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Direct Tax Vista Your bi-weekly Direct Tax & Foreign Trade recap Edn. 101 – 5th November ‘25 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
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We are pleased to put forth this issue of DTV as under. DTV would analyse the recent developments under Income Tax Act 1961 and International Tax and with also a commentary on how the position would be under the Income Tax Act 2025. We would also be discussing the new developments under International Trade during the Fortnight.
1. The expenses incurred during a ‘no-income period’ would be considered as allowable under Section 37(1) of ITA’61 or 34(1) of ITA’25 and unabsorbed depreciation would be allowed also under Section 32(2) of ITA’61 or 33(11) of ITA’25
Section 37(1) of Income Tax Act 1961 (ITA’61) provides that “Any expenditure (not being expenditure of the nature described in sections 30 to 36 [****] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".”
Section 34(1) of Income Tax Act 2025 (ITA’25) provides that
“(1) Any expenditure (not being an expenditure of the nature specified in sections 28 to 33, 44 to 49, 51 and 52 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
As regards unabsorbed Depreciation, both the Acts provide as follows –
Section 32(2) of Income Tax Act 1961 (ITA’61) provides that
Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]
Section 33(11) of Income Tax Act 2025 (ITA’25) provides that
Sec 33(11) (a) Where the profits and gains chargeable for the tax year before allowing the deduction under sub-sections (1) to (10) is less than such allowable deduction, then––
(i) if such profits and gains is not a loss, the deduction under sub-sections (1) to (10) shall be allowed to the extent of the available profits and gains;
(ii) if such profits and gains is a loss, no deduction under sub-sections (1) to (10) shall be allowed;
(b) the amount of deduction which has not been allowed under clause (a) shall be added to the allowable deduction under this section, whether available or not, for the succeeding tax year and the total amount shall be deemed to be eligible for deduction in that year, and so on for the succeeding tax years; and
Hence as per both ITA’61 and ITA’25 the position remains the same that Any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed as an expenditure. Also that unabsorbed Depreciation shall allowable as deduction for the succeeding tax years.
Many MNCs set us business in India as they get a contract for short time and thereafter there is a lull as there are no further contracts. However, it stays put in India to try to revive if proper circumstances arise, even though managing most of the operations from another Country say, Dubai. The question is that whether the expenses incurred during this ‘no-income period’ would be considered as allowable under Section 37(1) of Income Tax Act, 1961 (ITA’61).
The period of temporary lean phase can be called a “lull in business” and not a phase when business was discontinued. When the intention of the assessee was never to go completely out of business, it cannot be concluded that the assessee had discontinued its business. The expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profit’. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalisation of its administration.
Now what in a case that assessee himself declares that in India it has no “permanent establishment” so that its other incomes are not taxable in India. Here one has to appreciate that whether there is a permanent establishment in India or not, has to be determined as per the provisions of the relevant DTAA. As per the DTAA, the assessee may not have a permanent establishment in India, but that does not necessarily lead to the conclusion that the assessee is not in business. The assessee can be in business, depending upon the facts and circumstances of the case de hors’ the permanent establishment. Hence, it makes no difference if the business was primarily managed by a foreign Country’s Office (say Dubai Office).
Hence, as held by The Hon’ble Apex Court in the case of PRIDE FORAMER S.A. Vs COMMISSIONER OF INCOME TAX [2025-VIL-09-SC-DT], the expenses incurred during a ‘no-income period’ would be considered as allowable under Section 37(1) of ITA’61 or 34(1) of ITA’25. Also unabsorbed depreciation would be allowed.
2. No proportionate disallowance is warranted u/s 14A of ITA’61 or u/s 14 of ITA’25 when the assessee's own funds exceed the investments; Also disallowance on only the investments that yield exempt income and not on total investments
When the assessee's own funds exceed the investments, a presumption can be drawn that the investments were made out of the assessee's own funds and no proportionate disallowance is warranted under Section 14A of Income Tax Act 1961 (ITA’61). Disallowance of expense under Section 14A of Income Tax Act 1961 (ITA’61) read with Rule 8D of Income Tax Rules 1962 (ITR’62) is not justified, when the assessee has ample own funds to make the investments was held in the case of Supreme Court in the case of South Indian Bank Limited.
Further disallowance under Section 14A read with Rule 8D should not be done based on the total investments but only the investments that yield exempt income during the year. Relying on the judgment of the Delhi High Court in the case of Cargo Motors (P.) Limited the same was held in the case of GUJARAT STATE PETRONET LIMITED Vs DEPUTY COMMISSIONER OF INCOME TAX [2025-VIL-1463-ITAT-AHM].
Section 14 of Income Tax Act 1925 (ITA’25) corresponds to Section 14A of Income Tax Act 1961 (ITA’61) and squarely holds the same position.
Section 14 of ITA’25 provides –
14. Income not forming part of total income and expenditure in relation to such income.
(1) Irrespective of anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income.
(2) Where the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with—
(a) the correctness of the claim of expenditure incurred by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the total income under this Act, he shall determine such amount of expenditure in accordance with any method, as may be prescribed.
(3) Irrespective of anything to the contrary contained in this Act, the provisions of this section shall apply in a case where any expenditure has been incurred during any tax year in relation to income which does not form part of the total income under this Act, but such income has not accrued or arisen or has not been received during that tax year.
Section 14A of ITA’61 provides –
Expenditure incurred in relation to income not includible in total income.
14A. - Notwithstanding anything to the contrary contained in this Act, for the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.]
[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :]
[Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]
[Explanation.-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.]
Rule 8D of ITR’62 provides –
Method for determining amount of expenditure in relation to income not includible in total income.
8D(1) - Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with-
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
[(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income; and
(ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income:
Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.]
3. CBDT focus on Entertainment and Film Industry
The CBDT it seems now wishes AOs to focus on the entertainment sector. It has directed AOs vide F.No.225/215/2018/ITA-II to ensure uniformity in assessing the entertainment sector by examining pre-operative expenses under Section 35D, verifying Form No. 52A (with possible Section 272A penalty) from film producers, and allowing deductions per Rules 9A/9B. Please refer the circular for more details.
Declaration of expenses of feature film: The Assessing Officer may verify the submission of Form No. 52A and expenses claimed in books of account of these entities. A penalty u/s 272A of the Act for failure to furnish Form No. 52A within the prescribed time may also be considered by the AOs.
Expenses incurred on production of feature films:
On Production: The deduction in respect of expenditure on production of feature films may be verified and allowed as per Rule 9A of the Income-tax Rules, 1962.
On Distribution: the deduction in respect of expenditure incurred on acquisition of distribution rights of feature films may be examined and allowed as per Rule 9B of the Rules in the case of a distributor of the film.
4. Negative lien is not the same as Corporate Guarantee … No transfer Pricing impact thereon
Consider a 100% subsidiary Co. B provides a corporate guarantee to Bank C for Holding Co. A. This means that incase Co. A defaults, then Co. B would make good the borrowed amount to Bank C. A “negative lien” on the other hand means an undertaking by the owner of assets to a lender not to sell these assets on which a charge or a lien without the prior permission of the lender. It is an undertaking of convenience for not to sell the encumbered assets. It does not create any liability on the assessee.
In our example, the owner of assets i.e. Co. A (which is the owner of all the assets of Co.B) gives an assurance to Bank C to not sell these assets on which a charge or a lien without the prior permission of Bank C. It is an undertaking of convenience by Co.A to not sell the encumbered assets. It does not create any liability on Co. B.
Negative lien, is thus is a negative covenant which restricts a person from creating any kind of encumbrance over his assets or otherwise disposing them without the prior consent of the other person in whose favor he has given such an undertaking. Accordingly, the negative lien by an assessee does not provide any financial benefit / service to the other party. Even if the borrowers default in payment of loan, there will be no liability on assessee for paying any amount since assessee is not a guarantor.
Taking into consideration the foresaid position, the ITAT Delhi in the case of JOGPL PVT LTD Vs DCIT, CIRCLE-13(1), DELHI [2025-VIL-1473-ITAT-DEL] held that certainly once the international transaction arising out of the guarantee given for the benefit of AE (i.e. guarantee by Co.B for Co.A) goes, then what is left is a transaction between the assessee (Co. B) and the Lender Bank (Bank C) only, which are unrelated parties. The vital constituent of an international transaction is that the same should be between associated enterprises. However, Section 92B(2) of the Income Tax Act outlines the circumstances under which a transaction between two persons would be deemed to be between the associated enterprises.
5. Rectifications u/s 154 to speed up as CPC takes up jurisdiction for orders issued by Assessing Officers due to errors in accounting
The CBDT has issued a notification dated 27 October 2025, empowering the CIT-CPC, Bengaluru to have concurrent jurisdiction and rectify mistakes apparent from records under Section 154 and issue demand notices under Section 156 of the Income-tax Act, 1961. This authority covers cases involving:
- Errors in refund issued earlier;
- Non-consideration of prepaid tax credits or eligible reliefs;
- Incorrect computation of interest under section 244A;
- Any resulting error in computation of tax, refund, or demand.
The notification allows the CIT-CPC to delegate these rectification and demand-issuance powers to subordinate officers, including ADC/JC and AOs, for all cases processed through the CPC interface.
Ease in Process due to this move: From 2024, by change in the Income Tax Portal interface, Taxpayers could approach the AOs directly for corrections related to assessment orders. Now, the CPC can take upon itself the jurisdiction to rectify such mistakes itself rather than waiting for the AO. This move would speed up and streamline post-processing issue resolution for both refunds and demands.
6. Non-filing of ITR may lead to prosecution, incase of wilful evasion
Non-Filing of ITR and non-payment of taxes can cause prosecution u/s Section 276 C which provides that a person who willfully attempts to evade tax, penalty, or interest under the Income Tax Act, 1961, or under-reports income, may be subject to rigorous imprisonment and fines. If the amount evaded or tax on under-reported income exceeds Rs.25 Lakhs, imprisonment ranges from 6 months – 7 years with a fine; otherwise, imprisonment ranges from 3 months – 2 years with a fine.
Wilful evasion includes possession or control of false accounting records, making false entries, omitting relevant entries, or causing circumstances enabling tax evasion. The court may impose fines at its discretion. These provisions apply without prejudice to other penalties under the Act.
As per the provisions of Income Tax Act, there is difference between “willful evasion” and “failure” to pay tax. There are certain kinds of tax which if not paid then that itself is sufficient to attract penal provisions of Income Tax Act. Eg. TDS, whereas in case of ‘willful evasion’, there must be averment that the assessee deliberately and intentionally attempted to evade the tax and it must be substantiated. However, as per the provisions of 278 E ‘relating to presumption as to culpable State’ - the burden lies on assessee to establish that failure was not on account of willful intension.
Now, in hindsight it needs to be seen that Section 276-B will be applicable when the tax deducted at source is not credited to Government. This is one of the contingency. ‘Failure to credit’ itself is sufficient. It need not be willful. Because once you have deducted a tax from the income of other person (who is liable), such person is bound to credit it. That omission itself is an offence without addition of willfulness / intention; but the legislatures have cautiously used the word ‘willful evasion’ in Section 276-C of the Income Tax Act. It indicates there maybe cases wherein there is a genuine case for not paying tax on or before the due date even though return is submitted.
Incase a failure cannot be considered as a willful evasion. Such cases will be outside the clutches of Section 276-C of the Income Tax Act as was held in the case of VILAS BABANRAO KALOKHE Vs PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL), PUNE [2025-VIL-290-BOM-DT].
Hence taxpayers who disclose in their ITRs specifically tax payable, need to be very sure that they have paid such taxes. A lapse may land them into deep trouble.
7. Benchmarking two international Transactions included in one another
Consider the situation – An assessee subject to Transfer Pricing pays its AE for “provision of basic market research and testing services”. Further it also pays “infrastructure services fees and reimbursement of expenses” separately. However, actually this “infrastructure services fees and reimbursement of expenses” is also as a part of “basic market research and testing services”. The TP officer accepts the expenditure for “basic market research and testing services” to AE but disputes “infrastructure services fees and reimbursement of expenses”. The question is “Is the approach incorrect by segregating the transactions related to the “payment of infrastructure fee” and the “reimbursement of expenses paid to Associated Enterprises (AEs) for employee salary costs" and subjecting them to separate adjustments, while such transactions are already factored in the cost base used for charging the AE for the international transaction involving "provision of basic market research & testing services" which has been determined to be at arm's length, by the Ld. AO / TPO himself in the impugned order itself.”
Here the answer is in the negative for the assessee. It is a fact that assessee has carried out two international transactions i.e. infrastructure services fees and reimbursement made to the AE and they have to be benchmarked by verification of various documents whether the allocation of expenditures by the AE are as per the norms and reasonableness whether the third party documents are submitted and on what basis these are allocated to the assessee. There is no duplication in this exercise as was held in HONDA R & D (INDIA) PRIVATE LIMITED Vs DCIT, CIRCLE 10(1), DELHI [2025-VIL-1486-ITAT-DEL].
Let us now understand by a more common example- “the transactions related to the “purchase of goods” and the “royalty” paid to Associated Enterprises (AEs) are subject to separate adjustments, while royalty is already factored in the cost base used for charging the AE for the international transaction involving "purchase of goods" which has been determined to be at arm's length, by the Ld. AO / TPO. The following is a numerical presentation –
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Particulars |
Amount |
Remarks |
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Cost of goods purchased by Indian Enterprise (IE) from Foreign Associated Enterprise (AE) |
Rs.100/- |
AO does not dispute |
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Royalty Paid |
Rs.2/- |
AO disputes |
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Total Payment by IE to AE |
Rs.102/- |
AO does not dispute |
|
Comparable Uncontrolled Price (CUP) |
Rs.105/- |
8. Prosecution for non-filing of ITR or non-payment of taxes u/s 276CC/276C…but only on wilful evasion
The following are offences to note in Income Tax Act 1961 & Income Tax Act 2025–
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Income Tax Act 1961 |
Income Tax Act 2025 |
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Section 276C - Wilful attempt to evade tax, etc. |
Section 478 - Wilful attempt to evade tax, etc. |
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Section 276CC - Failure to furnish returns of income |
Section 479 - Failure to furnish returns of income |
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Section 276B - Failure to pay tax to the credit of Central Government under Chapter XII-D or XVII-B |
Section 476- Failure to pay tax to credit of Central Government under Chapter XIX-B. |
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Section 276BB - Failure to pay the tax collected at source |
Section 477 - Failure to pay tax collected at source. |
Consider the case the assessee-company filed its income tax return for AY 2023-24 belatedly on 31.12.2023 without paying the admitted tax liability of Rs.8,72,81,520/-. Notices were issued to the company to pay the tax dues, but it failed to do so. Thereafter, a complaint was filed against the company and its directors for the offence under Section 276C(2) of the Income Tax Act. Thereafter, the Company has paid a sum of Rs.3,85,19,770/- on 19.12.2024 and a further sum of Rs.4,87,61,750/- on 13.01.2025 towards the tax liability for the AY 2023-24. The question is whether the delay in payment of tax can constitute a "wilful attempt to evade payment of tax" under Section 276C(2) of the Income Tax Act, warranting prosecution of the assessee was the question in the case of M/s G SQUARE LAYOUT PRIVATE LIMITED Vs THE DEPUTY COMMISSIONER OF INCOME TAX [2025-VIL-292-MAD-DT].
The Court has held that the mere delay in payment of tax without any wilful attempt or mens rea to evade the payment would not attract the prosecution under Section 276C(2) of the Income Tax Act. The intention not to evade tax in this case was in the fact that all funds of the Company were locked in illiquid assets. The continuation of prosecution post payment of taxes would be an abuse of process of law and infringe the rights of the assessee. Accordingly, the Court quashed the complaint filed against the assessee company and its directors under Section 276C(2) of the Income Tax Act
For prosecution under Section 276C(2), there must be a positive act or deliberate attempt on the part of the assessee to evade the payment of tax. The apex court in Tamil Nadu Housing Board v. Collector of Central Excise [1995] Supp (1) SCC 50 while dealing with section 11A of the Central Excises and Salt Act, 1944, has held that the word "evade" in the context means defeating the provision of law of paying duty. It is made more stringent by use of the word "intent". In other words the assessee must deliberately avoid payment of duty which is payable in accordance with law and held that when the law requires an intention to evade payment of duty then it is not mere failure to pay duty. It must be something more.
9. GST Department’s Fake Invoicing Alert should not lead to Income tax Dept notices automatically. Income Tax Dept should conduct own inquiry
The Income Tax Department and GST Dept share information on the basis of which the other Department Act. However, this Act should not be in haste but on own inquiry. A hasteful action on GST Department’s information has caused some embarrassment for the Income Tax Dept in the case of VASUKI GLOBAL INDUSTRIAL LIMITED Vs PRINCIPAL CHIEF COMMISSIONER OF INCOME TAX [2025-VIL-293-GUJ-DT], where it had received information from the GST Department that the petitioner was involved in GST invoice fraud and was availing or passing on fraudulent Input Tax Credit on fake invoices. Based on this information, the Income Tax Department had issued notices under Section 148A(b) of the Income Tax Act, 1961 to various buyers and sellers who had transacted with the petitioner. This resulted in the suppliers of the petitioner stopping their business transactions with the petitioner. To add salt to injury the information received from the GST Department was found to be incorrect and the Income Tax Dept had to withdraw the notices. Hence the Income Tax Dept. was directed by the High Court that in the future, the Income Tax Department will not take any such action on the basis of the information made available on the Insight Portal without proper verification as per the provisions of the Act.
Before issuing a notice under Section 148A(1) of the Income Tax Act, 1961, it is the responsibility and liability of the Jurisdictional Assessing Officer to verify the information made available on the Insight Portal which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant Assessment Year. If necessary, the Assessing Officer must conduct an inquiry with prior approval of the specified authority with respect to such information, and only after verification of the information made available to the Assessing Officer, the provisions of Section 148A(1) of the Act shall be invoked.
Similarly, The Bombay High Court in the case of PR. COMMISSIONER OF INCOME TAX-3, PUNE Vs RAMELEX PRIVATE LTD [2025-VIL-286-BOM-DT] held that the Assessing Officer cannot make additions solely based on general information received from the Sales Tax Department, without proper proof of the transactions being bogus. The AO has to take into Account all documents produced by assessee like purchase bills, ledger accounts, bank payment proofs, etc. to justify the genuineness of the purchases, and also a certificate from its VAT auditor regarding the correct amount of purchases from one of the alleged Hawala dealers, which was duly considered by the CIT(A) and ITAT.
(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII-ER and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)