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Direct Tax Vista Your weekly Direct Tax recap With Coverage of Income Tax Act 2025 & Income Tax Rule 2026 Edn. 113 – 30th March 2026 Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
Friends,
We are pleased to put forth this issue of DTV as under. Now 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 and Income Tax Rule 2026. We would also be discussing the new developments under International Trade during the Fortnight.
1. Crackdown of CBDT on Restaurants… Are other B2C sectors are now “sensitive” and under close scrutiny?
It looks like the government is moving toward data triangulation across multiple sources (POS, aggregator platforms, utilities, banking transactions, GST filings, and ITRs). For businesses, the safest path forward is transparent reporting and proactive reconciliation before authorities come knocking. Recently, the Income Tax Department’s survey revealed suppressed sales worth ₹408 crore across restaurants, with 63,000 establishments flagged for review before March 31, 2026. The action on restaurants seem to paint a picture of how tax authorities are tightening compliance in the broader B2C sectors. The most common irregularities include:
o Bulk deletion or modification of bills.
o Not reporting banquet/party bookings.
o Fake purchase bills from unregistered vendors.
o Under-reporting aggregator sales (Swiggy/Zomato).
o Ignoring TDS/TCS and utility consumption data.
o Input/output mismatches in exempt sectors.
Restaurants and other B2C sectors seem “sensitive” and under close scrutiny now. Some pointers on the way forward are as follows:
o Reconciling POS/billing software with accounts and tax filings.
o Properly recording aggregator revenues.
o Matching purchases with sales and stock reconciliations.
o Monitoring inflated expenses against industry averages.
o Tracking family spending, investments, and SFT (Specified Financial Transactions).
o New PAN rule from April 1, 2026 under Income Tax Act 2025: Cash withdrawals above ₹10 lakh per account will be reported as SFT transactions. Hence cash withdrawals need to be accounted minutely.
The Big picture seems that this isn’t just about restaurants — the net may widen to include:
- Retail shops, hotels, real estate developers, jewellery, transport/logistics, influencers, and even professionals like doctors/lawyers who rely on cash billing.
- GST departments (like SGST Karnataka) are already issuing notices to small restaurants about UPI transactions, hinting at deeper integration between GST and Income Tax monitoring.
The SAKSHAM NUDGE campaign is now Designed to encourage voluntary compliance rather than punitive action, but clearly backed by strong data. Incase applicable, taxpayers may utilise the opportunity to file ITR-U.
2. 31st March Income Tax: Do's & Don’ts in the light of Implementation of Income Tax Act 2025 (ITA'25) & Income Tax Rules 2026 (ITR'26)
31st March is the critical deadline for aligning tax positions, avoiding lapses, and preparing for regime changes starting 1st April 2026. Here’s a quick synthesis of the key takeaways:
- New Income Tax Act 2025:
o File TDS/TCS corrections till Q3 of FY 23-24 which get time barred from 1st April 2026.
o New Form 128 for low/NIL TDS certificates needs to be filed.
o TDS on manpower supply now included under “work.” u/s 402 of ITA’25.
o Transitional provisions need implementation.
- Business & Profession:
o Certain TDS/TCS thresholds and rates change from 1st April 2026, like TCS on Scrap increases to 2% from 1% from 1st April 2026.
o MAT rules require careful budgeting depending on regime choice.
a. For TY 26-27, consider changing to New Tax Regime, incase MAT Credit is available.
b. Incase Old Regime is continued with, then the 14% provision for tax should be made in the Budget for FY26-27.
c. Even incase New Regime is chosen - Budget for Tax should be prepared accordingly as only 25% of the Tax Liability will be set off and the balance would need to be paid.
o Payments to SMEs under Section 43B(h) must be timely.
o Transitional changes for TDS/TCS changes under ITA’25 & ITR’26 need preparation.
- Core Compliance Actions
o Updated Returns (ITR-U): Last chance for AY 2021–22 by 31st March 2026.
o Updated Returns (ITR-U): For AY 2024–25, AY 23-24 and AY 22-23, the ITR-U can be filed with lower additional taxes till 31st March 2026. Hence, one needs to evaluate incase the same is required.
o Advance Tax: Needs to be adjusted for interest income, capital gains, buy-back income (as deemed dividend till 31st March 2026), etc, to avoid penalties.
- Capital Gains Tax to Consider on 31st March 2026:
o STCG can only be set off against STCL. See incase the whole year’s gains or losses need to be squared off.
o LTCG can be set off against both LTCL and STCL. See incase the whole year’s gains or losses need to be squared off.
o Consider booking gains to utilize carried-forward losses before they lapse.
o Use the ₹1.25 lakh LTCG exemption under Section 112A wisely.
- Salaried Persons & NRIs:
o NRIs must file their ITRs in India if they have Indian income, capital gains, or transfers, TDS more than Rs.25,000/-, etc.
o HRA Deductions for salaried: Be careful of Rent Paid to “Related Parties” and also the ‘place of employment’ vis-à-vis ‘rent paid’. The New Income Tax Act 2025 lays stricter guidelines and disclosures for these and Department would.
o Choose between Old vs. New Regime carefully, this being the First Year of the New regime after the massive rationalization in taxes from 1st April 2025. Mind that even after declaration to your employer, you may change the OPTION while filing your ITR.
o Ensure you file your returns incase your income is above Rs.2.5 Lakhs (Old Regime) and Rs.4 Lakhs (New Regime). To take the benefit of Tax-Free exemption of Rs.12 Lakhs under the new scheme and corresponding amount under the old regime, one has to mandatorily file his return.
o Submit proofs for deductions under 80C, 24(b), insurance, ELSS, etc. The receipts should be dated on or before 31st March 2026.
- House Property:
o Entire home loan interest is deductible for let-out property. Ensure Certificate is received.
o Vacant stock of property beyond 2 years risks deemed rent taxation.
3. Understanding Transitional Provisions to Income Tax Act 2025 (ITA25) from Income Tax Act 1961 (ITA61)
The Income Tax Act, 2025 (ITA25) will replace the Income Tax Act, 1961 (ITA61) effective 1 April 2026. Transitional provisions ensure continuity by clarifying which Act governs past years, mapping old sections to new ones, and maintaining existing frameworks for payments, TDS/TCS, and refunds. We herewith try to outline certain key issues and To-Dos relating to ITA25 implementation from 1st April 2026 as follows -
A. Exemptions granted/ Choices made in earlier Act, will continue in ITA25
B. LTDS Certification application in April 2026 under ITA25 For Tax Year (TY) 26-27 in Form 128 and electronic process
C. Section 194C Entry in ERP from 1st April 2026 under Section 393, Table 1, Entry 6(i) or 6(ii). Similarly all TDS would be deducted under other different Entries in Section 393.
D. All TCS Collections Entry in ERP from 1st April 2026 under Section 394
E. TDS/ TCS payment on 30th April under ITA61 for AY26-27
F. TDS/ TCS payment on 7th May under ITA25 for TY26-27
G. Advance Tax Challan to be used on 15th June under ITA25 for TY26-27
H. TDS/ TCS Return on 31st July under ITA25 for TY26-27 under New TDS/TCS Return Forms
I. TDS/ TCS Return on 31st May under ITA61 for AY26-27
J. ITRs to file for FY 25-26 under ITA’25/ ITA61 - AY26-27
K. Tax Payment for FY 25-26 under ITA61 for AY26-27
L. For returns filed till FY 25-26, Assessments would be under ITA61
M. Appeal Forms to be used for filing the appeals for AY26-27 or earlier would be those of ITA61.
N. Refunds already sanctioned will be available.
O. TDS Credits, MAT/AMT Credits, brough Forward of losses, etc need to be carried forward judiciously from ITA61 to ITA25.
P. Income Tax/ NSDL/ TRACES Portal changes need to be dealt with judiciously so that there is no litigation for technical glitches.
Q. Refunds earlier sanctioned in ITA61 can be adjusted against dues of ITA25; Dues of ITA61 can be adjusted against refunds of ITA25
R. Tax Positions taken under ITA61 need to be analysed and impact of the ITA25 be understood and calibrated by taxpyers.
S. Can ‘re-opening’ be done on the basis of a judgement of a Court under ITA25 even incase similar matter is settled in ITA61 – Multi-dollar question, which will be answered as we navigate to the new regime.
T. All rights, privileges, obligations or liabilities acquired, accrued or incurred under ITA61 or orders under ITA61 will be saved.
U. Penalty for proceedings on/before FY 25-26 under ITA61
V. Approval given, recognition granted, circular, direction, instruction, notification, order or rule issued will continue so far as it is not inconsistent with ITA25
W. For Limitations expired before 31.3.26, the limitation cannot be revived
4. Nil/Low TDS Certificates Rejection not possible due to existing demand only ITA’61; Under ITA’25 situation may ease a little due to additional disclosure requirements in Form 128 [Form 28 u/s 395 & Rule 213 Vs Form 13 u/s 197 & Rule 28AA]
The Delhi High Court’s decision in MakeMytrip (India) Private Limited v. Commissioner of Income Tax [2026-VIL-68-DEL-DT] is a significant reaffirmation of taxpayer rights under Section 197. By rejecting arbitrary reliance on outstanding demand and emphasizing compliance with Rule 28AA, the Delhi High Court has clarified the contours of administrative discretion in granting nil/lower TDS certificates. For businesses, the ruling provides assurance that the law remains a safeguard against excessive and unjustified tax withholding, thereby promoting liquidity and operational efficiency. Under New ITA’25, introduction of Form 128 under Rule 213 enhances disclosure requirements, ring-fencing assessing officers within statutory boundaries. Thus, the situation may ease under the new ITA’25. This decision underscores the judicial insistence on reasoned administrative orders under Section 197 of the Income-tax Act, 1961. By setting aside a rejection order that relied solely on outstanding demand, the Court reaffirmed the statutory obligation to evaluate applications against the parameters prescribed in Rule 28AA. To understand:
Section 197 provides taxpayers with a mechanism to obtain certificates authorizing deduction of tax at source (TDS) at a lower or nil rate. The provision is designed to prevent excessive tax withholding where the actual liability is demonstrably lower, thereby safeguarding liquidity and working capital. Rule 28AA prescribes mandatory parameters for determining the appropriate rate of TDS:
o Estimated income for the relevant year
o Past assessments and tax history
o Existing demand and its enforceability
o Refunds due to the taxpayer
The rule ensures that decisions are holistic, balancing revenue interests with taxpayer rights.
In this case, the assessee applied for a nil/lower TDS certificate for AY 2025–26. The application was rejected solely on the basis of outstanding demand. The Delhi High Court identified several deficiencies:
o Non-speaking order: The rejection lacked reasoning and failed to engage with the taxpayer’s submissions.
o Failure to examine enforceability of demand: The authority did not assess whether the outstanding demand was disputed or offset by refunds.
o Disregard of taxpayer’s claim: Assertions of nil taxable income and substantial refunds were ignored.
The Court relied on the precedent in Manpower Group, which held that orders under Section 197 must reflect application of mind to Rule 28AA criteria.
Outstanding demand is not conclusive: The existence of demand cannot automatically justify denial of certificates.
Reasoned orders are mandatory: Administrative discretion must be exercised transparently, with detailed reasoning.
Purpose of Section 197 reaffirmed: The provision exists to prevent undue blockage of working capital through excessive TDS.
5. Relaxation for Issuing TDS certificates for Q3 FY 2025–26 (quarter ending 31 December 2025) upto 31st March 2026
CBDT has issued Circular No. 02/2026 dated 25 March 2026, extending the deadline for issuing TDS certificates for Q3 FY 2025–26 (quarter ending 31 December 2025) to 31 March 2026. This relief was granted due to technical glitches on the income-tax e-filing portal, and certificates issued within this extended period will be treated as timely.
Hence, for Deductors (Employers, Banks, Businesses) Extra time is available to generate and distribute Form 16 (salaried employees) and Form 16A (non-salaried payments by Avoiding penalties for late issuance under Section 272A(2)(g) of ITA61.
6. File for condoning the delay in filing Form No. 10A under 12A(1)(ac)(i) of ITA61 before Jurisdictional PCIT/CIT (not DIT(CPC))
Registration and re-registration of trusts is an issue of disputes in various cases. One of the issues has now been clarified vide Circular No. 01/2026, that condonation for the delay in filing Form No. 10A under 12A(1)(ac)(i) of ITA61 has to be filed before Jurisdictional PCIT/CIT (not DIT(CPC)). This is a welcome step by the CBDT to clarify that incase a condonation application has to be filed, It should be before Jurisdictional PCIT/CIT. Hence merely for genuine delays the substantive rights of exemption would not be denied. However, due to the spurt in litigation incase of exemption for charitable activities, more such easements are required to be done by the CBDT. For Eg. Incase of re-registration issues like requirement of RC of 1973 where certificate was required to be applied for the first time, should not be brought up now. To understand Circular No. 01/2026 further:
The Issue was Delay in filing Form 10A for registration under Section 12A(1)(ac)(i). The question was regarding the Authority for Condonation: Jurisdictional PCIT/CIT or DIT(CPC)). It has now been clarified u/s 119(2)(b) of the ITA61 accordingly. However, the job is not over for eligible NPOs. Now they need to prepare Condonation Application citing genuine hardship and attach supporting documents (trust deed, audited accounts, reasons for delay) and thereafter represent before the Jurisdictional PCIT/CIT.
7. Summarising the key Government Amendments To The Finance Bill, 2026
The Finance Bill, 2026 was passed in the Lok Sabha on 25 March 2026 with 32–33 government amendments. All opposition-proposed changes were negated by voice vote. The Bill now awaits approval in the Upper House to complete the Budget process for FY 2026–27. We are trying to summarise the key Government Amendments To The Finance Bill, 2026 as under:
|
Provision |
Key Change |
Effective Date |
Relevant Clauses |
|
Uploading ITAT Orders |
Mandatory upload of Appellate Tribunal orders on designated portal. Many times, due to the non-seamless service of the Order, the appeal effect was delayed. This has caused lot of heart burn among assesses. Now with the upload of the order on the portal itself, the appeal effect of ITAT Orders shall be faster and seamless |
Orders passed on/after 1 Oct 2026 |
13A, 70A |
|
Minimum Time for Return Filing |
Minimum 30 days prescribed for filing return in reassessment notices. There was a dispute in many cases and even ex-parte orders. Assesses used to take the plea that since 3 months was the outer limit, the same should be provided, whereas officers used to argue that the period is not “specified”. This amendment removes the cause for dispute and ensures that the time limit is sacrosanct |
ITA 1961: 30 Mar 2026; ITA 2025: 1 Apr 2026 |
8A, 62A |
|
Timelines for Assessments (Court Success) |
Notice u/s 148 to be issued within 3 months of receipt of certified order; restriction aligned with appeals/revisions |
ITA 1961: 1 Feb 2026; ITA 2025: 1 Apr 2026 |
8B, 62B |
|
TRO Powers |
Arrest & detention powers removed; other recovery modes sufficient |
ITA 1961: 30 Mar 2026; ITA 2025: 1 Apr 2026 |
11A, 26B, 79A |
|
Refund Set-off |
Refunds can be set off across ITA 1961 & ITA 2025. This clarifies the position that any demand whether in ITA’61 or ITA’25 can be set-off against a refund under either ITA’61 or ITA’25 and vice-versa. There are other Transitional issues which may come up and from this clarification it seems that the CBDT is on its toes to support taxpayers on all issues which may give rise to litigation in future due to transition from ITA’61 to ITA’25. |
ITA 1961: 30 Mar 2026; ITA 2025: 1 Apr 2026 |
12A, 83A |
|
Approval Validity |
Clarification: approvals are administrative, not quasi-judicial; cannot be invalidated for insufficiency. After JAO/FAO explanation and DIN explanation, this amendment further reemphasizes the intent of CBDT to erase all litigation merely on procedural grounds. However, it would have been better that even on part of assesses these procedural issues are not considered and merits of the case are only considered. Such stand would have been more equitable. |
ITA 1961: 1 Apr 2021; ITA 2025: 1 Apr 2026 |
26A, 106 |
|
Buy-back Taxation |
Promoter tax regime applies only to Sec. 68 Companies Act buy-backs |
1 Apr 2026 |
34 |
|
Startup Benefits |
Turnover limit raised to ₹300 crore (aligned with DPIIT notification) |
1 Apr 2026 |
37A |
|
IFSC Benefits |
OBUs with expired 10-year period get fresh 10-year deduction from AY 2026-27 |
1 Apr 2026 |
38 |
|
Interest on Refunds/Defaults |
Old Act applies for AY 2025-26 & earlier; rate as per new Act from 1 Apr 2026 |
1 Apr 2026 |
107 |
|
Disability Pension |
Exemption for armed forces disability pension continued under ITA 2025 |
1 Apr 2026 |
108 |
|
Land Pooling Scheme |
Capital gains exemption continued under ITA 2025, restricted till 31 Mar 2031 |
1 Apr 2026 |
108 |
|
New Development Bank |
Exemption granted under Schedule VII |
1 Apr 2026 |
110A |
(The author is a FCA, LL.M, LL.B, MBA and Partner at Tax Connect Advisory Services LLP and also the Chairman of The National Fiscal Affairs Committee of The Bengal Chamber of Commerce and Member of National Taxation Committee of CII. He has Authored more than 25 books on varied aspects of Direct and Indirect Taxation. The views expressed are personal. E-mail - vivek.jalan@taxconnect.co.in)