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Direct Tax Vista Your weekly Direct Tax recap With Coverage of Income Tax Act 2025 & Income Tax Rule 2026 Edn. 114 – 7th May 2026 Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
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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. Navigating the Mistrust on trusts by CBDT: Registrations of Charitable Organizations under GPU challenged under ITA25
The Indian Income Tax Department’s recent cancellation of registrations for several prominent charitable trusts has sparked a debate on the fine line between philanthropy and commercialisation. In March 2026, when registrations under Section 12AB of the Income Tax Act 1961 came up for renewal, three leading Mumbai hospitals and a global spiritual organisation found their tax exemptions revoked. The department argued that their operations reflected a profit motive inconsistent with charitable principles, raising questions about how India defines and regulates “charity.”
Charitable and religious trusts, NGOs, and non-profit institutions must register under Section 12AB to claim tax relief. This registration is not permanent; it requires periodic renewal, during which the authorities assess whether the organisation continues to meet the conditions of charitable purpose. In these recent cases, the department scrutinised high surpluses and profit margins, concluding that the activities resembled commercial enterprises rather than incidental income streams. The trusts have challenged the cancellations before the Income Tax Appellate Tribunal, setting the stage for a legal battle that could reshape the sector.
The department’s stance echoes the Supreme Court’s 2022 judgment in the AUDA case, which distinguished permissible incidental activities from impermissible commercialisation. The Court held that while trusts may engage in revenue‑generating activities to sustain operations, excessive surpluses or systematic profit‑making can undermine their charitable character. This principle now guides the department’s interpretation, leading to stricter enforcement against institutions perceived to deviate from their stated goals.
The implications are significant. Hospitals, educational institutions, and spiritual organisations often rely on tax exemptions to maintain affordability and accessibility. If exemptions are withdrawn, they may face higher costs, reduced donations, and reputational challenges. At the same time, the government seeks to ensure that tax benefits are not misused by entities operating as de facto businesses under the guise of charity. Striking this balance is crucial for maintaining public trust in the non‑profit sector.
The department’s approach risks penalising institutions that generate surpluses for reinvestment in infrastructure or expansion of services. Various Tribunal’s rulings have clarified that such financial surpluses, which are re-invested and are not withdrawn and are consistently generated over the years and acceptable by the Department should not be challenged now. The intent should determine charitable status and not the outcome.
For now, the cancellations serve as a reminder that charitable organisations must align their operations closely with their stated objectives. Transparent accounting, reinvestment of surpluses into charitable activities, and clear documentation of public benefit will be essential to withstand scrutiny. As India’s non‑profit landscape evolves, the debate over profit and purpose will remain central to how the law interprets charity in practice.
Going forward we will dwell on the position of such issues in Income Tax Act 2025. So stay tuned!
2. Rs 1 crore gold seized from taxpayer during search with no purchase bills — can it be taxed? ITAT Bangalore Clarifies Scope of Section 69B of ITA61 (Section 103/104 of ITA25)
The recent ruling of the ITAT Bangalore in Ramnath Gupta Bysani vs JCIT (AY 2019‑20) [2026-VIL-653-ITAT-BLR] provides further clarity on the taxability of gold jewellery seized during search operations under Section 69B of the Income Tax Act, 1961. In this case, the Department seized 2,532.46 grams of gold jewellery valued at approximately ₹1.03 crore. The Assessing Officer treated the entire jewellery as unexplained investment on the ground that no purchase bills were produced and accordingly made an addition under Section 69B of ITA61 (Section 103/104 of ITA25). The assessee contended that the jewellery was accumulated over time through marriage gifts (streedhan), inheritance, and past purchases, and relied on CBDT Instruction No. 1916 dated 11 May 1994, which prescribes limits of jewellery that should not be seized during search operations—500 grams for a married woman, 250 grams for an unmarried woman, and 100 grams for a male member.
The Tribunal held that mere absence of purchase bills does not automatically render jewellery unexplained under Section 69B. It emphasized that Instruction No. 1916, though administrative in nature, reflects a pragmatic recognition of Indian social customs and must be applied in assessment proceedings. Accordingly, jewellery within the prescribed limits cannot be treated as unexplained investment, and the addition made by the Assessing Officer was deleted to that extent. The ruling underscores that while Section 69B empowers the Assessing Officer to tax investments not recorded in books of account where the assessee fails to explain the source, such deeming provisions must be applied in light of legislative intent and administrative guidance. Importantly, CBDT instructions are binding on departmental authorities under Section 119, and courts have consistently held that such instructions cannot be ignored when they mitigate hardship or clarify procedure.
From a compliance perspective, this decision reinforces that family‑held gold acquired through marriage, inheritance, or customary gifts enjoys protection up to the prescribed limits. While documentation such as wills, gift deeds, or affidavits remains advisable to strengthen the assessee’s position, the absence of purchase bills alone cannot justify additions under Section 69B. The ruling also highlights that assessment officers must balance statutory powers with CBDT guidance, ensuring that additions are not made mechanically but with due regard to socio‑cultural realities.
In conclusion, the ITAT Bangalore ruling provides further clarity on the taxability of seized jewellery. It establishes that taxation under Section 69B cannot be applied in isolation to penalize taxpayers merely for lack of purchase bills. Instruction No. 1916 continues to serve as a vital safeguard, ensuring that legitimate family‑owned gold remains outside the ambit of unexplained income additions. This case thus strengthens the principle that tax administration must be sensitive to cultural practices while remaining aligned with statutory provisions.
Now the question is whether Instruction No. 1916 would mutatis-mutandis apply to ITA25. For that we await further clarification from CBDT or the Jurisprudence to evolve.
3. Withdrawal of Provident Fund – Replacement of Form 15G/15H with Form 121
Effective 1 April 2026, the Employees’ Provident Fund Organisation (EPFO) has notified the replacement of Form 15G (Section 197A, Income Tax Act, 1961) and Form 15H (Section 197A(1C)) with a unified Form 121 for declaration of non‑taxable income at the time of EPF withdrawals. This procedural change harmonises compliance for subscribers across age categories and aligns with the CBDT’s emphasis on simplified self‑declaration formats.
Under Section 192A of the Income Tax Act, 1961, withdrawals from recognised provident funds attract TDS at 10% if the accumulated balance is taxable. Earlier, exemption from deduction was claimed through Form 15G/15H. With Form 121, the subscriber must declare that their total income is below the taxable threshold, failing which TDS will be deducted. The EPFO circular clarifies that mismatches in PAN, Aadhaar, or EPF account details will trigger automatic deduction, consistent with judicial dicta that procedural lapses cannot override substantive tax liability.
The jurisprudence on self‑declaration forms has been shaped by rulings such as CIT v. Eli Lilly & Co. (India) Pvt. Ltd. 2009-VIL-12-SC-DT, where the Supreme Court emphasised strict adherence to withholding provisions, and Hindustan Coca Cola Beverage Pvt. Ltd. v. CIT 2007-VIL-34-SC-DT, which held that once tax is paid by the recipient, recovery from the deductor is unwarranted. In the context of PF withdrawals, these principles imply that incorrect or delayed filing of Form 121 may expose the subscriber to deduction, though relief may be sought through rectification or refund claims under Section 237.
Practically, subscribers must file Form 121 each financial year, ensure consistency with ITR acknowledgements, and maintain documentary evidence of income. Failure to submit prior to initiating withdrawal may result in irreversible deduction, as EPFO systems process TDS contemporaneously with withdrawal requests. The transition to Form 121 thus underscores the need for accurate declarations, synchronisation of identity records, and proactive compliance to avoid unintended tax outflows.
4. Mismatch between IBC and tax law clouds loss carry-forward benefits Section 79 of the ITA61 (Section 119 of ITA25)
The interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Income‑tax Act, 1961 has created significant uncertainty in relation to the carry‑forward of losses where there is a substantial change in shareholding pursuant to a resolution plan. Under Section 79 of the ITA61 (Section 119 of ITA25), a company is generally prohibited from carrying forward losses if there is a change of more than 51% in beneficial shareholding. This provision is intended to prevent trafficking in losses. However, in the context of insolvency resolutions, such change in ownership is inevitable, and therefore an exception was carved out by way of amendments allowing companies to retain losses if the change in shareholding occurs pursuant to an approved resolution plan under the IBC.
The statutory framework requires that the jurisdictional Assessing Officer be given a reasonable opportunity of being heard before the resolution plan is approved. This procedural safeguard has become the focal point of litigation. In several cases, tax authorities have denied the benefit of loss carry‑forward on the ground that they were not formally notified or made part of the insolvency process. This creates a paradox: while the IBC provides that once a resolution plan is approved by the National Company Law Tribunal (NCLT) it is binding on all stakeholders, including governmental authorities, the Income‑tax Act insists on compliance with Section 79’s procedural requirement of hearing the tax officer.
The Supreme Court in Ghanshyam Mishra & Sons Pvt. Ltd. vs Edelweiss Asset Reconstruction Co. Ltd. (2021) clarified that once a resolution plan is approved under the IBC, it is final and binding on all stakeholders, including the tax department. This judgment was intended to ensure certainty and avoid reopening of settled claims. However, subsequent rulings have introduced complexity. In the case of JSW Steel Ltd. vs ACIT (ITAT Mumbai, 31 December 2025), the Tribunal held that approval of a resolution plan does not automatically entitle the company to carry forward losses. The Tribunal emphasized that the requirement of hearing the jurisdictional tax officer under Section 79 must still be satisfied, thereby re‑introducing procedural hurdles.
This divergence highlights a fundamental mismatch between insolvency law and tax law. The IBC is designed to facilitate timely resolution of distressed companies, while the Income‑tax Act seeks to prevent misuse of tax attributes. By insisting on strict compliance with Section 79, tax authorities are effectively imposing a condition not envisaged under the IBC framework. This creates uncertainty for resolution applicants who may factor in tax attributes such as carried‑forward losses when bidding for distressed assets.
From a compliance standpoint, companies undergoing resolution must ensure that tax authorities are formally notified and given an opportunity to present their views during the insolvency process. Failure to do so may result in denial of carry‑forward benefits, notwithstanding NCLT approval. Resolution professionals and applicants must therefore integrate tax considerations into the resolution plan documentation to avoid subsequent disputes.
In conclusion, while the legislative intent behind the IBC amendment was to preserve tax attributes and encourage resolution, judicial interpretation has created a grey area. The binding nature of resolution plans under the IBC, as affirmed in Ghanshyam Mishra, appears to conflict with the procedural requirements under Section 79, as emphasized in JSW Steel. Until legislative or judicial harmonisation occurs, taxpayers must adopt a cautious approach, ensuring procedural compliance with tax law while relying on the finality principle under the IBC. This area remains a live controversy at the intersection of insolvency and taxation, with significant implications for resolution applicants and distressed companies.
5. Taxability of Govt Incentives – A Transitional Analysis (Section 26/ 2(24)(xviii) & 145B of ITA61 - Section 28/ 2(49)(w) & 278 of ITA25
The jurisprudence on the taxability of government subsidies, grants, and duty drawback has undergone a significant shift with the enactment of the Income Tax Act, 2025 (ITA25), replacing the earlier Income Tax Act, 1961 (ITA61). The legislative framework under Section 2(24)(xviii) read with Section 145B(3) of ITA61 provided that assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession, or reimbursement was deemed to be income of the year of receipt, if not taxed earlier. In contrast, Section 2(49)(w) read with Section 278(3) of ITA25 employs the phrase “treated as” income of the tax year in which received, thereby subtly altering the drafting signal from a strict deeming fiction to a contextual treatment provision.
This change was tested in M/s SKF Engineering & Lubrication India Pvt Ltd v. DCIT [2026-VIL-608-ITAT-BLR], where the Assessing Officer added ₹21.7 lakh based on CBEC portal data, alleging unaccounted duty drawback. The assessee contended that under Section 145B(3), duty drawback is taxable only on actual receipt, not on accrual or portal reflection. The Tribunal accepted this position, holding that portal entries do not create an enforceable right to income until sanction and verification by customs authorities. The addition was deleted, consistent with the principle laid down in Matchwell Electricals (I) Ltd v. CIT 2002-VIL-353-BOM-DT, which held that government incentives are taxable only upon receipt or when a vested right arises.
The penalty proceedings under Section 270A (ITA61) were also quashed, as the difference was merely a timing issue, fully disclosed in books and audit reports. The Tribunal emphasised that misreporting requires concealment or deliberate suppression, which was absent. This aligns with Hindustan Coca Cola Beverage Pvt Ltd v. CIT 2007-VIL-34-SC-DT, where the Supreme Court underscored that once income is offered to tax, duplication of recovery is impermissible.
The drafting shift from “deemed to be” in ITA61 to “treated as” in ITA25 raises interpretational issues. In Bhagwan Dass Jain v. Union of India 1981-VIL-22-SC-DT, the Supreme Court recognised the legislative competence to tax notional income, observing that “anything which can be converted into income can be reasonably regarded as giving rise to income.” Thus, under ITA25, incentives reflected in ICEGATE or similar systems may be regarded as taxable in the year of appearance, even if not utilised or encashed, unless clarified otherwise. This could impact schemes such as RoDTEP scripts or MOOWR benefits, where notional accrual precedes actual monetisation.
Practically, taxpayers must synchronise accounting policies with statutory language, ensuring that incentive income is recognised in the correct year to avoid disputes. Documentation of receipts, reconciliations with customs data, and disclosure in tax audit reports are critical to defend against allegations of misreporting. The transitional jurisprudence underscores that while ITA61 adopted a strict deeming fiction, ITA25’s “treated as” formulation may allow purposive interpretation, but also opens the door to taxation of notional accruals.
6. Audit Report Errors and CPC Adjustments under Section 143(1) of ITA61 (Section 270(1) of ITA25)
The issue of erroneous audit reporting of contingent liabilities has recently been clarified by the Income Tax Appellate Tribunal (ITAT), Agra Bench in Gupta Continental Pvt Ltd v. DCIT [2026-VIL-611-ITAT-AGR]. The case involved a CPC adjustment of ₹3.61 crore based on disclosure in Clause 21(g) of Form 3CD, where the auditor mistakenly reported a contingent liability for customs duty as debited to the Profit & Loss account. In reality, no such expenditure was claimed. A corrigendum was subsequently issued by the auditor, but CPC rejected rectification under Section 154, citing irrelevant MAT credit issues.
The Tribunal held that Section 143(1)(a)(iv) permits CPC adjustments only where an expenditure is actually claimed in the return. Mere disclosure in the tax audit report, without a debit in the P&L, cannot justify addition. The principle that tax cannot be collected merely on account of typographical or software errors was reaffirmed, and the addition was deleted. The Tribunal recognised the validity of auditor corrigenda as evidence to rectify mistakes, consistent with the doctrine of substance over form.
This reasoning aligns with earlier precedents: Rail Vikas Nigam Ltd [2024-VIL-2212-ITAT-DEL], where contingent liabilities disclosed but not debited were held non‑taxable; Dwarkadish Spinners Ltd (ITA No. 4782/Del/2012), which ruled that audit report disclosure alone is insufficient; and Kay Bee Industrial Alloys Pvt Ltd [2011-VIL-744-ITAT-KOL], which held typographical errors in Form 3CD cannot lead to additions under Section 143(1).
The jurisprudence underscores that CPC’s scope is limited to prima facie adjustments, not adjudication of complex factual disputes. Assessees must substantiate corrigenda with supporting evidence such as TR‑06 customs challans or final orders, but once demonstrated, rectification is mandatory. The ruling strengthens taxpayer protection against mechanical additions and reinforces the principle of natural justice in faceless processing.
7. 194C Vs 194J Controversy: Short Deduction of TDS cannot invite disallowance u/s 40a(ia) of ITA61 [Sec 35(b) of ITA25]
The controversy surrounding short deduction of tax at source has been addressed by the Bombay High Court in Media Worldwide Ltd v. CIT [2026-VIL-112-BOM-DT]. The issue was whether disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 (ITA61), now corresponding to Section 35(b) of ITA25, can be invoked where tax is deducted under an incorrect provision of Chapter XVII‑B, resulting in short deduction.
The Court held that Section 40(a)(ia) is a machinery provision, not a charging section. The expression “tax deductible at source under Chapter XVII‑B” cannot be narrowly construed as “tax deductible under the appropriate provision.” Thus, deduction under the wrong section, even if resulting in shortfall, does not trigger disallowance under Section 40(a)(ia). The assessee may be treated as an assessee in default under Section 201, but the expenditure itself cannot be disallowed.
This reasoning is consistent with the Calcutta High Court in S.K. Tekriwal 2012-VIL-627-CAL-DT, which held that short deduction does not warrant disallowance under Section 40(a)(ia). Similarly, the Karnataka High Court in Kishore Rao & Others (HUF) 2016-VIL-268-KAR-DT and the Delhi High Court in Future First Info Services (P.) Ltd [2022-VIL-437-DEL-DT] adopted the same view. The Bombay High Court also noted the divergent stance of the Kerala High Court in PVS Memorial Hospital Ltd [2015-VIL-277-KER-DT], which had upheld disallowance in cases of short deduction. However, applying the principle laid down by the Supreme Court in Vegetable Products Ltd 1973-VIL-32-SC-DT, the Court held that where divergent views exist, the interpretation favourable to the assessee must prevail.
The ruling underscores that Section 40(a)(ia) is intended to enforce compliance with TDS provisions, not to penalise bona fide differences in interpretation of applicable sections. The correct remedy for short deduction lies in treating the deductor as an assessee in default under Section 201, subject to relief where the payee has discharged tax liability. This harmonises with the Supreme Court’s dictum in Hindustan Coca Cola Beverage Pvt Ltd v. CIT 2007-VIL-34-SC-DT, which held that recovery from the deductor is unwarranted once the payee has paid tax.
Practically, taxpayers must ensure proper classification of payments under Sections 194C, 194J, or other relevant provisions, but inadvertent short deduction will not invite disallowance of expenditure. The ruling provides certainty and prevents double jeopardy, reinforcing the principle that machinery provisions cannot be stretched to create substantive liabilities.
8. Navigating TDS Challenges: NRIs can also apply for LTDS under Form 128 (Old Form 13) u/s 395 earlier Sec 197/ 195
Taxation for Non-Resident Indians (NRIs) under the Indian Income Tax Act often presents unique challenges, particularly when it comes to property transactions and other income streams subject to Tax Deducted at Source (TDS). While resident Indians face a relatively modest 1% TDS on property sales, NRIs are subject to significantly higher rates. This disparity can create situations where the tax deducted far exceeds the actual liability.
For instance, consider an NRI who sells a property for ₹1 crore after purchasing it for ₹95 lakh. The real gain is only ₹5 lakh, yet TDS is levied on the entire ₹1 crore. This results in a deduction that is disproportionate to the actual tax payable. Such cases highlight the importance of applying for a Lower Tax Deduction at Source (LTDS) certificate in advance. NRIs can do so under Form 128 (previously Form 13), as per Sections 197 and 195 of the Income Tax Act. By securing this certificate before completing the sale, NRIs ensure that TDS aligns more closely with their true tax liability.
The LTDS mechanism is not limited to property transactions. It extends to other income categories where TDS applies, such as interest, royalties, technical fees, and capital gains (excluding salary). This provides NRIs with a valuable tool to manage their tax exposure and avoid unnecessary cash flow constraints.
Ultimately, proactive compliance is key. NRIs should plan ahead, assess their likely tax liability, and apply for LTDS well before finalizing transactions. Doing so not only prevents excessive deductions but also streamlines the process of meeting tax obligations in India. With careful preparation, NRIs can navigate the complexities of Indian taxation more efficiently and safeguard their financial interests.
(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 DT and IDT. The views expressed are personal. E-mail: vivek.jalan@taxconnect.co.in)