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Year: 2026

Company Law

20. *S M & Co (Chartered Accountants) vs. Track Infoline Pvt Ltd & Ors

COMPANY APPEAL (AT) NO.214/2025

Before NCLAT, Principal Bench, New Delhi

Date of Order: 2nd December, 2025

Auditor not to render prohibited services.

Facts

  •  RT Global Infosolutions Pvt. Ltd. (the “Company”) was the subject of a petition under sections 241 and 242 of the Companies Act, 2013 (CA 2013) filed by Track Infoline Pvt. Ltd., one of its shareholders, alleging fraud, mismanagement, and oppression by the management. S M & Co., a partnership firm of chartered accountants, was the statutory auditor of the Company and was implicated as a respondent in the NCLT proceedings.
  •  A significant factual allegation was that the Company’s registered office was located at New Delhi, which was the residential premises of members of the M family, who were also partners in S M & Co. This was relied upon to suggest that the auditors were not independent and were acting in concert with the management (RG Group) in the alleged mismanagement. After this issue was specifically raised in the petition, the Company passed a board resolution, shortly after an earlier NCLT order, shifting its registered office from the M family residence to a commercial premises adjacent to the registered office of another related company.
  •  The NCLT noted that the Company’s management had made inconsistent and false statements, including in board resolution extracts issued on the Company’s letterhead, which mentioned a different registered office address for a board meeting that did not match the earlier factual position. More crucially, the NCLT examined the audited financial statements and filings (AOC 4) for FYs 2016–17 and 2017–18, which were signed by S M & Co. and formed part of the proceedings. These balance sheets disclosed that the auditor had charged “management fees” and other amounts beyond the statutory audit fee, indicating that services other than audit were being rendered to the Company.
  •  Section 144 of the Companies Act, 2013, which was quoted in the NCLT order, prohibits auditors from rendering certain services, including management services, whether directly or indirectly, to the company, its holding or subsidiary. The petitioner contended that not only had the auditor charged management fees in violation of section 144(h) of CA 2013, but that later balance sheets for FY 2018–19, 2019–20 and subsequent years had been tampered with to show a flat audit fee of ₹2,00,000, thereby removing or altering earlier disclosures of management fees. To support this, reliance was placed on a certificate, issued after arguments had progressed, which purported to explain that certain payments were for ROC filing, tax audit, ITR filing, GST and TDS returns, while omitting any reference to management services.
  •  The NCLT concluded that the certificate referred to above demonstrated that the auditor was acting under specific instructions from the Company and was attempting to regularise or cover up prohibited payments that were earlier reflected in management fees. On these facts, the NCLT held that the auditor was guilty of tampering with records, accepting remuneration for prohibited services, and issuing a certificate contrary to the audited financial statements, and accordingly removed S M & Co. as auditor of the Company.
  •  S M & Co. filed an appeal before the NCLAT challenging the NCLT’s order removing them as auditor. Alongside the appeal, several applications were filed including for condonation of delay in filing the appeal due to the illness (cancer) of the appellant’s father; these interlocutory applications were allowed, and the delay was condoned.

Arguments

  •  Before the NCLT, petitioner therein argued that the auditor’s close connection with the Company’s management, evidenced by the common address and family relationship, showed a lack of independence and collusion in mismanagement. It was contended that the auditors not only failed in their duty to report wrongdoing but actively participated in it by receiving management fees and rendering prohibited services, contrary to section 144 of CA 2013. The petitioner highlighted that the audited balance sheets for FY 2016–17 and 2017–18 clearly reflected payments for “management services” to the auditor, attracting the bar under section 144(h), and giving rise to penal consequences under sections 141 and 147.
  •  The petitioner further submitted that there was a deliberate attempt to cover up the violation and fraud by subsequently altering the financial statements for FY 2018–19, 2019–20 and later years. According to them, the later financials were modified to show a uniform audit fee of ₹2,00,000 without separately disclosing management fees, thereby removing evidence of prohibited services. The certificate issued on behalf of the Company and relied upon by the auditor, was argued to be an afterthought, issued during the pendency of proceedings to recast the nature of payments as being for ROC filings, tax audit, ITR, GST and TDS returns, and not for management services. This, the petitioner contended, demonstrated that the auditor was acting at the behest of the management and tampering with records.
  •  On this basis, the petitioner urged that the auditor had breached statutory duties, independence, and ethical obligations, and therefore should be removed and held guilty of serious professional misconduct and contravention of the CA 2013. It was also argued that the auditor’s conduct facilitated or aided the alleged fraud and oppression, making their removal a necessary step in the reliefs under sections 241–242.
  •  In the appeal before NCLAT, S M & Co. challenged the NCLT’s findings and the direction of removing them as auditors of the Company. The essence of the appeal was that the NCLT had erred in concluding that they had rendered prohibited services and tampered with records, and that there was no basis to hold that section 144 had been violated. The appellant sought to rely on the records and certificates to contend that the services and fees were properly accounted for and that they had not breached their statutory obligations. They also implicitly questioned whether the NCLT could, in a 241/242 petition, remove an auditor based on such findings.
  •  The respondent (Track Infoline) opposed the appeal, supporting the NCLT’s factual findings and emphasising that the audited balance sheets themselves, as placed on record, clearly showed the charging of management fees by the auditor in earlier years, and that the later attempt to generalize the audit fee and issue a clarificatory certificate only strengthened the inference of tampering and collusion.

Conclusion of the Tribunal and the basis

  •  The NCLAT first dealt with the interlocutory applications and allowed those, and condoned the delay in filing the appeal.
  •  The NCLAT noted that there were audited balance sheets for FY 2016–17 and 2017–18, at specified pages of the appeal paper book, duly audited and signed by S M & Co., which showed that the appellant had charged management fees in those years. The appellate order further recorded that even in later years, the appellant continued to charge such fees, thereby contravening section 144(h) of the CA 2013, which prohibits auditors from rendering management services. Having examined the records annexed, the NCLAT agreed with the NCLT’s conclusion that the auditor had provided services other than auditing in violation of section 144 and that the findings in the NCLT’s order did not suffer from any error.
  •  On this basis, the NCLAT held that it found no error in the impugned order. The appeal was accordingly dismissed at the admission stage, thereby affirming the removal of S M & Co. as auditors of the Company and implicitly endorsing the NCLT’s observations on tampering of records, receipt of remuneration for prohibited services, and issuance of contradictory certificates.

Principle Emanating from the Judgement

  •  Auditor’s independence and prohibited services under section 144

The judgement reinforces that a statutory auditor must maintain strict independence and cannot render services that fall within the prohibited categories under section 144, particularly “management services” under clause (h), whether directly or indirectly to the company, its holding or subsidiary. Charging management fees or undertaking management type engagements while simultaneously acting as statutory auditor is a clear violation that can attract both regulatory and judicial consequences, including removal in proceedings under sections 241–242.

  •  Scope of relief in oppression–mismanagement proceedings:

The case illustrates that in an oppression–mismanagement petition under sections 241–242, the NCLT’s remedial jurisdiction extends to examining the role of the statutory auditor and directing removal where the auditor’s conduct is intertwined with the alleged fraud or mismanagement. An auditor found to be non independent can thus be removed as part of the broader relief necessary to bring an end to the matters complained about.

* (Name changed)

21. The Kolhapur Steel Ltd. vs. Karad Projects and Motors Ltd.

C.P.(CAA)/76(MB)2025

NCLT – Mumbai Bench (Court IV)

Date of Order: 3rd November, 2025

The National Company Law Tribunal, Mumbai Bench (NCLT), approved the Scheme of Amalgamation between the Holding and Subsidiary companies, highlighting a bona fide business purpose—such as strategic business and financial planning, including reviving a company, preventing production losses, preserving employment, and safeguarding capital—cannot be invalidated merely because it results in a tax benefit under Section 72A of the Income-tax Act, 1961. Accordingly, the Tribunal rejected the objections raised by the Income Tax Department against the amalgamation scheme.

The key findings and upholding by the Tribunal are as follows:

The NCLT held that the Scheme complies with Sections 230–232, does not violate any law, and does not contradict the public policy. No objections from shareholders or creditors remained unresolved, and regulatory directions were complied with.

However, the Income Tax Department objected to the Scheme on the ground that it was structured to obtain a tax benefit under Section 72A of the Income-tax Act, 1961, and therefore constituted a tax avoidance arrangement.

The Tribunal held that strategic business restructuring resulting in lawful tax benefits does not amount to a colourable device.

Section 72A permits carry-forward of losses subject to stringent conditions.

NCLT accepted the applicants’ clarification that revival of the Transferor’s business, protection of employment, and operational efficiency were the objectives of the merger and not tax evasion.

NCLT also recorded that Income Tax authorities are free to examine tax liability and to take necessary action as possible under the Income-Tax Act, 1961.

The NCLT held that GAAR can be invoked only through statutory procedure under Section 144BA and cannot be used to block sanction of a merger scheme. Therefore, allegations of “impermissible avoidance arrangement” were not sustained.

Conclusion

The NCLT rejected the objections, holding that it is a well-settled principle that any benefit legitimately available to an assessee within the framework of law cannot be denied merely because it may result in a loss of revenue to the Department. The Bench further observed that strategic business and financial restructuring through mergers among group entities—undertaken to revive the business of the transferor company and to safeguard production, employment, and capital—cannot be presumed to be a colourable device merely because
such restructuring results in a tax benefit to the transferee company in accordance with statutory provisions.

Accordingly, the NCLT dismissed the objections of the Income Tax Department and approved the Scheme.

Registration under Section 12A in Cases of an Object for Application outside India

Charitable trusts obtaining registration under Section 12ABfrom the Commissioner of Income Tax (CIT) often face rejection when a trust’s objects permit spending on charitable activities outside India.

The majority of judicial decisions have held that the mere existence of an object permitting spending outside India is not a valid ground for rejection of registration. The definition of “charitable purpose” (Section 2(15)) has no geographical limits, and Section 11(1)(c), which restricts exemption for income applied outside India (unless CBDT approved), is a computation provision relevant only after registration is granted.

However, the Mumbai Tribunal has taken a contrary view in Sila for Change Foundation’s case, upholding the denial of registration on the ground that the 2022 amendments in Section 12AB(4) and (5) permitting cancellation of registration in the event of specified violations effectively require compliance at the registration stage with all other laws material for the purpose of attainment of objects. This decision does not appear to be correct, as the none of the specified violations are attracted merely by having an object permitting spending outside India. Moreover, such an object is necessary if the trust ever intends to seek CBDT approval to spend outside India under section 11(1)(c).

ISSUE FOR CONSIDERATION

Every charitable or religious trust, society or section 8 company (for convenience referred to as “trust”) desiring to claim exemption of its income under sections 11 to 13 of the Income-tax Act, 1961 is required to be registered under section 12A with the Commissioner of Income Tax (“CIT”). The procedure for grant of registration is laid down in section 12AB.

While granting registration, the CIT is required to examine the following:
(i) the charitable or religious nature of the objects of the trust;
(ii) the genuineness of activities of the trust; and
(iii) the compliance by the trust of such requirements of any other law as are material for the achievement of its objects.

If satisfied, on examination, the CIT is required to grant registration under section 12AB. Sub-section (4) of section 12AB lists out the ‘specified violations’ for which the registration already granted can be cancelled by the CIT.

At times, a trust may have some objects in its trust deed or Memorandum of Association permitting it to spend on charitable activities outside India. Very often, at the time of application for registration, in such cases, the CIT may reject the application for registration on the ground that registration is not permissible for a trust which has an object permitting it to spend on charitable activities outside India.

While most of the benches of the Tribunal (including the Mumbai Bench) have taken the view that the existence of such an object in the Trust Deed or Memorandum of Association cannot be a ground for rejection of an application for registration under section 12A, recently, a contrary view has been taken by a couple of benches of the Mumbai Tribunal holding that such refusal to register at the initial stage itself is justified.

SARBAT THE BHALA GURMAT MISSION CHARITABLE TRUST’S CASE

The issue had come up before the Chandigarh bench of the Tribunal in the case of Sarbat the Bhala Gurmat Mission Charitable Trust vs. CIT 189 ITD 353.

In this case, the assessee, a charitable society, was in operation since December 2014. It had applied for grant of registration under section 12A. One of its objects included the opening of branches of the trust in India and abroad.

Charity without Borders The Indian Tax Registration Dilemma

After calling for information and making due enquiries, the CIT denied registration for the reason that the objects of the trust provided for operations being carried out/extended outside India also. The CIT observed that the Act ruled out grant of exemption of income applied for charitable purposes outside India. He noted that operations outside India was allowed only for limited purposes, and that too was subject to approval by the Central Board of Direct Taxes (“CBDT”). He therefore held that the activities of a trust can be treated as charitable only when its income is mandated for application within India, and not if the activities can be carried out outside India, and therefore denied the grant of registration under section 12A to the assessee trust.

Before the tribunal, on behalf of the assessee, it was contended that while denying grant of registration, the CIT had wrongly referred to the provisions of section 11 which denied exemption to incomes which were applied outside India for charitable purposes. The said provision of section 11 was applicable only while computing or determining the exempt income of entities which qualified for the exemption under the said section and that while examining the application for registration u/s 12A, the provisions of section 11 had no role to play. It was explained that for the limited purpose of grant of registration, the CIT was only required to consider the genuineness of the objects and activities of the trust and decide whether the objects listed were for “charitable purpose” as defined in section 2(15). It was pointed out that the definition of “charitable purpose” nowhere restricted the carrying out of charitable activities within the geographical boundaries of India alone. Therefore, while granting registration, the possibility of the trust carrying out activities outside India in future, could not lead to the conclusion that it was not formed for charitable purposes, and that therefore registration was not to be denied for this reason. It was argued that it was only in assessment of income, when the quantum of income exempt was to be determined, that the fact of income applied for charitable activities outside India would be relevant for the purpose of excluding such amount from exemption.

On behalf of the assessee, reliance was placed on the following judicial decisions favouring the view taken by the assessee:

MK Nambyar SAARF Law Charitable Trust vs. Union of India 269 ITR 556 (Del)

Foundation for Indo-German Studies vs. DIT 161 ITD 226 (Hyd Trib)

National Informatics Centre Inc vs. DIT 88 taxmann.com 878 (Del ITAT)

It was further submitted that in any case carrying out activities outside India was not its main object, but only incidental, and that the assessee would primarily carry out its activities in India only.

On behalf of the revenue, reliance was placed on the order of the CIT.

The tribunal noted the primary argument of the assessee against the order of the CIT contending that for the limited purpose of granting registration, the conditions mentioned in section 12AA only needed to be fulfilled; that the provisions of section 11(1)(c) were not relevant for the purpose of registration; section 11(1)(c) could be applied only while determining the income entitled to exemption under section 11 in assessment of income. According to the tribunal, what was therefore to be decided while entertaining the application for registration u/s 12A was whether the law provided for any such geographical limitation in carrying out charitable activities and whether an object clause permitting such activity outside India could lead to rejection of application for registration at the preliminary stage.

The tribunal analysed the provisions of section 2(15), 11, 12, 12A, and 12AA of the Act and observed that the definition of the term “charitable purpose” in section 2(15) listed various activities which qualified as charitable purpose and there was no restriction that required that such activities, when actually carried out, were within the geographical boundary of India. In other words, there was nothing in section 2(15) that mandated against the carrying out of activities outside India. It was only section 11 which placed a geographical restriction by limiting the exemption only to incomes applied to charitable purposes in India. But even section 11 did not completely rule out exemption to incomes applied outside India for charitable purposes, when carried out with the approval of the CBDT.

The Tribunal therefore held that the CIT’s order, denying registration to the assessee merely because its objects included application of income outside India, was not in accordance with law. It was even more so because that was not the sole and main object of the assessee, but only its ancillary and incidental object. Besides, it was not the case that there was to be no application of income within India at all as per the objects, the main object of the assessee involved carrying out charitable activities in India. Under those facts, the tribunal was of the view that, denying registration under section 12A because an incidental object entailed application of income outside India, would result in the assessee being altogether denied exemption to income applied in India, which it was otherwise entitled to in law.

Further, the tribunal observed that the provisions of section 11(1)(c), which the CIT had relied upon for holding that only activities carried out in India would qualify as charitable for grant of registration, was only for the purposes of determining the income which qualified for exemption under section 11. As per the tribunal, this section came into operation only once registration was granted under section 12A, and therefore could not be relevant for the purposes of granting registration under section 12A. As per the tribunal, the scheme of the Act was that all entities carrying out charitable activities as defined in section 2(15) qualified to be registered as charitable entities, but the exemption was provided and restricted only to the extent of income applied for charitable purposes in India.

The tribunal also noted that the issue was squarely covered by the decisions cited (supra) on behalf of the assessee. It noted that in the case of M K Nambyar SAARF Law Charitable Trust (supra), the High Court had held that the application of income outside India was not a relevant criteria for rejecting the application for grant of registration under section 12A, and the officer had to only restrict itself to the satisfaction about the objects and genuineness of the activity of the trust while granting registration, with no restriction at that stage on the activities being carried out inside or outside India.

The Tribunal therefore set aside the order of the CIT, and directed the CIT to grant registration as applied for by the assessee.

A similar view has been taken by other benches of the Tribunal in the cases of Dedhia Music Foundation vs. CIT 173 taxmann.com 394 (Mum), Odhavji Chanabhai Peraj Charity Trust vs. DCIT 177 taxmann.com 178 (Mum), International Bhaktivedanta Institute Trust vs. DIT 42 taxmann.com 330 (Hyd), Dr. T.M.A. Pai Foundation vs. CIT 175 taxmann.com 719 (Bang), TIH Foundation for IOT and IOE vs. CIT 176 taxmann.com 561 (Mum) and Shamkris Charity Foundation vs. CIT 180 taxmann.com 58(Mum).

SILA FOR CHANGE FOUNDATION’S CASE

The issue came up again before the Mumbai bench of the Tribunal in the case of Sila for Change Foundation vs. CIT 173 taxmann.com 694.

In this case, the assessee, a section 8 company, had been granted provisional registration under section 12A(1)(ac)(ii) by the CIT. When it applied for final registration, the CIT noted that one of its 18 objects was – “to provide support and other such developmental services to other organisations in India and outside India in the social sector”. He was of the opinion that this objects clause violated section 11, and therefore registration under section 12A could not be granted, since the assessee had not established the genuineness of the activities. The CIT also noted that the assessee had not established whether this object was compliant with any other law as was material for the purpose of achieving its objects. The CIT therefore rejected the application for registration under section 12AB.

On behalf of the assessee, before the Tribunal, it was submitted that subsequent to the provisional approval, the activities of the institution had commenced and were found to be genuine. It was argued that once the CIT was satisfied that activities undertaken by the institution were genuine, and in consonance with its aims and objectives, registration could not be denied. It was further submitted that the activities of the institution were bona fide, and that the assessee had not applied any income for activities outside India. It was therefore argued that the genuineness of the activities could not be doubted.

On behalf of the assessee, it was further submitted that clause 12 of the Memorandum of Association was not meant to enable the assessee to carry out charitable activities outside India. All that the clause stated was that the assessee could render support and coordinate with trusts/Institutions outside India. An example was given that if a student was granted education loan for seeking education outside India, and the assessee paid tuition fees to a university outside India of such student, it would not mean that the amount was utilised or applied for charitable activities outside India.

On behalf of the revenue, it was argued that clause 12 of the objects stated that it would provide support and carry out such development activities to other organisations in India and outside India in the social sector. Section 11 required that the activities must be carried out in India. Clause 12 of the objects was clearly in contravention of the primary requirement under section 11. It was therefore submitted that the claim of exemption was rightly denied.

The tribunal analysed the provisions of section 12A, and the changes in the registration procedure effective from 1st April 2021. It noted that at the time of application for regular registration, the CIT was required to call for such documents or information or make such inquiries as he thought necessary to satisfy himself about the genuineness of the activities of the trust and the compliances of other laws. Once he was satisfied on the above aspects, then registration would be granted.

The tribunal further noted that, as per section 12AB(4) and (5), with effect from 1st April 2022, the registration can be cancelled in the case of specified violations. The list of specified violations includes, inter alia, cases where it is found out that the activities are not genuine, or are not carried out in accordance with the objects of the institution, or the institution has not complied with the requirements of any other law as are material to the attainment of its objects. It noted that the Explanatory Memorandum explaining the provisions of the Finance Bill 2022, stated that provisional registrations were granted in an automatic manner, and that the provisions for cancellation of registration were being introduced to ensure that non-genuine trusts do not get the exemption. Therefore, the tribunal observed that merely because provisional registration had been granted, did not mean that final registration could not be denied.

The tribunal then analysed the provisions of sections 11(1)(a) and 11 (1)(c). It noted the decision of the Delhi High Court in the case of DIT vs. National Association of Software and Services Companies 345 ITR 362, where the Delhi High Court held that there was no need for a trust to apply for CBDT approval for application of income outside India under section 11(1)(c) if section 11(1)(a) granted exemption even if income of the trust was applied outside India so long as the charitable purposes were in India. It noted the Delhi High Court’s observations that it was illogical to allow expenditure paid to a student to study abroad but the same was not permissible if the payment was made directly to the foreign university. It also noted the decision of the Mumbai Tribunal in the case of Jamsetji Tata Trust vs. Jt DIT 148 ITD 388, where the tribunal held that education grant given to Indian students for studying abroad amounted to application of money for charitable purposes in India and though the final execution of the purpose may be outside India, that would not affect the satisfaction of the conditions.

According to the tribunal, the courts had always proceeded on the footing that section 11(1)(a) does not attract forfeiture of exemption of the entire income, unlike the provisions of section 13(1). In other words, if a trust was willing to pay taxes to the extent of its activities outside India, then, to that extent, it can have such activities. This supported the assessee’s contention that the provisions of section 11(1)(a) were attracted only if actual expenditure was incurred outside India, and could not be invoked only on the ground that the trust deed provided for activities outside India.

Having noted in favour of registration, the Tribunal finally rejected the application for registration by mainly relying on insertion of sub-sections (4) and (5) in section 12AB by the Finance Act 2022 which had widened the scope of violations, as specified in the explanation therein. According to the tribunal, the condition that the objects of the trust were not in violation of compliance under any other law for the time being in force towards achieving the material purposes of the objects, had now become necessary to be satisfied and established by the assessee at the time when its application was scrutinised for converting provisional to final registration. In the view of the tribunal, with such compliance required at the stage of registration, the relevant clause 12 in the Memorandum of Association of the assessee was a hurdle to grant final registration.

The Tribunal therefore rejected the appeal of the assessee, upholding the denial of registration under section 12A.

This decision was followed by another bench of the Tribunal (with one member common to both cases) in the case of Hemlata Charities vs. CIT 172 taxmann.com 649.

OBSERVATIONS

The power to refuse or reject the application for registration is strictly governed by s. 12AA of the Act. As noted earlier, the conditions that are to be examined by the CIT and in respect of which he needs to satisfy himself do not require him to reject the application on the ground that one of the objects of the trust contains a clause that permits the trust to apply its income out of India; as long as the objects behind the application are charitable and satisfy the test of section 2(15), there is no hurdle in granting registration to the trust.

At the stage of application, there may not be even any application of income. While section 11(1)(c) limits such application only where it is approved by the CBDT, that by itself is not a hurdle in registration of the trust. As long as the objects are found to be charitable within the meaning of section 2(15), the only thing that is required to be examined is whether the activities of the trust are genuine or not; they do not become non-genuine where some income is applied outside India, as long as the application is for charitable purpose.

The next condition, the non-satisfaction of which permits the refusal, is whether there was any non-compliance of requirements of ‘other law’ that is material for achieving the objects of the trust. It is beyond one’s imagination to conceive as to how a charitable object of the trust that permits application in a foreign country can be in non-compliance of some other law, and how can it be so even before the application of income is made for an overseas object. In any case it is for the CIT to demonstrate, with proof, that having such an object can and will lead to any non-compliance, that too one which can be considered to be material.

Applying or invoking the provisions of s. 11(1)( c) at the time of registration or even at the time of renewal of registration is absolutely avoidable. This provision is a computation provision and has application only while assessing the income. Even when this provision is successfully applied by the AO, that by itself cannot lead to any refusal of registration.

Applying s.12AB (4) and (5) at the time of registration is once again debatable. The provision applies to the cases of cancellation of registration and is applicable to the trust which is already registered. These provisions are not applicable to the case of a trust which is seeking registration. In any case, all of the seven situations of the Explanation to s. 12AB(4) require an act by the trust that has already taken place and has been committed, to enable the CIT to cancel registration. None of them could apply to a trust simply because it has an objects clause that permits it to apply income outside India. In our opinion, even where the income is so applied for charitable purpose outside India, there is no specific violation unless it is established by the CIT that such an application was in violation of the requirements of the other law or non-compliance thereof, which was material to the attainment of the objects.

The tribunal, in Sila for Change Foundation’s (supra) case, was perhaps justified in noting that by the amendment of law in 2022, if there was a specified violation, the CIT could reject the application for registration. However, in that case, the Tribunal really did not demonstrate as to how, by having an object permitting application outside India, there was a violation of compliance with any other law as was material for the attainment of objects of the trust. In fact, there was no such violation of compliance with any other law material for the attainment of objects of the trust. As noted by the Mumbai Bench of the Tribunal in Dedhia Music Foundation’s case (supra), the provisions of section 11(1) would not fall under the category of “any other law”, since it was only a computation provision, and that application of income for objects outside India cannot be construed to be violation of “any other law” under section 12AB(4). If there was indeed such a specified violation, then perhaps the decision of the tribunal would have been justified.

As rightly observed by the tribunal in that case, the correct position in law was that if there was actual application outside India, it was only then that the exemption was lost to the extent of such application. The 2022 amendment did not really affect this position, since none of the specified violations applied to a situation of having an object permitting application outside India. Therefore, the ratio of the decision of the Delhi High Court in the case of M K Nambyar Saarf Law Charitable Trust (supra), that application of income outside India is not a relevant factor for rejecting an application for registration under section 12A, would continue to be valid and hold good.

In fact, in Sila’s case, the tribunal failed to appreciate that unless the trust had an object permitting it to apply its income outside India, it could not even approach the CBDT for permission for application outside India, as the trust can spend only to the extent permitted by its objects. In fact, when a trust makes an application to the CBDT, one of the points on which enquiry is made is the specific object under which the trust intends to apply the money outside India. If there is no such object in the trust deed authorising the trustees to apply income or assets outside India, in law, the trust would not be able to apply any part of its income or assets outside India, and therefore there is no question of even applying to the CBDT for such permission. Therefore, existence of such a clause in the trust deed is essential, if a trust is ever to apply to the CBDT for application outside India. If a view is taken that a trust cannot be granted registration under section 12A if it has such a clause permitting spending outside India, then the provisions of section 11(1)(c), to the extent applicable to trusts set up after 01.04.1952, of taking prior CBDT approval, become redundant. That can never be the case, and therefore such an interpretation would be incorrect.

Therefore, clearly the better view of the matter is that the mere existence in the trust deed or Memorandum of Association of an object of spending outside India, cannot be a ground for rejection of registration under section 12AB (or under section 80G, for that matter).

Assessment and Appeals under the Income Tax Act, 2025

The Income Tax Act 2025 was enacted following demands to modernize and simplify the bulky 1961 Act. Despite high expectations for structural change, the New Act is considered a disappointment because it makes very little change in substance. The stated objective was merely language simplification, which involved converting hundreds of explanations and provisos into sub-sections, and changing established terms like “notwithstanding” to “irrespective”. This linguistic revision creates an apprehension of increased litigation by disrupting settled judicial interpretation.

Procedurally, the New Act replaces the concept of “assessment year” with “tax year”. A critical transitional issue is that the Old Act (1961) will continue to apply to proceedings pending as of April 1, 2026, for previous tax years. This means taxpayers and practitioners must remain proficient in the provisions of both the 1961 and 2025 Acts for at least the next decade. Ultimately, stakeholders question whether the substantial effort was worthwhile given the minimal changes and the risk of new legal controversies.

BACKGROUND

The Income Tax Act 1961 has been around for more than six decades. The said Act had undergone innumerable changes, some on account of changes in the economic environment, some due to judicial interpretation being not in consonance with legislative intent, and some for other reasons. Consequently, the Act had indeed become bulky, and many new users found it to be cumbersome. The need for a new Income Tax legislation had been doing the rounds for more than a decade and a half. A direct tax code was put in the public domain in around 2010. Professionals spent huge amounts of time trying to analyse and dissect the provisions thereof and make representations to the government. For reasons best known to the lawmakers the direct tax code got a quick burial and is now lying only in the archives.

When a New Act was mooted, the profession and probably the taxpayer had great expectations. This was an era of massive technological development, all-round economic growth and the liberalisation of 1991, had resulted in a sea change in business environment. The government always mentioned its object of ushering in “ease of doing business.” It was hoped that the new legislation would make structural changes, conduct a complete overhaul of the cumbersome procedural issues and the New Income Tax Act, would be a forward-looking model legislation. Sadly, these expectations have not been met and to that extent the new legislation is a disappointment. The feeling is that a great opportunity has been lost.

The announcement of the new legislation was made in July 2024; the bill was tabled on 13th February 2025. referred to the Select Committee immediately thereafter. After the report of the Select Committee, which suggested a large number of changes, many of which were accepted by the Finance Ministry, the old bill was withdrawn on 8th August 2025. The redrafted legislation was placed before Parliament on 11th August 2025, passed by both houses on 11/12th August 2025 and received presidential assent on 21st August 2025. The Income Tax Act 2025 (hereafter referred to as the New Act), does not make any change in substance in the Income Tax Act 1961 (hereafter referred to as the Old Act). In its responses to the Select Committee, the Finance Ministry has made it abundantly clear that it does not intend to make any policy change and the objective was merely to ensure that the new law had language which the stakeholders could easily comprehend, was dynamic and forward-looking. Unfortunately, the objects do not seem to have been achieved. There is apprehension that, on account of the changes in language, there may be increase in litigation, unless the lawmakers take appropriate steps.

SCOPE OF THIS ARTICLE

As has been narrated in the earlier paragraphs, there is very little change in substance between the Old Act and the New Act. The tabulations comparing/ matching old sections with the new sections are already in the public domain, and in this era of complete information access, bear no repetition. Therefore the object is to point out the limited changes that have been made in the provisions relating to assessment and appeals, analyse the thought process of the Finance Ministry which has been recorded by way of responses to the suggestions of the Select Committee and put forth some suggestions wherever appropriate.

IMPACT OF CHANGE IN LANGUAGE

As an endeavour towards simplifying language, all the explanations in the Old Act {900 in number) and provisos (1200 in number) have been given a go by, and the text of the said explanations and provisos find place in the New Act by way of sub-sections. The role and ambit of explanations and provisos had been judicially interpreted for more than six decades and the law on that aspect was now well settled. Judicial fora were clear, that an explanation could not exceed the ambit of the main provision and a proviso was only an exception or carve out.

Income Tax Act 2025 A Missed Opportunity

When an explanation or a proviso is enacted as an independent provision by way of a sub-section, it would stand on the same footing as the other sub-sections in the section. As a consequence, if the two sub-sections are in conflict with each other or there is an element of difference in interpretation, it would require judicial intervention to make a rational interpretation. The most significant difference in language is the use of the word “irrespective of” instead of the word “notwithstanding”. In my humble understanding, these two words do not mean the same thing. It is also important to note that the word “notwithstanding” was a non-obstantate clause, and if it appeared at two places, the impact was judicially interpreted. Using the word “irrespective of”, may result in interpretation issues. The Finance Ministry has clarified that the change in language is only to make it simple and not to disagree with established propositions. It may be appropriate for the Finance Ministry to clearly mention that despite the use of a different word, the intent is to accept the interpretation that was placed on the word “notwithstanding”.

REPEAL AND SAVINGS – SECTION 536

While section 536(2) of the New Act has clauses (a) to (s), clauses (c), (d), (e) and (g) are of importance for the scope of this article. Clauses (c), (d) and (e) provide that in respect of any proceeding pending as at the date of the commencement of the New Act, pertaining to tax year beginning before 1st April 2026, the provisions of the Old Act would continue to apply. This will mean that in regard to any proceeding which is pending as on 1st April 2026, in regard to assessment year 2026-27(previous year 2025-26), or any year prior thereto, the Old Act will apply. Further if any proceeding is initiated after 1st April 2026 pertaining to these years, the Old Act will continue to apply. This will mean that at least for the next decade or so, tax practitioners will have to keep abreast of the provisions of the Income Tax Act 1961, as well as the Income Tax Act 2025. Of course, this was the position also at the time that the Income Tax Act 1922, gave way to the Income Tax Act 1961. The difference is that the tax compliance landscape at that point of time was far simpler than it is today. Considering the current complexities, taxpayers, tax practitioners as well as tax administrators have a daunting task ahead.

The procedures, obligations limitations provided for/prescribed under the Old Act would continue for all years commencing on before 1st April 2026. Clause (g), provides that in regard to any refund pertaining to an year prior to the commencement of the New Act or any sum due by the assessee pertaining to that year, the provisions relating to interest either payable by the Central Government or by the assessee, the provisions of the New Act will apply for the period after the commencement of the act.

DEFINITIONS / CONCEPTS PRIOR TO ASSESSMENT

The definitions pertaining to assessment, person, regular assessment, tax in the New Act are virtually identical to that of the Old Act. In the term “assessment”, the term recomputation has been included. This is only a semantic change as computation of tax was always a part of the assessment process.

In keeping with the change of replacing the concept of assessment year by a tax year, the New Act does not have a definition of assessment year, but a tax year is defined in section 3, in place of a previous year. Therefore 2026-27 will be the assessment year for previous year 2025-26 and tax year for financial year 2026-27.

The provisions of section 263 in regard to furnishing of a return of income, and section 267 pertaining to an updated return are similar to the corresponding provisions in the Old Act.

ASSESSMENT

The provisions in regard to inquiry before assessment are similar to that under the Old Act. Section 270(1) which deals with processing of a return of income corresponds to section 143(1) of the Old Act. Before the Select Committee, the stake holders had represented that after processing the return by the Centralized Processing Centre (CPC), which is a mechanical process now facilitated by artificial intelligence, the responsibility of grant of refund, rectification etc should vest with the jurisdictional assessing officer (JAO). This would solve a large number of problems, which arise on account of the absence of a human interface. To illustrate, in the case of a developer following the percentage completion method, the withholding of tax by the flat purchaser, the determination of income results in a mismatch, requiring reconciliation. In situations like this, a human interface becomes inevitable.

The Finance Ministry response to the stakeholders suggestion was that the duties of the CPC and the JAO are properly delineated. According to the Ministry, the CPC processes returns according to Taxpayer’s Charter. It also transfers the rectification rights on request. The speed of such actions and the actual situation in the field is well known to taxpayers and tax practitioners.

Section 273 of the New Act corresponds to section 144B of the Old Act. However, there is a significant difference between the New Act and Old Act. Section 144B provided for the entire process of a faceless assessment. Despite the deletion of section 144B (9), which expressly provided that the non-adherence to the procedure would result in the assessment as non-est, statutory recognition of the process resulted in protection of the assesee’s rights. Section 273 delegates the duty of prescription to the CBDT. Before the Select Committee, the stakeholders urged that the assessment process should have statutory recognition. The Finance Ministry response was that even delegated legislation has parliamentary oversight, as the rules framed have to be placed before the Parliament. One wonders whether such oversight is sufficient protection for the taxpayer. The infringement of a statute would give different rights to an assessee. The same may not be true of a violation of a rule. While delegated legislation gives the administrators flexibility, one wonders whether the powers of prescription would be fairly used.

REASSESSMENT

Section 280 corresponds to section 148 of the Old Act by virtue of which a person is called upon to file a return, if, in the opinion of the department, income has escaped assessment. Sub section (5) of the section dispenses with the requirement of an opportunity in terms of section 281 in certain circumstances. The circumstances have been expanded to include , in terms of Section 280(6)(g) and (h) two situations, namely the issue of any direction by an approving panel in respect of an impermissible avoidance agreement, and any finding or direction contained in an order passed by any authority tribunal or court in any proceeding under this Act by way of appeal, reference revision, or by a court in any proceeding under any other the law. If these circumstances exist, no opportunity mandated by section 281, is necessary before issue of notice under section 280.

Before the Select Committee, the stake holders had requested that an opportunity be provided to an assessee, in terms of section 281 even if such circumstances exist. The Finance Ministry response was that, since the finding or direction was by a higher authority, it was bound to follow it and in any event an opportunity was already afforded by the authority before it recorded a finding or issued a direction. This could have significant repercussions for two reasons. Firstly, the term “authority” has not been defined in the New Act, though an income tax authority has been defined. So, the scope of the exclusion from a prior enquiry would stand substantially expanded, Secondly the finding or direction by a court under any other law, could put an assessee to substantial inconvenience. This is because each law has a different and distinct ambit. To illustrate, in a proceeding under say the PMLA or Prevention of Corruption Act, the court may record a finding. If the reopening is based on such a finding, it could have repercussions. Another example would be the statement of parties in matrimonial dispute before a family court. In such cases, statements are made in a particular context. If the court records a finding in regard to such statements, it could cause problem to assessees.

Section 282 sets out the time limit within which notice under section 280 can be issued. At first blush, one feels that the time limit has been increased from three years to four years and from five years to six years in certain circumstances, This is however not so. Section 149 of the Old Act prescribed limits with reference to an assessment year while the New Act prescribes time limits with reference to a tax year. The actual timelines therefore remain unchanged.
Section 286, corresponding to section 153 of the Old Act, sets out the time limits within which assessments, reassessments and recomputations are to be completed. Unlike section 153, which uses the term “month”, section 286 uses the word “year”. The reason for such change is not understood. Since both these terms are not defined in either the Old Act or the New Act the definition under the General Clauses Act will apply

APPEALS AND REVISION

The appeal and revision provisions remain substantially unchanged, though there are minor differences in language. Interestingly in regard to the revisionary powers of the Commissioner under section 378, the stakeholders had requested that the intimation under section 270(1) be treated as an order for the purpose of revision. This was earlier provided in section 264 in the Old Act, but after the deletion of the explanation, conflicting views had arisen. While declining to make a change in regard to the revisionary powers of the Commissioner, the Finance Ministry has explicitly stated that there is “no bar to a Commissioner exercising his jurisdiction in regard to an intimation under section 270(1). This would be clarified by way of administrative instructions.“ Thus, at least one controversy as to whether an assessee can invoke a Commissioner’s revisionary jurisdiction in regard to an intimation appears to have been settled.

CONCLUSION

If, simplification of language and reduction in volume were the only objects of the New Act, and the government was not desirous of making any structural or policy change, one wonders whether the huge effort and cost was worth it, A major part of the objects could have been achieved by a Taxation Laws Amendment Act. It will be only in mid-2027 that the provisions which are the subject matter of this article will be put to use. Even with the restriction that no policy change is to be made, it would be appropriate to make some changes in the Income Tax Act 2025. Probably the Government is conscious of this. It is borne out by the answer by the Minister of State for Finance in reply to a question in Parliament, which mentions that the forms to be used with effect from 1st April 2026, will be notified only after the Finance Bill 2026 is passed as the said bill may make certain changes to the New Act. One hopes that the lacunae which have already come to the fore are taken care of, so that litigation pertaining to the New Act can be avoided to the extent it can!

Allied Laws

43. K. S. Shivappa vs. K. Neelamma

AIR 2025 SC 4792

October 07, 2025

Minor’s Property – Repudiation of Voidable Transfer – Transfers held to be void ab initio. [S. 8 of the Hindu Minority and Guardianship Act, 1956; Article 60 of the Limitation Act, 1963]

FACTS

Mahadevappa owned plots in Davanagere, which were purchased in the names of the three minor sons of Rudrappa. Without obtaining the mandatory permission of the District Court under Section 8(2) of the Hindu Minority and Guardianship Act, 1956, Rudrappa, the natural guardian, sold plot no. 56 and plot no. 57 to third parties in 1971. The purchasers further transferred the plots, including a transfer of plot no. 57 in 1993 to Smt. Neelamma (Respondent). After attaining majority, the surviving minors, along with their mother, repudiated the guardian’s unauthorised sales by executing fresh sale deeds in favour of K.S. Shivappa (Appellant). Appellant thereafter combined both plots and constructed a house. The Respondent filed a suit for declaration and possession, claiming that her vendor had a good title. The Trial Court dismissed the suit, holding that the minors had validly repudiated the earlier sale through their later conveyance to Appellant. The First Appellate Court reversed the decision, holding that in the absence of a suit for cancellation, the guardian’s sale had attained finality. The High Court affirmed this view, leading to the appeal before the Supreme Court.

HELD

The Supreme Court held that a sale of a minor’s property made by a natural guardian without obtaining prior court permission under Section 8(2) of the Hindu Minority and Guardianship Act, 1956, is voidable, and it is not mandatory for the minor, upon attaining majority, to file a suit to set aside such a sale. The Court clarified that a voidable transaction may be avoided either through a formal suit or by unequivocal conduct, such as the minor subsequently selling the same property within the period of limitation. In this case, the surviving minors, after attaining majority, had validly repudiated their father’s unauthorised sale by executing a fresh sale deed in favour of the appellant, K.S. Shivappa. Consequently, the earlier sale to the respondent’s predecessor became void ab initio, and no valid title ever passed to the Respondent. Additionally, the Court held that Respondent failed to prove her title since she did not enter the witness box, and her power-of-attorney holder could not testify on matters within her personal knowledge.

Accordingly, the decrees of the First Appellate Court and High Court were set aside, and the Trial Court’s dismissal of Respondents suit was restored.

44. Dharmrao Sharanappa Shabadi & Ors vs. Syeda Arifa Parveen

2025 SCC Online SC 2155

October 07, 2025

Mohammedan Law – Oral Gift (Hiba) – Proof of Relationship – Limitation Act. [S. 50 & 73 of the Hindu Minority and Guardianship Act, 1956; Article 60 of the Limitation Act, 1963]

FACTS

The dispute pertained to agricultural land situated at Village Kusnoor, Karnataka. The original owner of the land, Khadijabee, obtained a decree of title in 1971. The Plaintiff, Syeda Arifa Parveen, claimed that she was the only daughter and legal heir of Khadijabee and that her mother had orally gifted 10 acres of the land to her, which was later recorded in a Memorandum of Gift. Upon the death of Khadijabee and her husband Abdul Basit, the Plaintiff alleged that she had become the absolute owner of the entire suit property. The Defendants, however, contended that they had validly purchased the entire land through five registered sale deeds executed by Abdul Bas (claimed to be Abdul Basit), and their names had been consistently recorded in the revenue records since then. When the Defendants allegedly interfered with her possession, the Plaintiff filed a suit seeking declaration of ownership, cancellation of sale deeds, and a permanent injunction.

HELD

The Supreme Court held that the Plaintiff failed to prove her status as the daughter of Khadijabee, as the oral testimony relied upon lacked credibility and was unsupported by any documentary evidence such as birth records, school certificates, or family documents. The Court further held that the alleged oral gift (Hiba) was not proved in accordance with Mohammedan Law, as there was no proof of actual or constructive delivery of possession to the Plaintiff at the time of the gift, and the consistent mutation entries in favour of Abdul Basit and thereafter the Defendants negated the claim of transfer of possession. Additionally, the Court ruled that the High Court had exceeded its appellate jurisdiction by enhancing the relief in favour of the Plaintiff without there being a cross-appeal. It also observed that the suit filed in 2013 challenging the sale deeds of 1995 was clearly barred by limitation. Consequently, the Defendants were held to be the lawful owners under their registered sale deeds.

Accordingly, the judgments of Trial Court and the High Court were set aside and Civil Appeal was allowed.

45. Sangita Sandip Jadhav & Ans vs. State of Maharashtra & Ors.

2025 SCC Online Bom 880

April 2, 2025

Stamp Duty – Refund – Agreement for Sale Cancelled – No Possession Handed Over – Limitation within Section 48. [S.47(c)(5) & S. 48(1) of Maharashtra Stamp Act, 1958 (MSA)]

FACTS

Petitioners entered into a registered Agreement for Sale to purchase a Flat in “Rukmini Heights”, Satara. They paid part consideration and stamp duty along with registration fees. Since loan applications were not sanctioned and they could not proceed with the transaction, the parties executed a registered Deed of Cancellation, wherein it was clearly stated that possession of the flat was never handed over. Petitioners applied for a refund of stamp duty under Section 47(c)(5) of MSA. The Collector of Stamps rejected the application, holding that possession was handed over based on a clause in the Agreement for Sale and invoked the Proviso to Section 48(1) of MSA, which bars refund where possession has passed. Appeal before the Chief Controlling Revenue Authority was also dismissed, leading to the present petition.

HELD

The Bombay High Court held that there was no conclusive evidence of possession having been delivered on execution of the Agreement for Sale, especially when only 15% of the total consideration was paid. The covenant relied upon by authorities was contradictory to the clause requiring execution of a Sale Deed only after payment of full consideration. The Cancellation Deed explicitly recorded non-delivery of possession, which further negated the conclusion of conveyance-like transfer. Even assuming possession was deemed to have been handed over, the Court held that the refund application was filed within six months from execution of the Agreement for Sale, thus satisfying Section 48(1) of MSA. Since the intended transaction had completely failed, the case squarely fell under Section 47(c)(5) of MSA. Retaining stamp duty in such circumstances would amount to unjust enrichment by the State. Therefore, the impugned orders were quashed, and the Respondents were directed to refund to the Petitioner.

Accordingly, rejection orders of the Collector and Chief Controlling were set aside and a refund was directed.

46. Varinder Kaur vs. Daljit Kaur & Ors.

2025 SCC Online Del 6212

September 26, 2025

Cancellation of Gift Deed – Neglect of Senior citizen – Maintenance is an Implied Condition. [S.23, Maintenance and Welfare of Parents and Senior Citizens Act, 2007]

FACTS

Respondent No. 1, Smt. Daljit Kaur executed a gift deed dated 05.05.2015 in favour of her daughter-in-law, the Appellant, transferring her residential property. Later, alleging neglect and maltreatment, she invoked Section 23 of the Senior Citizens Act, seeking cancellation of the gift deed on the ground that the Appellant had refused to provide basic amenities, care, medicines, and had even threatened her with confinement and harm. The Maintenance Tribunal refused cancellation on the basis that the gift was not shown to be conditional. However, on appeal under Section 16, the District Magistrate set aside the Tribunal’s decision and directed cancellation of the gift deed. The Appellant challenged said order before the High Court in a writ petition, which was dismissed by the learned Single Judge. The Appellant then filed the present Letters Patent Appeal under Clause X of the Letters Patent before the Division Bench.

HELD

The Delhi High Court held that for senior citizens gifting property to children or close relatives, “love and affection” inherently implies the condition of receiving care in return. Thus, an express condition in the deed is not mandatory for invoking Section 23. The Court further noted ample material in the form of letters and complaints showing that the Appellant had denied Respondent No. 1 basic necessities, medicines, and personal belongings, and had subjected her to threats and ill-treatment soon after obtaining the transfer. In such circumstances, the deeming fiction under Section 23(1) becomes operative, rendering the transfer voidable, and justifying cancellation of the gift deed. The Court endorsed the beneficial and purposive interpretation adopted by the District Magistrate and Single Judge, consistent with the statutory objective of protecting the dignity, security, and welfare of senior citizens.

Accordingly, the appeal was dismissed and cancellation of gift deed was upheld.

Editor’s Note: Readers may note that the subject matter of this dispute was covered in detail in the feature “Laws and Business” in the September 2025 Edition of BCAJ. Those who are interested may read the said feature for a more comprehensive view covering multiple cases.

47. Rama Bai vs. Amit Minerals through Incharge Officer & Anr.

2025 SCC Online SC 2067

September 24, 2025

Motor Accident Compensation – Driver without Valid License – Insurer Liable on ‘Pay and Recover’ Principle. [S.149(2)(a)(ii), Motor Vehicles Act, 1988]

FACTS

The Appellant is the mother of the deceased Nand Kumar, who was working as a conductor in a truck. The truck collided with a tractor-trolley, causing his death. The Motor Accident Claims Tribunal awarded ₹3,00,000/- as compensation and fastened liability on the driver and owner, as the driver’s driving licence had expired on 20.06.2010 and was only renewed from 03.11.2011 to 02.11.2014 — thus the driver did not hold valid licence on the date of the accident. In appeal, the High Court enhanced the compensation to ₹5,33,600/- with 7% interest, but absolved the Insurance Company from the liability due to breach of policy conditions. The Appellant approached the Supreme Court seeking application of the ‘pay and recover’ principle so that immediate compensation is not delayed.

HELD

The Supreme Court held that although the driver did not possess a valid driving licence on the date of accident giving the Insurance Company a valid defence under Section 149(2)(a)(ii) and justifying avoidance of liability, the beneficial object of the Motor Vehicles Act requires that victims are first compensated promptly. The Court applied the doctrine of “Pay and Recover”. The Insurance Company must first satisfy the award and thereafter recover the amount from the vehicle owner through appropriate legal proceedings.

Accordingly, the appeal was allowed and insurer was directed to ‘Pay and Recover’.