Taxmann's Analysis | Top 20 Landmark Rulings – Reshaping India's Direct Tax Regime

Top 20 Landmark Rulings

Reshaping India's Direct Tax Regime

Top 20 Landmark Rulings

Reshaping India's Direct Tax Regime

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Contents 1.

Reassessmet Notices Issued Under New Provisions Within Time Limit Extended by TOLA are Valid: SC

6

2.

Delhi HC Upholds Reassessment Initiated by Jurisdictional AO; Distinguishes With Hexaware Ruling

8

3.

CBDT Directed to Extend Due Date for e-Filing of ITR Due to Issues With New Utility Affecting Section 87A Rebate: HC

10

4.

Delhi HC Quashes CIC’s Order Directing I-T Dept. to Provide Info Related to PM CARES Fund

12

5.

SC Waives Interest on Tax Dues on Telcos Resulting From Its Decision Classifying Licence Fee as Capital Exp.

14

6.

Compensation Received From ‘Flipkart’ for Loss in Value of ESOP Due to Disinvestment Not Taxable as Perquisite: ITAT

15

7.

HC Justified Invoking GAAR as Issuance of Bonus Shares Was an Artificial Arrangement to Avoid Tax Obligations

16

8.

Property Not Eligible for Section 54F Relief If It Was Predominantly Being Used for Religious Purposes: ITAT

18

9.

Madras HC Upheld the Constitutional Validity of Section 194N; Said It is a Worthy Move to Reduce Cash Transactions

19

10.

Loose Sheets Found in House of 3rd Party Can’t Be Considered as Evidence Without Producing Corroborative Evidence: HC

20

11.

No Section 194H TDS on Income of Franchisee/Distributor From Sale of Prepaid Coupons/Starter-Kits: SC

21

12.

Exemption Under Section 10(26) Not Available to Firm Even If All Partners are Members of Scheduled Tribe: ITAT

23

13.

Sum Received From Employer on Account of Out-of-Court Settlement isn’t Taxable as Profit in Lieu of Salary: ITAT

24

14.

Receiving Gifts Through Banking Channels Does Not Establish Genuineness of Transaction: HC

25

15.

Supreme Court Upholds ICAI’s Limit of 60 Tax Audits Per CA; Makes It Effective From 01.04.2024

26

16.

Section 50C Not Applicable on Transfer of Leasehold Rights in Land and Building: ITAT

28

17.

Set-off of STCL on Which STT Was Paid Against STCG Not Subject to STT is Valid: ITAT

29

18.

Section 54G Relief Available Even If New Undertaking Was Set Up in Name of Firm in Which Assessee Was Partner: ITAT

30

19.

Properties Acquired in Name of Wife & Sons Using Unaccounted Amount to Be Treated as Benami

32

20.

Trust Not Liable to Pay Surcharge Just Because Its Income is Taxable at Maximum Marginal Rate: ITAT

33

The year 2024 brought several landmark rulings under Direct Tax Laws, significantly reshaping India’s tax landscape.

These judgments resolved intricate legal ambiguities and established precedents that will influence the future interpretation and enforcement of tax laws.

From upholding reassessment notices issued during the transition to a new tax regime to defining the boundaries of exemptions, capital gains taxation, and procedural compliance, these decisions carry profound implications for taxpayers, legal professionals, and tax authorities alike.

This article highlights the top 20 rulings of various courts and tribunals, concisely summarising each. As we enter 2025, these judgments will serve as cornerstones for practice and litigation, fostering greater clarity and equity in direct taxation.

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

5

1.

Reassessmet Notices Issued Under New Provisions Within Time Limit Extended by TOLA are Valid: SC

In the case of Ashish Agarwal [2022] 138 taxmann.com 64 (SC), the Supreme Court addressed whether reassessment notices issued under the old regime were valid after the new, more favourable reassessment regime came into effect. The Court ruled that all reassessment notices post 01-04-2021 should comply with the new reassessment regime.

However, notices under Section 148 of the old regime were deemed to be under Section 148A(b) of the new regime.

In the Ashish Agarwal ruling, the Supreme Court did not address whether or not the reassessment notices were issued within the time limits prescribed under the provisions of the Income Tax Act, read with the relaxations provided under TOLA. This was the primary issue for consideration before the Supreme Court in the instant appeal. The Supreme Court held that as under: (a)

TOLA extended the deadlines for certain actions under specified Acts that were due during the COVID-19 period. Section 3(1) of TOLA uses “any” to indicate that the relaxation applies to all actions due between 20-03-2020 and 31-03-2021. This section is concerned with the completion of actions under the specified Acts, and any amendment or substitution of provisions does not impact TOLA’s application as long as the action falls within the specified period.

(b)

Section 2(1)(b)(ii) of TOLA defines a ‘specified Act’ as including the Income Tax Act, and after 01 April 2021, it must be read as the Act amended by the Finance Act 2021. The substitution of Sections 147 to 151 does not impact TOLA’s purpose, which is to relax time limits for actions due between 20-03-2020 and 31-03-2021.

TOLA remains applicable to the Income Tax Act after 01 April, 2021 if actions under the substituted provisions fall within this period.

(c)

Section 3(1) of TOLA applies to the issuance of reassessment notices under Section 148 of the Income Tax Act. While TOLA did not amend the four- and six-year time limits under the Act, it provided a relaxation for issuing reassessment notices during the COVID-19 period.

(d)

TOLA does not apply if the time limit under Section 149 expires before 20-03-2020.

When issuing a reassessment notice, the Revenue must check both the Section 149 time limit and TOLA’s relaxation period. For example, the six-year limit for AY 2013-14 expired on 31-03-2020, but TOLA extended it to 30-06-2021.

(e)

Accordingly, after 01 April, 2021, the Income Tax Act has to be read along with the substituted provisions. TOLA will continue to apply to the Income Tax Act after 01 April, 2021, if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20-03-2020 and 31-03-2021.

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Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

(f)

TOLA will extend the time limit for the sanction grant by the authority specified under Section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20-03-2020 and 31-03-2021, then the specified authority under Section 151(i) has extended time till 30-06-2021 to grant approval.

(g)

In the case of Section 151 of the old regime, the test is: if the time limit of four years from the end of an assessment year falls between 20-03-2020 and 31-03-2021, then the specified authority under Section 151(2) has extended time till 31-03-2021 to grant approval;

(h)

Thus, Assessing Officers were required to issue the reassessment notice under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. All notices issued beyond the surviving period are timebarred and liable to be set aside.

Read the Ruling

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

7

2.

Delhi HC Upholds Reassessment Initiated

by Jurisdictional AO; Distinguishes With Hexaware Ruling

The instant writ petition was filed questioning the validity of the reassessment action initiated under Section 148 by the Jurisdictional Assessing Officer (JAO). The question before the High Court was: “Whether a notice issued by the JAO would be valid and compliant with the Faceless Scheme of Assessment, which had come to be adopted by virtue of Sections 144B and 151A?” The Delhi High Court that the provisions of the Faceless Reassessment Scheme 2022, supported by the extensive material presented by the respondents, bolsters the clear intent underlying each phase of the faceless assessment process. The scheme clearly contemplates the initial enquiry and formation of opinion to reassess being part of one defined process followed by actual assessment facelessly. It divides the reassessment process into two stages. When viewed in that light, it is manifest that it strikes a just balance between the obligation of the JAO to scrutinise information and the conduct of assessment itself through a faceless allocation.

The functions of the JAO and NFAC are complementary and concurrent, as contemplated under the various schemes and statutory provisions. This balanced distribution underscores the legislative intent to create a seamless integration of traditional and faceless assessment mechanisms within a unified statutory framework.

Section 144B, which provides for the faceless assessment, cannot be viewed as the solitary basis for the initiation of reassessment. The statute conceives various scenarios where the case of an individual assessee may be selected for examination and scrutiny based on information and material that falls into the hands of the Jurisdictional Assessing Officer (JAO) directly or is otherwise made available with or without the aid of the Risk Management System (RMS).

The faceless system of assessment does not nullify the JAO’s role in conducting assessments. The Court held that the JAO retains powers that do not conflict with, but rather complement, the objectives of neutrality and efficiency. The faceless assessment scheme centralises processes under the Faceless Assessing Officer (FAO) to reduce direct interaction.

However, this structure does not diminish the JAO’s authority. Instead, the JAO’s retained jurisdiction is vital for ensuring continuity and accountability, acting as a complementary element to the faceless assessment framework. The JAO’s retention of original jurisdiction provides a critical balance, ensuring that human oversight remains available within the faceless assessment structure when needed. Importantly, the Court highlighted that the JAO’s authority is not merely residual but an active, complementary role that reinforces the flexibility of the assessment system.

In Hexaware Technologies [2024] 162 taxmann.com 225 (Bombay), the Bombay High Court ruled that the JAO lost jurisdiction to issue reassessment notices after the introduction

8

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

of the Faceless E-Assessment Scheme 2022. The Court concluded that there could be no concurrent jurisdiction between the JAO and the FAO. However, the judgment did not refer to the notification dated 13 August, 2020, which gave NFAC officers concurrent powers with the AO. The Delhi High Court disagreed with Hexaware Technologies, considering multiple information sources that could aid a JAO in determining if income escaped assessment.

Accordingly, it was held that JAO could not be entirely stripped of the authority to assess or reassess solely due to the introduction of Section 144B and the Faceless Reassessment Scheme.

Read the Ruling

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

9

3.

CBDT Directed to Extend Due Date for e-Filing of ITR Due to Issues With New Utility Affecting Section 87A Rebate: HC

The Department of Income Tax annually releases utilities for filing income tax returns online. The department published a change in utility with effect from 5-7-2024; said modification unilaterally disabled assessees from claiming rebates under section 87A. As a result, taxpayers, despite being statutorily eligible, were effectively deprived of their entitlements solely due to technical modifications introduced by the department.

The Chamber of Tax Consultants (petitioner) had filed the writ petition before the Bombay High Court seeking a direction to modify the system developed and put in place by the Tax Department for filing income-tax returns for the assessment year 2024-2025 so as to allow the assessees at large to take complete benefit of the rebate available under section 87A. The issue in the present writ petition was whether the utility in the form of software could take away the statutory right to claim a rebate as per the proviso to section 87A and whether it is necessary for an assessee to make a claim for seeking a rebate under section 87A. The issue involved in the present petition required a detailed examination by giving an opportunity for a hearing to both sides to make detailed submissions. However, at this stage, the matter was being considered for the purpose of granting interim relief and whether the petitioner made a case for granting interim relief.

Therefore, for considering a prima facie case, it is necessary to note that under the Income-tax Act, 1961, there is a concept of self-assessment wherein an assessee is required to compute his own income, determine his tax liability, and pay such tax, and then file a return declaring his income. However, due to the change in the utility with effect from 5-7-2024, the assessees at large were not able to compute rebates under section 87A under the new regime with respect to income taxable at special rates. As a result, the assessees may have to pay additional tax to the extent that the rebate is not allowed to be claimed by the assessee. The petitioner is entitled to file a revised return computing rebate under section 87A, which would enable such an assessee to compute a refund in the revised return. Undisputedly, the last day to file a belated return in terms of section 139(4) is 31-12-2024, which allows even those assessees who have not filed their return within normal due dates.

The rebate under section 87A is inherently linked to the total income and taxpayer’s tax liability. The responsibility lies with the tax authorities to ensure proper implementation of the rebate as long as the taxpayer fulfils the statutory criteria. Procedural changes, such as those in utility software or instructions issued by the tax department, cannot override the substantive right to the rebate. Any action or inaction on the part of the tax authorities that limit the ability of taxpayers to avail of this statutory benefit is arbitrary and violative of the rule of law. Taxpayers should not bear the consequences of administrative inefficiencies or unilateral executive actions that undermine the legislative intent behind section 87A.

10

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

It is well-settled that statutory benefits must be extended in a manner that aligns with the objectives of the legislature. In this regard, procedural changes that deprive taxpayers of such benefits warrant judicial intervention to rectify the anomaly and ensure justice.

Tax authorities must act as facilitators to help taxpayers comply with the law rather than creating impediments through technical or procedural hurdles. Ensuring fairness, equity, and transparency in tax administration is crucial for upholding public confidence in the system.

Based on the above discussion by way of interim relief, the Central Board of Direct Taxes was directed to forthwith issue requisite notification under section 119 extending the due date for e-filing of the income-tax returns in relation to the assessees who are required to file a return of income by 31-12-2024, at least to 15-1-2025. This extension was to ensure that all taxpayers eligible for the rebate under section 87A are afforded the opportunity to exercise their statutory rights without facing procedural impediments.

Read the Ruling

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

11

4. Delhi HC Quashes CIC’s Order Directing I-T Dept. to Provide Info Related to PM CARES Fund An application under the RTI Act was filed seeking the procedure followed in granting exemption under section 80G of the Income-tax Act (IT Act) to the PM CARES Fund by the Income Tax Department (I-T Dept.). It was contended that he wanted to know the exact procedure followed by the Income Tax Department in granting such a swift approval and to see whether any rules or procedures were bypassed in granting such approval.

The Central Information Commission (CIC) ordered the I-T dept. to grant information as demanded by the applicant. Aggrieved by such an order, the I-T Dept filed a writ petition before the Delhi High Court.

The High Court held that section 138(1) of the IT Act provides that when a person makes an application in the prescribed form for any information relating to an assessee, the respective authority may if he is satisfied that it is in the public interest to do so, furnish or cause to be furnished the information asked for.

Further, sub-section (2) to section 138 contains a non-obstante clause which states that notwithstanding anything contained in sub-section (1) or any other law for the time being in force, direct that no information or document shall be furnished or produced by a public servant in respect of such matters relating to such class of assessees or except to such authorities as may be specified in the order.

The RTI Act also has a non-obstante clause in the form of Section 22, which says that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in the Official Secrets Act, 1923 and any other law.

A reading of both Acts shows that there is an inconsistency between the provisions of the RTI Act and the IT Act. Therefore, the question which arises for consideration is which Act will prevail.

The Income Tax Act focuses on specific provisions and laws concerning income tax. At the same time, the RTI Act is a general law that addresses providing information to citizens, facilitating their Right to Information.

Ordinarily, if there are two non-obstante clauses, the latter prevails over the former. At the same time, the applicability and overriding effect of an Act over other statutes cannot be decided merely by when the concerned Act comes into force. It is for the Courts to discern and interpret which Act will prevail over the other.

Thus, the Delhi High Court held that the IT Act, which is a special Act governing all the provisions and laws relating to income tax and super-tax in the country, will prevail over the RTI Act, which is in the nature of a General Act.

12

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

Further, the petitioner sought information from the Income Tax Department, not from the PM CARES Fund. As the requested information pertains to a third party, the PM CARES Fund should have been given an opportunity to be heard according to Section 11 of the RTI Act. The CIC should have followed the prescribed procedure under Section 11 before ordering the release of information.

Accordingly, the CIC lacks the authority to instruct the release of information under Section 138 of the IT Act. Even if it had such jurisdiction, the failure to notify PM CARES of the hearing would invalidate the decision.

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Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

13

5.

SC Waives Interest on Tax Dues on Telcos Resulting From Its Decision Classifying Licence Fee as Capital Exp.

The Supreme Court, in the case of CIT v. Bharti Hexacom Ltd. [2023] 155taxmann.com 322 (SC), overruled the Delhi High Court’s ruling and held that payment of license fee to DoT under Telecom Policy, 1999 was capital in nature.

It was argued that this judgment necessitates new orders on interest payments for tax demands post-1999 Telecom Policy. This places a heavy burden on assessees from the 2000-2001 assessment year onwards, prompting them to seek a waiver of interest for this period.

Revenue objected to this submission by contending that now that the tax demand would have to be met by the Assessees, it is logical that the interest on the said demand would also have to be paid.

The Supreme Court observed that since the judgment of this Court was dated 16.10.2023, and having regard to the Telecom Policy, which commenced from the year 1999, the payment of interest for the period for which the tax demand is now to be met in respect of these cases stands waived.

The Supreme Court held that this order shall not be a precedent in any other case as this order has been passed, bearing in mind the peculiar facts of this case and having regard to the lapse of time in litigation before the Delhi High Court and Supreme Court.

Read the Ruling

14

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

6.

Compensation Received From ‘Flipkart’ for Loss in Value of ESOP Due to Disinvestment Not Taxable as Perquisite: ITAT

The petitioner, Sanjay Baweja, was an ex-employee of Flipkart Internet Private Limited (FIPL), a wholly-owned subsidiary of Flipkart Marketplace Private Limited (FMPL). FMPL was a wholly-owned subsidiary of Flipkart Pvt. Ltd., Singapore (FPS). In 2012, FPS rolled out an Employee Stock Option Plan (ESOP) called the Flipkart Stock Option Plan (FSOP).

The petitioner was granted 1,27,552 stock options from 01.11.2014 to 31.11.2016 with a vesting schedule of 4 years. On 23.12.2022, FPS announced the disinvestment of its wholly-owned subsidiary called PhonePe. Thereafter, the value of FPS’s stock options fell, and FPS decided to grant the option holders a payment of USD 43.67 per option as compensation for the loss in the value of the options. It was also stated that the FPS would be withholding tax on the compensation, considering it to be a perquisite under Section 17(2)(vi). The petitioner filed an application under Section 197 seeking a ‘Nil’ deduction certificate.

The Assessing Officer (AO) rejected the application, and the matter reached the Delhi High Court.

The High Court held that the amount in question could not be considered as a perquisite under Section 17(2)(vi) as the stock options were not exercised by the petitioner, and the amount in question was a one-time voluntary payment made by FPS to all option holders in lieu of the disinvestment of PhonePe business.

The most crucial ingredient of the inclusive definition of perquisite is the determinable value of any specified security received by the employee by way of transfer/allotment, directly or indirectly, by the employer. As per Explanation (c) to Section 17(2)(vi), the value of specified security could only be calculated once the option is exercised. A literal understanding of the provision would provide that the value of specified securities or sweat equity shares is dependent upon the exercise of option by the petitioner. Therefore, for an income to be included in the inclusive definition of “perquisite”, it is essential that it is generated from the exercise of options, by the employee.

In this case, the petitioner had merely held the stock options without exercising them, so they do not constitute taxable income for the petitioner since none of the contingencies specified in Section 17(2)(vi) have occurred.

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Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

15

7.

HC Justified Invoking GAAR as Issuance of Bonus Shares Was an Artificial Arrangement to Avoid Tax Obligations

In the given case, the assessee sold the shares of a company to a private limited company.

Before the sale, the company issued bonus shares to its shareholders. Due to the issuance of bonus shares, the face value of each share of the company was reduced. The sale of shares resulted in a short-term capital loss to the assessee.

The assessee set off the short-term capital loss against the long-term gains made on another transaction of the sale of shares. The Assessing Officer (AO) treated said transaction as an impermissible avoidance arrangement as per the General Anti-Avoidance Rules (GAAR) under Chapter X-A starting from Section 95-102 of the Income Tax Act. Assessee filed writ petition before the Telangana High Court.

Assessee contended that the transactions resulting in bonus stripping were subject to the specific provisions of Section 94(8), which is a Specific Anti Avoidance Rule (SAAR). Any loss incurred on account of the purchase and sale of shares, resulting in bonus stripping, must be computed as per Section 94(8). However, the AO sought to treat the transactions as impermissible avoidance arrangements as per the GAAR. Assessee also relied upon 2012 Shome Committee Report. It was submitted that the Committee recommended that where SAAR is applicable to a particular transaction, then GAAR should not be invoked to look into that element.

The High Court held that the assessee’s argument was rooted in the belief that the Specific Anti Avoidance Rules (SAAR), particularly Section 94(8), should take precedence over the General Anti Avoidance Rule (GAAR). This contention, however, was fundamentally flawed and lacked consistency.

Given the multiple transactions that the taxpayer had undertaken, the case should fall under the umbrella of Chapter X-A and not Chapter X. Section 94(8) might be relevant in a simple, isolated case of the issuance of bonus shares, provided such issuance has an underlying commercial substance. However, this provision did not apply to the current case, as the issuance of bonus shares here was evidently an artificial avoidance arrangement that lacked any logical or practical justification.

It was clear that the assessee’s arrangement was primarily designed to sidestep tax obligations in direct contravention of the principles of the Act. The landmark Vodafone judgment provides crucial insight into this issue. The judgment implies that the business intent behind a transaction could be strong evidence that the transaction isn’t a deceptive or artificial arrangement. The commercial motive behind a transaction often reveals the true nature of the transaction.

The GAAR chapter, which comprises sections 95 to 102, provides a detailed account of various types of transactions that could be considered illegal tax avoidance arrangements.

This Chapter lists these transactions and provides an extensive definition of conditions that render a transaction or arrangement devoid of commercial substance.

16

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

Furthermore, Section 100 of this Chapter clarifies that this Chapter is applicable in addition to or as a substitute for any other existing method of determining tax liability.

This provision emphasises the legislative intention that the GAAR provisions should act as an all-encompassing safety net. It’s designed to capture all illicit arrangements, ensuring that tax on these arrangements is calculated using the provisions of this Chapter.

Further, the Committee’s stance that SAAR should generally supersede GAAR mainly pertains to international agreements, not domestic cases. This stand, as per the report, is further substantiated by the Finance Minister’s declaration, made on 14 January, 2013.

During this announcement, the Minister stated that the applicability of either GAAR or SAAR would be determined on a case-by-case basis.

Therefore, the assessee’s contention that the case should have otherwise fallen under Section 94(8) was not acceptable. It was clear and convincing that the entire arrangement was intricately designed to evade tax. Assessee, on his part, hadn’t been able to provide substantial and persuasive proof to counter this claim. Accordingly, the writ petition was dismissed, and AO was allowed to proceed.

Read the Ruling

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

17

8.

Property Not Eligible for Section 54F Relief If It Was Predominantly Being Used for Religious Purposes: ITAT

The assessee filed his return of income offering long-term capital gains for the relevant assessment year and claiming exemption under section 54F for a building constructed in a specific area of Hyderabad. Subsequently, the case was selected for scrutiny, and the notice was issued to the assessee.

Assessing Officer (AO) contended that the assessee claimed deduction in respect of the property in the nature of a Mosque. The nature of the usage of the property was mentioned in the application filed by the assessee before the GHMC as “Madrasa activities and Mosque” only. The assessee was required to construct the residential house as per section 54F. Dissenting with the assessee’s claim, AO disallowed the deduction claimed under section 54F, and the matter reached the Hyderabad Tribunal.

The Tribunal held that the Income-tax Act does not define the term residential house.

Judicial precedents and various dictionaries define the residential house as a house constructed for residence having a provision for a kitchen and toilet, etc. The assessee mentioned that the property consisted of Mosque, Orphanage School, and Staff Quarters in the application before GHMC. Further, during the proceedings, the assessee did not provide evidence of raising any construction in the premises. Various inspections carried out by the Department officials led to a conclusion that the property was predominantly being used for religious purposes, namely Mosque, Orphanage School, and Staff quarters.

In addition, the report suggested that the 3rd floor was residential, but it was contrary to the statement of the assessee filed before the GHMC seeking regularisation of the property. The statement clearly showed that the assessee had not used the property for residential purposes within the time granted by the statute. Therefore, the assessee was not entitled to any relief under section 54F.

Read the Ruling

18

Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

9.

Madras HC Upheld the Constitutional Validity of Section 194N; Said It is a Worthy Move to Reduce Cash Transactions

The instant writ petition was filed before the Madras High Court seeking a declaration that Section 194N of the Income Tax Act, 1961 is unlawful, arbitrary, violates fundamental rights under Articles 14 and 19(i)(g), and is unenforceable and unconstitutional.

Petitioner contended that the deductor under Chapter XVII is required to deduct/collect from any payments made to a deductee. Such a requirement is only in cases where the receipt or some portion constitutes taxable income. Since the cash withdrawal is not taxable, the question of deduction/collection does not arise.

The High Court held that the contention that Section 194N was a charge of tax on the amount withdrawn in cash was unsustainable as there could be no charging provision other than Sections 4 or 5 of the Income Tax Act. It was pointed out that the very placement of Section 194N in Chapter XVIIB would show that it was not a charging provision, and several cases have been cited to establish that the sections under Chapter XVII B are only machinery provisions, not intended to fasten any charge.

The power of the Legislature to tax is set out under Article 265 of the Constitution, and such power is wide, subject to the conditions and tests that have been laid out over the years to provide for reasonable restrictions in this regard. Article 265 states that no tax shall be levied or collected except by ‘authority of law’. What constitutes such ‘authority’ and what vests such power in the State would depend on the levy itself.

In deciding whether the levy is intra or ultra vires, the circumstances in which such levy has been introduced, the overall features of the levy as well as the attendant circumstances leading to the same, will have to be considered.

There have been several measures over the years to discourage and limit cash transactions, both under the Income Tax Act and other enactments. The challenge is now restricted to the modus operandi that the provision follows, as one hardly questions the legitimacy of the move to discourage cash transactions. We find that the object of Section 194N, as a measure to reduce cash transactions and gravitate towards an economy which is run in a transparent and accountable fashion, is laudable.

Further, the Legislature has provided for a situation where a payee, on the ground that the receipt is not amenable to tax, could seek and obtain a certificate from the Assessing Officer under Section 197. Such a certificate may be sought only in stipulated situations.

Section 194N is not part of the list.

However, an alternative method is available under Section 194N, allowing the Central Government, in consultation with the Reserve Bank of India, to issue a Gazette Notification specifying recipients exempted or subject to a reduced rate under this section. Thus, the recipient is not left remediless.

Accordingly, the writ petition was dismissed.

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10. Loose Sheets Found in House of 3rd Party Can’t Be Considered as Evidence Without Producing Corroborative Evidence: HC The Assessing Officer (AO) filed the instant writ petition challenging the order passed by the single Judge of the Karnataka High Court. The case involved AO searching at the premises of one Rajendran in New Delhi and recovering certain diaries/loose sheets, which purportedly consisted of certain entries relating to the assessee.

Based on Rajendran’s statement during the investigation, AO initiated action against the assessee. The assessee challenged the action taken by AO, and the single Judge of the High Court set aside the initiation of proceedings by setting aside the notice issued to the assessee under Section 153C. It was contended by the AO that single Judge was not right in referring to Section 34 of the Evidence Act and then holding that loose sheets cannot be considered as evidence.

The single Judge failed to appreciate one more aspect: Section 132 refers to not only books of accounts but also other documents. Even if it is to be assumed that the loose sheets would not fall within the ambit of books of accounts, undoubtedly, the same would fall within the ambit of documents.

The Karnataka High Court held that the entire allegation was made based on loose sheets of documents, which do not come under the ambit and scope of ‘books of entry’ or as ‘evidence’ under the Indian Evidence Act. The Hon’ble Supreme Court, in the case of Common Cause And Others v. Union of India [2017] 77 taxmann.com 245 (SC), has ruled that a sheet of paper containing typed entries in loose form, not shown to form part of the books of accounts regularly maintained by the assessee or his business entities, do not constitute material evidence.

Thus, the action taken by AO against the assessee based on the material contained in the diaries/loose sheets was contrary to the law declared by the Hon’ble Apex Court.

Accordingly, notices issued under Section 153C, based on the loose sheets/diaries, are contrary to law, which is required to be set aside in these writ appeals, as the same is void and illegal.

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11. No Section 194H TDS on Income of Franchisee/Distributor From Sale of Prepaid Coupons/Starter-Kits: SC The assessee is a cellular mobile telephone service provider. The assessee provides starter kits (SIM Cards) and prepaid coupons of a specified value at discounted prices to its distributors. Further, such SIM cards are sold by distributors to end users. The Assessing Officer (AO) considered that the difference between the discounted price and the actual sale value is commission or brokerage. Accordingly, the AO contended that the assessee failed to comply with the provisions of tax deduction under section 194H. The High Courts of Delhi and Calcutta have held that the assessee was liable to deduct tax at source under Section 194H. In contrast, the High Courts of Rajasthan, Karnataka and Bombay have held that Section 194H is not attracted.

The Supreme Court held that Explanation (i) to Section 194H defines that “commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.

The expression “direct or indirect” used in Explanation (i) to Section 194H is no doubt meant to ensure that “the person responsible for paying” does not dodge the obligation to deduct tax at source, even when the payment is indirectly made by the principal-payer to the agent payee. However, tax deduction at source in terms of Section 194H is not to be extended and widened in the ambit to apply to true or genuine business transactions, where the assessee is not responsible for paying or crediting income.

In the present case, the assessee neither pays nor credit any income to the person with whom it has contracted. The word “indirectly” does not regulate or curtail how the assessee can conduct business and enter into commercial relationships. Neither does the word “indirectly” create an obligation where the main provision does not apply.

The legal position of a distributor is generally regarded as different form that of an agent.

The distributor buys goods on his account and sells them in his territory. The profit made is the margin of difference between the purchase price and the sale price. The reason is that the distributor is an independent contractor in such cases. Unlike an agent, he does not act as a communicator or creator of a relationship between the principal and a third party. The distributor has rights of distribution and is akin to a franchisee.

Further franchise agreements provide a mechanism whereby goods and services may be distributed. In franchise agreements, the supplier or the manufacturer, i.e. a franchisor, appoints an independent enterprise as a franchisee through whom the franchisor supplies certain goods or services. There is a close relationship between a franchisor and a franchisee because a franchisee’s operations are closely regulated, and this possibly is a distinction between a franchise agreement and a distributorship agreement.

Franchise agreements are extremely detailed and complex. They may relate to distribution franchises, service franchises and production franchises. Notwithstanding the strict Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

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restrictions placed on the franchisees – which may require the franchisee to sell only the franchised goods, operate in a specific location, maintain premises which are required to comply with certain requirements, and even sell according to specified prices – the relationship may in a given case be that of an independent contractor.

An independent contractor is free from control on the part of his employer and is only subject to the terms of his contract. However, an agent is not entirely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent is fiduciary.

The distinction is that independent contractors work for themselves, even when they are employed to create contractual relations with third persons. An independent contractor is not required to render accounts of the business, as it belongs to him and not his employer.

Thus, the term ‘agent’ denotes a relationship that is very different from that existing between a master and his servant, or between a principal and principal, or between an employer and his independent contractor. However, servants and independent contractors are parties to relationships in which one person acts for another and thereby possesses the capacity to be involved in liability. Yet, the nature of the relationship and the kind of acts in question are sufficiently different to justify the exclusion of servants and independent contractors from the law relating to agency.

In other words, the term’ agent’ should be restricted to one who has the power of affecting the legal position of his principal by the making of contracts or the disposition of the principal’s property, viz., an independent contractor who may, incidentally, also affect the legal position of his principal in other ways.

Accordingly, it was held that the assessee would not be under a legal obligation to deduct tax at source on the income or profit component in the payments received by the distributors or franchisees from the third parties or customers or while selling or transferring the prepaid coupons or starter-kits to the distributors.

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12. Exemption Under Section 10(26) Not Available to Firm Even If All Partners are Members of Scheduled Tribe: ITAT The assessee partnership firm was running a hotel business under the name and style of M/s Hotel Centre Point at Shillong. It consisted of two partners, and both the partners were brothers and belonged to the Khasis tribe, which is enlisted as a Scheduled Tribe in the State of Meghalaya and is covered under Clause (25) of Article 366 of the Constitution of India The assessee claimed that because partners are individually exempt under section 10(26), a partnership firm comprised of those same partners should also be exempt. However, the Assessing Officer (AO) rejected the assessee’s claim.

Aggrieved by the order, the assessee preferred an appeal to the CIT(A). The CIT(A) allowed the claim of exemption under section 10(26) and the matter reached before the Tribunal.

The Tribunal held that a partnership firm is considered a separate entity for tax purposes under the Income Tax Act. This means it is subject to its own set of rules regarding tax rates, deductions, and allowances, distinct from those applicable to individuals. Deductions or exemptions available to individuals cannot be transferred to or used by the firm, and vice versa.

Section 5 of the Indian Partnership Act clarifies that a partnership is formed through a contract between partners, not by their status as members of a Hindu Undivided Family (HUF) or the same family. Therefore, even if the partners of a firm are siblings or spouses, their relationship does not impact the firm’s status or tax liability.

The exemption under section 10(26) has been specifically conferred on members of the Scheduled Tribe residing in the specified area. This exemption cannot be extended to another separate and distinct person.

The advantages and disadvantages conferred under the Income-tax Act on separate classes of persons are neither transferrable nor inter-changeable. The scope of the beneficial provisions cannot be extended to a different person, even after liberal interpretation, as it may defeat the mechanism and process provided under the Income Tax Act for the assessment of different classes/categories of persons.

Therefore, the benefit of exemption under section 10(26) as available to the individual members of the Khasi tribe cannot be extended to the firm.

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13. Sum Received From Employer on Account of Out-of-Court Settlement isn’t Taxable as Profit in Lieu of Salary: ITAT The assessee, an individual, received Rs. 2 Crore from his employer, INX Media, after his termination from service. The assessee voluntarily settled the case as his reputation was diminished due to extreme harassment and ill-treatment caused by the employer.

Assessing Officer (AO) added said amount along with Rs. 13,08,444 as perquisites in the assessee’s income. The AO treated the receipt as profits in lieu of salary. On appeal, CIT(A) deleted the additions made by AO. Aggrieved-AO filed the instant appeal before the Tribunal.

The Tribunal held that the payment of ex-gratia compensation was voluntary in nature without the employer having any obligation to pay further amount to the assessee in terms of any service rule. Thus, it would not amount to compensation in terms of section 17(3)(i).

The AO relied upon various Madras High Court judgments wherein it was held that the amount received for encashment of leave salary would be a profit in lieu of salary and taxable under the “voluntary Separation Programme”.

He also relied upon the decision of the Hon’ble Delhi High Court in the case of Deepak Verma (2010) 194 taxman 265 (Delhi) wherein it was held that if the payment is made ex gratia or voluntarily by an employer out of his own sweet will and is not conditioned by any legal duty or legal obligation, either on sympathetic grounds or otherwise, such payment is not to be treated as profit in lieu of salary under sub-clause (i) of section 17(3).

In the present case, the payment of ex-gratia compensation was voluntary in nature without there being any obligation on the part of the employer to pay further amount to the assessee in terms of any service rule. Therefore, it would not amount to compensation in terms of section 17(3)(i) of the Act. The impugned additions were rightly deleted by the CIT(A).

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Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

14. Receiving Gifts Through Banking Channels Does Not Establish Genuineness of Transaction: HC The assessee, an individual, received gifts from six individuals, aggregating to Rs. 14,50,000.

During the assessment proceedings, the Assessing Officer (AO) asked the assessee to furnish the details of the gift and the donor. In response, the assessee furnished the confirmation from the donors along with their PAN, acknowledgement of having filed the return of income, and the bank statement showing the gift amount credited to the assessee’s bank account.

Unsatisfied with the Explanation, the AO treated the gift as unexplained income under Section 68. On appeal, the Tribunal upheld the order of AO and confirmed his addition.

Aggrieved by the order, the assessee filed an appeal before the Allahabad High Court.

The High Court held that the assessee was well-to-do, whereas the donors were persons of modest means. In the absence of any relationship shown or basis disclosed for the generation of the gift, the Tribunal disbelieved the Explanation furnished by the assessee on the preponderance of probability emerging from the evidence led by the parties.

Insofar as the income tax assessment is purely a civil proceeding, the test of preponderance of probability applied by the Tribunal cannot be faulted. In the context of the gift set up by the assessee, merely because the assessee may have been able to establish such a gift was received through the bank channel and merely because the donors may not have disputed the gift made may never have been enough to establish the genuineness of the transaction.

The High Court held that slight differences in test may continue to exist in cases involving gifts and deposits that are to be repaid by the recipient. Insofar as the gift claimed by the petitioner amounted to a change of title in the money, the High Court did not find any defect in the course adopted by the Tribunal in disbelieving the claim based on holistic consideration of the material before the Tribunal.

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15. Supreme Court Upholds ICAI’s Limit of 60 Tax Audits Per CA; Makes It Effective From 01.04.2024 In the given case, the petitioners, who were Chartered Accountants, challenged the validity of Clause 6 of Guidelines No.1 - CA(7)/02/2008 dated 08.08.2008 issued by the Institute of Chartered Accountants of India (ICAI) under powers conferred by the Chartered Accountants Act, 1949 (Act) on the ground that the same is illegal, arbitrary and violative of Article 19(1)(g) of the Constitution of India.

The petitioners challenged the mandatory ceiling on the number of tax audits a Chartered Accountant can accept under Section 44AB of the Income Tax Act, 1961, as per Clause 6.0, Chapter VI of the Guidelines. They also seek to quash the disciplinary proceedings initiated by the Institute in line with these guidelines.

The Apex Court held that the Council of the ICAI had the legal competence to frame the Guideline restricting the number of tax audits a Chartered Accountant could carry out. The Court held that the ICAI was established to regulate the profession of chartered accountants, ensuring that the profession in the country maintains high professional ethics and renders quality service.

The power of the Council to regulate the profession of Chartered Accountants is not only in the interest of the Chartered Accountants but also in the interest of the public at large. As the Parliament may not always be able to amend the Schedules to the Act to incorporate newer professional misconducts, the Parliament has delegated the power to the Council to make any regulation or Guideline, the breach of which would amount to misconduct.

Therefore, the regulation or Guideline issued by the Council, the breach of which would result in professional misconduct, being a part of clause 1 of Part II of the Second Schedule, must be read as part and parcel of the Act itself.

Accordingly, the Council of the Institute had the legal competence to frame the Guideline restricting the number of tax audits that a Chartered Accountant could carry out, which was initially thirty and later raised to forty-five and thereafter to sixty in an assessment year.

Further, the restriction on the number of tax audits that could be undertaken by practicing Chartered Accountants doesn’t violate the right to practice the profession by a Chartered Accountant. It is a reasonable restriction and is protected under Article 19(6) of the Constitution. The Court observed that the power to control and impose taxes is a cornerstone of State sovereignty.

The restriction imposed by the ICAI on the number of tax audits that can be undertaken by a Chartered Accountant is not violative of Article 19(1)(g) of the Constitution. The restriction was imposed by the ICAI after taking into account the letter of CBDT and the CAG Report No. 32/2014. The restriction was imposed to eliminate the possibility of conducting tax audits in an insincere, unethical or unprofessional manner. The restriction was also

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supported by concerns and suggestions shared by experts and practitioners over a span of thirty years. It was imposed as the best conceivable and practical measure to rectify the targeted mischief and ensure the quality of tax audits conducted by the Chartered Accountants, which is in the general public’s interest.

The idea of compulsory tax audits was neither an inherent part of the practice of a Chartered Accountant nor an essential function that could be claimed as a fundamental right under Article 19(1)(g). As carrying out compulsory tax audit under Section 44AB of the Income Tax Act, 1961 is a ‘privilege’ & not a ‘right’ of a CA, the limit of 60 tax audits imposed by ICAI on every CA is to be upheld as it does not curtail the fundamental right of a CA to practice his profession.

If the Parliament, in its wisdom, at a certain future date, due to technological developments or any other reason, finds that expeditious and accurate assessments can be ensured without imposing on assessees the burden of additional requirements of the tax audit report and thereby deletes Section 44AB from the IT Act, 1961, it could not be possibly argued that the right under Article 19(1)(g) has been abridged.

Accordingly, the Court concluded that the limit of the maximum number of tax audits is valid and is not violative of Article 19(1)(g) of the Constitution as it is a reasonable restriction on the right to practise the profession by a Chartered Accountant and is protected or justifiable under Article 19(6) of the Constitution. However, the Guidelines dated 08.08.2008 and its subsequent amendment are deemed not to be effective until 01-04-2024.

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16. Section 50C Not Applicable on Transfer of Leasehold Rights in Land and Building: ITAT Assessee, an individual, was a salaried employee. He filed his return of income for the relevant assessment year and declared income. The return of income was processed under section 143(1). Subsequently, the Assessing Officer (AO) reopened the assessee’s case based on AIR information that the assessee sold a right in a leasehold property for Rs. 60,00,000 but did not offer the capital gains tax.

Reassessment was completed at an income of Rs. 75,94,850 for stamp duty purposes against the actual sale consideration of Rs. 60,00,000. On appeal, the CIT(A) upheld the reassessment proceedings, and the matter reached before the Delhi Tribunal.

The Tribunal held that the leasehold right in a plot of land is neither ‘land or building or both’ as such nor can be included within the scope of ‘land or building or both’. The distinction between a capital asset being ‘land or building or both’ and any ‘right in land or building or both’ is well recognised under the Act. Section 54D of the Act deals with certain cases in which capital gains on the compulsory acquisition of land and buildings are charged to tax. Section 54D(1) opens with: “Subject to the provisions of sub-section (2), where the capital gain arises from the transfer by way of compulsory acquisition under any law of a capital asset, being land or building or any right in land or building, forming part of an industrial undertaking…..”. Thus, it is palpable from section 54D that ‘land or building’ is distinct from ‘any right in land or building’.

Section 50C states that the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted for stamp valuation authority in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

Relying upon the decision of the Hon’ble Supreme Court in the case of Amarchand N. Shroff [1963] 48 ITR 59 (SC), the Tribunal held that a deeming provision could be applied only in the scope of the law and not beyond the explicit mandate of the section. Hence, the provisions of Section 50C of the Act are applicable only with respect to ‘land or building or both’. If the capital asset under transfer cannot be described as ‘land or building or both’, then Section 50C will not apply.

Accordingly, the provisions of Section 50C do not apply to the transfer of leasehold rights in land.

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17. Set-off of STCL on Which STT Was Paid Against STCG Not Subject to STT is Valid: ITAT Assessee, a Mauritius-based company, was registered with the Securities and Exchange Board of India as a foreign portfolio investor (FPI). During the relevant assessment year, the assessee earned short-term capital gain that was not subject to securities transaction tax (STT) and was taxable at the rate of 30 percent. The assessee also incurred short-term capital loss subject to STT and was in the 15% tax category.

While furnishing the return of income, the assessee had set off short-term capital losses against the short-term capital gains. During the assessment proceedings, the Assessing Officer (AO) contended that the set off of losses having lower taxability with gains of higher taxability was not in order. Thus, the AO computed set-off of short-term capital loss covered under section 111A against short-term capital gains chargeable to tax at the rate of 15% and did not grant any set-off short-term capital gain which was chargeable to tax at the rate of 30%.

On appeal, the Dispute Resolution Panel (DRP) also confirmed the action of the AO. Aggrieved by the order, the assessee preferred an appeal to the Mumbai Tribunal.

The Tribunal held that Section 70(2) provides that where the assessee suffers a shortterm capital loss, the assessee shall be entitled to set off such losses against capital gain computed similarly as under sections 48 to 55 of the Act. According to section 70(3), where the assessee suffers long-term capital loss, the assessee shall be entitled to set off such losses against the long-term capital gains computed similarly as provided under sections 48 to section 55.

Sections 48 to 55 do not provide for the tax rate on capital gain. It specifically lays down the computation mechanism of capital gain and certainly not tax on such capital gains.

It is not the case that either in the computation of short-term capital gains or short-term capital loss, there is any difference in the manner of computation. Therefore, short-term capital gain and short-term capital loss arising during the year are computed similarly as provided under sections 48 to 55 of the Act. Thus, there was no reason to deprive the assessee of set-off of short-term capital losses suffered by the assessee for the same year against the short-term capital gains earned by the assessee. Such a claim was in accordance with the provisions of section 70(2) of the Act.

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18. Section 54G Relief Available Even If New Undertaking Was Set Up in Name of Firm in Which Assessee Was Partner: ITAT The assessee was engaged in the business of manufacturing and job work of CI Casting, as a proprietor. While furnishing the return of income the assessee claimed deduction under section 54G on the ground that he had invested in a firm (new industrial undertaking in rural area) in which he was a partner and the said firm had invested the said amount in Factory Building and Plant & Machinery.

However, the Assessing Officer (AO) rejected the assessee’s contention and held that the assessee was an individual who shifted the undertaking from urban to rural areas to a partnership firm, which was a different entity under the Income Tax Act. Therefore, the AO made additions to the income of assessee and disallowed the assessee’s claim under section 54G. On appeal, CIT(A) upheld the action of AO. Aggrieved by the order, the assessee filed an appeal to the Rajkot Tribunal.

The Tribunal held that the object of section 54G is to promote decongestion of urban areas and balanced regional growth. This section exempts capital gains on the transfer of plant, machinery, land, building, etc., used for the purpose of the business of industrial undertaking as a consequence of shifting the industrial undertaking from an urban area to a non-urban area. The capital gain would be exempt to the extent, it is utilised within a period of one year before or three years after the date of transfer.

The assessee has complied with and satisfied the following conditions, namely: (i) shifting the existing undertaking from urban to rural area, (ii) transferring and installing the existing plant machinery, and other equipment in the rural area, (iii) making investment in the new undertaking for expansion and investment in business, (iv) MoU was made for expansion and investment in shifting the business, and (v) new investment in the firm was made in which the assessee was a partner. Therefore, the assessee had total right in the investment of the firm.

The firm name is only a compendious name given to the partnership for the sake of convenience. The firm’s assets belong to and are owned by the firm’s partners. Any property owned by it is really the property of the partners, and the use of the expression ‘firm’ is only a compendious mode to designate the persons who have agreed to a joint venture. What is called the property of the firm is really the property of the partners. The partnership property will vest in all the partners, and in that sense, every partner has an interest in the property of the partnership. The interest of a partner in a partnership firm belonged to him and would be includible in his ‘assets’ and will have to be taken into account while computing his net wealth.

The primary condition is that the assessee should have made an investment in the undertaking shifted to a rural area. Section 54G does not state that the asset should be acquired in the assessee’s name.

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The assessee shifted the existing plant and machinery, along with all important business plans, goodwill to rural area and therefore, the whole manufacturing undertaking has been shifted to rural areas. Therefore, the assessee was eligible for exemption under section 54G.

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19. Properties Acquired in Name of Wife & Sons Using Unaccounted Amount to Be Treated as Benami The assessee was found to have acquired various immovable properties illegally in the name of his two sons and his wife while working in the agriculture department office.

Many immovable properties were purchased at the time when both the sons of the assessee were minors, and they had no source of income. Apart from that, bank deposits and residential plots or agricultural land in the assessee’s name were far higher than income from his known sources, and he was the only earning member of this family.

After inquiry and investigation, the Initiating Officer concluded that the assessee did not have sufficient income to make such an investment. Accordingly, a notice was issued to the benamidaar and beneficial owner regarding the acquisition of property to disclose the sources.

The immovable and movable properties acquired in the names of two sons and the assessee’s wife were attached. The matter was reached before the Appellate Tribunal Safema.

The Tribunal held that the finding had been recorded even going against the definition of ‘benami transaction’ given under section 2(9)(A) despite the satisfaction of both the limbs of the definition. It was a case where the property was transferred or held by a person for which consideration was provided or paid by another person. It was the case where the wife and sons did not have sufficient means to acquire properties of the value given by the appellant and also that the acquisition of property was for the immediate or future benefit of the persons who provided consideration, i.e., the father.

It was found that the assessee could earn a salary while in service, and if no part of it was spent on his livelihood, he could not have acquired the property in the name of his wife and son.

If the total income of all the appellants was also considered, it did not come to the amount of property purchased. After deducting 30 percent of the income, the net earnings were not sufficient to acquire the property. The property was acquired for a value more than the earnings.

It was out of the assessee’s illicit income while in service of the agriculture department.

The unaccounted amount was used to acquire the property in the name of his wife and sons for his own benefit, and therefore, it becomes a case of ‘Benami transaction’

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Top 20 Landmark Rulings Reshaping India's Direct Tax Regime

20. Trust Not Liable to Pay Surcharge Just Because Its Income is Taxable at Maximum Marginal Rate: ITAT The assessee was a private discretionary trust registered under the Indian Trust Act. The assessee filed its return of income for the relevant assessment year. The return of income was processed under section 143(1), and the assessee was entitled to a refund of Rs. 1,80,670.

However, the Assessing Officer (AO) assessed the income of the assessee at Rs. 6.73 lakhs and levied a surcharge at the rate of 37 per cent as against nil computed by the assessee.

The assessee contended that the surcharge was levied despite the total income being less than Rs. 50 lakh.

The matter was carried to the CIT(A), wherein the surcharge was upheld. The assessee preferred an appeal to the Mumbai Tribunal.

The Tribunal held that the only issue that required adjudication was whether a surcharge could be levied where the total income was less than Rs. 50 lakhs. CIT(A) contended that since the assessee’s tax liability would fall under the maximum marginal rate, a surcharge would be applicable in the assessee’s case as per section 2(29C). The contention of the CIT(A) was incorrect.

The relevant provisions of the Finance Act 2022 stated that the surcharge was applicable only when the assessee, in the case of an Individual, Hindu Undivided Family or Association of Persons or Body of individuals, had a total income exceeding Rs. 50 lakh of such income tax.

Thus, the surcharge was leviable only if the total income exceeded Rs. 50 lakh. During the year under consideration, the assessee’s income was assessed at Rs. 6,73,590 less than Rs. 50 lakh. Therefore, levying a surcharge would not be applicable.

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Author of several best-selling books for professionals, including the recent one titled 'Trust and NGO's Ready Reckoner' by Taxmann

Has previously worked with Deloitte

Drafted publications for The Institute of Chartered Accountants of India, New Delhi, such as FAQs on GST for NPOs & FAQs on FCRA for NPOs. Has been a faculty and resource person at various national and international forums

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