIT in accordance with the CBDT Instruction. Merely because the assessment of past year was made by the ITO, it cannot be presumed that the jurisdiction for the current year will remain with the ITO. The jurisdiction was dynamic considering the CBDT Instruction and the income declared by the assessee in different years. Even if the initial notice u/s 143(2) was issued by the ITO, the jurisdiction was required to be transferred to the ACIT/DCIT because the returned income of the assessee in the current year was in excess of ₹30,00,000/-. Therefore, the contention of the assessee that the AO had no jurisdiction over the case was not accepted. It held that the jurisdiction over the case for the current year was with the ACIT/DCIT and not with the ITO. The jurisdiction was also rightly assumed by the ACIT/DCIT by issue of notice under section 143(2) of the Act dated 26.07.2016. Therefore, the assessment order as passed by the DCIT, Circle – 3(1)(2), Ahmedabad cannot be held as without jurisdiction. Accordingly, the ground no.-2 raised by the assessee in respect of jurisdiction over the case is dismissed.

As regards conversion of limited scrutiny into complete scrutiny by the AO and making ad hoc addition of ₹2,50,00,000/- without identifying the nature of addition, the Tribunal noticed that the case was selected for limited scrutiny on specific issues as already mentioned earlier. The AO had also discussed those issues in the assessment order and pointed out specific discrepancy in respect of import turnover mismatch and duty draw back mismatch. However, since no compliance was made by the assessee before the AO, he had rejected the books of account and made ad hoc addition of ₹2,50,00,000/- in respect of the mismatch on the issues of limited scrutiny as well as the other discrepancies as noticed in the course of assessment. It held that the objection of the assessee that AO was not empowered to exceed the limited issues on which the case was selected for scrutiny, is justified. However, merely because the AO had exceeded his jurisdiction in
making certain additions, the entire assessment cannot be held as void ab initio. The additions made in excess of the issues under consideration can only be held as illegal.

The Tribunal observed that the AO had specifically pointed out discrepancies to the extent of ₹2,11,04,500/- and ₹51,538/-, in the assessment order, in respect of import duty vis-à vis purchase mismatch and export duty drawback mismatch, which were two of the issues for which the case was selected for limited scrutiny. Therefore, the AO was entitled to make addition to the extent of the total difference of ₹2,11,56,038/- as identified in the assessment order. Only the addition made in excess of the identified difference of ₹2,11,56,038/- can be held as beyond jurisdiction. It held that the objection taken by the assessee on the addition beyond the limited scrutiny issues is no longer res integra as the same stood rectified by the AO. Further, the entire addition can’t be held as beyond jurisdiction and the assessment order can’t be quashed for this reason.

Minimum Guarantee Fee paid to various hotels / guest houses for not meeting contractual obligations for unsold rooms and loss from sold rooms is not rent as per section 194-I of the Act.

70. TS-1561-ITAT-2025 (Delhi Trib.)

Oravel Stays Ltd. vs. DCIT

A.Y.: 2020-21

Date of Order : 21.11.2025

Section: 194-I

Minimum Guarantee Fee paid to various hotels / guest houses for not meeting contractual obligations for unsold rooms and loss from sold rooms is not rent as per section 194-I of the Act.

FACTS

The assessee engaged in operating online platform for providing OYO rooms at various hotels, guest houses, etc for facilitating reservation / booking of hotel rooms through the appellant-assessee’s OYO platform, had entered into agreements with various hotels, etc. for facilitating booking of hotel rooms, etc. through its e-platform; OYO.

As per the said agreement, the hotel conducts its operations in terms of providing lodging and accommodation services, whereas the appellant assessee provides technology, sales and marketing services to various hotels relating to the provision of lodging and accommodation services through its e-platform. The agreement was based on ‘Minimum Guarantee Revenue Model’ (“MGRM’). As per the agreement, the assessee appellant assured minimum revenue benchmark, which hotels/guest houses may/will receive or likely/expect to receive from the appellant assessee e-platform. In case, the benchmark is exceeded, then the hotel/guest house was required to pay service fee to the appellant assessee otherwise the appellant assessee was required to pay the service fee in case of shortfall in achieving the benchmark. The agreement further provided that in case the rooms are sold at price lesser than the agreed amount between the appellant assessee and hotels, the difference/loss was to be borne by the appellant assessee.

Survey operation under section 133A of the Act was carried out at the business premises of the assessee and based on information gathered, proceedings under section 201 were initiated which culminated into a liability of ₹3,33,19,101 vide order dated 7.2.2020 passed under section 201(1) / 201(1A) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where the main plank of the argument was that the assessee did not have any exclusive and absolute right to use the hotel / guest house rooms as per the agreement. The said rooms were available to all for booking through the e-platform of the assessee.

HELD

The Tribunal, in view of the decision of the Apex Court in the case of Japan Airlines Co. Ltd. [(2015) 377 ITR 372 (SC)] held that following parameters are required to be looked into before invoking section 194-I of the Act viz. – (i) character of services as per agreement and business model; and (ii) right of exclusive use of room. It observed that in the present case, as per the agreement, the appellant-assessee did not have exclusive right to use the room of any hotel / guest house for itself. The booking of the room was available to general public at large through e-platform of the appellant-assessee. A perusal of the agreement revealed that there was no lessor-lessee relationship between hotel / guest house owners and the assessee which gave exclusive right to the appellant assessee to use the said rooms for itself only. The Tribunal, on a bare reading of the agreement, did not find any substance in the observations / conclusions of the CIT(A).

The Tribunal held that the guarantee fee paid to various hotels/guest houses for not meeting the contractual obligations for unsold rooms (booking of minimum number of rooms not met through e-platform of the appellant assessee) and loss from sold rooms (booking of rooms at a lesser price than the minimum agreed room tariff through e-platform of the appellant assessee) in accordance with the terms and conditions of the agreement is not rent as per section 194-I of the Act as the same has been paid for not using any room for itself but for the default on the part of appellant assessee to secure the number of bookings of rooms at a minimal tariff (for unsold rooms and loss from sold rooms).

The Tribunal held that the AO is not justified to treat payments aggregating to ₹31,25,07,038 as rent liable for TDS under section under section 194-I of the Act. It deleted the TDS liability upheld by the CIT(A) vide impugned order.

Penalty under section 270A is not leviable merely because assessee has declared income under a head different from which the Assessing Officer assessed it.

69. TS-1558-ITAT-2025 (Hyd. Trib.)

Penninti Vivekananda Rao vs. ADIT

A.Y.: 2020-21

Date of Order: 19.11.2025

Section: 270A

Penalty under section 270A is not leviable merely because assessee has declared income under a head different from which the Assessing Officer assessed it.

FACTS

The assessee filed return of income for assessment year 2020-21 declaring income under the heads `Capital gains’ and `Income from Other Sources’. The amount of income declared under the head `Capital gains’ interalia included ₹3,22,68,272 arising from surrender of three Equity Plus Funds issued by Bajaj Allianz Life Insurance Co. Ltd. (“Bajaj Equity Plus Fund”).

While assessing the total income of the assessee, the Assessing Officer (AO) assessed the gain on surrender of Bajaj Equity Plus Fund under the head “income from other sources” and not under the head “capital gains” as was returned by the assessee. The AO also initiated proceedings for levy of penalty under section 270A of the Act for misreporting of income. The assessee applied for grant of immunity which application was rejected. The AO, vide order dated 10.3.2023, levied a penalty of ₹2,48,02,158 under section 270A of the Act.

Aggrieved, assessee preferred an appeal to CIT(A) who upheld the penalty levied by the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

At the outset, the Tribunal noticed that the assessee has offered income of ₹3,22,68,272 with regard to surrender of Bajaj Equity Plus Fund and therefore the objection of the DR that the assessee had not offered income from surrender of Bajaj Equity Plus Fund is factually incorrect. The Tribunal held that the assessee had offered income of ₹3,22,68,272 with regard to surrender of Bajaj Equity Plus Fund in the return of income filed by him. Therefore, the assessee has disclosed all facts fully and truly in the return of income.

The Tribunal observed that the only issue is whether where the assessee has offered an income under the head capital gains instead of the head income from other sources, whether penalty for misreporting of income can be levied on the assessee under section 270A(9) of the Act or not. Since the assessee disclosed the income in the return of income, the Tribunal held that there is no misrepresentation or suppression of facts on part of the assessee. Consequently, it held that the case of the assessee does not fall under any of the clauses (a) to (f) of section 270A(9) of the Act. The situation, according to the Tribunal, was merely of reporting of income under an incorrect head and nothing more.

The Tribunal noticed that the Mumbai Bench of the Tribunal in the case of D C Polyester Ltd. vs. DCIT [ITA No. 188/Mum./2023; A.Y.: 2017-18; Order dated 17.10.2023] has held that penalty under section 270A of the Act cannot be levied merely because of a change of head of income. Following the ratio of this decision, the Tribunal held that in the present case also, no penalty can be levied under section 270A(9) of the Act. The Tribunal directed the AO to delete the penalty.

Assessee is liable to deduct tax at source under section 194-IC even though the agreement has been entered into with a person who is not owner of land but has leasehold rights therein.

68. ITA Nos. 2313, 2314,2315 & 2316/Mum/2025 (Mum.)

Sugee Seven Developers LLP vs. ITO

A.Y.s: 2020-21 to 2023-24

Date of Order : 10.10.2025

Section: 194-IC

Assessee is liable to deduct tax at source under section 194-IC even though the agreement has been entered into with a person who is not owner of land but has leasehold rights therein.

FACTS

During the course of survey, the Assessing Officer (AO) noticed that the assessee has deducted TDS @ 1% on payments made to Shri Premal Dayalal Doshi and called upon the assessee to show cause why the TDS under section 194-IC as per which tax should have been deducted at 10% is not applicable in the present case.

The assessee contended that Shri Premal Dayalal Doshi has only a leasehold right in the land which does not fall in the definition of specified agreement under section 45(5A) and therefore TDS was deducted under section 194-IA @ 1%. The assessee’s contention was that provisions of section 194-IC is not applicable since the term specified agreement includes only those agreements entered into with the owner and the assessee’s agreement is with the person holding only leasehold rights.

Aggrieved, assessee preferred an appeal to CIT(A) upheld the order of the AO.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal having perused the definition of the expression `specified agreement’ under section 45(5A) and also the Explanatory Memorandum to the Finance Bill, 2017 vide which the provisions of section 45(5A) have been introduced held that the legislative intention to introduce sub-section (5A) was to define the year of taxability for transfers under a JDA to minimise the genuine hardship of the assessee who may face capital gains in the year of transfer i.e. year of entering into JDA. If the narrower interpretation, as contended by the assessee, is to be accepted then it would lead to anomaly that transfer by the leasehold right owner under JDA would go out of the tax net as the transferor is not the owner as mentioned in the definition of `specified agreement’.

The Tribunal held that in its view the interpretation as argued on behalf of the assessee cannot be accepted since the legislative intent behind introduction of sub-section (5A) is to ease the tax burden on the assessee and such beneficial provision if interpreted as not applicable to transferor holding leasehold rights who has transferred under the JDA would go against the legislative intent.

On a perusal of the JDA, the Tribunal observed that land has been given on perpetual lease in the year 1938 and since then the land has been held by various persons and Shri Premal Dayalal Doshi has acquired the land along with the conditions as prescribed for the perpetual lease. It also noticed that Shri Premal Dayalal Doshi is holding the right to give the land for development and is entitled to receive consideration in monetary and non-monetary form. Given these facts and the legislative intent, as discussed, the Tribunal held that it is unable to agree with the submission that in the present case, the provisions of section 194-IC are not applicable.

Article 5 of India-Japan DTAA – Seconded employee who worked under the supervision and control of the Indian entity could not constitute fixed place permanent establishment of the Foreign Company

16. [2025] 177 taxmann.com 434 (Delhi – Trib.)

Mitsui Mining and Smelting Company Ltd. vs. ACIT (IT)

IT APPEAL NO.1407 (DELHI) OF 2025

A.Y.: 2022-23 Dated: 31 July 2025

Article 5 of India-Japan DTAA – Seconded employee who worked under the supervision and control of the Indian entity could not constitute fixed place permanent establishment of the Foreign Company

FACTS

The Assessee, a tax resident of Japan, was engaged in manufacturing of engineered and electronic materials. It had a subsidiary in India (“I Co”). I Co was engaged in manufacturing of converters used in automobiles. During the relevant AY, the Assessee filed its return and offered certain receipts as royalty and fees for technical services and claimed reimbursements were not taxable. The AO noted that I Co had reimbursed the Assessee towards salary of an employee who was seconded by the Assessee to I Co.

Based on the secondment agreement, the AO observed that employees exercised control over I Co’s premises and they carried out operations of the Assessee, which constituted Permanent Establishment (“PE”) for the Assessee. The DRP upheld the action of the AO.

Aggrieved by the order, the Assessee appealed to ITAT.

HELD

The following facts were clear from the secondment agreement:

  • The seconded employee was required to integrate herself into business of I Co to facilitate its operation.
  • The employee should work in her personal capacity, and I Co was to have exclusive control over her.
  • Scope of work of seconded employee was to be determined by I Co, and Assessee was not liable for any loss arising from performance of the employee.
  • The agreement categorically provided that the Assessee shall not have any right or control over any asset, structure, or seconded employee of I Co.

Based on the above, the ITAT held that no employer-employee relationship subsisted between the Assessee and the seconded employee.

The ITAT further held that the activity of secondment cannot constitute PE, as the Assessee did not have any control over the premises of I Co and did not carry out its business there.

Articles 8 and 11 of India-Ireland DTAA – Consideration received towards lease of aircraft is taxable as operating lease in terms of Article 8 of India-Ireland DTAA and not as interest in terms of Article 11; therefore, right to tax such income is vested only with Resident State.

15. [2025] 176 taxmann.com 902 (Delhi – Trib.)

Celestial Aviation Trading 15 Ltd. vs. ACIT (IT)

IT APPEAL NOS.1476 TO 1478, 1493 & 1616 (DELHI) OF 2025

A.Y.: 2022-23

Dated: 25 July 2025

Articles 8 and 11 of India-Ireland DTAA – Consideration received towards lease of aircraft is taxable as operating lease in terms of Article 8 of India-Ireland DTAA and not as interest in terms of Article 11; therefore, right to tax such income is vested only with Resident State.

FACTS

The Assessee, a tax resident of Ireland, was engaged in the business of leasing aircraft. It had entered into Aircraft Specific Lease Agreement (“ASLA”) with an Indian company (“I Co”) to lease aircrafts. I CO has also entered into a Common Terms Agreement (“CTA”) for aircraft leasing. The Assessee was of the view that ASLA was in the nature of an operating lease, and in terms of Article 8 of India-Ireland DTAA, the consideration was taxable only in Ireland. Therefore, the Assessee filed a nil return of income.

The AO was of the view that the agreement was a finance lease. Hence, the receipts under ASLA were in the nature of interest in terms of Article 11 of DTAA and taxable @10%. The DRP observed that the aircraft lease had a substantial economic life (8 years) and upheld the draft assessment order.

Aggrieved with the final order, the Assessee appealed to ITAT.

HELD

CTA was a standard agreement entered into for all aircraft leases and should be read alongside ASLA to understand the nature of the transaction. The following facts emerged from the agreement:

  • The aircraft lease was for 120 months and could be further extended by the lessee through written notice to lessor.
  • ASLA provides that the lessor is the owner of the aircraft, and CTA requires the lessee to display the owner’s name in an identified location.
  • Clause 10 of ASLA provides that deposits paid by the lessee in cash or by letter of credit shall be refunded after the lease period.
  • CTA provides that aircraft shall be returned to the lessor at the end of lease period and lessee cannot sub-lease it without lessor’s consent.
  • CTA requires the lessee to indemnify the lessor for any loss and breach of condition. On breach, the lessor can either sell or re-lease the aircraft.

Under a finance lease, the asset is transferred to the lessee after the lease term at a pre-agreed price. As per RBI Circular No. 24 dated 01.03.2002, finance lease requires prior approval of RBI for transfer of ownership.

As per DGCA regulations, the economic life of an aircraft is 20 years. Hence, observation of DRP that the lease period constitutes the aircraft’s substantial economic life is erroneous.

Based on the above, the ITAT held that the arrangement constituted an operating lease and consequently, consideration received for leasing was taxable only in Ireland in terms of Article 8 of India-Ireland DTAA.

Understanding Scope 2 Emissions And Why They Matter

Global warming and climate change, driven by greenhouse gas (GHG) emissions, are among the greatest challenges to sustainable development worldwide. It is imperative for organisations to step up and build strategies to address the risks related GHG emissions. Scope 2 emissions are indirect GHG emissions of an organisation arising from the purchase and consumption of energy in the form of electricity, heat, steam and cooling. Accounting, analysing and managing Scope 2 emissions provides a practical entry point for organisations in managing their GHG emissions. Scope 2 emissions reduction offer significant and enduring benefits for the organisation.

INTRODUCTION

Global warming and climate change pose a key challenge in sustainable development of the nations. Governments all over the world are taking steps to reduce their carbon footprint (Greenhouse Gas emissions) by setting nationally determined targets and introducing regulations on energy efficiency and emissions reduction. It is thus imperative for organisations (companies, government agencies, small businesses institutions etc.) to develop strategies to address the risks related to Greenhouse Gas (GHG) emissions to ensure long term resilience and align with national climate policies.

GHG emissions of an organisation has three sources1 viz. emitted directly from its business operations i.e. from the sources owned and operated by it (Scope 1 emissions), indirect emissions due to purchase and consumption of energy (Scope 2) and indirect emissions in its value chain (Scope 3 emissions). Total emissions from Scopes 1,2 and 3 emissions comprise the GHG Inventory of any organisation. In current times, understanding and improving the GHG inventory of the organisation makes good business sense for its long-term sustenance.

  1. Operational boundary as per GHG Protocol Corporate Standard

WHAT IS SCOPE 2 EMISSIONS?

Scope 2 emissions are indirect GHG emissions of an organisation arising from the purchase and consumption of energy in the form of electricity, heat, steam and cooling2. Electricity is purchased by organisations from a common grid or a dedicated power generation facility. It is used to run equipment, IT infrastructure, general lighting, air conditioning etc. Around 55% of the electricity generation in India happens using fossil fuels like coal, natural gas etc. in thermal power plants.3 Burning of fossil fuels for electricity generation at the power generation facility results in GHG emissions in the atmosphere.

2. This article focuses on energy generated from electricity only

3. Centra Electricity Authority Report Dec 2024

Scope 2 emissions are indirect in nature because the emissions are a consequence of activities of the organisation (running of equipment, IT infrastructure, general lighting, air conditioning etc) but occur at sources owned or controlled by another organisation i.e. power generation facility. For e.g. a manufacturing company consuming electricity from a grid which is fed by a distant thermal power plant. Here, the actual emissions occur at the thermal power plant by burning of fossil fuels. However, since these emissions are triggered by the operations of the organisation by the act of purchase of electricity, they are accounted as Scope 2 emissions of the organisation.

Note: Under Scope 2 accounting, the key criterion is purchase (or acquisition) of energy, rather than its consumption.

Thermal Power Plant

WHAT IS THE SIGNIFICANCE OF SCOPE 2 EMISSIONS ACCOUNTING?

In 2019, 34% of the global GHG emissions was contributed by electricity and heat production4. This is primarily due to burning fossil fuels for energy generation. Accounting for Scope 2 emissions by an organisation is an acknowledgement of causing emissions by sourcing electricity from “dirty” sources. Consistent Scope 2 accounting opens the doors for identification of GHG emissions reduction opportunities. It helps organisations to identify specific sources of emissions and develop focussed strategies for switching to low emissions electricity sources. Scope 2 accounting can also help setting reduction targets and track progress over time. Transparent reporting of Scope 2 emissions allows comparison of performance with peers and setting industry benchmarks. The significance of accounting for Scope 2 emissions is evident from the fact that all sustainability reporting frameworks like Global Reporting Initiative (GRI), Corporate Sustainability Reporting Directive (CSRD) and Business Responsibility and Sustainability Reporting (BRSR) require organizations to mandatorily report their Scope 2 emissions.

4 IPCC's 6th Assessment Report

WHAT ARE THE VARIOUS ELECTRICITY GENERATION/DISTRIBUTION METHODS?

a. From the Grid: Most organisations purchase or acquire some or all their electricity from the shared electricity distribution network called electricity grid. The grid is fed electricity from various types of power plants viz. thermal, hydel, solar, wind etc. This electricity is then consumed by the organisations from the common grid without being able to identify the specific power plant producing the electricity at any given time. In this case, the organisations shall account for the emissions from purchase of such electricity under Scope 2 using the grid average emissions factor.

Power Distribution Mechanism

b. From direct line transfer: Organisations in many industrial parks or collection of facilities are fed electricity directly from a local power plant owned by a third party. In such cases, the organisations shall account for the emissions from purchase of such electricity under Scope 2 under the supplier specific emissions factor.

c. From owned /operated equipment: Many big organisations have their own captive power plants (thermal or renewable) for power supply. In such cases, since the power plant is owned and operated by the company, its emissions will be accounted under Scope 1 based on actual fuel consumption.

d. From distributed generation/consumption: Some organisations own and operate small power plants (thermal or renewable) in proximity to their operations. The organisation may consume the output of this power plant; sell excess power generated to the common grid and purchase additional power from the grid to cover any additional demand. In this case, the organisations shall account for the emissions from onsite generation of such electricity under Scope 1 and purchased electricity under scope 2 for the gross units purchased from the grid (without adjusting the units sold to the grid) using the grid average emissions factor.

HOW TO CALCULATE SCOPE 2 EMISSIONS?

The first step in calculation of Scope 2 emissions is to ascertain the activity data points in the organisation. This comprises of all energy meters which record purchase and consumption units of electricity in the organisation’s facilities. The energy meters provide the units of electricity consumption (activity data). The second step is to determine if any of the organisation’s facility operates in a location with availability of information on source of electricity in the form of contractual instruments. Based on this information, in step three the appropriate emissions factors are chosen. In the fourth step, facility level emissions are calculated.

Scope 2 emissions = Units of electricity consumed (Activity Data) x Emission

In the final step, emissions data from all facilities of the organisation are rolled up to get emissions at organisational level.

Activity Data

Activity Data is the gross units of energy consumed by the organisation purchased/acquired from an entity outside the organisation. The electricity consumption as per the meter or the electricity bills in MWh or KWh units is the most accurate activity data. In cases where the electricity meter is shared, the activity data needs to be arrived at by allocating the units based on the floor area space occupied in the premises.

Activity data also includes quantity of energy certificates purchased by the organisation from the energy market (in certain locations). Energy Certificates convey an energy generation claim with specific attributes (like associated emissions). Generally, energy certificates and the underlying electricity are bundled together i.e. the consumer of the electricity also holds the energy certificates. However, in certain locations, the energy certificates can be unbundled from the electricity i.e. they can be bought from the market without purchasing the associated electricity. For e.g. Renewable Energy Certificates (RECs) are purchased by large organisations from the power exchanges to meet renewable energy targets.

Emission Factors

Scope 2 emissions accounting is the method of “allocating” the GHG emissions in power generation process to the end consumers of a grid. This allocation is done by applying specific emission factors for each unit of electricity consumed. The choice of emissions factors depends upon the type of electricity consumed i.e. from an identified power source or from the common grid. There are two types of methods to ascertain the emissions factor viz. location based, and market based. Which method to use depends upon the availability of information on source of electricity at the physical location of the facility.

Scope 2 Emissions

a. Location based method:

This method is used by facilities in all locations. The emission factor used is the “grid average emission factor” which is based on the statistical emissions information and electricity output aggregated and averaged within a defined location (country or a region) for a defined time-period. For e.g. the total CO2 emissions in India for electricity generation in FY 2023-24 was 1204.51 million tCO2e. The electricity generated from all power plants (including renewable energy) was 1655.70 million MWh. Therefore, the weighted average emission factor for India grid for FY 2023-24 was 1204.51/1655.70 = 0.7275. These emission factors are generated for a year or for shorter periods in certain locations.

5. CO2 Baseline database for the Indian Power Sector Version 20.0, Dec 2024

Example:

ABC has consumed 1100MWh of energy in FY 2024-25 from the national grid. The grid has published the latest average grid emission factor for the FY 2023-24 as 0.72 tCO2e/MWh.

Scope 2 emissions of ABC

1100 MWh X 0.72 tCO2e/MWh = 792 tCO2e
Total Scope 2 Emissions for FY 2024-25 under location-based method: 792 tCO2e.

b. Market based method6:

6. Only a few Countries in the world have established energy markets to support this method

This method is used by facilities which consume electricity from a grid with access to supplier specific data or energy specific data in the form of certificates or contractual instruments. These certificates provide information like source of electricity, supplier labels, supplier emission factor among others. In such markets, organisations also have access to purchase additional energy certificates (like renewable energy certificates). The energy certificates must meet the Scope 2 Quality Criteria for eligibility to be considered under Market based method.

These criteria are:

  1.  Should convey the GHG emission rate associated with each unit of electricity produced
  2. Should be uniquely identified and should enable tracking, redeeming and retiring/cancellation by the organisation.
  3.  Should be issued and redeemed as close as possible to the period of energy consumption to which the certificate is applied.
  4. Should be from the same market in which the organisation consumes the electricity.
  5. Should state that underlying electricity when unbundled from its certificate shall have a GHG emission rate of residual mix / grid average emission rate.

It may be noted here that the emission factor in market-based method is based on the contractual instruments it owns and not based on actual electricity consumption. In such a scenario, there sometimes exists some units of electricity consumed which are not associated with any contractual instruments. Emissions for such untracked units of electricity are calculated using Residual Mix emission factor. This factor is given by the supplier in the energy certificate/contractual instrument.

Difference between Location based method and Market based method:

Location-based Method Market-based Method
Applicable in areas without access to supplier-specific data Applicable only when supplier-specific or contractual instruments (e.g., RECs) are available
Power source type (renewable/non-renewable) is generally unknown Power source type is known through energy attribute certificates or contractual instruments
Emission factor represents average emissions from the regional/national grid Emission factor reflects emissions from specific sources as per contractual instruments
Based on total electricity consumed Based on the quantity allocated through certificates; unmatched electricity is residual mix

Example 1:

ABC has contractual agreement with XYZ power supplier to supply 1000 MWh of energy in FY 2024-25. XYZ provides energy certificates meeting Scope 2 criteria for the same with an emission factor of 0.5 tCO2e/MWh. During FY 2023-24, ABC consumes 1100 MWh of energy. Residual Mix Emission Factor = 0.70 tCO2e/MWh. Latest available Grid Average Emission Factor for FY 2022-23 = 0.72 tCO2e/MWh.

Scope 2 emissions of ABC

For consumption tracked by energy certificates,

1000 MWh X 0.5 tCO2e/MWh = 500 tCO2e

For consumption not tracked,

100 MWh (1100 – 1000) X 0.70 tCO2e/MWh = 70 tCO2e

Total Scope 2 Emissions for FY 2024-25 under market-based method: 570 tCO2e.

Total Scope 2 Emissions for FY 2024-25 under location-based method: 792 tCO2e (1100*0.72)

Example 2:

ABC has purchased 1000MWh of Renewable Energy Certificates (RECs) meeting Scope 2 criteria in FY 2024-25 from energy exchange. These RECs have an emission factor of 0 tCO2e/MWh. During FY 2023-24, ABC consumes 1100 MWh of energy from the grid. Latest available Grid Average Emission Factor for FY 2022-23 = 0.72 tCO2e/MWh.
Scope 2 emissions of ABC

For consumption being covered by RECs,

1000 MWh X 0 tCO2e/MWh = 0 tCO2e

For consumption not covered by RECs,

100 MWh (1100 – 1000) X 0.72 tCO2e/MWh = 72 tCO2e

Total Scope 2 Emissions for FY 2024-25 under market-based method: 72 tCO2e.

Total Scope 2 Emissions for FY 2024-25 under location-based method: 720 tCO2e. (1000*0.72)

REPORTING OF EMISSIONS UNDER SCOPE 2

Scope 2 emissions are reported in accordance with GHG Protocol Corporate Standard. The following are the points worth noting with respect to Scope 2 emissions reporting for any period:

  •  The organisations whose entire operations exist in a market where supplier specific data of electricity in the form energy certificates is not available shall report Scope 2 emissions only under location-based method.
  •  The organisations whose at least one of operations exist in a market where supplier specific data of electricity in the form energy certificates is available shall report Scope 2 emissions under both market-based and location-based method (for all locations). The locations which do not support market-based method shall show same emissions value under both market-based and location-based methods.
  •  Organisations should provide a reference to an assurance report (internal or external) for confirming the chain of custody of purchased energy certificates or other contractual agreements.
  •  Organisations should provide the disclosure of the methodologies used for Scope 2 emissions calculations. They should disclose the source from where the emission factors were derived.
  •  Organisations should disclose the information of the base year7 selected for Scope 2 emissions. Any context which has triggered base year emissions recalculations need to be disclosed.
  • Organisations should disclose the basis of goal setting i.e. based on location-based method total or market-based method total.
7. The earliest period after which the organisation has started tracking its Scope 2 Emissions. It is used for setting reduction targets

THE INDIAN CONTEXT

In India, electricity sector is managed by Central Electricity Authority (CEA). It is responsible for planning and development of power plants and other electricity systems. The sector is regulated by Central Electricity Regulatory Commission (CERC). This regulatory body determines tariffs, regulates interstate transmissions and issue licenses of trading and transmissions. The total power generation capacity was 441970 MW as on 31st March 2024 of which 55% used fossil fuels.

The whole of India was converted into a single grid in 2013. This involved the integration of all five regional grids into a single, synchronous grid operating at a single frequency. India has a single grid average emission factor published by the CEA. This weighted average emission factor describes the average CO2 emitted per unit of electricity generated in the Indian grid. It is calculated by dividing the absolute CO2 emissions of all power stations (including generation from Renewable sources and grid connected captive stations) by the total net generation injected into the grid. The latest grid average emission factor available is as of Dec 2024 which is available on the CEA website.

India has an established power market consisting of multiple power exchanges like India Energy Exchange (IEX) and Power Exchange of India Ltd (PXIL), providing a nationwide automated trading platform for the physical delivery of electricity, renewable energy, and certificates. Energy exchanges are also instrumental to facilitate exchange of Energy Saving Certificates (ESCerts) amongst Designated Consumers in meeting their Specific Energy Consumption targets under the PAT Scheme8.

8. Under the PAT (Perform Achieve Trade) Scheme, all major energy intensive sectors of India are called Designated Consumers.

 These DCs have been given targets to reduce their specific energy consumptions.

India also has a central agency known as Renewable Energy Certificate (REC) Registration Agency for registration of Renewable Energy generators. The value of 1 REC issued to the generators is equivalent to 1 MWh of electricity injected into the grid from renewable energy sources. The generators can either sell the renewable energy and attributes (bundled REC) at the stated tariffs or sell the electricity generation and environmental attributes associated with renewable energy generation separately (unbundled REC) on the power exchanges. These RECs are bought by Power Distribution Companies, Captive Power Plants (to meet their Renewable consumption obligations) and other organisations voluntarily as a part of their CSR activity. Once the transaction is successful on the exchange, the RECs are redeemed by the central agency.

Procedure of trading and redemption of RECs at Power exchanges

  1. During the Power Exchange bidding window, sellers (Renewable Energy generators) place offers and buyers (Power Distribution Companies) place bids.
  2. After bidding closes, Power Exchange sends bid volumes to Registration Agency for verification if the bid volume is within the valid RECs held by the sellers.
  3. Power Exchange calculates market price and volume
  4. Final trades are sent to Registration Agency which extinguishes/retires the sold RECs on a first-in-first-out basis. Once retired, a REC can no longer be claimed or traded.

Reporting of Scope 2 emissions in India require reporting under both market-based and location-based methods. RECs purchased from the energy exchanges meet the scope 2 quality criteria and is actively used by organisations to claim that their electricity consumption is “renewable,” even if the Indian grid mix is fossil heavy.

WHY IS REDUCTION IN SCOPE 2 EMISSIONS A LOW HANGING FRUIT FOR ORGANISATIONS?

Scope 2 emissions happen to be one the largest sources of Greenhouse Gas emissions globally of which electricity forms a major portion of the energy consumed. Scope 2 emissions reduction is a low hanging fruit since they can be managed by the organisation through relatively simple steps without changing its core business operations. These steps include:

a) Reduce overall energy demand of the organisation: The easiest and the most sustainable approach to achieving long-term reductions in
Scope 2 emissions is through investments in energy-efficient equipment and power quality correction technologies. Reduction in energy demand directly reduces Scope 2 emissions.

b) Tata Communications Ltd have reduced Scope2 emissions from 88,308 mtCO2e in FY 2021-22 to 68,911 mtCO2e in FY 2024-25.

 They consider “increase in energy efficiency by optimising energy consumption in facilities and data centres” as immediate focus action item. They ensure all their energy consumption across all operations is monitored, measured and reviewed. This helps in identifying performance issues, taking corrective actions and benchmarking them with the best practices.

 Source: Company Annual Report FY 2024-25

b) Optimise energy procurement: The next significant step for organisations is to transition their electricity supply towards low-emissions sources, such as renewable power plants (e.g., solar installations). These can effectively provide clean energy for townships, guest houses, offices, and other smaller facilities and directly reduce Scope2 emissions.

GHCL Ltd ‘s power requirements up to FY 2023-24 were primarily met through four captive power plants with a combined capacity of 38.7 MW, operating on fossil fuels such as coal and pet coke.

It commissioned 6.7 MW off-site renewable energy capacity in FY 2024–25. Collectively, these plants generate 46.5% of total electricity. This initiative has contributed to successfully reduce their Scope 1 and Scope 2 emissions by 8% from FY 2021 22 against their internal target of 30% reduction by FY 2030.
Source: Company Annual Report FY 2024-25

c) Purchasing Renewable Energy Certificates (RECs) from the Power Exchange: When the organisation purchases an REC, they claim the environmental attributes of that renewable generation — specifically that it displaced an equivalent amount of fossil-based electricity on the grid and the associated emissions. At a broader, systemic level, this market-based mechanism directs demand toward renewable energy, thereby supporting the expansion of the renewable market and progressively reducing dependence on fossil fuel generation and reducing Scope 2 emissions.

Capgemini India declared in 2023 that it runs entirely on renewable energy, helping avoid over 70,000 tonnes of carbon emissions each year. 17% of this renewable energy was covered by buying Renewable Energy Certificates (RECs), which play a key role in offsetting grid electricity emissions and achieving their Scope 2 emission reduction target.

Source: Press release dated 01st Oct 2023

PRACTICAL CHALLENGES IN SCOPE 2 EMISSION REDUCTION

  • Power Purchase Agreements (PPAs) can be legally complex and involve long negotiation cycles that many organizations may find difficult to navigate.
  • Upgrading to energy-efficient systems (like HVAC, LED, motors) requires capital upfront, despite long-term savings. Assessing what to upgrade and how to prioritise can be difficult for organisations. Also, retrofitting or replacing systems require downtime,
    which can be challenge especially in manufacturing or critical facilities.
  • When a company tries to buy electricity directly from a renewable power plant instead of the local distribution company, it they may additional charges to discourage such direct purchases and protect their revenue.

CONCLUSION

For organisations seeking long-term resilience and growth, integrating sustainability into core business strategies and operations is imperative. Leadership must place the reduction of the organisation’s GHG emissions at the forefront of priorities. Accounting, analysing and addressing Scope 2 emissions provides a practical entry point in this direction, offering significant and enduring benefits for the organisation.

References:

  • GHG Protocol Scope 2 Guidance – https://www.ghgprotocol.org
  • Central Electrical Authority – https://cea.nic.in/
  • India Energy Exchange – https://www.iexindia.com/
  • Renewable Energy Certificate Registry of India – https://www.recregistryindia.nic.in/
  • Intergovernmental Panel on Climate Change – https://www.ipcc.ch/

Tech Mantra

PDFgear

PDFg

PDFgear helps you read, edit, convert, merge and sign PDF files across devices. It is completely free and you do not even need to signup. Just download it and start using it. The files remain on your system and do not even go out for processing!

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PDFgear is truly free and is available on Windows, Mac, Android and iOS. It also incorporates free AI tools which may become chargeable as they move ahead.

Go ahead, take the first step towards PDF FreeDom today!

https://www.pdfgear.com/

Floating Notes

Floating
This is another Notes App with a difference – you can take notes and sync them on all your devices – but the notes will float on your screen above other apps. So, if you have something important to remember, it will always be on the screen for you!

You can minimise notes to the edge of the screen as only icons and schedule notes to appear only at certain times. You can also choose among a lot of icons and colors for your notes. You can change the transparency of the floating notes and also add checklists to track your progress while using other apps. And, of course, when you are watching movies or playing games, you can turn off visibility for a while!

Overall, a totally different Notes Experience!

Android : https://tinyurl.com/floatingnotes

URLCheck

URL
This app acts as an intermediary between your receiving any links by email or WhatsApp or any other app and the actual link where you will land up. When you click on a link and choose this app to open it, it will show a dialog with some information about the link. If it is a shortlink, it will show you the final destination; if it is not a secured site, it will indicate the same; and if it is a scam site, it will also alert you. If the target website has tracking parameters, it will show you the same – in all cases, you have the option to avoid that site!

An interesting free tool to avoid scams and dangerous links!

Android : https://tinyurl.com/urlch

Typi – Type with AI

Typing

Typi is an AI-powered solution that can provide instant answers to your queries. Whether you have a question about a particular topic or need help with a problem, Typi is here to assist you. With Typi, you can type your question anywhere on your device, and let Typi do the rest.

If you are typing an email or message and you make some typing / grammatical mistakes, instead of correcting each mistake individually, just type “?fixg” and all your errors will be rectified for the entire text. Or, if you have a long winding message and want to make it short, at the end, just type “?short” and voila – the entire message will be summarised. If you want your text to be converted to something more polite, just type “?polite” at the end and be amazed with the results!

But what if you’re looking for a quick and concise answer? That’s where “?typic” comes in. By adding “?typic” to your question, you can get a short and to-the-point response that’s perfect for when you’re in a hurry.

In short, it brings Gemini’s AI power to your keyboard without needing to switch apps.

Pretty neat and useful!

Android : https://tinyurl.com/typewithai

Learning Events at BCAS

1. CA Pariksha Pe Charcha held on Saturday, 6th December 2025@ Virtual.

Speakers: CA K S Ranjani, CA Heramb Maheshwari, CA Utsav Shah, CA Nidhish Naik, CA Naman Gupta, CA Ansh Bhorawat & CA Anjali Shukla

The Human Resource Development Committee of BCAS organised “CA Pariksha Pe Charcha”, an interactive learning session designed to guide CA students in their exam preparation journey. The program commenced with an inspiring keynote by CA K S Ranjani, who spoke on resilience, overcoming setbacks, and developing a success-oriented mindset. This was followed by an insightful session by CA Heramb Maheshwari (AIR 1 – November 2024), who shared his exam preparation journey, practical exam strategies and clarified ICAI evaluation myths.

A dynamic panel discussion featuring top rankers from the September 2025 CA Final exam brought real-life perspectives on study routines, discipline, answer writing, and balancing mental well-being. Students from across the country participated enthusiastically, making the session highly engaging and impactful.

Overall, the program provided a blend of motivation, actionable techniques, and relatable experiences, helping students approach their CA journey with clarity, confidence, and a structured plan.

Scan to watch on Youtube

CA Pariksha Pe Charcha

2. Webinar on New Labour Codes: Legal Framework, Financial Impact & Practical Implementation held on Friday, 5th December 2025@ Virtual.

The Finance, Corporate and Allied Laws Committee of the Bombay Chartered Accountants’ Society organised a webinar on “New Labour Codes: Legal Framework, Financial Impact & Practical Implementation” on Friday, 5th December 2025.

The Finance, Corporate and Allied Laws Committee of the Bombay Chartered Accountants’ Society organised a webinar on “New Labour Codes: Legal Framework, Financial Impact & Practical Implementation” on Friday, 5th December 2025.

The programme was conducted in two segments. Adv. Sundeep Puri covered the legal and conceptual aspects of the Codes, explaining the structure, intent and major changes introduced. CA Alok Agarwal and CA Bhavin Rajput discussed the financial, compliance and implementation-related implications, highlighting areas requiring organisational preparedness, policy review and systems alignment.

The webinar received an encouraging response from members across practice and industry. 316 participants enrolled for this webinar from 50+ cities and towns across India. Participants appreciated the clarity of explanations and the practical insights shared by the speakers.

Scan to watch online at BCAS Academy

Webinar on New Labour Codes

3. AARAMBH – Making Articleship Count held on Thursday, 04 December, 2025 @ HR College of Commerce & Economics, Churchgate, Mumbai

AARAMBH

Every meaningful journey begins with a purposeful start. Aarambh, meaning a new beginning, represents BCAS’s commitment to guiding CA students at one of the most defining stages of their professional journey – the commencement of articleship.

Through the Aarambh – Making Articleship Count Initiative, BCAS fulfils its professional social responsibility by engaging directly with students and sharing practical insights, real-life experiences, and guidance from young Chartered Accountants who have recently walked the same path. The sessions are designed to bridge the gap between academic learning and professional realities, enabling students to approach articleship with clarity, confidence, and a long-term perspective.

The first session under this initiative was held at H.R. College of Commerce & Economics, Churchgate, Mumbai, on Thursday, 4th December 2025. The programme was made possible through the wholehearted support and cooperation of Principal Mrs. Pooja Ramchandani and Director – Placement, Dr. Navin Punjabi.

The programme witnessed enthusiastic student participation, driven by an engaging panel discussion and vibrant interaction. The presence and encouragement of the team BCAS – President CA Zubin Billimoria, Hon. Joint Secretary CA Mrinal Mehta, Managing Committee member CA Anand Kothari, and the panelists from Core Group CA Mahesh Nayak, CA Aditya Pradhan and CA Vatsal Paun, further reinforced the Society’s collective commitment to nurturing the future torch-bearers of the profession.

BCAS remains steadfast in its mission to mentor, inspire, and support the next generation of Chartered Accountants, contributing meaningfully to the profession and to the nation at large.

4. FALCON – Making Articleship Count held on Wednesday 03rd December, 2025 at N M College of Commerce & Economics, Vile Parle, Mumbai

FALCON

The falcon bird symbolises vision, power and victory. With this initiative, BCAS offers young CA aspirants an opportunity to interact and learn from young Core Group members – those who have walked the path before them. The panellists dwell on the topics of Articleship, Post Qualification, Professional Association & Networking, and Leadership. To ensure that the aspirants feel both comfortable and confident to engage with the panellists, the initiative has BCAS meet them on their home turf – be it college, or coaching class or even CA firm.

The first session under this initiative was held at N M College of Commerce & Economics on Wednesday, 3rd December 2025. Principal Dr Parag Ajgaonkar and Vice Principal CA Dr Savita A Desai of the college personally welcomed the visiting team from BCAS comprising the President, CA Zubin Billimoria, Managing Committee member, CA Preeti Cherian and the three panellists – Managing Committee members, CA Samit Saraf and CA Sneh Bhuta and Core Group member, CA Vedant Gada. The session was ably supported by the Association of Accountancy Committee of N M College. The audience, comprising degree college students who are set to embark on this wondrous journey, found the discussion both informative and helpful.

From the BCAS perspective, engaging with the students as they commit themselves to a demanding, yet extremely satisfying career choice is imperative – these students are the face of tomorrow of the profession.

In the words of the American author, Mercedes Lackey, “The hatched chick cannot go back to the shell, the falcon who has found the sky does not willingly sit the nest.”

5. CATHON (Marathon) – Run for Fitness, Fun and Purpose held on Sunday, 30th November 2025 @ Iconic Bandra Fort, Mumbai.

CATHON

India’s Second Edition of CA-Thon 2025 – A Run for Fitness, Fun & Purpose was organized on Sunday, 30th November 2025 near Bandra Fort, Mumbai under the aegis of the Seminar, Membership & Public Relations (SMPR) Committee.

The event attracted 2,000+ participants – Chartered Accountants and non-Chartered Accountants alike – between the age group of 8 to 70 years – drawn from all walks of life, from different corners of the country. An added feature this year was the participation of select CA firms that enlisted their team members for the run.

The annual event helped increase the visibility of Brand BCAS, cement relationships within the community, promote health and fitness among participants drawn from all walks of life and contribute to a righteous cause (part of the proceeds went to donating professional sewing machines to women from marginalized communities, to help them become entrepreneurs in their own right). BCAS Foundation also joined hands in supporting these women through this donation.

Through this annual run, the CA-Thon hopes to encourage runners to incorporate physical activity as part of their daily routine, thereby leading to an agile and healthy life, which is one of the cornerstones of financial well-being.

6. Webinar on Tax Law in Transition- Impact on Landmark Rulings After Introduction of New Income Tax Act 2025 and Recent decisions covering the Real Estate sector held on Saturday, 29th November 2025 @ Virtual.

The Direct Tax Committee of the Bombay Chartered Accountants’ Society organized a Webinar on Tax Law in Transition – Impact on Landmark Rulings after New Era of Reform and Recent Decisions covering the Real Estate Sector.

The session focused on how the real estate sector continues to face complex tax challenges, especially due to frequent litigation, changing business models, and evolving regulatory rules. Participants were taken through key judicial developments and how these decisions affect day-to-day tax positions in the industry.

CA Harsh Kothari spoke on the impact of the New Income Tax Act on landmark decisions under the old Act. He explained how the restructured law attempts to simplify provisions but also creates new interpretational considerations. His session focused on how earlier judicial principles may continue, where they may no longer apply and what tax professionals should keep in mind while interpreting the new Act. The webinar offered clear and practical insights for professionals in a period where both the law and its interpretation are going through a significant transition.

CA Anil Sathe presented a clear and insightful overview of recent and significant rulings impacting the real estate industry. He explained how courts have interpreted issues such as development agreements, joint development models, withholding implications, timing of income recognition, and capital gains triggers. His session helped participants understand how these rulings guide practical tax positions and compliance for developers, landowners, and investors.

Scan to watch online at BCAS Academy

Webinar on Tax Law in Transition

7. Women’s Study Circle meeting — SAKHI CIRCLE! held on Friday, 28th November 2025@ Virtual.

The inaugural session of the Women’s Study Circle was an inspiring and interactive experience. The theme, ‘Celebrate Your Uniqueness’, encouraged participants to embrace individuality and make conscious choices about their personal and professional lives.

CA Nandita Parekh opened the session with a powerful quote from Michelle Obama:

“Each of us carries a bit of inner brightness, something entirely unique and individual. A flame that’s worth protecting. When we recognise our own light, we become empowered to use it.”

Through two engaging stories—one about Michelle Obama’s journey and another about a monkey— CA Nandita Parekh illustrated the importance of self-worth and clarity in decision-making. She posed thought-provoking questions:

– What do you truly want?

– What are you holding on to, and what can you let go?

– Are you trying to fit in or do you truly belong?

The discussion highlighted how women’s paths are diverse and often non-linear.

The session emphasized that success is not about fitting into a mould but about defining your own balance between career, family, hobbies, and aspirations.

Key Takeaways:

– Embrace individuality and celebrate your uniqueness.

– Define priorities and make conscious choices.

– Build support systems and networks for growth.

Motivational Highlight:

“Celebrate who you are today, while creating space for who you want to become.”

8. Lecture Meeting on Boosting Business and Professional Productivity through AI held on Wednesday, 26th November 2025 @ Virtual.

A public lecture meeting was conducted by the Bombay Chartered Accountants’ Society virtually on zoom platform on 26th November 2025.

The speaker CA Umesh Sharma explained how Artificial Intelligence can significantly enhance professional and business productivity, particularly for chartered accountants. The speaker highlighted several core technologies, including machine learning, natural language processing, and generative AI, emphasizing their roles in fraud detection, financial advisory, and process automation. He outlined a strategic framework for AI implementation, moving from individual skill-building to sector-wide integration while maintaining essential human judgment and ethical standards. Practical advice was provided for firms of all sizes to address operational challenges, such as managing document chaos and improving client relations through digital dashboards. Ultimately, the speaker encouraged professionals to view AI as a powerful assistant rather than a threat, urging proactive learning and technical adaptation to stay competitive in a changing financial landscape.

The lecture was well-attended, with over 260 participants joining online.

Scan to watch online on Youtube

Lecture Meeting on Boosting Business and Professional Productivity

9. FEMA Study Circle Meeting on How to Study FEMA held on 25th November 2025 @ Virtual

The FEMA Study Circle held a meeting on the topic “How to study FEMA” which dealt with the core fundamentals of gaining expertise in FEMA.

The session was chaired by CA Naresh Ajwani and led by group leader, CA Vivek Vithlani.

The chairman provided a deep insight into the unique aspects of the exchange control law, which makes this topic worthy of being taken for beginners.

The group leader explained the approach which is required to study and gain expertise in any law in general. Along with the approach, he shared the chronology of steps which he has developed over the years to understand any law. Further, the group leader showed how the generic approach and step-wise chronology can be applied to FEMA in particular and the nuances pertaining to the same. Light was also thrown on different legal documents issued by the Central Government and the RBI to show a 360-degree view of FEMA.

The meeting was concluded by summarising the milestones of gaining expertise in any law.

10. Power Summit 2025 held on 21st & 22nd November 2025 @ Lemon Tree Premier – Pune.

Power Summit

Human Resource Development Committee of BCAS organised a two-day residential program “The Power Summit 2025” on 21 & 22 November 2025 at Hotel Lemon Tree Premier, Pune. This was the 10th season of the Power Summit with the first one being held in 2011.

The theme for the Power Summit was Growth, Governance & Generational Transition – Shaping The Firms of 2030. The Power Summit hosted about 95 participants coming from cities across the country. There were certain participants who had been part of all the previous ninePower Summits as well as participants attending for the first time. This diversity added to the charm of the Summit.

The presentation and panel discussions over the two days were creative, intriguing, and interwoven in a manner that left all participants with valuable insights and a renewed determination to progress along their growth trajectory.

A brief snapshot of the presentation and panel discussions is as follows:

Topic Speaker / Panellist
& Moderator		 Key Learnings for Participants
Grow In Continuum: Succession Planning Strategies

for Proprietorship & Small Firms

 CA Jayraj Sheth Participants learnt from Jayraj’s presentation about key areas such as exploring when to begin succession planning, grooming successors and client transition strategies.
Partnership Deeds – Beyond the Fine Print,

ICAI – Latest Updates.

 

 Speaker: CA Vishal Doshi | Moderator: CA Ameet Patel Candid discussion with Vishal gave insights into how ICAI, at institution level, is perceiving and looking at mergers, multi-disciplinary partnerships etc. Also, Vishal shared updates on the latest progress happening at ICAI level on these topics.
Fireside Chat: Women in Leadership: The Evolving Role

of Women Professional

 

 Speaker: CA Priti Savla | Moderator: CA Nandita Parekh The chat highlighted the various initiatives taken by ICAI for empowering Women Professionals. Also, the personal journey of Priti, motivated and inspired all the participants.
Mergers and Expansion –

Why some work, why many fail

 

 Panellists: CA Manish Sampat, CA Naman Shrimal  | Moderator: CA Vaibhav Manek The power packed discussion with the panellists left the participants with lots of food for thought on various merger models, geographic / vertical expansion, profit-sharing agreements, reasons for things not working out and practical suggestions on how to navigate these challenges.
Practice Excellence- Preparing For Growth/ Merger Panellists: CA Paresh Shaparia, CA Subhash Saraf | Moderator: CA Ameet Patel The practical experience shared by both the panellists gave interesting insights to all participants on how to get oneself or one’s own firm ready for Growth and Merger. Key takeaways being around areas of practice reviews, policy documentation, MIS systems etc.
Professional Firms @ 2030

What will it take?

 

 Panellists: CA Nilesh Vikamsey, CA Naman Shrimal | Moderator: CA Vaibhav Manek The panellists shared multiple perspectives on what would be the key drivers for a successful CA Firm in 2030. Also, they shared interesting suggestions on future-proofing professional firms in the next decade.
Legal Insights on the Professional Service Firms – How to Navigate the Regulatory Landscape and Prepare for Risks and Liabilities Panellists: Mr. Shreyas Jayasimha, Ms. Radhika Iyer | Moderator: Vaibhav Manek It was an interesting panel discussion to provide a flavour to all the participants on the kind of legal risks that a professional is carrying in today’s time and practical suggestions on ways to navigate them. There was also discussion on how different professionals can collaborate to create a win-win situation for everyone.
Walk & Talk: Challenges of Firm Growth CA Nilesh Vikamsey, CA Ameet Patel, CA Nandita Parekh This was the concluding session in which the discussions focused on real-world barriers in expansion and how peers have navigated them. Interesting Q&As and discussions were done with the participants as well.

The Summit successfully generated substantial interest among the participants, thereby motivating them to strategically plan for their growth. The participants expressed their profound gratitude to the organising team for their exceptional work and the provision of a high-quality program. All participants shared their testimonials and gratitude via WhatsApp groups and social media platforms.

11. Direct Tax Laws Study Circle Meeting on Succession Planning from a Direct Tax Perspective held on 20th November, 2025@ Virtual.

Succession planning plays a vital role in ensuring smooth intergenerational transfer of wealth and preventing disputes. The session highlighted key tax provisions, legal mechanisms, and practical considerations in designing an effective succession structure.

The following major areas were discussed during the session:

  1.  Succession Modes – Wills, trusts, nominations, and family arrangements are the primary structuring options, each carrying different tax outcomes.
  2.  Legal Representative Liability – Responsibility of Legal heirs with respect to tax liabilities of the deceased, including interest and penalty till the date of death.
  3. Taxation of Executors [S. 168] – Separate assessment of the executor on the income of the estate until its complete distribution.
  4. Nominee vs. Legal Heirs – The difference between the two was highlighted with an example of a judgment of the Supreme Court in the case of Shakti Yezdani, wherein it was held that a nominee merely facilitates transmission and does not override the rights of legal heirs.
  5. Will-based transfers – Tax Neutrality – transfers under a Will are not regarded as a “transfer” under Section 47(iii), and inheritance is specifically exempt under Section 56(2)(x). Thus, passing assets through a Will is a tax-efficient mechanism.
  6. Family Arrangements – Not a Transfer – The session clarified that a genuine family settlement based on antecedent rights is not treated as a transfer for capital gains. It simply realigns existing rights in property to preserve peace and prevent litigation within the family.
  7. Situations wherein Family Settlements become taxable – The session clarified that If parties lack pre-existing rights—as in P.P. Mahatme (Bom HC)—payments received may be treated as taxable capital gains. Antecedent rights are therefore key to determining tax neutrality.
  8. Specific vs. Discretionary Trusts – The speaker clarified that certain trusts have identifiable beneficiaries with defined shares, while discretionary trusts allow trustees to decide distributions. Discretionary trusts are generally taxed at the maximum marginal rate unless specific exceptions apply.

Conclusion: The session was highly interactive, with participants actively engaging and gaining practical clarity on the tax and legal aspects of succession planning. The discussions helped simplify complex concepts and gave attendees a clear understanding of how to apply the right tools in real-life situations. Overall, the audience left with valuable insights to plan succession more confidently and effectively.

12. Felicitation of Chartered Accountancy pass-outs of the September 2025 Batch held on Monday, 17th November, 2025@ Sydenham College

Felicitation of Chartered Accountancy pass-outs Nov

The Seminar, Membership and Public Relations (SMPR) Committee hosted a felicitation ceremony on 17th November 2025 in the auditorium of the Sydenham College of Commerce & Economics, Churchgate, to honour the newly qualified Chartered Accountants from the September 2025 batch. Out of the 450 registrations, over 325 enthusiastic newly qualified CAs participated in the event. The guest and mentor for the event was CA (Adv.) Kinjal Bhuta, Treasurer of BCAS. In her address, she reminisced about her early days, the support she received from her clientele and elders in the profession, and how her association with BCAS has helped in shaping her career and growth as a professional. She shared six life lessons with the audience and invited them to come within the BCAS fold and partake of the bouquet on offer.

AIR 16, Nidhish Naik, AIR 28 Ansh Bhorawat, AIR 34 Naman Gupta and AIR 46 Anjali Shukla were then felicitated. A celebratory cake was cut post which all the other newly passed CAs were felicitated. The ceremony served as a warm welcome of the newly qualified CAs into the wider professional fraternity.

Scan to watch online on Youtube

Felicitation of Chartered Accountancy pass-outs

13. ITF Study Circle meeting – Black Money Act – Penalty for Non-Disclosure of Foreign Assets: Key Rulings held on 14th November, 2025@ Virtual.

The International Tax and Finance Study Circle organized a meeting (online) on 14 November 2025 to discuss key rulings with respect to penalty for non-disclosure of foreign assets under the Black Money Act:

Chairman of the session – CA Sushil Lakhani

Group Leader CA Kush Vatsaraj

  •  The session opened with the initial remarks from the chairman on the topic.
  • Post that, the group leader discussed the rationale of the Black Money Act and the basic provisions to set the context for the group.
  • Next the group leader discussed a number of rulings with respect to levy of penalty under the Black Money Act, including rulings under other laws but applicable to penalty under the Black Money Act.
  • The group leader discussed a recent Special Bench ruling with respect to the penalty being discretionary in greater detail
  • The participants debated various nuances with respect to the levy of penalty under the Black Money Act, especially with respect to some divergent views adopted by appellate authorities.
  • The group leader took the group through a number of scenarios with respect to the levy of penalty under the Black Money Act and shared his insights on the same. The chairman of the session also shared his insights.
  • The session closed with the floor being opened up for Q & A. Participants raised a number of questions and the same were answered by the group leader and the chairman of the session. Other participants also shared their practical experiences.

14. BCAS NXT – Learning & Development Bootcamp – A Deep Dive into GST Annual Return (GSTR-9) and Reconciliation Statement (GSTR -9C) held on 14th November, 2025@ Virtual.

The Human Resource Development Committee organized a BCAS NXT Learning & Development Bootcamp on “A Deep Dive into GST Annual Return (GSTR-9) and Reconciliation Statement (GSTR-9C)” on Friday, 14th November 2025, from 4:00 PM to 6:00 PM.
The session was led by Ms Riya Bhavesh Shah, a CA Final student, who delivered a detailed presentation covering each table in the GSTR-9 and GSTR-9C forms, the correct placement of data, and the importance of accurate and timely filing. The session also highlighted the consequences of late filing, recent procedural changes, and updates in reporting requirements. CA Ashwin Chotalia, the mentor for the session, provided valuable insights and guidance throughout, offering expert interventions as needed.

The bootcamp was held in person at Gokhale &  Sathe Chartered Accountants and was also streamed online, with active participation from students across India.

 

More than 250 students benefited from this session.

Scan to watch online on Youtube

BCAS NXT - Learning & Development Bootcamp

15. Finance, Corporate & Allied Laws Study Circle – Financial Wellness for Professionals held on Thursday, 13th November 2025 @ Virtual

The session on “Financial Wellness for Professionals” by Mr Tarun Birani focused on helping high-earning professionals move from income dependence to true wealth independence through structure and discipline. Using interactive polls and case studies, he highlighted how lifestyle inflation, safety bias and scattered assets often keep professionals financially vulnerable despite strong incomes.

Tarun introduced a clear Wealth Allocation Framework, classifying assets into safety, stability and aspirational buckets, and showed how goal-based cash flows, risk assessment and stress testing can convert affluence into resilient, long-term wealth. He emphasised the power of disciplined equity allocation, behaviour management and periodic rebalancing over market prediction or product selection.

Through real-life client stories, he demonstrated the dangers of concentration in business / profession and real estate, lack of liquidity buffers and poor succession planning, and contrasted this with the benefits of structured family wealth architectures and family offices.

The session concluded with practical action points for professionals to document their finances, separate business and personal wealth, and work with fiduciary, conflict-free advisors to achieve financial wellness with peace of mind.

16. Half-Day Panel Discussions on Transfer Pricing Benchmarking and Compliances held on Friday, 10th October 2025 @ Virtual

The Society successfully conducted its Half-Day Panel Discussions on Transfer Pricing Benchmarking and Compliances via an online platform on Friday, 10th October, 2025 from 2:00 pm to 6:30 pm.

Based on participants’ feedback and consultation with seniors in the Committee, this year BCAS has come up with unique concept of sharing the recordings of the transfer pricing workshop undertaken in October 2023 along with recordings of panel discussions conducted in October 2024 to the participants as pre-reading for the workshop followed by two live panel discussions to take forward the learnings by discussing the intricate and practical issues on transfer pricing making the same more interactive. Details of these two live panel discussions:

Session Topic Panel Members/ Faculties
1 Panel Discussion on Indian TP Compliance – Beyond Documentation, Towards Value Creation Moderator – CA Anjul Mota Panelists- CA Namrata Dedhia, CA Naman Shrimal and CA Stuti Trivedi
2 Panel Discussion on Burning Issues in Indian TP – From Litigation to Strategic Risk Management Chairman cum Moderator – CA Vispi Patel  Panelists- CA Bhavesh Dedhia, CA Suchint Majmudar and CA Vijay Iyer

Participants were also provided an option to share the queries or issues to the panellists by way of Google form before the respective panel discussion which the panellists addressed during the panel discussion. Eminent tax professionals of the country were the panelists as well as moderator for such panel discussions.

Both the live sessions including the recorded sessions covered all the concepts of Transfer Pricing under the Income Tax Act, 1961 and the other relevant provisions.

More than 54 Participants from 15 states spread over 30 cities attended these live panel discussions which was well-received and appreciated by the participants.

Scan to watch online on BCAS Academy

Half-Day Panel Discussions on Transfer Pricing Benchmarking and Compliances

II. REPRESENTATIONS

1. BCAS Seeks Extension for GSTR-9 and GSTR-9C Due to Increased Compliance Complexity

On 11 December 2025, BCAS submitted a representation to the Hon’ble Finance Minister, highlighting challenges in filing GSTR-9 and GSTR-9C for FY 2024-25. Recent notifications have withdrawn long-standing relaxations, increasing compliance complexity. Key concerns include detailed ITC reporting (Table 7), new import reconciliation requirements (Table 8H1), changes in auto-population (Table 8A shifting from GSTR-2A to GSTR-2B), and technical glitches on the GST portal causing mismatches.

For GSTR-9C, withdrawal of turnover reconciliation relaxations and mandatory cross-year ITC reporting have made preparation more onerous. Tight timelines due to dependence on audited financial statements further exacerbate the challenge.

BCAS has requested a three-month extensionfor filing to allow professionals sufficient time to adapt, ensure data accuracy, and avoid inadvertent errors.

Readers can read the full representation by scanning the QR code or visiting our website www.bcasonline.org

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BCAS Seeks Extension for GSTR-9 and GSTR-9C

III. BCAS OUTREACH

• BCAS Delegation Meets Chief Executive, Indian Banks’ Association

BCAS Delegation Meets Mr Atul Kumar

A delegation of BCAS – Bombay Chartered Accountants’ Society, led by CA Zubin Billimoria, President, and CA Kinjal Shah, Vice President, met Mr. Atul Kumar Goel, Chief Executive of the Indian Banks’ Association(IBA).

The delegation briefed Mr. Goel on the key initiatives and activities of BCAS and discussed potential areas of future cooperation between BCAS and IBA.

Mr. Daljit Dogra, Board Member of IBA and Managing Director of Zoroastrian Cooperative Bank, was also present and facilitated the interaction.

BCAS looks forward to a long-term and mutually beneficial professional association with the Indian Banks’ Association.

• Meeting of Office Bearers with Mr. Sudhir Hirdekar, ACP Crime Branch, Mumbai Police

IV. BCAS IN NEWS & MEDIA

  •  BCAS has been featured in several news and media platforms, showing our active involvement, professional contributions, and commitment to the field. This reflects the growing recognition of BCAS in the public and professional space.

Link: https://bcasonline.org/bcas-in-news/

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News and Views

Real Estate Investment Trusts (REITs): Decoding the Structure, Purpose, and Investment Merits

REITs, introduced to India via SEBI Regulations 2014, democratize access to high-quality commercial real estate by enabling fractional ownership. These trusts, overseen by a Sponsor, Trustee, and Manager, must distribute 90% of net cash flows to unit holders, offering stable yields and liquidity through stock exchange listings. Currently, seven Indian REITs manage assets worth approximately ₹2.3–2.5 lakh crore. While adoption is hindered by limited awareness and interest rate sensitivity, recent SEBI reforms—including SM REITs—aim to mainstream the asset class as it expands into data centers and logistics.

I. INTRODUCTION

Real Estate Investment Trusts (REITs) are among the most significant innovations in global real estate and financial markets, offering a transparent and accessible avenue for investors to participate in income generating commercial assets. Originating in the United States in the 1960s, to provide retail investors access to large scale real-estate which was previously available only to institutions, REITs have since evolved into a widely adopted global investment structure. Today, jurisdictions such as the US, Singapore, Japan and Australia operate mature REIT markets known for strong governance, liquidity and stable yields, effectively integrating real estate with capital markets.

In India, the REIT framework was formally introduced through the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014, marking a major step toward transparency and institutionalisation in the real estate sector. These regulations established standardised valuation practices, stringent disclosure norms and investor protection mechanisms aligned with international standards. Structurally, a REIT is a securitised trust that owns, operates or finances income generating assets. Investors purchase units of the REIT, which are mandatorily listed on recognised stock exchanges, thereby obtaining equity like liquidity supported by stable real estate backed cash flows. REITs must invest a significant majority of their assets in completed revenue generating properties and are required to distribute at least 90 percent of Net Distributable Cash Flows to unit holders, ensuring steady income. Through professional management, portfolio diversification and mandatory disclosures, REITs provide an efficient and investor friendly mechanism for participating in long term real estate performance across global and Indian markets.

The Indian REIT market currently comprises of seven SEBI-registered REITs, as per SEBI website with data uploaded up to 18th December 2025. Collectively, these REITs manage aggregate assets under management (AUM) of approximately ₹2.3–2.5 lakh crore (As per IRA), representing a substantial institutional real estate footprint in India. The underlying asset base is predominantly Grade-A commercial office real estate, with a portfolio comprising large, consumption-oriented retail malls and urban shopping destinations. Together, these seven REITs reflect the growing depth, diversification, and institutionalization of India’s commercial and retail real estate ecosystem under the SEBI (REITs) Regulations, 2014.

II. THE REIT STRUCTURE

The operational structure of a REIT is carefully designed to achieve transparency, accountability, and operational efficiency. The framework rests on three primary pillars, the Sponsor, the Trustee, and the REIT Manager, each of whom plays a critical and independent role in ensuring the success of the REIT. Additionally, much of the asset ownership is maintained through Special Purpose Vehicles (SPVs), which hold the individual properties under the REIT umbrella.

The Sponsor is the promoter entity or group responsible for establishing the REIT and transferring eligible real estate assets or SPV shareholding to the trust. Sponsors typically consist of experienced real estate developers or investment entities with extensive track records.

The Trustee functions as an independent fiduciary responsible for safeguarding unit holders’ interests. The Trustee ensures regulatory compliance, monitors the performance and actions of the REIT Manager, and oversees the custody of the assets held by the trust.

The REIT Manager acts as the operational driver of the REIT. It is entrusted with property management, leasing strategies, financing decisions, investor communication, risk management, and overall commercial performance. The Manager’s responsibilities have a direct bearing on asset occupancy, yield generation, and long-term value creation.

The structural relationship between these entities, including the SPVs, enables REITs to maintain governance, operational flexibility, and scalability.

structural relationship between these entities, including the SPVs, enables REITs to maintain governance, operational flexibility, and scalability.

REITs

III. NEED FOR REITs AS AN INVESTMENT PRODUCT

Real Estate Investment Trusts emerged globally as a structural reform to address opacity, inconsistent valuations, and fragmented ownership that historically characterised real estate markets. By placing income generating assets within a regulated trust framework, REITs introduced standardised valuation practices, periodic disclosures, governance oversight, and compliance-based transparency. This transformed real estate into a securitised and publicly monitored investment class comparable to mainstream financial instruments. Mature markets such as the United States, Singapore, Japan and Australia illustrate how REITs enhance market integrity, attract long term institutional capital, and broaden investor participation. India adopted this global model through the Securities and Exchange Board of India Real Estate Investment Trusts Regulations 2014, aligning domestic real estate investing with international best practices and creating an institutional mechanism for transparency and financial discipline.

The central rationale behind REITs both globally and in India has been the democratization of real estate ownership and the mobilisation of patient capital into high quality commercial assets. Traditional real estate investment required significant capital, involved high transaction costs, and offered limited liquidity, restricting participation largely to wealthy individuals and institutions. REITs resolve these barriers by enabling fractional ownership through exchange listed units, combining the liquidity of public markets with the stability of asset backed cash flows from completed real estate. In the Indian context, this structure has enabled capital inflows into Grade A offices, retail centres, logistics parks and industrial facilities, allowing developers to deleverage and reinvest while converting illiquid property holdings into monetizable financial assets.

Finally, the introduction of REITs was intended to deepen and diversify the products & capital markets themselves. Prior to REITs, Indian capital markets were largely dominated by equity and debt instruments, offering limited avenues for investors seeking steady, asset-backed, yield-oriented products. REITs fill this structural gap by offering predictable income distributions, relatively lower volatility, and a strong linkage to economic productivity through commercial real estate performance. Their regulated nature, mandatory distribution of 90% of Net Distributable Cash Flows (NDCF), and governance standards elevate them far above conventional property transactions. In essence, REITs represent a hybrid investment class, combining the liquidity of public markets with the stability and cash-flow resilience of high-quality real estate, thereby strengthening financialization, market depth, and investor choice within the broader investment ecosystem.

IV. REITs AND KEY MERITS OF INVESTING IN REITs

1. Income Stability, Liquidity and Professional Management

REITs are preferred for their predictable income, supported by the mandatory distribution of at least ninety percent of net distributable cash flows. Their listing on recognised stock exchanges provides liquidity and enables convenient entry and exit, unlike traditional real estate which is costly and slow to transact. Professional management ensures efficient leasing, tenant retention and asset maintenance, leading to sustained occupancy and stable long term cash flows.

2. Dual Benefit of Yield and Capital Appreciation with Diversification Advantages

REITs deliver a combination of steady rental yields and potential capital appreciation as high quality commercial properties typically gain value over time. Their diversified portfolios across cities and tenant categories reduce concentration risk and protect against localized market disruptions. Periodic rent escalations in commercial leases also offer inflation aligned income growth, enhancing overall financial returns.

3.SEBI Regulatory Framework and Superior Investor Protection

a) Transparency and Standardised Valuation

SEBI’s regulatory framework ensures transparency through quarterly financials, annual audited accounts and compulsory independent valuations based on uniform methodologies. Public disclosure of valuation assumptions eliminates the opacity historically associated with real estate.

b) Prudent Asset Composition and Leverage Controls

Regulations require at least eighty percent of REIT assets to be completed and income generating, significantly reducing development risk. Borrowings cannot exceed forty nine percent of asset value without credit rating and approval from seventy five percent of unit holders, ensuring financial discipline.

c) Governance Safeguards

A clear separation between the sponsor, trustee and manager, along with mandatory arm’s length related party transactions and independent unit holder approval, reduces conflicts of interest and enhances institutional credibility.

V. REITs NOT AS FIRST CHOICE PRODUCTS, WHY?

Despite a supportive regulatory framework, REITs have not yet emerged as a first-choice investment product for Indian investors primarily due to a combination of limited awareness, yield sensitivity, and market perception issues. REITs compete directly with traditional fixed-income products and direct real estate, yet their distribution yields fluctuate with interest rate cycles, making them less attractive during high-rate environments. The relatively small size of the Indian REIT market, limited trading liquidity, and concentration in office and retail assets further restrict broad investor appeal. Also alternative products like Real Estate Mutual Funds, which offer a more efficient alternative to REITs for long-term investors, are better positioned to navigate the structural challenges of India’s predominantly unorganised real estate market by providing diversified, professionally managed exposure without the operational, legal, and liquidity risks associated with direct property ownership. As a result, while REITs are institutionally credible and regulated, they are still viewed as a niche, yield-oriented product rather than a core allocation, delaying their adoption as a mainstream first-choice investment.

To further increase participation, the REIT structure can be strengthened by rebalancing sponsor influence, internalising management functions, simplifying SPV layers, expanding asset eligibility, and enhancing investor control, thereby improving alignment, transparency, and long-term scalability in India’s unorganised real estate market.

VI. SEBI MEASURE TO GIVE EXPOSURE TO REITs

SEBI has recently undertaken a series of targeted regulatory initiatives to deepen investor participation in REITs and strengthen their role within India’s capital markets. Key measures include rationalisation of minimum investment and trading lot sizes, enhanced disclosure, valuation and governance standards, and greater capital-raising flexibility through follow-on offerings and debt issuances. A significant recent development is the reclassification of Real Estate Investment Trusts (REITs) as equity-related instruments, which facilitates enhanced participation by Mutual Funds and Specialized Investment Funds (SIFs) and supports greater institutional capital inflows (28 November 2025 Circular). In parallel, SEBI has introduced Small and Medium REITs (SM REITs) to enable fractional ownership of real estate assets under a regulated framework, thereby broadening access for retail and high-net-worth investors. Collectively, these measures reinforce SEBI’s intent to position REITs as a mainstream, liquid and yield-oriented asset class in the Indian investment ecosystem.

VII. FUTURE OUTLOOK

Real Estate Investment Trusts represent a structural transformation in how economies financialise and institutionalise real estate. Globally, REITs have bridged the gap between physical property ownership and modern capital markets by introducing transparency, standardised valuation, and regulatory discipline. India’s adoption of this framework places it within a mature international ecosystem where REITs already serve as essential vehicles for deepening markets, democratising ownership, and converting real estate activity into stable, tradable financial returns.

The strength of REITs lies in their ability to translate commercial real estate productivity into predictable income supported by institutional governance. In India, where real estate has long been marked by opacity and fragmentation, REITs have set new benchmarks of credibility and professionalism. They have opened access to high quality commercial assets for domestic investors while attracting global pension funds, sovereign wealth funds, and long horizon allocators seeking stability in a high growth market.

As India’s economic landscape expands, REITs are poised to diversify into next generation asset classes including data centres, digital infrastructure, industrial warehousing, last mile logistics, and technology enabled office ecosystems. This trajectory mirrors the evolution seen in mature global markets where REITs have successfully expanded into specialised segments such as healthcare, cold storage, hospitality and renewable infrastructure. With regulatory clarity improving and taxation frameworks stabilising, India is positioned to attract deeper pools of long-term international capital, strengthening its role as a compelling yield driven investment destination.

The future relevance of REITs in India therefore extends beyond real estate alone. They stand at the intersection of financial market development, urban growth, investment democratisation, and economic formalisation. If supported through progressive policies and continued institutional participation, REITs have the potential to become one of India’s most influential financial instruments over the coming decade, aligning the country more closely with global REIT markets while shaping a sophisticated, transparent and yield oriented investment environment.

Regulatory Referencer

I. DIRECT TAX: SPOTLIGHT

1. Capital Gains Account (Second Amendment) Scheme 2025 – Notification No. 161/2025 and 162/2025 dated 19 November 2025

II. FEMA

1. RBI modifies FEMA compounding directions and updates bank account details for receiving fees and compounding amounts

The RBI has decided to change the details of accounts where compounding application fee and compounding amount will be received. This is to streamline these receipts. Accordingly, Annexure I of the Master Direction has been modified.

[AP (DIR Series) Circular No. 15/2025-26,dated 24th November, 2025]

2. RBI bars Pakistani/Bangladeshi citizens from carrying Indian notes to/from Nepal & Bhutan under revised FEMA norms

The Foreign Exchange Management (Export and Import of Currency) Regulations, 2015 has been amended. After the amendment, regulation 8 adds the phrase ‘not being citizen of Pakistan or Bangladesh’, thus barring these citizens from taking out of India or bringing into India Indian currency through Nepal or Bhutan.

[Notification No. FEMA 6(R)/(4)/2025-RB,dated 28th November 2025]

3. RBI permits AD Category-II banks/entities & FFMCs to submit ‘LRS daily return’ directly on CIMS portal w.e.f. January 1, 2026

As of now, Authorised Dealer (AD) Category-I Banks are required to submit data related to transactions under the Liberalised Remittance Scheme on Centralised Information Management System (CIMS) by the next working day. This is done for their own data as also the data of AD Category-II banks/entities and FFMCs attached to them or maintaining an account with them in their ‘LRS daily return’.

From 1st January, 2026, AD Category-II Bank and Full-fledged money changers (FFMC) will directly file the details of LRS transactions undertaken by them in the ‘LRS daily return’ on CIMS. With this, it will enable AD Category-II banks and FFMCs to check cumulative amount remitted by a resident individual (PAN-wise) before facilitating their next requested LRS transaction. Accordingly, they may discontinue submitting LRS transactions through AD Category-I Banks.

[AP (DIR Series) Circular No. 17, dated 3rd December, 2025]

4. RBI proposes to mandate Authorised Dealers to disclose transaction costs for foreign exchange contracts to retail users

The RBI has released Draft circular on mandatory Disclosure of transaction cost for foreign exchange transactions. Public comments are invited until 9th January, 2026. The new draft proposes disclosure requirements related to transactions costs – remittance fees, foreign exchange rate, currency conversion charges, etc. – in relation to foreign exchange cash, foreign exchange tom and foreign exchange spot contracts offered to retail users. Comments can be sent to postal and email addresses provided in the Release.

[Press Release No. 2025-26/1666, dated 9th December 2025]

III. IFSCA

1. IFSCA mandates display of key global access risks, including market, currency and custody risks, at every login by their clients

Under clause 39 of the “Regulatory Framework for Global Access in IFSC” circular dated 12th August 2025 issued under the IFSCA (Capital Market Intermediaries) Regulations, 2025, Global Access Providers (GAPs) and Introducing Brokers (IBs) are required to have a system to ensure that key risks and disclaimers relating to global access are displayed at every login by their clients. The Authority specifies risks and disclaimers in Annexure 1 of the circular to be displayed by GAPs and IBs at every login by the clients. This compliance shall be fulfilled by 31st December 2025.

[Circular No. IFSCA/DSI/12/2025-Capital Market, dated 26th November 2025]

Recent Developments in GST

ADVANCE RULINGS

1. Shibaura Machine India Pvt. Ltd. (AAR Order No.32/ARA/2025 dt.18.8.2025)(TN)

Manufacturer expanding factory sought ITC on electrical works. AAR held that contract was a works contract creating immovable property; electrical installations not plant and machinery; ITC blocked under sections 17(5)(c),(d) of CGST.

FACTS

The facts are that the applicant is engaged in the business of manufacturing of injection moulding machinery and accessories. To expand their business operation and have constructed a new factory adjacent to its exiting factory, they have incurred capital expenditure towards procurement in relation to setting up of this factory. They also entered into a separate contract with supplier for installation, testing & commissioning of Electrical Works for the new factory. The said electrical work falls under SAC 995461 – Electrical installation services including electrical wiring & fitting services, fire alarm installation services, burglar alarm system installation services, leviable to GST at the rate of 18%.

Under above background, applicant sought AR on following questions:

“1) Whether Input Tax Credit (ITC) is eligible on electrical works carried out for expansion of factory for manufacturing activity?

2) What should be the basis to arrive the timeline to avail ITC on tax invoice raised by Supplier to bill “Advance Component” of the Contract and Subsequent Adjustment of Advance in the Service Bills showing both Gross and Net amount.”

In the course of hearing details of contract were given. The contract was divided in six parts as under:

S. No. Particulars Amount (exclusive of GST) Remarks
1 LT Panels 3,93,11,861 Design, supply and installation of LT switchgear panels
2 Busduct 3,91,85,553 Design, supply and installation of Aluminium busduct
 3 LT Electrical Works 11,09,38,208 Supply and installation of MCB distribution boards, power receptacles, circuit mains & points, cable trays, earth electrodes and etc.
4 Lightning Protection Works 87,95,062 Supply and installation of external lightning protection system
5 Light Fixtures 1,73,21,086 Supply, installation, testing and commissioning of complete light fixtures
6 Civil Works 62,83,369 Associated miscellaneous civil works excavation & back filling and laying heavy duty pipes.

Citing definition of ‘business’ in section 2(17), it was argued that even capital goods are eligible for ITC and also submitted that the blocking provision of section 17(5)(c) or (d) will not apply as it is part of plant and machinery. Additionally, it was argued that it is not immovable property as it can be removed without damage and re-installed.

HELD

After referring to relevant provisions, the ld. AAR observed that from the scope of the contract entered into between the parties, it could be seen that the agreement is not just for installation/commissioning of electrical works, but it is a composite contract of Works Contract Service involving “Supply, Installation, Testing and Commissioning of Electrical Works”, as indicated in table above, wherein the break-up of the cost involved on Supply and Installation of Electrical works has been provided separately.

Considering above, ld. AAR held that the work is in respect of immovable property. Regarding the accounting of above work as ‘plant and machinery’, the ld. AAR observed that merely accounting an immovable property as a movable property or accounting a particular item under a different head, does not preclude the immovable nature of the item being accounted.

The ld. AAR distinguished the ARs cited by applicant and took note of subsequent AR orders denying ITC on electrical work. Ultimately the ld. AAR held that the GST paid on the electrical installation work carried out for expansion of factory for manufacturing activity is not eligible for availment of Input Tax Credit (ITC) by the applicant, as it is blocked under Sections 17(5)(c) and 17(5)(d) of the CGST/TNGST Acts, 2017.

2. Orsino Hotels & Resorts LLP (AAR Order No.09/WBAAR/2025-26 dt.22.8.2025) (WB)

AAR held hotel accommodation with meal plans is composite supply; food has no separate GST rate. Accommodation taxed at 12% or 18% based on tariff; walk-in restaurant services taxed at 5% or 18% for specified premises.

FACTS

The applicant was engaged in hotel business through its property named Orsino Spa Resort (formerly known as Hotel Pine Tree Spa Resort) located in Darjeeling. The resort comprised of 45 rooms, offers various amenities such as a spa, banquet facilities, a bar, a multi-cuisine restaurant and a cafe. The hotel also offered various meal plan options along with the accommodation service as per the industry practices like American Plan (AP), which included all the 3 meals i.e. breakfast + lunch + dinner, Continental Plan (CP), which includes breakfast and European Plan (EP), which provided only accommodation service.

The hotel also provided separate restaurant services to the walk-in-guests.

Applicant sought to obtain AR on following questions:

“(i) What is the appropriate classification and applicable GST rate for the food component provided under the American Plan (AP) or Continental Plan (CP) when the total value of the combined supply (AP, CP) exceeds ₹7,500 and the tax invoice distinctly enumerates the two supplies separately?

(ii) The separate restaurant services provided to walk in guests shall be taxable at which rate in above case, considering the recent Notification No. 05/2025 Central Tax (Rate) dated 16.01.2025?”

The applicant explained that it charges GST on the composite supply of services provided i.e. bundled supply of accommodation along with meal options though, there is a clear demarcation of charges between accommodation and food services in the pricing structure/tax invoice.

HELD

The ld. AAR referred to relevant legal terms like meaning of hotel, which usually means an establishment that provides paid Lodging accommodation on short term basis, and it may provide food and other varied services to guests.

The ld. AAR similarly analysed the relevant terms like room, tariff, value of supply (for hotel) etc. The ld. AAR also referred to recent changes in the GST Act in respect of accommodation service given by the hotels and especially in respect of specified premises.

Regarding ‘accommodation service’, the ld. AAR observed that accommodation service is not something to do with lodging only but includes other things as well that are necessary for lodging for a short period of time. The ld. AAR observed that Food is one such thing, among many others. The ld. AAR referred to definition of ‘Composite Scheme’ given in section 2(30) and held that food is composite service with accommodation service.

After noting Notification relating to hotel including amendments, the ld. AAR observed that supply of hotel accommodation service is to be taxed either under serial no. 7(i) or under serial no. 7(vi) of the Notification No. 11/2017- Central Tax (Rate) Dated 28.06.2017 depending on the value of supply of a unit of accommodation. If the value is less than or equal to ₹7500/-, the supply is to be taxed under serial no. 7(i) i.e. 12%. On the other hand, if the value of supply is more than ₹7500/-, the supply is to be taxed under serial no. 7(vi) i.e.18%. There will not be any separate rate of tax for food and accommodation.

Regarding the restaurant services provide to walk-in-customers, the ld. AAR held that the restaurant service provided by the applicant to the walk-in guests will be taxable under serial no. 7 (ii) of Notification No. 11/2017- Central Tax (Rate) Dated 28.06.2017 as amended, read with the corresponding State Tax notification, i.e. @ 5%. The ld. AAR further held that in any Financial Year, the hotel charges a rate of above ₹7,500/- for any unit of accommodation (inclusive of the food charges in the applicable plan, even if indicated separately in the invoices) and if the premises qualify to be considered as “specified premises”, for the next Financial Year, appropriate rate of GST will be 18% for the said restaurant services provided to walk-in guests.

The ld. AAR thus disposed of application by ruling that under the American Plan (AP) or Continental Plan (CP), the food component will have no separate treatment for the purpose of taxation, since it is clearly a case of “composite supply” and rate of tax to be decided accordingly.

3. MRF Limited (AAR No.33/ARA/2025 dt.1.9.2025)(TN)

AAR held that from 1 April 2025, common input service invoices must be received directly under ISD registration; routing through regular registration and onward invoicing is impermissible under amended ISD provisions.

FACTS

MRF Limited (the applicant), are the leading manufacturer of automobile Tyres and Tubes and allied products having H.O. in the State of Tamil Nadu and are registered under GSTIN No. 33AAACM415G1ZU. They have also having units in the States of Telangana, Kerala, Goa, Gujarat and Union Territory of Puducherry.

The Applicant also holds GST Input Service Distributor (ISD) registration being No. 33AAACM4154G2ZT for its Head Office in terms of Section 24(viii) of the CGST Act, 2017 for distribution of Input Tax Credit (ITC) attributable to MRF Tamil Nadu and other States or exclusively to one or more State/s of the applicant, having the same PAN, in terms of Section 20 of the CGST Act, 2017 read with Rule 39 of the CGST Rules, 2017. The HO received many common input services such as Advertising, Auditing, Banking, Annual Maintenance Contract, Manpower recruitment, Consultancy, Repair & Maintenance etc. which are attributable to and consumed at different States including Tamil Nadu (more than one location or at all locations).

The applicant submitted that presently the suppliers of all such common input services issue their GST invoices to MRF HO mentioning the Regular GST Registration Number of the applicant and MRF HO currently books the cost of all such common input services in MRF HO books. The MRF HO raises tax invoices to the concerned States proportionate to or attributable to such states, added with 2% mark-up value.

There are changes in ISD mechanism from 1.4.2025 vide amendment in section 2(61) and section 20 of CGST Act. CBIC has issued Notification No. 16/2024-Central Tax dated 6th August, 2024 to notify 1st April, 2025 as effective date for application of amendments.

Under above background, the applicant raised following questions for AR.

“1) Whether the Applicant can comply with the amended provision of section 2(61) and section 20 of the CGST Act, 2017 as amended by notification 16/2024-Central tax dated 6th August 2024 by following the procedure as stated at para 12 a) to 12 d) of the statement of containing applicant’s interpretation of law (Annexure ‘B’) in terms of Rule 54(1A) of the CGST Rules, 2017.

2) Whether the Applicant can continue to receive the Input Service Invoices issued by the Service Provider/Supplier of Service for the Common Input Service (Which are attributable to one or more State/s) in the name of and addressed to Applicant’s Regular Registration and subsequently transfer the same in terms of Rule 54(1A) of CGST Rules, 2017 to MRF HO ISD Registration for subsequent distribution of the common Input Tax Credit through ISD Mechanism?”

HELD

The ld. AAR noted the amendments and observed that from 1st April 2025, to receive common input service invoices, for distribution to other branches/States, the taxpayer should necessarily be registered as an ISD. The ld. AAR further observed that the applicant’s practice of receiving the invoices from vendors pertaining to common input services, in the name of MRF HO and raising invoices in the name of their ISD registration and thereby distributing the common credit to the various branches/States is not consistent with the legal position from 1st April 2025, as method to receive and distribute such ITC of common input services only through ISD mechanism is made mandatory from 1.4.2025.

The ld. AAR passed AR accordingly.

4. Theni Nattathi Kshatriya Kula Hindu Nadargal Uravinmurai Dharma Fund (AAR No.35/ARA/2025 dt.2.9.2025)(TN)

AAR held outpatient consultation is exempt, but medicines supplied to outpatients are taxable; not a composite supply, as patients may buy medicines elsewhere; separate supplies, not eligible for healthcare exemption.

FACTS

The facts are that applicant is registered under the GST Act. The applicant is dedicated to serving society through their hospital. The applicant’s hospital provides essential healthcare services to both, inpatients and outpatients, and they operate separate pharmacies within the hospital premises for their convenience. The applicant highlighted that from pharmacy;

  •  Medicines are supplied exclusively to patients with prescriptions issued by their hospital doctors.
  •  No medicines are dispensed to walk-in patients without a prescription from their hospital doctors.

The applicant submitted that the services are covered by entry Sl.No.74 of Notification No. 12/2017 CT(R) dated 28.06.2017, which exempts services by way of healthcare provided by a clinical establishment.

It was emphasised they operate pharmacies within the hospital premises for the convenience of patients and medicines are supplied to patients only on a prescription issued by their own hospital doctors. The applicant considers that medicines supplied to outpatients based solely on their hospital doctor’s prescription is exempt, as the same is liable to be treated as a ‘composite supply’ along with the main supply of ‘Healthcare service’, which is exempt.

With above background following questions were raised.

“1. Whether Consultation service and medicines supplied to out-patients attracts GST?

2. Can we treat consultation and supply of medicine to outpatient as composite supply?

3. If the above is a Composite Supply, is a single invoice required, or are multiple invoices with the same registration number sufficient?”

HELD

The ld. AAR referred to scope of entry 74 about healthcare services and the ‘Scheme of Classification of Services’, annexed to GST Rate Notification No. 11/2017-CT(Rate) dated 28.06.2017, as amended. The ld. AAR also referred to clarification provided in the Circular no.32/06/2018-GST, dated 12.2.2018, wherein supply to other than inpatients is held taxable.

The ld. AAR also made reference to Section 2(30) of CGST Act, 2017, which defines “Composite Supply”.

The ld. AAR observed that while providing health care related services to out-patients, medicines and consumables, which is only of advisory nature, are prescribed to them by the Doctor who attends to the patient. It is also noted that for such out-patient, there is no mandate to procure such prescribed medicines only from the pharmacy attached to the hospital, and they are at liberty to procure the same from the hospital or other pharmacies of their choice.

The ld. AAR held that the supply of Medicines in the course of providing health care services to out-patients visiting the hospital for diagnosis or medical treatment or follow up procedures cannot be considered as part of a composite supply involving supply of health care service, as they are different supplies independent of each other.

Accordingly, the ld. AAR answered the questions in negative.

5. Sripsk Developers LLP (AAR No.11/ARA/2025 dt.2.9.2025)(TN)

AAR held construction of service apartments, despite RERA residential registration, is commercial in nature; based on usage, features and KMC approval, classified as commercial buildings, taxable at 12% under GST.

FACTS

The applicant, a Contractor, has made this application seeking an advance ruling in respect of following question:

“Classification of construction services being rendered to customers on account of construction of proposed B+G+31 Storey Service Apartment Building at 27, Matheshwartola Road, Kolkata – 700 046 in terms with Notification No. 03/2019-Central Tax (Rate) dated 29-03-2019 (as amended). Whether the Service Apartment being constructed would fall under construction services of multi-storied residential buildings or construction services of commercial buildings?”

M/s.PS Group Realty Limited & Others acquired land (referred to as landowner) with restrictions from Kolkata Municipality Corporation and West Bengal Trade Promotion Organisation, that the said land shall be used for setting up the Hotel Cum Convention Centre and other commercial venture/ enterprise excluding residential units and for no other purpose.

The land owner granted development rights to applicant (also referred to as developer) for the development and construction of three building blocks, wherein the PHASE-1 will comprise the Service Apartment & the Multi-Level Car Parking and PHASE-2 will comprise the Hotel and both together shall constitute the “Complex” and thereafter market, promote and sell/transfer and otherwise deal with the Service Apartment Units by executing necessary Definitive Agreements.
The applicant obtained necessary permission from Kolkata Municipal Corporation under Section 393 of KMC Act,1980 read with 69(I)(B) of KMC Building Rules,2009 vide BP No. 2024070124 dated 20-12-2024, valid upto 19-12-2029, for proposed complex as Service Apartment Building.

The West Bengal Real Estate Regulatory Authority (WBRERA) issued Registration Certificate of Project in Form ‘C’ under Rule 6(1) of RERA Rules bearing Project Registration No. WBRERA/P/KOL/2025/002336 which was granted as ‘Residential Project’. Since the property was for residing and there was no separate category as service apartment, the registration was granted under ‘Residential Project’.

HELD

The AAR noted that the perception of service apartment is different from that of residential apartment. The service apartments, unlike residential apartments, can be given on rent for long term as well as for short term, as per requirement. The service apartments are generally treated akin to hotel rooms and hence these apartments are classified as commercial in nature, in common parlance.

The question was raised in AR application as under GST perspective, the taxability of construction of residential building is different to that of construction of commercial complex.

For Residential apartments tax rate is 5%, whereas for commercial apartments it is 12%.

The ld. AAR, along with legal provisions also considered the features of said construction like, it will be fully furnished, will have hotel like services and others.

The ld. AAR, noting the difference between the residential apartment and service apartment, observed that, in addition to WBRERA, the KMC is also a ‘competent authority’ to sanction the project and KMC in the sanctioned plan has accepted project as ‘service apartment building’ and not as ‘residential apartment building’.

The ld. AAR observed that simply because WBRERA has classified complex Service Apartment as residential apartment, neither the nature and purpose of the project nor the classification made by the KMC as a ‘competent authority’ becomes redundant. The project remains to be a project of commercial apartments and ruled that the Service Apartment, being constructed by the applicant, will fall under construction service of commercial buildings, liable to tax accordingly.

6. Link Up Textiles Pvt. Ltd. (AAR No.42/ARA/2025 dt.8.10.2025)(TN)

AAR classified men’s cotton pyjama sets under HSN 620721; one top and bottom constitute one piece. Though packed in two sets, per-set value below ₹1,000 attracts 5% GST.

FACTS

The applicant is exporting Men’s Pyjama Set consisting of a top (Kurta/Shirt) and bottom (pyjama/trouser) made of cotton, (TOP-67% Cotton, 29% Polyester, 4% Spandex Woven Shirt; Bottom – 67% Cotton, 29% polyester, 4% Spandex woven pant) in 2 sets/pack. The set is designed for comfort and general use and is typically categorized under apparel and clothing accessories.

The applicant contemplates that the above said product falls under Chapter 62 of the HSN Classification, specifically under HSN Code 6207 or 6211, which pertains to men’s nightwear and similar apparel, and the GST rate should be as per Notification No. 01/2017-Central Tax (Rate) dated 28th June 2017. It can be 5% (if the sale value per piece does not exceed ₹1000) or 12% (if the sale value per piece exceeds ₹1000).

Vide application dated 18.2.2025, the applicant has sought advance ruling on the following questions:

“1) Under which HSN Code should men’s pyjama sets with above mentioned description be classified?

2) What is the applicable GST rate on such men’s pyjama sets which are packed in 2 sets as per their buyer’s instruction and the cost of such packed pyjama sets are more than ₹1000.”

HELD

The ld. AAR noted the contents of purchase order as also the invoice issued by the applicant.

The ld. AAR also considered the composition of product as given above and HSN 620721, which covers goods described as under:

“Mens or boys singlets and other vests, underpants, briefs, nightshirts, pyjamas, bathrobes, dressing gowns and similar articles – night shirts and pyjamas : of cotton”

The ld. AAR also noted different rates under entry 223 of Schedule I (5%) and entry 170 in Schedule II (12%) as per selling price.

The ld. AAR also observed that the goods are sold under different names and the product supplied by the applicant is for export and consists of ‘kurta-pyjama’ as pyjama set. Accordingly, the ld. AAR held that the combination of top and bottom or a ‘pyjama set’ shall be treated as a ‘piece’ and should be classified accordingly.

The ld. AAR also noted that the applicant is packing 2 sets of pyjamas in a single pack as per the requirements of their customer abroad i.e. 2 Shirts and 2 Paints in one pack. The price of one Pack consisting of two pyjama sets is ₹1371/-. Hence, the price of one pyjama set or a piece of apparel consisting of 1 Shirt and 1 Pant is only ₹686/- which is less than ₹1,000/-. The ld. AAR held that the product is qualified to be classified under Schedule-I chargeable to GST at the rate of 5%.

Goods And Services Tax

I. SUPREME COURT

81. (2025) 35 Centax 222 (S.C.) Commissioner Trade and Tax Delhi vs. Shanti Kiran India (P) Ltd. dated 18.12.2025

ITC cannot be denied to a bona fide purchaser when seller was registered on the date and transactions were genuine, even if seller’s registration is cancelled subsequently on account of non-payment of tax to Government.

(Editor’s Note: While the below judgement pertains to Delhi VAT, important principles emanating from it are likely to be relevant for GST law. Accordingly, this case has been considered in this feature).

FACTS

Respondent was a registered dealer under the Delhi Value Added Tax Act, 2004, who purchased goods from registered selling dealer and paid VAT as charged in valid tax invoices. At the time of the transactions, the selling dealers were duly registered; however, their registrations were cancelled subsequently for failure to deposit the tax collected with the Government. Despite the genuineness of the transaction, the petitioner sought to deny ITC to the respondent on the ground that the selling dealers had defaulted in tax payment. The Delhi High Court allowed ITC to the respondent, holding that bona fide purchasers cannot be penalised for the seller’s subsequent default. Being aggrieved petitioner approached the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that input tax credit under section 9(1) of the Delhi VAT Act cannot be denied to a purchasing dealer when, on the date of the transaction, the selling dealer was duly registered and the purchase transactions and invoices were genuine. Subsequent cancellation of the seller’s registration or failure of the seller to deposit the collected tax with the Government does not disentitle the bona fide purchaser from claiming ITC. The Court upheld the High Court’s view that the Department’s remedy lies against the defaulting selling dealer and not in denying ITC to the purchaser. Accordingly, the appeal filed by the Department was dismissed.

82. State of Karnataka vs. Taghar Vasudeva Ambrish[2025] 181 taxmann.com 199 (SC) dtd.04-12-2025

Leasing of a residential building to a company for providing hostel services is eligible for exemption under GST

FACTS

The assessee is the co-owner of a residential property situated in Bangalore. The property consists of 42 rooms. It is a four-story building with a terrace and a common area. The assessee, along with the other co-owners, executed a lease deed in favour of M/s DTwelve Spaces Private Limited (for short, “the lessee”). The lessee, in turn, leased out the residential property as a hostel to provide long-term accommodation to students and working professionals, with the duration of stay ranging from 3 months to 12 months. The Central Government, by way of Notification No.9/2017- Integrated Tax (Rate) dated 28.06.2017, granted exemption from payment of goods and services tax in respect of services, which include renting services, which are provided with respect to a residential dwelling for use as a residence. The assessee sought clarification from the advance ruling authority (AAR) as regards the eligibility to claim exemption on the rent received by him from the lessee by letting the property. The AAR held that the services viz. Renting of residential dwellings for use as a residence does not fall under Entry 13 of the Exemption Notification, as the lessee is not itself using the premises in question. Being dissatisfied with the ruling of the AAR, they filed an appeal before the Appellate Authority (AAAR). The AAAR affirmed the AAR’s ruling. Aggrieved, the assessee filed a petition in the High Court.

The High Court allowed the writ petition, holding that the assessee is entitled to avail the benefit under the exemption notification. Aggrieved by the same, the department filed an appeal before the Hon’ble Supreme Court.

HELD

The Hon’ble Court, discussing the rule of purposive interpretation held that giving Entry 13 of the Exemption Notification a narrow interpretation by holding that it is available only when the property so rented is used by service recipient themselves would ultimately lead to legislative intent being defeated as the exemption is extended to cases wherein residential dwelling is rented out and ultimately used as residence, irrespective of the person using it. The legislative intent behind this exemption clause is that a rented property, which is used as a residence, should not suffer 18% GST or IGST. However, if Entry 13 is given such a narrow interpretation, then exemption will not be available in cases where a lessee has subleased the property for use as a residence.

The Hon’ble Court further held that the exemption envisaged under Entry 13 is an activity-specific exemption and not a person-specific exemption. Hence, in the present matter, the ultimate use of the property remained unchanged. In other words, it remained as ‘use for residence’ by students/working women. However, if GST is levied on this transaction between the assessee and the lessee, the same will be passed on to the students and working professionals, which would ultimately lead to a situation where the legislative intent behind granting exemption for residential use is defeated.

The Hon’ble Court also referred to the Explanation added to Entry 13 w.e.f. 01.01.2023 to hold that even if the rent is paid by a registered person, the exemption will be available if it is used for the purpose of one’s own residence and is rented in one’s personal capacity. Therefore, the intention from the beginning was to ensure that rental agreements for use of the property for residential purposes are granted exemption from GST. Accordingly, the Hon’ble Court declined to interfere with the judgment of the High Court and dismissed the appeal of the department.

II HIGH COURT

83. (2025) 35 Centax 55 (Del.) Puneet Batra vs. Union of India dated 09.09.2025

Computers seized from an advocate’s office cannot be accessed by GST authorities without his presence and consent, as such access would violate attorney–client privilege and confidentiality

FACTS

Petitioner, an advocate associated with M/s. Bass Legal LLP, had provided tax and legal services to an entity namely M/s. Martkarma Technology Pvt. Ltd. (‘Martkarma’). After the Respondent conducted a search at the premises of Martkarma, the petitioner was unable to communicate with the said entity and as a result, withdrew the power of attorney held in respect thereof. Thereafter, the Respondent issued four summons to the petitioner, pursuant to which the petitioner ultimately appeared in person upon issuance of the fourth summons for recording of his statement. Subsequently, the Respondent conducted a search at the petitioner’s office under section 67 of the Central Goods and Services Tax Act, 2017,
during which documents and a CPU containing extensive professional data were seized. The search was carried out in the absence of the petitioner, though a partner of the firm was present, and photographic material indicates that the Respondent accessed the computer system during the operation.
Aggrieved by the seizure of the CPU and the risk posed to the confidentiality of information relating to unrelated clients stored therein, the petitioner approached the Hon’ble High Court seeking appropriate relief.

HELD

The Hon’ble High Court held that Respondent cannot open or access a computer seized from a petitioner’s office without the petitioner’s presence and consent. Such access would violate confidentiality and attorney–client privilege. The Court allowed examination of the CPU only under strict safeguards, including presence of the petitioner, lawyers/forensic experts and senior IT officials, cloning of the hard drive with a copy to the advocate, limited access to client-specific data, sealing of the CPU thereafter and restraint on any coercive action against the petitioner.

84. (2025) 36 Centax 132 (Chhattisgarh) Golden Cargo Movers vs State of Chhattisgarh dated 15.10.2025

A GST demand order cannot exceed the amount proposed in the SCN or impose penalty without notice, failing which the order and consequential recovery actions are liable to be quashed under section 75(7) of the CGST Act

FACTS

Petitioner, a GST-registered service provider, filed its annual return for F.Y. 2018–19 classifying its services as goods transport services and claiming exemption from GST. Upon scrutiny, Respondent alleged that the services were in fact classifiable as supporting services in transport, taxable at 18% and accordingly issued a SCN in Form DRC-01 under section 73 proposing tax and interest of ₹1.32 crore. As the petitioner did not pay the proposed amount, the respondent passed a final order in Form DRC-07 determining a higher liability of about ₹5 crores, including penalty and initiated recovery proceedings by attaching the petitioner’s bank account and immovable property. Aggrieved by the final demand exceeding the amount proposed in the SCN and inclusion of penalty without notice, the petitioner approached the Hon’ble High Court.

HELD

The Hon’ble High Court held that the final order passed under section 73 determining a tax liability higher than the amount proposed in the SCN and including penalty without any proposal in the notice, violated the statutory mandate of section 75(7) of the CGST Act. Consequently, the assessment order in Form DRC-07 and the consequential attachment of the petitioner’s bank account and immovable property were quashed, with liberty granted to the department to initiate fresh proceedings in accordance with law after giving due opportunity of hearing.

85. (2025) 36 Centax 213 (Mad.) A.S.R. Constructions vs. State Tax Officer dated 28.10.2025

Interest on delayed GST payment should be computed only from the due dates of the specified returns to the actual payment date in the electronic ledger

FACTS

Petitioner was issued a SCN proposing levy of interest on alleged delayed payment of outward tax liability reflected in GSTR-9 for the period April 2021 to March 2022. Although the petitioner had already discharged the entire tax liability by debiting the electronic ledger on 19.12.2022, which was prior to issuance of the SCN, the respondent nevertheless computed and confirmed interest by treating the tax as unpaid even beyond the said date. Aggrieved, the petitioner approached the Hon’ble High Court.

HELD

The Hon’ble High Court held that interest on delayed payment of GST can be levied only for the period during which the tax actually remained unpaid, i.e., from the statutory due dates for payment under section 39 (GSTR-3B) up to the date of actual debit in the electronic ledger. Since the petitioner had discharged the entire tax liability on 19.12.2022, interest could not be charged beyond that date merely because the liability was disclosed later in GSTR-9 or noticed in the show cause notice. Accordingly, the matter was remanded to the respondent for fresh computation of interest.

86. (2025) 34 Centax 375 (Mad.) K.S Traders vs. Deputy Commercial Tax Officer (Int), Virudhunagar dated 26.8.2025.

Minor mismatches between e-invoice and e-way bill dispatch details do not justify detention or penalty under GST if tax obligations are otherwise complied with.

FACTS

Petitioner an importer of timber, dispatched a consignment to a customer in Vilathikulam, Thoothukudi District, raising an e-invoice on 23-06-2025 from its registered premises at Shencottah. The following day, an e-way bill was generated for the same consignment, but it listed the place of dispatch as Tuticorin instead of Shencottah, creating a mismatch between the e-invoice and e-way bill. On this ground, the consignment was intercepted and seized by the respondent. Petitioner paid the tax and penalty as recorded in the release order and challenged the detention and penalty before the Hon’ble High Court.

HELD

The Hon’ble High Court held that the minor discrepancy between the place of dispatch mentioned in the e-invoice and the e-way bill did not justify interception, detention or penalty under section 129 of the GST Act. The Court observed that the petitioner had complied with tax obligations and the mismatch was a technical, venial error due to differences in office and dispatch locations. Following the precedent in Jindal Pipes Ltd. vs. Deputy State Tax Officer (Int) — (2024) 21 Centax 361 (Mad.), the Court allowed the writ petition, directing that the amount paid by the petitioner be credited to the electronic cash ledger for adjustment against future tax liability.

87. (2025) 35 Centax 280 (A.P.) TUF Metallurgical Pvt. Ltd. vs Union of India dated 18.09.2025.

Export duty cannot be levied on supply of goods from DTA to SEZ in the absence of an express charging provision in the SEZ Act, and any rule imposing such duty is ultra vires.

FACTS

The Petitioner, a unit located in the Special Economic Zone (SEZ), was engaged in manufacturing Low Carbon Ferro Chrome entirely for export and procured its primary raw material (Chrome Concentrate) from mines situated in Odisha within the Domestic Tariff Area (DTA). Petitioner sought permission from the Respondent to procure such raw material from the DTA without payment of export duty. Respondent rejected the request by invoking the 5th proviso to Rule 27(1) of the Special Economic Zones Rules, 2006, which mandates levy of export duty on supplies from DTA to SEZ where such duty is leviable. Aggrieved, the petitioner filed a writ petition before the Hon’ble High Court challenging both the rejection order and the constitutional validity of the said proviso.

HELD

The Hon’ble High Court held that export duty cannot be charged on supply of goods from DTA to SEZ units because the SEZ Act, 2005 does not authorize such levy. Section 55 only allows the Government to make rules for granting exemptions and not to impose duties. The Court observed that while section 30 of the SEZ Act clearly provides for customs duty when goods move from SEZ to DTA, there is no similar provision for supplies from DTA to SEZ, and the earlier provision under section 76F of the Customs Act enabling such levy had been consciously omitted. Therefore, the 5th proviso to Rule 27(1) of the SEZ Rules, 2006, which imposed export duty on DTA to SEZ supplies, was held to be beyond the law and was struck down by the Hon’ble High Court.

88. (2025) 36 Centax 200 (Ori.) Swastik Marketing vs. Chief Commissioner of CT and GST dated 25.09.2025.

No coercive recovery can be initiated against an assessee when the GST Appellate Tribunal is not constituted.

FACTS

Petitioner was issued an order dated 02.01.2025 under section 130 read with section 122 of the CGST Act demanding fine and penalty on the allegation of sale of goods without issuing tax invoices. Notably, the said order itself directed the petitioner to appear and show cause on or before 01.02.2025. Despite granting the petitioner time to appear and show cause, the respondent had already passed a final demand order. The petitioner’s statutory appeal was subsequently dismissed by the respondent solely on the ground of delay, without considering the reasons for such delay or the merits of the case. As the GST Appellate Tribunal under section 109 had not yet been constituted, the petitioner approached the Hon’ble High Court by filing a writ petition seeking protection against coercive recovery of the demand.

HELD

The Hon’ble High Court held that since the GST Appellate Tribunal under section 109 of the CGST Act had not yet been constituted, the petitioner could not be compelled to pursue the statutory appellate remedy and therefore no coercive action could be taken for recovery of the demand. The Court further noted that a final demand order had been passed on 02.01.2025 despite the respondent itself granting time to the petitioner to appear and show cause up to 01.02.2025, which prima facie vitiated the proceedings. In these circumstances,
the Court directed that no coercive steps be taken against the petitioner in respect of the impugned demand.

89. (2025) 36 Centax 226 (All.) Archana Plasmould vs. State of U.P. dated 10.11.2025

Penalty under section 129(3) of the CGST Act cannot be imposed merely for non-generation of Part-B of the e-way bill when goods are accompanied by valid documents and there is no intention to evade tax.

FACTS

Petitioner was transporting goods which were intercepted and detained during transit solely on the ground that Part-B of the e-way bill had not been generated. At the time of interception, the goods were accompanied by valid tax invoices and all other requisite documents and there was no discrepancy in the description, quantity or value of the goods. The petitioner consistently explained that Part-B of the e-way bill could not be filled due to an undisputed technical glitch and that there was no intention to evade payment of tax. Despite this, the Respondent imposed a penalty under section 129(3) of the CGST Act, which was subsequently affirmed in appeal by the Respondent. Being aggrieved, the petitioner approached the Hon’ble High Court challenging the detention and penalty proceedings.

HELD

The Hon’ble High Court held that mere non-filling of Part-B of the e-way bill, when accompanied by valid tax invoices and other requisite documents, does not by itself justify detention or imposition of penalty under section 129(3) of the CGST Act. The petitioner’s explanation that Part-B of the e-way bill could not be generated due to a technical glitch remained undisputed. Further, since the respondent recorded no finding of any intention to evade payment of tax, the essential ingredient of mens rea was absent. Accordingly, the penalty and detention orders were held to be unsustainable in law, quashed by the Court, and the writ petition was allowed with a direction to refund the amount deposited.

90. [2025] 181 taxmann.com 390 (Punjab & Haryana) Laxmi Metal and Machines vs. Union of India dated 28.11.2025.

For calculating the period of limitation, the day on which the order is communicated/served is to be excluded and the period of 3 months will be counted from the immediate next day.

FACTS

Petitioner is a partnership firm engaged in the business of trading in used imported machinery. Petitioner filed a refund application in Form RFD-01 on 09.11.2023 seeking a refund of the amount paid under protest. Proper Officer rejected the refund claim vide Order-in-Original dated 24.01.2024, and the same was communicated to the appellant on 01.02.2024. Petitioner filed an appeal on 01.06.2024 before the Appellate Authority. Appellate Authority rejected the appeal filed by the appellant on the grounds that the said appeal is time-barred.

HELD

The Hon’ble High Court, relying upon the decision in the case of Pramod Kumar Tomar vs. Asst. Commissioner Mundka Division Delhi West [2024] 162 taxmann.com 335/104 GST 222/86 GSTL 411 (Delhi), held that the First Appellate Authority erred in computing limitation, as the day on which the order was passed or communicated had to be treated as Day Zero. The Court further held that the assessee was entitled to a one-month extended period under the statute. Accordingly, it held that in the given factual matrix, an appeal was filed within the period of limitation, i.e. on 01.06.2024.

91. [2025] 181 taxmann.com 487 (Allahabad) Saniya Traders vs. Additional Commissioner Grade-2 dated 03.12.2025.

Cancellation of GST registration subsequent to the transaction cannot be the ground for disallowing the ITC under section 74 of the CGST Act, especially where goods are purchased, and full payment is made through banking channels and the transaction is reported in GST returns by the supplier and tax is also paid.

FACTS

The petitioner is a registered dealer engaged in the business of supplying scrap and waste. The petitioner purchased old scrap batteries from a supplier who, in turn, issued a tax invoice and also an E-way bill. The said sale is duly reflected in GSTR No. 1 of the supplier. The petitioner also discharged its tax liability while making payment to the supplier. The said transaction has duly been shown in the GSTR returns. The seller has also paid tax as per section 49 of the Act. All payments were made to the supplier, including IGST, through the banking channel.

An inspection was conducted by the Central Investigation Bureau and it was alleged that 42 suppliers located in Uttar Pradesh were engaged in fictitious invoices without actual movement of goods. On the said basis, the purchases declared by the petitioner were treated as purchases from a non-existing supply firm. Further, an allegation was made that no trading activity was found at the place of such supply. Accordingly, the order was passed under section 74, reversing the input tax credit along with interest and a 100% penalty and an appeal filed against the said order also came to be dismissed. Aggrieved by the same, the petitioner came before the Hon’ble Court.

HELD

The Hon’ble Court observed that the petitioner has shown its purchases from a registered dealer, who was registered at the time of the transaction. The seller has filed its return till 2021, both GSTR-1 and GSTR-3B, but for the supply made to the petitioner, payment of tax was made and deposited with the department. Further, the petitioner made the payment through the banking channel. The Hon’ble Court observed that it is nobody’s case that at the time of the transaction, the petitioner and its supplier were not registered, but on subsequent dates to the transaction, the registration of the supplier was cancelled. The Court further observed that although under the GST Act, the authorities are empowered to cancel the registration from the date of inception, i.e. the date of registration, but in the present case, the authorities, in their wisdom, have cancelled the registration of the seller on a subsequent date, i.e. after the date of the transaction. In these circumstances, the Hon’ble Court held that the proceedings under section 74 of the GST Act cannot be initiated against the dealer as the case in hand is not that of ITC wrongly availed or utilised by reason of fraud or wilful wrong statement of facts or by means of fraud and upon adjudication. Relying upon the Apex Court decision in the case of Commissioner of Trade and Tax, Delhi vs. Shanti Kiran India (P.) Ltd [2025] 179 taxmann.com 665 (SC), (2025) 35 Centax 222 (SC) (refer above Supreme Court), the Hon’ble Court held that on the date of the transaction, the selling dealer was registered. Neither the transaction nor the invoice in question can be doubted, and hence, the ITC should have been granted. Accordingly, the impugned order was quashed.

92. [2025] 181 taxmann.com 92 (Allahabad) Chaurasiya Zarda Bhandar vs. State of U.P dated 19.11.2025.

Interest and Penalty cannot be demanded in the order, if the same is not proposed in the show cause notice, as the same will be beyond the scope of the notice.

FACTS

A show cause notice was issued to the petitioner, wherein, for the financial year 2019-20, a tax liability was shown against the petitioner and he was required to show cause as to why the same may not be recovered. There was no proposal to impose any interest or penalty. The petitioner has referred to section 75(7) to indicate that the amount of tax, interest and penalty demanded in the order shall not be in excess of the tax determined by the proper officer and no demand shall be confirmed on the ground other than the grounds specified in the notice.

HELD

Since SCN contained no proposal for interest or penalty, imposition thereof in the impugned order was contrary to the statutory mandate that demand shall not travel beyond SCN. The impugned assessment and demand order was arbitrary and unsustainable and therefore was quashed.

इष्टम् धर्मेण योजयेत् !

The two verses discussed in this article are adopted from ‘Samayochit Padyamalika’ – Collection of appropriate verses. They are also there in Panchatantra. It gives a message that whatever we desire and we wish to achieve should be secured in a righteous way. It is to be noted that the word ‘Dharma’ in Sanskrit scriptures is used in the sense of ‘duty’, ‘proper conduct’ and not in the sense of ‘religion ‘(way of worship, etc.) as we understand today. So it is not used in the sense of a community or sect.

सत्कुले योजयेत्कन्यां पुत्रम् विद्यासु योजयेत् !

व्यसने योजयेच्छत्रुमिष्टं धर्मेण योजयेत् !!

Literal meaning of first shloka –

One should get one’s daughter married into a family of high morals, good culture, etc. (Elite family). One should get one’s son connected to ‘studies’ ‘learning’ (vidyabhyas). One should get one’s enemy connected to some calamity (put an enemy into a difficulty); and thus, one should achieve one’s desired object in a manner acceptable to the Dharma.

उत्तमं प्रणिपातेन शूरं भेदेन योजयेत् !

नीचमल्पप्रदानेन इष्टम् धर्मेण योजयेत् !!

Literal meaning of second shloka –

One should make friends with a superior or powerful person by bowing before him politely (by giving respect). One should win a brave person’s heart by the strategy of ‘divide and rule’. (That’s what Britishers did in India by creating divisions among Indian people. Shivaji Maharaj also adopted that strategy while fighting against five Mughal kingdoms). One should get a lower category person on one’s side by paying him something. Thus, one should secure the desired object by following the principles of Dharma.

In Panchatantra, four Brahmanas acquired theoretical knowledge without understanding its proper application. They interpreted the ‘shastras’ in a weird manner. They took certain principles ‘literally’ without understanding the spirit behind them. Once they saw a donkey sitting in a cemetery. They remembered the principle that a true friend is the one who accompanies you everywhere – to the king’s palace or to the cemetery (राजद्वारे श्मशाने च). They treated the donkey as their friend. Then they saw a camel running very speedily. They remembered that Dharma also should move ‘swiftly’. So they tied the donkey to the camel! They became a laughing stock in the society.

In today’s times, in the international politics ‘there is a principle that there are no permanent friends nor permanent foes; there are only permanent interests’.

Likewise, in our personal life also, we should protect our interests; in a right or proper manner. We should not resort to undesirable or immoral means. Today, India has been able to procure many things for our country from those nations who may be enemies of each other! We are trying to win friendship with all the nations by appropriate strategies which are proper and not crooked.

Similarly, with our enemies, we may try to put them into difficulties like internal quarrels, splits, etc. The Government is also trying to provide good facilities of learning and opportunities to progress for our youth. The Government also is trying to provide better security, support, facilities and opportunities for women. We are smoothening our relations with super-powers; and offer help to smaller countries.

In short, इष्टम् धर्मेण योजयेत्!

Miscellanea

1. ECONOMIC & MARKETS

# Spare parts are quietly reshaping the Luxury Automotive Economy

Luxury automakers are increasingly relying on proprietary engineering, making verified spare parts crucial for maintaining performance and asset value. Unlike mainstream vehicles, luxury cars require brand-specific components to ensure optimal functioning, as even minor deviations can lead to significant technical risks. Platforms like SparesUSA have emerged to provide access to vetted parts, addressing the growing demand for factory-authenticated components.

The distinction between luxury and mainstream vehicles lies in their manufacturing processes, where luxury cars are integrated systems that require precise specifications. As traditional dealership networks lose their exclusivity, specialized platforms are becoming essential for sourcing the right parts globally. This shift has transformed the aftermarket, making access to verified components a necessity for preserving the integrity and performance of high-end vehicles.

(Source: International Business Times – By Karcy Noonan – 18 December 2025)

2. WORLD – SCIENCE

# Neutron Star Explained: How Collapsed Stars Become the Universe’s Densest Stellar Remnants

Neutron stars, formed from the remnants of massive stars after supernova explosions, are among the universe’s most extreme objects. When stars between eight and twenty times the Sun’s mass exhaust their nuclear fuel, gravity causes their cores to collapse, creating neutron stars that can contain more mass than the Sun within a city-sized volume.

These stars exhibit incredible densities, where protons and electrons merge into neutrons, creating neutron degeneracy pressure that prevents further collapse into black holes. Neutron stars have distinct internal structures, including a thin outer crust and a superfluid core, and are limited by the Tolman–Oppenheimer–Volkoff mass boundary, beyond which they collapse into black holes.
Neutron stars conserve angular momentum, leading to rapid rotation, with some pulsars spinning hundreds of times per second. Magnetars, a rare type of neutron star, possess intense magnetic fields that can cause starquakes and gamma-ray bursts.
Gravitational wave detections, such as GW170817, have linked neutron star mergers to the creation of heavy elements and refined our understanding of their properties.

As they cool over time, neutron stars emit neutrinos and later photons, allowing astronomers to study their ages and internal behaviours. Neutron stars play a crucial role in galactic chemistry by ejecting neutron-rich material during mergers, contributing to the formation of heavy elements essential for life. Overall, neutron stars serve as natural laboratories for exploring fundamental physics under extreme conditions.

(Source: International Business Times – By Glanze Patrick – 24 December 2025)

3. BUSINESS

# Top Global Energy Players Assemble at Wison Technology Seminar 2025

Over 250 decision-makers, technical experts, and industry partners from the global energy sector gathered at the Wison Technology Seminar 2025, held from December 2-4 2025 in Shanghai.
This event highlighted Wison’s leadership in sustainable energy technology and focused on topics such as the energy transition, floating wind, green hydrogen, carbon capture, and Power-to-X technologies.

This year’s seminar was larger and more diverse than the inaugural event, fostering connections among companies, technology partners, and asset owners. Featuring 56 speakers, the seminar included keynotes and panel discussions on policy frameworks, the global energy mix, net-zero targets, and technological innovation.

Wison signed strategic agreements with international partners, including ABB, Emerson, Schneider Electric, and Inprocess, to advance low-carbon technologies and system integration. The partnership with Inprocess will enhance Wison’s digitalisation efforts, incorporating technologies that support the design of floating liquefied natural gas (FLNG) and floating production, storage, and offloading (FPSO) vessels.

Participants also visited Wison’s Nantong shipyard to see the fabrication of FLNG vessels. Damien Nguyen, CTO of Wison New Energies, and Hengwei Liu, CTO of Wison Engineering, emphasized the importance of decarbonization, standardization, and digitalisation in energy systems, calling for improved collaboration and risk mitigation across the value chain.

Overall, the seminar served as a platform for exchanging ideas and identifying real-world use cases and collaboration opportunities.

(Source: International Business Times – Created By Matthew Edwards – 23 December 2025)

Revelation

Harshadbhai was in a jolly mood today. It was 28th of September, his birthday. He and his wife Priyanka were out on a stroll.

They met Pareshbhai with his wife Aparna. Pareshbhai also was in a celebration mood. It was their wedding anniversary.

Both Harshad and Paresh always used to complain that due to tax deadline of 30th September, they were never in a position to enjoy the birthday or anniversary. Today, the main reason of their good mood was the extension of time allowed by the Finance Minister! It was like a big Birthday Gift to both of them! Both were obviously chartered accountants and their pleasure was contained in small things like the hearing is adjourned, stay is granted in the client’s recovery proceedings, a client has agreed to pay a small fee next month, a ‘bad’ revenue officer has been transferred elsewhere; and so on!

They were close friends and they entered ‘Khau Galli ((Lane of eateries). There were many decorated and illuminated stalls. Chat, Bhelpuri, ragada pattice, pani-puri, vada, samosa, dhokla, farsan, South Indian dishes, sandwiches, tea, coffee, juices, ice creams so on and so forth. All mouth-watering dishes!

They tasted the dishes one by one, driven by the choices of their wives. While eating, the topic of chatting between Harshad and Paresh as usual was the CA practice.

Priyanka and Aparna were discussing about new sari, new dress, children’s schools, hobby class, tuitions, etc. etc. One common complaint was Harshad and Paresh both sit late in office, they don’t look after anything in the house, they don’t take the family for outing, no movie, no enjoyment!

Harshad and Paresh were cursing the practice with usual complaints like careless clients,complicated laws and regulations, corrupt departments, inefficient colleagues no staff, no articles, late sitting, no income but increasing expenses, clients’ expectations and the like. Both agreed that the practice had lost its charm and they cursed their fate.

The owners of the shops were all enjoying counting money at the counter! Harshad and Paresh envied them.

Finally, they sat in the ice cream parlour. Their chat was continuing. They concluded that rather than practice, they should have entered into this ‘food’ business. The owner of the shop was familiar. He overheard their grievance about the profession. He came to their table and mentioned the new variety of ice cream that had recently come into the market. He enquired whether they both were CAs; and he smiled. They also opened up and said they should have been in this business, rather than in practice! They were further shocked to learn that all the owners stayed in an elite colony where there were 3 to 4 cars in each family.

To their great surprise, he refused to accept the payment of the bill. He said it was complimentary from him to mark their anniversaries! They thanked him whole-heartedly. Ladies also were pleased.

At the time of parting, the owner revealed a secret – Sir, all the owners of these stall including the pan-wala were earlier practising as chartered accountants.

Transmission Of Securities

Transmission of securities occurs by operation of law upon a shareholder’s death, distinct from voluntary inter vivos transfers,. While nominees provide immediate administrative continuity, they act only as trustees; beneficial ownership remains governed by succession laws or Wills,. For transmission, companies require death certificates and legal evidence like probates or succession certificates, especially during disputes,. SEBI’s new “TLH” code (effective 2026) streamlines tax reporting for transfers from nominees to heirs,. To bypass complex probate processes, many individuals utilize private family trusts, removing assets from their personal estate during their lifetime.

INTRODUCTION

Securities have become the most valuable asset for many individuals. This is all the more true for promoters of listed companies. In such a scenario, when a shareholder dies, the transmission of the securities held by him in an effective and efficient manner becomes very vital. While the law in this respect is a mix of Legislation and Decisions, the practical aspects have issues at times. Let us examine the position with respect to the transmission of securities when a shareholder dies.

TESTATE OR INTESTATE SUCCESSION?

Depending upon whether the individual shareholder who dies left behind a valid Will, or not, the transmission would be testamentary (under a Will) or intestate (under the relevant succession law). In case of intestate succession, the law applicable would be the Hindu Succession Act, 1956 or the Indian Succession Act, 1925 of Portuguese Civil Code or the Uniform Civil Code (only where applicable) or the Shariah Law, depending upon the faith professed by the deceased.

LAW ON TRANSMISSION OF SHARES

A decision of the Gauhati High Court in Hemendra Prasad Barooah vs. Bahadur Tea Co. (P.) Ltd. [1991] 70 Comp Case 792 (Gauhati) has explained the meaning of transmission of shares. The word ‘transfer’ was an act of the parties or of the law, by which title to property was conveyed from one person to another. Inter vivos transfer was a transfer from one living person to another. It was a transfer of property during the lifetime of the owner and it was to be distinguished from succession where the property passed on death. Under section 211 of the Indian Succession Act, 1925, the executor of a deceased person was the legal representative for all purposes, and all the property of the deceased person vested in him as such. The word ‘transmission’ had been used in the Companies Act in contradistinction to the word ‘transfer’. ‘Transmission’ was referable to devolution of title by operation of law. It may be by succession or by testamentary transfer. As regards ‘transfer’, it had been used to mean inter vivos transfer. The executor of a deceased person was his legal representative for all purposes, and all the property of the deceased vested in him as such. Therefore, the right to the shares or other interest of the deceased member in the company devolved on the executor of the deceased by operation of law as distinguished from inter vivos transfer. But the executors did not become members of the company unless their names were registered. In such a situation, on death, the right of deceased to the shares or other interest as a member in the company devolved on executors as they are the legal representatives of the deceased. The right to the shares or other interest in the company, of the deceased member, passed or transmitted to the executors.

S.44 of the Companies Act, 2013 states that the shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the Articles of the company. The NCLAT Chennai Bench has explained the procedure for transmission of shares in its decision in the case of Emaar Hills Township Pvt. Ltd. vs. Telangana State Industrial Infrastructure Corporation, (2022) ibclaw.in 992 NCLAT.

In respect of `Transfer of Securities’, there are two parties to the `Contract’, i.e., Transferor and Transferee. Such a transfer is like any other `commercial transaction’. However, in the case of `Transmission of Shares’, there is no `Transferor’ or `Transferee’, as `Shares’ vests in favour of a `Person’, by an `Operation of Law’, like that of an `inheritance’ of `property’. Where `Transmission of Shares’ takes place, by an `operation of law’, there is no further requirement, to be carried out, like executing an `instrument of Transfer’ and `Company Law Register’; the `Securities’ on receipt of intimation of `Transmission’, in favour of a `Person’, to whom the `Shares’ are `transmitted’. Moreover, when `Title’ to the `Shares’, came to `Vest’ in another `Person’, by an `Operation of Law’, it was not essential to submit a Transfer Form.

A decision of the NCLAT, Chennai Bench in Avanti Metals Pvt. Ltd. vs. Alkesh Gupta, [2024] 158 taxmann.com 650 (NCLAT – Chennai) has succinctly summarised the law with respect to transmission of securities. The NLCAT analysed s.44 of the Companies Act and held that when s.44 of the Act provided that shares of any member in a Company were required to be transferred in the mode and manner provided for under the Articles of Association of the Company, the prescribed requirements were bound to be followed. In this case, the Articles required the production of a valid succession certificate. The NCLAT held that production of a succession certificate was a necessary requirement for transmission and since there was a dispute as to heirship of the deceased shareholder, the Company was within its right to refuse transfer of shares, until such succession dispute was resolved by a Competent Court of Law. It held that a Company cannot refuse `Transmission of Shares’, once the `legal heirs’ proved his/her entitlement to them, through a `Probate’, a `Succession Certificate’. It was pointed out that `transfer’ was an act of parties or law by which the title to the party was conveyed from one person to another. This would lapse by `Operation of Law’ or `Succession’. `Transmission of Shares’ on the basis of `Will’ could raise complicated issues which required an `evidence’, to be read by the parties and need to be determined by a Court of Law. It further held that a Will probated by a `Competent Court’ was binding on the parties, unless it is set aside by a `Competent Forum’. If the `Probate Proceedings’ were pending in a `Civil Court’, then the `Petition’ under the `Companies Act’ for `rectification of register’ would not be maintainable. Where there was a dispute as to the heirship of a `deceased shareholder’, the Company could refuse `transfer of shares’, until such dispute was resolved by a `Competent Court of Law’.

It relied upon the decision in the case of Thenappa Chettiar vs. Indian Overseas Bank Ltd. [1943] 13 Comp Case 202 (Madras) which held that a succession certificate can be granted, not merely in respect of a debt but also in respect of a security, which was defined in the Indian Succession Act to include a share in a company. The application for a certificate had to set out the right which the petitioner claimed and also the debts and securities in respect of which it was applied for. The grant of the certificate, specifying the debts and the securities, empowered the person to whom it was granted, not merely to receive the interest or the dividends on the securities, but also to negotiate or transfer them. The grant of a certificate gives to the grantee a good title to recover the debt or the security and affords full indemnity to all persons dealing with him. The High Court also held that transfer and transmission were quite distinct from each other. The former was based upon an act of parties; the latter was the result of the operation of law. In the case of a transmission of shares, they continued to be subject to the original liabilities, and if there was any lien on the shares for any sums due, the lien would subsist, notwithstanding the devolution of the shares.

The Supreme Court in Aruna Oswal vs. Pankaj Oswal [2020] 221 Comp Case 374 (SC) has held that a dispute as to inheritance of shares was eminently a civil dispute which could not be decided in proceedings of oppression and mismanagement.

ARTICLES OF ASSOCIATION

The Articles of Association of a Company generally provides for the procedure that a company will adopt in respect of an application made for transmission of shares. The Companies Act, 2013 Table F provides for the model form of the Articles. Regulation 23 states that on the death of a member, the survivor or survivors where the member was a joint holder, and his nominee or nominees or legal representatives where he was a sole holder, shall be the only persons recognised by the company as having any title to his interest in the shares.

It further states that any person becoming entitled to shares in consequence of the death of a member may, upon such evidence being produced as may from time to time properly be required by the Board of Directors and subject as hereinafter provided, elect, either
(a) to be registered himself as holder of the share; or
(b) to make such transfer of the share as the deceased member could have made

Moreover, the Board of Directors shall have the same right to decline or suspend registration as it would have had, if the deceased member had transferred the share before his death.

JOINT OR SINGLE HOLDING?

Since most shares and securities are held in a dematerialised form, the transmission needs to be seen with the Demat Account. The hierarchy in a demat account is that on demise of a joint holder the 2nd holder would become the account holder and on the demise of both the holders, the nominee, if any, would become the account holder.

In case of a single holder in a demat account, the nominee, if any, would become the account holder.

However, it should be remembered that the joint holder and the nominee would only be the legal owner and not the beneficial owner of the account. In this respect the decision of the Supreme Court in Shakti Yezdani vs. Jayanand Jayant Salgaonkar, 2024 (4) SCC 642 has settled the issue once and for all. The issue of whether a nomination overrides a Will in respect of securities and demat accounts had been a contentious issue for long. The Supreme Court analysed various Supreme Court decisions in case of bank accounts, insurance policies, PPF, etc., which had held that a Will overrides a nomination. It then analysed the provisions of the Companies Act and the Depositories Act, 1996 and held that the same legal principle even applies in the case of securities and a demat account. The vesting of the shares/securities in the nominee under the Companies Act, 1956 and the Depositories Act, 1996 was only for a limited purpose, i.e., to enable the Company to deal with the securities thereof, in the immediate aftermath of the shareholder’s death and to avoid uncertainty as to the holder of the securities, which could hamper the smooth functioning of the affairs of the company. The Court rejected the argument that the intention of the shareholder was to bequeath the shares/securities absolutely to the nominee, to the exclusion of any other persons (including legal representatives) and hence, constituted a ‘statutory testament. The Court held that this was because the Companies Act did not deal with succession, nor did it override the laws of succession. It was beyond the scope of the company’s affairs to facilitate the succession planning of the shareholder. In case of a Will, it was upon the administrator or executor under the Indian Succession Act, 1925, or in case of intestate succession, the laws of succession to determine the line of succession. Ultimately, it concluded that the nomination process did not override the succession laws. Simply said, there was no third mode of succession that the scheme of the Companies Act, 1956 (pari materia provisions in Companies Act, 2013) and the Depositories Act, 1996 aimed or intended to provide!

SEBI LODR PROVISIONS

The SEBI (LODR) Regulations, 2015 also provide for the procedure of transmission of shares in the case of a listed company. R.40 provides that the listed entity shall comply with all procedural requirements as specified in Schedule VII to the Regulations with respect to transmission of securities. Further, transmission of securities held in physical or dematerialised form shall be effected only in dematerialised form. The key requirements specified in the Regulations are as follows:

(1) In case of transmission of securities, where the securities are held in single name with nomination, the following documents shall be submitted:

(a) duly signed transmission request form by the nominee;
(b) death certificate;
(c) PAN of the nominee

(2) In case of transmission of securities, where the securities are held in single name without nomination, the following documents shall be submitted:

(a) a notarized affidavit from all legal heir(s) to the effect of identification and claim of legal ownership to the securities. In case the legal heir(s) are named in a Succession Certificate or Probate of Will or Will or Letter of Administration an affidavit from these legal heir(s)/claimant(s) alone shall be sufficient;

(b) duly signed transmission request form by the legal heir(s)/claimant(s);

(c) death certificate

(d) PAN of the legal heir(s)/claimant(s)
(e) a copy of Succession Certificate or Probate of Will or Will or Letter of Administration or Court Decree; Where a copy of Legal Heirship Certificate is submitted, a No Objection Certificate from all non-claimants must also be given

(f) for cases where the value of securities is up to ₹5 lakhs per listed entity in case of securities held in physical mode, and up to ₹15 lakhs per beneficial owner in case of securities held in dematerialized mode, as on date of application, and where the documents mentioned in para (e) are not available, the legal heir(s) /claimant(s) may submit the following documents:

(i) no objection certificate from all legal heir(s) stating that they do not object to such transmission or copy of family settlement deed executed by all the legal heirs; and

(ii) a notarized indemnity bond indemnifying the Share Transfer Agent/ listed entity,

The listed entity may, at its discretion, enhance the value of securities from the threshold limit of ₹5 lakhs, in case of securities held in physical mode.

SEBI’S NEW TLH CODE

In September 2025, SEBI introduced a new reporting code ‘TLH’ to simplify transmission of securities from nominees to legal heirs. It recognises that the nominee acts as a Trustee of the securities of the original security holder and transfers the securities to the legal heir as per succession plan.

As per earlier procedure for effecting such transfers, the nominee, while transferring the securities to legal heir had to effectuate an off-market transfer. This unfortunately in some cases led to the nominee being assessed for capital gains tax as on a transfer. SEBI recognised that while clause (iii) of Section 47 of the Income-tax Act, 1961, exempted such transmission from being considered as a “transfer”, this process caused inconvenience to the nominee.

In order to alleviate this inconvenience, a Working Group (“WG”) was formed. The WG, based on engagement with the CBDT, recommended that to address the issue, reporting entities should use the reason code “TLH” (i.e. Transmission to Legal Heirs), while reporting such transactions to the CBDT.

Accordingly, as a part of ease of doing investment and in order to streamline the process of transmission of securities from nominee to legal heir and resolve the above-mentioned issues related to taxation, SEBI has now specified that a standard reason code viz. “TLH” shall be used by the reporting entities while reporting the transmission of securities from nominee to legal heir, to the CBDT so as to enable proper application of the provisions of the Income Tax Act, 1961. This should be used in Demat Slips executed by the nominee who is transferring shares to the legal heir. SEBI has directed RTAs, Listed Issuers, Depositories and Depository Participants to make necessary system changes and implement this proposal with effect from 1st January 2026.

TRUSTS AS AN ALTERNATIVE SOLUTION

The entire judicial debate explained above over nominee vs beneficial owner, transmission, succession certificates/probates is relevant only in the case of securities held by the deceased in his individual name. Thus, these issues come to the fore when the shares where held by an individual and he/she passes away. However, in case the same are settled on a private family trust then all these problems cease to exist. A transfer to a trust is made during one’s lifetime and the shares then cease to be a part of the settlor’s estate. Accordingly, transmission and succession to these shares is not relevant even after the settlor passes away since they would constitute assets of the trust and not of the estate. In countries levying Estate Duty/Inheritance Tax, gifting assets to a trust could sometimes also help reduce this tax incidence. However, the trusts need to be structured properly after paying due heed to income tax/gift tax and other relevant issues. This has led to promoters of several listed companies parking their promoter holdings in private irrevocable trusts. Some press reports indicate that nearly one-third of all companies listed on the NSE have promoter holding parked in trusts and this number is rapidly increasing.

CONCLUSION

Promoter shares and for that matter shares, in general, form a large component of the estate of many families. If due care and caution is not paid to their succession/inheritance, then these could get locked up in legal tangles and controversies.

India’s New Labour Codes

India’s four Labour Codes—the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions (OSH) Code, 2020—seek to consolidate 29 central labour laws into a unified framework governing wages, industrial relations, social security and workplace safety. The Codes have been passed and notified, but are yet to be brought into force; implementation will follow separate commencement notifications, and recent policy statements indicate an intention to make them fully operational from 1 April 2026, after re-publication and finalisation of rules by the Centre and States.

The reforms introduce several cross cutting features: a uniform definition of “wages” with a 50% cap on specified exclusions; broader definitions of “worker” and “employee”; an inspector cum facilitator regime; digitisation of registers and returns through portals such as Shram Suvidha; and a common licensing framework, particularly relevant for contract labour and inter State migrant work. At the Code specific level, key changes include a statutory floor wage and universalised wage coverage, expanded social security to gig and platform workers funded partly by aggregator contributions, higher thresholds for prior permission on lay off and closure and for standing orders, recognition of a sole negotiating union with 51% membership, rationalised applicability thresholds under the OSH Code, and formal recognition of fixed term employment.

For professionals, three areas deserve immediate attention: restructuring of CTCs and payroll systems around the new wage definition; re assessment of contract labour and outsourcing strategies in light of new thresholds and licensing; and readiness for digital compliance and transitional issues once commencement notifications are issued. The Codes have the potential to ease doing business and extend social protection, but their success will depend on state-level rule-making, administrative capacity, and how stakeholders navigate the trade offs between flexibility and security.

1. INTRODUCTION

For decades, India’s labour law landscape has been characterised by a dense web of central and state statutes, many with overlapping subject matter, conflicting definitions and dated assumptions about the nature of work. Employers have struggled with fragmented compliance and multiple inspections, while a large majority of the workforce, especially in the unorganised and informal sectors, has remained outside effective social security coverage.

The four Labour Codes are designed to move from a purely regulatory mindset to a facilitative, risk-based framework, recognising contemporary forms of work such as platform work and fixed-term employment. All four Codes have received Presidential assent and stand notified in the Gazette, but they will come into force only on dates to be appointed by separate notifications under the respective commencement provisions. Recent ministerial statements and press releases indicate that the government’s present plan is to make the Codes fully operational from 1 April 2026, aligning with the financial year and allowing time to finalise central and state rules.

The principal reason for the delay has been the federal nature of labour as a Concurrent List subject: the Centre must frame rules on matters within its ambit, while States and Union Territories must frame their own rules where empowered. As of late 2025, most States and UTs have pre-published draft rules under some or all of the Codes, but a small number still lag behind, and several jurisdictions are revisiting their drafts in light of stakeholder feedback. This staggered readiness explains why commencement has been repeatedly deferred, despite the Codes having been passed in 2019–2020.

Decoding Indias New Labour Codes A Modern Framework for Work

2. KEY THEMES CUTTING ACROSS ALL CODES

Broader definitions of “worker” and “employee.”

Across the Codes, the definitions of “worker” and “employee” are significantly broader than in many legacy statutes, generally covering persons employed in any industry to do manual, unskilled, skilled, technical, operational, clerical or supervisory work, subject to specified wage ceilings for certain categories. This enlarged coverage is particularly relevant for supervisory and middle management layers that were previously excluded under some laws by virtue of salary thresholds or nature of duties tests.

For advisory and litigation practice, this implies that classification disputes may shift from the question of “workman versus non-workman” to the precise application of statutory exclusions and state-specific rules. Employers will need to revisit designation structures and job descriptions to ensure they align with the new definitions.

Uniform definition of “wages” and the 50% rule

Perhaps the single most consequential reform is the adoption of a uniform definition of “wages” across all four Codes. While details differ slightly between Codes, the core construct is common: wages include basic pay and dearness allowance and specified components, while certain allowances and benefits are expressly excluded; however, if the aggregate value of such exclusions exceeds 50% of total remuneration, the excess is deemed to form part of wages.

This “50% rule” directly affects calculations for provident fund, gratuity, bonus, retrenchment compensation and other wage-linked benefits, substantially limiting the scope to depress contribution-bearing wage elements by inflating allowances. For many Indian CTC structures—traditionally built around a relatively low “basic + DA” portion with multiple allowances—this will translate into higher long-term social security costs, lower immediate take-home for employees, and a need for complete redesign of salary templates.

Inspector cum facilitator and digitisation

All four Codes envisage a shift from the conventional “Inspector Raj” to an inspector cum facilitator model, emphasising guidance and graded enforcement before prosecution in many situations. Inspection schemes are to be computerised and risk based, with provisions for web based scheduling, random selection and online submission of documents.

Digitisation is a central theme: electronic registers, e returns and online licences are encouraged or mandated, with the Shram Suvidha portal and linked systems expected to play a central role in unified filings. While larger enterprises may find this consistent with existing HRIS/ERP practices, smaller establishments will need to build digital competencies and address issues such as data accuracy, security and document retention.

Common licensing and single registration

The Codes introduce a move towards common licensing, particularly for contractors and staffing entities, and single registration for establishments covered by the OSH provisions. Instead of multiple location specific licences under different Acts (for example, separate contract labour licences for individual sites), a single licence may cover multiple establishments, subject to prescribed conditions.

Similarly, the OSH Code enables one registration for an establishment carrying on more than one activity that would previously have required distinct registrations (such as factory, motor transport and contract labour). This is intended to simplify compliance and make growth across locations easier, but also raises the bar for centralised compliance management within organisations.

3. THE CODE ON WAGES, 2019

Consolidation and coverage

The Code on Wages consolidates four key enactments: the Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act and the Equal Remuneration Act. A significant change is that the Code applies to all employees across all sectors for its wage related provisions, moving away from the earlier concept of “scheduled employments” under the Minimum Wages Act.

This universalisation reduces fragmentation and makes it easier to understand wage obligations vis à vis different categories of employees; however, detailed state specific minimum wages and rules will still require careful attention by employers with multi state operations.

National floor wage and minimum wage

The Wage Code introduces a statutory national floor wage to be fixed by the Central Government, taking into account factors such as living standards and geographical differences. States will continue to fix minimum wages for different skill levels and industries, but cannot set them below the notified floor wage.

The distinction between the central floor wage and state minimum wages is important in advisory work, especially when analysing cross border wage disparities and potential relocations of labour intensive activities. The floor wage is intended to reduce extreme regional differentials while allowing states to respond to local cost of living conditions.

Wage definition, overtime and payment modes

Under the Wage Code, the uniform wage definition and 50% cap on exclusions determine the base for overtime, bonus and other wage linked entitlements. Overtime pay must be at least double the normal rate of wages, requiring payroll systems to correctly compute overtime on the statutory wage base, including any deemed additions under the 50% rule.

The Code also rationalises wage periods, prescribes time limits for payment, and clarifies permissible deductions, while facilitating digital payment modes and electronic record keeping. This aligns wage practice with broader financial inclusion and digitisation policies.

Impact on CTC structuring

From a practitioner’s standpoint, the 50% rule is the central driver of CTC impact under the Wage Code. Employers must map each pay component to either the “wage” or “exclusion” bucket, simulate the impact on provident fund, gratuity and other benefits, and consider re balancing fixed and variable pay.

In many cases, the employer’s cost of compliance will rise because contribution-bearing wages will effectively increase, even if the total CTC remains unchanged. Employees may initially perceive a reduction in take-home salary due to higher statutory deductions, but the long-term benefit accrual in PF and gratuity will be more robust. Transparent communication and change management will therefore be critical.

4. THE CODE ON SOCIAL SECURITY, 2020

Consolidation and scheme architecture

The Code on Social Security, 2020 consolidates nine central labour Acts into a single statute. Those Acts are:

  1.  The Employees’ Compensation Act, 1923
  2. The Employees’ State Insurance Act, 1948
  3. The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952
  4. The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1959
  5.  The Maternity Benefit Act, 1961
  6.  The Payment of Gratuity Act, 1972
  7.  The Cine Workers Welfare Fund Act, 1981
  8. The Building and Other Construction Workers’ Welfare Cess Act, 1996
  9. The Unorganised Workers’ Social Security Act, 2008

The Code enables the Central Government to frame schemes for different classes of persons, with institutions such as the National Social Security Board advising on schemes for unorganised, gig and platform workers. The effectiveness of this architecture will ultimately depend on how schemes are designed and funded, and on the capacity of implementing agencies.

Gig and platform workers – registration and aggregator contributions

A path-breaking feature is the explicit recognition of “gig workers” and “platform workers”, who are often engaged as independent contractors and were largely outside traditional social security statutes. The Code contemplates mandatory registration of unorganised, gig and platform workers on a designated portal, typically using Aadhaar-based identity, as a precondition to claim benefits under the relevant schemes.

Aggregators—such as ride-hailing companies, food delivery platforms and similar digital intermediaries—are required to contribute a notified percentage of their annual turnover, within a statutory band, subject to an overall cap as a proportion of the amounts payable to such workers. These contributions, along with government funding and worker co contributions where prescribed, will form the corpus for benefits like accident insurance, health cover and old age support. From a tax and advisory perspective, this will influence pricing, margin structures and the design of platform contracts.

Aadhaar linkage and unorganised sector schemes

The Code provides for Aadhaar based identification in accessing benefits, and in practice Aadhaar linkage is expected to be embedded in registration and claim processes. This can reduce duplication and leakages but may pose inclusion challenges for workers lacking robust documentation or digital literacy, especially in remote areas.

For the unorganised sector more generally, the Code contemplates schemes on health, maternity, disability, old age and other contingencies, to be implemented through existing and new institutions. The key compliance question for employers will be the extent to which they are treated as “aggregators” or “principal employers” under different schemes and rules, especially in complex supply chains.

Gratuity and fixed term employment

The Social Security Code introduces important changes in gratuity eligibility for fixed term employees, aligning it with their actual period of service rather than the earlier five year continuous service requirement. Fixed term employees will be entitled to gratuity on a pro rata basis if they complete one year of service, improving benefit equity compared to permanent workers.

This interacts with the IR Code’s formal recognition of fixed term employment and will influence contract structuring, costing and actuarial valuations. Employers will need to review their gratuity funding policies and consider the volatility introduced by larger numbers of shorter tenure employees becoming eligible for gratuity.

5. THE INDUSTRIAL RELATIONS CODE, 2020

Consolidation and recognition of trade unions

The Industrial Relations Code consolidates the Trade Unions Act, Industrial Employment (Standing Orders) Act and Industrial Disputes Act into a unified regime for trade union registration, standing orders and dispute resolution. One of its most significant changes is the formal recognition framework for negotiating unions.

Where a trade union has at least 51% of workers in an industrial establishment as members, it must be recognised as the sole negotiating union. If no union meets this threshold, a negotiating council is constituted comprising representatives of unions with at least 20% membership, ensuring that collective bargaining is channelled through a defined structure. This reduces multiplicity at the bargaining table but may intensify inter union competition to reach the 51% mark.

Thresholds for lay off, retrenchment and closure

The IR Code raises the threshold at which prior government permission is required for lay off, retrenchment and closure in certain industrial establishments from 100 to 300 workers. Establishments below this threshold may proceed without prior permission, subject to compliance with notice, compensation and other procedural safeguards.
The threshold for mandatory standing orders is also increased from 100 to 300 workers. These changes are aimed at providing mid sized enterprises and MSMEs with greater flexibility to respond to market conditions, but unions view them as weakening job security. In practice, states may exercise their power to further increase the threshold, leading to some jurisdictional variation.

Fixed term employment and unfair labour practices

The IR Code formally recognises fixed term employment, requiring that fixed term employees receive the same wages and benefits as permanent workers doing similar work, including eligibility for gratuity on a pro rata basis under the Social Security Code. This provides a lawful alternative to prolonged contractual arrangements with less clarity on rights and obligations.

The Code also consolidates and clarifies lists of unfair labour practices attributable to employers and workers, modernising the grounds for complaint and enforcement. This will be particularly relevant in adjudication and conciliation proceedings under the new regime.

Regulation of strikes and lock outs

A major change is the extension of the requirement of 14 days’ prior notice for strikes (and lock outs) from public utility services to all industrial establishments. Strikes and lock outs are also prohibited during conciliation proceedings and for prescribed cooling periods thereafter, and an expanded definition of “strike” can cover concerted mass casual leave above a set threshold.

From an employer’s standpoint, these provisions offer greater predictability and time to engage in negotiation or contingency planning. Unions argue that the combination of higher thresholds for retrenchment permissions and tighter strike conditions constrains collective bargaining leverage.

6. THE OCCUPATIONAL SAFETY, HEALTH AND WORKING CONDITIONS CODE, 2020 (OSH CODE, 2020)

Consolidation and applicability thresholds

The OSH Code consolidates 13 enactments relating to occupational safety, health and working conditions, including the Factories Act, Mines Act, Contract Labour Act and others. A key policy objective is to rationalise applicability thresholds, especially for smaller establishments, while maintaining safety oversight in higher-risk environments.

For factories, the threshold is raised to 20 workers where power is used and 40 workers where power is not used, compared with the earlier 10 and 20, respectively. For contract labour, the applicability threshold increases from 20 workers to 50 workers. These changes may relieve very small units from some regulatory burdens, but at the same time call for more robust self-regulation where statutory coverage does apply.

Single registration and duties of employers and workers

The OSH Code provides for single registration for an establishment, covering multiple activities which were previously subject to separate registrations. It also codifies duties of employers, employees and other persons, including obligations relating to safe premises, risk assessments, medical examinations, safety committees and reporting of accidents and dangerous occurrences.

Women are explicitly permitted to work in all establishments, including at night, subject to their consent and compliance with prescribed safety conditions and facilities. This aligns with broader gender equality policies but requires employers to plan carefully for transport, security and workplace design issues for night shift operations.

7. SELECTED COMPARATIVE TABLES

Old–new parameters

Parameter Earlier framework (illustrative) Position under Codes
Wage definition Multiple definitions in EPF, ESI, MW, Bonus. Uniform definition with 50% cap on exclusions.
National floor wage No binding statutory floor; advisory concept. Statutory floor wage by Centre; States’ minima cannot go below.
Lay off/closure permission Prior permission from 100 workmen onwards. Threshold raised to 300 workmen; states may enhance.
Standing orders Applicable from 100 workmen. Applicable from 300 workers.
Contract labour applicability From 20 contract workers. From 50 contract workers under OSH Code.
Gig/platform workers Not recognised. Recognised with aggregator contribution obligations.
Limitations for wage claims Varied/long limitation periods. Harmonised (e.g., three years under the Wage Code).
Inspection model Inspector-driven, often discretionary. Risk-based inspector cum facilitator with e systems.

ILLUSTRATIVE OSH APPLICABILITY THRESHOLDS

Establishment type Earlier threshold OSH Code threshold
Factory (with power) 10 or more workers. 20 or more workers.
Factory (without power) 20 or more workers. 40 or more workers.
Contract labour 20 or more contract workers. 50 or more contract workers.

8. IMPACT AND CRITICAL VIEWPOINTS

Employer and HR perspective

From an employer’s perspective, the Codes simultaneously offer simplification and introduce new cost and capability burdens. On the one hand, higher thresholds for lay off permissions and standing orders, common licensing and digital filings can materially improve ease of doing business, particularly for MSMEs and multi-location enterprises. On the other hand, the 50% wage rule, aggregator contributions for gig workers and expanded gratuity coverage will increase statutory outgo in many cases and demand significant changes to HR, payroll and compliance systems.

Administrative readiness is a further concern: employers will have to navigate overlapping regimes during transition, manage contractual amendments, and align internal policies with central and state rules that may not be perfectly harmonised at the outset. Early years of implementation can be expected to see interpretative disputes and litigation around definitions, thresholds and the interaction between central Codes and state rules.

WORKER AND UNION PERSPECTIVE

Trade unions have welcomed the promise of wider social security coverage but remain sceptical of higher thresholds for prior permission on retrenchment and closure, and of tighter strike notice and prohibition provisions. There is concern that flexibility on fixed term employment, coupled with reduced state control over closures in mid sized units, may encourage increased use of short term contracts and weaken job security.

For workers in the gig and unorganised sectors, the Codes create a statutory framework for social security where none existed earlier, but the real test will lie in the design and funding of schemes, ease of registration and claim processes, and the capacity of institutions to reach highly dispersed and mobile worker populations.

Administrative and system readiness

Regulators face their own readiness challenges: creating interoperable digital systems (such as upgraded Shram Suvidha type platforms), training inspector cum facilitators, issuing clear guidance circulars, and ensuring consistent interpretations across regions. The multilingual publication of rules and the development of user friendly interfaces for small employers and workers will be critical to genuine inclusiveness.

These factors, together with ongoing state level rule making, help explain why commencement has been calibrated and repeatedly deferred, and why a synchronised 1 April 2026 roll out is being projected as the current target.

9. CONCLUSION – READINESS ROADMAP FOR PROFESSIONALS

The four Labour Codes represent one of the most far reaching overhauls of India’s labour regulatory framework since independence, with the potential to simplify compliance, enhance formalisation and extend social security coverage. Whether this potential is realised will depend on the quality and timeliness of rule making, the robustness of digital infrastructure, and how employers, workers and regulators adapt in practice.

For professionals, the immediate action agendabefore the anticipated 1 April 2026 commencement includes:

  • Conducting detailed impact assessments on CTC, PF and gratuity under the new wage definition.
  •  Reviewing contract labour, outsourcing and fixed term employment strategies in light of new thresholds and licensing norms.
  •  Upgrading HR, payroll and compliance systems for digital registers, returns and interaction with central and state portals.
  •  Tracking state wise rule making and tailoring advice and internal policies to jurisdiction specific requirements.
  • Training HR, IR and finance teams on the substantive changes, especially around gig worker contributions, recognition of unions and OSH thresholds.

If these steps are taken proactively, the transition to the new regime can be managed with reduced disruption, allowing businesses to focus on core operations while supporting a more formal, secure and transparent labour market over the next decade.

Selling a Business… But What about the Goodwill?

When a company plans to sell a division but doesn’t yet meet Ind AS 105 “held for sale” criteria, a goodwill impairment dilemma arises. Companies face three options: immediate separation for testing (View 1), waiting until disposal (View 2), or reallocating goodwill only if internal reporting structures have changed (View 3). The authors argue View 3 is most appropriate under Ind AS 36. It ensures goodwill follows how management actually monitors the business rather than future intentions. This prevents premature, irreversible impairments while avoiding the masking of losses within a larger group’s performance.

Companies buy businesses and may merge them with other units, and sometimes decide, ‘This bit no longer fits. Let’s sell it.’ When that happens, an important question pops up: If we’re planning to sell part of the business, what happens to the goodwill attached to it? That question gets especially tricky when the sale is planned but not yet near-enough to be classified as ‘held for sale’ under Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations. Let’s look at a simple case study.

ABC: FUTURE SALE AND GOODWILL ACCOUNTING

ABC Tech is a growing technology company. One of its acquired divisions, DataServe, provides cloud data services and has historically been managed as part of the Digital Services Group, a broader cash-generating unit (CGU) that includes several synergistic service lines. Goodwill from past acquisitions is carried on ABC’s balance sheet and is allocated to the Digital Services Group CGU, which includes DataServe.

Later in the year, ABC’s board formulates a plan to dispose of DataServe in the next 12-18 months as part of a strategic refocus. However, as of the March year-end, this plan is still in its early stages with no binding agreement or active sale process in place yet.

DataServe does not meet the Ind AS 105 criteria to be classified as ‘held for sale’, which require the asset to be available for immediate sale and the sale to be highly probable within one year (Paragraphs 7-8 of Ind AS 105). In other words, the idea is on the table, but the formal held-for-sale threshold (management commitment, active marketing, likely sale within 12 months, etc.) hasn’t been crossed.

This situation puts ABC’s finance team in a tough spot for the year-end impairment review. Normally, they would test the Digital Services Group (which includes DataServe) for goodwill impairment as a whole. But with DataServe potentially on the chopping block, questions arise:

View 1: Should they carve out DataServe as a separate CGU and allocate a portion of goodwill to it for impairment testing now?

View 2: Should they leave everything as-is until the sale becomes more certain or is completed?

View 3: Consider if internal management now views DataServe separately, and therefore reallocate goodwill if the internal reporting structure has in fact changed?

Each approach has implications for financial results and compliance. Let’s explore these three views and the accounting consequences.

THE GOODWILL ALLOCATION DILEMMA

At the heart of the issue is goodwill, that arose when ABC acquired businesses in the past. Goodwill is allocated to CGUs for impairment testing purposes, typically at the level at which management monitors the business (Ind AS 36.80). In ABC’s case, all goodwill from the Digital Services Group’s past acquisitions sits with the combined Digital Services CGU (of which DataServe is part). Under Ind AS 36, Impairment of Assets, goodwill must stick to the lowest level at which management monitoring occurs and cannot be arbitrarily moved around. Accounting standards only allow reallocating goodwill in very limited circumstances, mainly when a portion of the business is disposed of, or when the company reorganises its reporting structure.

So, with a sale on the horizon but not yet a done deal, ABC’s finance team faces a judgment call. The challenge is whether to change the impairment testing approach now by isolating DataServe, or to wait until the sale is imminent or complete or to change the level at which goodwill is internally monitored and carry out reallocation of goodwill on that basis. This decision can significantly affect the timing and amount of any impairment charge.

Recognizing an impairment now by separating DataServe could reflect DataServe’s standalone value perhaps revealing a shortfall if its recoverable amount (higher of fair value less costs to disposal and value in use) is below its carrying value including goodwill. On the other hand, keeping goodwill unallocated to DataServe means any weakness in that unit might be masked by the strength of the larger group, potentially deferring any loss recognition until the sale actually occurs. The risk of a misstep is high, a mistimed impairment could either needlessly dent the current year’s profits or, conversely, delay an inevitable write-down that then hits all at once when DataServe is sold.

The Goodwill Dilemma Accounting for a planned Business Sale

With this context in mind, the authors analyse the three views:

View 1: Immediate CGU Separation (Allocate Goodwill to DataServe Now)

Under this view, ABC would treat DataServe as an independent CGU immediately, even though it does not yet meet the criteria of ‘held for sale’ under Ind AS 105. That means-

  •  the splitting off a portion of goodwill from the Digital Services Group (using a reasonable basis such as relative fair values), and
  •  testing DataServe for impairment, separately at year-end.

To support this view, one may argue that the view reflects economic reality. If DataServe is going to be sold, its value should be tested on a standalone basis now. Early testing may avoid a surprise loss later and ensures transparency if DataServe’s recoverable amount is below its carrying value.

However, this view does not strictly meet the requirements of Ind AS 36, which only allows goodwill to be reallocated when:

(i) an operation is disposed of (Paragraph 86 of Ind AS 36),

(ii) the unit is classified as held for sale (arising from paragraphs 6-8, 15 and 38 of Ind AS 105 read with paragraph 87 of Ind AS 36, or

(iii) the internal reporting structure changes (Paragraph 87 of Ind AS 36).

A planned sale on its own is not one of these triggers. If the sale stalls or is significantly delayed, goodwill impairments cannot be reversed (para 124 of Ind AS 36). Thus, this approach risks an irreversible write-down ahead of the requirements of the standards.

View 2 — Keep Goodwill with the Digital Services Group (Wait for Disposal or Ind AS 105 Classification as held for sale)

Here, ABC would do nothing now. DataServe stays inside the existing Digital Services CGU, and goodwill continues to be tested only at the Digital Services CGU until the unit is either:

  •  classified as held for sale (paragraphs 6-8 of Ind AS 105), or
  •  actually disposed of ( paragraph 86 of Ind AS 36).

Ind AS 105 only requires separate measurement once held-for-sale criteria are met and Ind AS 36 requires goodwill to stay with its CGU group until a disposal event occurs or reporting-structure changes. In that case, the downside weaknesses in DataServe may be masked by stronger parts of the Digital Services CGU. This may delay recognition of impairment, leading to a larger loss on disposal when sale eventually happens.

View 3 — Reallocate Goodwill Only If Internal Reporting Has Changed

View 3 focuses on paragraph 87 of Ind AS 36, which requires reallocating goodwill when the internal structure in which goodwill is monitored changes. Under this view, the key question is – Has ABC started monitoring DataServe separately (e.g., standalone KPIs, budgeting, CODM (Chief Operating Decision Maker) review)?

If the answer is yes, then DataServe has effectively become a separate CGU and the goodwill should be reallocated immediately. If the answer is no, the goodwill stays with the Digital Services Group until held-for-sale classification or disposal.

This view avoids both extremes, namely:

  •  It prevents premature impairment (unlike View 1).
  •  It responds to eventual changes in the business (unlike View 2).

View 3 aligns accounting with economic substance and how management actually runs the businesses, which is central to CGU framework under Ind AS 36. In the authors’ view, View 3 is most appropriate under Ind AS framework, as it best reflects the following principles in Ind AS 36 and Ind AS 105:

  •  Paragraphs 80 of Ind AS 36 which ties goodwill allocation to how management monitors the business, not to intentions.
  •  Paragraph 86 of Ind AS 36 and together with paragraphs 6-8, 15 and 38 of Ind AS 105 which trigger allocation to a disposal group only upon disposal or held-for-sale classification.
  •  Paragraph 87 of Ind AS 36 which triggers reallocation only when internal reporting structure changes.

Therefore, goodwill should move only when the reporting structure moves. For ABC, unless DataServe has already been carved out in internal reporting, goodwill stays with the Digital Services Group until classification as held for sale or actual disposal. This approach avoids premature impairment, maintains compliance with Ind AS 36, and ensures stakeholders see losses when they truly arise not before, not after. However, one important flaw of this view is that management may not change the internal monitoring system of goodwill, so that as much as possible, impairment of goodwill is delayed beyond the current year. Therefore, for this view to operate smoothly, management should be above board, and the internal reporting structure should reflect the actual business realty.

ONE SIMPLE LINE TO REMEMBER

Goodwill should follow how the business is really being run, not just what might happen in future. If the way management organises and reports the business changes, goodwill moves too. If that has not changed yet, the goodwill does not move, even if a sale is in early stages of discussion. That is how one avoids both ugly surprises at a later date as well as unnecessary impairment charge, that is irreversible. Overall, all the views have some challenges, though View 3 seems most appropriate under the circumstances.

Search and seizure — Assessment of any other person — Satisfaction note — Time of recording satisfaction note — Permissible stages — If not recorded immediately after completion of searched person’s assessment —Proceedings are invalid — Delay of 22 months in recording satisfaction note — Contrary to Circular No. 24/2015 — Notice issued u/s. 153C quashed and set-aside.

56. Parag Rameshbhai Gathani vs. ITO (International Taxation)

(2025) 180 taxmann.com 662 (Guj.)

A. Y. 2017-18: Date of order 18/11/2025

Ss. 153C r.w.s 132 and 153A of ITA 1961

Search and seizure — Assessment of any other person — Satisfaction note — Time of recording satisfaction note — Permissible stages — If not recorded immediately after completion of searched person’s assessment —Proceedings are invalid — Delay of 22 months in recording satisfaction note — Contrary to Circular No. 24/2015 — Notice issued u/s. 153C quashed and set-aside.

A search action was carried out on 15/10/2019 upon one Mr. SRT who was a land broker and financer group of assessees. In the course of search, certain incriminating material was found and seized. Upon examination of the material, it was found that financial transactions were carried out with some individuals which included the name of the assessee. Assessment in the case of Mr. SRT was completed in August 2021.

Subsequently, the Assessing Officer of Mr. SRT (searched person) recorded a satisfaction note on 06/06/2023 and transferred the seized material to the Assessing Officer of the assessee. The Assessing Officer of the assessee recorded satisfaction note on 14/07/2023 alleging that the assessee had made payment of on money for purchase of property. Accordingly, the Assessing Officer issued notice u/s. 153C of the Income-tax Act, 1961 in the name of the assessee on 09/02/2024.

Against the said notice, the assessee filed petition before the High Court challenging the notice. The Gujarat Hon’ble High Court allowed the petition and held as follows:

i) As per the Circular No. 24/2015 dated 31/12/2015 and the judgement of the Hon’ble Supreme Court in the case of Calcutta Knitwears (2014) 43 taxmann.com 446 (SC), recording of the satisfaction note apply in three stages to the proceedings u/s. 153C of the Act. Though, the Assessing Officer had an opportunity to record the satisfaction note at two stages i.e. stage (a) and (b) as specified in the Circular, the same is not done. The next stage which was available was stage (c) on immediate completion of proceedings of the searched person in August, 2021, however, the satisfaction note was recorded on 06/06/2023, after a period of 22 months. The satisfaction note was drawn by the Assessing Officer of the petitioner on 17/10/2023.

ii) In the case of Jitendra H. Modi (2018) 403 ITR 110 (Guj.), this Court, by placing reliance on the decision of the Supreme Court in the case of Calcutta Knitwears (supra), has held that satisfaction recorded after 09 months could not be said to be immediate action and hence, the Coordinate Bench of this Court set aside the notices issued under Section 158BD of the Act. In the instant case, there has been a delay of 22 months in recording the satisfaction, which runs contrary to the decision in Calcutta Knitwears (supra) as well as provision ‘(c)’ of Circular No.24/2015 dated 31/12/2015, which uses the expression “immediately after the assessment procedure is completed.

iii) Twin reasons are assigned by the respondents in the affidavit in reply for delay in recording the satisfaction note, (a) COVID-19 pandemic; and, (b) adoption of Faceless Scheme. So far the reason of COVID-19 is concerned, the same runs contrary to the action of the respondents, since the assessment of the searched person was itself done during the pandemic, and in the affidavit-in-reply, the respondent has mentioned that the Omicron variant commenced in December 2021 and continued until February 2022. Thus, even after February, 2022, the satisfaction note has been recorded on 17/10/2023. The second reason of workload due to Faceless Scheme is also a lame excuse, since indubitably the exercise u/s. 153A and 153C of the Act falls outside the purview of the said scheme. Hence, both the reasons assigned appear to be an afterthought, hence the same are rejected

iv) There was no restricting factor on the Assessing Officer to record the satisfaction earlier. The expression “immediate” though is impossible to quantify in period, however, the same cannot be extended to such an extent which defeats the purpose of cost effective, efficient and expeditious completion of search assessments. The intention of using such term is to reduce and avoid long drawn proceedings and to bring certainty to the assessment. Thus, both the writ petitions succeed. The impugned notices issued u/s. 153C of the Act for the respective assessment years are hereby quashed and set aside.”

Revision u/s. 264 — Revision of intimation issued u/s. 143(1) accepting the returned income — Revision application filed pursuant to decision of Jurisdictional Tribunal in S. K. Ventures — — Rejection of application by CIT — Decision of Jurisdictional Tribunal not acceptable to the Department — High Court held — CIT bound to follow Jurisdictional Tribunal — Merely because order is challenged in appeal before the High Court cannot be the ground to not follow.

55. Dipti Enterprises vs. ADIT

2025 (11) TMI 1856 (Bom.)

A. Y. 2020-21: Date of order 17/11/2025

Ss. 264 of ITA 1961

Revision u/s. 264 — Revision of intimation issued u/s. 143(1) accepting the returned income — Revision application filed pursuant to decision of Jurisdictional Tribunal in S. K. Ventures — — Rejection of application by CIT — Decision of Jurisdictional Tribunal not acceptable to the Department — High Court held — CIT bound to follow Jurisdictional Tribunal — Merely because order is challenged in appeal before the High Court cannot be the ground to not follow.

The assessee firm was engaged in the business of real estate development. The assessee filed its return of income for the A. Y. 2020-21 after claiming deduction u/s. 80-IB(10) of the Income-tax Act, 1961 which, the assessee was claiming since A. Y. 2010-11. At the time of filing its return of income, the utility automatically calculated the tax liability u/s. 115JC of the Act and deemed total income of the assessee at ₹2,17,85,501. Since the tax payable as per the normal provisions was lower than the tax payable on the deemed total income determined in accordance with the AMT provisions, the total liability was determined at ₹49,97,467 based on the AMT provisions. The return of income filed was accepted u/s. 143(1) of the Act.

According to the assessee, the provisions of 115JC could not be applied to the projects which were already approved prior to the date of introduction of section 115JC. Since the assessee’s projects were approved prior to the date of enforcement of section 115JC the provisions of section 115JC were inapplicable. Therefore, the assessee filed an application u/s. 264 of the Act seeking revision of the of the intimation issued u/s. 143(1) of the Act on the ground that extra tax paid as per the return of income by applying the provisions of section 115JC of the Act be refunded. To support its view, the assessee relied upon the decision of the jurisdictional Tribunal in the case of S.K. Ventures vs. ITO (order dated 05.03.2019 bearing ITA No. 1248/Mum./2018).

The assessee’s application for revision was rejected on the ground that the decision rendered by the Tribunal was not acceptable to the Department and the decision of the Jurisdictional Tribunal was challenged in appeal before the High Court and was pending disposal. Therefore, no relief could be granted u/s. 264.

Against the said order, the assessee filed a writ petition before the Hon’ble Bombay High Court. The High Court allowed the petition and held as follows:

“i) Merely because the order of the appellate authority is “not acceptable” to the department, and is the subject matter of an appeal, can furnish no ground for not following a judicial precedent, unless its operation has been suspended by a competent Court. If this healthy rule is not followed, it would lead to undue harassment to assessees and result in chaos in the administration of tax laws.

ii) Secondly, we hold that the doctrine of binding precedents plays a vital role in tax jurisprudence. It is first required to be ascertained whether, in the facts and circumstances of the case and in law, a particular judicial precedent is factually and legally in consonance with the case in hand or not. If it is found that the precedent relied upon is distinguishable, then such parameters based on which it is distinguishable need to be described in the order. The Respondent has not assigned any cogent reasons for distinguishing the decision of the jurisdictional Tribunal in the case of S.K. Ventures vs. ITO (supra) from that of the Petitioner.

iii) If the assessee is pleading that its interpretation of the applicability of Section 115JC has already been decided by the jurisdictional Tribunal, then in such a case, the Respondent ought to have considered the facts and law of the said case. If the facts are identical, then it ought to have been followed. We are of the view that if in the facts and circumstances of the case and in law, the case of the Petitioner is in consonance with the facts in the decision rendered by the jurisdictional Tribunal, then it ought to be followed as a matter of judicial discipline.

iv) Even though in the return of income the taxes were determined and paid pursuant to Section 115JC, the same can be challenged by the Petitioner if being levied without the authority of law. Just because an assessee is under a bona fide mistake of law paid tax which was not exigible as such, cannot by itself, with nothing more, be a ground for the Respondent for not granting legitimate relief under the law we are of the view that provisions of Section 264 would also cover within its ambit a claim which is not made in the Return of Income Thus, we are of the view that provisions of Section 264 would also cover within its ambit a scenario where intimation is issued u/s. 143(1) accepting the returned income of the Petitioner.

v) The matter is remanded to the Respondent to pass a fresh order on the application of Petitioner to consider the applicability of the decision of the jurisdictional Tribunal in the case of S.K. Ventures vs. ITO (supra) and direct the Respondent to ascertain whether the relevant facts in the case of S.K. Ventures vs. ITO (supra) viz-a-viz facts of the present case are identical or not (w.r.t. ascertaining the applicability of the provisions of Section 115JC) within a period of four weeks from the date of uploading of the present order. If it is found that the facts in the case of S.K. Ventures vs. ITO (supra) are identical to the present case, then the ratio laid down in the said order should be followed.”

Offences and prosecution — Compounding of offences — Delay — Compounding application was rejected solely on the ground of delay of 36 months from date of filing complaint — Held, limitation period stipulated in CBDT guidelines — Guidelines treated as binding statutes without exercising discretion — Where Act provided no limitation period, rigid time-line through guidelines is impermissible — Held, mechanical rejection of application without considering facts and circumstances is improper — Order set aside and matter remanded for reconsideration exercising proper discretion.

54. L.T. Stock Brokers (P) Ltd. vs. CIT: (2025) 480 ITR 26 (Bom): 2025 SCC OnLine Bom 517

Date of order 04/03/2025

S. 279(2) of ITA 1961

Offences and prosecution — Compounding of offences — Delay — Compounding application was rejected solely on the ground of delay of 36 months from date of filing complaint — Held, limitation period stipulated in CBDT guidelines — Guidelines treated as binding statutes without exercising discretion — Where Act provided no limitation period, rigid time-line through guidelines is impermissible — Held, mechanical rejection of application without considering facts and circumstances is improper — Order set aside and matter remanded for reconsideration exercising proper discretion.

A complaint was filed by the Income Tax Department against the assessee company for offences under the Income-tax Act, 1961. The assessee filed an application u/s. 279(2) of the Act for compounding the offences. The Chief Commissioner’s the application by an order dated January 17, 2024, solely on the ground that it was filed beyond 36 months from the date of filing of the complaint against the petitioners. The Chief Commissioner has relied upon paragraph 9.1 of the CBDT guidelines dated September 16, 2022 ((2022) 447 ITR (Stat) 25) for compounding offences under the Income-tax Act, 1961.

The assessee filed a writ petition challenging the order. The Bombay High Court allowed the petition and held as under:

“i) The CBDT guidelines of 2014 ((2015) 371 ITR (Stat) 7) which in para 8 referred to the period of limitation, does not exclude the possibility that in the peculiar case where the facts and circumstances so required, the competent authority should consider the explanation and allow the compounding application. This means that notwithstanding the so-called limitation period, in a given case, the competent authority can exercise discretion and allow compounding application.

ii) The competent authority has treated the guidelines as a binding statute in the present case. On the sole ground that the application was made beyond 36 months, the same has been rejected. The competent authority has exercised no discretion as such. The rejection is entirely premised on the notion that the competent authority had no jurisdiction to entertain a compounding application because it was made beyond 36 months. Such an approach is inconsistent with the rulings of this court, the Madras High Court and the hon’ble Supreme Court ruling in the case of Vinubhai Mohanlal Dobaria vs. Chief CIT [(2025) 473 ITR 394 (SC); 2025 SCC OnLine SC 270.] relied upon by the learned counsel for the Revenue.

iii) We set aside the impugned order dated January 17, 2024 and direct the Chief Commissioner to reconsider the petitioner’s application for compounding in the light of the observations made by the hon’ble Supreme Court in Vinubhai Mohanlal Dobaria vs. Chief CIT [(2025) 473 ITR 394 (SC); 2025 SCC OnLine SC 270.]. This means that the Chief Commissioner will have to consider all facts and circumstances and decide whether such facts make out the case for exercising discretion in favour of compounding the offence.”

Charitable trust — Exemption u/s. 11 — Exception u/s. 13 — Salary paid to chairperson treated as payment to person prohibited u/s. 13(3) — AO held the payment is excessive and disallowed 30 per cent of the salary u/s. 40A(2)(a) — CIT(A) deleted addition finding salary reasonable — Tribunal dismissed the appeal filed by Department after examining qualification and experience of chairperson — Held, reasonable remuneration for services rendered did not constitute benefit u/s. 13(1)(c) — Assessee entitled to exemption u/s. 11.

53. CIT(Exemption) vs. IILM Foundation: (2025) 480 ITR 1 (Del): 2025 SCC OnLine Del 2540

A. Ys. 2009-10 to 2011-12: Date of order 21/04/2025

Ss. 11, 12 and 13 of ITA 1961

Charitable trust — Exemption u/s. 11 — Exception u/s. 13 — Salary paid to chairperson treated as payment to person prohibited u/s. 13(3) — AO held the payment is excessive and disallowed 30 per cent of the salary u/s. 40A(2)(a) — CIT(A) deleted addition finding salary reasonable — Tribunal dismissed the appeal filed by Department after examining qualification and experience of chairperson — Held, reasonable remuneration for services rendered did not constitute benefit u/s. 13(1)(c) — Assessee entitled to exemption u/s. 11.

The assessee was a charitable trust registered u/s. 12A of the Income-tax Act, 1961. The assessee was predominantly engaged in activities of imparting education through various educational institutions. The relevant assessment years are 2009-10 to 2011-12. The Assessing Officer held the salary paid to the assessee’s chairperson was excessive and not commensurate with her educational qualifications, experience and duties, and since she was a related party being chairperson, disallowed 30 per cent of the payments u/s. 40A(2)(a) of the Act.

The Commissioner (Appeal) deleted the addition finding that the salary is reasonable and following consistence with the A. Y. 2008-09. The Tribunal dismissed the appeal filed by the Revenue. The Tribunal examined the additional evidence regarding the chairperson’s qualifications and contributions and held that the salary was justified and not unreasonable. The Tribunal held that section 13(1)(c) r.w.s. 13(2)(c) did not bar payment of reasonable salary to persons mentioned in section 13(3) for services rendered.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) A plain reading of sub-section (1) of section 13 of the Act indicates that exemptions under section 11/12 of the Act would not operate so as to exclude from the total income of the previous year any income, which is directly or indirectly, for the benefit of the person referred to in sub-section (3) of section 13 of the Act. It is, thus, clear that if any part of the income of a trust for charitable or religious purposes is diverted for the direct or indirect benefit of a person referred to in sub-section (3) of that Act, that part of the income would not be excluded from the total income of the assessee by virtue of section 11/12 of the Act. In other words, the exemption under those sections would not be available to the extent that the said income of a charitable or religious purposes is applied for the benefit of a person specified in sub-section (3) of section 13.

ii) By virtue of clause (c) of sub-section 2 of the Act if any amount is paid by way of a salary or allowance to a person, which is specified under sub-section (3) of section 13 of the Act, it would be deemed that the income of the property or trust has been applied for the benefit of that person for the purposes of clauses (c) and (d) of sub-section (1) of section 13. However, if a person specified under sub-section (3) has rendered any service and the amount or allowance paid to such person is such, that is, reasonably paid for such services, the same cannot be deemed to have been applied for the benefit of the said person for the purposes of clause (c) or (d) of section 13(1) of the Act. This is apparent from the plain language of clause (c) of sub-section (2) of section 13 of the Act. The opening words of the said clause must be read in conjunction with the last words of the said clause—”if any amount is paid by way of salary, allowance or otherwise… in excess of what may be reasonably paid for such services”. Thus, if the amount paid for services is such as is reasonably payable for such service, the same cannot be construed as applied for the benefit of a prohibited person notwithstanding that it is paid to such a person. Consequently, such payment would not fall within the exception of clause (c) of sub-section (1) of section 13 of the Act.

iii) The order of the Tribunal holding that the assessee had not violated the provisions of section 13(1)(c) in remunerating its chairperson for the services rendered was not perverse.

iv) In view of the above the questions of law as noted above is answered in favour of the assessee and against the Revenue.”

Appeal to High Court u/s. 260A — Additional question of law raised for first time in High Court — Jurisdiction of High Court — General principles — Assessee-company merged with another and ceased to exist — Assessment in name of non-existing entity(Merged company) — Question whether assessment order passed on non-existing entity is void — Question involving jurisdictional issue not raised before Tribunal — Whether merits consideration — Held by High Court that the additionally proposed question of law involved in these appeals is involving jurisdictional issue and hence included.

52. Reliance Industries Ltd. vs. P.L. Roongta: (2025) 479 ITR 763 (Bom): 2025 SCC OnLine Bom 3676

A. Ys. 1993-94 to 1995-96: Date of order 20/01/2025

Ss. 143(3) and 260A of ITA 1961

Appeal to High Court u/s. 260A — Additional question of law raised for first time in High Court — Jurisdiction of High Court — General principles — Assessee-company merged with another and ceased to exist — Assessment in name of non-existing entity(Merged company) — Question whether assessment order passed on non-existing entity is void — Question involving jurisdictional issue not raised before Tribunal — Whether merits consideration — Held by High Court that the additionally proposed question of law involved in these appeals is involving jurisdictional issue and hence included.

In this case the assessee-company had amalgamated with the another company. The Assessing Officer had knowledge of amalgamation. However, the assessment order was passed in the name of the non-existing amalgamating entity. As such the assessment was void. However, the ground that the assessment was void was not taken in appeal before the CIT(A) and also the Tribunal.

The question before the Bombay High Court was that whether the ground that the assessment order was void can be raised first time in the High Court in an appeal u/s. 260A of the Income-tax Act, 1961. The High Court allowed the writ petition and held as under:

“i) Mr. Mistri proposes the following question:

‘Whether on the facts and in the circumstances of the case and in law, the assessment order under section 143(3) of the Act passed on a non-existent entity is bad in law, void ab initio?’

ii) Section 260A(4) of the Income-tax Act, 1961 provides that the appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question. However, the proviso to this sub-section states that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

iii) Usually, for a case to “involve” such a question, the same should have been raised before the original authority or at least the appellate authorities. When a question was never raised before the original authority or the appellate authorities, then, typically, it would not be easy to hold that such a question was involved and, therefore, should be framed by exercising the powers under the proviso to sub-section (4) of section 260A of the Income-tax Act. However, to the above general proposition, there are exceptions. Suppose a question of law goes to the root of the jurisdiction, and there is no necessity to investigate new facts or if there is no serious dispute on the facts. In that case, such a question can be framed even though the same may not have been raised in the earlier proceedings before the original or appellate authority. Consent, per se, cannot confer jurisdiction upon an authority where such jurisdiction is inherently lacking.

iv) In Ashish Estates and Properties Pvt. Ltd. vs. CIT [(2018) 96 taxmann.com 305 (Bom).] , the co-ordinate Bench of this court held that a question which was not raised before the Tribunal should not ordinarily be allowed to be raised in an appeal u/s. 260A unless it was a question on the issue of jurisdiction or question, which went to the root of the jurisdiction.

v) In Santosh Hazari vs. Purushottam Tiwari [(2001) 251 ITR 84 (SC); (2001) 3 SCC 179; 2001 SCC OnLine SC 375; AIR 2001 SC 965.] , the hon’ble Supreme Court held that an entirely new point raised for the first time before the High Court is not a question involved in the case unless it goes to the root of the matter. It will, therefore, depend on the facts and circumstances of each case whether a question of law is a substantial one and involved in the case, or not; the paramount overall consideration being the need for striking judicious balance between the indispensable obligation to do justice at all stages and impelling necessity of avoiding prolongation in the life of any lis.

vi) In CIT vs. Jhabua Power Ltd. [(2015) 13 SCC 443; 2013 SCC OnLine SC 1228; (2013) 37 taxmann.com 162 (SC).], the two questions set out in paragraph 3 of the order were sought to be raised for the first time before the hon’ble Supreme Court. Both the questions related to the issue of limitation and, in that sense, did go to the root of the jurisdiction. The court held that these two questions were required to be answered first by the Income-tax Appellate Tribunal. Therefore, the appeal was allowed, the decisions of the High Court and the Tribunal were set aside, and the matter was remanded to the Tribunal to decide the questions of law relating to limitation after affording an opportunity of hearing to both parties.

vii) For all the above reasons, we are satisfied that the question proposed by Mr. Mistri is involved in these appeals, and, therefore, we frame the above question in all these appeals. If answered in favour of the assessees, the question would go to the root of jurisdiction.”

Document Identification Number – mandate of Circular 19/2019 dated 14.08.2019 sets out the requirement of all communications from the department to bear a DIN. Section 154(7) – Rectification – Not permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended/rectified was passed.

20. Siemens Limited vs. Deputy Commissioner of Income Tax, Circle, 8(2)(1), Mumbai & Ors

[WRIT PETITION NO. 2747 OF 2025 (BOM)(HC) dated 02/12/2025]

A.Y. 2005-06

Document Identification Number – mandate of Circular 19/2019 dated 14.08.2019 sets out the requirement of all communications from the department to bear a DIN.

Section 154(7) – Rectification – Not permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended/rectified was passed.

The Petitioner challenged the validity of an order passed by Respondent under Section 154 of the Act, dated 29.03.2024. The impugned order did not bear a Document Identification Number (for short “DIN”). The Petitioner also challenged the intimation letter dated 10.07.2024 issued by Respondent, providing a DIN to the impugned order, when the impugned order was passed contrary to the Central Board of Direct Taxes Circular No. 19/2019 dated 14.08.2019.

The Petitioner filed its original Return of Income on 28.10.2005, declaring a total income of ₹253.76 Crores and filed a revised Return of Income on 30.03.2007 declaring a total income of ₹246.59 Crores. Since there were international transactions involved, Respondent No. 1 (AO) made a reference to Respondent No. 2 [the Transfer Pricing Officer (TPO)] under Section 92CA(1) of the Act for computing the Arm’s Length Price in relation to those international transactions entered into by the Petitioner. The TPO passed an order dated 20.02.2008 under Section 92CA(3) of the Act, recommending an addition of ₹47.53 Crores to the Arm’s Length Price in the transactions entered into by the Petitioner in 4 out of its 9 divisions, as there were mistakes in the recommendations / order of the TPO, the Petitioner filed Rectification Applications dated 25.02.2008 and 28.02.2008 to rectify various errors that had crept into the TPO’s order.

While this rectification was pending, Respondent No. 1 passed an Assessment Order dated 31.12.2008 under Section 143(3) of the Act, making the transfer pricing adjustment of ₹47.53 Crores recommended by the TPO, and in addition thereto, made other corporate tax additions aggregating ₹69.89 Crores, thereby assessing the total income of the Petitioner at ₹364.01 Crores.

Thereafter, the TPO passed an order dated 20.01.2009 under Section 154 of the Act, correcting the mistakes apparent on the record in his order dated 20.02.2008, and consequently, deleted the additions in (i) the AD & PTD Division, and (ii) the Medical Division – Manufacturing. However, the TPO did not rectify the mistake in the Medical Division – Distribution, and the Video Division.

On 29th January 2009, the Petitioner filed an Appeal before the Commissioner of Income Tax (Appeals) against the Assessment Order dated 31.12.2008, passed by Respondent No.1. In the meanwhile, to implement the TPO’s order dated 20.01.2009, Respondent No. 1 passed a rectification order dated 09.03.2011 under Section 154 of the Act revising the total income of the Petitioner to ₹337.52 Crores.

Subsequently, the CIT(A) passed an order dated 29.03.2019 under Section 250 of the Act, partly allowing the Appeal of the Petitioner, by which order he directed the TPO to recompute the adjustment made to the Arm’s Length Price of the international transactions in terms of his directions.

Being aggrieved by the order of the CIT(A), the Petitioner filed an Appeal to the Income Tax Appellate Tribunal on 06.06.2019 challenging both, the corporate tax issues, as well as the issues relating to the transfer pricing addition made to transactions in respect of two of its divisions.

The TPO passed an order dated 05.03.2020 giving effect to the order of the CIT(A) and deleted the transfer pricing adjustment of ₹34.92 Crores (i.e. in respect of transactions in the Medical Division – Distribution of ₹32.21 Crores, and in the Video Division of ₹2.71 Crores).
Consequently, Respondent No. 1 passed an order dated 16.03.2020 giving effect and deleted the transfer pricing adjustment of ₹34.92 Crores along with other reliefs granted by the CIT(A) of ₹24.01 Crores, and determined the revised total income of the Petitioner at ₹278.60 Crores.

Subsequently, when the appeal before the Tribunal initially came up for hearing, and the fact that the grounds relating to the transfer pricing addition had become infructuous in view of the order passed by the TPO was pointed out, the Members requested the Petitioner to file revised grounds of Appeal in Form No. 36 after excluding the grounds relating to the transfer pricing adjustment. Accordingly, the Petitioner filed a revised Form No. 36 on 20.06.2022 by excluding the transfer pricing grounds.

After all this, suddenly the TPO issued a notice dated 21.03.2024 whereby he proposed to rectify his order dated 05.03.2020 and withdraw the relief of ₹32.21 Crores granted in respect of the transactions in the Medical Division – Distribution. The Petitioner addressed a letter dated 26.03.2024 pointing out that there was no mistake apparent on record which could be rectified under Section 154 of the Act. However, the TPO passed a rectification order dated 27.03.2024 rectifying the order passed by him on 05.03.2020, while giving effect to the CIT(A) order, and thereby, made a revised transfer pricing adjustment of ₹32.21 Crores to the transactions of the Medical Division – Distribution.

Since the appeal before the Tribunal was still pending, the Petitioner filed another revised Form No. 36 on 12.04.2024, reinstating the transfer pricing grounds filed originally on 06.06.2019, in view of the order dated 27.03.2024 passed by the TPO.

Thereafter, Respondent No. 1 issued a notice dated 20.06.2024 seeking to initiate rectification proceedings under Section 154 of the Act and fixed the hearing on 01.07.2024. The Petitioner replied thereto by a letter dated 01.07.2024, pointing out that the proposed rectification proceedings are time-barred, as no rectification is permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended was passed, having regard to the provisions of Section 154(7). The Petitioner pointed out that Respondent No. 1 proposed to rectify his earlier order dated 16.03.2020, which could only be rectified till 31.03.2024 and that initiation of rectification proceedings under Section 154 was not permissible. Without prejudice to the above, the Petitioner also pointed out that the matter was outside the scope of Section 154 of the Act as the issue is highly debatable and cannot be termed as a mistake apparent on record and only a glaring, obvious or self-evident mistakes can be subjected to rectification proceedings under Section 154 of the IT Act.

An employee of the Petitioner, to his utter shock and surprise, saw the impugned order purportedly dated 29.03.2024 for the first time on the income tax portal on 17.07.2024. The impugned order was not received by the Petitioner, either by email, or by physical delivery.

Respondent No. 1, thereafter, uploaded the impugned letter dated 10.07.2024 (which too was never received either by email or by physical delivery by the Petitioner) and an employee of the Petitioner noticed the impugned letter for the first time on 17.07.2024 while accessing the income tax portal. The intimation letter mentioned that the order under Section 154 read with Section 250 of the Act dated 29.03.2024 has DIN ‘ITBA/REC/M/154/2024-25/1066567478(1).’

The Petitioner challenged the impugned order and the impugned letter issued by Respondent No. 1 by filing a writ petition. The primary challenge was that:- (i) the impugned order is illegal inasmuch as it does not, on the face of it, have a DIN and is, thus, contrary to the mandate of the CBDT Circular 19/2019; and (ii) is not passed on the day it is purported to be dated, i.e., 29.03.2024 as the same officer who allegedly passed the order on 29.03.2024 issued a notice dated 20.06.2024 asking the Petitioner to Show Cause on or before 1.07.2024 as to why the rectification proceedings under Section 154 of the Act should not be initiated to rectify the order passed by him on 16.03.2020.

The Petitioner relied on the mandate of Circular 19/2019 dated 14.08.2019 which sets out the requirement of all communications from the department to bear a DIN. The CBDT has elaborately set out the manner in which a DIN is required to be generated, allotted and duly quoted in the body of any notice, order, summons, letter or any correspondence issued by any income tax authority on or after 1.10.2019. The only exceptions to this requirement are set out in paragraph 3 of the Circular and the said paragraph also details out as to how care is to be taken to bring the case within the exceptional circumstances. Paragraph 4 makes it amply clear that any “communication” which is not in conformity with the provisions of paragraphs 2 and 3 will be invalid and deemed to have never been issued. Accordingly, it was submitted that the order purported to be dated 29.03.2024 is to be set aside on this narrow ground. It was further submitted that the order, on the face of it, does not refer to any of the exceptional circumstances as mentioned in paragraph 3 of the said Circular being applicable and, in any event, even if such circumstances existed, the same would have to be regularised within a period of 15 working days of its issuance by compulsorily generating the DIN and communicating the DIN to the Petitioner which has not been done by Respondent No. 1. The impugned letter dated 10.07.2024 was not communicated to the Petitioner by either email or physical delivery and from the Affidavit-in-reply it was noted that the impugned letter was sent only on 16.07.2024 by Respondent No. 1, and that too, to a wrong email ID. Further, no approval of the Chief Commissioner / Director General of Income Tax has been obtained before passing the impugned order manually which was also in contravention to paragraph 3 of the said Circular. In this regard, reliance was placed on the judgments of this Court in Ashok Commercial Enterprises vs. ACIT (2023) 459 ITR 100 (Bom) and Hexaware Technologies Ltd. vs. ACIT (2024) 464 ITR 430 (Bom) where this Court has emphasised the mandatory requirement of a document to have a DIN and the effect if it does not. Reliance was also placed on the judgement of the Madras High Court in CIT vs. Sutherland Global Services Inc (2025) 175 taxmann.com 897 (Mad) and CIT vs. Laserwoods US Inc (2025) 175 taxmann.com 920 (Mad) where the directions passed by the Dispute Resolution Panel without a DIN were held to be invalid. Further reliance was also placed on the judgments of the Delhi High Court in CIT vs. Brandix Mauritius Holdings Ltd. (2023) 456 ITR 34 (Del) as well as the Calcutta High Court in PCIT vs. Tata Medical Centre Trust (2023) 459 ITR 155 (Cal) wherein also a similar view of the mandatory nature of an order to have a valid DIN was taken. It was further submitted that the mere fact that aforesaid judgments of the Delhi High Court, Calcutta High Court and the Madras High Court in Sutherland Global Services Inc (supra) were stayed by the Supreme Court, did not mean that the judgments had lost their precedential value.

Without prejudice to the aforesaid the Petitioner next pointed out that Respondent No. 1 proposed to rectify his earlier order dated 16.03.2020, which could only be rectified till 31.03.2024, because Section 154(7) of the Act mandated that no rectification is permissible after the expiry of four years from the end of the Financial Year in which the order sought to be amended/rectified was passed. It was further pointed out that the impugned order is back dated and could not have been passed on 29.03.2024 especially because the same individual who is purported to have passed the order dated 29.03.2024 issued a Show Cause Notice dated 20.06.2024 as to why a rectification order should not be passed, and fixed a time to respond by 1.07.2024. The Petitioner filed a detailed reply dated 01.07.2024 wherein it was, inter alia, pointed out that the proposed action is time barred having regard to the mandate of Section 154(7). It was urged that it was at this stage only that Respondent No. 1 realised his error and, thereafter, hastily took steps to back date the order before 31.03.2024. The back dating of the impugned order is also established by the impugned letter which provides the DIN of the impugned order as being “ITBA/REC/M/154/2024-25/1066567478(1)”. The use of the Financial Year 2024-25 in the DIN itself demonstrates that the DIN has been generated only in the Financial Year 2024-25 and hence, the impugned order was passed after 1.04.2024. In fact, orders / notices which indisputably are generated in the Financial Year 2023-24 have a DIN which makes a reference to the Financial Year 2023-24 . For all these reasons, it was submitted that the impugned order dated 29.03.2024 and the impugned letter dated 10.07.2024 be quashed.

The Respondent relied on the fact that the Petitioner has an alternate remedy available in the form of pursuing its Appeal before the Tribunal which is pending. Further, the Respondent sought to justify the impugned order and the impugned letter by submitting that the manual order was uploaded in the ITBA system and the same is reflected as generated on 29.03.2024 and the DIN was not generated due to a technical glitch. Further, it was pointed out that the delay in DIN generation does not invalidate the Assessment Order by relying on the Judgment of the Jharkhand High Court in Prakash Lal Khandelwal vs. CIT (2023) 151 taxmann.com 72 (Jha.). Additionally, it was pointed out that as per Circular No. 19/2019, the DIN is required only when the order is communicated to the Assessee and does not govern the passing of an order. The passing of an order, and communicating the said order, are two separate events. Time barring provisions apply to passing of the order, while DIN provisions apply to communication of the order. Reliance was also placed on Section 92CA of the Act.

In the rejoinder, the Petitioner has also objected to the tendering of the two Affidavits-in-Reply, one affirmed on 29.05.2025 (but not served on the Petitioner till 20.11.2025) and the other affirmed on 20.11.2025. It was contended that only the first Affidavit-in-Reply affirmed on 29.05.2025 should be considered as the second Affidavit-in-Reply is an afterthought and seeks to improve upon the lacuna in the Respondents’ case and should be ignored because both the Affidavits-in-Reply are affirmed by the same person, i.e., Assistant Commissioner of Income Tax, Circle 5(3)(1), Mumbai. It was only when the utter worthlessness of the first Affidavit was realised, an effort was made to improve upon the same by preparing the second one.

Further, the Petitioner pointed out that the delay in the DIN generation invalidates the order, and what is stated by the Respondents in the Affidavit-in-Reply was contrary to the Circular as it nowhere provides that the DIN is required only when the order is to be communicated to the Assessee and such an interpretation would frustrate the whole object of the Circular itself which was issued to maintain a proper audit trail. Hence, he pointed out that before passing an order a DIN has to be generated and quoted on the face of the order. Further, while dealing with the judgment of the Jharkhand High Court in Prakash Lal Khandelwal (supra), it was pointed out that the same is distinguishable on facts as it was a case where the order was passed on 31.03.2022, uploaded on 1.04.2022 and communicated to the Assessee on 3.04.2022 which is factually very different from the present case at hand and in any event the Judgment wrongly interpreted the Circular by holding that the ‘making of an order’, ‘issue of order’, ‘uploading of order on web portal’ or ‘Communicating of Order’ are all different acts or things and thereby, upheld the Assessment Order dated 31.03.2022 which was uploaded on 1.04.2022. The High Court, with respect, has also failed to appreciate the use of the word “communication” in the Circular covering within its ambit all notices, orders, letters, summons and correspondence.

Further, the Petitioner invited our attention to the provisions of Section 154(3) of the Act which specifically requires a notice to be issued by the concerned Authority to allow the assessee an opportunity of being heard, where an amendment has the effect of enhancing an assessment or reducing a refund or otherwise, and since Respondent No. 1 proposed to rectify his order dated 16.03.2020 to increase the assessed total income, albeit consequent to an order passed by the TPO, an opportunity of being heard is mandated by Section 154(3) and the impugned order cannot be passed before such a notice is issued and which, in fact, was issued only on 20.06.2024. Further it was pointed out that the impugned order is manually passed and back dated so as to save it from limitation.

The Honourable Court observed that on facts it was apparent that this was a case where Respondent No.1 has, in order to protect himself, back dated and manually passed the impugned order only to get over the period of limitation which expired on 31.03.2024.

The Honourable Court further referred to the CBDT Circular No. 19/2019 [F.No. 225/95/2019-ITA.II] dated 14.08.2019 . The Court observed that the object with which the Circular was issued by the CBDT was to ensure that a proper audit trail is maintained in respect of each and every notice / order / summons / letter / correspondence issued after 1.10.2019. The Supreme Court in Pradeep Goyal vs. UOI (2023) 1 SCC 566 also noted that the laudable object with which this requirement was introduced, albeit in the context of GST. Thus, a court ought to arrive at a conclusion which is in consonance with the object sought to be achieved, and it cannot be said that the failure to generate and quote a DIN on a document is a mere irregularity which can be ignored. The Court noted that the present case was one that exemplifies a situation whose occurrence was sought to be prevented by the CBDT, and cannot be brushed under the carpet by invoking Section 292B of the Act, or treating it as a mere procedural defect which is capable of being cured. There was no doubt that the impugned order being a rectification order under Section 154 of the Act would fall within paragraph 1 of the CBDT Circular which covers a notice, order, summons, letter and any correspondence (which has been defined as ‘communication’ in the CBDT Circular). The fact that paragraph 2 stipulates “that no communication shall be issued by any Income-tax authority relating to assessment, appeals, orders, statutory or otherwise, exemptions, enquiry, investigation, verification of information, penalty, prosecution, rectification, approval etc., to the assessee” on or after 1.10.2019 would squarely cover the impugned order, and unless a DIN was quoted on the face of the impugned order, the impugned order was to be treated as invalid and deemed to never have been issued.

The Court further noted that in the present case, the impugned order does not bear a DIN on the face of the order and no exceptional circumstance is mentioned in the impugned order while passing it manually without a DIN. Further, in spite of two Affidavits being filed, there is no approval of either the Chief Commissioner or the Director General of Income Tax which has been brought on record. Thus, it can be safely presumed that none exists. Even assuming that the present case was covered by one of the exceptional circumstances, there has been an abject failure to regularise the defect within the prescribed time frame of 15 working days by Respondent No. 1. Respondent No. 1 has issued the impugned letter dated 10.07.2024 providing a DIN for the impugned order, but the impugned letter is not communicated to the Petitioner, and in any event is beyond the time period of 15 working days provided in the Circular to regularize the impugned order. The fact that the impugned order is manually passed without a DIN on the face of the order and without referring to any exceptional circumstances on the face of the order, the impugned letter separately furnishing the DIN for passing the impugned order, cannot validate the impugned order passed without a DIN, when no reasons are mentioned in the impugned order.

The Court further observed that the judgment of the Jharkhand High Court in Prakash Lal Khandelwal (supra) was wholly misplaced. The said facts, on the basis of which that judgment was rendered, are distinguishable from the facts of this case, where there was a delay of a single day in uploading the order and generating the DIN. Even otherwise, the Jharkhand High Court has not appreciated the true scope of the meaning given to the word “communication” in the Circular correctly, as it has misread the word “communication” which is defined in paragraph 1 of the Circular and held that it was mandatory to quote a DIN at the time of communication of a notice/order and not at the time of issuance thereof, overlooking that what the circular mandates is that every notice, order, summon, letter and any correspondence issued by an Income Tax Authority should have a DIN allotted and duly quoted on the body of such communication. The only exception to this, was set out in paragraph 3 of the said circular.

The Honourable Court observed that the judgments in Ashok Commercial Enterprises (supra) and Hexaware Technologies Ltd (supra) and the Madras High Court in Laserwoods US Inc (supra) have not been stayed and the mere fact that the orders of the Delhi High Court in Brandix Mauritius Holdings Ltd (supra), Calcutta High Court in Tata Medical Centre Trust (supra) and the Madras High Court in Sutherland Global Services Inc (supra) are stayed by the Supreme Court, does not mean that these judgments have lost their precedential value.

Thus, having regard to the facts, the court held that the impugned order is back dated. It was apparent that the time limit provided for in Section 154(7), viz., a period of 4 years from the end of the relevant Financial Year expired on 31.03.2024, as the order sought to be amended was dated 16.03.2020. The impugned order was not passed till 20.06.2024 as the same Assessing Officer, who has passed the impugned order allegedly on 29.03.2024, has issued a Show Cause Notice seeking to commence rectification proceedings under Section 154 of the Act.

Further, no separate Notice under Section 154(3) of the Act was issued by Respondent No. 1 granting an opportunity of being heard to the Petitioner even though the rectification order that was proposed to be passed was to give effect to an order passed by the TPO. As the effect of the order would have been to increase the total income, the mandate of Section 154(3) would have to be complied with by Respondent No. 1. The fact that the Notice was issued on 20.06.2024 itself shows that the impugned order could not have been passed before this date and by the time this Notice dated 20.06.2024 was issued, the time limit under Section 154(7) had already expired.

The Court held that due to the noncompliance with the requirements of the CBDT Circular as it is passed without a DIN or; from the fact that the same Officer has issued the Notice under Section 154(3) on 20.06.2024 and he could not have issued the impugned order before 20.06.2024 and he had back dated the order, shows that the impugned order is not valid and should be quashed.

As far as the argument of alternate remedy was concerned, the court observed that present case squarely falls within the realm of exceptions carved out by the Supreme Court in Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai (1998) 8 SCC 1, in other words, an alternate remedy would not operate as a bar where the impugned order was passed without jurisdiction.

In View Of The Above, It Was Held That Respondent No. 1 Had Acted Beyond Jurisdiction, And Accordingly The Impugned Order Dated 29.03.2024 Passed By Respondent No. 1 And The Impugned Letter Dated 10.07.2024 Issued By Respondent Was Quashed And Set Aside.

ICAI and Its Members

I. EXPOSURE DRAFT

EXPOSURE DRAFT OF IND AS 119

NEW ACCOUNTING STANDARD FOR SUBSIDIARIES

The Institute of Chartered Accountants of India (ICAI) has issued an Exposure Draft of Ind AS 119, “Subsidiaries without Public Accountability: Disclosures,” aligned with the recently issued IFRS 19 by the International Accounting Standards Board.

Scope: The standard provides reduced disclosure requirements for eligible subsidiaries that:

  • Do not have public accountability
  • Have an ultimate or intermediate parent producing IFRS-compliant consolidated financial statements available for public use

Purpose: Eligible subsidiaries can apply these simplified disclosure requirements instead of the full disclosure requirements in other Ind AS standards.

Effective Date: Annual reporting periods beginning on or after April 1, 2027 (aligning with the global IFRS 19 effective date of January 1, 2027)

Public Comments Invited:

The Accounting Standards Board invites stakeholders to submit comments on the Exposure Draft by March 5, 2026.

Submit Comments:

  • Online (Preferred): http://www.icai.org/comments/asb/
  • Email: commentsasb@icai.in
  • Postal: ICAI, New Delhi

Download the Exposure Draft: https://resource.cdn.icai.org/89774asb-aps3404.pdf

This development is part of India’s ongoing convergence with international accounting standards, ensuring consistency with global financial reporting practices.

II. ICAI TOOLS

ICAI CAVALRY: PSYCHOMETRIC TEST ASSESSMENT SERIES

Empowering Professional Excellence through Skill Assessment-ICAI CAvalry: Psychometric Test Assessment Series to assess the various Skills possessed by the Members of ICAI

ICAI has launched ICAI CAvalry, a comprehensive Psychometric Test Assessment Series designed to enhance the holistic development of Chartered Accountants by focusing on critical behavioural and cognitive competencies beyond technical expertise. In the modern professional landscape, technical proficiency alone is insufficient. Future-ready CAs must demonstrate leadership, influence, negotiation, and impactful communication skills while navigating complex business environments. This initiative addresses the need for professional agility, leadership, and resilience.

Skills to Be Covered: The series encompasses 18+ high-impact competencies. The assessments will rotate across the high-impact psychometric factors dealing with the skills such as Branding Skills, Communication Skills, Critical Thinking Skills, Design Thinking Skills, Emotional Intelligence, Entrepreneurial Skills, Interpersonal Skills, Leadership Skills, Listening Skills, Negotiation Skills, Networking Skills, Problem-Solving Skills, Public Speaking Skills, Team Building Skills, Time Management Skills, Work Ethics, Decision-Making Skills, New-Age Professional/Technological Skills, any other Skills

1st Psychometric Test Assessment to assess the Branding & Communication Skills

https://docs.google.com formsd/e/1FAIpQLSfwfTQum_kPSwlnwtDHx1djTbqJjLHi7naW0ERm4Vms0OXApQ/viewform

2nd Psychometric Test Assessment to assess the Critical and Designing Thinking Skills

https://docs.google.com/forms/d/e/1FAIpQLSeog5QP681yTVut02MgCehWDmlh-i_-Fu_6RMvyusHQHMKV6g/viewform

III. ICAI PUBLICATION

1. New Research Publication on Accounting for Digital Assets

The ICAI has published a comprehensive research report titled “Accounting for Digital Assets” addressing the emerging challenges in accounting for blockchain-based assets, cryptocurrencies, NFTs, and other digital instruments. The report analyses the global accounting landscape through IFRS, FASB, and Ind AS perspectives, with particular focus on regulatory gaps in India’s framework. It identifies core challenges in classification, recognition, measurement, and disclosure of digital assets under existing standards such as IAS 2, IAS 32, and IAS 38. The research provides empirical insights, expert opinions, and policy recommendations for standard setters, regulators, and businesses navigating this complex space. A key finding highlights that current accounting standards inadequately capture the unique nature and behaviour of digital assets, emphasizing the need for tailored recognition, measurement, and disclosure practices. This timely publication offers essential guidance to accounting professionals dealing with the complexities of the rapidly evolving digital asset ecosystem.

Link: https://resource.cdn.icai.org/89848research-aps3482-final-acc-for-digital-assets.pdf

2. RESOURCE MATERIAL ON PUBLIC PROCUREMENT

The ICAI Research Committee has published a comprehensive Resource Material on Public Procurement, recognising its critical role as the cornerstone of good governance and economic efficiency. Public procurement serves as a vital link between the utilisation of public funds and the delivery of goods, works, and services to citizens. As governments worldwide strive to ensure transparency, accountability, and value for money in public spending, this resource material provides professionals and policymakers with an essential understanding of procurement processes. The publication offers a detailed overview of conceptual, legal, and procedural aspects of public sector procurement, covering the Indian regulatory framework including General Financial Rules and Government Procurement Manuals, alongside international best practices from UNCITRAL, WTO (GPA), and the World Bank. This comprehensive guide equips stakeholders with the knowledge needed to navigate the complexities of public procurement effectively.

Link: https://resource.cdn.icai.org/89849research-aps3482-icai-sm-public-procurement.pdf

IV. EXPERT ADVISORY COMMITTEE OPINION

Accounting treatment of salary paid to staff/employees and cost related to food trials during testing phase prior to opening of a new restaurant, under Ind AS framework.

A. FACTS OF THE CASE

The Company is a private company incorporated in India and is engaged in owning and operating contemporary and fine-dine luxury restaurants under various brands. The Company typically opens 8–10 new restaurant outlets every year across India. In order to maintain uniform standards of food quality, ambience, lighting, cooling and service quality across all outlets from the first day of operations, the Company conducts food and beverage trials prior to opening a new outlet.

The Company installs various machinery and equipment in each outlet, such as kitchen equipment, air-conditioning systems, walk-in freezers, audio-visual equipment, lighting and ambience control systems, exhaust systems, STP plants, furniture and fixtures, IT systems, etc. Food and beverage trials, testing and calibration of equipment take about one month. For this purpose, personnel are recruited in advance to test and handle equipment and to prepare for the opening of the outlet.

The Company proposed to capitalise (i) employee benefit costs incurred during the testing phase and (ii) food and beverage material costs incurred during trial runs as part of the cost of construction of the outlet, relying on paragraphs 7, 16 and 17 of Ind AS 16 – Property, Plant and Equipment.

B. QUERY

Whether the accounting treatment proposed by the Company, i.e., capitalising:

(i) employee benefit costs, and

(ii) food and beverage material costs,

incurred during the testing phase prior to opening a new restaurant outlet, as part of the cost of property, plant and equipment under Ind AS 16, is correct.

C. POINTS CONSIDERED BY THE COMMITTEE

The Committee examined the issue solely from the perspective of Ind AS, particularly Ind AS 16. It noted that Ind AS 16 does not prescribe a single unit of account for PPE and that a restaurant outlet as a whole is generally not considered an item of PPE. Instead, individual assets such as kitchen equipment, air-conditioning systems, lighting systems, furniture, etc., constitute separate items of PPE.

The Committee emphasised that only costs directly attributable to bringing a specific asset to the location and condition necessary for it to operate as intended by management can be capitalised. Costs relating to opening a new facility, conducting business in a new location, or staff training are specifically excluded from capitalisation.

With respect to employee benefit costs, the Committee observed that salaries paid to chefs, kitchen staff and service personnel during trials were incurred to ensure consistency in service quality and customer experience, and not for construction or acquisition of any specific PPE. However, costs of technicians engaged during the testing phase for resolving technical issues necessary to make specific equipment operational could be capitalised, if clearly identifiable.

Regarding food and beverage material costs, the Committee noted that trial runs were conducted to standardise taste, presentation and consistency, and not to test whether equipment was capable of operating. Since the equipment was already capable of operating as intended, such costs did not add value to any specific asset and could not be considered directly attributable to PPE.

D. EAC’S OPINION

The Committee opined that capitalisation of employee benefit costs and food and beverage material costs incurred during the testing phase prior to opening a new restaurant outlet is not appropriate.

However, if it can be clearly demonstrated that a portion of employee benefit costs relates to technicians engaged in resolving technical operational issues necessary to bring specific PPE to the condition required for operation, such costs may be capitalised to that extent. All other employee benefit costs and food and beverage trial costs should be expensed as incurred.

Read Opinion in ICAI’s The Chartered Accountants December 2025 pages 131-135

Link: https://resource.cdn.icai.org/89673cajournal-dec2025-35.pdf

V. ICAI BOARD OF DISCIPLINE’S ORDERS

1. Case : Sh. Gajendra Prasad Panda vs. CA. A.K.P.

File No. : PR/836/2022/DD/34/2023/BOD/750/2024

Date of Order : 08.12.2025

Particulars Details
Nature of Case Alleged unauthorised conduct of tax audit and obstruction of incoming auditor
Background The Respondent had earlier acted as statutory auditor of the Complainant. After deterioration of professional relations, the Complainant decided to change the auditor. It was alleged that despite cessation of engagement, the Respondent forcibly added himself as auditor on the Complainant’s Income-tax portal and conducted the tax audit for FY 2021–22 without authorisation, and thereafter wrote to the incoming auditor advising him not to accept the assignment.
Key Allegations – Unauthorised addition of Respondent’s name on the assessee’s Income-tax portal and conduct of tax audit for FY 2021–22 without consent.

– Writing to the incoming auditor claiming completion of audit and alleging non-payment of tax liabilities by the Complainant, thereby attempting to obstruct change of auditor.
Respondent’s Defence – Allegations were mala fide and triggered by his refusal to issue an unqualified audit report contrary to law.

– He had completed the audit and issued a qualified report based on professional judgment and advised payment of additional tax.

– Communication to incoming auditor was factual, made in professional courtesy, without any intent to threaten or obstruct.
– After his DSC was taken by the Complainant’s representatives without authority, he did not upload the audit report and had no further role.
Findings – The allegation of unauthorised addition on the Income-tax portal was already dropped at the prima facie stage by the Director (Discipline).

– On the surviving charge relating to communication with the incoming auditor, the Board found no evidence of malafide intent, threat, or obstruction.

– The Respondent’s explanation was found credible and corroborated by surrounding circumstances.

– Mere communication of factual position to an incoming auditor does not constitute misconduct.
Charges Established None – No misconduct under Item (2), Part IV, First Schedule to the CA Act, 1949.
Decision Not Guilty

 

2. Case : CA. MNJ vs. CA. SSS

File No. : PR/54/2018/DD/63/2018/BOD/756/2024

Date of Order : 08.12.2025

Complainant Alleged lack of fairness and transparency in conduct of ICAI branch elections
Background The Respondent acted as Returning Officer for elections to the Managing Committee of the Satara Branch of WIRC of ICAI for the term 2016–2019. The Complainant alleged that the Respondent manipulated the election process to enable certain candidates to be elected unopposed by improperly accepting withdrawal of nominations after the prescribed deadline.
Particulars Details
Key Allegations – Respondent pressurised certain candidates to withdraw nominations.

– Withdrawal forms were emailed after the stipulated cut-off time of 6:00 PM on 29.01.2016.

– Despite absence of a valid withdrawal by one candidate, the Respondent displayed a final list of six candidates (equal to available seats) and declared them elected unopposed.

– Conduct allegedly lacked fairness and transparency, amounting to other misconduct.
Respondent’s Defence – No statutory rules or binding guidelines prescribe the manner of withdrawal of nominations in ICAI branch elections.

– Both concerned candidates had communicated their intention to withdraw telephonically before the deadline, on speakerphone, in the presence of branch officials.

– Actions were taken in good faith to ensure smooth conduct of elections and avoid unnecessary delay or expense.

– Complaint suffered from delay and issues of locus standi.
Findings – Witnesses (including the concerned candidates and Branch In-Charge) confirmed on oath that withdrawal intentions were communicated telephonically before the deadline.

– No evidence of mala fide intent or manipulation by the Respondent was established.

– In absence of any clear statutory procedure for withdrawal of nominations, reliance on telephonic confirmation, in good faith, could not be faulted.

– The Complainant himself committed errors in invoking a non-existent clause in the complaint.
Particulars Details
Charges Established None – No other misconduct under Item (2), Part IV, First Schedule to the CA Act, 1949.
Decision Not Guilty

 

3. Case : Shri AG vs. CA. VT

File No. : PR/452/2022/DD/449/2022/BOD/769/2024

Date of Order : 08.12.2025

Complainant     : Shri AG, Director – M/s LFS Pvt. Ltd.
Nature of Case Alleged acceptance of statutory audit without prior written communication with previous auditor
Background The Respondent was appointed statutory auditor of the company for FYs 2020–21 to 2022–23. The Complainant alleged that the Respondent accepted the audit without obtaining a written No Objection Certificate (NOC) from the previous auditor, exerted pressure to procure the NOC, retained company documents, failed to resign formally, and did not file Form ADT-3, thereby obstructing appointment of a new auditor.
Key Allegations – Accepted audit assignment without written communication/NOC from previous auditor.

 
Particulars Details
– Pressurised the company to obtain NOC and threatened discontinuation of audit work.

– Failed to formally resign and to file Form ADT-3, allegedly blocking appointment of another auditor.
Respondent’s Defence – Previous auditor had no objection; verbal NOC was received through a professional intermediary and later confirmed in writing.

– Dispute arose due to non-payment of audit fees (₹9,500 outstanding).

– Allegations were motivated to avoid payment; any lapse was procedural and bona fide.
Findings – The complaint was filed without a valid Board Resolution authorising
initiation of disciplinary proceedings on behalf of the company.
 

 

 – The purported resolution was found to be an afterthought and not a valid authorisation.

– In absence of statutory authorisation, the complaint was void ab initio; merits were not examined.
Charges Established None
Decision Not Guilty; complaint dismissed and case closed under Rule 15(2).

 

Glimpses of Supreme Court Rulings

11. National Cooperative Development Corporation vs. Assistant Commissioner of Income Tax – SC

(2025)181 Taxmann.com 333-SC

Deductions – Section 36(1)(viii) provides a deduction of “profits derived from the business of providing long-term finance” in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development – The phrase “derived from” must be interpreted much more narrowly than the phrase “attributable to” – It requires a direct or immediate nexus with the specific business activity, for if the income is even a “step removed” from the business in question, that nexus is snapped – The deduction is limited to income from “first degree” sources and explicitly keeps out “ancillary profits” of the undertaking

The current litigation concerns several assessment years in which the Assessee, a statutory corporation mandated to advance initiatives for the production, processing, and marketing of agricultural produce and notified commodities in accordance with cooperative principles, sought deductions under Section 36(1)(viii) of the Income-tax Act, 1961 (‘the Act’).

In the Assessment Order, the AO proceeded to consider each of the receipts independently. As regards the dividend income, the AO held that this was a return on investment in shares, which is legally distinct from interest earned on long-term loans. Similarly, with respect to the interest on short-term bank deposits, the AO reasoned that these accrued from the investment of idle surplus funds in the interim period, rather than from the core activity of providing agricultural credit. As regards service charges received for the Sugar Development Fund (SDF), the AO noted that the Assessee was acting merely as a nodal agency for the Central Government. The funds disbursed belonged to the government, and the Assessee received a service fee for its administrative role in monitoring these loans. Consequently, the AO concluded that none of these three streams of income could be characterised as “profits derived from the business of providing long-term finance” as envisaged by the Act. Accordingly, the AO disallowed the deductions claimed on these counts and added them back to the total income of the Assessee.

Aggrieved by the Assessment Order, the Assessee preferred an appeal before the CIT(A). The CIT(A) upheld the disallowances relying heavily on the legislative intent and the definition of “long-term finance” in the Explanation to Section 36(1)(viii). This view was subsequently affirmed by the Income Tax Appellate Tribunal (ITAT) and finally by the High Court.

The High Court affirmed the findings of the lower authorities. Addressing the Assessee’s argument regarding dividend income, the High Court held that under Section 85 of the Companies Act, 1956 preference shares are part of share capital and cannot be treated as loans. The Court reasoned that a shareholder is not a creditor and cannot sue for debt; therefore, investments in redeemable preference shares do not satisfy the definition of “long-term finance” which requires a “loan or advance” with repayment of “interest.” Thus, dividends derived from such shares were not deductible under Section 36(1)(viii).

Regarding the interest on short-term deposits, the High Court upheld the Tribunal’s finding that this income was derived from the investment of idle funds during the interregnum period. The Court concluded that such interest is a step removed from the business of providing long-term finance. Since the immediate source of this income is the bank deposit and not a long-term loan extended by the Assessee, the strict requirements of the “derived from” test were not met.

On the issue of service charges for Sugar Development Fund (SDF) loans, the High Court noted the admitted factual position that the loans were funded by the Government of India, not by the Assessee. The Assessee merely acted as a nodal agency for monitoring and disbursement. Since the Assessee’s own funds were not involved, and it received service charges rather than interest, the Court held that the Assessee could not be considered to be carrying on the business of providing long-term finance in this specific context. Consequently, this income stream was also excluded from the deduction.

According to the Supreme Court, the question for adjudication before it in this batch of appeals was whether the National Co-operative Development Corporation (NCDC), Appellant-Assessee, was entitled to deductions under Section 36(1)(viii) of the Act in respect of three specific heads of income, being, (i) Dividend income on investments in shares, (ii) Interest earned on short-term deposits with banks, and (iii) Service charges received for monitoring Sugar Development Fund loans.

The Supreme Court noted that the relevant statutory provision, Section 36(1)(viii) allows for a specific deduction in computing the income referred to in Section 28. The Section provides a deduction in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development. The deduction is capped at an amount not exceeding forty percent of the “profits derived from such business of providing long-term finance.” The Explanation to the Section defines “long-term finance” to mean any loan or advance where the terms provide for repayment along with interest during a period of not less than five years.

The Supreme Court further noted that this strict framework was introduced intentionally by the Finance Act, 1995. Before this amendment, the provision allowed deductions based on the “total income” of the corporation. Parliament noticed that financial corporations were diversifying into activities unrelated to agricultural financing but were still claiming tax benefits on their entire profit. The amendment was introduced to fix this “mischief” by ensuring that the deduction is restricted only to profits that come directly from the core activity of providing long-term credit.
According to the Supreme Court, this intent was explicitly stated in the Memorandum explaining the Finance Bill, 1995, which explained why the amendment was necessary.

The Assessee contended before the Supreme Court that the phrase “derived from” should be interpreted broadly. Relying on CIT vs. Meghalaya Steels Ltd. 2016:INSC:253 : (2016) 6 SCC 747, it was argued that if a receipt flows directly from the business and is chargeable under Section 28, the Assessee qualifies for the said deductions. Also, that the distinction between “attributable to” and “derived from” is artificial when the business is indivisible. Conversely, the Respondent had submitted that judicial authority has consistently held that “derived from” signifies a strict, first-degree nexus. For this proposition reliance was placed on CIT vs. Sterling Foods 1999:INSC:190 : (1999) 4 SCC 98, Pandian Chemicals Ltd. vs. CIT (2003) 5 SCC 590 and Liberty India vs. CIT 2009:INSC:1094 : (2009) 9 SCC 328.

According to the Supreme Court, resolution of the competing perspectives would depend on the interpretation of the expression “derived from.” The Supreme Court agreed with the Respondent’s submission that this phrase connotes a requirement of a direct, first-degree nexus between the income and the specified business activity. The Supreme Court observed that it is judicially settled that “derived from” is narrower than “attributable to”, this distinction was lucidly clarified by it in Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978:INSC:83 : (1978) 2 SCC 644, where it was held that the legislature uses “derived from” when it intends to give a restricted meaning.

According to the Supreme Court, the phrase “derived from” whether used alone or as “derived from the business of” appears across multiple provisions of the Act, such as Section 80HHC and Section 80JJA and it has consistently held that this phrase requires a direct and proximate connection, or a “first-degree nexus,” between the income and the specific activity. The addition of the words “the business of” simply clarifies which activity is the source; it does not dilute the requirement for a direct link. Any interpretation suggesting otherwise would upset settled law.

According to the Supreme Court, the Assessee’s reliance on the decision in Meghalaya Steels (supra) was misplaced because the facts in that case were fundamentally different. In Meghalaya Steels (supra), the Court interpreted Section 80-IB, which allowed deductions for profits derived from “any business” of an industrial undertaking. The income in dispute there consisted of specific government subsidies given to reimburse the company for actual operational costs like transport, power, and insurance. The Court held that since these subsidies were essentially paying back the costs incurred to run the factory, they had a direct link to the profits of the business. Importantly, that judgment did not change the strict Rule regarding the phrase “derived from” established in earlier cases; it merely applied the Rule to a specific situation involving cost reimbursement,

The Supreme Court held that the present case, however, stood on a completely different footing. Unlike Section 80-IB which applies to “any business,” Section 36(1)(viii) is extremely narrow and restricts the deduction strictly to profits derived from “such business of providing long-term finance”. The disputed income here is not a reimbursement of business costs, nor does it come from the core activity of long-term lending. Therefore, the reasoning in Meghalaya Steels cannot be applied here to expand the scope of the deduction, as the specific statutory requirements and the nature of the income are entirely distinct.

Furthermore, the Supreme Court also rejected the Assessee’s attempt to portray its operations as a “single, indivisible integrated activity” to claim the deduction on all receipts. This specific argument was conclusively dealt with by it in Orissa State Warehousing Corpn. vs. CIT 1999:INSC:153 : (1999) 4 SCC 197, where the Assessee sought to claim an exemption under Section 10(29) for interest income on the ground that it was part of its integrated warehousing business.

In Orissa State Warehousing Corpn. (supra), the Court held that fiscal statutes must be construed strictly based on the plain language used. The Court explicitly rejected the “integrated activity” theory.

The Supreme Court held that the legal principles established by the decisions cited above set a strict threshold for eligibility. First, the phrase “derived from” must be interpreted much more narrowly than the phrase “attributable to”. Second, it requires a direct or immediate nexus with the specific business activity, for if the income is even a “step removed” from the business in question, that nexus is snapped. Third, the deduction is limited to income from “first degree” sources and explicitly keeps out “ancillary profits” of the undertaking. Finally, this Court refuses to accept the argument that Appellants business should be treated as a “single, indivisible and integrated activity” in order to expand the scope of a specific deduction.

The Supreme Court thereafter dealt with arguments made with respect of each of the three receipts.

Re: Dividend received on redeemable preference shares

The Assessee had argued that the substance of redeemable preference shares are effective loans, as fixed redemption Schedule and dividend rate assimilate them to the nature of debt. Resisting this, the Respondent draws our attention to the admitted factual position that these receipts are “investments in agricultural based societies by way of contribution to share capital”. The Respondent submitted that under Section 85 of the Companies Act, 1956, preference shares unequivocally remain share capital and cannot be treated as loans. Reliance is placed on the Constitution Bench decision in Bacha F. Guzdar vs. CIT (1954) 2 SCC 563 to demonstrate that dividends arise from the contractual relationship of shareholding, and the immediate source of the income is the investment in shares, not the activity of lending.

The Supreme Court observed that dividends are a return on investment dependent on the profitability of the investee company, and this distinction is fundamental to the genealogy of the income. The Constitution Bench decision in Bacha F. Guzdar (supra), established that dividend income is derived from the contractual relationship of the shareholder, not the underlying activity or the nature of the funds.

The Supreme Court further observed that a fundamental distinction exists between a shareholder and a creditor. The basic characteristic of a loan is that the person advancing the money has a right to sue for the debt. In stark contrast, a redeemable preference shareholder cannot sue for the money due on the shares or claim a return of the share money as a matter of right, except in the specific eventuality of winding up. This is also the reason for the Court, in Bacha F. Guzdar (supra), to hold that the immediate source of dividend income is the investment in share capital and not the business of providing loans. Since the statute specifically mandates ‘interest on loans’, extending this fiscal benefit to ‘dividends on shares’ would defy the legislative intent. Therefore, the Supreme Court concluded that dividend income does not qualify as profits derived from business of providing long-term finance.

Re: Interest on short-term deposits in banks

The Assessee had placed heavy reliance on the decision of the Supreme Court in National Co-operative Development Corporation vs. CIT 2020:INSC:544 : (2021) 11 SCC 357. They argued that the Supreme Court has already recognized that earning interest on idle funds is “interlinked” with their business and constitutes “business income” rather than “Income from Other Sources”. Based on this, the Assessee contended that their operations were a “single, indivisible integrated activity.” The Appellant contended that since the funds were parked temporarily only to be eventually used for lending, the interest earned on them should be treated as effectively “derived from” the business of providing finance.

The Supreme Court rejected this submission because it confuses two different concepts i.e. the classification of income and the eligibility for a specific deduction. There is a vital distinction between the general genus of “Business Income” and the specific species of “profits derived from the business of providing long-term finance”. Just because an income falls into the broad bucket of “Business Income” does not automatically mean it qualifies for the 40% deduction under Section 36(1)(viii) for the later specific species.

The Supreme Court observed that in NCDC (supra), the dispute was whether the corporation could deduct its expenses under Section 37. The revenue argued that the interest income was “Income from Other Sources,” which would have prevented the corporation from deducting business expenses against it. According to the Supreme Court, it was rightly held that since the funds were waiting to be lent out, the interest was “business income,” and therefore, normal business expenses could be deducted. However, the present case was not about deducting expenses; it was about claiming a special incentive deduction under Section 36(1)(viii). This Section is much stricter and requires more than just being “business income”; it requires the profit to be directly “derived from” long-term financing.

Furthermore, the NCDC judgment dealt with tax years 1976-1984. The law being interpreted in this case was amended significantly by the Finance Act, 1995. Parliament specifically changed the law to narrow the scope of this deduction because financial corporations were claiming benefits on all sorts of diversified income. Therefore, a judgment based on the old, broader law to interpret the new, stricter provision cannot be used. According to the Supreme Court, the amendment was designed precisely to stop the kind of broad “integrated business” claim the Assessee was making now. In NCDC (supra) the Court merely held that interest from short-term deposits was “business income” and not income from other sources. In the present case, the Revenue does not dispute that this is business income, but would contend that Section 36(1)(viii), as a special deduction provision operates on a much narrower plane.

The Supreme Court observed that even if a receipt is classified as “Business Income” under Section 28, it does not automatically qualify for the special deduction unless it satisfies the strict rigor of being “derived from” the specific activity of long-term finance defined in the Explanation. The legislative intent was to incentivize the specific act of providing long-term credit, not the passive investment of surplus capital. If it were to accept the Assessee’s argument, it would create a perverse incentive for financial corporations to park funds in safe, short-term investments and claim the 40% deduction, rather than fulfilling their statutory mandate of providing high-risk long-term credit to the agricultural sector. Consequently, interest earned from bank deposits failed this test as it is, at best, attributable to the business, but certainly not derived from the activity of providing long-term finance.

Re: Service Charge on Sugar Development Fund loans

The Assessee asserted that acting as a nodal agency for the Sugar Development Fund was part of its statutory mandate, and the service charges received were consideration for the core activity of facilitating long-term finance, irrespective of the fund’s origin. Per contra, the Respondent argued that these charges are merely “service fees” or agency commissions paid by the Government of India. The Respondent emphasized that since the
corpus belongs to the Government, the Assessee acted as an intermediary, not as the financier providing the loan.

The Supreme Court observed that deduction under Section 36(1)(viii) is predicated on the financial corporation “providing” the finance. In the case of SDF loans, the admitted factual position is that the funds belong to the Government of India. The Assessee bears no risk and utilizes no capital of its own.

The receipts in question were service charges paid by the Government for the administrative tasks of monitoring and disbursement. The proximate source of this income is the agency agreement with the Government, not the lending activity itself. A fee received for agency services cannot be equated with “profits derived from the business of providing long-term finance,” which implies the deployment of the corporation’s own funds and the earning of interest thereon. Consequently, this income stream was rightly excluded from the deduction.

The Supreme Court, upon a cumulative assessment of the statutory scheme and the judicial precedents cited, held that the claim of the Assessee was not correct in law.

For the above reasons, there was no merit in the appeals and consequently, the same were dismissed.

From The President

My Dear BCAS Family,

The new Labour Code 2019, representing one of the biggest labour reforms since independence, which consolidates 29 existing labour laws into 4 codes, Code on Wages, Industrial Relations Code, Code on Social Security and Occupational Safety, Health and Working Conditions Code, aims at simplifying compliance and enhancing worker and employee welfare and protection, and has been notified for implementation effective 21st November, 2025. This has prompted me to focus on the theme of wellness and work-life balance and their impact on professionals and institutions like us.

The terms wellness and work-life balance are often used interchangeably. Wellness is not just physical fitness but is much more holistic, encompassing mental, emotional, social and even financial well-being.

Beyond Burnout

IMPACT ON PROFESSIONALS:

Our profession demands precision, rigour and stringent ethical standards, along with strong physical and mental health on an ongoing basis. Absence of the same could lead to chronic stress, burnout, diminished cognitive functioning, impaired decision-making, resulting in increased errors of judgement, thereby impacting the quality of our services to clients and other stakeholders. This has led to the adoption of sustainable practices in both our work and personal environments. A well-rested, mentally balanced professional is not only more productive, creative and collaborative, but also better equipped to navigate the complexities that define our professional role.

When professionals neglect their health and personal lives, the ripple effects touch families, teams and the broader organisational culture. When employees experience high burnout rates, the employers face increased attrition, diminished morale and reputational challenges—all of which impact service quality and client relationships.

As professionals, it is our individual as well as collective responsibility as employers to take mitigating steps to ensure that we promote wellness and work-life balance in the course of our professional duties and responsibilities.

Individual Responsibilities:

The journey toward wellness and work-life balance primarily requires personal commitment which entails taking the following steps, amongst others:

  • Set clear boundaries: Technology has blurred the lines between office and home. The “post-pandemic” scenario of work from home has further blurred these lines. We must learn to adopt a digital detox routine by designating tech-free hours and ensuring quality personal time.
  • Prioritise physical health: Regular exercise, adequate sleep and proper nutrition are not optional extras; they are professional tools that enhance performance. Even brief daily walks or stretching can make a measurable difference. The pandemic has also played a role in making us more health-conscious.
  • Invest in relationships: The demands of our profession should not come at the cost of meaningful connections with family and friends. These relationships provide emotional sustenance and perspective that work alone cannot offer.
  • Seek help when needed: Mental health struggles are not signs of weakness. Reaching out professionally to mitigate the same, whether through counselling, peer support, or therapy, should be regarded as an act of strength and self-awareness rather than shame and neglect.
  • Meaningful time management: Not all tasks carry equal weight. We must learn to distinguish between urgent and important. We must learn to delegate effectively whilst maintaining control and resisting the temptation to micromanage. Efficiency is not about doing more; it is about doing what matters most. Another important mantra that I have always practised is to learn to say no. Practising these results in meaningful time management and makes for an effective leader without increasing your blood pressure!
  • Financial Wellness- Planning for Peace of Mind: Ironically, as financial experts, we often spend more time managing clients’ wealth than our own. Financial wellness is not about having abundant wealth but having clarity, control, and confidence in one’s financial decisions. Whether it is retirement planning, risk management, budgeting, or investment discipline—peace of mind is a product of proactive planning. As professionals who are often the first responders in financial crises of others, we too must ensure that our financial foundations are sound and stress-free.

Collective Responsibility:

Wellness at workplaces is not just a personal goal but a shared responsibility. Firms, institutions, and professional bodies must lead by example by fostering respectful work cultures, discouraging toxic competitiveness and encouraging work-life balance. Leaders must set the tone at the top and support their teams. Policies framed must reflect compassion, not just compliance. Stakeholders are increasingly emphasising sustainable practices, which include wellness and work-life balance in their dealings. Finally, though the ICAI has also laid down guidelines regarding working hours for articled students since many small and medium sized firms rely on them, the ground realities reflect a different picture. It is our duty as responsible professionals to respect these guidelines both in letter and spirit to ensure healthy and balanced academic and professional growth for the younger generation who are our future.

BCAS’S ROLE:

As a responsible organisation, BCAS also resonates with what we as children have learnt in nursery rhymes that “All Work and No Play Makes Jack a Dull Boy”, by focusing on health and wellness apart from its focus on knowledge and education through various initiatives by the HR Committee. The recent CA THON and the forthcoming cricket tournament in early January 2026 are but a few of several such initiatives.

SUSTAINABLE SUCCESS VS. BEING BUSY:

To conclude, it would be appropriate to reflect on a profound quote by noted philosopher and author Henry David Thoreau in his book Life Without Principle where he emphasises about meaningful and sustainable work rather than being merely busy, both of which fit in with the philosophy of BCAS and its longevity and relevance over 77 years and many more to come!

“It is not enough to be busy; so are the ants. The question is: What are we busy about?”

I would like to end by wishing you all and your families a very happy and healthy 2026 and hope each one of you makes at least one “new-year resolution” of giving adequate attention to wellness and work-life balance in your daily lives!

A big thank you to one and all!

Warm Regards,

CA. Zubin F. Billimoria

President

From Published Accounts

COMPILER’S NOTE:

To unlock value and for infusing funds into specific businesses, corporates are today resorting to demergers of specific business undertakings with regulatory approvals. In most such cases of demerger especially those not under common control, the resultant company uses the principles of Appendix C of Ind AS 103 “Business Combinations” whereas the demerged company uses Appendix A of Ind AS 10 “Distribution of Non-cash Assets to Owners”. Also, in the absence of any specific Ind AS dealing with the accounting of demerger in the books of the transferor under a common control business combination, paras 10-12 of Ind AS 8 on “Accounting Policies, Changes in Accounting Estimates and Errors” is resorted to.

Given below are disclosures for a demerger of an undertaking of a large company having international operations.

Tata Motors Limited (from standalone results (audited) for the period ended 30th September 2025 (demerged company)

From to Results / Notes

1. Standalone audited financial results for the quarter and six months ended September 30, 2025 (‘the Statement’)

Particulars Quarter ended Six months ended Year ended
September 30, 2025 June 30, 2025* September 30, 2024* September 30, 2025 September 30, 2024* March 31, 2025*
Audited Audited Unaudited Audited Unaudited Audited
Profit/ (loss) for the period after tax from continuing operations (237) 3,854 15 3,617 1,296 1,538
Profit before exceptional gain and tax for the period from discontinued – 1,624 1,092 1,624 2,407 5,628
Exceptional gain on disposal of discontinued operations 82,318 – – 82,318 – –
Tax expense (net) of discontinued operations – 212 446 212 893 1,292
Profit for the period after exceptional gain and tax from discontinued operations 82,318 1,412 646 83,730 1,514 4,336
Profit before tax from continuing and discontinued operations (before exceptional gain) 138 6,347 1,410 6,485 4,513 8,004
Profit for the period 82,081 5,266 661 87,347 2,810 5,874

*Re-presented refer note 4

Note 4: Scheme of Arrangement

The Board of Directors has, at its meeting held on August 1, 2024, approved a Composite Scheme of Arrangement amongst Company, Tata Motors Limited (formerly TML Commercial Vehicle Ltd), Tata Motors Passenger Vehicles Limited and their respective shareholders under Section 230-232 of the Company’s Act, 2013 which inter alia provides for:

  • demerger, transfer and vesting of the commercial vehicles business of Company along with related investments (“Demerged Undertaking”) to Tata Motors Limited on a going concern basis; and
  • amalgamation of Tata Motors Passenger Vehicles Ltd with the Company with an objective of consolidating the passenger vehicles business.

The Company has received the National Company Law Tribunal (NCLT) order approving the Scheme on August 25, 2025, with appointed date of July 1, 2025. Upon filing with the Registrar of Companies “ROC”, the Scheme became effective from October 1, 2025. Pursuant to the approval and effectiveness of the Scheme:

  • Demerged Company has transferred all the assets, liabilities and reserves (including other components of equity and general reserve), valuing ₹11,579 crores at their respective carrying amounts, pertaining to Demerged Undertaking as appearing in the books of accounts of the Demerged Company, being transferred on account of demerger. Accordingly, the Demerged Company has reduced from its books of account, the carrying amounts appearing on the appointed date.
  • Having recorded the transfer of the assets and liabilities, as aforesaid, the Demerged Company has made necessary adjustments for the sake of compliance with Indian Accounting Standards (“Ind AS”) notified under Section 133 of the Companies Act, 2013, specifically Appendix A to Ind AS 10 ‘Distribution of Non cash assets to Owners’, and has created a liability at the fair value of the Demerged Undertaking with gain in the income statement (net of assets and Habllities transferred) with the corresponding debit to the Retained Earnings and extinguishing the liability of ₹82,318 crores. There is no impact on net worth for this gain booked in the results, accordingly the same is not considered for EPS calculations.

Fair value has been derived for each of the companies of Demerged Undertaking separately. Depending on the business and data, we have used discounted cash flows, comparable market multiples and available quoted price to determine the fair value.

Note 5

For the quarter ended September 30, 2025, the profit before tax is ₹138 crores and tax charge is ₹375 crores. Upon effective of the Composite Scheme, the tax losses which were available for set-off in the quarter ending June 30, 2025, are now moved to the Demerged Undertaking leading to a higher tax charge in the demerged entity.

FROM AUDITORS’ REPORT

2. Independent Auditor’s Report on the audit of the Standalone Financial Results

Opinion

We have audited the accompanying standalone quarterly financial results of Tata Motors Passenger Vehicles Limited (formerly Tata Motors Limited) (“the Company”) for the quarter ended 30 September 2025 and the year-to-date results for the period from 1 April 2025 to 30 September 2025, (in which are included interim financial statements / financial information of its joint operation and financial information of a Trust) attached herewith, being submitted by the Company pursuant to the requirement of Regulation 33 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”).

In our opinion and to the best of our information and according to the explanations given to us and report of other auditor on separate audited condensed interim financial statements/financial results of its joint operation, these standalone financial results:

a. are presented in accordance with the requirements of Regulation 33 of the Listing Regulations in this regard; and

b. in the context of the overriding effect of the provision in the Composite Scheme of Arrangement as approved by the National Company Law Tribunal (‘NCLT’), regarding accounting for demerger of commercial vehicles business from the specified retrospective appointed date, give a true and fair view in conformity with the recognition and measurement principles laid down in the applicable accounting standards and other accounting principles generally accepted in India, of the net profit and other comprehensive loss / income and other financial information for the quarter ended 30 September 2025 as well as for the year to date results for the period from 1 April 2025 to 30 September 2025.

Emphasis of Matter

a. We draw attention to Note 4 to the standalone financial results, which describes the accounting for the Composite Scheme of Arrangement (‘the Scheme’) amongst the Company, Tata Motors Limited (formerly Tata Motors Commercial Vehicles Limited) (‘TML’) and Tata Motors Passenger Vehicles Limited for demerger of commercial vehicles business from the Company into TML and merger of the Tata Motors Passenger Vehicles Limited into the Company. The Scheme has been approved by the National Company Law Tribunal (‘NCLT’) vide its order dated 25 August 2025 and a certified copy has been filed by the Company with the Registrar of Companies, Maharashtra, on 1 October 2025. Though the appointed date as per the NCLT approved Scheme is 1 July 2025, as per the requirements of Appendix C to Ind AS 103 “Business Combination”, Business Combination (‘the amalgamation of Tata Motors Passenger Vehicles Limited with the Company’) has been accounted for as if it had occurred from the beginning of the preceding period in the standalone financial results.

Accordingly, amounts relating to the quarter and year-to-date ended 30 September 2025 include the impact of the business combination and the amounts for the quarter ended 30 June 2025 and the corresponding amounts as at and for the previous year ended 31 March 2025 and for the quarter and previous year to date ended 30 September 2024 have been restated by the Company after recognising the effect of the business combination as above. The aforesaid note 4 also describes in detail the impact of the business combination on the standalone financial results. Our opinion is not modified in respect of this matter.

b. We draw attention to Note 4 to the standalone financial results, which describes the accounting for the Composite Scheme of Arrangement (‘the Scheme’) amongst the Company, TML and Tata Motors Passenger Vehicles Limited for demerger of commercial vehicles business from the Company into TML and merger of the Tata Motors Passenger Vehicles Limited into the Company. The Scheme has been approved by the National Company Law Tribunal (‘NCLT’) vide its order dated 25 August 2025 and a certified copy has been filed by the Company with the Registrar of Companies, Maharashtra, on 1 October 2025. In accordance with the scheme approved by NCLT, the Company has given effect to the Scheme from the retrospective appointed date specified therein i.e. 1 July 2025 for the demerger of the commercial vehicles business, which overrides the relevant requirement of Appendix A to Ind AS 10 (according to which the scheme would have been accounted for from 25 August 2025 which is the date on which the Scheme has been approved by the NCLT). The financial impact of the aforesaid treatment has been disclosed in the aforesaid note.

Our opinion is not modified in respect of this matter.

From composite scheme of arrangement amongst Tata Motors Limited (demerged company/ amalgamated company) and TML Commercial Vehicles Limited (resulting company) and Tata Motors Passenger Vehicles Limited (amalgamating company) and their respective shareholders under sections 230 to 232 and other applicable provisions of the companies act, 2013 (extracts)

PART I

18. ACCOUNTING TREATMENT

18.1 Accounting treatment in the books of the Demerged Company:

18.1.1 The Demerged Company shall give effect to the Scheme in its books of accounts in accordance with Appendix A to the Indian Accounting Standards 10 notified under Section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015 and the generally accepted accounting principles in India.

18.1.2 Upon the Scheme becoming effective and from the Appointed Date, the Demerged Company shall transfer all the assets and liabilities, at their respective carrying amounts, pertaining to the Demerged Undertaking as appearing in the books of accounts of the Demerged Company, being transferred to and vested in the Resulting Company. Accordingly, the Demerged Company shall reduce from its books of accounts, the carrying amounts appearing on such date in accordance with the provisions of Section 2(19AA) of the Income Tax Act.

18.1.3 Upon the Scheme becoming effective, and from the Appointed Date, the carrying value of Cost of Hedging Reserve and Hedging Reserve (forming part of “Other components of Equity” in the Statement of Changes in Equity) pertaining to Demerged Undertaking as appearing in the books of accounts of the Demerged Company will be reclassified to profit or loss as a reclassification adjustment. The carrying value of fair value reserve in relation to equity instruments carried at fair value through Other Comprehensive Income shall be transferred to retained earnings.

18.1.4 Having recorded the transfer of the assets and liabilities and balances in Other Components of Equity, as aforesaid, the Demerged Company shall make necessary adjustments for the sake of compliance with Indian Accounting Standards (“Ind AS”) notified under Section 133 of the Companies Act, 2013, specifically Ind AS 10 Appendix A ‘Distribution of Non cash assets to Owners’, and shall create a liability at the fair value of the Demerged Undertaking with the corresponding debit to the Retained Earnings.

18.1.5 The book value of net assets derecognised will be adjusted against the liability recognised at above. The difference, if any, shall be recognised in the statement of profit and loss in accordance with Ind AS 10 Appendix A.

18.2 Accounting treatment in the books of the Amalgamated Company

18.2.1 The Amalgamated Company shall give effect to the Scheme in its books of accounts in accordance with the accounting standards specified under Section 133 of the Act read with the Companies (Indian Accounting Standards) Rules, 2015 and the generally accepted accounting principles in India.

18.2.2 Upon the Scheme becoming effective, the Amalgamated Company shall, in accordance with Appendix C to Indian Accounting Standard 103 – Business Combinations, record all the assets, liabilities and reserves pertaining to the Amalgamating Company vested in it pursuant to this Scheme at their respective carrying values as appearing in the books of the Amalgamating Company. Merger Deficit Adjustment Account of the Amalgamating Company will be adjusted against the capital reserve (on merger/sale of business) of the Amalgamated Company.

18.2.3 The difference between (a) excess of carrying values of assets over the carrying values of liabilities of the Amalgamating Company and (b) reserves of the Amalgamating Company shall be credited or debited. as the case may be, to equity and classified as ‘capital reserve’ or any other appropriate component of the equity. The value of existing investment held by the Amalgamated Company in the Amalgamating Company shall be cancelled and the corresponding amount shall be debited to ‘capital reserve’ or any other appropriate component of the equity.

18.2.4 The financial statements of the Amalgamated Company for the prior period shall be restated as if the business combination had occurred from the beginning of the preceding period presented in the financial statements. irrespective of the actual date of the combination.

PART IV

GENERAL TERMS AND CONDITIONS

41. Change of Name of Amalgmated Company and the Resulting Company

41.1 Upon this Scheme becoming effective and subject to Clause 41.3 below, the name of the Amalgamated Company or Demerged Company shall stand changed on and from the Effective date to ‘TATA MOTORS PASSENGER VEHICLES LIMITED’ or such other name which is determined by the Board of the Amalgamated Company …

41.3 Upon Scheme becoming effective and simultaneously with the change of name of the Amalgamated Company, the name of the Resulting Company shall stand changed on and from the effective date to ‘TATA MOTORS LIMITED’ or such other name…

CA Firm Of 2030

Let me begin by wishing you all a very Happy New Year. Every January brings its familiar mix of resolutions and reflections. This one arrives with an unmistakable question for the profession: With gradual reduction in opportunities across compliance and regulatory services, what is the future of the profession? What would the CA Firm of 2030 look like? For many professionals, the gradual reduction in professional opportunities over the last decade and rapid technological advancements, including affordable AI, has created a sense of unease.

But perhaps this moment is not a threat; it is a signal. The CA firm of 2030 will not be defined by the number of audits or compliances performed but by the quality of insight, the sophistication of systems, and the breadth of services it delivers. The redesign of our profession begins now, not in 2030.

During my professional career, I have had the opportunity to visit firms of varying sizes and meet many professionals. The ones that felt genuinely future-ready were not necessarily the ones with the biggest teams, but those with the strongest systems, which in many cases, were automated. In one mid-sized practice, a GST reconciliation that earlier consumed a week was completed overnight because they had built an internal automation engine. The senior wasn’t replaced; he was liberated—able to focus on judgment rather than just data work. This is what the future will demand: humans doing the thinking, machines doing the lifting.

Yet digital capability brings a deeper responsibility. AI today can produce a draft submission or an audit memo in minutes. But the illusion of perfection can be dangerous, with high levels of hallucinations and bias. A young manager shared, “AI makes me faster, but forces me to be twice as sceptical.” She is right. As workflows automate, professional scepticism and ethical clarity become our defining edge. In a machine-first world, conscience becomes a competitive advantage.

Building the CA Firm of 2030

Equally significant is the shift from individual-driven excellence to institutionalised resilience. Many firms still depend on a few irreplaceable seniors. When one leaves, years of templates, client nuances, and tacit knowledge vanish. A 2030-ready firm avoids this fragility by building documented SOPs, knowledge repositories, review layers, and digital memory. When such knowledge systems carry the practice, people can grow; when people alone carry it, systems collapse.

This transition to a process and system centric firm aligns closely with a broader national aspiration. The PMO’s recent push to develop large Indian accounting firms—firms with governance, specialisation, and scale comparable to global networks—captures a sentiment that has long been brewing. India’s economy demands Indian-origin institutions that can operate across cities, sectors, and service lines. I met a three-partner Jaipur firm that joined a national network and, within a year, began servicing a listed client by leveraging expertise from member firms in Mumbai and Bangalore. Their story mirrors the future: collaboration, scale, and ecosystems—not isolation—will define relevance.

Scale is just one determinant of relevance. Domain specialists can carve a niche to make scale redundant. In such a set-up, the objective is not to achieve high volume and low unit value but a low volume with high unit value. However, emphasis on processes, systems and collaboration will augur well in this approach too. A niche advise given to a client will also have to run through various processes to make sure it is balanced and implementable. In this complex world of information overload, knowledge systems can assist such expert to decipher relevant information and maintain his cutting knowledge edge. Collaboration may not take the structure of formal networks, but may be more through cordial human relationships to avoid the perception of being inaccessible or inapproachable.

And through all this, a human thread binds everything together: the ability to communicate clearly. Whether interpreting GST litigation trends, drafting an advisory note, or explaining risk in simple language, clarity has become a strategic skill. Good writing is not a cosmetic flourish; it is good thinking expressed. In the firm of 2030, every professional will need to be a designer of processes, systems, and words.

So here, at the start of 2026—amid regulatory shifts, AI acceleration, and a national call to build strong Indian accounting institutions—the real question is not, “What will happen to our profession?” but, “What will we choose to build?”

The firms that act now—by strengthening systems, embracing AI responsibly, collaborating intelligently, and communicating with clarity—will not just survive the decade. They will define it.

Best Regards,

 

CA Sunil Gabhawalla

Editor

Income-Tax Act, 2025: TDS & TCS Provisions

The Income Tax Act, 2025 (‘New Act’), attempts to simplify and consolidate the extensive TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) provisions previously spread across 69 sections in the existing Income tax Act, 1961 (‘Old Act’). TDS provisions are now merged primarily into two sections in the New Act: Section 392 (TDS on salary) and Section 393 (TDS on all other payments), while TCS provisions are consolidated into Section 394.

The New Act achieves simplification primarily through tabulation, replacing the self-contained sections of the Old Act with tables that lists payment types, payer categories (e.g., ‘Specified Person’), rates, and thresholds. Key changes in the New Act include streamlining the definition of professional services to align advertising services with Section 393, resulting in a higher 10% TDS rate. The scope for obtaining a lower TDS deduction certificate has also been expanded to cover all payment types.

Furthermore, Section 392 of the New Act merges TDS on salary and EPF withdrawals, clarifying that EPF withdrawals exceeding ₹50,000 are subject to 10% TDS. Procedurally, the timing for TCS collection on motor vehicle sales exceeding ₹10 Lacs has been preponed to the time of debiting the buyer’s account or receipt, whichever is earlier.

INTRODUCTION

Currently, the TDS and TCS provisions are spread across 69 different sections under the Old Act. The new Income Tax Act, 2025 (‘New Act’) makes a fair attempt to consolidate the TDS provisions laid down across 69 sections into 2 sections i.e. section 392 of the New Act, which pertains to TDS on salary, and section 393 of the New Act, which covers TDS on all other types of payments. Further, TCS provisions are merged into 1 single section i.e. section 394 of the New Act. The new sections are now covered under Chapter XIX of the New Act, as against the erstwhile Chapter XVII of the Old Act.

SCHEME OF THE NEW ACT

Under the Old Act, each section was a self-contained code, which included definitions, exclusions, thresholds, etc. In contrast, the New Act has spread the provisions across various tables, and one needs to read the applicable section along with the relevant table and Serial Number in the said table, to determine the applicability and rate of TDS. It is to be noted that definitions for the purpose of Chapter XIX are contained in section 402, which is titled as “Interpretations” for the purposes of this chapter.
Across the sections relating to the TDS and TCS provisions, the language has been simplified and has been put up in a tabulated manner such that it is aligned with the structure of the New Act. Various sub sections to the main section, as provided under the Old Act, are provided in a simplified language in the New Act.

The scheme of the New Act is as follows.

  • Section 393(1) deals with payments made to a Resident
  • Section 393(2) deals with payments made to a Non-Resident
  • Section 393(3) deals with payments made to any person (i.e. both Resident and Non-Resident)
  • Section 393(4) deals with payments where no deduction of tax is required to be made

Each of the above 4 sub-sections includes a table distinctly listing the type of payment, the category of the payer and the applicable TDS rate with the threshold.

In terms of reading the New Act, sub section (1) or sub section (2) or sub section (3) needs to be read in conjunction with sub section (4) concurrently, so as to check whether the applicable provisions have any carve outs or not, including thresholds for
attracting TDS.

Similarly, section 394 of the New Act, which relates to TCS provisions, also includes a table which includes all sub sections of current section 206C.

There is one more table in section 395 dealing with declaration for nil / lower TDS. This covers the procedure for obtaining Nil / lower TDS in certain cases.

Requirements for filing 15CA/15B etc. as per section 195(6) of the Old Act are now expected to be prescribed under section 397(3)(d) of the New Act.

Succinctly, these sections as outlined in the New Act have largely simplified the language as provided in the Old Act, and have essentially tabulated the provisions by retaining the core concept with certain rewording being carried out at a few places.

Furthermore, Section 400 of the New Act has been introduced to empower the CBDT to issue guidelines for the removal of any difficulty in giving effect to the entire chapter of collection and recovery of tax. It is expected that such guidelines will need to be issued considering the changes made in the entire gamut of the TDS / TCS provisions, as one will now need to refer to Serial No of the Tables under the applicable sections, rather than the current practice of referring to the section (or sub section) itself. This will require changes in the entire manner of reporting in the TDS statements, returns, certificates and challans to be used for making the TDS payments. One also awaits the Rules to be notified, as these will contain substantial procedural changes.

TDS & TCS Overhaul Whats New in the 2025 TAx Act

SIGNIFICANT CHANGES

This article brings out the changes in the TDS provisions in the Old Act and the New Act

I)Section 392 of the New Act – Salary and accumulated balance due to an employee

Section 392 of the New Act merges the existing section 192 (TDS on salary) and 192A of the Old Act (TDS on EPF withdrawals). While the crux of both sections of the Old Act is retained, the New Act also clears the ambiguity by providing that payments made to employees on account of EPF withdrawals shall be subject to TDS @ 10% for payments made in excess of ₹50,000.

II) Section 393 of the New Act – Tax to be deducted at source on other payments

Before embarking to this section, it becomes essential to discuss the concept of a ‘Specified Person’ as the table provided in the section 393 and section 394 refers to the said term. The New Act distinctly categorizes the Payer as a ‘Specified Person’ and ‘Any other person’.

The term ‘Specified Person’ has been defined under section 402(37) of the New Act as follows:

A ‘Specified Person’ means:

(a) any person, not being an individual or Hindu undivided family; or

(b) an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed ₹1 crore in case of business or ₹50 lakh in case of profession during the tax year immediately preceding the tax year in which such income or sum is credited or paid.

In terms, it is bringing into effect the exclusions from the applicability of the chapter on a pari materia basis to the existing provisos to several sections under the Old Act, and is more of a redrafting for ease of reading, rather than any material change of law. This definition is relevant for determining the applicability of the several items listed in the tables, where TDS is to be applicable to payers who are individuals or Hindu Undivided Families.

While the term ‘Any other person’ has not been defined under the New Act, it would mean that Any Person would mean a person who is not a ‘Specified Person’.

III) Lower TDS deduction certificate – Scope expanded

The Old Act provided that certificate to obtain lower TDS rate was available only to payments in the nature of Salary, interest on securities, dividends and interest other than interest on securities.

Section 395 of the New Act has expanded its scope and accordingly, all types of payments are eligible for availing the benefit of obtaining a lower TDS deduction certificate.

While the draft Bill provided for certificate only for lower rate of TDS, the New Act provides for certificate for either nil or lower rate of TDS.

IV) TDS on commission and brokerage – Streamlining of definition to exclude services in the nature of ‘advertisement’

Section 194H of the Old Act provides for deduction of tax at source for payments made in the nature of commission and brokerage (other than payments made in the nature of professional services) @ 2%. The said section also provided for a definition of ‘professional services’ by way of an Explanation in the section, i.e. Explanation (ii). This definition did not include advertising services, and hence commission or brokerage relating to advertising services were covered by section 194H.

Besides, section 194J of the Old Act, which provides for payments in the nature of professional or technical services, this section also provides for a definition of ‘professional services’. The definition under this section, in Explanation (a) includes the profession of advertisement. As a result, professional services relating to advertisement were also sought to be covered by section 194J.

Section 393 read with section 402(28) of the New Act aligns this anomaly by streamlining the definition of professional services across both TDS sections, so as to mention that advertising services are professional services.

V) Sr. no. 9 – TDS on rent – Streamlining of definition

Currently under the Old Act, TDS to be deducted on Rent is spread across 4 sections i.e. Section 194 I (Rent), Section 194-IA (Payment on transfer of certain immovable property other than agricultural land), Section 194-IB (Payment of rent by certain individuals or Hindu undivided family) and Section 194-IC (Payment under specified agreement).

While section 194 I of the Old Act provided for a broader definition for payments made in relation to Rent, Section 194 IB of the Old Act restricted itself to only land or building or both. Section 393(1) read with section 402(29) of the New Act has streamlined the definition, with the change that now even rent for the use of factory buildings and land appurtenant to factory building are now included.

VI) Sr. No. 14 – Update on timing of collection of TCS exceeding ₹10 Lacs in case of motor vehicle

Section 206C(1F) of the Old Act required collection of tax source on the amount exceeding ₹10 Lacs at the time of receipt from the buyer of a motor vehicle. Section 394(1) of the New Act as amended has brought forward the timing for collection of tax at source by changing the timelines as follows:

– at the time of debiting of the amount payable by the buyer or licensee or lessee to the account of the buyer or licensee or lessee; or
– at the time of receipt of such amount from the said buyer or licensee or lessee in cash or by way of a cheque or a draft or any other mode, whichever is earlier.

VII) Sr. No. 5 – Interest income

This entry in section 393(1) of the New Act has essentially clubbed 2 sections – Sections 193 and 194A of the Old Act.

Upon reading of section 393(1) with 393(4) of the New Act, it is worthwhile to note that while all exemptions available are still retained under the New Act when compared to the Old Act, the exemption previously available to ‘any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank)’ has been removed and accordingly if it crosses the threshold limits, then TDS ought to be deducted. This is on account of change in definition of banking company in section 402, which now does not include cooperative banks. consequently, the exemption in this aspect is now restricted to a banking company only.

VIII) TDS on certain amounts paid in cash

Section 194N of the Old Act provides for TDS higher rates of 2% / 5% with different thresholds for cash payments by banks, cooperative banks and post offices, depending on whether the recipient has or has not filed his income tax returns for the preceding three years. Under the New Act, Sl. No 5 of the Table below section 393(3) now does away with the need to verify if the tax returns of the recipient have been filed or not, and fixed the thresholds at ₹3 crore for cooperative banks, and ₹1 crore for others., i.e. banks and post offices.

CONCLUSION

The Old Act and New Act are substantially the same, except the few differences noted above. However, the users will need to get used to the new manner of the presentation of the law. Instead of the provisions relating to a particular type of deduction being available in one place earlier, now reference will need to be made to the section, the applicable table, the table for exclusions, and the definition section in the chapter. It is expected that the users will take time to comprehend the change, and will need to be careful while preparing challans, returns and the like while complying with the law. For the sake of an easy reference, an Annexure is appended to depict the corresponding provisions under both the laws.

Ready Referencer for sections applicable for TDS provisions under both Acts

A. CORE TDS SECTIONS (192 TO 196D)

Old Section Description New Act Section(s)
192 Salary 392
192A PF withdrawal 392(7)
193 Interest on securities 393(1) Sl. No. in Table – 5(i);

393(4) Sl. No. in Table – 6
194 Dividends 393(1) Sl. No. in Table – 7;

393(4) Sl. No. in Table – 10
194A Interest (other than securities) 393(1) Sl. No. in Table – 5(ii),(iii);

393(4) Sl. No. in Table – 7
194B Lottery winnings 393(3) Sl. No. in Table – 1
194BA Online gaming winnings 393(3) Sl. No. in Table – 2
194BB Horse race winnings 393(3) Sl. No. in Table – 3
194C Contractors payments 393(1) Sl. No. in Table – 6(i);

393(4) Sl. No. in Table – 8
194D Insurance commission 393(1) Sl. No. in Table – 1(i)
194DA Life insurance policy proceeds 393(1) Sl. No. in Table – 8(i)
194E Payments to NR sportsmen 393(2) Sl. No. in Table – 1
194EE NSS deposits 393(3) Sl. No. in Table – 6
194F Repurchase of units Omitted (already omitted in 2024)
194G Lottery ticket commission 393(3) Sl. No. in Table – 4
194H Commission/Brokerage 393(1) Sl. No. in Table – 1(ii);

393(4) Sl. No. in Table – 1
194-I Rent 393(1) Sl. No. in Table – 2(ii);

393(4) Sl. No. in Table – 2
194-IA Transfer of immovable property 393(1) Sl. No. in Table – 3(i)
194-IB Rent by certain individuals/HUF 393(1) Sl No.in Table -2(i)
194-IC Joint development agreement 393(1) Sl. No. in Table – 3(ii)
194J Professional / Technical fees 393(1) Sl. No. in Table – 6(iii);

393(4) Sl. No. in Table – 9
194K Income from units 393(1) Sl. No. in Table – 4(i);

393(4) Sl. No. in Table – 4
194L Compensation for compulsory acquisition (old) Omitted
194LA Compensation for immovable property 393(1) Sl. No. in Table – 3(iii);

393(4) Sl. No. in Table – 3
194LB Interest from infrastructure debt funds 393(2) Sl. No. in Table – 5
194LBA Income from units of business trust 393(1) Sl. No. in Table – 4(ii);

393(2) Sl. No. in Table -s 6 & 7;

393(4) Sl. No. in Table -s 5,13
194LBB Income of investment funds 393(1) Sl. No. in Table – 4(iii);

393(2) Sl. No. in Table – 8;

393(4) Sl. No. in Table – 14
194LBC Securitisation trust income 393(1) Sl. No. in Table – 4(iv);

393(2) Sl. No. in Table – 9
194LC Interest from Indian company (foreign borrowings) 393(2) Sl. No. in Table -s 2,3,4
194LD Interest on Government securities / bonds Omitted
194M Payments by certain Individuals/HUFs 393(1) Sl. No. in Table – 6(ii)
194N Cash withdrawals 393(3) Sl. No. in Table – 5;

393(4) Sl. No. in Table – 18
194-O E-commerce payments 393(1) Sl. No. in Table – 8(v);

393(4) Sl. No. in Table – 11
194P TDS for specified senior citizens 393(1) Sl. No. in Table – 8(iii)
194Q Purchase of goods 393(1) Sl. No. in Table – 8(ii)
194R Perquisite/business benefit 393(1) Sl. No. in Table – 8(iv)
194S Virtual digital assets 393(1) Sl. No. in Table -8(vi))

393(4) Sl.No. in Table -12
194T Payments to partners 393(3) Sl. No. in Table -7
195 Payments to non-residents Entirely merged into 393(2) Non-resident
195A Net-of-tax income 393(10)
196 Payments to Govt/RBI/Exempt bodies 393(5)
196A Units of non-residents 393(2) Sl. No. in Table – 10;

393(4) Sl. No. in Table – 15
196B Income from units 393(2) Sl. No. in Table -s 11 & 12
196C Foreign currency bonds/shares 393(2) Sl. No. in Table -s 13 & 14
196D FII income from securities 393(2) Sl. No. in Table -s 15 & 16;

393(4) Sl. No. in Table -s 16 & 17

B. TDS Compliance, Certificates, and Reporting

Old Section Subject New Act Section
197 Lower deduction certificate 395(1)
197A No deduction in certain cases 393(6)
197B Lower deduction – temporary Omitted
198 TDS deemed income of payee 396
199 Credit for TDS 390(1),(5),(6)
200 Duty of person deducting TDS 397(3)
200A Processing of TDS statements 399
201 Failure to deduct/pay TDS 398
202 TDS is one mode of recovery 390(4)
203 TDS certificates 395(4)
203A TAN 397(1)
206A Statement for payments without TDS 397(3)
206AA PAN requirement 397(2)
206AB Higher TDS for non-filers Omitted

C. TCS (Old → New)

Old Section Description New Section
206C Procedural & other provisions for TCS Compliance under 395(3), 397(3), 398
206C(1) TCS on specified goods (alcohol) 394(1) –Sl. No. 1 in Table
206C(1) TCS on sale of scrap 394(1) – Sl. No. in 4 Table
206C(1) TCS on sale of tendu leaves 394(1) – Sl. No. in 2 Table
206C(1) TCS on sale of Timber, etc. 394(1) – Sl. No. in 3 Table
206C(1C) TCS on  parking lot, toll etc. 394(1) –Sl. No. 9 in Table
206C(1C) TCS on sale of minerals being coal, or lignite or iron ore 394(1) – Sl. No. in 5 Table
206C(1F) TCS on sale of motor vehicle 394(1) – Sl. No. 6 in Table
206C(1G) TCS on foreign remittance (LRS) 394(1) – Sl. No. 7 Table
206C(1I) TCS on sale of overseas tour package 394(1) – Sl. No. 8 Table
206CA TAN for TCS collectors 397(1)(a)
206CC PAN requirement for TCS 397(2)

DPDP Law, Cyber Security and Chartered Accountants

India’s Digital Personal Data Protection (DPDP) Law, operationalised by the 2025 Rules, establishes a privacy-centric legislative framework for managing personal data, aligning India with global standards like GDPR and affirming privacy as a fundamental right. The regime is anchored by core principles like consent, data minimization, and accountability.

The law empowers the Data Protection Board (DPB) to enforce compliance, imposing heavy fines up to INR 250 crores for violations. Data Fiduciaries must obtain explicit consent, maintain data logs, designate a DPO (for Significant Data Fiduciaries (SDFs)), and perform Data Protection Impact Assessments (DPIAs). Data Principals are granted rights to access, correct, and erase their data.

While distinct from cybersecurity (which protects all digital assets), DPDP focuses specifically on the lawful processing of personal data. Chartered Accountants (CAs) are positioned to play a vital strategic and advisory role by verifying DPDP controls, participating in DPIAs, assessing financial reporting liabilities, and guiding clients to use compliance as a strategic differentiator.

INTRODUCTION

The recent Digital Personal Data Protection (DPDP) Law, enacted by the Indian government and operationalised with the DPDP Rules of 2025, marks a significant milestone in India’s digital economy and privacy landscape. India’s DPDP Act establishes clear legislative frameworks for processing, storing, and transferring personal data, aiming to balance innovation with robust privacy rights. Enacted after years of deliberation, the DPDP Act and its 2025 Rules represent India’s alignment with global data protection standards. CA as an individual in practice or firms collectively handle massive amounts of personal financial data of their client and hence they themselves are Data Fiduciaries. This article explores the law’s context, core principles, compliance obligations, comparison with Cyber Security, and the strategic, audit, and advisory functions CAs are now expected to discharge, as well as the implications for practising CAs.

EVOLUTION AND CONTEXT OF THE DPDP ACT

India’s move toward a unified data protection law was driven by rapid digital adoption, rising cybersecurity incidents, and the Supreme Court’s affirmation of privacy as a fundamental right. Enacted in 2023 and implemented in phases starting in 2025, the DPDP Act positions India closer to global standards, such as the General Data Protection Regulations (GDPR). The Act and Rules reflect extensive stakeholder consultations and aim to promote trust, accountability, and cross-border data interoperability.

CORE PRINCIPLES AND STRUCTURE

The DPDP regime is anchored on principles of consent, transparency, purpose limitation, data minimization, accuracy, storage limitation, security safeguards, and accountability. The Data Protection Board (DPB) is empowered to oversee compliance, impose penalties, and issue operational guidance. Organisations must implement structured governance mechanisms, including impact assessments, audit trails, consent recording, and breach response controls.

RIGHTS AND DUTIES UNDER THE DPDP ACT

Data Principal Rights

  •  entitled to obtain access to their personal data, request correction of inaccuracies, and seek erasure of such data in accordance with the Act.
  •  designate a nominee to exercise their rights and manage their personal data in the event of their incapacity or death.
  •  require organisations to provide clear information on how their personal data is processed and may request erasure where lawful and appropriate.

Duties of Data Fiduciaries

  •  Obtain explicit, free, and informed consent from Data Principals before collecting or processing their personal data.
  •  Provide easy opt-out mechanisms and ensure Data Principals can obtain access to their data upon request.
  • Perform Data Protection Impact Assessments and regular audits as mandated for Significant Data Fiduciaries (SDFs), to evaluate and mitigate privacy risks.
  • Designate a Data Protection Officer and maintain data logs for at least one year.
  • Implement appropriate retention and data-flow controls for personal data, recognising that the Act does not mandate blanket localisation; assess and manage retention requirements for specific categories of data.
  • Ensure that cross-border transfers are executed only in compliance with applicable law, targeted restrictions prescribed by the Government, and the conditions set out in the Rules.

Exemptions

  •  Processing for research, statistical, or archival purposes provided such processing adheres to conditions that safeguard personal data and prevent misuse.
  • Startups and specified government functions may be granted reduced or conditional compliance requirements, subject to notifications issued by the Government, to balance regulatory burden with operational needs.

Enforcement and Penalties

  •  Non-compliance can attract heavy fines, up to INR 250 crores, depending on severity.
  •  Repeated violations can result in blocking access to services.
  •  Mandatory breach notifications to both individuals and the Data Protection Board (DPB).

Data Privacy is your Business A CA's Guide to India's DPDP Act

CYBERSECURITY AND DPDP REGULATIONS

Cybersecurity and DPDP regulations share common objectives but also have distinct focuses and implications, especially for Chartered Accountants (CAs) in India.

Similarities Between Cybersecurity and DPDP Regulations

Aspect Remarks
Protection of Data Both aim to protect sensitive information—cybersecurity focuses on protecting all digital asset security, while DPDP targets personal data privacy and lawful processing.
Risk Management They require organizations to assess risks, implement controls, monitor vulnerabilities, and respond to incidents or breaches effectively.
Compliance and Accountability Both impose legal and regulatory compliance responsibilities, demanding documented policies, audits, and reporting to regulators and stakeholders.
Incident Response Mandate timely detection, notification, and mitigation of data breaches or cyber incidents.
Governance Frameworks Both require established governance structures, including roles such as Data Protection Officers (DPOs) and Chief Information Security Officers (CISOs).

Differences Between Cybersecurity and DPDP Regulations

Aspect Cybersecurity DPDP Regulations
Scope Protects all digital information assets and IT infrastructure from cyber threats and attacks Governs the processing, storing, and sharing of personal data in compliance with privacy rights
Focus Ensures confidentiality, integrity, and availability of data and systems Emphasises lawful, fair, and transparent processing of personal data with user consent
Legal Basis Based on IT Act, sectoral cyber laws, and security frameworks like ISO 27001 Based specifically on DPDP Act, 2023 and DPDP Rules, 2025 with a privacy-centric legal framework
Primary Function Technical controls such as firewalls, encryption, access controls, intrusion detection Policy-based controls, data minimisation, consent management, impact assessment, and rights of Data Principals
Regulatory Oversight CERT-In, sectoral regulators (RBI, IRDA) Data Protection Board established under DPDP Act
Penalties For cybersecurity breaches and IT law violations Heavy fines for personal data breaches, non-compliance with privacy norms (up to INR 250 Cr)

Chartered Accountants’ Obligations in DPDP Compliance

Obligation Description
Data Fiduciaries requiring privacy and protection of their clients data
Compliance Audits Verify implementation of DPDP-compliant data protection controls and processes.
Risk and Impact Assessments Participate in DPIAs to evaluate data processing risks and mitigation strategies.
Financial Reporting Ensure accurate accounting and disclosure of data protection-related liabilities and penalties.
Advisory Services Guide organizations on policy, contractual, and procedural updates for compliance.
Collaboration with DPOs Provide independent assurance on data protection controls and breach management.
Confidentiality & Ethics Maintain confidentiality of client data consistent with professional standards.
AI and Technology Audits Audit and advise on AI systems’ compliance with DPDP requirements.

LIKELY SDFs IN INDIA: SECTORS / COMPANIES

Based on the criteria in the DPDP Act / Rules (volume of data, sensitivity, risk, technology use) and expert commentary, these are the sectors / companies that are most likely to be designated as Significant Data Fiduciaries (SDFs) – 1) BFSI (Banks, Fintech, Non-bank Financial Institutions), 2) Hospitals, diagnostic labs, telemedicine platforms, 3) E-commerce / Retail Platforms, 4) Social media giants (Meta, Instagram, large content platforms), Internet Platforms, 5) Major telecommunications service providers, 6) Large IT / SaaS companies, 7) Government Contractors / Public-Private Entities, 8) Companies using AI / algorithmic profiling, biometric analytics, behavioral profiling etc.

CHARTERED ACCOUNTANT’S IN PRACTICE – A DATA FIDUCIARIES

The DPDP Act makes CAs in Practice a Data Fiduciaries. CA handles significant personal data (financials, income, etc.), making them Data Fiduciaries responsible for its protection. Processing personal data requires specific, informed, free, unambiguous consent from their clients. Clients (Data Principals) have rights to access, correct, erase data, and appoint others to exercise these rights.

To comply with the requirements, the CAs in Practice require clear Privacy Notices & explicit Consent for client data.

CA has to take updated Engagement Letters which must covers all the details – what (data), why (purpose), how (it’s protected), rights (access/erase) and complaint links necessitating proactive updates for transparency, risk mitigation, and trust, especially for employee/children’s data.

The engagement letter should be expanded and formalised as a comprehensive data protection document, incorporating sections that address the following a) Acknowledging DPDP Act, CA’s role as Data Fiduciary, b) What specific personal data (financial, Aadhaar Card details etc.) is collected, c) Clearly state why (tax filing, audit, advisory) and limit it, d) How consent is obtained (affirmative action, e.g., signed letter) and that it’s specific to purpose, e) Steps taken to protect data (access controls, encryption), f) Inform clients of their right to access, correct, withdraw consent, etc., and how to exercise them, g) Specify process for clients to withdraw consent and data erasure timelines, h) If data shared with third parties (e.g., software vendors, bankers etc.), specify and get consent, i) How to lodge complaints (Link to DPB/Internal Mechanism), j) Specific clause for parental consent if applicable.

OPPORTUNITIES FOR CHARTERED ACCOUNTANTS

  •  New Compliance Practice Area: CAs can advise companies on DPDP compliance frameworks, audit data protection systems, and certify controls akin to financial audits. This is akin to how GST opened a new field for CAs.
  •  Risk and Governance Advisory: mitigation strategies, and integrate privacy governance with financial and operational audits, helping organisations identify privacy risks, and recommend.
  •  Training and Capacity Building: Delivering workshops on DPDP laws, data privacy culture, and cybersecurity basics for employees and management.
  •  Assurance and Reporting: Conducting independent data protection audits, evaluating breach preparedness, and supporting statutory disclosures of data privacy risks.
  •  Representation and Liaison: Representing clients in front of regulatory authorities like the Data Protection Board for compliance issues.
  •  Cross-disciplinary Expertise: Gaining certifications in data privacy (e.g., CIPP, CIPM), cybersecurity (e.g., CISSP), or IT auditing (e.g., CISA) to strengthen advisory credibility.
  •  Strategic Compliance: Turning Risk into Opportunity: CAs should guide companies to treat compliance not as a checkbox but a strategic differentiator, enabling trust and competitive advantage.

CHALLENGES AND EMERGING ISSUES

  •  Phase-wise rollout with an 18-month transition period presents complexities for project planning and milestone tracking.
  •  Balancing compliance, business agility, and cost—especially for MSMEs and startups.
  •  Interpreting rules around algorithmic transparency and AI audits.
  •  Navigating sectoral overlaps (financial regulations, IT Act, etc.).

IMPORTANT ASPECTS RELEVANT TO CHARTERED ACCOUNTANTS

Some important aspects of DPDP Act relevant to chartered accountants are explained below

1. Core Compliance Checklist (All Entities)

  •  Maintain updated Privacy Policy, consent mechanism, and Record of Processing Activities.
  •  Implement personal data lifecycle controls: collection → storage → retention → deletion.
  •  Put in place procedures for access, correction, erasure, withdrawal and nomination requests.
  •  Establish incident response and breach notification workflows.
  •  Execute Data Processing Agreements with all vendors and maintain annual due-diligence records.
  •  Retain security and system logs for the minimum period prescribed under the Rules.

2. Additional Requirements for Significant Data Fiduciaries (SDFs)

  •  Appoint Data Protection Officer in India.
  •  Undertake Data Protection Impact Assessments for high-risk processing.
  •  Commission independent data audits annually.
  •  Maintain board-level oversight on privacy, risk and incidents.

3. Key Areas for CA Engagement

  •  Governance & Risk Advisory: data mapping, policy framework, DPIA facilitation, vendor risk.
  •  Assurance: review of controls, log retention, breach readiness, and compliance documentation.
  •  Financial Reporting: evaluate provisions or contingent liabilities for penalties under Ind AS/ AS; assess post-balance sheet events and impairment implications.
  •  Contract Vetting: recommend clauses on purpose limitation, security safeguards, sub-processing and deletion.

4. The “Consent Manager” Framework – This is a new entity type in the fintech/financial ecosystem. CAs advising fintech clients need to understand this structure as it changes how financial data is shared

CONCLUSION

While cybersecurity focuses on protecting IT assets, including broader information systems from cyber attacks, DPDP regulations focus specifically on protecting individuals’ personal data privacy through lawful processing practices. Both require robust governance, risk management, and compliance mechanisms. Chartered Accountants have a significant opportunity to expand their role beyond traditional finance and audit into the emerging field of data privacy compliance and cybersecurity assurance. Achieving cross-disciplinary expertise through certifications and continuous education will position CAs as trusted advisors in India’s evolving digital privacy landscape. Chartered Accountants are pivotal in ensuring companies not only comply with the law but also strengthen governance, risk management, and public trust. Their multidisciplinary expertise will be vital as businesses transition to the new regulatory paradigm and leverage compliance for strategic growth. CAs in Practice should proactively revise the engagement letter to ensure compliance with the law and ensure robust consent management systems are in place before full enforcement.

Place of Supply of Goods In Case Of Ex-Works Transactions

In Toyota Kirloskar Motor Pvt Ltd vs. Union of India, the Karnataka High Court clarified that Section 10(1)(a) of the IGST Act determines the Place of Supply (POS) for Ex-Works (EXW) transactions. Although EXW contracts transfer title at the factory gate, the court held that POS is where physical movement terminates for delivery to the recipient. This statutory factual test overrides private contractual terms or the Sale of Goods Act. This interpretation upholds the destination-based consumption tax principle, preventing double taxation when goods are destined for a different state.

The implementation of the Goods and Services Tax (GST) in India transitioned the indirect tax system from an origin-based model to a destination-based consumption tax. This fundamental shift mandates that the tax accrues to the state where the goods or services are finally consumed or utilized. Central to applying this principle is the accurate determination of the place of supply (POS).

In transactions involving the sale of goods, the determination of POS often centers on physical logistics. However, the commercial reality of “Ex-Works” (EXW) contracts introduces complexities that challenge the straightforward application of the statutory rules, especially when the supplier and the registered recipient are located in different states. Under an EXW contract, the supplier’s contractual liability typically ends when the goods are made available at their premises, with the recipient assuming responsibility for subsequent transit and risk.

This article details the legal framework governing the determination of the Place of Supply for goods, analyses the conflict arising specifically in the context of EXW transactions where movement of goods is involved, and outlines an interpretation established by the law, supported by administrative clarifications and judicial interpretation.

THE LEGAL FRAMEWORK FOR DETERMINING PLACE OF SUPPLY OF GOODS

For supply of goods other than imports or exports, the applicable provisions are listed in Section 10 of the Integrated Goods and Services Tax (IGST) Act, 2017.

The fundamental principle governing the Place of Supply for most transactions involving the movement of goods is defined in Section 10(1)(a) of the IGST Act:

Section 10(1)(a): where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient.

This provision highlights several critical elements:

  1.  Involvement of Movement: The rule applies when the supply inherently involves the physical movement of the goods.
  2.  Person Causing Movement: It explicitly specifies that the person undertaking the movement is irrelevant for determining the POS. The movement can be caused by the supplier, the recipient, or any other person.
  3.  Termination for Delivery: The determining location is where the movement of the goods ends specifically for delivery to the recipient.

AMBIGUITY OF EX-WORKS (EXW) TRANSACTIONS

The EXW contract stipulates that the seller fulfils its’ obligation to deliver when they place the goods at the disposal of the buyer (or their designated carrier) at the seller’s premises. The buyer assumes all risks and costs from that point forward.

When an EXW sale occurs between a registered supplier in State A and a registered buyer in State B, and the buyer arranges transport out of State A, an apparent conflict arises upon applying Section 10(1)(a):

  1.  Argument for Intra-State Supply (Origin-based interpretation): It can be contended that since the supplier’s legal and contractual responsibility for “delivery” ends at the factory gate in State A, the “movement of goods terminates for delivery to the recipient” at that point. If this interpretation were accepted, the Location of Supplier (StateA) and the POS (State A) would be the same, making the supply Intra-State and liable to CGST + SGST.
  2.  Argument for Inter-State Supply (Destination-based interpretation): It is countered that while the contractual term is EXW, the entire transaction involves movement intended for the final delivery address provided by the recipient (State B). The movement initiated by the recipient from State A to State B logically terminates in State B.

 

Ex Works GST The Landmark Ruling on Place of Supply

APPARENT CONFLICTS

In the case of Penna Cement Industries Limited 2020 (37) G.S.T.L. 463 (A.A.R. – GST – Telangana), the Telangana Advance Ruling Authority examined this question raised by the applicant. It held that in the case of EXW sales, the movement of goods does not conclude at the factory gate but terminates at the location specified as the destination in the invoice or transport documents. Accordingly, it held that the Place of Supply is to be determined with reference to this ultimate destination. Consequently, since the Location of the Supplier (State A) and the Place of Supply (State B, the destination) fell under different States, it held that the supply qualifies as inter-state supply.

In the context of timing of input tax credit claim, the Central Board of Indirect Taxes and Customs (CBIC), in Circular No. 241/35/2024-GST dated 31.12.2024, specifically clarified that in an EXW contract, the registered person (dealer) is deemed to have “received” the goods for ITC purposes at the moment the goods are handed over to the transporter at the supplier’s factory gate for onward transmission. This deemed receipt occurs because the delivery is made to another person (the transporter) on the direction of the registered person (the dealer), satisfying the Explanation to Section 16(2)(b) of the CGST Act, 2017. Accordingly, it clarified that the credit can be availed by the recipient at that point of time and need not be deferred till the time of actual physical receipt by the buyer in his warehouse/factory.

Though answering different aspects of EXW transactions, there appears to be an apparent conflict between the advance ruling and the CBIC Circular. In any case, neither of them constitute binding precedents and therefore, the issue seemed unresolved.

TOYOTA KIRLOSKAR’S CASE

Recently, the Karnataka High Court was seized with this precise issue: whether the ‘place of supply’ for inter-state transactions is governed by private contractual terms or by the explicit provisions of the IGST Act. The Court in the case of Toyota Kirloskar Motor Pvt Ltd vs. Union of India 2025-VIL-1276-KAR confirmed that the statutory test for the termination of movement of goods overrides any clauses in commercial agreements regarding the transfer of title or risk, thereby preventing a potential double taxation liability of over ₹4,456 crores for the taxpayer.

The legal challenge originated from a Show Cause Notice (SCN) issued by the tax authorities challenging the petitioner’s classification of its vehicle supplies to out-of-state dealers on an ex-works basis as inter-state transactions, contending they should have been treated as intra-state sales. Based on this single observation, the SCN demanded a substantial amount of tax amounting to ₹4,456,23,39,464/-for the period of April 2018 to March 2021. This demand was levied in addition to the IGST that the petitioner had already remitted on these same transactions, effectively subjecting the company to double taxation.

The conflict centered on a fundamental interpretative question: which legal framework—general contract law or specific tax legislation—should determine the place of a supply for GST purposes?

THE REVENUE’S POSITION (RESPONDENTS)

The tax department’s entire case was built upon the terms of the Sample Dealership Agreement and the associated Tax Invoices. Their argument proceeded as follows:

  1.  Contractual Supremacy: The respondents contended that specific clauses within the dealership agreement were determinative. These clauses established that the title and risk in goods passed from the petitioner to the dealer at the factory in Bidadi, Karnataka, at the moment the goods were placed onto a common carrier for dispatch.
  2.  Equating Title Transfer with “Delivery”: The department equated this contractual transfer of title with the concept of “delivery” under the Sale of Goods Act, 1930.
  3.  Legal Conclusion: Based on this interpretation, they argued that the movement of goods, for the purpose of the GST law, terminated within Karnataka. This, in their view, rendered the transaction an intra-state supply, making it liable for CGST and KGST instead of IGST.

THE TAXPAYER’S POSITION (PETITIONER)

The petitioner argued that the revenue’s interpretation was fundamentally flawed and contrary to the architecture of the GST laws.

  1.  Nature of Supply: The petitioner’s core defence was that the supplies were unequivocally inter-state in nature, as the goods were dispatched from Karnataka for delivery to dealers located in other states. Consequently, they had correctly paid the applicable Integrated GST (IGST) in full accordance with the law.
  2.  Prohibition of Double Taxation: An alternative argument was that compelling them to pay CGST and KGST on the very same transaction for which IGST had already been remitted would constitute double taxation, a practice that is impermissible under law.
  3.  Supremacy of GST Law: The petitioner asserted that the determination of the place of supply for GST is not governed by general commercial laws like the Sale of Goods Act or private contractual arrangements. Instead, it is dictated by the specific, overriding provisions of the IGST Act, which were enacted to deal with such situations.

HIGH COURT’S INTERPRETATION AND LEGAL RATIONALE

The High Court’s analysis establishes a clear hierarchy between GST statutes and general commercial agreements for tax purposes. The court focussed on the explicit language of the IGST Act and the core principles of taxation.
Primacy of Section 10(1)(a) of the IGST Act: The Court identified Section 10(1)(a) of the IGST Act as the sole provision governing the determination of the place of supply in this case. The text of the provision is unambiguous:

Section 10. – Place of supply of goods other than supply of goods imported into, or exported from India. – (1) The place of supply of goods, other than supply of goods imported into, or exported from India, shall be as under:

(a) where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient.

The Court observed that the place of supply is determined by a single, factual test: the location where the movement of goods terminates for delivery to the recipient. The court explicitly ruled that this termination point is not when goods are handed to a common carrier, but when they physically reach the recipient’s destination, enabling them to take actual delivery.

Rejection of Contractual Terms for GST Place of Supply Determination: The court addressed and rejected the respondents’ reliance on the Dealership Agreement and the Sale of Goods Act. It found the department’s attempt to link the contractual transfer of title to the statutory definition of “place of supply” to be erroneous. The court’s finding was that there is “no nexus or connection whatsoever” between the passing of title under a private agreement and the liability to pay IGST as determined by Section 10(1)(a). Thus, for GST purposes, the specific tax legislation provides a self-contained code that overrides general commercial law and private contractual terms. The intent of the parties regarding title transfer is irrelevant to the geographical test mandated by the IGST Act.

Principle Against Double Taxation: The court also fortified its decision by invoking the fundamental principle against double taxation. The court noted that the petitioner had undisputedly remitted the applicable IGST on the full value of the supply, which included both the goods and the freight charges. Therefore, demanding CGST and KGST on the same supply was deemed legally impermissible. The court further observed that the situation was essentially “revenue neutral,” which further weakened the rationale for the department’s aggressive and legally flawed demand.
Accordingly, the High Court allowed the writ petition and held that the place of supply will be the ultimate destination of goods in the case of EXW transactions.

CONCLUSION

Beyond resolving the specific dispute for Toyota Kirloskar, the High Court’s ruling offers critical guidance and reinforces fundamental principles of GST law. This ruling firmly establishes a critical hierarchy: for determining the place of supply, the specific criteria laid out in Section 10(1)(a) of the IGST Act supersede any conflicting terms regarding title transfer, risk, or delivery found in commercial agreements or derived from general laws like the Sale of Goods Act. This means that ‘Ex-Works’ delivery terms in a contract, which might suggest a sale concludes at the factory gate, are irrelevant for determining the nature of the supply (inter-state vs. intra-state) for GST purposes when the goods are destined for another state.

The court further clarified that the phrase “terminates for delivery to the recipient” refers to a physical event. The place of supply is the geographical location where the goods’ journey ends and the recipient is able to take possession. It is not the notional point where title or risk is contractually transferred to a carrier at the supplier’s premises. This interpretation favours a practical, fact-based assessment over a legalistic one based on contractual fine print.

The court’s condemnation of the demand as a form of double taxation reinforces a core tenet of the GST framework. It serves as a powerful reminder that a single transaction cannot be arbitrarily subjected to both IGST and CGST/SGST. This principle protects taxpayers from erroneous demands arising from misinterpretation of the law by tax authorities.

In essence, this judgement provides clear authority that for supplies involving the movement of goods, the determination of place of supply must be based on the physical termination point of the goods’ journey, as mandated by the IGST Act, regardless of contractual agreements to the contrary.