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Direct Tax Vista Your weekly Direct Tax recap With Coverage of Income Tax Act 2025 & Income Tax Rule 2026 Edn. 115 – 5th June 2026 Vivek Jalan, Partner, Tax Connect Advisory Services LLP |
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We are pleased to put forth this issue of DTV as under. Now DTV would analyse the recent developments under Income Tax Act 1961 and International Tax and with also a commentary on how the position would be under the Income Tax Act 2025 and Income Tax Rule 2026. We would also be discussing the new developments under International Trade during the Fortnight.
1. Exemption for Government Securities – Income-tax (Amendment) Ordinance, 2026
The Income-tax (Amendment) Ordinance, 2026 promulgated on 5th June 2026 introduces targeted exemptions under Schedule IV of the Income-tax Act, 2025, specifically benefitting Foreign Institutional Investors (FIIs) and the Bank for International Settlements (BIS). This amendment, will be retrospectively effective from 1st April 2026, reflecting India’s policy intent to attract foreign capital and align with international financial norms. At a time when global headwinds have contributed to pressure on our foreign exchange reserves with plumetting forex reserves by 6% in 3 months, from $ 728 billion to $ 682 billion, this reform sends a clear signal that India is committed to attracting long‑term, stable foreign capital.
The Ordinance inserts new entries 13D and 13E in the exemption table of Schedule IV. These provisions exempt from tax any interest earned on Government securities and any capital gains arising from their sale, exchange, or transfer, when such income accrues to FIIs or BIS. The exemption, however, is conditional upon furnishing prescribed information in the manner notified by the authorities.
The impact of this amendment is that it reduces the effective tax burden on foreign investors in Indian government securities, potentially leading to increased foreign participation in India’s debt market. It also signals India’s commitment to harmonizing its tax regime with international practices, particularly in the context of sovereign and institutional investors.
This move is significant for several reasons. First, it enhances India’s attractiveness as a destination for sovereign and institutional investors by reducing tax friction on government debt instruments. Second, it strengthens India’s integration with global financial institutions like BIS, headquartered in Basel, Switzerland, which plays a pivotal role in international monetary cooperation. Third, by extending exemptions to FIIs, the amendment seeks to deepen liquidity in the government securities market, thereby supporting fiscal financing and monetary policy transmission.
The Ordinance also clarifies definitions under Note 4 appended to Schedule IV. It specifies that “Foreign Institutional Investor” shall carry the meaning assigned under Section 210(6)(a) of the Income-tax Act, 2025, while “Government security” adopts the definition under Section 2(f) of the Government Securities Act, 2006. This statutory cross-referencing ensures consistency and avoids interpretational disputes.
Overall, the Income-tax (Amendment) Ordinance, 2026 represents a calibrated step towards liberalizing India’s capital markets while safeguarding regulatory oversight. This measure will not only deepen our debt markets but also help bolster forex reserves, ensuring that India’s growth trajectory remains well‑supported by robust external financing. It is a forward‑looking reform that aligns with our broader vision of financial stability, global integration, and sustainable economic expansion.
2. I-T Department to Challenge HC Relief on Public Trusts in Supreme Court
The long-standing tussle between India’s Income Tax Department and public charitable trusts has taken a fresh turn, with the Department preparing to move the Supreme Court against recent Bombay High Court ruling [2026-VIL-73-BOM-DT]. The dispute centers on whether charitable and religious public trusts must include an irrevocability clause in their deeds to qualify for tax benefits.
The Bombay High Court had earlier ruled that the absence of an express irrevocability clause cannot be grounds for refusal or cancellation of registration under Section 12AB of the Income Tax Act, 1961. This ruling provided relief to several trusts, many of which were facing scrutiny from the Revenue authorities. The Court emphasized that the essence of charitable activity should not be undermined by technicalities in drafting, especially when the trust’s objectives and operations clearly serve public welfare.
The Income Tax Department, however, views the matter differently. Senior officials argue that irrevocability is a critical safeguard to prevent misuse of charitable assets and properties. Without such a clause, they fear trusts could potentially divert resources away from charitable purposes, undermining the intent of tax exemptions. The Department has therefore decided to challenge the High Court’s interpretation before the Supreme Court, seeking clarity and uniformity in the application of law.
The controversy is not new. Historically, the Revenue has insisted that irrevocability is a fundamental condition for recognition of charitable trusts. The rationale is that once assets are dedicated to charity, they should remain permanently committed to that purpose. The new Income Tax Act, effective April 1, 2021, explicitly requires charitable trusts to be irrevocable, reinforcing the Department’s position. This statutory change was intended to close loopholes and ensure that charitable institutions remain true to their stated objectives.
In our view though, The High Court’s ruling reflects a pragmatic approach, focusing on substance over form. Charitable intent and actual activities should carry greater weight than the precise wording of trust deeds. The Supreme Court’s eventual decision will therefore have far-reaching implications, not only for existing trusts but also for the framework of charitable regulation in India.
The case highlights the delicate balance between encouraging philanthropy and safeguarding against abuse. Charitable trusts play a vital role in education, healthcare, and social welfare, often filling gaps left by government programs. Ensuring their smooth functioning is essential, but so is maintaining accountability and transparency. The Supreme Court’s ruling will likely set a precedent that shapes the future of charitable governance, determining whether technical compliance or substantive intent should prevail.
For now, the charitable sector awaits clarity. The Department’s move signals its determination to enforce stricter standards, while trusts hope for judicial recognition of their broader social contributions. The outcome will define the contours of tax benefits for public trusts and could reshape the landscape of philanthropy in India.
3. ITAT Bangalore Rules on Scope of Section 143(1)(a)(vi) Adjustments: Food for thought on Distinction Between 44AD and 44ADA (Section 143(1), 44ADA & 44AD of ITA61 & – Section 270(1) & 58 of ITA25)
In a notable decision, the Income Tax Appellate Tribunal (ITAT) Bangalore had allowed the appeal of Shri Arthur Bernard Sebastine Pais [2019-VIL-1587-ITAT-BLR], clarifying the scope of adjustments permissible under section 143(1)(a)(vi) of the Income Tax Act, 1961. The case revolved around whether the assessee’s professional receipts should be taxed under section 44AD or section 44ADA, and whether the Centralized Processing Centre (CPC) was justified in making additions during return processing.
The assessee, an individual, had declared professional receipts of ₹15,00,000 from Crest Advertising Ltd. and interest income of ₹14,228. In his return for AY 2017-18, he opted for presumptive taxation under section 44AD, offering 8% of gross receipts as income. However, CPC noted that tax had been deducted at source under section 194J, which applies to professional services, and therefore proposed to apply section 44ADA, which mandates 50% of gross receipts as presumptive income for specified professionals under section 44AA(1).
The assessee argued that his services did not fall under the specified professions listed in section 44AA(1), and hence section 44ADA was inapplicable. He maintained that his consultancy services were managerial in nature, not technical consultancy as defined under the Act. He further contended that CPC’s adjustment was contrary to CBDT Instruction No.10/2017, which clarified that additions under section 143(1)(a)(vi) can only be made when receipts are omitted from the return, not when there is a dispute over the applicable presumptive scheme.
The CIT(A) upheld CPC’s view that section 44ADA applied, but directed rectification to avoid double taxation, restricting the addition to the difference between 50% under section 44ADA and 8% already offered under section 44AD. Dissatisfied, the assessee approached the Tribunal.
The ITAT, presided over by Vice President N. V. Vasudevan, observed that CPC’s adjustment was beyond the scope of section 143(1)(a)(vi). The Tribunal emphasized that the assessee had already declared the full receipts in his return, and the issue was only whether they should be taxed under section 44AD or 44ADA. Such a determination, the Tribunal held, cannot be made during summary processing under section 143(1). The CBDT’s instruction was cited to reinforce that only omissions of receipts justify adjustments, not interpretational disputes.
Accordingly, the Tribunal deleted the addition, ruling that CPC was not justified in invoking section 143(1)(a)(vi). Importantly, the ITAT left open the substantive question of whether the assessee’s income should fall under section 44AD or 44ADA, noting that such issues require detailed examination and cannot be resolved at the processing stage. However, this issue has been squarely decided in Manoj Rajaram Sharma vs ITO (2026-VIL-900-ITAT-MUM), which may be referred to.
This ruling underscores the limits of CPC’s powers in return processing and provides relief to taxpayers facing similar adjustments. It highlights that interpretational disputes on presumptive taxation schemes must be adjudicated through proper assessment proceedings, not through mechanical adjustments.
4. Defending Bogus Sales and Cash Credits – Metal Scrap and Other Industry (Section 68 of ITA61 – Section 102 of ITA25)
In recent years, allegations of bogus sales and unexplained cash credits under Section 68 of ITA61 have become increasingly common in assessments. Sensitive sectors such as metal scrap, iron, and alloys are particularly vulnerable, where transactions are often questioned by the AO despite the presence of supporting documentation. Defending such cases requires not only documentary evidence but also a strategic approach to establish the genuineness of transactions and the credibility of counterparties as was the case of SRI VENKATESH IRON AND ALLOYS INDIA LTD Vs ITO [2026-VIL-620-ITAT-KOL].
The AO frequently relies on third‑party statements or incomplete verifications to make additions. In such circumstances, the assessee must demonstrate the existence of the vendor and the receipt of goods. This goes beyond producing invoices and challans; it involves corroborating the transaction through multiple layers of evidence. Independent validation, such as obtaining a KYC and physical verification (PV) of the vendor by a third party, can significantly strengthen the defense. Such measures provide credibility that the vendor is a genuine entity engaged in legitimate business activity. Further, proving the movement of goods is critical. Transport documents like lorry receipts, weighment slips, and e‑way bills serve as tangible proof that the goods were physically delivered. When matched with banking records showing payments through legitimate channels, the assessee can establish a seamless chain of evidence linking the vendor, the goods, and the financial transaction. This holistic approach makes it difficult for the AO to sustain allegations of bogus sales.
Another important dimension is reliance on statutory records filed with tax authorities. C‑Forms, VAT/GST returns, and other filings act as independent validation from government systems. When the assessee’s records align with statutory filings, it demonstrates consistency and transparency. Such alignment is often decisive in appellate forums, where tribunals look for corroboration beyond self‑maintained documents.
Finally, third‑party validation and cross‑examination opportunities are important. Allowing independent confirmations or remand reports ensures that the AO’s reliance on unverified statements is rebutted. Success in such disputes lies in a multi‑layered evidentiary strategy. Establishing the vendor’s existence, proving receipt and movement of goods, and corroborating transactions through statutory and banking records collectively “seal the deal.” This structured defense not only protects the assessee from unwarranted additions but also sets a precedent for robust compliance in sensitive sectors.
5. Addition on Suppressed Sales/ Bogus Purchase/ Whats App Chats… Set Aside (Section 69A of ITA61 - Section 104 of ITA25)
Bogus purchases from shell companies, suppressed sales inferred from dispatch slips, and undisclosed income based on WhatsApp chats would not sustain as was held in the case of Balmukund Concast Pvt Ltd vs DCIT, CC 4(3) [2026-VIL-605-ITAT-KOL].
Bogus Purchases
The Revenue alleged that the assessee engaged in purchases from shell entities. However, the assessee furnished invoices, e‑way bills, transport documents, books of accounts, and supplier confirmations. CIT(A) deleted the addition, noting that once sales were accepted, corresponding purchases could not be disallowed. ITAT upheld this finding, relying on DCIT vs Sharp Mint Ltd (2024-VIL-276-ITAT-DEL), which established that accepted sales necessarily validate the purchases. This reinforced the principle that documentary evidence and consistency in accounts rebut allegations of bogus transactions.
Suppressed Sales
The Revenue sought to treat dispatch slips as evidence of suppressed sales. ITAT observed that dispatch slips merely recorded tentative prices subject to discounts, GST, and unexecuted orders. No corroborative evidence was produced to show receipt of differential consideration in cash or kind. Consequently, the addition was set aside, highlighting that tentative records without supporting proof cannot justify suppression of sales.
Undisclosed Income
CIT(A) partly sustained an addition of ₹20.47 lakh by applying a gross profit rate on alleged undisclosed transactions reflected in WhatsApp chats. However, ITAT relied on its earlier ruling in Balmukund Sponge & Iron Pvt Ltd (Dec 2025), holding that WhatsApp chats without corroborative evidence cannot justify additions under Section 69A. It clarified that presumptions under Section 292C are rebuttable, and digital communications alone are insufficient to establish undisclosed income.
6. Section 119(2)(b) of ITA61 [239 of ITA25] is not just discretionary—it imposes a duty to relieve hardship
The Chhattisgarh High Court has clarified the scope of Section 119(2)(b) of the Income Tax Act, 1961 [corresponding to Section 239 of the Income Tax Act, 2025] in the case of EARTHMET RESOURCES PRIVATE LIMITED Vs UNION OF INDIA [2026-VIL-103-CHG-DT]. The company, was eligible for the concessional tax regime under Section 115BAB but failed to file Form 10‑ID within the prescribed portal window, which closed on February 15, 2021. Its condonation request was rejected by the authorities on October 3, 2023, prompting litigation.
The Court emphasized that although Section 119(2)(b) is worded in discretionary terms, the discretion is coupled with a duty to relieve genuine hardship. It held that the provision must be construed liberally, ensuring that taxpayers are not penalized for procedural lapses that result in disproportionate financial consequences. Paying higher tax due to a missed filing window was recognized as genuine hardship. The Court relied on the Bombay High Court’s ruling in Pankaj Kailash Agarwal v. ACIT, which had observed that late filing does not confer any benefit to the assessee, but denial of condonation leads to undue hardship.
The judgment criticized the CBDT and Revenue authorities for mechanically rejecting the condonation request without examining the hardship and expediency involved. Their failure to consider circumstances such as COVID‑related disruptions and portal issues was found to be contrary to the legislative intent behind Section 119(2)(b).
In its directions, the Court condoned the delay and ordered the CBDT to reopen the portal for four weeks to allow the company to file Form 10‑ID. Thereafter, the claim under Section 115BAB was to be considered on merits in accordance with law. The ruling underscores that Section 119(2)(b) is not merely discretionary but imposes a duty on authorities to relieve genuine hardship, reinforcing the principle of substantive justice over procedural rigidity.
7. Treaty Benefit After Tiger Global & ITA25 - Form 41 under ITR26 (Form 10F of ITR62) and TRC is best to take to avoid risks… but practical challenges are there
The landscape of treaty benefits for non‑residents has undergone a significant shift following the Supreme Court’s ruling in AAR v. Tiger Global International II Holdings [2026-VIL-02-SC-DT] and the procedural changes introduced under ITA25. Historically, treaty provisions, where more beneficial, were understood to override domestic tax law, with compliance largely centered around furnishing Form 10F and a Tax Residency Certificate (TRC). However, with the introduction of ITR26, Form 10F has been replaced by Form 41, which must now be filed online, and the CBDT has squarely held through FAQs dated 20 March 2026 that failure to e‑file Form 41 disentitles a non‑resident from claiming treaty benefits, including concessional withholding tax rates.
The FAQs make it clear that Form 41 must be furnished whenever treaty benefits are claimed, whether at the stage of tax deduction at source or while filing the income tax return. Moreover, the form must be filed annually by non‑residents seeking relief under a DTAA. This procedural requirement has created practical challenges, particularly because many jurisdictions issue TRCs only for calendar years or retrospectively after the close of the relevant year. The insistence that TRCs uploaded with Form 41 must be valid for the relevant Indian financial year has led to compliance difficulties, especially in cases where TRCs are not contemporaneously available.
The Supreme Court’s observations in Tiger Global added another layer of complexity. The Court held that a TRC is not determinative of residential status and must be read in the context of the facts of each case. While this does not diminish the importance of TRCs, it underscores that they are not conclusive proof of treaty eligibility. In practice, however, TRCs remain a critical base document, and when combined with Form 41, they form the backbone of treaty relief compliance. The absence of legislative clarification has left room for tax authorities to challenge treaty eligibility where Form 41 is not filed, even if the TRC contains all requisite particulars.
Tribunal rulings in earlier cases such as Skaps Industries [2018-VIL-936-ITAT-AHM], Smt. Maya C Nair [2018-VIL-2192-ITAT-BLR], and Sreenivasa Reddy Cheemalamarri [2020-VIL-1243-ITAT-HYD] had recognized that delays or non‑filing of prescribed forms should not defeat treaty claims if substantive eligibility could be demonstrated. These precedents suggest that courts and tribunals may adopt a liberal approach, but until legislative clarity emerges, risk management dictates that resident payers continue to insist on e‑filed Form 41.
From a compliance perspective, ITA25 requires non‑residents to align their documentation processes with Indian financial years, ensure timely availability of TRCs, and integrate Form 41 filing into their annual compliance calendar. Resident payers, meanwhile, must verify that Form 41 has been filed before granting treaty benefits at the withholding stage. The combined effect of the Tiger Global ruling and the procedural changes under ITA’25 is a more stringent compliance environment, where procedural lapses could result in denial of treaty relief despite substantive eligibility.
This evolution highlights the growing importance of procedural rigor in international tax compliance. While substantive treaty rights remain intact, their enforceability now hinges on timely and accurate procedural compliance. In the absence of legislative relaxation, both non‑residents and resident payers must treat Form 41 and TRC as indispensable components of treaty benefit claims, ensuring that compliance failures do not translate into financial exposure or litigation risk.
8. Compensation received under settlement agreements are not automatically taxable as Capital Gains (Section 45 of ITA61 - Section 67 of ITA25)
The taxability of compensation received under settlement agreements has always been a contentious issue between taxpayers and the Revenue. In a recent ruling for AY 2018-19, the Kolkata ITAT in the case of Belani Housing Development Limited [2026-VIL-903-ITAT-KOL] has provided clarity, holding that compensation received for surrendering a personal privilege such as the “right to sue” does not constitute taxable capital gains.
The case arose from a 2004 Co-Operation Agreement where the assessee, along with three corporate bodies, planned a real estate project. An unregistered Agreement for Sale was executed with Saregama India Ltd (SIL) to purchase factory land for ₹16.10 crores, with an advance of ₹25 lakhs paid. However, disputes emerged when SIL failed to perform, and arbitration revealed that SIL lacked marketable title since the land vested with the State Government under the West Bengal Estate Acquisition Act, 1953.
The assessee pursued litigation in Barasat Court, obtaining interim orders that restricted SIL from alienating the property. To resolve the disputes and clear the title, SIL entered into a Settlement Agreement on March 27, 2018, agreeing to pay ₹18 crores in exchange for unconditional withdrawal of all suits. The assessee’s share was ₹6.58 crores.
The assessee treated this receipt as a non-taxable capital receipt. The Assessing Officer disagreed, contending that the settlement extinguished a valuable right under the original Agreement for Sale and was therefore taxable under Section 45 of the Income Tax Act, 1961 as capital gains. The CIT(A) restricted the substantive addition to ₹6.58 crores but also made a protective addition of ₹11.42 crores against the assessee.
The Tribunal examined the nature of the settlement and found that the Agreement for Sale was void ab initio, as SIL had no valid title. Consequently, the assessee had no enforceable right to specific performance. What remained was only the pending litigation—the “right to sue.” The ITAT emphasized that a right to sue is a personal privilege, not property under Section 2(14) of the Act, and therefore cannot be transferred. Any compensation for surrendering such a right is not taxable.
The Tribunal distinguished the Revenue’s reliance on capital gains provisions, noting that the ₹18 crores was paid for withdrawal of litigation, not cancellation of rights under the Agreement for Sale. It also vacated the protective addition of ₹11.42 crores, holding that the CIT(A) had exceeded jurisdiction.
In its findings, the ITAT reinforced three key principles. First, the right to sue is not a capital asset, and its surrender cannot trigger capital gains tax under Section 45. Second, relying on Supreme Court rulings in Saurashtra Cement and Oberoi Hotels, the Tribunal held that compensation for loss of a profit-earning apparatus is a capital receipt. Third, the Revenue’s reliance on Section 28(ii)(e) was misplaced, as this provision taxing contractual terminations was introduced only from AY 2019-20, making it inapplicable to AY 2018-19.
This ruling provides significant clarity for taxpayers, affirming that damages received to settle personal litigation do not automatically fall within the ambit of capital gains taxation. By separating a right to sue from a capital asset, the Tribunal has upheld both commercial realities and legal principles, ensuring that settlement receipts prior to AY 2019-20 remain outside the tax net.
(The author is a FCA, LL.M, LL.B, MBA and Partner at Tax Connect Advisory Services LLP and also the Chairman of The National Fiscal Affairs Committee of The Bengal Chamber of Commerce and Member of National Taxation Committee of CII. He has Authored more than 25 books on varied aspects of DT and IDT. The views expressed are personal. E-mail: vivek.jalan@taxconnect.co.in)