Direct Tax Vista

Your weekly Direct Tax recap

Edn. 112 – 9th December 2025

By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

 

1. CBDT’s NUDGE to Taxpayers to disclose Foreign Assets under Black Money Act again: Attention ‘Residents’ filing their ITRs on 10th Dec ’25

CBDT has again received the information from foreign jurisdictions under the Automatic Exchange of Information (AEOI) program regarding the Foreign Assets and foreign source of Income held by Indian Residents. They have again started intimating such taxpayers to disclose their foreign assets in their ITRs by 10th December 2025 or incase they have filed their ITRs, then to revise by 31st December 2025. This program is called “Nonintrusive Usage of Data to Guide and Enable (NUDGE)”. There would not be a scrutiny, assessment, etc but residents should just disclose their Foreign Assets and foreign source of Income in their ITRs.

 

We recently handled a case wherein a NRI has earned foreign income and purchased foreign Assets out of that income. In such case, it is important to note that such disclosure is not required as they are not taxed in India. Only the Indian Income needs to be disclosed for NRIs. However, incase for a resident the money has been transferred out of India to purchase the foreign asset, then such disclosure is mandatory to save oneself from the penal action under Black Money Act.

 

Some important points to note for disclosing in FA/ FSI Schedule –

 

1. Schedule FA & FSI: This Schedule need not be filled up if you are “not ordinarily resident‟ or a “non-resident‟. Hence for salaried NRIs and others outside India, no need to disclose their Foreign Income here.

 

2. Schedule FA: The following Assets needs disclosure –

Table A1 - Foreign depository accounts

Table A2 - Foreign custodian accounts

Table A3 - Foreign equity and debt interest

Table A4 - Foreign cash value insurance contract or annuity contract

Table B - Financial interest in any entity outside India

Table C - Any immovable property outside India

Table D - Any other capital assets outside India.

Table E - Any other account located outside India in which you are a signing authority (which is not reported in tables A1 to D)

Table F - Trust created outside India in which you are a trustee, a beneficiary or settlor

Table G - Any other income derived from any foreign source (which is not reported in tables A1 to F)

 

3. Schedule FA: Even incase one derives an immediate or future benefit, directly or indirectly, in respect of the asset and where the consideration for such asset has been provided by any person other than such person, disclosure has to be made.

 

4. Schedule FSI: Please ensure that the details of foreign tax credit and income are reported in Form 67 in order to claim credit.

 

2. Can a deduction for delayed deposit of employees' contribution to PF/ESI be claimed as a deduction after Checkmate Services Decision [Section 36(1)(va) read with section 2(24)(x) of ITA’61 Vs Section 29(1)(e) read with section 2(49)(o)]

The Supreme Court in Checkmate Services Pvt. Ltd. v. CIT has categorically held that employees' contribution to PF/ESI is governed by section 36(1)(va) read with section 2(24)(x) of the Act, and such contribution shall be treated as income of the employer if not deposited within the due date prescribed under the relevant Acts. Section 43B applies only to employer's contribution, and not to employees' contribution. Thus, the law as settled by the Supreme Court is that delayed remittance of employees' contribution, even if deposited before filing of return under section 139(1), is not allowable as deduction. ITAT after ITAT and High Court after High Courts have ruled accordingly. A chance was taken again with the argument that the issue was debatable at the time of processing and, therefore, could not be adjusted under section 143(1)(a) in the case of M/s SRC PROJECTS PVT LTD Vs THE ACIT [2025-VIL-1647-ITAT-CHE]. However, this too was held not tenable in view of the decisions of the co-ordinate Benches of the Tribunal, which held that such adjustment can be made under section 143(1)(a) based on information available in the tax audit report.

 

A little ray of hope as a writ has been filed with The Delhi HC to examine the constitutional validity of Section 2(24)(x) r.w. Section 36(1)(va). The Delhi HC has issued notice in the Writ Petition preferred by the Assessee (Aroon Aviation Services Pvt Ltd) challenging the constitutional validity of the provisions of Section 2(24)(x) read with Section 36(1)(va); Section 2(24)(x) seeks to treat the employee’s contribution deducted by the employer relating to PF and ESI etc. as income of the employer and no deduction is permissible under section 36(1)(va) to the employer if such contributions are deposited with the Government after the due date prescribed under the relevant enactment dealing with such social contributions;

 

Assessee has contended that in view of the SC judgment in Checkmate Services, the employers are being exposed to mandatory disallowance even in genuine/bonafide cases even if the delay is of a single day and for reasons beyond the control of the employer; The matter is listed on April 7, 2026. Till such time… Fingers crossed!

 

3. Prior approval of superior before assessment or re-assessment order, pursuant to search operation under Section 153D read with Section 153A of the IT Act 61 [Section 293 & 294 of ITA’25] must not be given mechanically

Consider a case where a Search/ Requisition of Documents have taken place by DDITs (Investigation) and the Dept. could not find much meat on the bone. The DDIT’s and JDIT/ADIT (Investigation) keep discussing the matter over a period of time. Thereafter the DDIT’s during the procedure prepare a draft Order u/s 153A and present to the JC/ADC (Investigation). The JDIT/ADIT (Investigation) approves the draft order within minutes on the same day. Furthermore, the draft assessment orders accompanying the proposals for approval contained glaring discrepancies, such as the draft orders already mentioning the details of the approval orders that were yet to be issued.

 

In this case if the JDIT/ADIT would not be considered as to have applied mind and the Order is likely to be quashed. The Income Tax Departmental Manual provides guidance on the processing of proposals for approval for issuing an assessment or re-assessment order pursuant to search operation under Section 153D read with Section 153A of the IT Act 61 [Section 297 of ITA’25]. This manual is equivalent to instructions under Section 119 of the IT Act and thus binding on IT officials. If breached, the Orders are liable to be quashed. Just because the ADIT/JDIT and the DDITs kept on speaking at regular intervals, it does not mean that the ADIT/ JDIT.

 

The Bombay High Court in the case of PR COMMISSIONER OF INCOME TAX CENTRAL 4 PR COMMISSIONER OF INCOME TAX CENTRAL Vs CITRON INFRAPROJECTS LIMITED [2025-VIL-323-BOM-DT], thus confirmed the order of the ITAT. Their Order was based on the Supreme Court’s views in the case of ACIT Vs. Serajuddin and Co. [(2024) 163 taxmann.com 118 (SC)].

 

4. Tally Solutions Pvt. Ltd. and SAP India Pvt Ltd are not functionally comparable for Transfer pricing FAR Analysis purposes [Sec 92C of ITA’61 – Sec 165 of ITA’25]

In transfer pricing, Functional analysis involves a detailed review of Functions, Assets and Risks of the entity under review and comparables. Functions include Identifying the specific roles and responsibilities, such as manufacturing, distribution, or research and development, performed by each entity. A pure Trading Organisation will not be the right comparable with a manufacturing organisation or one which makes and sells software, so to say.

 

The functions performed by SAP India Ltd is of presale activity, marketing and advertisement, pricing, product customisation, replication of SAT software, quality control, sales and distribution, maintenance services, consultancy services and training services. It also pays royalty to the parent for these sublicensing of software and maintenance services provided to the end-user, to compensate it for the right to sublicense and use of the intellectual property in the software developed by parent.

 

SAP challenged the inclusion of Tally solutions private limited having a margin of 40.06%, as a comparable. It was held as functionally dissimilar having its own product for sale and a diversified business activity, and therefore it is not merely a distributor. In absence of segmental information availability, this comparable required to be excluded as was held in M/s SAP INDIA PRIVATE LIMITED Vs THE DEPUTY COMMISSIONER OF INCOME TAX [2025-VIL-1646-ITAT-BLR].

 

5. Contesting Income Tax Penalty when Quantum Order Accepted [Section 271(1)(c) of ITA’61 – Section 439 of ITA’25 w.r.t. Sec 270A of ITA’61]

Sometimes when stakes are not huge, assesses may not contest quantum orders to prevent further litigation. Sometimes, when there is a loss and the assessment reduces the loss, the assesses accept the quantum orders. What follows is a penalty order of 50% to 200% of the tax amount involved! The assesses provide the following explanations -

 

1. Oversight by consultant

2. Oversight by Tax Auditor

3. Admitting Quantum for Buying Peace of mind

 

Department contests-

1. Significant inaccuracies cannot be dismissed as inadvertent

2. Deliberate and malafide Intention to evade taxes

3. A Company with professional advisors is not expected to make such mistakes

 

Section 271(1)(c) states that If the 2[Assessing] Officer or 57[the Joint Commissioner (Appeals) or the Commissioner (Appeals)] 5[or the 54[Principal Commissioner or] Commissioner] in the course of any proceedings under this Act, is satisfied that any person.. has concealed the particulars of his income or 10[****] furnished inaccurate particulars of such 11[income, or] he may direct that such person shall pay by way of penalty.

 

Similarly Section 270A (1) states that The Assessing Officer or 5[the Joint Commissioner (Appeals) or the Commissioner (Appeals)] or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income…

 

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent. of the amount of tax payable on under-reported income.

 

Hence the AO should clearly state what the Assessee has done to invoke penalty –

1. Concealed the particulars of his income or 

2. Furnished inaccurate particulars of such 11[income, or

3. Under-reported his income

4. Under-reported income is in consequence of any misreporting

 

While ITA’25 has not mirrored Section 271 of ITA’61, yet Section 439 of ITA’25 has mirrored Section 270A of ITA’61 and also requires the AO to determine whether the assessee has Under-reported his income or misreported. The Hon’ble Supreme Court in the case of CIT vs. SSA’s Emerald Meadows [2016] 73 taxmann.com 248 (SC) and following the same, has held that non-issuance of a specific show cause is a illegal infirmity. The same proposition has been reiterated by various Hon’ble Courts including Hon’ble Supreme Court in the case of PCIT vs. Shyam Sunder Jindal [2024] 164 taxmann.com 503 (SC). Hence it is very important for the AO to denote the right limb of the Section as an allegation. Further quantum proceedings have attained finality doesn’t automatically lead to levy of penalty where the assessee has made the necessary disclosure.

 

Hence, to contest the penalties once quantum proceeding reaches finality assesses may do the following –

 

1. Substantiate by facts as to how they have made full and true disclosures.

2. Substantiate on the basis of facts and circumstances as existed then as to how the mistake (if at all happened).

3. Submit evidences for 2 & 3 above.

4. Contest on why the particular Limb of the Section may not apply.

 

One may go through the recent case in the matter - DCIT Vs M/s NEVALES NETWORKS PVT LTD [2025-VIL-1648-ITAT-MUM]

 

6. Contesting Bogus purchase disallowance under Income Tax now after GST [Sec 69C of ITA’61 - Sec 105 of ITA’25]

Where the Assessing Officer alleges that the assessee has entered into bogus purchases basis information from Sales tax department/ Investigation Wing/ any other intelligence, the obligation is cast on the assessee to prove that the transactions are genuine. The genuineness of the expenditure may be proved by producing invoices, stock register, lorry receipts/delivery challans, bank statement, correlation with sales, e-way bills, sales registers, GST returns, etc to establish the genuineness of the purchases. Where the assessee is able to prove that the purchases are genuine, the onus shifts on the Assessing Officer to prove that the transactions are bogus.

 

Incase the Revenue relies on a statement of a third party to make an addition, the assessee has a fundamental legal right to cross-examine that party. Denial of this right renders the addition void (Andaman Timber Industries principle). A general admission by an entry operator is not enough. The AO must provide corroborative evidence linking the specific transactions of the assessee to the fraud.

 

In an apt case of JCIT (IN SITU), CIRCLE-1, LUDHIANA Vs M/s SHARMANJI YARNS PVT LTD [2025-VIL-1649-ITAT-CHD], it was thus concluded that the assessee had discharged its onus to substantiate the purchases, and the entire disallowance made by the AO was deleted.

 

Going a little more on 69C of ITA’61 Vs Sec 105 of ITA’25, a little out of the present context, it may be worthwhile to note that Section 105 of ITA’25 has become more stringent so to say as against Sec 69C of ITA’61. Under Section 69C the use of the words “may be” has been replaced with “shall be”. This therefore leaves no option for Courts to interpret the same in the assesses favour incase of any ambiguity. Further, the provisio to Sec 69C is much more expanded in scope under Section 105(2). Incase of say such expenses which can be categorised as CSR expenses. Incase the AO invokes Sec 69C and incase such expenses would otherwise be classified as CSR, then it may be claimed as a deduction u/s 80G so to say incase it satisfies other conditions. This is because ITA’61 only debars the expenditure to be claimed under any “head of Income”. However, u/s 105 of ITA’25, this expenses cannot be claimed under the Entire Act, including Section 133 (Section 133 of ITA’25 - Deduction in respect of donations to certain funds, charitable institutions, etc.)

 

7. Sec 69C of ITA’61 Vs Sec 105 of ITA’25: More Stringent; Unexplained expenses disallowed u/s 69C of ITA’61 may be claimed as a deduction other than under a head of Income; However, u/s 105 of ITA’25 these disallowances cannot be claimed as a deduction under entire Act

Section 105 of ITA’25 has become more stringent so to say as against Sec 69C of ITA’61. Under Section 69C the use of the words “may be” has been replaced with “shall be”. This therefore leaves no option for Courts to interpret the same in the assesses favour incase of any ambiguity.

 

The Hon'ble Supreme Court in case of CIT v. Smt. P.K. Noorjahan [1999] 237 ITR 570 (SC) in context of section 69 - Unexplained investments has held that, “3…a discretion has been conferred on the ITO under section 69 to treat the source of investment as the income of the assessee if the explanation offered by the assessee is not found satisfactory and the said discretion has to be exercised keeping in view the facts and circumstances of the particular case.”

 

Relying on the above decision of the Hon'ble Apex Court, in case of PCIT v. Rama Shankar Yadav [2017] 85 taxmann.com 173 (Allahabad), the High Court has held that, “10. At the same time, the use of the word "may" in the aforesaid provision makes the deeming provision discretionary and not mandatory. In other words, even if not explanation is offered or it is found to be unsatisfactory, it is not mandatory to treat such unexplained expenditure to be the income of the assessee… 17. The question raised above is answered in favor of the assessee and against the department and it is held that as the provision of Section 69C of the Act is not mandatory in nature, the Assessing Authority has full discretion either to add or not to add the unexplained expenditure in the income of the assessee based upon sound judicial principles….”

 

Further, the provisio to Sec 69C is much more expanded in scope under Section 105(2). Lets understand the history of the proviso to Section 69C. Circular No. 772 dated 23rd December 1998 explained the necessity of introduction of such Proviso. It states that as per section 69C of the Act, the expenditure was deemed to be income of the assessee, however, there is no corresponding provision for disallowance of such expenditure. This used to enable the taxpayer whose income was charged to tax under section 69C to claim the expenditure as deduction under section 37 defeating the very objective of the section.

 

Now incase of say such expenses which can be categorised as CSR expenses. Incase the AO invokes Sec 69C and incase such expenses would otherwise be classified as CSR, then it may be claimed as a deduction u/s 80G so to say incase it satisfies other conditions. This is because ITA’61 only debars the expenditure to be claimed under any “head of Income”. However, u/s 105 of ITA’25, this expenses cannot be claimed under the Entire Act, including Section 133 (Section 133 of ITA’25 - Deduction in respect of donations to certain funds, charitable institutions, etc.)

 

69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the 2[Assessing] Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, deemed to be the income of the assessee for such financial year:]

[Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.]

 

105. Unexplained expenditure.

(1) Where any expenditure has been incurred by the assessee in any tax year, and––(a) the assessee offers no explanation about the source of such expenditure or part thereof; or (b) the explanation offered about the source of such expenditure by the assessee is not satisfactory in the opinion of the Assessing Officer, then, the amount covered by such expenditure or part thereof, shall be deemed to be the income of the assessee for that tax year.

(2) Irrespective of any other provision of this Act, the amount deemed as income in sub-section (1) shall not be allowed as a deduction under this Act.

 

8. Time barring of 6 years for refund application is only for “Tax Paid” and not when “payments are made” when income itself is exempt [Sec 237 of ITA’61 Vs Sec 431 of ITA’25]

Section 237 of ITA’61 provides that – “237. If any person satisfies the 1[Assessing] Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess.”

 

The same is mirrored by Section 431 of ITA’25 which provides that – “431. Refunds. If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any tax year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess.”

 

One must understand that as per Article 265 of The Constitution Taxes cannot be collected without any authority of Law. Incase a payment is made where no tax is payable, then the nature of the payment does not remain taxes at all. This brings us to the point that for refund of such payments, there should be no Limitation period as such as held in the case of LT. COL. NIKHIL SUBODH GAJJAR RETD Vs PRINCIPAL COMMISSIONER OF INCOME TAX AHMEDABAD 3 [2025-VIL-322-GUJ-DT]

 

Circular 9/2015 [F.NO.312/22/2015­OT], DATED 9­6­2015 specifies the time period for condonation of delay in filing refund claim. It states inter-alia as follows -

 

“SECTION 119 OF THE INCOME­TAX ACT, 1961 INCOME ­TAX AUTHORITIES INSTRUCTIONS TO SUBORDINATE AUTHORITIES CONDONATION OF DELAY IN FILING REFUND CLAIM AND CLAIM OF CARRY FORWARD LOSSES UNDER SECTION 119(2)(b) CIRCULAR 9/2015 [F.NO.312/22/2015­OT], DATED 9­6­2015

 

3. No condonation application for claim of refund/loss shall be entertained beyond six years from the end of the assessment year for which such application/claim is made.This limit of six years shall be applicable to all authorities having powers to condone the delay as per the above prescribed monetary limits, including the Board. A condonation application should be disposed of within six months from the end of the month in which the application is received by the competent authority, as far as possible.”

 

However, Circular No.9/2015 which prohibits entertaining an application for claim of refund/loss beyond six years from the end of relevant assessment year would not be applicable incase a petitioner is entitled to the refund of the payment made as taxes as disability pension received by the petitioner is falling under exempt income and therefore, the petitioner is not liable to pay any tax on such disability pension.

 

If the same analogy is applied for say Non-Profit Organisations, Trusts, etc, it means that the application of refunds has no time limit.

 

9. Filing ITR as per Form 26AS... Matching ITR Revenue with Form 26AS just to avoid notices [Chapter XVII-B of the ITA’61 vs Chapter XIX-B of the ITA’25]

CBDT has clarified vide Circular No. 23/2017 dated 19th July, 2017 that if GST on Services component has been indicated separately in the invoice, then no tax would be deducted at source under Chapter XV Il-B of the Income Tax Act, 1961 on such GST component. Consider a case when the deductor has not followed this. The deductee assessee say declares a total sales revenue of Rs.100 Crores whereas TDS credit is claimed on a total gross receipts of Rs.118 Crores. The difference is due to the inclusion/exclusion of GST amount shown by the contractor while deducting TDS and wrongly reported the total amount of Turnover. This will trigger a notice in most circumstances. The question is whether for the fault of the deductor, the assessee (deductee) shows collections as Rs.118 Crores claiming an expense of Rs. 18 Crores as GST payment, which is not as per the Accounting Principles.

 

Our suggestion is not to do so as just to protect a notice, one should not do a wrong reporting in the Income Tax Return and claim an expense which is actually an asset and not an expense at all. However, when the notice does come then the assessee should submit all documentary evidence or confirmation from parties to get it dropped.

 

Where the assessee was requested to reconcile the sales with those appearing in form no.26AS and merely submitted the receipt as appearing in form no.26AS and as reported in the gross sales and no reasons for the difference between the two have been provided, the demand was confirmed

 

As the assessee only submitted an excel sheet showing the difference of receipts as per the books and receipt as per TDS schedule and no other documentary evidence or confirmation has been submitted by the assessee, the AO treated the entire difference amount of Rs.5,38,41,149/- as income of the assessee for the year under consideration. However, on further submissions the issue was dropped in the case of M/s NIKSHEP INFRA PROJECTS Vs THE INCOME TAX OFFICER [2025-VIL-1636-ITAT-BLR].

 

 

(The author is a FCA, LL.M, LL.B, MBA and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman of The National Fiscal Affairs Committee of The Bengal Chamber of Commerce and Member of National Taxation Committee of CII. He has Authored more than 25 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)