If you are heading to the Income Tax Appellate Tribunal now, the first question is not about the merits but about the statute. An ITAT appeal that touches the Income-tax Act 2025 transition can be governed by the old 1961 Act, the new 2025 Act, or, in practice, a little of both. The answer turns on a test many practitioners are still getting wrong: the tax year the dispute concerns, not the date on which the order happens to be passed. This article explains the test, the form, the limitation period and the traps. It is a companion to our complete guide to the income-tax appeal ladder.

The Test that Decides Which Act Applies

The Income-tax Act 2025 (Act 30 of 2025) came into force on 1 April 2026 and repealed the Income-tax Act 1961. The repeal is not a clean break. Section 536 of the new Act saves the old law for work in progress, and its clause (2)(c), as reproduced in the Central Board of Direct Taxes’ transition FAQs of July 2026, says that the provisions of the repealed Act continue to apply to any proceeding pending on commencement “and to any proceedings initiated on or after the 1st April, 2026 (including notices, assessment, reassessment, recomputation, rectification, penalty, reference, revision and appeals) in respect of any tax year beginning before the 1st April, 2026”, carried out as per the procedure in the repealed Act. Clause (2)(e) adds that proceedings pending on commencement, “by way of an application, appeal, reference or revision”, continue and are disposed of “as if” the 2025 Act had not been enacted.

Read together, these provisions establish a two-part test for determining which statute governs an ITAT appeal under the Income-tax Act 2025 or the repealed 1961 Act, the test has two limbs. First, was the appeal already pending before the Tribunal on 1 April 2026? If so, the 1961 Act continues to govern it. Second, if not, ask which tax year the dispute is about. The 2025 Act speaks of a “tax year”, which replaces the old assessment year and previous year. A tax year that began before 1 April 2026 means financial year 2025-26 and everything earlier (assessment year 2026-27 and before). For those years, proceedings “initiated” even after 1 April 2026, appeals expressly included, run under the repealed Act. Only a dispute about a tax year beginning on or after 1 April 2026 is a 2025-Act appeal.

A hypothetical shows the point. A company’s assessment for financial year 2024-25 is completed in March 2026 and the first appeal is decided in a faceless order in August 2026. The order is passed after the new Act commenced, yet the dispute concerns a pre-April-2026 tax year, so the second appeal to the Tribunal is a 1961-Act appeal. A first appeal against an assessment for financial year 2026-27, decided in 2027, would be a 2025-Act appeal.

One caution for readers of earlier commentary, including our own pillar guide: a rule of thumb that says “was the order passed before or after 1 April 2026?” is a shorthand that can mislead. The text of clause (2)(c) keys the position to the tax year. We have not found a reported decision of a High Court or the Tribunal that tests this reading, so treat it as the better reading of the statute, not a settled holding.

Limitation: Two Months from the End of the Month

This is where an old assumption trips people up. The familiar sixty-day period under section 253(3) of the 1961 Act is gone. The official text of the section now provides that every appeal “shall be filed within two months from the end of the month in which the order sought to be appealed against is communicated”, and the Income Tax Department’s own page records the amendment as made by Act 15 of 2024 (the Finance (No. 2) Act 2024) with effect from 1 October 2024. Section 362(3) of the 2025 Act uses materially the same words. So for an order communicated on or after 1 October 2024, the period is identical whichever Act governs.

The practical arithmetic is simple. An order communicated on 10 October gives time until 31 December; an order communicated on 31 October gives the same date. The period runs from communication, not from the date the order bears, which matters in faceless proceedings where the order may be uploaded, e-mailed and posted on different days. We found no reported authority fixing which of those events is the “communication” for a faceless order, so the safe course is to count from the earliest one and keep proof of each.

Cross-objections must be filed within thirty days of receiving notice of the other side’s appeal. Both Acts allow the Tribunal to admit a late appeal or cross-objection if it is satisfied there was “sufficient cause” for the delay (section 253(5); section 362(5)). That is a discretion, not a right.

Form 36, Form 115 and the Fee

Form 115, prescribed under Rule 193 of the Income-tax Rules, 2026, replaces Form 36 under Rule 47 of the old Rules for appeals governed by the 2025 Act. For an ITAT appeal governed by the 1961 Act, the savings provision preserves the old procedure, which points to Form 36 and the Income-tax (Appellate Tribunal) Rules, 1963. However, no official clarification has been identified specifying which form must be used for such appeals following the replacement of the old Rules. Until the position is clarified, check the Tribunal’s e-filing portal for the form accepted for the relevant tax year. If only Form 115 is available, consider filing a covering note explaining that the appeal is governed by the 1961 Act read with Section 536(2)(c) of the 2025 Act.

The Tribunal’s own rules have also moved. A notification of 19 December 2025 (No. 71-Ad(AT)/2025) amended the 1963 Tribunal Rules to require the memorandum of appeal to be digitally signed, appeals to be e-filed, and an e-mail address and mobile number to be given for service. It did not rewrite the rule on grounds of appeal. The practical result is that a 1961-Act appeal heard in 2026 is being run on digitally amended 1963 Rules.

The fee is in the statute, not the form. Under section 362(6), it is Rs 500 where total income is Rs 1,00,000 or less; Rs 1,500 where it is above that but not above Rs 2,00,000; and one per cent of assessed income, capped at Rs 10,000, above that; Rs 500 for orders not involving an assessed income. Cross-objections and appeals by the Department attract no fee. The 1961 Act’s scale in section 253(6) is the same in outline.

Rectification and the High Court Follow the Appeal

Because clause (2)(c) lists “rectification”, “reference” and “appeals” together, the sensible reading is that a Tribunal order in a 1961-Act appeal remains within the old Act at every later step. A rectification application lies under section 254(2) of the 1961 Act, within six months from the end of the month in which the order was passed, and a High Court appeal lies under section 260A on a substantial question of law, within 120 days. The 2025 Act’s equivalents are section 363(2) (rectification, six months) and section 365 (High Court, 120 days). The six-month period for rectification is counted from the month in which the order was passed, not communicated, so it can start running before the order reaches you.

Where the Law Cuts Both Ways

The assessee’s best argument on any procedural slip is that procedure is the handmaid of justice: a Tribunal can condone delay for sufficient cause, and an appeal filed in good faith on the wrong form should not be dismissed for the error. The Revenue’s best answer is that limitation is statutory, that sufficient cause is for the assessee to prove, and that a party who chose to wait for clarity on form took the risk. Neither side can point to a decided case on the transition point yet. The same holds for the “tax year” reading: it is the more natural reading of clause (2)(c), but an assessee who guesses wrong on the governing Act and files late has no authority to fall back on.

Frequently Asked Questions

Does the Income-tax Act 1961 or 2025 Govern Your ITAT Appeal?

It depends on the tax year the dispute concerns, not on the date of the order. Under the savings clause in section 536 of the Income-tax Act 2025, proceedings, including appeals, for any tax year beginning before 1 April 2026 continue under the repealed 1961 Act and its procedure, even if the order appealed against is passed after that date. Disputes for later tax years fall under the 2025 Act.

How long do I have to appeal to the ITAT?

Two months from the end of the month in which the order is communicated. Section 253(3) of the 1961 Act has said so since 1 October 2024, and section 362(3) of the 2025 Act says the same. The old sixty-day rule applies only to orders communicated before 1 October 2024. A Tribunal can condone delay for sufficient cause.

Is the appeal filed on Form 36 or Form 115?

Form 115 is the form for appeals under section 362 of the 2025 Act. For a 1961-Act appeal the savings clause keeps the old procedure, which points to Form 36, but we have not located an official instruction that says so in terms. Check what the Tribunal’s e-filing portal accepts at the time of filing and never let the question of form cause a delay.

What is the ITAT appeal fee?

Section 362(6) fixes it by reference to total assessed income: Rs 500 where total income is Rs 1,00,000 or less, Rs 1,500 where it is above Rs 1,00,000 but not above Rs 2,00,000, and one per cent of assessed income, capped at Rs 10,000, where it is above Rs 2,00,000. Cross-objections and appeals by the Department carry no fee.

Do rectification and the High Court appeal also follow the old Act?

For a tax year beginning before 1 April 2026, the savings clause expressly lists rectification and appeals among the proceedings that continue under the repealed Act. The natural reading is that a rectification application and a High Court appeal on a substantial question of law follow sections 254(2) and 260A of the 1961 Act, not sections 363 and 365 of the 2025 Act.

Sources

• Income-tax Act, 2025 (Act 30 of 2025), section 536(1), repeal — Income Tax Department.
• Central Board of Direct Taxes, FAQs on transition provisions of the Income-tax Act, 2025 (July 2026), reproducing section 536(2)(c) and (e) — incometaxindia.gov.in.
• Income-tax Act, 1961, section 253, as amended by the Finance (No. 2) Act 2024 (Act 15 of 2024) w.e.f. 1 October 2024 — Income Tax Department.
• Income-tax Act, 2025, section 362 (appeals to the Appellate Tribunal) — Income Tax Department; section 363 — Income Tax Department.
• Form 115 and Form 115 FAQs, Income-tax Rules, 2026 (Rule 193) — Income Tax Department.
• Income-tax (Appellate Tribunal) Amendment Rules, 2025, Notification No. 71-Ad(AT)/2025, 19 December 2025 — LiveLaw report.
• Income-tax Act, 1961, sections 254(2) and 260A — India Code.

The post ITAT Appeal After the Income-tax Act 2025: Which Act, Which Form and What Limitation Applies appeared first on Bhatt & Joshi Associates.

A trading or manufacturing business that buys goods in volume can discover, years later, that a missed deduction of a few thousand rupees has cost it lakhs. The reason is the link between section 194Q TDS, the buyer’s duty to deduct tax on purchases, and the section 40(a)(ia) disallowance, which removes thirty per cent of the purchase expense from the buyer’s deductible costs if the tax was not deducted or not deposited in time. This article explains how the two provisions fit together, the routes back from a disallowance, and the points the courts have not yet settled. It sits in our income-tax appeals series.

What Section 194Q Requires of a Buyer

Section 194Q was inserted by the Finance Act 2021 with effect from 1 July 2021. Its first sub-section requires a buyer who is responsible for paying any sum to a resident for the purchase of goods, where the value or aggregate value exceeds fifty lakh rupees in a previous year, to deduct 0.1 per cent of the sum exceeding fifty lakh rupees. A “buyer” is a person whose total sales, gross receipts or turnover from business exceeded ten crore rupees in the financial year immediately before the year of purchase, other than persons the Central Government notifies. The deduction is made at the time the sum is credited to the seller’s account or paid, whichever is earlier. Where the seller does not furnish a Permanent Account Number, the rate is five per cent.

The Central Board of Direct Taxes explained the section in Circular 13 of 2021 (30 June 2021). Three of its answers matter most in disputes. First, where GST is shown separately in the invoice or contract when the amount is credited, tax is deducted on the amount excluding GST; if deduction happens only at payment, with no prior credit, the GST component cannot be identified and tax runs on the whole amount. Second, the section applies to advance payments, because payment is itself a trigger. Third, where a transaction falls under both section 194Q and the seller’s tax-collection duty under section 206C(1H), section 194Q prevails and the seller does not collect. Sub-section (5) of section 194Q is drafted in the same sense.

The overlap has since mostly fallen away. We understand that the Finance Act 2025 withdrew the seller’s collection duty under section 206C(1H) from 1 April 2025, leaving section 194Q as the only turnover-based tax on goods transactions from financial year 2025-26. For the years 2021-22 to 2024-25, which are the years now being assessed and appealed, the overlap rule still matters.

How the Thirty Per Cent Disallowance Works

Section 40(a)(ia) of the 1961 Act disallows, in computing business profits, thirty per cent of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date for filing the return under section 139(1). Section 194Q sits in Chapter XVII-B. On its words, therefore, a purchase on which section 194Q tax was due and not deducted is a sum within section 40(a)(ia).

Two features make the provision punishing. The thirty per cent is computed on the sum payable, which is the purchase value, not on the 0.1 per cent tax that should have been deducted. A hypothetical makes the scale clear. A buyer purchases Rs 2 crore of goods from one seller in a year and deducts nothing. The tax it should have deducted was 0.1 per cent of Rs 1.5 crore, or Rs 15,000. The disallowance is thirty per cent of Rs 2 crore, or Rs 60 lakh, which at a corporate rate in the region of 25 per cent adds roughly Rs 15 lakh of tax, plus interest. The second feature is that the Supreme Court has refused to soften it by reading it narrowly. In Palam Gas Service v. CIT (Supreme Court, 3 May 2017) the Court held that section 40(a)(ia) reaches not only amounts still payable at year-end but also amounts already paid during the year. In Shree Choudhary Transport Co. v. ITO (Civil Appeal No. 7865 of 2009, 29 July 2020; (2020) 426 ITR 289) the Court upheld a full disallowance for assessment year 2005-06 and held that the Finance Act 2014 reduction of the disallowance from a hundred to thirty per cent operates only from assessment year 2015-16. For the years in which section 194Q applies, thirty per cent is therefore the rate.

Relief from Section 194Q TDS Disallowance: The Two Provisos to Section 40(a)(ia)

First Proviso: Deposit-Timing Relief

If tax is deducted in a later year, or is deducted in the year but deposited after the section 139(1) due date, the first proviso allows the thirty per cent as a deduction in the year in which the tax is actually paid. The effect is to shift the cost between years, not to remove it, which still helps a buyer whose profits are higher in the later year. A deposit made on or before the due date for the return avoids the disallowance entirely.

Second Proviso: Where the Seller has Already Paid the Tax

The second proviso, inserted by the Finance Act 2012, provides that where the buyer has failed to deduct tax but the resident payee has furnished a return, taken the sum into account in computing income and paid the tax due, and the buyer obtains the accountant’s certificate in Form 26A (Rule 31ACB), the buyer is deemed to have deducted and paid the tax on the date the seller furnished the return. The related first proviso to section 201(1) protects the buyer from being treated as an assessee in default. The courts have treated the provision as remedial. The Delhi High Court in CIT v. Ansal Land Mark Township (P) Ltd (ITA 160 and 161 of 2015, 26 August 2015) held the second proviso declaratory and curative and retrospective from 1 April 2005, reasoning that where the seller has paid tax on the same receipt there is no loss to the revenue. In CIT v. Calcutta Export Co. (Supreme Court, 24 April 2018) the Court treated the earlier Finance Act 2010 amendment, allowing deposit up to the return due date, as curative. The related principle in Hindustan Coca-Cola Beverage (P) Ltd v. CIT ((2007) 293 ITR 226 (SC)) is that no demand under section 201 can be raised against a payer where the payee has paid the tax. That decision concerns recovery of the tax, not the computation under section 40(a)(ia), which is a separate provision.

The practical lesson is that the second proviso is a documents exercise. The buyer needs the seller’s return particulars and proof of tax paid, an accountant’s certificate in Form 26A, and, ideally, the seller’s confirmation, assembled before the appellate stage. Failure to produce them is the commonest reason relief is refused.

What is Still Unsettled

Three important questions concerning Section 194Q TDS and disallowance under Section 40(a)(ia) remain open. First, whether section 40(a)(ia) applies to section 194Q purchases. The text says yes, and but we found no ruling of a High Court or the Supreme Court deciding the point. The scope of the provision offers a narrower argument: items that are not “goods”, or not a “purchase” from a resident, fall outside both provisions.

Second, the base. The thirty per cent is applied to the “sum payable”, which on the plain words is the whole purchase value. A buyer might argue that tax was “deductible” only on the part above Rs 50 lakh, so that the disallowance should be limited to that part. We found no decision on this. It is a respectable argument, but an untested one.

Third, the effect of deducting under the wrong section. A buyer that deducted tax, but under a head other than section 194Q, may argue that the purpose of the provision is met; we have not verified any decision applying that argument to section 194Q, and it should be treated as untested.

Balance: What Cuts for and Against the Buyer

For the buyer: the second proviso gives a complete answer where the seller is compliant; the first proviso converts a permanent disallowance into a timing difference where the tax is deposited late; the Delhi High Court’s reading of the second proviso as retrospective protects older years; and the scope of section 194Q is limited to goods bought from residents.

For the Revenue: the section’s words are wide; the Supreme Court has refused to read down the disallowance in Palam Gas and Shree Choudhary Transport; the thirty per cent is levied on the whole sum, not on the tax missed; an advance payment above the threshold is itself a default point; and the burden of establishing the seller’s compliance lies on the buyer. Interest on the late or short deduction under section 201(1A) is a separate exposure.

Which Act Applies from Here On?

The Income-tax Act 2025 has been in force since 1 April 2026. Under its savings clause (section 536(2)(c)), proceedings, including appeals, relating to a tax year beginning before 1 April 2026 continue under the 1961 Act. The disallowance and the deduction duty for the years now in dispute therefore remain governed by sections 40(a)(ia) and 194Q of the 1961 Act. The 2025 Act re-enacts both in its own numbering, but we have not confirmed the section numbers against the official text, and readers working on tax years from 2026-27 should check them directly. Our article on the transition for ITAT appeals explains the tax-year test.

Frequently Asked Questions

When must a buyer deduct TDS under section 194Q?

When a buyer whose turnover exceeded Rs 10 crore in the preceding financial year pays or credits a resident seller for goods, and the purchases from that seller in the year exceed Rs 50 lakh. Tax at 0.1 per cent is deducted on the amount above Rs 50 lakh, at the time of credit or payment, whichever is earlier.

How much is disallowed under section 40(a)(ia) if I miss the deduction?

Thirty per cent of the sum payable to the resident on which tax was deductible. The disallowance is computed on the sum payable, not on the tax that should have been deducted. For assessment years from 2015-16 the rate is thirty per cent; the Supreme Court has held the reduction from a hundred per cent is prospective.

Can I avoid the disallowance if the seller has already paid tax on the income?

Yes, in principle. The second proviso to section 40(a)(ia) treats the buyer as having deducted and paid the tax where the seller has filed a return, included the sum in income and paid the tax due, and the buyer obtains the accountant’s certificate in Form 26A. The Delhi High Court has held this proviso curative and retrospective.

What if I deducted the tax but deposited it late?

The first proviso allows the thirty per cent as a deduction in the year in which the tax is actually paid, if tax was deducted late or deposited after the due date for filing the return. The relief is one of timing, not a permanent saving, but a deposit made by the due date under section 139(1) avoids the disallowance altogether.

Is GST included when working out section 194Q tax?

Not if it is shown separately in the invoice or contract when the amount is credited. CBDT Circular 13 of 2021 says tax is then deducted on the amount excluding GST. If deduction happens only at the stage of payment, with no earlier credit, the GST component cannot be separated and tax is deducted on the whole amount.

Sources

• Income-tax Act, 1961, section 194Q (inserted by the Finance Act 2021, w.e.f. 1 July 2021) — Income Tax Department.
• CBDT Circular No. 13 of 2021, 30 June 2021 (F. No. 370142/26/2021-TPL), clarifications on sections 194-O, 194Q and 206C(1H) — incometaxindia.gov.in.
• Income-tax Act, 1961, section 40(a)(ia) and provisos; section 201(1) and first proviso; Rule 31ACB of the Income-tax Rules, 1962 — India Code.
• Palam Gas Service v. CIT, Supreme Court of India, 3 May 2017 — report.
• Shree Choudhary Transport Co. v. ITO, Civil Appeal No. 7865 of 2009, Supreme Court of India, 29 July 2020; (2020) 426 ITR 289 — report.
• CIT v. Ansal Land Mark Township (P) Ltd, ITA 160 and 161 of 2015, Delhi High Court, 26 August 2015 — judgment.
• CIT v. Calcutta Export Co., Supreme Court of India, 24 April 2018 — report.
• Hindustan Coca-Cola Beverage (P) Ltd v. CIT, (2007) 293 ITR 226 (Supreme Court of India).
• Income-tax Act, 2025, section 536(2)(c) (savings) — CBDT transition FAQs.

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Every contested income-tax demand in India runs the same three-stage income tax appeal ladder – first to the Commissioner (Appeals) or, for most taxpayers today, the faceless National Faceless Appeal Centre, then to the Income Tax Appellate Tribunal, and finally, only on a genuine question of law, to the High Court. What has changed is the statute underneath it: the Income-tax Act 2025 has replaced the 1961 Act from 1 April 2026, renumbering the appeal provisions and changing at least one limitation period along the way, while a savings clause keeps older pending appeals running on the old rules. This guide sets out the ladder as it now stands, stage by stage, including how a stay of recovery is actually obtained while an appeal is pending.

The Law that Now Governs your Appeal: The 2025 Transition

The Income-tax Act 2025 received Presidential assent in August 2025 and has been in force from 1 April 2026, replacing the Income-tax Act 1961. This is not a cosmetic renumbering exercise for a taxpayer mid-appeal: it changes the section a lawyer cites, and in at least one important respect – the limitation period for appealing to the Tribunal – it changes the rule itself. A savings provision in the new Act preserves continuity for work already in progress: an appeal or other proceeding pending before the CIT(A)/NFAC or the Tribunal on 1 April 2026 continues to be governed by the 1961 Act’s procedure through to its disposal, and no limitation period that had already expired under the old Act is revived by the change of statute. In practical terms, an assessee should ask a simple date-based question before doing anything else: was the order under challenge passed before or after 1 April 2026? An order predating that cut-off is very likely to travel on the 1961 Act’s own provisions and forms; an order passed after it falls to be appealed under the 2025 Act, with its new section numbers, its new Form 115, and its new limitation wording.

Step one: The First Appeal to the Joint Commissioner (Appeals), the Commissioner (Appeals), or NFAC

The appeal begins with the same order that always triggered it – most commonly an assessment order raising a demand, though a list of other orders (penalty, rectification refusal, and others) is also appealable. Under the 1961 Act this sat in section 246A, with the mechanics of filing in section 249 and the appellate procedure in section 250; the 2025 Act carries the same structure forward as appealable orders before the Joint Commissioner (Appeals) or Commissioner (Appeals), the filing mechanics, and the procedure in appeal. The limitation period remains thirty days from service of the notice of demand or the order, condonable for sufficient cause, and the appeal is not ordinarily entertained unless the tax due on the income actually returned has been paid – a precondition that protects the exchequer’s basic recovery position even while the dispute over the balance is heard, though it can be relaxed by the appellate authority on a written application showing good reason. Since 2021, most of these first appeals have been processed on a faceless basis through the National Faceless Appeal Centre, removing routine person-to-person contact between the taxpayer and the officer deciding the appeal. That faceless architecture is expected to continue in substance under the new Act’s general power to design technology-driven, interface-free schemes, though readers should confirm the exact scheme in force for their appeal year before assuming automatic continuity of every procedural detail. The Joint Commissioner/Commissioner (Appeals) has wide powers at this stage – going well beyond simply confirming or cancelling the assessment – which are examined in their own right further below.

Step Two: The Appeal to the Income Tax Appellate Tribunal

An order of the first appellate authority that still leaves either side aggrieved can be carried to the Income Tax Appellate Tribunal – the final fact-finding body in the hierarchy. Under the 1961 Act this appeal was filed on Form 36 within sixty days of communication of the order; under the 2025 Act, the form has changed to Form 115, and the limitation period is now expressed differently – within two months from the end of the month in which the order is communicated, which in most fact patterns gives an appellant a little more running room than the old flat sixty-day count, though the two should not be assumed identical in every case. A cross-objection can still be filed by the other side within thirty days of notice of the appeal. The Tribunal’s own powers on disposal are broad: it may pass such orders as it thinks fit after giving both sides a hearing, and it retains the power to rectify a mistake apparent from the record – a power now capped, as it has been since a 2016 amendment to the 1961 Act, at six months from the end of the month in which the order was passed, a limitation the new Act appears to carry forward without extending it.

Getting a Stay from the Tribunal Itself

Where recovery is pressing, the Tribunal can grant its own stay of the disputed demand, ordinarily for up to one hundred and eighty days at a time and extendable, on the Tribunal’s satisfaction that the delay in disposing of the appeal is not attributable to the assessee, to an aggregate outer limit of three hundred and sixty-five days – conditional, as a rule, on the assessee depositing at least twenty per cent of the disputed demand or furnishing equivalent security. The requirement that the stay must lapse automatically once the outer limit is reached, whatever the reason for the delay, was itself curtailed by the Supreme Court in 2021: in DCIT v. Pepsi Foods Ltd. (Civil Appeal No. 1106 of 2021, decided 6 April 2021) the Court struck down the words making automatic vacation of the stay apply “even if the delay in disposing of the appeal is not attributable to the assessee,” holding that an assessee who has done nothing to cause the delay cannot be made to suffer coercive recovery purely because the Tribunal’s own list is congested. A diligent assessee, in other words, should not assume that crossing the 365-day mark automatically exposes it to recovery – the reason for the delay still matters.

Step Three: The High Court, and Only on a Substantial Question of Law

The final ordinary avenue is an appeal to the jurisdictional High Court – under the 1961 Act, section 260A; carried forward in the 2025 Act in materially the same terms. The right to appeal is deliberately narrow: an appeal lies only “if the High Court is satisfied that the case involves a substantial question of law,” available to either the Revenue or the assessee, within one hundred and twenty days of the Tribunal’s order (condonable), and the memorandum of appeal must precisely state the question of law said to arise. The classical test for what makes a question “substantial” comes from the Supreme Court’s decision in Sir Chunilal V. Mehta & Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd. (AIR 1962 SC 1314): a substantial question is one of general public importance, or one that directly and substantially affects the rights of the parties, that has not already been finally settled by the Supreme Court or a comparable court, that is not free from difficulty, or that calls for a discussion of alternative views – and it excludes a question already settled by binding authority or one that is merely fanciful. Applying that test specifically to tax appeals, the Supreme Court in Vijay Kumar Talwar v. CIT ((2011) 330 ITR 1) confirmed that the High Court’s jurisdiction under this provision is confined to the substantial questions it frames, that the Tribunal is the final fact-finding authority in the hierarchy, and that its findings of fact are not ordinarily disturbed unless they are perverse or based on no evidence at all. Once the High Court has formulated the question, the hearing is ordinarily confined to it, though the Court retains a discretion, for reasons it must record, to hear the appeal on a question not originally formulated, and it may also decide any issue that the Tribunal failed to determine or decided wrongly. The Code of Civil Procedure 1908 applies to these appeals as far as it can.

How Much Power does an Appellate Authority Actually Have?

A recurring, and genuinely doctrinal, question through all three stages is how far an appellate authority can go beyond the specific point the taxpayer originally raised. The Supreme Court has, over several decades, described the first appellate authority’s powers as co-extensive with the Assessing Officer’s own – it can do what the Assessing Officer could have done and can also direct him to do what he failed to do (CIT v. Kanpur Coal Syndicate, (1964) 53 ITR 225 (SC)) – and has allowed both the first appellate authority and the Tribunal to entertain an entirely new legal ground, or even a fresh claim, that was never raised before the Assessing Officer, so long as the relevant facts are already on the record (Jute Corporation of India Ltd. v. CIT, (1991) 187 ITR 688 (SC); National Thermal Power Co. Ltd. v. CIT, (1998) 229 ITR 383 (SC)) and even, in an appropriate case, to grant relief on such a ground without the appellant having asked for it at all (CIT v. Mahalakshmi Textile Mills Ltd., (1967) 66 ITR 710 (SC)). That power is not unlimited, however: a Full Bench of the Delhi High Court in CIT v. Sardari Lal & Co. ((2001) 251 ITR 864) held that the first appellate authority, however wide its powers over the subject matter the Assessing Officer actually considered, cannot travel outside that assessment altogether to bring an entirely new source of income to tax for the first time in appeal – that step belongs to reassessment, not appeal. Read together, the assessee gets real latitude to perfect a legal argument on appeal; the Revenue does not get a free-standing power, at the appellate stage, to go hunting for income the original assessment never touched.

Stay of Recovery before the First Appeal is Even Decided

An assessee does not have to wait for the CIT(A)/NFAC to decide the appeal before seeking relief from recovery. The Assessing Officer has long had a discretionary power – section 220(6) under the 1961 Act – to treat the assessee as not “in default” for the disputed amount while the first appeal is pending, and the exercise of that discretion has been shaped less by the bare section than by the Central Board of Direct Taxes’ own administrative guidance. The Bombay High Court’s decision in KEC International Ltd. v. B.R. Balakrishnan ((2001) 251 ITR 158) is still the standard reference on how that discretion should be exercised: the officer must record, in brief, the assessee’s case for a stay; must specifically consider whether the assessed income is so much higher than the returned income that unconditional stay – or only a part-deposit – is warranted; must genuinely examine a plea of financial hardship where one is raised; and must not take coercive recovery steps while the statutory period for filing the appeal is still running. A CBDT office memorandum of 29 February 2016 fixed the benchmark deposit at fifteen per cent of the disputed demand as a general norm, later revised upward, and the figure now commonly applied by field officers – and now also appearing as the Tribunal’s own statutory deposit threshold at the next stage – is twenty per cent. None of this is a rigid formula: a genuinely strong prima facie case, or genuine and demonstrated hardship, can justify a lower figure or no deposit at all, and a taxpayer who simply asks for “a stay” without addressing these specific parameters in writing is not making the case the guidance itself asks for.

The Move to Paperless Filing

Alongside the change of statute, the Tribunal’s own procedural rules have been substantially digitised. A notification amending the Appellate Tribunal Rules, issued in December 2025, made the digital signing of the memorandum of appeal mandatory, requires appeals to be e-filed rather than physically lodged in multiple paper copies, makes an email address and mobile number compulsory for service of notices, and prescribes the specific annexures – such as the draft assessment order, a transfer-pricing officer’s order, or Dispute Resolution Panel directions, where relevant – that must accompany the digitally-filed memorandum. The same regime now extends to applications for stay and other miscellaneous applications before the Tribunal. The change is procedural rather than substantive, but a defectively-filed or non-compliant appeal can still be treated as no appeal at all, so the formal filing requirements deserve the same attention as the substantive grounds.

Balance: Neither Side has it Easy

The appellate architecture is not tilted as one-sidedly as either an aggrieved taxpayer or a revenue officer might assume in the moment. In the assessee’s favour: the Supreme Court has read down the automatic, no-questions-asked lapse of a Tribunal stay at the 365-day mark where the assessee is not to blame for the delay (Pepsi Foods); the appellate authorities’ coextensive and plenary powers let a genuinely meritorious legal point be raised late without being lost on a technicality (Jute Corporation, NTPC, Mahalakshmi Textile Mills); and a long-standing, periodically revised CBDT policy on monetary limits means the Department does not, as a matter of settled practice, pursue a further appeal – to the Tribunal, the High Court or beyond – merely because it disagrees with a low-value order, sparing many small taxpayers a fight the tax effect does not justify. In the Revenue’s favour: the first appeal cannot even be filed, save in a case of relaxation, without paying tax on the income actually returned; the co-extensive powers of the first appellate authority stop well short of letting it hunt for an entirely new source of income never considered in the original assessment (Sardari Lal); the High Court’s jurisdiction is deliberately confined to genuine questions of law, so a taxpayer cannot use a section 260A-type appeal to reopen findings of fact that went against it (Vijay Kumar Talwar); and any stay of recovery, at either the assessing or the Tribunal stage, still comes at a real price – ordinarily a twenty per cent deposit or equivalent security – so an appeal, even a strong one, rarely buys an assessee a complete, cost-free pause on recovery.

Frequently Asked Questions

Which law now governs an income-tax appeal – the 1961 Act or the 2025 Act?

The Income-tax Act 2025 has been in force since 1 April 2026. A savings provision keeps appeals and proceedings that were already pending under the 1961 Act running under the 1961 Act’s own procedure until they are disposed of. A fresh appeal against an order passed on or after 1 April 2026 follows the 2025 Act.

How long do I have to file a first appeal against an assessment order?

Thirty days from the date of service of the notice of demand or the order, whether the appeal is filed under the 1961 Act’s section 249 or its 2025 Act successor, and the appellate authority can condone a delay for sufficient cause. The appeal is not ordinarily entertained unless tax on the income returned has been paid, though this condition can be relaxed on a written application.

What form is used to appeal to the Income Tax Appellate Tribunal now?

Form 115 has replaced the familiar Form 36 for appeals filed under the Income-tax Act 2025. The limitation period has also changed in wording, from a flat sixty days under the old Act to two months from the end of the month in which the order is communicated under the new one.

When can the High Court be approached against an ITAT order?

Only where the High Court is satisfied the case involves a substantial question of law – not merely a disagreement with the Tribunal’s view of the facts. The appeal must be filed within one hundred and twenty days, precisely state the question of law, and the hearing is ordinarily confined to the question the High Court itself formulates.

Can recovery be stayed while my first appeal is pending?

Yes, on a written application, though the decision is discretionary. Guidance from the Central Board of Direct Taxes has long anchored the amount an assessee must ordinarily deposit as a condition of stay – fifteen per cent under a 2016 office memorandum, and the figure now commonly applied is twenty per cent – while leaving room for a lower or nil deposit where genuine financial hardship or a strong prima facie case is shown.

Can the Tribunal grant a stay, and for how long?

Yes. The Tribunal can stay recovery for up to one hundred and eighty days at a time, extendable to an aggregate of three hundred and sixty-five days, ordinarily conditional on depositing at least twenty per cent of the disputed demand or furnishing equivalent security. The Supreme Court has held that an automatic lapse of the stay at the outer limit cannot apply where the delay in deciding the appeal is not the assessee’s fault.

Sources

• Income-tax Act, 2025 (Act 30 of 2025) — Income Tax Department; CBDT’s transition FAQs on the Income-tax Act 2025.
• Income-tax Act 1961, sections 246A, 249, 250, 251, 253, 254, 260A (as they stood before 1 April 2026) — India Code.
• Form 115 — Guidance Note and FAQs, Income Tax Department — incometaxindia.gov.in.
• Appellate Tribunal (Amendment) Rules 2025, Notification No. 71-Ad(AT)/2025, 19 December 2025.
• CBDT Office Memorandum F. No. 404/72/93-ITCC, 29 February 2016.
• DCIT v. Pepsi Foods Ltd., Civil Appeal No. 1106 of 2021, Supreme Court of India, decided 6 April 2021.
• KEC International Ltd. v. B.R. Balakrishnan, (2001) 251 ITR 158 (Bombay High Court), decided 31 May 2001.
• Sir Chunilal V. Mehta & Sons Ltd. v. Century Spinning & Manufacturing Co. Ltd., AIR 1962 SC 1314.
• Vijay Kumar Talwar v. CIT, (2011) 330 ITR 1 (Supreme Court of India).
• CIT v. Kanpur Coal Syndicate, (1964) 53 ITR 225 (Supreme Court of India).
• Jute Corporation of India Ltd. v. CIT, (1991) 187 ITR 688 (Supreme Court of India).
• National Thermal Power Co. Ltd. v. CIT, (1998) 229 ITR 383 (Supreme Court of India).
• CIT v. Mahalakshmi Textile Mills Ltd., (1967) 66 ITR 710 (Supreme Court of India).
• CIT v. Sardari Lal & Co., (2001) 251 ITR 864 (Delhi High Court, Full Bench).

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Transaction taxes on IFSC exchanges affect trading costs and liquidity because they apply to transactions rather than profits. In India, securities transaction tax (STT), commodities transaction tax (CTT) and stamp duty on securities transactions follow different rules for qualifying trades on International Financial Services Centre (IFSC) exchanges compared with domestic exchanges. Understanding these GIFT IFSC transaction tax exemptions requires examining the applicable statutory provisions, rates and conditions.

Securities Transaction Tax

STT is charged under Chapter VII of the Finance (No. 2) Act, 2004. Section 98 sets out the taxable securities transactions and the rates.

Two developments matter as at 17 September 2026.

Rates rose in 2026. The Finance Act, 2026, by section 159 (enacting clause 143 of the Finance Bill, 2026), amended the section 98 table (serial number 4) to increase the rate on the sale of an option in securities from 0.1% to 0.15% of the option premium, on the sale of an option where the option is exercised from 0.125% to 0.15% of the intrinsic price, and on the sale of futures in securities from 0.02% to 0.05% of the traded price. The Notes on Clauses record that these take effect from 1 April 2026.

Chapter VII does not apply to IFSC exchange transactions in foreign currency. Section 113A of the same Act provides that the provisions of Chapter VII shall not apply to taxable securities transactions entered into by any person on a recognised stock exchange located in an International Financial Services Centre, where the consideration for the transaction is paid or payable in foreign currency. The provision was introduced with effect from 1 June 2016.

Two conditions therefore govern the exclusion: the transaction must be on a recognised stock exchange located in an IFSC, and the consideration must be paid or payable in foreign currency. A trade that fails either condition is outside the exclusion.

Commodities Transaction Tax

Commodities transaction tax (CTT) is levied under Chapter VII of the Finance Act, 2013, on specified commodity derivatives transactions on a recognised association. Section 132A provides an exemption for qualifying transactions on a recognised association located in an International Financial Services Centre (IFSC), where the consideration is paid or payable in foreign currency. This exclusion took effect on 1 June 2016.

Like the securities transaction tax (STT) exclusion, this provision is conditional. Qualifying commodity derivatives transactions on an IFSC exchange are excluded from CTT, while transactions on a domestic exchange do not qualify for this specific exclusion.

Verification note: The Gazette text of sections 113A and 132A was not directly available during research. The provisions were checked against reproduced statutory text in published tax commentary, and the Government’s Arthapedia entry on IFSCs confirms that STT and CTT exemptions formed part of the 2016–17 Budget’s IFSC tax package. Readers relying on these provisions for a transaction should verify the current statutory text against the Gazette.

Stamp Duty on Securities Transactions

Stamp duty on securities transactions was centralised by amendments to the Indian Stamp Act, 1899. Section 9A, inserted by Act 7 of 2019 and brought into force on 1 July 2020, provides that:

• on a sale of securities through a stock exchange, stamp duty on each sale in the clearance list is collected by the stock exchange or an authorised clearing corporation from the buyer, on the market value at settlement;
• on a transfer of securities for consideration by a depository otherwise than through such a sale, duty is collected by the depository from the transferor; and
• on a creation or change in depository records pursuant to an issue of securities, duty on the allotment list is collected by the depository from the issuer.

Section 9A(2) charges these instruments at the rates in Schedule I and dispenses with physical stamping. It then carries a proviso, inserted by Act 12 of 2020 with effect from 1 April 2020:

“Provided that no such duty shall be chargeable in respect of the instruments of transaction in stock exchanges and depositories established in any International Financial Services Centre set up under section 18 of the Special Economic Zones Act, 2005.”

Three points follow.

The relief is instrument-specific. It applies to instruments of transaction in IFSC stock exchanges and depositories. It is not a general stamp-duty exemption for entities located in GIFT IFSC.

Collection machinery is displaced along with the charge. Because section 9A operates by making exchanges, clearing corporations and depositories the collecting agents, and because section 9A(3) bars State Governments from charging duty on associated documents for the transactions in section 9A(1), the proviso removes the levy at its point of collection.

Other instruments remain chargeable. Leases of office space, LLP agreements, security documents, powers of attorney and similar instruments executed in Gujarat continue to be governed by the Gujarat Stamp Act, 1958 and the applicable state schedule, unless a specific state exemption applies. Any state-level concession should be confirmed against the relevant Gujarat notification for the period concerned.

Transaction Tax Exemptions on IFSC Exchanges: Key Differences

The currency condition in the first two rows is worth emphasising, because it is easy to overlook in structuring. It attaches to the consideration for the transaction, not to the currency in which the underlying security is denominated or in which the investor’s accounts are maintained.

Equally, these levies are distinct from income tax. A transaction outside STT may still produce taxable capital gains, and the availability of an exemption under Schedule VI of the Income-tax Act, 2025 depends on entirely separate conditions (Article 7). The absence of a transaction tax says nothing about the income-tax treatment of the same trade.

Frequently Asked Questions

1. Are IFSC exchange trades exempt from Securities Transaction Tax (STT)?

Yes. Section 113A of the Finance (No. 2) Act, 2004 excludes qualifying transactions on recognised IFSC stock exchanges where consideration is paid or payable in foreign currency.

2. Is Commodities Transaction Tax (CTT) exempt in GIFT IFSC?

Section 132A of the Finance Act, 2013 provides a similar exclusion for qualifying commodity transactions on recognised associations located in an IFSC, subject to the foreign-currency condition.

3. Is stamp duty exempt on securities transactions in GIFT IFSC?

Yes. Section 9A(2) of the Indian Stamp Act, 1899 provides an exemption for specified transaction instruments involving stock exchanges and depositories established in an IFSC.

4. Do transaction tax exemptions apply to all transactions in GIFT IFSC?

No. STT and CTT exclusions are subject to specific statutory conditions. The stamp duty exemption covers specified transaction instruments, not every agreement or document executed in GIFT IFSC.

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Moving a fund is not like moving an office. The relocation of offshore funds to GIFT City can involve two potential capital gains tax events: the fund’s transfer of assets to a new vehicle in GIFT IFSC and each investor’s exchange of interests in the original fund for interests in the new one. The Income-tax Act, 2025 provides tax neutrality for qualifying relocations, subject to specific statutory conditions and a prescribed deadline.

Section 70 of the Income-tax Act, 2025 identifies transactions that are not regarded as transfers for capital gains purposes. Two clauses specifically address the tax treatment of fund relocation:

• Section 70(1)(t): The transfer of a capital asset by the original fund to the resultant fund as part of a relocation.
• Section 70(1)(u): The transfer by a shareholder, unit holder or interest holder of shares, units or interests in the original fund in exchange for shares, units or interests in the resultant fund.

Together, these provisions cover both the fund-level transfer of assets and the investor-level exchange of interests. If either limb fails to qualify, the intended tax neutrality may not apply to that part of the transaction, with different consequences for the fund and its investors.

The Three Defined Terms that Do the Work

Section 70(2) (Table, Sl. No. 5) defines the key terms that determine whether an offshore fund relocation to GIFT IFSC qualifies for tax neutrality.

“Original fund” means, in substance, a fund established, incorporated or registered outside India that collects funds from members for investment on their behalf and satisfies four conditions: it is not a person resident in India; it is a resident of a country or specified territory with which India has an agreement under section 159(1) or (2), or is established in a country or territory notified by the Central Government; the fund and its activities are subject to applicable investor-protection regulation in that country; and it fulfils such other conditions as may be prescribed. The definition also covers an investment vehicle wholly owned and controlled directly or indirectly by the Abu Dhabi Investment Authority or the Government of Abu Dhabi, and any fund notified by the Central Government subject to specified conditions.

“Relocation” means the transfer of assets of the original fund, or of its wholly owned special purpose vehicle, to a resultant fund on or before 31 March 2030, where the consideration is discharged in the form of shares, units or interests in the resulting fund issued either to the holders of the original fund in the same proportion as their existing holdings, or to the original fund itself in the same proportion where no issue is made to holders.

“Resultant fund” means a fund established or incorporated in India as a trust, company or LLP, located in an IFSC, which has been granted either a certificate of registration as a Category I, II or III Alternative Investment Fund, or a certificate as a retail scheme or Exchange Traded Fund under Schedule VI (Note 1) satisfying the conditions in Schedule VI, and which is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the IFSCA Fund Management Regulations.

Three practical points follow. First, the deadline is a hard date: a relocation completed after 31 March 2030 is outside the definition. Second, proportionality is essential; the consideration must mirror existing holdings. Third, the resultant fund must already hold, or obtain, the correct IFSCA authorisation. The regulatory step is a condition of the tax outcome, not a parallel workstream.

What Follows from Neutrality

Because the relocation transfers are not regarded as transfers, three further consequences arise under the Act.

• Cost carries over. For assets and interests acquired through a transfer referred to in section 70(1)(t) or (u), the cost of acquisition is the cost to the previous owner, computed under the Act’s special provisions for such transactions. Neutrality defers the gain; it does not erase it.
• No charge as a receipt without consideration. The Act’s charge on receipt of property without, or for inadequate, consideration expressly excludes receipts by way of a transaction not regarded as a transfer under section 70(1)(t) and (u). Without this, the investor’s receipt of new units could have been taxed as a gratuitous receipt.
• Losses survive a change in shareholding. The Act’s restriction on carry-forward of losses where there is a change in shareholding does not apply to a company to the extent the change takes place on account of relocation referred to in section 70(2) (Table: Sl. No. 5.C).

After Relocation: The Built-in Indian Gains

Neutrality at the point of relocation would be of limited use if the resultant fund then paid Indian tax on gains that the original fund would not have paid. Schedule VI (Table, Sl. No. 10) addresses this. Capital gains on the transfer of shares of a company resident in India are excluded from total income of a non-resident or a specified fund, where:

• the gains arise on a transfer by the resultant fund or a specified fund;
• the shares were transferred from the original fund, or its wholly owned special purpose vehicle, to the resultant fund in relocation, and the gains on those shares would not have been chargeable to tax had the relocation not taken place; and
• the exclusion is limited to the extent attributable to units held by non-residents that are not permanent establishments of a non-resident in India, computed in the prescribed manner.

The second condition is the analytical heart of the provision. It preserves the pre-relocation position rather than improving it. Where the original fund would have been taxable in India on a gain, for example because no treaty relief was available, the resultant fund does not acquire an exemption by relocating. Testing this counterfactual, asset by asset, is the central diligence exercise in a relocation.

Sequencing the Transaction

A relocation of an offshore fund to GIFT IFSC generally involves the following steps:

1. Confirm the original fund qualifies, including the treaty or notified-jurisdiction condition and investor-protection regulation in its home jurisdiction.
2. Establish and authorise the resultant fund in GIFT IFSC under the IFSCA Fund Management Regulations, with the correct category of registration or scheme certificate (see Articles 18 and 19).
3. Structure the consideration so that shares, units or interests are issued in the same proportion, satisfying the definition of relocation.
4. Run the counterfactual analysis on the Indian-share portfolio for Schedule VI (Sl. No. 10).
5. Complete the transfer on or before 31 March 2030.
6. Maintain the non-resident unit-holding position, since both Schedule VI and section 210 apply attribution rules based on units held by non-residents.

Points of Continuing Uncertainty

Several conditions in these provisions are “as may be prescribed”, including conditions for the original fund and the manner of computing attributable income. Claims should be tested against the rules in force for the relevant tax year. Under the 1961 Act, the corresponding provision was section 47(viiab) and related clauses, and notifications issued under that Act, for example the notification dated 12 September 2023 concerning investment trusts, schemes and ETFs, continue to be relevant so far as they are consistent with the 2025 Act. As at 17 September 2026, no judicial decision interpreting the relocation provisions of the 2025 Act was traced.

Finally, tax neutrality does not address the non-tax dimensions of a relocation: investor consents, the treatment of existing contracts, the regulatory position of the original fund in its home jurisdiction, and the foreign-exchange and reporting consequences of the transfer. Those sit outside the Income-tax Act and must be run in parallel.

FAQs

1. What is tax-neutral relocation of an offshore fund to GIFT IFSC?

It allows qualifying transfers of fund assets and investor interests without treating them as transfers for capital gains purposes under section 70.

2. What is the deadline for tax-neutral fund relocation?

The relocation must be completed on or before 31 March 2030.

3. Which funds qualify for relocation tax neutrality?

The original fund must meet the statutory eligibility conditions, and the resultant fund must satisfy the prescribed IFSC location and regulatory authorisation requirements.

4. Does relocation eliminate future capital gains tax?

No. Tax neutrality generally defers capital gains at relocation. Subsequent gains remain subject to applicable tax rules, although Schedule VI provides a limited exclusion for qualifying Indian-share gains.

5. Why is proportional consideration important?

The shares, units or interests issued as consideration must satisfy the statutory proportionality requirements for the transaction to qualify as a relocation.

The post Relocating an Offshore Fund to GIFT IFSC : The Tax-Neutrality Conditions appeared first on Bhatt & Joshi Associates.

Most published summaries of GIFT IFSC tax benefits describe exemptions that belong to investors rather than to the IFSC unit itself. Under the Income-tax Act, 2025, those investor-side exemptions have been consolidated into a single place: Schedule VI, which operates through section 11 and is titled “Income not to be included in total income of certain eligible persons in International Financial Services Centre or having income therefrom”.

Schedule VI is built as a table. Column B states the income, column C the eligible person, and column D the conditions. Nothing is exempt in the abstract: each row must be matched to a person and to its conditions.

Categories of GIFT IFSC Tax Exemptions

Schedule VI sets out twelve GIFT IFSC tax exemptions across four categories.

Rows 1 to 4 — specified funds. These exempt, in the hands of a “specified fund”:

1. income from the transfer of a capital asset referred to in section 70(1)(r) where the transfer takes place on a recognised stock exchange located in an IFSC;
2. income from the transfer of securities, other than shares in a company resident in India;
3. income from securities issued by a non-resident, where the securities are not issued by a permanent establishment of a non-resident in India; and
4. business income from a securitisation trust.

The conditions are cumulative and structural. Consideration must be paid or payable in convertible foreign exchange (row 1). More importantly, the exemption applies only “to the extent” the income is attributable to units held by non-residents, not being the permanent establishment of a non-resident in India, or to the investment division of an offshore banking unit. The computation is to be made in the prescribed manner.

This attribution rule is the heart of the regime. A fund with resident investors is not disqualified outright, but the exemption tracks the non-resident share of its units.

Rows 5 to 7 — non-resident counterparties and clients. These cover:

• income from non-deliverable forward contracts, offshore derivative instruments or over-the-counter derivatives, and distributions on them, where the contract is entered into with an offshore banking unit of an IFSC or with a foreign portfolio investor that is an IFSC unit, subject to prescribed conditions (row 5);
• royalty or interest on the lease of an aircraft or a ship, where paid by an IFSC unit that commenced operations on or before 31 March 2030 (row 6); and
• income from a portfolio of securities, financial products or funds managed or administered by a portfolio manager on behalf of the non-resident, received in an account maintained with an Offshore Banking Unit in an IFSC, to the extent the income accrues or arises outside India and is not deemed to accrue or arise in India (row 7).

Row 7 is narrower than it first appears. It is an exemption for offshore-sourced income routed through an IFSC account; it does not convert Indian-source income into exempt income.

Rows 8 and 11 — aircraft and ship leasing. Row 8 exempts capital gains on the transfer of equity shares of a domestic company that is an IFSC unit primarily engaged in aircraft or ship leasing, for a non-resident or another IFSC unit, where the company commenced operations on or before 31 March 2030 and the gains fall within the prescribed ten-year windows. Row 11 exempts dividends from such a leasing unit in the hands of an IFSC unit. “Aircraft” and “ship” are defined in Note 3 to include engines and parts.

Rows 9, 10 and 12 — unit holders, relocation and borrowing. Row 9 exempts income accruing to a unit holder of a specified fund, or arising on transfer of units in it. Row 10 exempts capital gains of a non-resident or specified fund on the transfer of shares of an Indian company that were transferred to the resultant fund on relocation, where those gains would not have been taxable had the relocation not occurred (see Article 8). Row 12 exempts interest payable by an IFSC unit on moneys borrowed by it on or after 1 September 2019, in the hands of a non-resident recipient.

Row 12 is commercially important: it is the basis on which offshore lenders are able to lend to IFSC units without an Indian withholding cost, provided the borrowing date condition is met.

The Definition that Controls Rows 1 to 4 and 9

“Specified fund” is defined in Note 1(g). It means, in substance:

• a fund established or incorporated in India as a trust, company, LLP or body corporate, located in an IFSC, which has either a certificate of registration as a Category III Alternative Investment Fund (under the SEBI AIF Regulations, 2012 or the IFSCA Fund Management Regulations) or a certificate as a retail scheme or Exchange Traded Fund satisfying the conditions for such schemes under the IFSCA Fund Management Regulations; and whose units are held by non-residents, subject to carve-outs; or
• the investment division of an offshore banking unit registered as a Category-I foreign portfolio investor, which has commenced operations on or before the specified date and maintains separate accounts as prescribed.

The Finance Act, 2026 amended Note 1(g) in two respects. It restructured the unit-holding condition, so that all units other than those held by a sponsor or manager must be held by non-residents, with an exception where a non-resident unit holder subsequently becomes resident and the units held by such resident holders do not exceed 5% of total units issued, subject to prescribed conditions. It also substituted “2030” for “2025” as the commencement deadline for the investment division of an offshore banking unit, extending the window by five years.

For funds, this means the investor register is a tax document. A change in an investor’s residential status can affect the fund’s own characterisation, and the 5% tolerance is the margin within which that risk is managed.

What is not Exempt?

Schedule VI does not exempt everything a specified fund earns. Income outside its exemptions remains taxable. Section 210 prescribes special tax rates for specified funds and foreign institutional investors, including 10% for specified funds and 20% for foreign institutional investors on income from securities, 30% or 20% on short-term capital gains depending on the applicable provision, and 12.5% on long-term capital gains.

Section 210(2) applies the same attribution rule as Schedule VI: for a specified fund, the provision applies only to income attributable to units held by non-residents who are not permanent establishments in India.

Nor does Schedule VI exempt an IFSC unit’s own business income. That is governed separately by the deduction under section 147 (Article 5).

Practical Consequences

• Identify the row before claiming the benefit. Each row has its own eligible person and conditions. “It is a GIFT City fund” is not a tax analysis.
• Watch the 31 March 2030 dates. Rows 6 and 8, and the definition of the investment division of an offshore banking unit, are keyed to commencement of operations by that date. So is “relocation” under section 70(2).
• Model the attribution rule. For specified funds, the exemption follows the non-resident share of units, computed in the prescribed manner. Fund documentation, transfer restrictions and investor onboarding should reflect this.
• Track residential status changes. After the 2026 amendment, the consequence of a non-resident investor becoming resident is governed by an express carve-out with a 5% ceiling.
• Check the borrowing date. Row 12 applies to moneys borrowed on or after 1 September 2019.

Where a condition is “as may be prescribed”, the operative detail sits in the rules. Claims should be tested against the rules in force for the relevant tax year rather than against the Schedule alone.

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Executive Summary

The power to reopen an assessment under Section 148 of the Income Tax Act 1961 is among the most consequential and contested provisions in Indian tax law. It enables the Assessing Officer (AO) to issue a notice requiring an assessee to file a return of income for a year already assessed, where the AO has reason to believe that income chargeable to tax has escaped assessment. This power, when exercised lawfully, serves the legitimate revenue interest of recovering taxes on income that was not brought to account in the original assessment. When exercised improperly — whether on the basis of information not independently applied by the AO, a mere change of opinion, or stale grounds — it constitutes an overreach that courts have consistently set aside. The “borrowed satisfaction” defence to section 148 reassessment notices has become one of the most important judicial doctrines in Indian tax litigation, particularly following the sweeping amendments introduced by the Finance Act 2021 and the Supreme Court’s landmark ruling in Union of India v. Ashish Agarwal (2022). This article examines the statutory framework for reassessment under Section 148, the conditions for valid reopening, the borrowed-satisfaction doctrine, the procedural safeguards introduced by Section 148A, and the mechanisms available to challenge an unlawful reopening.

Reassessment Under Section 148: Statutory Framework

Section 147 and the Escapement of Income

Section 147 of the Income Tax Act 1961 is the substantive provision that enables reassessment. It provides that if the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, the AO may assess or reassess such income and also any other income chargeable to tax which has escaped assessment, by issuing a notice under Section 148.

The phrase “reason to believe” is not a mere formality; it has been interpreted by the Supreme Court as a jurisdictional condition. The AO must have tangible material before him giving rise to a genuine and honest belief — based on objective satisfaction, not subjective suspicion — that income chargeable to tax has escaped assessment. In ITO v. Lakhmani Mewal Das (1976) 3 SCC 757, the Supreme Court held that the reasons recorded by the AO must disclose a live nexus between the material in the AO’s possession and the belief that income has escaped assessment.

The expression “reason to believe” is distinct from “reason to suspect”: a mere suspicion, without objective material, does not satisfy the jurisdictional requirement. Courts have also consistently held that a “change of opinion” — where the AO is merely dissatisfied with the view he took during the original assessment — does not constitute a valid ground for reopening under Section 147. In CIT v. Kelvinator of India Ltd. (2010) 2 SCC 723, the Supreme Court definitively held that after the 1989 amendment to Section 147 (which removed the distinction between cases where the assessee had and had not filed a return), the AO cannot reopen an assessment merely on the ground of a change of opinion where the issue had been expressly or impliedly considered during the original assessment.

The Finance Act 2021 Amendments: A Structural Overhaul

The Finance Act 2021 introduced a fundamental structural overhaul of Reassessment Under Section 148, effective from 1 April 2021. The amendments replaced the prior regime — under which an AO could reopen an assessment on the basis of reason to believe, subject to prior approval in cases beyond four years — with a new architecture that introduced the mandatory pre-notice procedure under Section 148A and significantly revised the limitation periods.

Under the post-2021 regime, the AO is required, before issuing a notice under Section 148, to follow the procedure mandated by Section 148A. Section 148A(a) requires the AO to conduct an inquiry, if required, with the prior approval of the specified authority, with respect to the information suggesting that income has escaped assessment. Section 148A(b) requires the AO to provide the assessee an opportunity of being heard by serving upon the assessee a show cause notice as to why a notice under Section 148 should not be issued. Section 148A(c) requires the AO to consider the reply of the assessee. Section 148A(d) requires the AO to pass an order deciding whether it is a fit case to issue a notice under Section 148, after obtaining prior approval of the specified authority.

Crucially, Section 148A exempts certain categories of cases from the pre-notice procedure. Cases where the AO receives information from a specified authority about assets or income outside India, or information in the form of a document obtained under Section 132 or 132A, or cases covered by the proviso to Section 148, are exempt from the Section 148A procedure. In such cases, the AO may directly issue a notice under Section 148.

Revised Limitation Periods

The Finance Act 2021 also revised the limitation periods applicable to reassessment Under Section 148. Under the current regime, a notice under Section 148 may be issued within three years from the end of the relevant assessment year if the income that has escaped assessment amounts to or is likely to amount to fifty lakh rupees or less. Where the escaped income is more than fifty lakh rupees, the notice may be issued within ten years from the end of the relevant assessment year, provided that the AO has in his possession books of account or other documents or evidence — not the AO’s own analysis, but tangible evidence — which reveal that income chargeable to tax has escaped assessment.

The ten-year limitation is confined to cases where the AO possesses such evidence; it is not a general power to reopen any assessment beyond three years on mere suspicion.

The Borrowed-Satisfaction Doctrine

The Core Principle

The borrowed-satisfaction doctrine addresses a specific and recurring fact pattern: an AO issues a notice under Section 147/148 on the basis of information or a report generated by another officer — for example, a report from the Investigation Wing of the Income Tax Department, a statement recorded during a survey operation under Section 133A, information relayed by the Director General of Income Tax (Intelligence), or a finding from a search and seizure operation — without independently applying his own mind to the material and forming his own independent satisfaction that income has escaped assessment.

The doctrine holds that such a reopening is invalid. The AO who issues the Section 148 notice must himself form the opinion that income has escaped assessment, based on independent consideration of the material. The AO cannot simply borrow the satisfaction of another officer and issue the notice on that basis. The AO’s recorded reasons must demonstrate that the AO personally applied his mind to the tangible material and arrived at his own genuine belief.

The doctrine finds its roots in the fundamental proposition that the power to reopen an assessment is a quasi-judicial power that must be exercised by the officer upon whom it is conferred, based on his own consideration of the material. Delegating that consideration to another officer, or merely accepting the conclusion of another officer without independent scrutiny, converts the exercise of the power into a mechanical act — which is not a valid exercise of the jurisdictional power conferred by Section 147.

The Doctrine Contrasted with “Change of Opinion”

The borrowed-satisfaction doctrine and the change-of-opinion doctrine are distinct, though they often arise in related factual contexts. The change-of-opinion doctrine operates where the issue that the AO now seeks to reopen was addressed, considered, and decided — expressly or by necessary implication — in the original assessment. The AO cannot reopen the assessment merely because he (or his successor) would now decide the same issue differently.

The borrowed-satisfaction doctrine operates where the AO does not form an independent opinion at all, but instead imports the opinion of another officer. The change-of-opinion objection goes to the substance of the belief (the issue was already considered); the borrowed-satisfaction objection goes to the process of forming the belief (the AO did not form one himself).

Both objections are available to an assessee challenging a Section 148 notice, and they may coexist in the same case.

Key Judicial Decisions on Borrowed Satisfaction

The principle that an AO cannot reopen on borrowed satisfaction has been affirmed repeatedly by High Courts across India. The principle draws support from the Supreme Court’s insistence, in ITO v. Lakhmani Mewal Das (1976) 3 SCC 757, that the AO’s reasons must disclose his own satisfaction rather than a mechanical relay of another officer’s conclusions.

The Bombay High Court and the Delhi High Court have in numerous decisions set aside Section 148 notices where the recorded reasons disclosed nothing more than a reference to an Investigation Wing report, without any independent application of mind by the AO. The High Courts have held that the AO must consider the report, examine the material underlying it, and thereafter record his own satisfaction — not merely quote the conclusion of the other officer.

Union of India v. Ashish Agarwal (2022)

The Supreme Court’s decision in Union of India v. Ashish Agarwal (2022) 4 SCC 543 arose from the practical chaos created by the Finance Act 2021 amendments. The amendments came into force on 1 April 2021, and during the transition period from 1 April 2021 to 30 June 2021, the tax department issued a large number of notices under the old Section 148 (without following the new Section 148A procedure), relying upon relaxations granted under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020 (TOLA).

These notices were challenged in a large number of writ petitions across multiple High Courts, which held the notices to be invalid for non-compliance with the post-2021 procedure. The Supreme Court, in Ashish Agarwal, adopted a pragmatic approach. The Court held that the notices issued during the period 1 April 2021 to 30 June 2021 under the old Section 148, without following Section 148A, could be treated as notices issued under Section 148A(b) of the new regime. The Court directed that the assesses be given the opportunity to file objections within the procedure of Section 148A, and that the AO thereafter follow the full Section 148A procedure before issuing a fresh notice under Section 148. The decision effectively provided an amnesty for technically defective notices issued during the transition period, while insisting on procedural compliance going forward.

The TOLA extended certain time limits under the Income Tax Act that had been disrupted by the COVID-19 pandemic, and the interplay between TOLA extensions and the new limitation periods under the post-2021 regime was addressed in Ashish Agarwal and subsequent decisions.

Procedural Landscape

Step 1: Participation in Section 148A Proceedings

When an assessee receives a notice under Section 148A(b), the first step is to file a detailed response to the show cause notice within the time allowed (typically thirty days, extendable). The response should address each of the grounds stated in the notice, present all relevant documentary evidence, and raise any jurisdictional objections — including borrowed satisfaction and change of opinion — at this stage. Failure to raise an objection at the Section 148A stage does not preclude the assessee from raising it subsequently, but it is prudent to do so at the earliest opportunity.

Step 2: The Order Under Section 148A(d)

After considering the assessee’s reply, the AO must pass an order under Section 148A(d) either deciding that it is a fit case for issuing a notice under Section 148, or holding that no such notice need be issued. If the AO decides to issue a notice, the order under Section 148A(d) must be a reasoned order that addresses the assessee’s objections.

The order under Section 148A(d) is separately appealable before the Commissioner of Income Tax (Appeals) under Section 246A of the Income Tax Act, as amended, and may also be challenged by way of a writ petition before the High Court under Article 226 of the Constitution of India.

Step 3: Challenge by Writ Petition

Where the assessee considers that the notice under Section 148 has been issued without independent satisfaction of the AO, or on borrowed satisfaction, or in violation of the procedural requirements of Section 148A, a writ petition before the High Court under Article 226 is an effective remedy. The assessee must demonstrate that the AO’s recorded reasons are inadequate — whether because they merely relay another officer’s conclusions, or because the jurisdictional preconditions of Section 147 have not been satisfied.

The High Court will call for the reasons recorded by the AO and examine them to determine whether they reflect independent application of mind. If the borrowed-satisfaction doctrine is established, the Court will quash the notice.

Key Judicial Precedents

In CIT v. Kelvinator of India Ltd. (2010) 2 SCC 723, the Supreme Court held that Section 147 does not permit reopening on the basis of a mere change of opinion, and that the AO must have tangible material indicating escapement of income.

In ITO v. Lakhmani Mewal Das (1976) 3 SCC 757, the Supreme Court laid the foundation for the requirement that the AO’s belief must be based on material of a rational and relevant character, with a live nexus between the material and the belief.

In Union of India v. Ashish Agarwal (2022) 4 SCC 543, the Supreme Court provided the framework for treating transition-period notices as Section 148A(b) notices and directed that the full Section 148A procedure be followed.

Conclusion

The reassessment power under Section 148 of the Income Tax Act 1961, as restructured by the Finance Act 2021, is a circumscribed power whose exercise is subject to both substantive and procedural constraints. The borrowed-satisfaction doctrine — requiring the AO to form his own independent opinion rather than importing the conclusions of another officer — is a well-established judicial safeguard against mechanical and unjustified reopening of concluded assessments. The mandatory pre-notice procedure under Section 148A provides an additional layer of protection, requiring the AO to give the assessee an opportunity to object before a Section 148 notice is issued. The revised limitation periods of three and ten years introduce a proportionality principle into the regime. The Supreme Court’s decision in Ashish Agarwal (2022) resolved the practical uncertainties created by the transition from the old to the new regime. An assessee who receives a Section 148 notice should, as a matter of course, scrutinise the recorded reasons for independence of the AO’s satisfaction, consider whether the change-of-opinion or borrowed-satisfaction objection is available, and avail of the procedural remedies under Section 148A and under Article 226 of the Constitution if those objections are well-founded.

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Executive Summary

The faceless assessment 144b challenge has emerged as one of the most consequential procedural topics in Indian direct tax law since the introduction of mandatory faceless assessment under Section 144B of the Income Tax Act, 1961 by the Finance Act, 2021. The faceless assessment scheme was conceived to eliminate the human interface between the income tax officer and the taxpayer, thereby reducing opportunities for corruption, ensuring anonymity of the assessing officer, and creating a more objective, technology-mediated assessment environment. However, the implementation of the scheme has generated a substantial body of litigation concerning natural justice, the right of the taxpayer to an effective hearing, the adequacy of the show cause notice process, and the legality of final assessment orders passed without affording a reasonable opportunity to respond. This article examines the statutory architecture of Section 144B, the institutional structure of the National Faceless Assessment Centre (NFAC) and its regional units, the rights of the taxpayer during the assessment process, and the full spectrum of remedies available to challenge a final assessment order—from revision under Section 264 to a second appeal before the Income Tax Appellate Tribunal, and ultimately to the High Court and the Supreme Court. The article also compares faceless assessment under Section 144B with ordinary assessment under Section 143(3) and highlights the procedural safeguards that have been interpreted by courts as mandatory prerequisites for a valid assessment order.

Statutory Framework

Section 144B of the Income Tax Act, 1961

Section 144B was inserted into the Income Tax Act, 1961 by the Finance Act, 2021 with effect from 1 April 2021. The provision mandates that all assessments required to be made under Sections 143(3) and 144 of the Act shall be made in accordance with the faceless assessment procedure where the case is selected for scrutiny assessment. Section 144B provides a detailed procedure for the faceless assessment, including the issuance of notices, the assignment of cases to the NFAC and its constituent units, the preparation of draft assessment orders, the review of draft orders, and the finalisation and communication of the assessment order.

The key institutional actors under Section 144B are the National Faceless Assessment Centre (NFAC), the Assessment Units, the Verification Units, the Technical Units, and the Review Units. The NFAC is headquartered at New Delhi and serves as the central coordinating authority for all faceless assessments. Cases are assigned to Assessment Units located in different cities through a computer-based allocation system, and the identity of the officer handling a particular case is not disclosed to the taxpayer.

Under Section 144B(7), the NFAC is required, before passing a final assessment order that is prejudicial to the taxpayer, to issue a show cause notice (SCN) specifying the additions or disallowances proposed in the draft assessment order. The taxpayer is entitled to respond to the SCN within the time stipulated therein, which the statute provides must be at least fifteen days. Where the taxpayer requests an opportunity for hearing, the NFAC is required to provide a hearing by video conferencing in accordance with the scheme notified by the Central Board of Direct Taxes (CBDT).

Distinction Between Section 143(3) and Section 144B

Section 143(3) of the Income Tax Act, 1961 governs the regular scrutiny assessment procedure in which the assessing officer (AO) conducts the assessment after issuing a notice under Section 143(2) and calls for information, documents, or explanations under Section 142(1). In the conventional Section 143(3) process, the AO may conduct personal hearings, examine the taxpayer’s representatives, inspect documents produced, and interact directly with the taxpayer’s authorised representative. The taxpayer has a reasonable expectation of oral advocacy and direct engagement with the AO on points of fact and law.

Section 144B represents a fundamental departure from this model. The communication between the NFAC and the taxpayer is entirely electronic. The taxpayer’s representative uploads documents and written submissions through the income tax portal; the Assessment Unit prepares a draft order based on the uploaded material; the draft order may go through a review by the Review Unit before being finalised by the NFAC. The absence of physical interaction is both the design feature and the source of litigation, as taxpayers have contended that complex matters involving factual disputes, expert evidence, or voluminous documentation cannot be adequately adjudicated through an exclusively electronic interface.

CBDT Scheme and Notifications

The CBDT has issued multiple circulars and notifications governing the operationalisation of the faceless assessment scheme. The scheme has been amended since its introduction to address implementation difficulties, extend timelines for responses, and expand the facility for video conferencing. As of June 2026, the faceless scheme covers all cases selected for scrutiny assessment, except for assessments involving searches (under Section 153A/153C), international taxation matters handled by dedicated transfer pricing officers, and certain other notified exceptions.

Procedural Landscape

Rights of the Taxpayer During Faceless Assessment

The taxpayer retains several important rights during a faceless assessment under Section 144B, and an understanding of these rights is essential to both responding effectively during the assessment and formulating grounds of challenge if the final order is adverse.

The first right is the right to receive the SCN and to respond within the stipulated time. The SCN issued under Section 144B(7) must be specific: it should identify each proposed addition or disallowance, the evidence or material on the basis of which the addition is proposed, and the statutory provision under which the addition is made. A SCN that is vague, omnibus, or fails to identify the material relied upon violates the principles of natural justice and provides a ground for challenge.

The second right is the right to request a video conferencing hearing. Where the taxpayer’s response involves complex factual or legal issues, or where the taxpayer wishes to orally present arguments or take the officer through extensive documentary evidence, a request for video conferencing may be submitted. The NFAC is obligated to schedule and conduct the video conference, and a failure to grant the requested hearing is a procedural error that may vitiate the final order.

The third right is the right to be represented by an authorised representative. Under Section 288 of the Income Tax Act, 1961, a taxpayer may appear before income tax authorities through a range of authorised representatives including advocates, chartered accountants, and other qualified persons. In faceless proceedings, the authorised representative accesses the portal using the taxpayer’s credentials and submits written responses on behalf of the taxpayer.

The fourth right is the right to a reasoned order. The final assessment order under Section 144B must address each objection raised by the taxpayer in response to the SCN. A non-speaking order or an order that does not engage with the taxpayer’s submissions has been consistently struck down by High Courts as violating natural justice.

Step-by-Step Challenge Pathway for a Final Assessment Order

Step 1: Revision Under Section 264

The first option available to a taxpayer who receives an adverse final assessment order under Section 144B is to apply for revision to the Principal Commissioner of Income Tax (PCIT) or Commissioner of Income Tax (CIT) under Section 264 of the Income Tax Act, 1961. Section 264 enables the superior officer to revise any order passed by a subordinate authority, provided the revision is not barred by limitation (the period for application under Section 264 is generally one year from the date of the order) and the matter is not sub judice in an appeal. Revision under Section 264 is particularly useful where the error is a clear factual error, where there is a computational mistake in the assessment order, or where the assessee did not file an appeal but seeks administrative correction. However, Section 264 revision and appeal to the Commissioner of Income Tax (Appeals) are mutually exclusive remedies: once an appeal is filed, the revision route is foreclosed and vice versa.

Step 2: Appeal to CIT(A) or NFAC Appeals

The primary statutory appeal remedy against a final assessment order under Section 144B lies under Section 246A of the Income Tax Act, 1961, which provides for an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. With effect from amendments introduced by the Finance Act, 2023, the appellate function of the CIT(A) has been partly transitioned to the NFAC Appeals framework, where appeals are assigned to faceless appellate units without disclosure of the appellate officer’s identity. The procedure at the first appellate stage mirrors the faceless scheme: responses are submitted electronically, hearings are conducted by video conferencing if requested, and the appellate order is communicated electronically.

An appeal before the CIT(A) must be filed within thirty days of the date of service of the assessment order, accompanied by the prescribed form and a statement of facts and grounds of appeal. The grounds should be specific, identify each addition that is challenged, and articulate the factual and legal basis for the challenge. Payment of tax on the undisputed amount, or payment of a mandatory pre-deposit as prescribed, is a condition for the maintainability of the appeal.

Step 3: Further Appeal to the Income Tax Appellate Tribunal (ITAT)

If the order of the CIT(A) is adverse, either the taxpayer or the Department may prefer a further appeal before the Income Tax Appellate Tribunal (ITAT) under Section 253 of the Income Tax Act, 1961. The ITAT is a quasi-judicial body constituted under Section 252 and has benches in major cities across India, including Ahmedabad for Gujarat matters. An appeal before the ITAT must be filed within sixty days of the date of the CIT(A)’s order. The ITAT hears both questions of fact and questions of law and is the final fact-finding authority; its findings of fact are ordinarily conclusive unless they are perverse or based on no evidence.

Step 4: High Court Appeal Under Section 260A

A further appeal from the ITAT lies to the High Court under Section 260A of the Income Tax Act, 1961, but only on a substantial question of law. Section 260A, modelled on the civil appellate jurisdiction of the High Court under Section 100 of the Code of Civil Procedure, 1908, does not permit a fresh examination of findings of fact made by the ITAT unless the finding is shown to be perverse. The appeal must be filed within one hundred and twenty days of the date of receipt of the ITAT’s order. The High Court must first admit the appeal by formulating the substantial question(s) of law arising from the order before proceeding to hear the case on merits.

In the context of faceless assessment under Section 144B, several questions of law have arisen that High Courts across India have treated as substantial: whether the principles of natural justice were complied with in the conduct of the faceless assessment, whether the SCN adequately disclosed the material on which the addition was based, whether the NFAC was obligated to grant a video conferencing hearing before passing the final order, and whether the time afforded to respond to the SCN was sufficient in the facts of the case.

Step 5: Supreme Court

An order of the High Court on a Section 260A appeal may be challenged before the Supreme Court by way of a Special Leave Petition under Article 136 of the Constitution of India. The Supreme Court’s jurisdiction is discretionary and is typically invoked where the High Court’s decision involves a substantial error of law, creates a conflict with a prior Supreme Court decision, or raises a question of constitutional importance relating to the procedural rights of taxpayers in faceless proceedings.

Natural Justice in Faceless Proceedings

The most significant procedural safeguard in faceless assessment is the obligation to comply with natural justice—the right to a fair hearing before an adverse decision is made. Multiple High Courts, including the Delhi High Court, the Bombay High Court, and the Gujarat High Court, have held that the mandatory requirement under Section 144B to issue a SCN, to allow a response period, and to provide video conferencing on request are not mere procedural formalities but are substantive components of the right to a fair hearing under Article 21 of the Constitution of India.

Courts have consistently quashed assessment orders passed without issuing an adequate SCN, passed without granting a video conferencing hearing that was requested, or passed within a time so short after the SCN that the taxpayer could not meaningfully respond. The principle that emerges from this body of jurisprudence is that the faceless process must afford a genuine and effective hearing, and that the removal of the physical interface cannot serve as a pretext for reducing the quality of the opportunity given to the taxpayer.

Key Judicial Precedents

Several High Court decisions have addressed the legality of faceless assessment orders under Section 144B and the procedural requirements that must be satisfied.

The Gujarat High Court has in multiple writ petitions under Article 226 granted interim stays of demand raised in faceless assessment orders where the taxpayer has shown prima facie that the SCN was issued without adequate particulars or that the opportunity to respond was effectively denied. These decisions have reinforced the principle that even in a faceless environment, the obligation to comply with natural justice cannot be diluted.

The Delhi High Court has in several decisions addressed the interface between Section 144B and the constitutional guarantee of a fair hearing, holding that a final order passed without issuing a mandatory SCN is void ab initio and not merely voidable. The distinction between void and voidable orders is significant because a void order does not carry a limitation period for challenge in the same manner as a voidable order.

The Bombay High Court has addressed the question of whether the taxpayer’s right to a video conferencing hearing is absolute or contingent on the NFAC’s satisfaction. Courts have generally held that where a request for video conferencing is made in good faith and within the time allowed, the NFAC is obligated to grant the facility, and a refusal to do so vitiates the subsequent order.

Conclusion

The faceless assessment 144b challenge landscape as of June 2026 reflects a mature body of law that has developed over five years of the scheme’s operation. The key statutory provisions—Section 144B for the assessment process, Section 246A for the first appeal, Section 253 for the ITAT appeal, and Section 260A for the High Court—together constitute a comprehensive appellate framework. The rights of the taxpayer to receive a specific SCN, to respond within an adequate time, and to obtain a video conferencing hearing are treated by courts as mandatory safeguards whose breach renders the final order legally vulnerable. Practitioners advising taxpayers who have received adverse faceless assessment orders must carefully examine the assessment record, the adequacy of the SCN, the time allowed for response, and whether all the taxpayer’s objections were considered in the final order, before selecting the appropriate challenge route. The availability of both the administrative remedy of revision under Section 264 and the judicial remedy of appeal and writ petition provides taxpayers with multiple avenues to secure a fair determination of their tax liability.

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Executive Summary

The intersection of dtaa form 10f non resident Indian tax compliance has become an increasingly critical area of practice as cross-border transactions involving royalties, fees for technical services, interest, dividends, and capital gains have grown in volume and complexity. India’s network of Double Taxation Avoidance Agreements (DTAAs) entered into under Section 90 of the Income Tax Act, 1961 offers non-resident payees the ability to claim reduced withholding tax rates that are often significantly lower than the domestic statutory rates. However, accessing DTAA benefits requires strict compliance with a layered documentation regime that includes obtaining a Tax Residency Certificate from the country of residence and filing Form 10F, whether in physical form (for certain categories) or in the now-mandatory online format on the Indian income-tax e-filing portal. Failure to comply results in the payer being required to withhold tax at the maximum applicable rate, often 20 percent under Section 206AA or the domestic rate, whichever is higher. This article systematically examines the legal basis for DTAA override, the documentation requirements, the post-BEPS Limitation of Benefits clauses that have reshaped treaty shopping, and the practical compliance steps for non-residents seeking to invoke DTAA benefits on payments from Indian sources.

Statutory Framework

Section 90: India’s Treaty Override Provision

Section 90(1) of the Income Tax Act, 1961 authorises the Central Government to enter into agreements with the government of any country outside India or specified territory for granting relief in respect of income on which income tax has been paid both under the Act and under the income-tax law of that country. Section 90(2) provides the critical substantive rule: where the Central Government has entered into a DTAA with the government of a foreign country, an assessee to whom the agreement applies shall be entitled to the provisions of the Act or the DTAA, whichever are more beneficial. This “beneficial override” principle is the legal cornerstone of all DTAA planning — a non-resident is not compelled to apply the domestic income-tax rules if the DTAA provides a lower rate of tax or a full exemption.

Section 90(4) was introduced by the Finance Act, 2012 and imposes a mandatory condition for claiming DTAA benefits: a non-resident assessee shall not be entitled to claim the benefit of any DTAA unless a Tax Residency Certificate is obtained from the government of the country of which it claims to be a resident. This provision effectively made the TRC a prerequisite for DTAA access, closing the loophole that allowed treaty shopping without proof of genuine residence in the treaty partner state.

Section 90(5), also introduced by the Finance Act, 2012, empowers the government to prescribe additional information and documentation requirements, in addition to the TRC, for a non-resident to claim DTAA benefits. It is under this provision that Form 10F has been prescribed.

Section 91: Relief for Countries Without a DTAA

Where India does not have a DTAA with a particular country, Section 91 of the Income Tax Act provides unilateral relief to an Indian resident who has paid tax in that foreign country on income that is also taxed in India. Section 91 does not provide a mechanism for non-residents from non-treaty countries to claim reduced withholding in India; such non-residents are subject to the full domestic withholding rates.

Section 206AA: The Consequences of Non-Compliance

Section 206AA of the Income Tax Act, 1961 provides that where any person is entitled to receive any sum or income or amount on which tax is deductible at source, and such person does not furnish his Permanent Account Number (PAN) or valid tax identification details, the payer shall deduct tax at source at the rate of 20 percent or the rate specified in the relevant provision of the Act, whichever is higher. For non-residents who do not furnish a PAN, this provision would apply at a rate of 20 percent even if the DTAA rate is, for example, 10 percent or 15 percent. However, the CBDT issued a circular clarifying that where a non-resident furnishes a Tax Residency Certificate along with the prescribed documents, the higher Section 206AA rate would not apply to income covered by the DTAA.

Types of Income for Which DTAA Benefits Are Claimed

Non-resident payees most commonly invoke DTAA benefits in India in relation to the following categories of income. Royalties are payments for the use of intellectual property, patents, trademarks, copyrights, and know-how; domestic rates under Section 115A of the Income Tax Act are 20 percent (plus surcharge and cess), while DTAA rates range from 10 percent to 15 percent across India’s major treaties. Fees for Technical Services are payments for the rendering of managerial, technical, or consultancy services; domestic rates are similarly 20 percent under Section 115A, and DTAA rates are lower. Interest income arising in India and paid to a non-resident is taxable at 20 percent under Section 115A domestically, while treaty rates may be as low as 7.5 percent in some treaties. Dividends paid by Indian companies to non-residents are subject to withholding at domestic rates, with DTAA rates typically ranging from 5 percent to 15 percent. Capital gains on sale of shares or other assets are subject to complex rules, with some DTAAs providing full exemption from Indian capital gains tax.

Key DTAAs: India-Mauritius, India-Singapore, India-Netherlands, India-USA

The India-Mauritius DTAA historically provided a full exemption from Indian capital gains tax on sale of Indian shares, making Mauritius the most utilised treaty jurisdiction for foreign portfolio investment into India. Following a renegotiated protocol effective 1 April 2017, capital gains on shares acquired on or after 1 April 2017 are taxable in India; the transitional concession of 50 percent of the Indian capital gains rate applies for the period 1 April 2017 to 31 March 2019.

The India-Singapore DTAA historically mirrored the India-Mauritius capital gains exemption but was also amended in coordination with the India-Mauritius protocol. Following the amendment, capital gains on Indian shares acquired on or after 1 April 2017 are taxable in India. The India-Singapore treaty continues to offer benefits on interest (7.5 percent) and royalties (10 percent).

The India-Netherlands DTAA provides competitive rates on dividends (5 percent for substantial holdings, 10 percent otherwise), interest (10 percent), and royalties (10 percent). The Netherlands is a frequently used holding company jurisdiction for European investment into India.

The India-USA DTAA provides reduced rates on dividends (15 percent), interest (10 to 15 percent depending on the category), and royalties (15 percent). The US DTAA includes a Limitation of Benefits (LoB) article, discussed below.

Procedural Landscape

The Documentation Compliance for DTAA Form 10F Non-Resident

The following numbered steps describe the complete compliance sequence for a non-resident seeking to claim DTAA benefits on a payment from an Indian payer.

Step 1: The non-resident payee obtains a Tax Residency Certificate from the tax authority of its country of residence. The TRC must cover the relevant financial year and must contain the information prescribed under Rule 21AB of the Income Tax Rules, 1962, including the payee’s name, residential status, period for which the certificate is applicable, address, taxpayer identification number, tax identification number in the country of residence, and the status of the person in that country (individual, company, etc.).

Step 2: The non-resident payee files Form 10F. This is a self-declaration form providing specific additional information that may not be included in the TRC. Form 10F requires the payee to state the tax identification number in its country of residence, the period of residential status, the address of the payee in its country of residence during the period, the country of which the payee claims to be a resident, and the specific articles of the DTAA under which benefits are claimed.

Step 3: Online filing on the Indian e-filing portal. With effect from July 2022, the CBDT issued a notification requiring all non-residents claiming DTAA benefits to file Form 10F electronically on the Indian income-tax e-filing portal (www.incometax.gov.in). This requirement created a practical challenge because non-residents without a PAN cannot directly access the portal. The CBDT subsequently clarified that non-residents who do not have a PAN are required to register on the e-filing portal as a non-PAN user specifically for the purpose of filing Form 10F. The requirement for online filing was initially made applicable from 1 October 2023 after several extensions.

Step 4: The non-resident payee shares the TRC, the Form 10F, and a declaration confirming the absence of a Permanent Establishment in India (where relevant) with the Indian payer before the payment is made or the tax is withheld.

Step 5: The Indian payer, upon being satisfied with the documentation, withholds tax at the DTAA rate rather than the domestic rate. The payer should maintain copies of all the documentation received from the non-resident payee for tax audit and assessment purposes.

Step 6: The payer files the TDS returns, reflecting the DTAA rate and the basis for applying it, and issues Form 16A or 16B (TDS certificates) to the non-resident payee.

Step 7: The non-resident payee files its Indian income-tax return (if required) or relies on the TDS as final tax, depending on the nature of the income and the applicable treaty provisions.

No Permanent Establishment Requirement

For non-residents claiming DTAA benefits on business income, the treaty typically provides that business income of a resident of one contracting state is taxable only in that state unless the enterprise carries on business in the other contracting state through a permanent establishment situated therein. Accordingly, a non-resident claiming exemption from Indian tax on business income must provide a declaration that it does not have a permanent establishment in India. If a PE is found to exist, the business income attributable to the PE becomes taxable in India. The PE concept has become increasingly complex with the BEPS-inspired amendments, including the concept of a “Dependent Agent PE” and the “Service PE” clause found in some of India’s DTAAs.

Key Judicial Precedents

Azadi Bachao Andolan v. Union of India (2003) 263 ITR 706 (SC)

The Supreme Court in this case upheld the constitutional validity of the India-Mauritius DTAA and the circular issued by the CBDT providing that entities holding a valid Tax Residency Certificate from Mauritius would be entitled to claim DTAA benefits. The Court held that the CBDT circular was binding on the revenue authorities and that revenue authorities could not go behind the TRC to deny DTAA benefits. The decision is a landmark in establishing the primacy of the TRC as conclusive evidence of residential status for DTAA purposes.

Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613

While primarily a case on the taxability of offshore transfers of shares in Indian companies, the Supreme Court’s observations in Vodafone on treaty interpretation, the arm’s length principle, and the limits of the General Anti-Avoidance Rule (GAAR) have had broad implications for DTAA planning. The Court held that tax planning within the framework of the law is permissible, while artificial or sham transactions designed solely to avoid tax without any commercial substance are not entitled to treaty benefits.

Engineering Analysis Centre of Excellence Pvt. Ltd. v. Commissioner of Income Tax (2021) 432 ITR 471 (SC)

This Supreme Court decision has significant implications for the taxation of software payments as royalties. The Court held that payments for the use of software (including off-the-shelf software) do not constitute royalties under the respective DTAAs examined in the case (including the India-USA, India-Singapore, India-Germany, India-France, and India-Sweden DTAAs) because the end-user does not acquire any copyright right but only a limited licence for personal use. This decision substantially reduced the withholding tax obligation of Indian payers on software payments to non-residents and is of immediate practical relevance to technology companies with global supply chains.

Limitation of Benefits Clauses in Post-BEPS DTAAs

The Base Erosion and Profit Shifting (BEPS) project launched by the OECD in 2015 fundamentally changed the landscape of international tax treaty policy. India is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), which has modified many of India’s bilateral DTAAs. The principal BEPS-related safeguard relevant to DTAA access by non-residents is the Principal Purpose Test (PPT) introduced by Article 7 of the MLI.

Under the PPT, a benefit under a covered tax agreement shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting the benefit in those circumstances would be in accordance with the object and purpose of the relevant provisions of the covered tax agreement. In practice, the PPT means that a non-resident whose presence in a treaty jurisdiction is motivated primarily by the desire to access favourable treaty rates rather than by genuine commercial substance risks having the DTAA benefits denied by the Indian revenue authorities. The MLI has modified many of India’s key DTAAs, including the India-Mauritius, India-Singapore, India-Netherlands, and India-Cyprus treaties, among others. Non-residents seeking to claim DTAA benefits on payments from India must therefore assess whether their treaty position would survive a PPT challenge by the Indian tax authorities.

Conclusion

The dtaa form 10f non resident compliance framework under the Income Tax Act, 1961 is a carefully calibrated system designed to balance the legitimate treaty entitlements of non-resident payees against the Indian revenue’s interest in ensuring that only bona fide residents of treaty partner states receive the benefit of reduced withholding rates. The TRC and Form 10F together constitute the essential documentation prerequisites, and the CBDT’s requirement for online filing of Form 10F has added a procedural layer that non-residents and their Indian advisors must navigate with care. The post-BEPS environment, marked by the introduction of the Principal Purpose Test through the MLI, has added a substantive layer of scrutiny that requires non-residents to demonstrate genuine commercial presence and purpose in their country of residence. Landmark decisions such as Azadi Bachao Andolan, Vodafone, and Engineering Analysis Centre of Excellence have shaped the contours of DTAA access and interpretation in India. A thorough and proactive approach to DTAA compliance — including obtaining a valid TRC, filing Form 10F before payment is made, ensuring the absence of a PE, and assessing treaty position in the context of the PPT — is the only reliable path to securing the benefit of lower withholding tax rates for non-resident recipients of income from Indian sources.

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For decades, Indian tax practitioners operated on the assumption that any ambiguity in a tax provision — whether it imposed a liability or granted a relief — should be resolved in favour of the taxpayer. A landmark Constitution Bench ruling of the Supreme Court in 2018 shattered that assumption. This article examines the evolution of the ‘revenue-favourable interpretation’ principle for exemption and deduction provisions under the Income Tax Act, analyses the key judgments in depth, and provides a practitioner’s guide to navigating this area of law.

1. The Old Law: Sun Export and Pro-Assessee Interpretation

Before 2018, the position on interpretation of exemption notifications was governed by the three-Judge Bench decision in Sun Export Corporation, Bombay v. Collector of Customs, Bombay, (1997) 6 SCC 564. In that case, the Supreme Court held that if two views are possible on a tax exemption provision — one favouring the assessee and one favouring Revenue — the view favouring the assessee should prevail.

This principle was derived from the older charging-provision rule (benefit of doubt to assessee) and applied indiscriminately to all tax provisions — both liability-creating and exemption-granting. Tax practitioners and assessees understandably relied on this position. Ambiguity in an exemption clause, they argued, must be resolved in the taxpayer’s favour.

Sun Export Position (pre-2018): If two views are possible on an exemption provision, the view favouring the assessee prevails.

This position is now overruled. It should NOT be relied upon in any assessment, appeal, or litigation.

2. The Paradigm Shift: Dilip Kumar (2018) — The Constitution Bench Rules

A two-Judge Bench of the Supreme Court, when hearing the Dilip Kumar customs matter, doubted the correctness of the Sun Export ratio. The matter was elevated to a three-Judge Bench, which in turn referred it to a Constitution Bench. The five-judge Constitution Bench in Commissioner of Customs (Import), Mumbai v. M/s. Dilip Kumar and Company & Ors., (2018) 9 SCC 1 : 2018 SCC OnLine SC 747 (Civil Appeal No. 3327 of 2007, decided 30 July 2018), settled the law conclusively.

The reference question was: ‘What is the interpretive rule to be applied while interpreting a tax exemption provision/notification when there is ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax to be applied?’

The Constitution Bench answered as follows:

• Exemption notification should be interpreted strictly; the burden of proving applicability rests on the assessee.
• When there is ambiguity in an exemption notification, the benefit of such ambiguity cannot be claimed by the assessee — it must be interpreted in favour of Revenue.
• The ratio in Sun Export case is not correct. All decisions taking a similar view as in Sun Export case stand overruled.
• These principles apply to all tax statutes, not only the Customs Act.

Why does ambiguity in exemptions favour Revenue?

An exemption is a concession granted by the State from an otherwise applicable tax. The concession is precise — it applies only to what Parliament clearly intended to exempt. Extending exemptions through interpretive generosity amounts to a judicially-created tax waiver that Parliament never authorised. This would violate the constitutional principle that taxes (and their remission) must be authorised by law. The national exchequer must be protected from exemptions that are wider than what Parliament intended.

3. Income Tax Application: PCIT v. Wipro Limited (2022)

While Dilip Kumar arose under the Customs Act, its application to the Income Tax Act was confirmed and demonstrated most powerfully by the Supreme Court in PCIT-III, Bangalore and Another v. M/s. Wipro Limited, Civil Appeal No. 1449 of 2022 (Supreme Court of India, decided 11 July 2022).

Background: Wipro Ltd., a 100% Export Oriented Unit (EOU), filed its return of income for AY 2001-02 claiming exemption under Section 10B of the Income Tax Act, 1961. Section 10B provided a deduction of 100% of profits derived by an EOU from export. In the same original return, Wipro declared a loss — because it had claimed the Section 10B deduction, it did not claim carry-forward of the loss (Section 72 does not permit loss carry-forward when income is exempt).

Subsequently, Wipro filed a revised return purporting to withdraw the Section 10B claim and instead claim carry-forward of losses. The Department denied the revised return, holding that under Section 10B(8), the option to withdraw the exemption had to be exercised by filing a written declaration with the Assessing Officer before the due date of filing the original return under Section 139(1).

Section 10B(8) reads:

“Notwithstanding anything contained in the foregoing provisions of this section, where the assessee, in computing the total income of any previous year, has claimed the deduction referred to in sub-section (1) … the assessee shall, before the due date for furnishing the return of his income under sub-section (1) of section 139, furnish to the Assessing Officer a declaration in writing that he wishes to opt out of the provisions of this section…” — Section 10B(8), Income Tax Act, 1961

The Supreme Court’s Analysis

The Supreme Court considered two questions: (a) whether the requirement of filing a declaration is mandatory, and (b) whether the time limit of ‘before the due date under Section 139(1)’ is also mandatory.

The Court held both conditions mandatory, applying the following reasoning:

• Applying the literal rule: The words ‘before the due date’ in Section 10B(8) are unambiguous. There is no room for a directory reading.
• Applying the Dilip Kumar principle: Section 10B(8) is part of an exemption/deduction provision under income tax act. Such provisions must be strictly construed. The conditions for opting out of an exemption are as much subject to strict interpretation as the conditions for opting into it.
• On revised returns: A revised return under Section 139(5) can only be filed to correct an omission or wrong statement in the original return. Filing a revised return to switch from claiming an exemption to not claiming it, and instead claiming carry-forward of losses, is not a correction of omission or wrong statement — it is a fundamentally different tax position. This is impermissible.
• On national exchequer: Allowing the revised return would permit the assessee to have the best of both worlds — claim the exemption in the original return and then walk back that choice after observing the tax consequences. Parliament did not intend this.

Impact and Implications of Wipro (2022)

The Wipro judgment has far-reaching practical consequences for all taxpayers who claim Section 10A, 10B, 10AA, 80IA, 80IB, 80IC, or any other special deduction that comes with procedural conditions. Key implications include:

• Procedural deadlines attached to exemption/deduction claims under income tax are mandatory, not directory. Missing the deadline means losing the claim — regardless of the reason for missing it.
• A revised return cannot be used to substitute a fundamentally different tax position. It can only correct genuine errors (wrong facts, arithmetic mistakes) in the original return.
• Taxpayers who carelessly claim an exemption in the original return and then try to reverse course will not be permitted to do so after the due date.
• The judgment reinforces the discipline that deductions must be actively managed — consult your tax advisor before filing the original return, not after.

4. Section 80AC: The Statutory Embodiment of the Mandatory Principle

Section 80AC of the Income Tax Act, 1961 provides that no deduction shall be allowed under the Chapter VI-A provisions (Sections 80-IA to 80-RRB, which include deductions for infrastructure, industrial undertakings, housing projects, scientific research, and others) unless the assessee furnishes a return of income on or before the due date specified under Section 139(1).

This is the clearest statutory embodiment of the revenue-favourable interpretation principle: Parliament itself has made timely filing of the return a condition precedent to any deduction. The ITAT Special Bench in M/s. Saffire Garments v. ITO, (2013) 140 ITD 6, ITAT Special Bench, Rajkot (a decision dealing with the equivalent provision under Section 10A), held that this condition is mandatory and non-compliance forfeits the deduction.

The ITAT, Mumbai in Uma Developers v. ITO, ITA No. 2164/Mum/2016 (ITAT Mumbai, 2019) applied the same principle to Section 80IB(10) and Section 80AC, holding that the assessee’s failure to file the return within the due date under Section 139(1) disentitled it from the deduction under Section 80IB(10) — the condition in Section 80AC is mandatory.

Section 80AC in the Income Tax Act, 2025:

The Income Tax Act, 2025 (in force from 1 April 2026) continues the principle underlying Section 80AC. While section numbers have changed, the mandatory condition of timely return filing for claiming Chapter VI-A type deductions is maintained in the new Act. All precedents on Section 80AC remain applicable to the equivalent provision in the 2025 Act.

5. The Tension: Where Courts Have Not Always Favoured Revenue

It would be misleading to suggest that courts uniformly and always resolve interpretive ambiguity in Revenue’s favour. The Dilip Kumar principle, powerful as it is, operates within limits. Several important countervailing principles exist:

• CIT v. Vegetable Products Ltd., (1973) 88 ITR 192 (SC): Ambiguity in a charging provision always favours the assessee. This rule is unaffected by Dilip Kumar.
• Mathuram Agrawal v. State of Madhya Pradesh, (1999) 8 SCC 667: Where there is genuine ambiguity in a taxing statute, the benefit of doubt goes to the taxpayer — this applies to the liability side.
• Section 273B, Income Tax Act, 1961: Penalties for procedural defaults (including late audit report filing) can be avoided by demonstrating ‘reasonable cause’. The Kerala High Court has applied this even to Section 271B penalties for late audit report filing (2025).
• CBDT Circulars: Where a CBDT Circular interprets a provision in the assessee’s favour, Revenue is bound by it even if the statutory language might support a narrower Revenue-favourable reading.
• Delhi High Court in CIT v. Unitech Ltd., ITA 239/2015 (Delhi HC, October 5, 2015): Left open the question of whether Section 80AC’s mandatory nature is definitive, noting the conflict in ITAT decisions — demonstrating that the question is not always closed.

6. Master Reference Table: Key Judgments on Revenue-Favourable Interpretation

7. Practitioner’s Compliance Guide: Protecting Your Deduction Claims

In light of the Dilip Kumar and Wipro principles, here is a step-by-step compliance checklist for any taxpayer claiming a deduction or exemption under the Income Tax Act:

• Step 1 — Identify the type of deduction/exemption under income tax: Is it under Section 10 (exemptions), Chapter VI-A (deductions), or Section 10A/10B/10AA (special category)? Each has specific conditions.
• Step 2 — Read all conditions literally: Do not assume that conditions are merely procedural or directory. After Wipro (2022), assume all conditions are mandatory unless there is clear judicial authority to the contrary.
• Step 3 — File your return of income on time: Section 80AC and equivalent provisions make timely return filing a condition precedent to any Chapter VI-A deduction. Filing even one day late forfeits the claim.
• Step 4 — File all prescribed forms and audit reports before the return due date: Audit reports (Form 10CCB for Section 80IA/80IB etc.) must be filed before or along with the return — not after.
• Step 5 — If claiming Section 10B or Section 10A, decide your position before filing the original return: Do not claim the exemption and then try to withdraw it through a revised return. After Wipro, this is not permissible.
• Step 6 — Review CBDT Circulars: If there is a Circular that interprets the provision in your favour, it is binding on the Assessing Officer. Cite it in your return and any correspondence.
• Step 7 — In case of genuine error in the original return: You can file a revised return under Section 139(5) only to correct an omission or wrong factual statement. You cannot file a revised return to take a diametrically different tax position.
• Step 8 — Document all compliance: Maintain contemporaneous records of when forms were filed, returns were submitted, and declarations were made. In any dispute, the burden of proving compliance is on you.

8. Conclusion

The law on interpretation of exemption and deduction provisions under income tax act in India has undergone a fundamental transformation since the Constitution Bench in Dilip Kumar (2018). The comfortable assumption that ambiguity always helps the taxpayer is no longer correct. For exemptions and deductions in income tax, ambiguity helps Revenue. For charging provisions, ambiguity still helps the assessee. This distinction is foundational — every tax practitioner, taxpayer, and adjudicator must have it firmly in mind.

The PCIT v. Wipro (2022) judgment brought this principle squarely into income tax law, with concrete consequences. The Section 80AC cases confirm that Parliament has already codified the principle in statutory form for Chapter VI-A deductions. The income tax practitioner of today must counsel clients to treat procedural conditions not as bureaucratic formalities but as substantive prerequisites — failure to comply destroys the claim, irreversibly.

FAQs

1. What is the revenue-favourable interpretation principle in Indian tax law?
The revenue-favourable interpretation principle means that if there is ambiguity in exemption or deduction provisions under Indian income tax law, the interpretation favouring the tax authorities may prevail.

2. What did the Supreme Court decide in the Dilip Kumar case?
In Dilip Kumar Judgment, the Supreme Court held that exemption notifications must be interpreted strictly, and ambiguity in such provisions should favour Revenue, not the taxpayer.

3. Does ambiguity in every tax law provision favour Revenue?
No. Ambiguity in charging provisions may still favour the taxpayer, as held in CIT v. Vegetable Products Judgment. The revenue-favourable rule mainly applies to exemptions and deductions.

4. What was the impact of the PCIT v. Wipro judgment?
The PCIT v. Wipro Judgment confirmed that procedural conditions and deadlines in deduction or exemption provisions are mandatory and must be strictly followed.

5. Can a revised return be used to change an exemption claim?
Generally, no. A revised return can correct errors or omissions but cannot be used to take a completely different tax position after the due date.

6. What is Section 80AC of the Income Tax Act?
Section 80AC requires taxpayers to file their return on or before the due date under Section 139(1) to claim certain deductions under Chapter VI-A.

7. Are procedural conditions for deductions mandatory?
Yes. Courts have increasingly treated procedural conditions, filing deadlines, and declarations as mandatory for claiming deductions and exemptions.

8. How can taxpayers protect deduction claims under the Income Tax Act?
Taxpayers should file returns on time, submit required forms and audit reports before deadlines, and ensure full compliance with all statutory conditions.

References

1. Commissioner of Customs (Import), Mumbai v. M/s. Dilip Kumar & Co., (2018) 9 SCC 1 : 2018 SCC OnLine SC 747
2. Sun Export Corpn. v. Collector of Customs, Bombay, (1997) 6 SCC 564 (overruled)
3. PCIT-III, Bangalore v. M/s. Wipro Ltd., Civil Appeal No. 1449 of 2022 (SC, July 11, 2022)
4. EY Tax Alert: Supreme Court follows strict interpretation of exemption provision (July 2022)
5. PCIT v. Wipro — Full PDF Judgment (TaxGuru)
6. M/s. Saffire Garments v. ITO, ITAT Special Bench, Rajkot, (2013) 140 ITD 6
7. Uma Developers v. ITO, ITA No. 2164/Mum/2016, ITAT Mumbai (2019) — BCAJ Analysis
8. CIT v. Vegetable Products Ltd., (1973) 88 ITR 192 (SC)
9. Pradip J. Mehta v. CIT, (2008) 300 ITR 231 (SC) — ITAT Online
10. CIT v. Unitech Ltd., ITA 239/2015 & CM 6678/2015 (Delhi HC, October 5, 2015) — Thakurani Analysis
11. KPMG Flash News: Dilip Kumar — Exemption Notification to be Interpreted Strictly (August 2018)
12. BCA Journal: Analysis of PCIT v. Wipro Ltd.
13. PwC News Flash: Constitution Bench Holds Benefit of Ambiguity Favours Revenue (August 2018)
14. Income Tax Act, 2025 — Notified IT Rules 2026 (CBDT)

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