Direct Tax Vista

Your weekly Direct Tax recap

Edn. 111 – 18th November 2025

By 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. We would also be discussing the new developments under International Trade during the Fortnight.

1. Due to Notices not being received by taxpayers; Is an SIR (Special Intensive Review) of Income Tax Databases required to be done by CBDT as the New Income Tax Act 2025 is implemented? Sec 282 of ITA’61 & Sec 501 of ITA’25 - Reg

A major issue which is concerning for the CBDT as well as the taxpayers is the passing of "ex-parte" orders, as the notices are not being replied to by taxpayers. The aftereffect is naturally “low quality Orders” on best judgement of officers on the basis of data which is available. In a recent review with Trade & Industry as well as professional associations, a CBDT member suggested massive outreach programs for Intensive review of the database of the ‘e-mail Ids’ and ‘mobile number’ of the taxpayers available with the Department.

The matter was also taken up in the case of M/s GENERAL TRADERS Vs PRINCIPAL CHIEF COMMISSIONER OF INCOME TAX, RANCHI [2025-VIL-310-JHR-DT] where a Notice under Section 148 issued for Reassessment Proceedings was challenged on the basis of Principles of Natural Justice. The petitioner, a partnership firm engaged in the business of road construction, mining and crushing, filed its return of income for the assessment year 2016-17. After more than 6 years, the petitioner received a notice, intimating that certain notices under Sections 148 and 142(1) of the Income Tax Act, 1961 had been issued to the petitioner, to which the petitioner did not respond. The petitioner contended that it had not received any such notices, and that the department had sent the notices to an old and inactive email ID instead of the updated email ID provided by the petitioner. Further, the notice sent by ‘speed post’ finally had been received by the petitioner and acted upon. The error happened as the Income Tax Department uses the e-mail id on the ITR. However, the assessee had changed the Id on the E-Portal of Income Tax Dept. It was held that the Assessing Officer failed to check if there was any change in the address before initiating the proceedings, and that the valid service of notice under Section 148 is a jurisdictional requirement that must be mandatorily complied with. The onus is on the Revenue to show that proper service of notice has been effected under Section 148. Consequently, the Court quashed the reassessment proceedings, the ex parte assessment order, and the penalty orders, and remitted the matter to the concerned Assessing Officer for considering the matter afresh.

In this regard it is important to note that as per Section 282 of ITA’61 and Section 501 of ITA’25 as follows -

ITA ’25 Sec 501. Service of notice, generally.

(1) The service of a notice, or summon, or requisition, or order, or any other communication, under this Act (herein referred to as communication) may be made by delivering or transmitting a copy thereof, to the person therein named—

(a) by post or by such courier services as may be approved by the Board;

(b) in such manner as provided under the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons;

(c) in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000 (21 of 2000); or

(d) by any other means of transmission of documents, as may be prescribed.

(2) The Board may make rules providing for the addresses (including the address for electronic mail or electronic mail message) to which the communication referred to in sub-section (1) may be delivered or transmitted to the person therein named.

(3) For the purposes of this section, “electronic mail” and “electronic mail message” means a message or information created or transmitted or received on a computer, computer system, computer resource or communication device including attachments in text, image, audio, video and any other electronic record, which may be transmitted with the message.

ITA ’61 Sec 282. (1) The service of a notice or summon or requisition or order or any other communication under this Act (hereafter in this section referred to as "communication") may be made by delivering or transmitting a copy thereof, to the person therein named,-

(a) by post or by such courier services as may be approved by the Board; or

(b) in such manner as provided under the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons; or

(c) in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000 (21 of 2000); or

(d) by any other means of transmission of documents as provided by rules made by the Board in this behalf.

Explanation.-For the purposes of this section, the expressions "electronic mail" and "electronic mail message" shall have the meanings as assigned to them in Explanation to section 66A of the Information Technology Act, 2000 (21 of 2000).]

Important to note that reference to IT Act 2000 is removed in ITA’25 as the same was held unconstitutional by Hon’ble Supreme Court in the case of Shreya Singhal v Union of India, AIR 2015 SC 1523. Further the words ‘or’ are removed after clause ‘a’ and ‘b’ which means that under ITA’25 notices, etc will be served by all ways so that the service is an ‘effective service’. It is pertinent to note that recently in a landmark judgement the Hon’ble Madras High Court, in the case of Tvl. Jai Infotech v. Deputy State Tax Officer has held that for a notice to be valid, it had to be an ‘effective service’ in addition to a ‘legal service’

2. Global Capability Centres (GCCs) services for Transfer Pricing: ITeS (Information Technology Enabled Services) or KPO(Knowledge Process Outsourcing)?

A Construction/ Engineering GCC has the following characteristics by and large –

a. It renders backend support services to the construction/ Steel/ EPC industry

b. It generally provide structural detailing services, as per the drawings/designs supplied by its A.E. It may provide other similar engineering services

c. It employs a software generally with the help of which it provides the services.

d. The services rendered to generally the foreign AEs are low-end services

e. The GCC generally engage diploma holders or not very highly qualified people for rendering services.

Rule 10TA(e) of IT Rules 1962 defines "information technology enabled services" [ITeS] and provides that –

(e) "information technology enabled services" [ITeS] means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:-

(i) back office operations;

(ii) call centres or contact centre services;

(iii) data processing and data mining;

(iv) insurance claim processing;

(v) legal databases;

(vi) creation and maintenance of medical transcription excluding medical advice;

(vii) translation services;

(viii) payroll;

(ix) remote maintenance;

(x) revenue accounting;

(xi) support centres;

(xii) website services;

(xiii) data search integration and analysis;

(xiv) remote education excluding education content development; or

(xv) clinical database management services excluding clinical trials,

but does not include any research and development services whether or not in the nature of contract research and development services;

Rule 10TA(g) of IT Rules 1962 defines "knowledge process outsourcing services" [KPO] and provides that –

(g) "knowledge process outsourcing services" [KPO] means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:-

(i) geographic information system;

(ii) human resources services;

(iii) engineering and design services;

(iv) animation or content development and management;

(v) business analytics;

(vi) financial analytics; or

(vii) market research,

but does not include any research and development services whether or not in the nature of contract research and development services;

Hence ITeS and KPO Services is that KPO service are similar in the sense that -

a. Both are business process outsourcing services

b. Both are provided mainly with the assistance or use of information technology

However, the key difference between ITeS and KPO Services is that –

a. KPO service requires application of knowledge and advanced analytical and technical skills

b. The services enumerated in Rule 10TA(e) would specifically be ITeS and Rule 10TA(e) would specifically be ITeS and the services enumerated in Rule 10TA(g) would specifically be KPO services

It is important to note that it is important for TP studies as the profitability of KPO Services for engineering Companies would generally be higher that ITeS Services. On the said analysis The ITAT-HYD held in the case of DGS TECHNICAL SERVICES PRIVATE LIMITED Vs THE DEPUTY COMMISSIONER OF INCOME TAX [2025-VIL-1568-ITAT-HYD] that the services provided by the assessee were in the nature of ITeS and not KPO.

3. Defending summary disallowance of Business Expenses

Certain Business Expenses are summarily disallowed by Department during scrutiny and the same may has been contested with the following arguments by the taxpayers in various cases like DCIT Vs M/s SCAN HOLDINGS (P) LTD [2025-VIL-1572-ITAT-DEL], THE ACIT Vs UNIMED TECHNOLOGIES LTD [2025-VIL-1573-ITAT-AHM], etc. We summarise the same, which may be beneficial for taxpayers –

A. Salary paid to Promoter Directors – The salary expenses pertaining to payment-made-to the promoter/ directors was duly evidenced by Form 16, bank statements, attendance register and salary ledger accounts. One can content that “it is inconceivable that a company can function without paying salaries” – the argument was found incontrovertible. It would be evidenced by the fact that they have been offered to tax in the ITR of the counter party too.

B. Rent paid to Directors – The rent expenses pertaining to payment-made-to the directors should be evidenced by Form 16A, bank statements, rent deeds and receipts, and ledger accounts. The same would be evidenced by the fact that they have been offered to tax in the ITR of the counter party too. Furthermore, the reasonableness should be demonstrated.

C. Adhoc disallowance of Domestic/ Foreign Travel Expenses as Bogus- Documentary evidence in the form of bank statements, bills and vouchers and the ledger to prove whether on any day the payment in cash was more than Rs.10000/0 as per Section 40A(3) of ITA’61 [Section 36(4) of ITA’25]. Further the business purpose and genuineness of the expenses should be demonstrated.

D. Software Expenses/Product approvals consultancy (Capital or Revenue Expenditure) -

i. Incase software expenditure is incurred for licenses, data modules, for product manufacturing or such expenses for increasing “operational efficiency” it is a part of the routine business expenditure.

ii. Incase payment for professional consultancy services is incurred in the ordinary course of business to ensure compliance/ facilitate business, then it is a part of the routine business expenditure.

The point to prove the difference between Capital and Revenue Expenditure, is whether a new asset of enduring nature is created or not. Incase no new asset is created, then it is ‘revenue expenditure’.

4. Notice u/s 148 or 148A of ITA’61 [Section 280 and 281 of ITA’25] shall only issued by the authority as mentioned in Section 151 of ITA’61 [Section 284 of ITA’25]

The Supreme Court in the case of Union of India v. Rajeev Bansal had clearly held that the specification of authority under Section 151 of ITA’61 [Section 284 of ITA’25] is directly co-related to the time when the notice is issued and non-compliance with the strict time limits prescribed under Section 151 affects the jurisdiction of the AO to issue the notice under Section 148. Incase approval of PCCIT/ CCIT is required and is taken from even CIT or junior Authority, the whole reassessment proceedings was quashed as laid down in the case of ACIT (IT) – 1(2)(1) Vs BARCLAYS EXECUTION SERVICES LIMITED [2025-VIL-1567-ITAT-MUM]. Hence, Section 151 of ITA ’61 was amended w.e.f. 1st Sept 2024 as follows –

Sanction for issue of notice.

151. Specified authority for the purposes of sections 148 and 148A shall be the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director, as the case may be.

Section 284 of ITA’25 is the same as Section 151 of ITA’61. Therefore now such notices do not even require the approval of CIT, but even approval of ADCIT or the AD or the JCIT or JD would suffice.

5. Income Tax Exemption of Trusts cannot be denied merely because there is a surplus as long as the surplus is used for objects u/s 2(15) of ITA’61 [Section 2(23)/ 346 and 355(e) of ITA’25], Rule of consistency should be followed while assessing trusts

For many associations Income Tax Registration u/s 12A and exemption u/s 11 is denied since these associations collect hefty sponsorship and advertisement charges from Corporate and substantial Delegate fees. The AOs allege that the gross receipts are is in the nature of trade, business and commerce and deny the exemption.

It is argued that the association is a facilitator for conducting conferences on commercial basis. It is also argued that these case falls within the ambit of sub clause (iii) of Section. 28 of ITA’61 as the income derived by trade, professional or similar association from specific services performed for its members. Further it is submitted that since, sec. 11 does not operate in these cases, the taxable income of the assessee is determined in a commercial sense, as envisaged by Board's Circular No.5P dated 19.6.1968, which state as follows -

"Where the trust derives income from house property interest on securities, capital gains, or other sources, the word "income" should be understood in its commercial sense. Le, book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise”.

Here, it is now trite as follows -

1. The mere generation of surplus does not imply profit motive, so long as the surplus is applied solely towards the objects of the trust. This legal position has been clearly enunciated by the Hon’ble Supreme Court in Queen’s Educational Society v. CIT (372 ITR 699), wherein it was held that when surplus is ploughed back into educational purposes, the institution exists solely for education and not for profit.

No part of the income or property of the trust should in any ways be diverted for private benefit. All receipts, including sponsorships and delegate fees, should be utilised for conference-related expenses or donations to other registered charitable institutions having similar objects. In such case, the existence of surplus cannot be a ground to deny exemption.

2. Rule of Consistency – incase in any/all prior and subsequent assessment years, the Revenue has accepted the assessee’s claim of exemption u/s.11 of the Act on identical facts. No change in law or factual matrix is demonstrated by the Department for the impugned year. In such case, the principle of consistency, as laid down by the Hon’ble Supreme Court in Radhasoami Satsang v. CIT (193 ITR 321), mandates that a different view should not be taken in the absence of change in facts or circumstances.

These principles were again laid down in NEURO UPDATE CHENNAI Vs ITO, EXEMPTION WARD -1, CHENNAI [2025-VIL-1571-ITAT-CHE]

Sec 2(15) of ITA’61 states as follows –

(15) "charitable purpose" includes relief of the poor, education, yoga, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility:

[Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless-

(i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty per cent. of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year;]

Corresponding Sections of ITA’25 are as follows –

Section (23) “charitable purpose” includes––

(a) relief of the poor;

(b) education;

(c) yoga;

(d) medical relief;

(e) preservation of environment (including watersheds, forests and wildlife);

(f) preservation of monuments or places or objects of artistic or historic interest;

(g) the advancement of any other object of general public utility;

Section 346. Restriction on commercial activities by registered non-profit organisation, carrying out advancement of any other object of general public utility.

No registered non-profit organisation, carrying out advancement of any other object of general public utility, shall carry out any commercial activity unless,—

(a) such commercial activity is undertaken in the course of actual carrying out of advancement of any object of the general public utility;

(b) the aggregate receipts from such commercial activity or activities do not exceed 20% of the total receipts of such registered non-profit organisation of the relevant tax year; and

(c) separate books of account are maintained by such registered non-profit organisation for such activities.

Section 355(e) “commercial activity” means any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity;

6. Foreign Exchange Loss on Loan should be booked every year under Income Tax [Section 43AA of ITA’61 (Section 43 of ITA’25)]

The treatment of Income Tax incase of Forex loss for monetary item i.e. Payable/ Loan is covered under Section 43AA of ITA’61 (Section 43 of ITA’25). Assesses are required to report Foreign currency loans as per ICDS VI (Rule 5i) which states that In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year.

Now consider a case when due to the error in reporting as well as computation, the forex loss was not recognised year-on-year but once only in the year of repayment. It was held in the case of HYDERABAD YADGIRI TOLLWAY PRIVATE LIMITED Vs PRINCIPAL COMMISSIONER OF INCOME TAX [2025-VIL-1561-ITAT-AHM] that the assessee was not entitled to claim the entire foreign exchange loss on repayment of foreign currency loan in one year.

7. TDS u/s 195 of ITA’ [Section 393 of ITA’25] is not applicable when the Commission is paid for ‘services rendered outside India’

TDS to be deducted on any sum chargeable under the provisions of ITA’61 not being income chargeable under the head ‘Salaries’. (E.g. Payments such as interest, royalty, fees for technical services are liable for tax deduction u/s. 195 of the Act). Hence, TDS is applicable when the services are rendered IN India. Income from services rendered outside India is taxable only in the country of residence of the service provider as per the DTAs.

No disallowance can be made u/s 40(a)(ia) on the ground that tax was not deducted u/s 195 on commission paid to non-resident agents where the entire income is earned outside India. Incase no part of income is accrued or arising in India, it was not chargeable to tax in India and hence there is no need to deduct TDS. The Hon’ble Madras High Court in CIT v. Faizan Shoes (P) Ltd. (supra) and CIT v. Kikani Exports (P) Ltd. [(2014) 369 ITR 96 (Mad.)] has categorically held that where services are rendered OUTSIDE India, section 195 is not attracted. However, assessee should duly comply with the procedural requirement under section 195(6) of ITA’61 by filing Form-15CA and Form-15CB.

(The author is a CA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Lead - Indirect Tax Core Group of CII-ER and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)