Final Course

Study Material
(Modules 1 to 4)

Paper 4
Direct Tax Laws &
International Taxation
[Direct Tax Laws as amended by the Finance Act, 2025]
Assessment Year 2026-27

Module – 3
(Relevant for May 2026, September 2026
and January 2027 examinations)

BOARD OF STUDIES (ACADEMIC)

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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a

This Study Material has been prepared by the faculty of the Board of Studies (Academic). The
objective of the Study Material is to provide teaching material to the students to enable them to
obtain knowledge in the subject. In case students need any clarification or have any suggestion for
further improvement of the material contained herein, they may write to the Joint Director, Board of
Studies (Academic).
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Basic draft of this publication was prepared by CA. (Dr.) Rashmi Goel.

Edition : September, 2025

Committee/Department : Board of Studies (Academic)

E-mail : bosnoida@[Link]

Website : [Link]

Price : ` /- (For All Modules)

ISBN No. : 978-93-48313-65-2

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)
Printed by :

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CONTENTS

MODULE – 1
Chapter 1 : Basic Concepts
Chapter 2 : Incomes which do not form part of Total Income
Chapter 3 : Profits and Gains of Business or Profession
Chapter 4 : Capital Gains
Chapter 5 : Income from Other Sources
Chapter 6 : Income of Other Persons included in assessee’s Total Income
Chapter 7 : Aggregation of income, set-off or carry forward of Losses
Chapter 8 : Deductions from Gross Total Income
MODULE – 2
Chapter 9 : Assessment of Various Entities
Chapter 10: Assessment of Trusts and Institutions, Political Parties and Other Special Entities
Chapter 11 : Tax Planning, Tax Avoidance & Tax Evasion
Chapter 12 : Taxation of Digital Transactions

MODULE – 3
Chapter 13 : Deduction, Collection and Recovery of tax
Chapter 14 : Income-tax Authorities
Chapter 15 : Assessment Procedure

Chapter 16 : Appeals and Revision

Chapter 17 : Dispute Resolution
Chapter 18 : Miscellaneous Provisions
Chapter 19 : Provisions to Counteract Unethical Tax Practices
Chapter 20 : Tax Audit and Ethical Compliances

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MODULE – 4
Chapter 21 : Non-resident Taxation
Chapter 22 : Double Taxation Relief
Chapter 23 : Advance Rulings

Chapter 24 : Transfer Pricing

Chapter 25 : Fundamentals of BEPS
Chapter 26 : Application and Interpretation of Tax Treaties

Chapter 27 : Overview of Model Tax Conventions

Chapter 28 : Latest Developments in International Taxation

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DETAILED CONTENTS : MODULE - 3

CHAPTER 13: DEDUCTION, COLLECTION AND RECOVERY OF TAX

Learning Outcomes............................................................................................................... 13.1

Contents:
13.1 Deduction at source and advance payment [Section 190] ........................................... 13.2
13.2 Direct payment [Section 191] ..................................................................................... 13.3
13.3 Deduction of tax at source.......................................................................................... 13.4

13.4 Certificate for deduction of tax at a lower rate [Section 197) .................................... 13.113
13.5 No deduction in certain cases [Section 197A] ......................................................... 13.113
13.6 Miscellaneous provisions ...................................................................................... 13.120

13.7 Tax collection at source ......................................................................................... 13.134

13.8 Processing of TDS /TCS Statements [Section 200A/ Section 206CB] ...................... 13.152
13.9 Advance payment of tax [Section 207 to 219] ......................................................... 13.154
13.10 Interest chargeable in certain cases ....................................................................... 13.157
13.11 Collection and recovery of tax - Other Methods ...................................................... 13.165
13.12 Refunds ................................................................................................................. 13.178
13.13 Penal consequences for failure to deduct or collect
or pay tax at source ............................................................................................... 13.184
Significant Select Cases ................................................................................................... 13.187

Test Your Knowledge ........................................................................................................ 13.205

CHAPTER 14: INCOME TAX AUTHORITIES

Learning Outcomes............................................................................................................... 14.1

Contents:
14.1 Appointment and Control [Section 116 to 119A] .......................................................... 14.2

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14.2 Jurisdiction ............................................................................................................... 14.9

14.3 Powers of Income-tax Authorities [Section 131 to 136] .............................................. 14.14
Significant Select Cases ..................................................................................................... 14.39
Test Your Knowledge .......................................................................................................... 14.41

CHAPTER 15: ASSESSMENT PROCEDURE

Learning Outcomes ................................................................................................................ 15.1

Contents:
15.1 Return of income ................................................................................................................. 15.3

15.2 Permanent Account Number (PAN) [Section 139A] ................................................... 15.20

15.3 Quoting of Aadhaar Number [Section 139AA] ........................................................... 15.33
15.4 Scheme for submission of returns through Tax Return Preparers [Section 139B] ....... 15.36

15.5 Persons authorised to verify return of income [Section 140] ...................................... 15.38
15.6 Self assessment [Section 140A] ............................................................................... 15.41
15.7 Updated return of income [Section 139(8A)] ............................................................. 15.42

15.8 Tax on updated return [Section 140B] ...................................................................... 15.45

15.9 Inquiry before assessment [Section 142] .................................................................. 15.50
15.10 Special audit and inventory valuation under section 142 ........................................... 15.51
15.11 Power of Assessing Officer to make a reference to the
Valuation Officer [Section142A] ................................................................................ 15.55
15.12 Faceless Inquiry & Valuation [Section 142B] ............................................................. 15.55
15.13 Assessment [Section 143] ....................................................................................... .15.57
15.14 Power of Joint Commissioner to issue Directions
in Certain Cases [Section 144A] .............................................................................. 15.63
15.15 Faceless Assessment [Section 144B] ....................................................................... 15.63
15.16 Reference to Principal Commissioner or Commissioner in
Certain Cases [Section 144BA] ................................................................................ 15.74

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15.17 Reference to Dispute Resolution Panel [Section 144C] ............................................. 15.77

15.18 Income Escaping Assessment [Sections 147 to 151]................................................. 15.81

15.19 Faceless Assessment of Income Escaping Assessment [Section 151A] .................... 15.86

15.20 Other Provisions [Section 152] ................................................................................. 15.87

15.21 Time limit for completion of Assessments and Reassessments [Section 153] ............ 15.87

15.22 Rectification of Mistakes [Section 154] ..................................................................... 15.97

15.23 Other Amendments [Section 155] ........................................................................... 15.100

15.24 Notice of Demand [Section 156] ............................................................................. 15.108

15.25 Modification and revision of notice in certain cases [Section 156A].......................... 15.109

15.26 Intimation of Loss [Section 157] ............................................................................. 15.110

15.27 Faceless Rectification, Amendments and Issuance of Notice

or Intimation [Section 157A] ................................................................................... 15.110

15.28 Block Assessment in Search and Requisition cases ................................................ 15.111

Significant Select Cases ................................................................................................... 15.125

Test Your Knowledge ........................................................................................................ 15.129

CHAPTER 16: APPEALS AND REVISION

Learning Outcomes ................................................................................................................ 16.1

Contents:
16.1 Appeals before Joint Commissioner (Appeals)
or Commissioner (Appeals) ........................................................................................ 16.2
16.2 Appeals to the Appellate Tribunal [Sections 252 to 255] ............................................ 16.10
16.3 Appeals to High Court [Sections 260A & 260B] ......................................................... 16.17
16.4 Appeal to the Supreme Court [Section 261] .............................................................. 16.19

16.5 Procedure when assessee claims identical question of law

pending before the High Court or Supreme Court [Section 158A] .............................. 16.20

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16.6 Deferment of appeal by revenue when an identical question

of law is pending before High Court or Supreme Court [Section 158AB] .................... 16.21
16.7 Revision of orders [Sections 263 and 264] ................................................................ 16.23
16.8 Monetary limits for regulating filing of appeals by
Income Tax Authorities [Section 268A] ..................................................................... 16.29
16.9 Doctrine of partial merger and doctrine of total merger .............................................. 16.34
Significant Select Cases ..................................................................................................... 16.36
Test Your Knowledge .......................................................................................................... 16.49

CHAPTER 17: DISPUTE RESOLUTION

Learning Outcomes ................................................................................................................ 17.1

Contents:

17.1 Introduction .......................................................................................................................... 17.2

17.2 Dispute Resolution Committee [Section 245MA] .................................................................. 17.3
Test Your Knowledge .......................................................................................................... 17.14

CHAPTER 18: MISCELLANEOUS PROVISIONS

Learning Outcomes ................................................................................................................ 18.1

Contents:
18.1 Mode of taking or accepting certain loans,
deposits and specified sum [Section 269SS] ............................................................... 18.3
18.2 Mode of undertaking transactions [Section 269ST] ..................................................... 18.5
18.3 Facility for accepting payment through
prescribed electronic modes [Section 269SU] ............................................................. 18.7
18.4 Mode of repayment of certain loans or deposits [Section 269T] ................................... 18.8
18.5 Transfers to defraud revenue void [Section 281] ....................................................... 18.10
18.6 Provisional attachment to protect the interest of the revenue [Section 281B] ............. 18.11
18.7 Service of Notice [Sections 282, 283 & 284] ............................................................. 18.14

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18.8 Authentication of notices and other documents [Section 282A] .................................. 18.15
18.9 Submission of statements by procedures of Cinematographic
films or persons engaged in specified activity [Section 285B] .................................... 18.16
18.10 Obligation to furnish Statement of Financial
Transaction or Reportable Account [Section 285BA] ................................................. 18.17
18.11 Obligation to furnish information on
transaction of Crypto-Assets [Section 285BA] ........................................................... 18.26
18.12 Annual Information Statement [Section 285BB] ......................................................... 18.27

18.13 Publication of Information [Section 287] .................................................................... 18.28

18.14 Appearance by Registered Valuers [Section 287A] ................................................... 18.29

18.15 Appearance by authorized representative [Section 288] ............................................ 18.29

18.16 Power to tender immunity from prosecution [Section 291] ......................................... 18.35

18.17 Cognizance of offences and Bar of suits in Civil Courts [Section 292 and 293] .......... 18.35

18.18 Certain laws not to apply [Section 292A]................................................................... 18.36

18.19 Return of income etc. not to become invalid [Section 292B] ...................................... 18.36

18.20 Notice deemed to be valid in certain circumstances [Section 292BB] ........................ 18.36

18.21 Presumption as to assets, books of account, etc. [Section 292C] .............................. 18.37

18.22 Authority empowered to grant an approval under

the Income-tax Act, 1961 deemed to have power to
withdraw the approval granted [Section 293C] .......................................................... 18.39

18.23 Act to have effect pending legislative provision for charge of tax [Section 294] .......... 18.39

18.24 Rules [Section 295 and 296] .................................................................................... 18.39

18.25 Schedules to the Income-tax Act, 1961 ..................................................................... 18.40

Significant Select Cases ..................................................................................................... 18.41

Test Your Knowledge ......................................................................................................... 18.45

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CHAPTER 19: PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES

Learning Outcomes ................................................................................................................ 19.1

Contents:

19.1 Introduction ............................................................................................................... 19.2

19.2 Penal provisions under the Income-tax Act, 1961 ....................................................... 19.3
19.3 Offences and Prosecution under the Income-tax Act, 1961 ....................................... 19.35
19.4 Overview of the Black Money & Imposition of tax law ................................................ 19.57
Significant Select Cases ..................................................................................................... 19.77

Test Your Knowledge .......................................................................................................... 19.82

CHAPTER 20: TAX AUDIT AND ETHICAL COMPLIANCES

Learning Outcomes ................................................................................................................ 20.1

Contents:

20.1 Introduction ............................................................................................................... 20.2

20.2 Tax Audit under section 44AB .................................................................................... 20.5
20.3 Form 3CA & Form 3CB ............................................................................................ 20.10
20.4 Form 3CD – Statement of particulars required to be
furnished under section 44AB .................................................................................. 20.12
20.5 Summary of provisions in respect of which information
to be furnished in Form 3CD .................................................................................... 20.79
20.6 Penalty for failure to furnish Tax Audit Report [Section 271B] ................................... 20.85
Case Studies ....................................................................................................................... 20.86

Test Your Knowledge ........................................................................................................ 20.102

Q & A – Significant Select Cases ........................................................................................ 1 – 13

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CHAPTER 13
7
DEDUCTION, COLLECTION
AND RECOVERY OF TAX

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ examine the provisions relating to deduction and collection of tax at source to
determine whether tax needs to be deducted/collected at source;
❑ compute the amount of tax to be deducted/collected at source;
❑ analyse and apply the provisions relating to deduction and collection of tax at source
to address related issues;
❑ examine the provisions relating to advance tax obligations, the instalments and due
dates, and interest and penal consequences of non-payment or delayed payment of
advance tax; analyse and apply such provisions to determine the quantum of
advance tax payment and interest liability, if any, and address related issues ;
❑ examine the provisions relating to chargeability of interest for defaults in furnishing
return of income, for non-payment of advance tax and deferral of advance tax;
analyse and apply such provisions to compute interest and address related issues;
❑ analyse and apply the provisions relating to refunds to compute the refund due and
address related issues.

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 13.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Levy of
Tax Tax Advance Collection Refunds
interest
Deduction Collection Payment and Levy of fee and
[Sections
at source at source of tax Recovery [Sections Interest
234A,
[Sections [Sections [Sections [Sections 234E and [Sections
234B,
192 to 206C to 207 to 220 to 234H] 237 to
234C and
206AB] 206CCA] 219] 232] 245]
234D]

Note – Provisions which are specifically related to non-residents and REITs and Invits are
discussed in Chapter 21: Non-resident Taxation and Chapter 10: Assessment of Trusts and
Institutions, Political Parties and Other Special Entities, respectively.

13.1 DEDUCTION AT SOURCE AND ADVANCE PAYMENT

[SECTION 190]
The total income of an assessee for the previous year is taxable in the relevant assessment year.
For example, the total income for the P.Y. 2025-26 is taxable in the A.Y. 2026-27. However, income-
tax is recovered from the assessee in the previous year itself through –

(1) Tax deduction at source (TDS)

(2) Tax collection at source (TCS)
(3) Payment of advance tax

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.3

Another mode of recovery of tax is from the employer through tax paid by him under section 192(1A)
on the non-monetary perquisites provided to the employee.
These taxes are deductible from the total tax due from the assessee. The assessee, while filing his
return of income, has to pay self-assessment tax under section 140A, if tax is due on the total income
as per his return of income after adjusting, TDS, TCS, relief of tax claimed under section 89, relief
of tax claimed under section 90, 90A or 91 on account of tax paid in a country outside India or
specified territory outside India, tax credit claimed to be set off in accordance with the provisions of
section 115JAA or section 115JD, any tax or interest payable according to the provisions of section
191(2) and advance tax.

13.2 DIRECT PAYMENT [SECTION 191]

(1) Direct payment of tax [Section 191(1)]- Section 191 provides that in the following cases,
tax is payable by the assessee directly –
(i) in the case of income in respect of which tax is not required to be deducted at source;
and
(ii) income in respect of which tax is liable to be deducted but is not actually deducted.
In view of this provision, the proceedings for recovery of tax
necessarily had to be taken against the assessee whose tax
was liable to be deducted, but not deducted.
In order to overcome this difficulty, Explanation to this section
provides that if any person, including the principal officer of a company
(i) who is required to deduct tax at source; or
(ii) an employer paying tax on non-monetary perquisites under section 192(1A),
does not deduct or after deducting fails to pay such tax, or does not pay, the whole or part of
the tax, then, such person shall be deemed to be an assessee-in-default.
However, if the assessee himself has paid the tax, this provision will not apply.
(2) Direct payment of tax, where income of the assessee includes value of specified
security or sweat equity shares allotted or transferred free of cost or at a concessional
rate to the assessee by an employer being an eligible start-up [Section 191(2)] – In a
case where the income of the assessee includes the value of any specified security or sweat
equity shares allotted or transferred, directly or indirectly, by the current employer, being an

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eligible start-up referred to in section 80-IAC, free of cost or

at concessional rate to the assessee, the income-tax on such
income has to be paid by the assessee within 14 days from
the earliest of the following dates -
- after the expiry of 48 months from the end of the
relevant assessment year; or
- from the date of the sale of such specified security or
sweat equity share by the assessee; or

- from the date of the assessee ceasing to be the employee of the employer who allotted
or transferred him such specified security or sweat equity shares.

13.3 DEDUCTION OF TAX AT SOURCE

13.3.1 Salary [Section 192]
(1) Applicability of TDS under section 192
This section casts an obligation on every person responsible
for paying any income chargeable to tax under the head
‘Salaries’ to deduct income-tax at the time of payment on the
amount payable.
(2) Manner of deduction of tax

(i) Such income-tax has to be calculated at the average rate of income-tax computed on
the basis of the rates in force for the relevant financial year in which the payment is
made, on the estimated total income of the assessee where the employee intimates to
the employer his intent to exercise the option of shifting out of the default tax regime
under section 115BAC.
Note - The liability to deduct tax at source in the case of salaries arises only at the
time of payment.
(ii) Average rate of income-tax means the rate arrived at by dividing the amount of income-
tax calculated on the total income, by such total income.
(iii) The income-tax in respect of the total income of an employee would be computed at
the rates provided in section 115BAC, subject to certain conditions, including the

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condition that the employee does not avail of specified exemptions and deductions.
The tax regime provided in section 115BAC is the default tax regime applicable , inter
alia, to an individual.
However, under section 115BAC(6), an employee may exercise an option to opt out
of this tax regime.
(iv) A deductor, being an employer, has to seek information from each of its employees
having income under section 192 regarding their intended tax regime and each such
employee shall intimate the same to the deductor, being his employer, regarding his
intended tax regime for each year and upon intimation, the deductor shall compute his
total income, and deduct tax at source thereon according to the option exercised.
If intimation is not made by the employee, it shall be presumed that the employee
continues to be in the default tax regime and has not exercised the option to opt out
of the new tax regime. Accordingly, in such a case, the employer shall deduct tax at
source, on income under section 192, in accordance with the rates provided under
section 115BAC(1A).
It is also clarified that the intimation would not amount to exercising option under
section 115BAC(6) and the person shall be required to do so separately in accordance
with the provisions of that section [Circular No. 4/2023 dated 5.4.2023].
(v) The concept of payment of tax on non-monetary perquisites has been provided in
sections 192(1A) and (1B). These sections provide that the employer may pay this tax,
at his option, in lieu of deduction of tax at source from salary payable to the employee.
Such tax will have to be worked out at the average rate applicable to aggregate salary
income of the employee and payment of tax will have to be made every month along
with tax deducted at source on monetary payment of salary, allowances, etc.
(vi) An employer, being an eligible start-up referred to in section 80-IAC, responsible for
paying any income to the assessee by way of perquisite being any specified security
or sweat equity shares allotted or transferred, directly or indirectly, free of cost or at
concessional rate to the assessee, has to deduct or pay, as the case may be, tax on
the value of such perquisite provided to its employee within 14 days from the earliest
of the following dates -
- after the expiry of 48 months from the end of the relevant assessment year; or
- from the date of the sale of such specified security or sweat equity share by the
assessee; or

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- from the date of the assessee ceasing to be the employee of the employer who
allotted such shares
Such tax has to deducted or paid on the basis of rates in force for the financial year in
which the said specified security or sweat equity share is allotted or transferred.
(vii) In cases where an assessee is simultaneously employed under more than one
employer or the assessee takes up a job with another employer during the financial
year after his resignation or retirement from the services of the former employer, he
may furnish the details of the income under the head “Salaries” due or received by him
from the other employer, the tax deducted therefrom and such other particulars to his
current employer. Thereupon, the subsequent employer should take such information
into consideration and then deduct the tax remaining payable in respect of the
employee’s remuneration from both the employers put together for the relevant
financial year.
(viii) For purposes of deduction of tax out of salaries payable in a foreign currency, the
value of salaries in terms of rupees should be calculated at the prescribed rate of
exchange as specified in Rule 26 of the Income-tax Rules, 1962.
(ix) In respect of salary payments to employees of Government or to employees of
companies, co-operative societies, local authorities, universities, institutions,
associations or bodies, deduction of tax at source should be made after allowing relief
under section 89, where eligible.
(x) A tax payer having salary income in addition to other income chargeable to tax for that
financial year, may send to the employer, the following particulars of:
(a) such other income and particulars of any tax deducted under any other
provision;
(b) loss, if any, under the head ‘Income from house property’, if the assessee
intimated to the employer his intent to exercise the option of shifting out of the
default tax regime provided under section 115BAC(1A).

The employer shall take the above particulars into account while calculating tax
deductible at source.
(xi) An employee can inform his employer for a financial year, the details of the following:

(a) such other income chargeable to tax (not being a loss under any such head );

(b) any tax deducted or collected under any other provision of the Act; and

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.7

(c) loss, if any, under the head “Income from house property” if the assessee
intimated to the employer his intent to exercise the option of shifting out of the
default tax regime provided under section 115BAC(1A),

in prescribed form and manner and thereupon the person responsible to deduct tax
shall take into account the above particulars while calculating tax deductible at source.

However, it has to be noted that on account of submission of the above details, the
tax deducted at source on salaries should not be reduced except with respect to loss
from house property (allowable to the extent of ` 2,00,000) and tax deducted at source
and tax collected at source.
(3) Furnishing of statement of particulars of perquisites or profits in lieu of salary by
employer to employee

Section 192(2C) provides that the employer shall furnish to the employee, a statement in
Form No. 12BA giving correct and complete particulars of perquisites or profits in lieu of salary
provided to him and the value thereof. The statement shall be in the prescribed form and
manner. This requirement is applicable only where the salary paid/payable to an employee
exceeds ` 1,50,000. For other employees, the particulars of perquisites/profits in lieu of
salary shall be given in Form 16 itself.

(4) Circular issued by CBDT

Every year, the CBDT issues a circular giving details and direction to all employers for the
purpose of deduction of tax from salaries payable to the employees during the relevant
financial year. These instructions should be followed.
(5) Requirement to obtain evidence/ proof/ particulars of claims from the employee by the
employer
Section 192(2D) casts responsibility on the person
responsible for paying any income chargeable under the
head “Salaries” to obtain from the assessee, the evidence
or proof or particulars of prescribed claims (including
claim for set-off of loss) under the provisions of the Act in
the prescribed form and manner, for the purposes of –

(1) estimating income of the assessee; or

(2) computing tax deductible under section 192(1).

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 13.8 DIRECT TAX LAWS

In case an employee has intimated his employer of his intent to exercise the option of shifting
out of the default tax regime provided under section 115BAC(1A), Rule 26C requires
furnishing of evidence of the following claims by him to the person responsib le for making
payment under section 192(1) in Form No.12BB for the purpose of estimating his income or
computing the amount of tax to be deducted at source:
S. No. Nature of Claim Evidence or particulars
1. House Rent Allowance Name, address and PAN of the landlord(s)
where the aggregate rent paid during the
previous year exceeds ` 1 lakh.
2. Leave Travel Concession or Evidence of expenditure
Assistance
3. Deduction of interest under the Name, address and PAN of the lender
head “Income from house
property”
4. Deduction under Chapter VI-A Evidence of investment or expenditure.

ILLUSTRATION 1
LL Limited paid leave travel facility to its employees and considered exemption under section 10(5),
based on the self-declaration furnished by the employees, who have exercised option to opt out of
new tax regime under section 115BAC. The Assessing Officer held that the company as an employer
ought to have verified the genuineness of the claim of exemption by obtaining from them, the proof
of actual expenditure incurred by availing leave travel facility. Accordingly, the Assessing Off icer
treated the assessee company as assessee in default. Decide the correctness of action.
SOLUTION
Section 192 casts liability on the employer to deduct tax at source from the salary paid to its
employees.
In this case, the employer has paid leave travel concession/facility to its employees and the said
concession/ facility would be eligible for exemption subject to the conditions laid down in section
10(5) read with Rule 2B of the Income-tax Rules, 1962.
Section 192(2D) casts responsibility on the person responsible for paying any income chargeable
under the head ‘Salaries’ to obtain from the assessee, the evidence or proof or particulars of prescribed
claims under the provisions of the Act in the prescribed form and manner for the purposes of –
(1) estimating income of the assesses; or
(2) computing tax deductible under section 192(1).

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.9

Rule 26C of the Income-tax Rules, 1962 mandates a salaried assessee claiming, inter alia, leave
travel concession or assistance to furnish evidence of expenditure incurred in relation thereto to the
person responsible for making such for payment under section 192(1), for the purpose of estimating
his income for computing the tax deductible under section 192.
In the given case, LL Limited paid leave travel concession to its employees and considered for
exemption on the basis of mere self-declaration, instead of verifying and obtaining the evidence/
proof of actual expenditure. Thus, the action of the Assessing Officer is correct in law.

13.3.2 Premature withdrawal from Employees Provident Fund

[Section 192A]
(1) Compliance with Rule 9 of Part A of the Fourth Schedule: Certain Concerns
(i) Under the Employees’ Provident Fund and
Miscellaneous Provisions Act, 1952 (EPF & MP
Act, 1952), certain specified employers are
required to comply with the Employees’ Provident
Fund Scheme, 1952 (EPFS). However, these employers are also permitted to
establish and manage their own private provident fund (PF) scheme subject to the
fulfillment of certain conditions.

(ii) The provident funds established under a scheme framed under EPF & MP Act, 1952 or
Provident Fund exempted under section 17 of the said Act and recognised under the
Income-tax Act, 1961 are termed as Recognised Provident fund (RPF) under the Act.

(iii) Part A of the Fourth Schedule to the Income-tax Act, 1961 contains the provisions
relating to RPFs. Under the existing provisions of Rule 8 of Part A of the Fourth
Schedule, the withdrawal of accumulated balance by an employee from the RPF is
exempt from taxation.
(iv) For the purpose of discouraging pre-mature withdrawal and promoting long term
savings, if the employee makes withdrawal before continuous service of five years
(other than the cases of termination due to ill health, contraction or discontinuance of
business, cessation of employment etc.) and does not opt for transfer of accumulated
balance to the new employer, the withdrawal would be subject to tax.

(v) Rule 9 of Part A of the Fourth Schedule provides the manner of computing the tax
liability of the employee in respect of such pre-mature withdrawal. In order to ensure
collection of tax in respect of such pre-mature withdrawals, Rule 10 of Part A of the

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 13.10 DIRECT TAX LAWS

Fourth Schedule casts responsibility on the trustees of the RPF to deduct tax as
computed in Rule 9 at the time of payment.
(vi) Rule 9 provides that the tax on the withdrawn amount is required to be calculated by
re-computing the tax liability of the years for which the contribution to RPF has been
made by treating the same as contribution to unrecognized provident fund. The
trustees of private provident fund schemes, are generally a part of the employer group
and hence, have access to or can easily obtain the information regarding taxability of
the employee making pre-mature withdrawal for the purposes of computation of the
amount of tax liability under Rule 9. However, it may not always be possible for the
trustees of EPFS to get the information regarding the taxability of the employee such
as year-wise amount of taxable income and tax payable for the purposes of
computation of the amount of tax liability under Rule 9.
(2) Applicability and Rate of TDS
Section 192A provides for deduction of tax @10% on premature taxable withdrawal from
employees’ provident fund scheme. Accordingly, in a case
where the accumulated balance due to an employee
participating in a recognized provident fund is includible in
his total income owing to the provisions of Rule 8 of Part A of the Fourth Schedule not being
applicable, the trustees of the Employees Provident Fund Scheme, 1952 or any person
authorised under the scheme to make payment of accumulated balance due to empl oyees
are required to deduct income-tax @10%.
(3) Time of tax deduction at source
Tax should be deducted at the time of payment of accumulated balance due to the
employee.
(4) Non-applicability of TDS under section 192A
No tax deduction is to be made under this section, if the amount of such payment or aggregate
amount of such payment to the payee is less than ` 50,000.

ILLUSTRATION 2
Mr. Sharma, an employee of M/s. ABC Ltd. since 10-04-2021, resigned on 31-03-2026 and withdrew
` 60,000 being the balance in his EPF account. Discuss with reasons whether the provisions of
Chapter XVII-B are attracted, and if so, what is the net amount receivable by the payee, Mr. Sharma?

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.11

SOLUTION
As per section 192A, in a case where the accumulated balance due to an employee participating in
a recognized provident fund is includible in his total income owing to the provisions of Rule 8 of Part
A of the Fourth Schedule not being applicable, the trustees of the Employees’ Provident Fund
Scheme, 1952 or any person authorised under the scheme to make payment of accumulated balance
due to employees are required to deduct income-tax@10% at the time of payment of accumulated
balance due to the employee. Tax deduction at source has to be made only if the amount of such
payment or aggregate amount of such payment of the payee is ` 50,000 or more.
Rule 8 of Part A of the Fourth Schedule, inter alia, provides that only if an employee has rendered
continuous service of five years or more with the employer, then accumulated balance in a
recognized provident fund payable to an employee would be excluded from the total income of that
employee.
In the present case, Mr. Sharma has withdrawn an amount exceeding ` 50,000 on his resignation
after rendering a continuous service of four years with M/s. ABC Ltd. Therefore, tax has to be
deducted at source@10% under section 192A on ` 60,000, being the amount withdrawn on his
resignation without rendering continuous service of a period of five years with M/s. ABC Ltd.
The net amount receivable by Mr. Sharma is ` 54,000 [i.e., ` 60,000 – ` 6,000, being tax deducted
at source].

13.3.3 Interest on securities [Section 193]

(1) Person responsible for deduction of tax at source
This section casts responsibility on every person
responsible for paying to a resident any income by way
of interest on securities, being the amount or the
aggregate of amounts exceeding ` 10,000 during
the financial year.
(2) Meaning of interest on securities [Section 2(28B)]
Interest on securities means -

(i) interest on any security of the Central Government or a State Government

(ii) interest on debentures or other securities for money issued by or on behalf of a local
authority or a company or a corporation established by a Central, State or Provincial
Act.

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(3) Rate of TDS

Such person is vested with the responsibility to deduct income-tax at the rates in force from
the amount of interest payable.
The rate at which tax is deductible under section 193 is 10%, both in the case of domestic
companies and resident non-corporate assessees.
(4) Time of tax deduction at source
Tax should be deducted at the time of credit of such income to the account of the payee or
at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode,
whichever is earlier.
Where any income by way of interest on securities is credited to any account in the books of
account of the person liable to pay such income, such crediting is deemed to be credit of such
income to the account of the payee and tax has to be deducted at so urce. The account to
which such interest is credited may be called “Interest Payable account” or “Suspense
account” or by any other name.
(5) Threshold Limit
No tax is required to be deducted if the amount or aggregate of amount of interest is less
than ` 10,000 in a financial year. Prior to F.Y. 2025-26, there was no such threshold limit.
(6) Non-applicability of TDS under section 193
No tax deduction is to be made from any interest payable:
(i) on 4¼% National Defence Bonds
1972, where the bonds are held by an
individual not being a non-resident;

(ii) on 4¼% National Defence Loan, 1968 or 4¾% National Defence Loan, 1972, where
the interest is payable to an individual;
(iii) on National Development Bonds;
(iv) on 7-year National Savings Certificates (IV Issue);

(v) on debentures issued by any institution or authority or any public sector company or
any co-operative society (including a co-operative land mortgage bank or a co-
operative land development bank), as notified by the Central Government;

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.13

Accordingly, the Central Government has, vide Notification No. 27 & 28/2018,
dated 18-06-2018, notified-
(i) “Power Finance Corporation Limited 54EC Capital Gains Bond” issued by
Power Finance Corporation Limited {PFCL} and
(ii) “Indian Railway Finance Corporation Limited 54EC Capital Gains Bond” issued
by Indian Railway Finance Corporation Limited {IRFCL}
Thus, no tax is required to be deducted at source on interest payable on “Power
Finance Corporation Limited 54EC Capital Gains Bond” and “Indian Railway Finance
Corporation Limited 54EC Capital Gains Bond”.
The benefit of this exemption would, however, be admissible in the case of transfer of
such bonds by endorsement or delivery, only if the transferee informs PFCL/IRFCL by
registered post within a period of sixty days of such transfer.

(vi) on 6½% Gold Bonds, 1977 or 7% Gold Bonds, 1980, where the bonds are held by an
individual (other than a non-resident), provided that the holders of the bonds make a
written declaration that the total nominal value of the bonds held by him or on his
behalf did not in either case exceed ` 10,000 at any time during the period to which
the interest relates;

(vii) on any security of the Central Government or a State Government;

Note – It may be noted that tax has to be deducted at source in respect of interest
payable on 8% Savings (Taxable) Bonds, 2003, or 7.75% Savings (Taxable) Bonds,
2018 or Floating Rate Savings Bonds, 2020 (Taxable), or any other notified security
of the Central Government or State Government if such interest payable exceeds
` 10,000 during the financial year;

(viii) on securities to LIC, GIC, subsidiaries of GIC or any other insurer, provided –

(a) the securities are owned by them or

(b) they have full beneficial interest in such securities.

(ix) to a business trust by a special purpose vehicle on any security.

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13.3.4 Dividend [Section 194]

(1) Applicability of TDS under section 194

The principal officer of a domestic company is required to

deduct tax on dividend distributed or paid by it to its
resident shareholders.

The provisions of tax deduction at source under section 194, therefore, applies only to
dividend distributed or paid to resident shareholders.

(2) Rate of TDS

The rate of deduction of tax in respect of such dividend is 10%.

(3) Time of tax deduction at source

The deduction of tax has to be made before making any payment by any mode in respect of
any dividend or before making any distribution or payment to a resident shareholder of any
amount deemed as dividend under section 2(22)(a)/(b)/(c)/(d)/(e)/(f).

(4) Non-applicability of TDS under section194

(i) No tax is to be deducted in case of a shareholder, being an individual, where -

(a) the dividend is paid by any mode other than

cash; and

(b) the amount of such dividend or aggregate of dividend distributed or paid or

likely to be distributed or paid during the financial year by the company to such
shareholder does not exceed ` 10,000.

(ii) The TDS provisions will not apply to such dividend credited or paid to

- LIC, GIC, subsidiaries of GIC or any other insurer provided the shares are
owned by them, or they have full beneficial interest in such shares

- a business trust by a special purpose vehicle

- any other person as may be notified by the Central Government.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.15

No deduction of tax at source under section 194 on dividend paid by any unit of an
IFSC, primarily engaged in the business of leasing of an aircraft to a company, being
a Unit of an IFSC primarily engaged in the business of leasing of an aircraft
[Notification No. 52/2023 dated 20.07.2023]
In exercise of the power provided under section 197A(1F), the Central Government has,
vide this notification, notified that, no tax is required to be deducted under section 194 from
dividend paid by any unit of an IFSC, primarily engaged in the business of leasing of an
aircraft (payer) to a company, being a Unit of an IFSC primarily engaged in the business
of leasing of an aircraft (payee) subject to the following:
(i) The payee has to furnish and verified a statement-cum-declaration to the payer giving
details of previous year relevant to the assessment year in which the dividend income
eligible for exemption under section 10(34B) is payable.
(ii) The payer would not deduct tax on payment made or credited to the recipient of such
dividend (payee) after the date of receipt of copy of statement-cum-declaration from
payee and furnish the particulars of all the payments made to the recipient of such
dividend on which tax has not been deducted in the statement of deduction of tax
under section 200(3) read with the Rule 31A.

13.3.5 Interest other than interest on securities [Section 194A]

(1) Applicability of TDS under section 194A
This section applies only to interest, other than “interest
on securities”, credited or paid by assessees other than
individuals or Hindu undivided family. However, an
individual or Hindu undivided family whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed ` 1 crore in case of business and ` 50 lakhs
in case of profession during the immediately preceding financial year is liable to deduct tax
at source under this section.
These provisions apply only to interest paid or credited to residents.

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(2) Time of tax deduction at source

The deduction of tax must be made at the time of crediting such interest to the payee or at
the time of its payment in cash or by any other mode, whichever is earlier.
Where any such interest is credited to any account in the books of account of the person
liable to pay such income, such crediting is deemed to be credit of such income to the account
of the payee and the tax has to be deducted at source. The account to which such interest is
credited may be called “Interest Payable account” or “Suspense account” or by any other
name.

Clarification regarding deduction of tax at source on payment of interest on time

deposits under section 194A by banks following Core-branch Banking Solutions
(CBS) software
The CBDT has, vide Circular No.3/2010 dated 2.3.2010 clarified that Explanation to
section 194A is not meant to apply in cases of banks where credit is made to provisioning
account on daily/monthly basis for the purpose of macro monitoring only by the use of
CBS software. It has been further clarified that since no constructive credit to the
depositor’s/ payee’s account takes place while calculating interest on time deposits on
daily or monthly basis in the CBS software used by banks, tax need not be deduct ed at
source on such provisioning of interest by banks for the purposes of macro monitoring
only. In such cases, tax shall be deducted at source on accrual of interest at the end of
financial year or at periodic intervals as per practice of the bank or as per the depositor's/
payee's requirement or on maturity or on encashment of time deposits, whichever event
takes place earlier, whenever the aggregate of amounts of interest income credited or
paid or likely to be credited or paid during the financial year by the banks exceeds the
limits specified in section 194A.
Note - The time for making the payment of tax deducted at source would reckon from the
date of credit of interest made constructively to the account of the payee.
(3) Rate of TDS
The rate at which the deduction is to be made is given in Part II of the First Schedule to the
Annual Finance Act. The rate at which tax is to be
deducted is 10% both in the case of resident non-
corporate assessees and domestic companies.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.17

(4) Non-applicability of TDS under section 194A

No deduction of tax shall be made in the following cases:
(a) If the aggregate amount of interest paid or credited during the financial year does not
exceed ` 10,000.
This limit is ` 50,000 where the payer is a –
(i) banking company;
(ii) a co-operative society engaged in banking business; and
(iii) post office and interest is credited or paid
in respect of any deposit under notified
schemes (“Senior Citizens Saving
Scheme, 2019” and “Mahila Samman Savings Certificate, 2023” have been
notified by the Central Government for this purpose).
“Mahila Samman Savings Certificate, 2023” is a one-time scheme available for
two years, i.e., from 1 st April, 2023 to 31 st March, 2025. It offers a maximum
deposit facility of upto ` 2 lakh in the name of a women or a girl for 2 years at
a fixed interest rate of 7.5% p.a., compounded quarterly.
Consequently, no tax under section 194A would be deductible by the post office
on interest paid or credited under this scheme since the amount of interest
would not exceed ` 50,000.
In respect of (i), (ii) and (iii) above, the limit is ` 1,00,000, in case of payee, being a
senior citizen.
The limit will be calculated with respect to income credited or paid by a branch of a
banking company or a co-operative society or a public company in case of:
(i) time deposits with a banking company
(ii) time deposits with a co-operative society carrying on the business of banking;
and
(iii) deposits with housing finance companies, provided:
- they are public companies formed and registered in India
- their main object is to carry on the business of providing long-term
finance for construction or purchase of houses in India for residential
purposes
- they are eligible for deduction under section 36(1)(viii).

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 13.18 DIRECT TAX LAWS

The threshold limit will be reckoned with reference to the total interest credited or paid
by the banking company or the co-operative society or the public company, as the
case may be, (and not with reference to each branch), where such banking company
or co-operative society or public company has adopted core banking solutions.
(b) Interest paid or credited by a firm to any of its partners;
(c) Interest paid or credited in respect of deposits under any scheme framed by the
Central Government and notified by it in this behalf;
(d) Interest income credited or paid in respect of deposits (other than time deposits made
on or after 1.7.1995) with a banking company to which the Banking Regulation Act,
1949 applies; or
(e) Income paid or credited by a co-operative society (other than a co-operative bank) to
a member thereof or to such income credited or paid by a co-operative society to any
other co-operative society;
(f) Interest income credited or paid in respect of -
(i) deposits with primary agricultural credit society or a primary credit society or a
co-operative land mortgage bank or a co-operative land development bank;
(ii) deposit (other than time deposits made on or after 1.7.1995) with a co-operative
society [other than cooperative society or bank referred to in (i)] engaged in
carrying on the business of banking.
From a combined reading of (e) and (f), it can be inferred that a co-operative bank
other than mentioned in (i) above is required to deduct tax at source on payment of
interest on time deposit. However, it is not required to deduct tax from the payment of
interest on time deposit, to a depositor, being a co-operative society.
However, a cooperative society referred to in (e) or (f) is liable to deduct tax if –
(i) the total sales, gross receipts or turnover of the co-operative society exceeds
` 50 crore during the financial year immediately preceding the financial year in
which interest is credited or paid; and
(ii) the amount of interest or the aggregate amount of interest credited or paid, or
is likely to be credited or paid, during the financial year is more than ` 1,00,000
in case of the payee being a senior citizen and ` 50,000, in any other case.
Thus, such co-operative society is required to deduct tax under section 194A on
interest credited or paid by it –
(a) to its member or to any other co-operative society; or

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.19

(b) in respect of deposits with a primary agricultural credit society or a primary

credit society or a co-operative land mortgage bank or a co-operative land
development bank or
(c) in respect of deposits with a co-operative bank other than a co-operative society
or bank, engaged in carrying on the business of banking
(g) Interest income credited or paid by the Central Government under any provisions of
the Income-tax Act, 1961.
(h) Interest paid or credited to the following entities:
(i) banking companies, or co-operative societies engaged in the business of
banking, including co-operative land mortgage banks;
(ii) financial corporations established under any Central, State or Provincial Act.
(iii) the Life Insurance Corporation of India.
(iv) companies and co-operative societies carrying on the business of insurance.
(v) the Unit Trust of India; and
(vi) notified institution, association, body or class of institutions, associations or
bodies (National Skill Development Fund and Housing and Urban Development
Corporation Ltd. (HUDCO), New Delhi have been notified by the Central
Government for this purpose)
(i) income credited by way of interest on the compensation amount awarded by the Motor
Accidents Claims Tribunal;
(j) income paid by way of interest on the compensation amount awarded by the Motor
Accidents Claims Tribunal where the amount of such income or, as the case may be,
the aggregate of the amounts of such income paid during the financial year does not
exceed ` 50,000.
(k) income paid or payable by an infrastructure capital company or infrastructure capital
fund or infrastructure debt fund or public sector company or scheduled bank in relation
to a zero coupon bond issued on or after 1.6.2005.
(l) income by way of interest paid by special purpose vehicle to business trust under
section 10(23FC)
Notes
(1) The expression “time deposits” [for the purpose of (4)(a), (d) and (f) above] means the
deposits, including recurring deposits, repayable on the expiry of fixed periods.

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(2) Senior citizen means an individual resident in India who is of the age of 60 years or
more at any time during the relevant previous year.
(5) Power to the Central Government to issue notification
The Central Government is empowered to issue notification for non-deduction of tax at source
or deduction of tax at a lower rate, from such payment to such person or class of persons,
specified in that notification.
S.
No.

1. Applicability of provisions for deduction of tax at source under section 194A

on interest on fixed deposit made in the name of the Registrar General of
Court or the depositor of the Fund on directions of Courts [Circular
No.23/2015, dated 28-12-2015]
Section 194A stipulates deduction of tax at source (TDS) on interest other than
interest on securities if the aggregate of amount of such interest credited or paid to
the account of the payee during the financial year exceeds the specified amount.
In the case of UCO Bank in Writ Petition No. 3563 of 2012 and CM No. 7517/2012
vide judgment dated 11/11/2014, the Hon'ble Delhi High Court has held that the
provisions of section 194A do not apply to fixed deposits made in the name of
Registrar General of the Court on the directions of the Court during the pendency
of proceedings before the Court. In such cases, till the Court passes the appropriate
orders in the matter, it is not known who the beneficiary of the fixed deposits will
be. Amount and year of receipt is also unascertainable. The Delhi High Court, thus,
held that the person who is ultimately granted the funds would be determined by
orders that are passed subsequently. At that stage, undisputedly, tax would be
required to be deducted at source to the credit of the recipient. The High Court has
also quashed Circular No.8/2011.
The CBDT has accepted the aforesaid judgment. Accordingly, it is clarified that
interest on FDRs made in the name of Registrar General of the Court or the
depositor of the fund on the directions of the Court, will not be subject to TDS till
the matter is decided by the Court. However, once the Court decides the ownership
of the money lying in the fixed deposit, the provisions of section 194A will apply to
the recipient of the income.
2. No deduction of tax at source 194A on payment made to a member of
Schedule Tribe referred u/s 10(26) by a Scheduled Bank [Notification No.
110/2021, dated 17.09.2021]
In exercise of the power provided under section 197A(1F), the Central Government
notified that no tax is required to be deducted on the following payment under
section 194A, namely payment in the nature of interest, other than interest on
securities, made by a Scheduled Bank located in a specified area to a member of
Scheduled Tribe residing in any specified area as referred to in section 10(26)

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[Refer Chapter 3 in Module 1 for detail regarding specified area], subject to the
following conditions:
(i) the payer satisfies itself that the receiver is a member of Scheduled Tribe
residing in any specified area, and the payment as referred above is accruing
or arising to the receiver as referred to in section 10(26), during the previous
year relevant for the assessment year in which the payment is made, by
obtaining necessary documentary evidences in support of the same;
(ii) the payer reports the above payment in the statements of deduction of tax as
referred to in section 200(3)
(iii) the payment made or aggregate of payments made during the previous year
does not exceed ` 20 lakh.
3. Deduction of tax at source on interest income accrued to minor child, where
both the parents have deceased [Notification No. 05/2017, dated 29.05.2017]
Under Rule 31A(5) of the Income-tax Rules, 1962, the Director General of Income-
tax (Systems) is authorized to specify the procedures, formats and standards for
the purposes of furnishing and verification of, inter alia, the statements and shall be
responsible for the day-to-day administration in relation to furnishing and
verification of the statements in the manner so specified.
The Principal Director General of Income-tax (Systems) has, in exercise of the
powers delegated by the CBDT under Rule 31A(5), specified that in case of minors
where both the parents have deceased, TDS on the interest income accrued to the
minor is required to be deducted and reported against PAN of the minor child unless
a declaration is filed under Rule 37BA(2) that credit for tax deducted has to be given
to another person.
4. Deduction of tax at source on interest on deposits made under Capital Gains
Accounts Scheme, 1988 where depositor has deceased [Notification No.
08/2017, dated 13.09.2017]
The Principal Director General of Income-tax (Systems) has, in exercise of the
powers delegated by the CBDT under Rule 31A(5), vide this notification, specified
that in case of deposits under the Capital Gains Accounts Scheme, 1988 where the
depositor has deceased:
(i) TDS on the interest income accrued for and upto the period of death of the
depositor is required to be deducted and reported against PAN of the
depositor, and
(ii) TDS on the interest income accrued for the period after the death of the
depositor is required to be deducted and reported against PAN of the legal
heir,
unless a declaration is filed under Rule 37BA(2) that credit for tax deducted has to
be given to another person.

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ILLUSTRATION 3
Examine the TDS implications under section 194A in the cases mentioned hereunder –
(i) On 1.10.2025, Mr. Harish, aged 45 years, made a six-month fixed deposit of ` 12 lakh@9%
p.a. with ABC Co-operative Bank. The fixed deposit matures on 31.3.2026.
(ii) On 1.6.2025, Mr. Ganesh, aged 35 years, made three nine months fixed deposits of ` 3 lakh
each, carrying interest @9% p.a. with Dwarka Branch, Janakpuri Branch and Rohini Branch
of XYZ Bank, a bank which has adopted CBS. The fixed deposits mature on 28.2.202 6.
(iii) On 1.10.2025, Mr. Rajesh, aged 40 years, started a six months recurring deposit of
` 2,00,000 per month @8% p.a. with PQR Bank. The recurring deposit matures on 31.3.202 6.
SOLUTION
(i) ABC Co-operative Bank has to deduct tax at source@10% on the interest of
` 54,000 (9% × ` 12 lakh × ½) under section 194A. The tax deductible at source under
section 194A from such interest is, therefore, ` 5,400.
(ii) XYZ Bank has to deduct tax at source@10% u/s 194A, since the aggregate interest on fixed
deposit with the three branches of the bank is ` 60,750 [3,00,000 × 3 × 9% × 9/12], which
exceeds the threshold limit of ` 50,000. Since XYZ Bank has adopted CBS, the aggregate
interest credited/paid by all branches has to be considered. Since the aggregate interest of
` 60,750 exceeds the threshold limit of ` 50,000, tax has to be deducted @10% u/s 194A.
(iii) No tax has to be deducted under section 194A by PQR Bank on the interest of ` 28,000
falling due on recurring deposit on 31.3.2026 to Mr. Rajesh, since such interest does not
exceed the threshold limit of ` 50,000.
ILLUSTRATION 4
Maya Bank credited ` 73,50,000 towards interest on the deposits in a separate account for macro -
monitoring purposes by using Core-branch Banking Solutions (CBS) software. No tax was deducted
at source in respect of interest on deposits so credited even where the interest in re spect of some
depositors exceeded the limit of ` 50,000.
The Assessing Officer disallowed 30% of interest expenditure, where the interest on time deposits
credited exceeded the limit of ` 50,000 and levied a penalty under section 271C.
Decide the correctness of action of the Assessing Officer.

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SOLUTION
The Explanation to section 194A provides that where any income by way of interest other than
interest on securities is credited to any account, whether called ‘interest payable account’ or
‘suspense account’ or by any other name, in the books of account of the person liable to pay such
income, such crediting shall be deemed to be credit of such income to the account of the payee and
provisions of section 194A, shall, thus, apply.
However, the CBDT has, vide Circular No.3/2010 dated 2.3.2010, clarified that Explanation to
section 194A will not apply in cases of banks where credit is made to provisioning account on
daily/monthly basis for the purpose of macro monitoring only by the use of CBS software.
Since no constructive credit to the depositor's/ payee's account takes place while calculating interest
on daily/monthly basis in the CBS software used by banks, tax need not be deducted at source on
such provisioning of interest by banks for the purposes of macro monitoring only.
In such cases, tax shall be deducted at source on accrual of interest at the end of the financial year
or at periodic intervals as per practice of the bank or as per the depositor's or payee’s requirement
or on maturity or on encashment of time deposit, whichever event takes place earlier and wherever
the aggregate amount of interest income credited or paid or likely to be credited or paid during the
financial year by the bank exceeds the limits specified in section 194A i.e., ` 50,000.
In view of the above, the action of the Assessing Officer in disallowing the interest expenditure
credited in a separate account for macro monitoring purpose is not valid and consequent initiation
of penalty proceedings under section 271C is not tenable in law.

13.3.6 Winnings from lotteries, crossword puzzles, etc. and horse races
[Sections 194B and 194BB]
(1) Rate of tax
Any income by way of winnings from lotteries, crossword
puzzles, card game and other game of any sort, or from
gambling or betting of any form or nature whatsoever,
races including horse races, etc., will be charged to
income-tax at a flat rate of 30% [Section 115BB].

(2) TDS on winning from lotteries, crossword puzzles, etc.

According to the provisions of section 194B, every person responsible for paying to any
person, whether resident or non-resident, any income by way of winnings from lottery or
crossword puzzle or card game and other game of any sort, or from gambling or betting of
any form or nature whatsoever, is required to deduct income-tax therefrom at the rate of 30%

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if the amount of payment in respect of a single transaction exceeds ` 10,000. Winnings

by way of jackpot would also fall within the scope of section 194B.
(3) Cases where winnings are partly in kind and partly in cash
In a case where the winnings are wholly in kind or partly in cash and partly in kind but the
part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the
winnings, the person responsible for paying shall, before releasing the winnings, e nsure that
tax has been paid in respect of the winnings.
The provisions of section 194B are not applicable in respect of winnings from any online
game.
(4) Person responsible for deduction of tax under section 194BB
Section 194BB casts responsibility on the following persons to deduct tax at source -

(i) a bookmaker; or
(ii) a person to whom a license has been granted by the Government under any law for
the time being in force -

(a) for horse racing in any race course; or

(b) for arranging for wagering or betting in any race course.
(5) Threshold limit and rate of TDS under section 194BB
The obligation to deduct tax at source under section 194BB arises when the above mentioned
persons make payment to any person of any income by
way of winnings from any horse race in excess of the
amount of ` 10,000 in a single transaction. The rate
applicable for deduction of tax at source is 30%.

Similarly, in cases where the book-maker or other person responsible for paying the winnings,
credits such winnings and debits the losses to the individual account of the punter, tax has to
be deducted @30% on winnings before set-off of losses. Thereafter, the net amount, after
deduction of tax and losses, has to be paid to the winner.
(6) Meaning of the expression “horse race”
In the context of the provisions of section 194BB, the expression ‘any horse race’ used therein
must be taken to include, wherever the circumstances so necessitate, more than one horse race.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.25

ILLUSTRATION 5
Mr. Govind won the first prize in a lottery ticket, and the prize was a Maruti car worth ` 5 lakhs. What
is the procedure to be adopted before handing over the Maruti Car to Mr. Govind?
SOLUTION
Section 194B provides that the person responsible for paying to any person, any income by way of
winnings from any lottery or crossword puzzle, card game or any other game of any sort and the
amount of winning exceeds ` 10,000 in a single transaction, tax shall be deducted at source @30%.
However, in case where the winning is wholly in kind, the person responsible for paying the prize
shall before releasing the winning, ensure that the tax has been paid in respect of such winning.
The Karnataka High Court, in the case of CIT v. Hindustan Lever Ltd. (2014) 361 ITR 1, has held
that where the winnings are wholly in kind, the responsibility cast under section 194B is to ensure
that the tax is paid by the winner of the prize before the prize is released in his favour. In this regard,
the CBDT Circular No.763 dated 18/2/1998 clarifies that the person responsible for paying the
winnings shall, before releasing such winnings, ensure that the tax is paid by the winner. He can do
so, for example, by collecting from the winner a sum equal to the tax deductible at source on the
winnings in kind, before releasing the winnings. For this purpose, the value of the winnings in kind
shall be taken as the cost incurred by the payer in acquiring the said winnings in kind.

Therefore, in this case, since the entire winning is in kind, it must be ensured that the sum equal to
the tax deductible at source (i.e., ` 1,50,000, being @ 30% of ` 5 lakhs) is paid by Mr. Govind,
before the car is released in his favour. This can be done by collecting ` 1,50,000 from Mr. Govind
before releasing the Maruti car to him and remitting the said sum to the Government account or
verifying the tax payment by the winner and thereafter releasing the prize.

13.3.7 Winnings from online games [Section 194BA]

(1) Applicability of TDS on winnings from online games
Any person responsible for paying to any person (whether
resident or non-resident) any income by way of winnings
from any online game during the financial year shall deduct
income-tax on the net winnings in his user account,
computed in the manner as may be prescribed, at the end
of the financial year at the rates in force, i.e., 30% [Section 194BA(1)]

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(2) TDS on withdrawal during the financial year

However, in a case where there is a withdrawal from user account during the financial
year, the income-tax shall be deducted at the time of such withdrawal on the net winnings
comprised in such withdrawal, as well as on the remaining amount of net winnings in the
user account, computed in the manner as may be prescribed, at the end of the financial
year [Proviso to section 194BA(1)].
(3) Net winnings wholly in kind or partly in cash or partly in kind
Where the net winnings are wholly in kind or partly in cash, and partly in kind, but the part in
cash is not sufficient to meet the liability of deduction of tax in respect of whole of the net
winnings, the person responsible for paying shall, before releasing the winnings, ensure that
tax has been paid in respect of the net winnings.

(4) Meaning of certain terms:

Term Meaning
Computer Computer, computer system, computer network, data, computer
resource data base or software [Section 2(1)(e) of Information Technology
Act, 2000]
Internet The combination of computer facilities and electromagnetic
transmission media, and related equipment and software,
comprising the interconnected worldwide network of computer
networks that transmits information based on a protocol for
controlling such transmission.
Online game A game that is offered on the internet and is accessible by a user
through a computer resource including any telecommunication
device.
Online gaming An intermediary that offers one or more online games.
intermediary
User Any person who accesses or avails any computer resource of an
online gaming intermediary.
User Account Account of a user registered with an online gaming intermediary.

(5) Manner for computation of net winnings

In exercise of powers conferred by section 115BBJ read with

section 194BA, the CBDT has, vide Notification No. 28/2023
dated 22.5.2023 inserted Rule 133 to prescribe the manner for
computation of net winnings:

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.27

Section 115BBJ provides that any income by way of winnings from online games, would be
chargeable to tax @30%. The tax would be calculated on net winnings from such online
games computed in the prescribed manner.
Accordingly, Rule 133 prescribes the following manner for the computation of net innings:
Sub-rule Provision
(1) Computation of net winnings for the previous year:
Net winnings from online games during the previous year, for the purposes
of section 115BBJ, shall be calculated using the following formula, namely -
Net winnings = (A + D) - (B + C)
A = Aggregate amount withdrawn from the user account during the financial
year.
B = Aggregate amount of non-taxable deposit made in the user account by
the assessee during the financial year.
C = Opening balance of the user account at the beginning of the financial
year.
D = Closing balance of the user account at the end of the financial year.
(2) Computation of net winnings at the time of first withdrawal during the
F.Y.
Net winnings comprised in the first withdrawal during the financial year, for
the purposes of section 194BA, shall be calculated using the following
formula -
Net winnings = A - (B + C)
A = Amount withdrawn from the user account.
B = Aggregate amount of non-taxable deposit made in the user account by
the owner of such account during the financial year, till the time of such
withdrawal.
C = Opening balance of the user account at the beginning of the financial
year.
Note - If the sum of amounts B and C is equal to or greater than the amount
A, net winnings would be considered as zero [Sub-rule (3)].
(3) Computation of net winnings at the time of each subsequent withdrawal
Net winnings comprised in each subsequent withdrawal during the financial
year, for the purposes of section 194BA, shall be calculated using the
following formula -
Net winnings = A - (B + C + E)
A = Aggregate amount withdrawn from the user account during the financial
year till the time of subsequent withdrawal including the amount of such
subsequent withdrawal.

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B = Aggregate amount of non-taxable deposit made in the user account by

the owner of such account during the financial year, till the time of such
subsequent withdrawal.
C = Opening balance of the user account at the beginning of the financial
year.
E = Net winnings comprised in the earlier withdrawal or withdrawals
computed under sub-rule (2), or under this sub-rule, during the financial year
till the time of subsequent withdrawal if tax has been deducted in accordance
with the provision of section 194BA on winnings comprised in such
withdrawal or withdrawals.
Note - Net winnings would be zero, if the sum of amounts B, C and E is equal
to or greater than the amount A [Sub-rule (5)]
(4) Computation of net winnings at the end of the financial year:
Net winnings comprised in the user account at the end of the financial year,
for the purposes of section 194BA, shall be calculated using the following
formula, namely -
Net winnings = (A + D) - (B + C + E)
A = Aggregate amount withdrawn from the user account during the financial
year.
B = Aggregate amount of non-taxable deposit made in the user account by
the owner of such account during the financial year.
C = Opening balance of the user account at the beginning of the financial
year.
D = Closing balance of the user account at the end of the financial year.
E = Net winnings comprised in the earlier withdrawal or withdrawals
computed under sub-rule (2), or sub-rule (4), during the financial year if tax
has been deducted in accordance with the provision of section 194BA on
winnings comprised in such withdrawal or withdrawals.
Note - Net winnings would be zero, if the sum of amounts B, C and E is equal
to or greater than the sum of amount A and D [Sub-rule (7)].

Meaning of certain terms:

Term Meaning
Non-taxable deposit The amount deposited by the user in his user account and which
is not taxable.
Taxable deposit Any amount deposited in the user account which is not a non-
taxable deposit and includes any amount paid directly to the user
not through the user account.
Withdrawal Any amount withdrawn by the user from any user account.

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Important points for consideration

User Account: User account shall include every account of
user, by whatever name called, which is registered with the
online gaming intermediary and where any taxable deposit,
non-taxable deposit or the winnings made by the user is credited and withdrawal by the
user is debited.
(a) Multiple user accounts: Whenever there are multiple user accounts of the same
user, each user account shall be considered for the purposes of calculating net
winnings and the deposit, withdrawal or balance in the user account shall mean
aggregate of deposit, withdrawal or balance in all user accounts.
(b) Transfer from one user account to another user account: Whenever there are
multiple user accounts of the same user, transfer from one user account to another
user account, maintained with the same online gaming intermediary, of the same
user shall not be considered as withdrawal or deposit, as the case may be, for the
purposes of deducting tax under section 194BA.
Payment in cash or kind
Whenever there is payment to the user in kind or in cash, or partly in kind and partly in
cash, which is not from the user account, the provisions of this rule shall apply to calculate
net winnings by deeming that the money equivalent to such payment has been deposited
as taxable deposit in the user account and the equivalent amount has been withdrawn
from the user account at the same time and shall accordingly be included in amount A;
Taxable deposit in the form of bonus
- Whenever there is a taxable deposit in the form of bonus, referral bonus,
incentives, promotional money, discount by whatever name called; and such
deposit can only be used for playing the online games and not for withdrawal or
any other purposes, such deposit shall be ignored for the purposes of calculation
of net winnings and shall not be included in amount B or amount C or amount D;
and
- Whenever any bonus, referral bonus, incentives, promotional money, discount, by
whatever name called, is not considered as part of amount B or amount C or
amount D under clause (e) and subsequently, they are recharacterized and allowed
to be withdrawn, they shall be deemed as taxable deposit at the time of such
recharacterization and it shall be deemed that the equivalent amount has been
deposited in the user account at that time.

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(6) Power of CBDT to issue Guidelines [Section 194BA(3)]

If any difficulty arises in giving effect to the provisions of this section, the CBDT may, with the
previous approval of the Central Government, issue guidelines for the purposes of removing
the difficulty.
Every guideline issued by the CBDT shall, as soon as may be after it is issued, be laid before
each House of Parliament, and shall be binding on the income-tax authorities and on the
person liable to deduct income-tax.
Accordingly, the CBDT has, vide Circular No. 5/2023
dated 22.5.2023, issued the following guidelines:
Question 1: There are multiple wallets under one user. How "net winnings" is to be
computed with respect to multiple wallets of one use.
Answer: It has been clarified in the Rule 133 that user account shall include every account
of user, by whatever name called, which is registered with online gaming intermediary and
where any taxable deposit, non-taxable deposit or the winning of the user is credited and
withdrawal by the user is debited. Thus, each wallet which qualifies as a user account shall
be considered as user account for the purposes of computing net winnings. It has further
been clarified in the Rule 133 that whenever there are multiple user accounts of the same
user, each user account shall be considered for the purposes of calculating net winnings. The
deposit, withdrawal or balance in the user account shall mean the aggregate of deposits,
withdrawals or balances in all user accounts.
For illustration, a user has multiple user accounts under one deductor (one TAN). For the
purposes of calculating tax required to be deducted under section 194BA, each of these user
accounts is to be considered. Deposit in any of these user accounts would be considered as
deposit (non-taxable or taxable as per the definition in Rule 133) and withdrawal from any
user accounts would be considered as withdrawal.
Let us suppose that there is a first withdrawal from any of these user accounts. Net winnings
for the purposes of calculating tax required to be deducted under section 194BA shall be
calculated as under
Net winnings = A - (B + C)
A= Amount withdrawn from the user account.
B= Aggregate amount of non-taxable deposit made in the user account by the owner of
such account during the financial year, till the time of such withdrawal.
C= Opening balance of the user account at the beginning of the financial year.

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Here for the purposes of calculating amount B, the non-taxable deposits in all of the user
accounts under that deductor (one TAN) is to be aggregated. Same would apply to calculating
all other amount for calculation under Rule 133.
However, if the one deductor (one TAN) is having multiple platforms and it is not
technologically feasible for him to integrate multiple user accounts across platforms , then he
may, at his option, calculate tax required to be deducted for the purposes of section 194BA
for each platform separately. But even in that case all the user accounts under one user in
one platform need to be considered for the purposes of calculating net winnings in the
formulas provided in Rule 133.
It may also be noted that Rule 133 has also clarified that transfer from one user account to
another user account, maintained with the same online gaming intermediary, of the same
user shall not be considered as withdrawal or deposit, as the case may be. However, if the
deductor is deducting tax under section 194BA for each platform separately, as discussed in
the immediately preceding paragraph, transfer from one user account to another user account
under same online gaming intermediary across platforms shall be considered as withdrawal
or deposit for the purposes of calculation of net winnings under Rule 133.
Question 2: If a user borrows some money and deposits in his user account, will it be
considered taxable deposit or non-taxable deposit?

Answer: For non-taxable deposit it is necessary that the amount deposited by the user is not
taxable, i.e., it is from already taxed income or it is not chargeable to tax. In a case where
user borrows the money and deposit in his user account, it shall be considered as non-taxable
deposit.
Question 3: How will bonus, referral bonus, incentives etc., be treated?
Answer: Bonus, referral bonus, incentives etc, are given by the online game intermediary to
the user. They are to be considered as taxable deposit under Rule 133. The taxable deposit
will increase the balance in user account and is not allowed to be deducted in the calculation
of net winnings, as only non-taxable deposits are allowed to be deducted. Thus, any deposit
in the form of bonus, referral bonus, incentives etc, would form part of net winnings and tax
under section 194BA is liable to be deducted at the time of withdrawal as well as at the end
of the financial year.
Some deposit could be money equivalent too like coins, coupons, vouchers, counters etc. In
such a situation the equivalence in money of such deposit shall be considered as taxable
deposit and would accordingly form part of balance in user account.

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However, it is seen that there is some incentives/bonus which is credited in user account only
for the purposes of playing and they cannot be withdrawn or used for any other purposes.
Rule 133 has provided that such deposit shall be ignored for calculation of net winnings. Thus
they shall not be included in non-taxable deposit and they shall also not be included in
opening balance or closing balance of user account. Thus, to the extent they will not be part
of net winnings. However, person liable to deduct tax under section 194BA must keep
separate accounts of such deposits.
Further, if and when these incentive/bonus are recharacterized and they are allowed to be
withdrawn, they would be treated as taxable deposit at the time when they are
recharacterized. Thus, they will become part of net winnings in the year of recharacterization.
Question 4: At what point we consider that amount has been withdrawn?
Answer: As stated earlier, it has also been clarified in the Rule 133 that transfer from one
user account to another user account, maintained with the same online gaming intermediary,
of the same user shall not be considered as withdrawal or deposit, as the case may be.
However, when the amount is withdrawn from the user account to any other account, it shall
be considered as withdrawal. With respect to deductor, any account of user which is not
registered with the online game intermediary (for which he is a deductor) is an account which
is not a user account and any transfer from user account to such account is a withdrawal.
When in consideration of amount in user account, some coupons etc are issued for purchase
of goods or services, or some item in kind is issued, that will also be considered as withdrawal.
It is the duty of the person who is required to deduct tax at source under section 194BA to
ensure that the tax, as required to be deducted, is deducted at source under section 194BA,
before issuing such coupons or items in kind.
The clarification provided in answer to Question no 1 is also needed to be kept in mind. It has
been clarified that if the deductor is deducting tax under section 194BA for each platform
separately, transfer from one user account to another user account under same online gaming
intermediary across platform shall be considered as withdrawal or deposit for the purposes
of calculation of net winnings under Rule 133.
Question 5: There are a large number of gamers who play with very insignificant
amount and withdraw also very small amount. Deducting tax at source under section
194BA for each insignificant withdrawal would increase compliance for tax deductor.
Can there be relaxation to ease compliance?
Answer: In order to remove difficulty in deducting tax at source under section 194BA for
insignificant withdrawal, it is clarified that tax may not be deducted on withdrawal on
satisfaction of all of the following conditions, namely:-

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(i) net winnings comprised in the amount withdrawn does not exceed ` 100 in a month;
(ii) tax not deducted on account of this concession is deducted at a time when the net
winnings comprised in withdrawal exceeds ` 100 in the same month or subsequent
month or if there is no such withdrawal, at the end of the financial year; and
(iii) the deductor undertakes responsibility of paying the difference if the balance in the
user account at the time of tax deduction under section 194BA is not sufficient to
discharge the tax deduction liability calculated in accordance with Rule 133.
Question 6: When the net winnings is in kind how will tax deduction under section
194BA operate?
Answer: At the outset, it may be clarified that where money in user account is used to buy
an item in kind and given to user then it is net winnings in cash only and the deductor is
required to deduct tax at source under section 194BA accordingly.
However, there could be a situation where the winning of the game is a prize in kind. In that
situation provision of section 194BA(2) will operate.
According to this where the net winnings are wholly in kind or partly in cash, and partly in kind
but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole
of the net winnings. In these situations, the person responsible for paying, shall, before
releasing the winnings, ensure that tax has been paid in respect of the net winnings. In the
above situation, the deductor will release the net winnings in kind after the deductee provides
proof of payment of such tax (e.g., Challan details, etc.).
In the alternative, as an option to remove difficulty if any, the deductor may deduct the tax
under section 194BA and pay to the Government.
Question 7: How will the valuation of winnings in kind required to be carried out?
Answer: The valuation would be based on fair market value of the winnings in kind except in
following cases:-
(i) The online game intermediary has purchased the winnings before providing it to the
user. In that case the purchase price shall be the value for winnings.
(ii) The online game intermediary manufactures such
items given as winnings. In that case, the price
that it charges to its customers for such items shall
be the value for such winnings.

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It is further clarified that GST will not be included for the purposes of valuation of winnings
for TDS under section 194BA.

13.3.8 Payments to contractors and sub-contractors [Section 194C]

(1) Applicability of TDS under section 194C
Section 194C provides for deduction of tax at source from the payment made to resident
contractors and sub-contractors.
Tax has to be deducted at source under
section 194C by any person responsible for
paying any sum to a resident contractor for carrying out any work (including supply of labour
for carrying out any work) in pursuance of a contract between the contractor and the –
(i) the Central Government or any State Government; or
(ii) any local authority; or
(iii) any statutory corporation; or
(iv) any company; or
(v) any co-operative society; or

(vi) any statutory authority dealing with housing accommodation; or

(vii) any society registered under the Societies Registration Act, 1860; or
(viii) any trust; or
(ix) any university established under a Central, State or Provincial Act and an institution
declared to be a university under the UGC Act, 1956; or
(x) any firm; or
(xi) any Government of a foreign State or foreign enterprise or any association or body
established outside India; or
(xii) any person, being an individual, HUF, AOP or BOI, who has total sales, gross receipts
or turnover from the business or profession carried on
by him exceeding ` 1 crore in case of business and
` 50 lakhs in case of profession during the financial
year immediately preceding the financial year in which
such sum is credited or paid to the account of the contractor.

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(2) Time of deduction

Tax has to be deducted at the time of payment of such sum or at the time of credit of such
sum to the account of the contractor, whichever is earlier.
Where any such sum is credited to any account in the books of account of the person liable
to pay such income, such crediting is deemed to be credit of such income to the account of
the payee and the tax has to be deducted at source. The account to which such sum is
credited may be called “Suspense account” or by any other name.
However, no tax has to be deducted at source in respect of payments made by individuals/
HUF to a contractor exclusively for personal purposes.
(3) Rate of TDS
The rate of TDS under section 194C on payments to contractors would be 1%, where the
payee is an individual or HUF and 2% in respect of other payees. The same rates of TDS
would apply for both contractors and sub-contractors.
The applicable rates of TDS under section 194C are as follows –
Payee TDS rate
Individual/HUF contractor/sub-contractor 1%
Other than individual / HUF contractor/sub-contractor 2%
Contractor in transport business (if PAN is furnished) Nil
Sub-contractor in transport business (if PAN is furnished) Nil

(4) Threshold limit for deduction of tax at source under section 194C
No deduction will be required to be made if the consideration for the contract does not exceed
` 30,000. However, to prevent the practice of composite
contracts being split up into contracts valued at less than
` 30,000 to avoid tax deduction, it has been provided that tax
will be required to be deducted at source where the amount credited or paid or likely to be
credited or paid to a contractor or sub-contractor exceeds ` 30,000 in a single payment or
` 1,00,000 in the aggregate during a financial year.
Therefore, even if a single payment to a contractor does not exceed ` 30,000, TDS provisions
under section 194C would be attracted where the aggregate of the amounts of such sums
credited or paid or likely to be credited or paid to the contractor during the financial year
exceeds ` 1,00,000.

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ILLUSTRATION 6
ABC Ltd. makes the following payments to Mr. X, a contractor, for contract work during the
P.Y.2025-26 –
` 20,000 on 1.5.2025
` 25,000 on 1.8.2025
` 28,000 on 1.12.2025
On 1.3.2026, a payment of ` 30,000 is due to Mr. X on account of a contract work.
Discuss whether ABC Ltd. is liable to deduct tax at source under section 194C from payments
made to Mr. X.
SOLUTION
In this case, the individual contract payments made to Mr. X does not exceed ` 30,000.
However, since the aggregate amount paid to Mr. X during the P.Y. 2025-26 exceeds
` 1,00,000 (on account of the last payment of ` 30,000, due on 1.3.2026, taking the total
from ` 73,000 to ` 1,03,000), the TDS provisions under section 194C would get attracted.
Tax has to be deducted @1% on the entire amount of ` 1,03,000 from the last payment of
` 30,000 and the balance of ` 28,970 (i.e., ` 30,000 – ` 1030) has to be paid to Mr. X.
(5) Definition of work
Work includes –
(a) advertising;
(b) broadcasting and telecasting including production of programmes for such
broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(d) catering
(e) manufacturing or supplying a product
according to the requirement or specification of a customer by using material
purchased from such customer or its associate, being a person related to the customer
in such manner as defined u/s 40A(2)(b) (i.e., the customer would be in the place of
assessee; and the associate would be the related person(s) mentioned in that section).
However, “work” shall not include manufacturing or supplying a product according to the
requirement or specification of a customer by using raw material purchased from a person,

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other than such customer or associate of such customer, as such a contract is a contract for
‘sale’. However, this will not be applicable to a contract which does not entail manufacture or
supply of an article or thing (e.g., a construction contract).
It may be noted that the term “work” would include manufacturing or supplying a product
according to the requirement or specification of a customer by using material purchased from
such customer or its associate. In such a case, tax shall be deducted on the invoice value
excluding the value of material purchased from such customer or its associate, if such value
is mentioned separately in the invoice. Where the material component has not been
separately mentioned in the invoice, tax shall be deducted on the whole of the invoice value.
Further, it is clarified that work shall not include any sum referred to in section 194J(1).
(6) Non-applicability of TDS under section194C

No deduction is required to be made from the sum credited or paid or likely to be credited or
paid during the previous year to the account of a contractor, during the course of the business
of plying, hiring or leasing goods carriages, if he furnishes his PAN to the deductor.

In order to convey the true intent of law, it has been

clarified that this relaxation from the requirement to
deduct tax at source shall only be applicable to the
payment in the nature of transport charges (whether paid by a person engaged in the business
of transport or otherwise) made to a contractor fulfils the following three conditions cumulatively-

is engaged in the business

of plying, hiring or leasing
goods carriages

owns ten or less goods has furnished a

carriages at any time declaration to this effect
during the previous year along with his PAN
Exemption
u/s 194C(6)

Meaning of “Goods carriage”:

“Goods carriage” means -
(i) any motor vehicle constructed or adapted for use solely for the carriage of goods; or
(ii) any motor vehicle not so constructed or adapted, when used for the carriage of goods.

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The term “motor vehicle” does not include vehicles having less than four wheels and with
engine capacity not exceeding 25cc as well as vehicles running on rails or vehicles adapted
for use in a factory or in enclosed premises.
(7) Important points
(i) The deduction of income-tax at source from payments made to non-resident
contractors will be governed by the provisions of section 195.
(ii) The deduction of income-tax will be made from sums paid for carrying out any work or
for supplying labour for carrying out any work. In other words, the section will apply
only in relation to ‘works contracts’ and ‘labour contracts’ and will not cover cont racts
for the sale of goods.
(iii) Contracts for rendering professional services by lawyers, physicians, surgeons,
engineers, accountants, architects, consultants, etc., cannot be regarded as contracts
for carrying out any “work” and, accordingly, no deduction of income-tax is to be made
from payments relating to such contracts under this section. Separate provisions for
fees for professional services have been made under section 194J.

S. No.

1. Deduction of tax at source on payment of gas transportation charges

by the purchaser of natural gas to the seller of gas [Circular No.
9/2012 dated 17.10.2012]
In case the Owner/Seller of the natural gas sells as well as transports the
gas to the purchaser till the point of delivery, where the ownership of gas
to the purchaser is simultaneously transferred, the manner of raising the
sale bill (whether the transportation charges are embedded in the cost of
gas or shown separately) does not alter the basic nature of such contract
which remains essentially a ‘contract for sale’ and not a ‘works contract’
as envisaged in section 194C. Therefore, in such circumstances, the
provisions of Chapter XVII-B are not applicable to the component of Gas
Transportation Charges paid by the purchaser to the Owner/Seller of the
gas. Further, the use of different modes of transportation of gas by Owner/
Seller will not alter the position.
However, transportation charges paid to a third-party transporter of gas,
either by the Owner/Seller of the gas or purchaser of the gas or any other
person, shall continue to be governed by the appropriate provisions of the
Act and tax shall be deductible at source on such payment to the third
party at the applicable rates.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.39

2. Applicability of TDS provisions on payments by broadcasters or

Television Channels to production houses for production of content
or programme for telecasting [Circular No. 04/2016, dated 29-2-2016]
The issue under consideration is whether payments made by the
broadcaster/telecaster to production houses for production of
content/programme are payments under a ‘work contract’ liable for tax
deduction at source under section 194C or a contract for ‘professional or
technical services’ liable for tax deduction at source under section 194J.
In this regard, the CBDT has clarified that while applying the relevant
provisions of TDS on a contract for content production, a distinction is
required to be made between:
(i) a payment for production of content/programme as per the
specifications of the broadcaster/telecaster; and
(ii) a payment for acquisition of broadcasting/ telecasting rights of the
content already produced by the production house.
In the first situation where the content is produced as per the
specifications provided by the broadcaster/ telecaster and the copyright
of the content/programme also gets transferred to the telecaster/
broadcaster, such contract is covered by the definition of the term ‘work’
in section 194C and, therefore, subject to TDS under that section.
However, in a case where the telecaster/broadcaster acquires only the
telecasting/ broadcasting rights of the content already produced by the
production house, there is no contract for ‘’carrying out any work”, as
required in section 194C(1). Therefore, such payments are not liable for
TDS under section 194C. However, payments of this nature may be liable
for TDS under other sections of Chapter XVII-B of the Act.
3. TDS on Goods and Services Tax (GST) component comprised in
payments made to residents [Circular No. 23/2017 dated 19.07.2017]
The CBDT had, vide Circular No. 1/2014 dated 13.01.2014, clarified that
wherever in terms of the agreement or contract between the payer and
the payee, the service tax component comprised in the amount payable
to a resident is indicated separately, tax shall be deducted at source on
the amount paid or payable without including such service tax component.
In order to harmonize the same treatment with the new system for taxation
of services under the GST regime w.e.f. 01.07.2017, the CBDT has, vide
this circular, clarified that wherever in terms of the agreement or contract
between the payer and the payee, the component of 'GST on services'
comprised in the amount payable to a resident is indicated separately, tax
shall be deducted at source on the amount paid or payable without
including such 'GST on services' component.

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GST shall include Integrated Goods and Services Tax, Central Goods and
Services Tax, State Goods and Services Tax and Union Territory Goods
and Services Tax.
Further, for the purposes of this Circular, any reference to “service tax” in
an existing agreement or contract which was entered into prior to
01.07.2017 shall be treated as “GST on services” with respect to the
period from 01.07.2017 onward till the expiry of such agreement or
contract.
Note – The clarification given in the above circular applies to any amount
paid or payable to a resident on which tax is deductible at source as per
the provisions of Chapter XVII-B.
4. Applicability of TDS provisions on payments by the transporter to
truck operators or owners for hiring the vehicles [Shree Choudhary
Transport Co. v ITO [2020] 426 ITR 0289(SC)]
The assessee-firm entered into contract with a cement company for
transporting cement to various places in India. As the assessee did not
have transport vehicles of its own, it engaged the services of other
transporters for the said purpose. The cement company effected
payments to the assessee towards transportation charges after due
deduction of tax at source. In its return of income, the assessee showed
the income arising out of the business of transport contracts. While
making payment to the truck operators or owners, the assessee had not
deducted tax at source.
The Supreme Court observed that the nature of the contract entered into
by the assessee with the consignor company (cement company) makes it
clear that it was the responsibility of the assessee to transport the goods
(cement) of the company; and how to accomplish this task of
transportation was a matter exclusively within the domain of the
assessee.
There is no privity of contract between the transporters and the consignor
company (cement company). Hiring the services of the transporters for
this purpose could have only been under a contract between the assessee
and the transporters, irrespective of whether such a contract was reduced
into writing or not.
If a particular truck was not engaged, there existed no contract, but when
any truck got engaged for the purpose of execution of the work
undertaken by the assessee and freight charges were payable to its
operator or owner upon execution of the work, i. e., transportation of the
goods, all the essentials of a contract existed; and the truck operator or
owner became a sub-contractor.
The Supreme Court opined that the assessee was not acting as a
facilitator or intermediary between the consignor company and the truck
operators or owners because those two parties had no privity of contract

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.41

between them. The contract of the company for transportation of its goods
was only with the assessee and it was the assessee who hired the
services of the trucks. The payment made by the assessee to such
transporter was clearly a payment made to a sub-contractor.
The Supreme Court, thus, held that section 194C was applicable and the
assessee was under obligation to deduct tax at source in relation to the
payments made by it to the truck operators or owners for hiring the
vehicles for the purpose of its business of transportation of goods.

ILLUSTRATION 7
Bharathi Cements Ltd. purchased jute bags from Raj Kumar & Co. The latter has to supply the jute
bags with the logo and address of the assessee, printed on it. From 01.09.2025 to 20.03.2026, the
value of jute bags supplied is ` 8,00,000, for which the invoice has been raised on 20.03.2026.
While effecting the payment for the same, is the assessee bound to deduct tax at source, assuming
that the value of the printing component involved is ` 1,10,000. You are informed that the assessee
has not sold any material to Raj Kumar & Co. and that the latter has to manufacture the jute bags in
its plant using raw materials purchased by it from outsiders.
SOLUTION
As per the definition under section 194C, "work" shall not include manufacturing or supplying a
product according to the requirement or specification of a customer by using raw material purchased
from a person, other than such customer or associate of such customer. This is regardless of the
quantum of expenditure incurred towards printing or processing comprised in the bill amount.
The problem clearly states that Raj Kumar & Co. has to manufacture the jute bags using raw
materials purchased from outsiders and that the assessee Bharathi Cements Ltd has not sold any
material to them. Therefore, in this case, it is a contract of sale. Hence, the provisions of section
194C are not attracted and no liability to deduct tax at source would arise.

ILLUSTRATION 8
Alap Ltd. has made following payments on various dates in financial year 202 5-26 to Vilambit Ltd.
towards work done under different contracts:
Contract Number Date of payment Amount (`)
1. 5.5.2025 20,000
2. 6.6.2025 15,000
3. 8.8.2025 25,000
4. 10.12.2025 25,000
5. 29.01.2026 17,000

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 13.42 DIRECT TAX LAWS

Alap Ltd. claims that it is not liable for deduction of tax at source under section 194C. Examine the
correctness of the claim made by the company. What would be the position if the value of contract
no. 5 is ` 14,000 only and there was no further contract during the year?
SOLUTION
As per section 194C(5), tax has to be deducted at source where the amount credited or paid or likely
to be credited or paid to a contractor or sub-contractor exceeds ` 30,000 in a single payment or
` 1,00,000 in aggregate during the financial year.
Therefore, in the given case, even though the value of each individual contract does not exceed
` 30,000, the aggregate amount exceeds ` 1,00,000. Hence, Alap Ltd's contention is not correct
and tax is required to be deducted at source on the whole amount of ` 1,02,000 from the last
payment of ` 17,000 towards Contract No.5 on account of which the aggregate amount exceeded
` 1,00,000.
However, no tax deduction is to be made if the value of the last contract is ` 14,000 as the aggregate
amount in such case would only be ` 99,000, which is below the aggregate monetary limit of
` 1,00,000.

13.3.9 Insurance Commission [Section 194D]

(1) Applicability of TDS under section 194D

Section 194D casts responsibility on any person

responsible for paying to a resident any income by way
of remuneration or reward, whether by way of
commission or otherwise, for soliciting or procuring
insurance business (including the business relating to
the continuance, renewal or revival of policies of
insurance) to deduct tax at source.
(2) Rate of TDS
Such person is required to deduct income-tax at the rate of 2% in case of resident other than
a domestic company and 10% in case of a domestic company.

(3) Time of deduction

The deduction is to be made at the time of the credit of the income to the account of the
payee or at the time of making the payment (by whatever mode) to the payee, whichever is
earlier.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.43

(4) Threshold limit

The tax under this section has to be deducted at source only if the
amount of such income or the aggregate of the amounts of such
income credited or paid during the financial year to the account of
the payee exceeds ` 20,000.

13.3.10 Payment in respect of life insurance policy [Section 194DA]

(1) Taxability of sum received under a life insurance policy
Under section 10(10D), any sum received under a life
insurance policy, including the sum allocated by way of bonus
on such policy is exempt subject to fulfilment of conditions
specified under the said section.
Consequently, the sum received under a life insurance policy which does not fulfill the
conditions specified under section 10(10D) is taxable.
(2) Rate of TDS
For ensuring a proper mechanism for reporting of transactions and collection of tax in respect
of sum paid under life insurance policies which are not exempt under section 10(10D), section
194DA provides for deduction of tax at the rate of 2% on the amount of income comprised
therein i.e., after deducting the amount of insurance premium paid by the resident assessee
from the total sum received.
(3) Threshold limit
Tax deduction is required only if the payment or aggregate
payment under a life insurance policy, including the sum
allocated by way of bonus in a financial year to an assessee,
is ` 1,00,000 or more. This is for alleviating the compliance burden on the small tax payers.

ILLUSTRATION 9
Examine the applicability of the provisions for tax deduction at source under section 194DA in the
following cases -
(i) Mr. X, a resident, is due to receive ` 4.50 lakhs on 30.6.2025, towards maturity proceeds of
LIC policy taken on 1.7.2022, for which the sum assured is ` 4 lakhs and the annual premium
is ` 1,25,000.

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 13.44 DIRECT TAX LAWS

(ii) Mr. Y, a resident, is due to receive ` 3.95 lakhs on 31.12.2025 on LIC policy taken on
1.1.2012, for which the sum assured is ` 3.50 lakhs and the annual premium is ` 26,100.
(iii) Mr. Z, a resident, is due to receive ` 95,000 on 1.8.2025 towards maturity proceeds of LIC
policy taken on 31.7.2017 for which the sum assured is ` 90,000 and the annual premium is
` 10,000.
SOLUTION
(i) Since the annual premium exceeds 10% of sum assured in respect of a policy taken after
31.3.2012, the maturity proceeds of ` 4.50 lakhs due on 30.6.2025 are not exempt under
section 10(10D) in the hands of Mr. X. Therefore, tax is required to be deducted @ 2% under
section 194DA on the amount of income comprised therein i.e., on ` 75,000 (` 4,50,000, being
maturity proceeds - ` 3,75,000, being the aggregate amount of insurance premium paid).
(ii) Since the annual premium is less than 20% of sum assured in respect of a policy taken before
1.4.2012, the sum of ` 3.95 lakhs due to Mr. Y would be exempt under section 10(10D) in his
hands. Hence, no tax is required to be deducted at source under section 194DA on such sum
payable to Mr. Y.
(iii) Even though the annual premium exceeds 10% of sum assured in respect of a policy taken
after 31.3.2012, and consequently, the maturity proceeds of ` 95,000 due on 1.8.2025 would
not be exempt under section 10(10D) in the hands of Mr. Z. However, tax deduction at source
provisions under section 194DA are not attracted since the maturity proceeds are less than
` 1 lakh.

13.3.11 Payments in respect of deposits under National Savings Scheme,

etc. [Section 194EE]
(1) Rate of TDS
The person responsible for paying to any person any amount
from National Savings Scheme Account shall deduct
income-tax thereon at the rate of 10% at the time of
payment.
(2) Threshold limit

No such deduction shall be made where the amount of payment or the aggregate amount of
payments in a financial year is less than ` 2,500.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.45

(3) Non-applicability of TDS under section 194EE

The provisions of this section shall not apply to the payments made to the heirs of the assessee.

No deduction of tax at source under section 194EE on amount withdrawn under NSS
[Notification No. 27/2025 dated 04.04.2025]
In exercise of the power provided under section 197A(1F), the Central Government has, vide
this notification, notified that, no tax is required to be deducted under section 194EE on
amount (including interest accrued) withdrawn by the individual assessee under NSS (in
respect of which deduction was allowed under section 80CCA), on or after 4 th April, 2025.

13.3.12 Commission etc. on the sale of lottery tickets [Section 194G]

(1) Applicability and Rate of TDS
Under section 194G, the person responsible for paying to any person, who is or has been
stocking, distributing, purchasing or selling lottery tickets, any income by way of commission,
remuneration or prize (by whatever name called) on lottery tickets in an amount exceeding
` 20,000 shall deduct income-tax thereon at the rate of 2%.
(2) Time of deduction of tax
Such deduction should be made at the time of credit of such income to the account of the
payee or at the time of payment of such income by cash, cheque, draft or any other mode,
whichever is earlier.
Where any such income is credited to any account,
whether called “Suspense Account” or by any other
name, in the books of account of the person liable to
pay such income, such crediting shall be deemed to be
credit of such income to the account of the payee and
the provisions of this section shall apply accordingly.

13.3.13 Commission or brokerage [Section 194H]

(1) Applicability and Rate of TDS
Any person other than an individual or HUF, who is responsible for paying any income by way
of commission (other than insurance commission) or brokerage to a resident shall deduct
income tax at the rate of 2%.

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 13.46 DIRECT TAX LAWS

However, an individual or HUF whose total sales, gross

receipts or turnover from the business or profession carried on
by him exceed ` 1 crore in case of business and ` 50 lakhs
in case of profession during the financial year immediately
preceding the financial year in which such commission or
brokerage is credited or paid, is liable to deduct tax at source.
(2) Time of deduction
The deduction shall be made at the time such income is credited to the account of the payee
or at the time of payment in cash or by issue of cheque or draft or by any other mode,
whichever is earlier.
Even where income is credited to some other account, whether called “Suspense account” or by
any other name, in the books of account of the person liable to pay such income, such crediting
shall be deemed to be credit to the account of the payee for the purposes of this section.
(3) Threshold limit
No deduction is required if the amount of such income or the aggregate of such amount does
not exceed ` 20,000 during the financial year.
(4) Meaning of “Commission or brokerage”
“Commission or brokerage” includes any payment received or receivable, directly or
indirectly, by a person acting on behalf of another person
- for services rendered, or
- for any services in the course of buying or selling of goods, or
- in relation to any transaction relating to any asset, valuable article or thing, other
than securities.
(5) Non-applicability of TDS under section 194H
(i) This section is not applicable to professional
services. “Professional Services” means
services rendered by a person in the course of
carrying on legal, medical, engineering or architectural profession or the profession of
accountancy or technical consultancy or interior decoration or such other profession
as notified by the CBDT for the purpose of compulsory maintenance of books of
account under section 44AA.
(ii) Further, there would be no requirement to deduct tax at source on commission or
brokerage payments by BSNL or MTNL to their public call office (PCO) franchisees.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.47

Applicability of TDS provisions on payments by television channels and

publishing houses to advertisement companies for procuring or canvassing
for advertisements [Circular No. 05/2016, dated 29-2-2016]
There are two types of payments involved in the advertising business:
(i) Payment by client to the advertising agency, and
(ii) Payment by advertising agency to the television channel/newspaper company
The applicability of TDS on these payments has already been dealt with in Circular
No. 715 dated 8-8-1995, where it has been clarified in Question Nos. 1 & 2 that
while TDS under section 194C (as work contract) will be applicable on the first type
of payment, there will be no TDS under section 194C on the second type of
payment, e.g. payment by advertising agency to the media company.
However, another issue has been raised in various cases as to whether the
fees/charges taken or retained by advertising companies from media companies
for canvasing/booking advertisements (typically 15% of the billing) are
'commission' or 'discount' for attracting the provisions of section 194H.
The CBDT has clarified that no TDS is attracted on payments made by television
channels/newspaper companies to the advertising agency for booking or procuring
of or canvassing for advertisements. It is also further clarified that 'commission'
referred to in Question No.27 of the CBDT's Circular No. 715 dated 8-8-1995 does
not refer to payments by media companies to advertising companies for booking
of advertisements but to payments for engagement of models, artists,
photographers, sportspersons, etc. and, therefore, is not relevant to the issue of
TDS referred to in this Circular.

ILLUSTRATION 10
Moon TV, a television channel, made payment of ` 50 lakhs to a production house for the production
of programme for telecasting as per the specifications given by the channel. The copyright of the
programme is also transferred to Moon TV. Would such payment be liable for tax deduction at source
under section 194C? Discuss.

Also, examine whether the provisions of tax deduction at source under section 194C would be
attracted if the payment was made by Moon TV for the acquisition of telecasting rights of the content
already produced by the production house.

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 13.48 DIRECT TAX LAWS

SOLUTION
In this case, since the programme is produced by the production house as per the specifications
given by Moon TV, a television channel, and the copyright is also transferred to the television
channel, the same falls within the scope of definition of the term ‘work’ under section 194C.
Therefore, the payment of ` 50 lakhs made by Moon TV to the production house would be subject
to tax deduction at source under section 194C.
If, however, the payment was made by Moon TV for the acquisition of telecasting rights of the content
already produced by the production house, there is no contract for ‘’carrying out any work”, as
required in section 194C(1). Therefore, such payment would not be liable for tax deduction at source
under section 194C.

13.3.14 Rent [Section 194-I]

(1) Applicability and Rate of TDS
Any person other than individual or HUF, who is responsible for paying to a resident any
income by way of rent, shall deduct income tax at the rate of:
(i) 2% in respect of rent for plant, machinery or equipment;
(ii) 10% in respect of other rental payments (i.e., rent for
use of any land or building, including factory building or
land appurtenant to a building, including factory building,
or furniture or fittings).
However, an individual or HUF whose total sales, gross receipts
or turnover from the business or profession carried on by him
exceed ` 1 crore in case of business and ` 50 lakhs in case of profession during the F.Y.
immediately preceding the F.Y. in which such rent was credited or paid, is liable to deduct
tax at source.
Further, no deduction shall be made under this section from rent credited or paid to a business
trust, being a REIT, in respect of any real estate asset owned directly by it.
(2) Time of deduction

This deduction is to be made at the time of credit of such income to the account of the payee
or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode,
whichever is earlier.

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Where any such income is credited to any account, whether called “Suspense account” or by
any other name, in the books of account of the person liable to pay such income, such
crediting shall be deemed to be credit of such income to the account of the paye e and the
provisions of this section will apply accordingly.
(3) Threshold limit
No deduction needs to be made where the amount of
rent credited or paid for a month or part of a month
by such person to the account of, or to, the payee,
does not exceed ` 50,000.
(4) Meaning of Rent
“Rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy
or any other agreement or arrangement for the use of (either separately or together) any –
(a) land; or
(b) building (including factory building); or
(c) land appurtenant to a building (including factory building); or
(d) machinery; or
(e) plant; or
(f) equipment; or
(g) furniture; or
(h) fittings,
whether or not any or all of the above are owned by the payee.

Applicability/non-applicability of TDS under section 194-I on certain payments

Nature of Payment Analysis Conclusion

Payments made by the The main function of cold storage is to No tax is to be

customers on account of preserve perishable goods by means of deducted under
cooling charges to the a mechanical process, and storage of section 194-I.
cold storage owners. such goods is only incidental in nature. However, tax to be
[Circular No.1/2008 The customer is also not given any deducted under
dated 10.1.2008] right to use any demarcated section 194C.
space/place or the machinery of the

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cold store and thus does not become

a tenant. Therefore, the provisions of
194-I are not applicable to the cooling
charges paid by the customers of the
cold storage.
However, since the arrangement
between the customers and cold
storage owners is basically
contractual in nature, the provision of
section 194C will be applicable to the
amounts paid as cooling charges by the
customers of the cold storage.
Lumpsum lease The CBDT has, clarified that lump sum Not liable for TDS
premium paid for lease premium or one-time upfront under section
acquisition of long-term lease charges, which are not adjustable 194-I.
lease [Circular against periodic rent, paid or payable
No.35/2016, dated 13-10- for the acquisition of long-term
2016] leasehold rights over land or any other
property are not payments in the nature
of rent within the meaning of section
194-I.
Remittance of Section 194-I requires deduction of tax The provisions of
Passenger Service Fees at source at specified percentage on section 194-I shall
(PSF) by an Airline to an any income payable to a resident by not be applicable.
Airport Operator way of rent. Explanation to this section
[Circular No. 21/2017, defines the term “rent” as any payment,
dated 12.06.2017] by whatever name called, under any
lease, sub-lease, tenancy or any other
agreement or arrangement for the use
of any (a) land; or (b) building; or (c)
land appurtenant to a building; or (d)
machinery; (e) plant; (f) equipment (g)
furniture; or (h) fitting, whether or not
any or all of them are owned by the
payee.
On the issue of whether payment of
PSF by an airline to an Airport Operator
qualifies as rent to attract TDS under
section 194-I, the Bombay High Court
relied on the Apex Court ruling in Japan
Airlines and Singapore Airlines case,
wherein it was observed that the
primary requirement for any payment to
qualify as rent is that the payment must

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.51

be for the use of land and building and

mere incidental/minor/insignificant use
of the same while providing other
facilities and service would not make it
a payment for use of land and buildings
so as to attract section 194-I.
Accordingly, the Bombay High Court
declined to admit the ground relating to
the applicability of the provisions of
section 194-I on PSF charges holding
that no substantial question of law
arises.
Payment of lease rent or The Central Government has, vide this No tax is required
supplemental lease Notification, specified that no tax is to be deducted
rent, made by a ‘lessee’ required to be deducted under section under section
to a lessor, being a Unit 194-I on payment in the nature of lease 194-I
located in International rent or supplemental lease rent, as the The above
Financial Services case may be, made by a lessee to a relaxation is
Center for lease of an lessor, being a Unit located in IFSC, for available to the
aircraft [Notification No. lease of an aircraft subject to the lessor during the
65/2022, dated following conditions- said previous
16.06.2022] (a) The lessor has to, - years relevant to
the ten
(i) furnish a statement-cum-
consecutive
declaration to the lessee
assessment
giving details of previous
years as declared
years relevant to the ten
by the lessor for
consecutive assessment
which deduction
years for which the lessor opts
under section
for claiming deduction under
80LA is being
section 80LA(1A) read with
opted. The lessee
section 80LA(2); and
shall be liable to
(ii) such statement-cum- deduct tax on
declaration has to be payment of lease
furnished for each previous rent for any other
year relevant to the ten year.
consecutive assessment
years for which the lessor opts
for claiming deduction.
(b) The lessee would –
(i) not deduct tax on payment
made or credited to lessor
after the date of receipt of

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 13.52 DIRECT TAX LAWS

copy of statement cum-

declaration from the lessor;
and
(ii) furnish the particulars of all
the payments made to lessor
on which tax has not been
deducted in view of this
notification in the statement of
deduction of tax.
Payment of lease rent or The Central Government has, vide No tax is required
supplemental lease Notification No. 57/2023, dated to be deducted
rent, made by a ‘lessee’ 01.08.2023 specified that no tax is under section
to a lessor, being a Unit required to be deducted under section 194-I
located in International 194-I on payment in the nature of lease
The above
Financial Services rent or supplemental lease rent, as the
relaxation is
Center for lease of a case may be, made by a lessee to a
available to the
ship [Notification No. lessor, being a Unit located in IFSC, for
lessor during the
57/2023 dated lease of a ship subject to the following
said previous
01.08.2023] conditions-
years relevant to
(a) The lessor has to furnish and the ten
verify a statement-cum- consecutive
declaration to the lessee giving assessment
details of previous years relevant years as declared
to the ten consecutive by the lessor for
assessment years for which the which deduction
lessor opts for claiming deduction under section
under section 80LA(1A) read with 80LA is being
section 80LA(2); and opted. The lessee
shall be liable to
(b) The lessee would –
deduct tax on
(i) not deduct tax on payment payment of lease
made or credited to lessor rent for any other
after the date of receipt of year.
copy of statement cum-
declaration from the lessor;
and
(ii) furnish the particulars of all
the payments made to lessor
on which tax has not been
deducted in view of this
notification in the statement of
deduction of tax.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.53

TDS on GST component Service tax paid by the tenant doesn’t TDS to be
of rental income partake the nature of income of the deducted only on
[Circular No.4/2008 landlord. The landlord only acts as a the amount of rent
dated 15.4.2008] collecting agency for the Government excluding rent
for collection of service tax. Therefore,
tax deduction at source under section
194-I would be required to be made on
the amount of rent paid/payable without
including the service tax.
Note - It is possible to take a view that
the clarification given in Circular No.
4/2008 would apply in the GST regime
also.

13.3.15 Payment on transfer of certain immovable property other than

agricultural land [Section 194-IA]
(1) Applicability and Rate
Every transferee responsible for paying any sum as
consideration for transfer of immovable property (land,
other than agricultural land, or building or part of building)
to a resident transferer shall deduct tax, at the rate of 1%
of such sum or the stamp duty value of such property,
whichever is higher.
“Agricultural land”, for the purpose of this section, means rural agricultural land. In other
words, transfer of urban agricultural land, will attract the provision of section 194 -IA, if the
consideration or the stamp duty value of such land is ` 50 lakhs or more.
It is clarified that in case there is more than one transferor or transferee in respect of
immovable property, consideration for the purpose of TDS shall be the aggregate of the
amounts paid or payable by all the transferees to the transferor or all the transferors for
transfer of such immovable property.
(2) Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the resident
transferor or at the time of payment of such sum to a resident transferor, whichever is earlier.

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(3) Threshold limit

Tax is not required to be deducted at source where
the total amount of consideration for the transfer of
immovable property and the stamp duty value of such
property, are both less than ` 50 lakhs.
(4) Non-applicability of TDS under section 194-IA
Since tax deduction at source for compulsory acquisition of immovable property is covered
under section 194LA, the provisions of section 194-IA do not get attracted into the hands of
the transferee in such cases.
(5) No requirement to obtain TAN
The provisions of section 203A containing the requirement of obtaining Tax Deduction
Account Number (TAN) shall not apply to the person required to deduct tax in accordance
with the provisions of section 194-IA.
(6) Meaning of consideration for transfer of any immovable property
Consideration for transfer of any immovable property includes all charges of the nature of
club membership fee, car parking fee, electricity or water facility fee, maintenance fee,
advance fee or any other charges of a similar nature, which are incidental to the transfer of
the immovable property.
ILLUSTRATION 11
Mr. X sold his house property in Bangalore as well as his rural agricultural land for a consideration
of ` 60 lakh and ` 15 lakh, respectively, to Mr. Y on 1.8.2025. He has purchased the house property
and the land in the year 2024 for ` 40 lakh and ` 10 lakh, respectively. The stamp duty value on the
date of transfer, i.e., 1.8.2025, is ` 85 lakh and ` 20 lakh for the house property and rural agricultural
land, respectively. Examine the tax implications in the hands of Mr. X and Mr. Y and the TDS
implications, if any, in the hands of Mr. Y, assuming that both Mr. X and Mr. Y are resident Indians.
SOLUTION
(i) Tax implications in the hands of Mr. X
As per section 50C, the stamp duty value of house property (i.e., ` 85 lakh) would be
deemed to be the full value of consideration arising on transfer of property since the stamp
duty value exceeds 110% of the consideration received. Therefore, ` 45 lakh
(i.e., ` 85 lakh – ` 40 lakh, being the purchase price) would be taxable as short-term capital
gains in the A.Y.2026-27.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.55

Since rural agricultural land is not a capital asset, the gains arising on the sale of such land
is not taxable in the hands of Mr. X.
(ii) Tax implications in the hands of Mr. Y
In case the immovable property is received for inadequate consideration, the difference
between the stamp value and actual consideration would be taxable under section 56(2)(x),
if such difference exceeds the higher of ` 50,000 and 10% of the consideration.
Therefore, in this case, ` 25 lakh (` 85 lakh – ` 60 lakh) would be taxable in the hands of
Mr. Y under section 56(2)(x).
Since agricultural land is not a capital asset, the provisions of section 56(2)(x) are not
attracted in respect of receipt of agricultural land for inadequate consideration, since the
definition of “property” under section 56(2)(x) includes only capital assets specified
thereunder.
(iii) TDS implications in the hands of Mr. Y
Since the sale consideration and stamp duty value of house property, both are not less than
` 50 lakhs, Mr. Y is required to deduct tax at source under section 194-IA. The tax to be
deducted under section 194-IA would be ` 85,000, being 1% of ` 85 lakh (higher of ` 60
lakhs and ` 85 lakhs).
TDS provisions under section 194-IA are not attracted in respect of transfer of rural
agricultural land.

13.3.16 Payment of rent by certain individuals or Hindu undivided family

[Section194-IB]
(1) Applicability and Rate of TDS
Section 194-IB requires any person, being individual or HUF, other than those individual or
HUF whose total sales, gross receipts or turnover
from the business or profession exceeds ` 1 crore in
case of business and ` 50 lakhs in case of profession
in the financial year immediately preceding the
financial year in which such rent was credited or paid, responsible for paying to a resident
any income by way of rent, to deduct income tax at the rate of 2%.

(2) Threshold limit

Under this section, tax has to be deducted at source only if

the amount of such rent exceeds ` 50,000 for a month or
part of a month during the previous year.

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 13.56 DIRECT TAX LAWS

(3) Time of deduction

This deduction is to be made at the time of credit of such rent, for the last month of the
previous year or the last month of tenancy, if the property is vacated during the year, as the
case may be, to the account of the payee or at the time of payment th ereof in cash or by
issue of cheque or draft or by any other mode, whichever is earlier.

(4) No requirement to obtain TAN

The provisions of section 203A containing the requirement of obtaining a Tax Deduction
Account Number (TAN) shall not apply to the person required to deduct tax in accordance
with the provisions of section 194-IB.

(5) Meaning of “Rent”

“Rent” means any payment, by whatever name called, under any lease, sub-lease, tenancy
or any other agreement or arrangement for the use of any land or building or both.

(6) Deduction not to exceed rent for last month

Where the tax is required to be deducted as per the provisions of section 206AA, such
deduction shall not exceed the amount of rent payable for the last month of the previous year
or the last month of the tenancy, as the case may be. [Section 206AA provides for deduction
of tax at source at a higher rate, which is discussed at length later in this chapter]
ILLUSTRATION 12

Mr. X, a salaried individual, pays rent of ` 55,000 per month to Mr. Y from June, 2025. Is he required
to deduct tax at source? If so, when is he required to deduct tax? Also, compute the amount of tax
to be deducted at source.

Would your answer change if Mr. X vacated the premises on 31st August, 2025?

Also, what would be your answer if Mr. Y does not provide his PAN to Mr. X?
SOLUTION

Since Mr. X pays rent exceeding ` 50,000 per month in the F.Y. 2025-26, he is liable to deduct tax at
source @2%. The tax is to be deducted in the last month of the P.Y. 2025-26 i.e., March 2026 or in
the last month of tenancy, if the property is vacated during the year. Since property is not vacated
during the year, ` 11,000 [(` 55,000 x 2% x 10)] has to be deducted from rent payable for March, 2026.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.57

If Mr. X vacated the premises in August, 2025, then tax of ` 3,300 [` 55,000 x 2% x 3] has to be
deducted from rent payable for August, 2025.

In case Mr. Y does not provide his PAN to Mr. X, tax would be deductible @20%, instead of 2%.

In case 1 above, this would amount to ` 1,10,000 [` 55,000 x 20% x 10] but the same has to be
restricted to ` 55,000, being rent for March, 2026.

In case 2 above, this would amount to ` 33,000 [` 55,000 x 20% x 3].

13.3.17 Payment under specified agreement [Section 194-IC]

(1) Applicability and Rate
This section casts responsibility on any person responsible for paying to a resident any sum
by way of consideration, not being consideration in kind, under a specified agreement under
section 45(5A), to deduct income-tax at the rate of 10%.
(2) Time of deduction
This deduction is to be made at the time of credit
of such sum to the account of the payee or at the
time of payment thereof in cash or by issue of
cheque or draft or by any other mode, whichever
is earlier.
(3) Non-applicability of section 194-IA
Since tax deduction at source for specified agreement under section 45(5A) is covered under
section 194-IC, the provisions of section 194-IA do not get attracted in the hands of the
transferee in such cases.
(4) Meaning of specified agreement
Specified agreement under section 45(5A):
- It means a registered agreement in which a person owning land or building or both,
agrees to allow another person to develop a real estate project on such land or building
or both.
- The consideration, in this case, is a share, being land or building or both in such
project; part of the consideration may also be in cash.

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 13.58 DIRECT TAX LAWS

13.3.18 Fees for professional or technical services [Section 194J]

(1) Applicability and Rate of TDS
Every person other than an individual or a
HUF, who is responsible for paying to a
resident any sum by way of–
(i) fees for professional services; or
(ii) fees for technical services; or
(iii) any remuneration or fees or commission, by whatever name called, other than those
on which tax is deductible under section 192, to a director of a company; or
(iv) royalty, or
(v) non-compete fees referred to in section 28(va)
shall deduct tax at source at the rate of
(a) 2% in case of fees for technical services (not being professional services) or royalty
where such royalty is in the nature of consideration for sale, distribution or exhibition
of cinematographic films; and
(b) 10% in other cases.
However, in case of a payee, engaged only in the business of operation of a call centre, the
tax shall be deducted at source @ 2%
(2) Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the payee or
at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode,
whichever is earlier.
Where any sum is credited to any account, whether called suspense account or by any other
name, in the books of accounts of the person liable to pay such sum, such crediting shall be
deemed to be credit of such sum to the account of the payee and tax has to be deducted
accordingly.
(3) Threshold limit

No tax deduction is required if the amount of fees or the

aggregate of the amounts of fees credited or paid or likely
to be credited or paid during a financial year does not

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exceed ` 50,000 in the case of fees for professional services, ` 50,000 in the case of fees
for technical services, ` 50,000 in the case of royalty and ` 50,000 in the case of non-
compete fees.
The limit of ` 50,000 under section 194J is applicable separately for fees for professional
services, fees for technical services, royalty and non-compete fees referred to in section
28(va). It implies that if the payment to a person towards each of the above is less than
` 50,000, no tax is required to be deducted at source, even though the aggregate payment
or credit exceeds ` 50,000 to such person. However, there is no such exemption limit for
deduction of tax on any remuneration or fees or commission payable to director of a company.
Summary of rates and threshold limit u/s 194J for deduction of tax at source

Nature of payment TDS rate Separate Limit

Fees for technical services (not being professional services) 2% ` 50,000
Fees for professional services 10% ` 50,000
Royalty in the nature of consideration for sale, distribution 2%
or exhibition of cinematographic films ` 50,000
Other royalty 10%
Any remuneration or fees or commission, by whatever 10% Nil
name called, other than those on which tax is deductible
under section 192, to a director of a company
Non-compete fees 10% ` 50,000
Note - In case of a payee, engaged only in the business of operation of call centre, the
tax shall be deducted at source @2%

ILLUSTRATION 13
XYZ Ltd. makes a payment of ` 28,000 to Mr. Ganesh on 2.8.2025 towards fees for
professional services and another payment of ` 25,000 to him on the same date towards fees
for technical services. Discuss whether TDS provisions under section 194J are attracted.
SOLUTION
TDS provisions under section 194J would not get attracted, since the limit of
` 50,000 is applicable for fees for professional services and fees for technical services,
separately. It is assumed that there is no other payment to Mr. Ganesh towards fees for
professional services and fees for technical services during the P.Y.202 5-26.

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(4) Non-applicability of TDS under section 194J

(i) An individual or a Hindu undivided family is not
liable to deduct tax at source.
However, an individual or HUF, whose total sales,
gross receipts or turnover from business or profession carried by him exceeds ` 1
crore in case of business or ` 50 lakhs in case of profession in the financial year
immediately preceding the financial year in which the fees for professional services
or fees for technical services is credited or paid is required to deduct tax on such
fees.

Note - It may be noted that since this provision requires such individuals/HUFs to
deduct tax at source only in respect of fees for professional services or fees for
technical services, it can be inferred that individuals and HUFs are not required to
deduct tax at source under section 194J on royalty and non-compete fees.

(ii) Further, an individual or Hindu Undivided Family, shall not be liable to deduct income-
tax on the sum payable by way of fees for professional services, in case such sum is
credited or paid exclusively for personal purposes.
(5) Meaning of “Professional services”

“Professional services” means services rendered by a person in the course of carrying on

legal, medical, engineering or architectural profession or the profession of accountancy or
technical consultancy or interior decoration or advertising or such other profession as is
notified by the CBDT for the purposes of section 44AA or
of this section.
Other professions notified for the purposes of section
44AA are as follows:
(a) Profession of “authorised representatives”;
(b) Profession of “film artist”;

(c) Profession of “company secretary”.

(d) Profession of “Information technology”
The CBDT has notified the services rendered by following persons in relation to the sports
activities as Professional Services for the purpose of the section 194J:
(i) Sports Persons,

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(ii) Umpires and Referees,

(iii) Coaches and Trainers,
(iv) Team Physicians and Physiotherapists,
(v) Event Managers,
(vi) Commentators,
(vii) Anchors and
(viii) Sports Columnists.
Accordingly, the requirement of TDS as per section 194J would apply to all the aforesaid
professions. The term “profession”, as such, is of a very wide import. However, the term has
been defined exhaustively in this section. For the purposes of TDS, therefore, all other
professions would be outside the scope of section 194J. For example, this section will not
apply to professions of teaching, sculpture, painting, etc., unless they are notified.
(6) Meaning of “Fees for technical services”
Explanation (b) to section 194J provides that the term ‘fees for
technical services’ shall have the same meaning as in Explanation
2 to section 9(1)(vii). The term ‘fees for technical services’ as
defined in Explanation 2 to section 9(i)(vii) means any consideration (including any lump sum
consideration) for rendering of any of the following services:
(i) Managerial services;
(ii) Technical services;
(iii) Consultancy services;
(iv) Provision of services of technical or other personnel.
It is expressly provided that the term ‘fees for technical services’ will not include the following
types of consideration:
(i) Consideration for any construction, assembly, mining or like project, or
(ii) Consideration which is chargeable under the head ‘Salaries’.

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(7) TPAs liable to deduct tax under section 194J on payment to hospitals on behalf of
insurance companies
The CBDT has, through Circular No.8/2009 dated 24.11.2009, clarified
that TPAs (Third Party Administrator’s) who are making payment on
behalf of insurance companies to hospitals for settlement of
medical/insurance claims etc. under various schemes, including cashless schemes are liable
to deduct tax at source under section 194J on all such payments to hospitals etc. This is
because the services rendered by hospitals to various patients are primarily medical services
and, therefore, the provisions of section 194J are applicable to payments made by TPAs to
hospitals, etc.
Whether transaction charges paid by the members of the stock exchange for
availing fully automated online trading facility, being a facility provided by the stock
exchange to all its members, constitute fees for technical services to attract the
provisions of tax deduction at source under section 194J [CIT v. Kotak Securities
Ltd (2016) 383 ITR 1 (SC)]
The Supreme Court observed that technical services like managerial and consultancy
service are in the nature of specialised services made available by the service provider to
cater to the special needs of the customer-user as may be felt necessary. It is the above
feature that would distinguish or identify a service provider from a facility offered.
The Apex Court, accordingly, held that the service provided by the BSE for which
transaction charges are paid failed to satisfy the test of specialized, exclusive and
individual requirement of the user or the consumer who may approach the service provider
for such assistance or service.
Therefore, the transaction charges paid to BSE by its members are not for technical
services but are in the nature of payments made for facilities provided by the stock
exchange. Such payments would, therefore, not attract the provisions of tax deduction at
source under section 194J.

(8) Consideration for use or right to use of computer software is royalty within the meaning
of section 9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right, property
or information is deemed to accrue or arise in India. The term “royalty” means consideration
for transfer of all or any right in respect of certain rights, property or information.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.63

As per Explanation 4 to section 9(1)(vi), the

consideration for use or right to use of computer
software would be royalty. This Explanation clarifies
that, transfer of all or any rights in respect of any right, property or information includes and has
always included transfer of all or any right for use or right to use a computer software (including
granting of a licence) irrespective of the medium through which such right is transferred.
Consequently, the provisions of tax deduction at source under section 194J and section 195
would be attracted in respect of consideration for use or right to use computer software since
the same falls within the definition of royalty as per the provisions of the Income-tax Act, 1961.
Note - The Central Government has, vide Notification No.21/2012 dated 13.6.2012, effective
from 1st July, 2012, exempted certain software payments from the applicability of tax
deduction under section 194J. Accordingly, where payment is made by the transferee for
acquisition of software from a resident-transferor, the provisions of section 194J would not
be attracted if -
(1) the software is acquired in a subsequent transfer without any modification by the
transferor;
(2) tax has been deducted either under section 194J or under section 195 on payment for
any previous transfer of such software; and
(3) the transferee obtains a declaration from the transferor that tax has been so deducted
along with the PAN of the transferor.

ILLUSTRATION 14
East Bengal Club, a renowned football club, has engaged Raghu, a resident in India, as its coach at
a remuneration of ` 6 lakhs per annum. The club wants to know from you whether it is liable to
deduct tax at source from such remuneration.
SOLUTION
Section 194J requires deduction of tax at source @10% from the amount credited or paid by way of
fees for professional services, where such amount or aggregate of such amounts credited or paid to
a person exceeds ` 50,000 in the F.Y. 2025-26. As per Explanation (a) to section 194J, professional
services include services rendered by a person in the course of carrying on such other profession
as is notified by the CBDT for the purposes of section 194J.
Accordingly, the CBDT has, vide Notification No.88 dated 21.8.2008, notified the services rendered
by coaches and trainers in relation to the sports activities as professional services for the purposes
of section 194J.

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Therefore, the club is liable to deduct tax at source under section 194J from the remuneration
payable to the Coach, Raghu.

13.3.19 Income in respect of units [Section 194K]

(1) Applicability and rate of tax

Section 194K provides for deduction of tax at source

@10% by any person responsible for paying to a resident
any income in respect of –

(i) units of a Mutual fund specified under section 10(23D)

(ii) units from Administrator of the specified undertaking

(iii) units from the specified company, being a company whose entire capital is subscribed
by financial institutions or banks as notified by the Central Government

(2) Time of deduction

The deduction is to be made at the time of credit of such sum to the account of the payee or
at the time of payment by any mode, whichever is earlier.

Where any income in respect of units of a mutual fund, Administrator of the specified
undertaking or the specified company is credited to any account in the books of account of
the person liable to pay such income, such crediting is deemed to be credit of such income
to the account of the payee and tax has to be deducted at source. The account to which such
income is credited may be called “Suspense account” or by any other name.

(3) Non-applicability of section 194K

No tax is required to be deducted if -

(i) the amount of such income or the aggregate of the amounts of such income credited
or paid or likely to be credited or paid during a financial year does not exceed ` 10,000;
or

(ii) the income is of the nature of capital gains.

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13.3.20 Payment of compensation on acquisition of certain immovable

property [Section 194LA]
(1) Applicability
Section 194LA provides for deduction of tax at source by a person responsible for paying to
a resident any sum in the nature of –

(i) compensation or the enhanced compensation or

(ii) the consideration or the enhanced consideration
on account of compulsory acquisition, under any law
for the time being in force, of any immovable property
(other than agricultural land).
Immovable property means any land (other than agricultural land) or any building or part of a
building.
“Agricultural land” for the purpose of this section means any land situated in India including
urban agricultural land.
(2) Rate of TDS
The amount of tax to be deducted is 10% of such sum mentioned in (1) above.

(3) Time of deduction

The tax should be deducted at the time of payment of such sum in cash or by issue of a
cheque or draft or by any other mode, whichever is earlier.
(4) Threshold limit
No tax is required to be deducted where the amount of
such payment or, as the case may be, the aggregate
amount of such payments to a resident during the
financial year does not exceed ` 5,00,000.

(5) Non-applicability of TDS under section 194LA

No tax is required to be deducted where payment is made in respect of any award or
agreement which has been exempted from levy of income tax under section 96 of the Right
to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement
Act, 2013.

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13.3.21 Payment made by an individual or a HUF for contract work or by

way of commission or brokerage or fees for professional services
[Section 194M]
(1) Applicability and rate of TDS
Section 194M provides for deduction of tax at
source @2% by an individual or a HUF responsible
for paying any sum during the financial year to any
resident –
(i) for carrying out any work (including supply
of labour for carrying out any work) in
pursuance of a contract; or
(ii) by way of commission (not being insurance commission referred to in section 194D)
or brokerage; or
(iii) by way of fees for professional services.
It may be noted that only individuals and HUFs (other than those who are required to deduct
income-tax as per the provisions of section 194C or 194H or 194J) are required to deduct tax
in respect of the above sums payable during the financial year to a resident.
(2) Time of deduction
The tax should be deducted at the time of credit of such sum or at the time of payment of
such sum, whichever is earlier.
(3) Threshold limit
No tax is required to be deducted where such sum or, as
the case may be, aggregate amount of such sums
credited or paid to a resident during the financial year does not exceed ` 50,00,000.

(4) Non-applicability of TDS under section 194M

An individual or a Hindu undivided family is not liable to deduct tax at source under section
194M, if –
(i) they are required to deduct tax at source u/s 194C for carrying out any work (including
supply of labour for carrying out any work) in
pursuance of a contract, i.e., an individual or a
HUF whose total sales, gross receipts or

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turnover from the business or profession carried on by him exceeds ` 1 crore in case
of business and ` 50 lakhs in case of profession during the immediately preceding
financial year and such amount is not exclusively credited or paid for personal
purposes of such individual or HUF.
(ii) they are required to deduct tax at source u/s 194H on commission (not being insurance
commission referred to in section 194D) or brokerage, i.e., an individual or an HUF
whose total sales, gross receipts or turnover from the business or profession carried
on by him exceeds ` 1 crore in case of business and ` 50 lakhs in case of profession
during the immediately preceding financial year.
(iii) they are required to deduct tax at source u/s 194J on fees for professional services,
i.e., an individual or a HUF whose total sales, gross receipts or turnover from the
business or profession carried on by him exceeds ` 1 crore in case of business and
` 50 lakhs in case of profession during the immediately preceding financial year and
such amount is not exclusively credited or paid for personal purposes of such
individual or HUF.
(5) No requirement to obtain TAN
The provisions of section 203A containing the requirement of obtaining Tax Deduction
Account Number (TAN) shall not apply to the person required to deduct tax in accordance
with the provisions of section 194M.

Note - For the meaning of the terms “Work”, “Professional services” and “Commission or brokerage”
refer sub-heading “15.3.7 Payments to contractors and sub-contractors [Section 194C]”, “15.3.18
Fees for professional or technical services [Section 194J]” and “15.3.13 Commission or brokerage
[Section 194H]”, respectively.

ILLUSTRATION 15
Examine whether TDS provisions would be attracted in the following cases, and if so, under which
section. Also, specify the rate of TDS applicable in each case. Assume that all payments are made
to residents.

Particulars of the payer Nature of payment Aggregate of

payments made in
the F.Y.2025-26
1. Mr. Ganesh, an individual Contract Payment for repair of ` 5 lakhs
carrying on retail business residential house

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with turnover of ` 2.5 crores Payment of commission to ` 80,000 in

in the P.Y.2024-25 Mr. Vallish for business purposes November 2025
2. Mr. Rajesh, a wholesale Contract Payment for the ` 20 lakhs in
trader whose turnover was reconstruction of a residential January, 2026, ` 15
` 95 lakhs in P.Y. 2024-25. house (made during the period lakhs in February
January-March, 2026) 2026 and ` 20 lakhs
in March 2026.
3. Mr. Satish, a salaried Payment of brokerage for buying ` 51 lakhs
individual a residential house in March,
2026
4. Mr. Dheeraj, a pensioner Contract payment made during ` 48 lakhs
October-November 2025 for
reconstruction of residential
house

SOLUTION

Particulars of Nature of Aggregate of Whether TDS provisions are

the payer payment payments in the attracted?
F.Y.2025-26
1. Mr. Ganesh, an Contract ` 5 lakhs No; TDS under section 194C is
individual Payment for not attracted since the
carrying on retail repair of payment is for personal
business with residential purpose. TDS under section
turnover of ` 2.5 house 194M is not attracted as
crores in the aggregate of contract payment
P.Y.2024-25 to the payee in the
P.Y.2025-26 does not exceed
` 50 lakhs.
Payment of ` 80,000 Yes, u/s 194H @2%, since the
commission to payment exceeds
Mr. Vallish for ` 20,000, and Mr. Ganesh’s
business turnover exceeds from
purposes business ` 1 crore in the
P.Y.2024-25.
2. Mr. Rajesh, a Contract ` 55 lakhs Yes, under section 194M @2%,
wholesale trader Payment for since the aggregate of
whose turnover reconstruction payments (i.e., ` 55 lakhs)
was ` 95 lakhs in of residential exceed ` 50 lakhs. Since, his
P.Y.2024-25 house turnover from business does

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.69

not exceed ` 1 crore in the

P.Y.2024-25, TDS provisions
under section 194C are not
attracted in respect of
payments made in the
P.Y.2025-26.
3. Mr. Satish, a Payment of ` 51 lakhs Yes, under section
salaried brokerage for 194M@2%, since the payment
individual buying a of ` 51 lakhs made in March
residential 2026 exceeds the threshold of
house ` 50 lakhs. Since Mr. Satish is
a salaried individual, the
provisions of section 194H are
not applicable in this case.
4. Mr. Dheeraj, a Contract ` 48 lakhs TDS provisions under section
pensioner payment for the 194C are not attracted since
reconstruction Mr. Dheeraj is a pensioner.
of residential TDS provisions under section
house 194M are also not applicable
in this case, since the payment
of ` 48 lakhs does not exceed
the threshold of ` 50 lakhs.

13.3.22 TDS on cash withdrawal [Section 194N]

(1) Applicability and rate of TDS
Section 194N provides that every person, being
- a banking company to which the Banking
Regulation Act, 1949 applies (including
any bank or banking institution referred under section 51 of that Act)
- a co-operative society engaged in carrying on the business of banking; or

- a post office
who is responsible for paying any sum, being the amount or aggregate of amounts, as the
case may be, in cash exceeding ` 1 crore during the previous year, to any person from
one or more accounts maintained by such recipient-person with it, shall deduct tax at source
@2% of such sum

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 13.70 DIRECT TAX LAWS

Where the recipient is a co-operative society, the higher threshold limit of ` 3 crores is
applicable for cash withdrawals.
(2) Time of deduction
This deduction is to be made at the time of payment of such sum.
(3) Modification in rate of TDS and threshold limit of withdrawal for recipient who has not
furnished return of income for last 3 years
If the recipient has not furnished the returns of income for all the three assessment years
relevant to the three previous years, for which the time limit for filing return of income under
section 139(1) has expired, immediately preceding the previous year in which the payment of
the sum is made, the sum shall mean the amount or the aggregate of amounts, as the
case may be, in cash > ` 20 lakhs during the previous year, and the tax shall be deducted
at the rate of -
- 2% of the sum, where the amount or aggregate of amounts, as the case may be,
being paid in cash > ` 20 lakhs but ≤ ` 1 crore (` 3 crores in case the recipient is
a co-operative society
- 5% of the sum, where the amount or aggregate of amounts, as the case may be,
being paid in cash > ` 1 crore (` 3 crores in case the recipient is a co-operative
society.

However, the Central Government is empowered to specify, with the consultation of RBI, by
notification, the recipient in whose case this provision shall not apply or apply at reduced rate,
subject to the satisfaction of the conditions specified in such notification.
(4) Non-applicability of TDS under section 194N
Liability to deduct tax at source under section 194N shall not be applicable to any payment
made to –
(i) the Government
(ii) any banking company or co-operative society engaged in carrying on the business of
banking or a post-office
(iii) any business correspondent of a banking
company or co-operative society engaged in
carrying on the business of banking, in accordance with the RBI guidelines

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(iv) any white label ATM operator of a banking company or co-operative society engaged
in carrying on the business of banking, in accordance with the authorisation issued by
the RBI under the Payment and Settlement Systems Act, 2007
The Central Government may specify, with the consultation of RBI, by notification, the
recipient in whose case section 194N shall not apply or apply at a reduced rate, subject to
the satisfaction of the conditions specified in such notification. Accordingly, the Central
Government has, after consultation with the Reserve Bank of India (RBI), specified –
(i) Cash Replenishment Agencies (CRA’s) and franchise agents of White Label
Automated Teller Machine Operators (WLATMO’s) – For availing exemption from
applicability of TDS u/s 194N, CRA’s and franchise agents of WLATMO’s should
maintain a separate bank account from which withdrawal is made only for the purposes
of replenishing cash in the Automated Teller Machines (ATM’s) operated by such
WLATMO’s. Further, the WLATMO should furnish a certificate every month to the bank
certifying that the bank account of the CRA’s and the franchise agents of the
WLATMO’s have been examined and the amounts being withdrawn from their bank
accounts have been reconciled with the amount of cash deposited in the ATM’s of the
WLATMO’s.

(ii) Commission agent or trader, operating under Agriculture Produce Market

Committee (APMC), and registered under any law relating to Agriculture Produce
Market of the concerned State - For availing exemption from the applicability of TDS
u/s 194N, the commission agent/trader should intimate to the banking company or co-
operative society or post office, his account number through which he wishes to
withdraw cash in excess of ` 1 crore in the previous year along with his Permanent
Account Number (PAN) and the details of the previous year. Also, he should certify to
the banking company or co-operative society or post office that the withdrawal of cash
from the account in excess of ` 1 crore during the previous year is for the purpose of
making payments to the farmers on account of purchase of agriculture produce.
Further, the banking company or co-operative society or post office has to ensure that
the PAN quoted is correct and the commission agent or trader is registered with the
APMC, and for this purpose, collect necessary evidences and place the same on
record.
(iii) (a) the authorised dealer and its franchise agent and sub-agent; and
(b) Full-Fledged Money Changer (FFMC) licensed by the RBI and its franchise
agent;

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Such persons should maintain a separate bank account from which withdrawal is made
only for the purposes of -
(i) purchase of foreign currency from foreign tourists or non-residents visiting India
or from resident Indians on their return to India, in cash as per the directions or
guidelines issued by RBI; or
(ii) disbursement of inward remittances to the recipient beneficiaries in India in
cash under Money Transfer Service Scheme (MTSS) of the RBI;
The exemption from the requirement to deduct tax u/s 194N would be available only if
a certificate is furnished by the authorised dealers and their franchise agent and sub -
agent, and the Full-Fledged Money Changers (FFMC) and their franchise agent to the
bank that withdrawal is only for the purposes specified above and the directions or
guidelines issued by the RBI have been adhered to.
“Authorised dealer” means any person who is authorised by the RBI as an authorised
dealer to deal in foreign exchange [Section 10(1) of the Foreign Exchange
Management Act, 1999].
(iv) Foreign Representations, Diplomatic Missions, etc. - The provisions of section
194N shall not apply to Foreign Representations duly approved by the Ministry of
External Affairs of the Government of India including Diplomatic Missions, agencies of
the United Nations, International Organisations, Consulates and Offices of Honorary
Consuls which are exempt from paying taxes in India as per the Diplomatic Relations
(Vienna Convention) Act, 1972 and the United Nations (Privileges and Immunities) Act,
1947.
(5) Person to whom credit is to be given for tax deducted and paid: Rule 37BA provides the
manner of giving credit for tax deducted and remitted to the Central Government , i.e., it
specifies the person to whom credit for tax deducted is to be given and also the assessment
year for which the credit may be given. Accordingly, sub-rule (3A) has been inserted in Rule
37BA, to provide that, for the purposes of section 194N, credit for tax deducted at source
shall be given to the person from whose account tax is deducted and paid to the Central
Government account for the assessment year relevant to the previous year in which such tax
deduction is made.

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(6) Furnishing particulars in case of no deduction of tax in consequence of exemption

[Rule 31A]
Every person has to furnish particulars of the amount paid or credited on which tax was not
deducted in view of the exemption provided in point (4) above. [Rule 31A].
Example
The persons referred to in (i) to (vi) in Column (2) of the table below have always been filing their
returns of income on or before the due date u/s 139(1). The persons mentioned in (vii) to (x) in
Column (2) of the table below have not filed their returns of income for the last five years. Determine
the liability of deduction of tax at source u/s 194N by the bank/co-operative bank referred to in
column (3) of the table below in each of the following individual cases, assuming that this is the only
withdrawal in the P.Y.2025-26 by the persons referred to in Column (2).
(1) (2) (3) (4) (5) (6)
Person Bank/Co-operative Date of Amount of TDS u/s 194N
making the Bank from which withdrawal withdrawal (` )
withdrawal money is (` )
withdrawn
(i) Mr. Harshit SBI 1.7.2025 1,10,00,000 ` 10,00,000 x 2%
= ` 20,000
(ii) Mr. Pranav SBI 1.8.2025 90,00,000 Nil (since
withdrawals <
` 1 crore)
(iii) ABC Co- SBI 1.9.2025 2,70,00,000 Nil (since
operative withdrawals <
Society ` 3 crore)
(iv) XYZ Co- MNO Co-operative 1.9.2025 3,10,00,000 ` 10,00,000 x 2%
operative bank = ` 20,000
Society
(v) Mr. Vaibhav MNO Co-operative 1.9.2025 2,10,00,000 ` 1,10,00,000 x
bank 2% = ` 2,20,000
(vi) A Ltd. MNO Co-operative 1.10.2025 1,05,00,000 ` 5,00,000 x 2%
bank = ` 10,000
(vii) M/s. DEF & Co., MNO Co-operative 1.2.2026 90,00,000 ` 70,00,000 x 2%
a firm bank = ` 1,40,000
(viii) Mr. Varun BOI 1.2.2026 1,20,00,000 ` 80,00,000 x 2%
(+)
` 20,00,000 x 5%
= ` 2,60,000

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(ix) Mr. Rakesh BOI 1.2.2026 45,00,000 ` 25,00,000 x 2%

= ` 50,000
(x) PQR Co- BOI 1.2.2026 3,30,00,000 ` 2,80,00,000 x
operative 2% (+)
Society ` 30,00,000 x 5%
= ` 7,10,000

13.3.23 TDS on certain payment by e-commerce operator to e-commerce

participant [Section 194-O]
(1) Applicability and rate of TDS

Section 194-O provides that where sale of goods or provision of services of an e-commerce
participant is facilitated by an e-commerce
operator through its digital or electronic facility or
platform, such e-commerce operator is liable to
deduct tax at source @0.1% of the gross amount
of such sales or services or both.
(2) Time of deduction
The deduction is to be made at the time of credit of amount of such sale or services or both
to the account of an e-commerce participant or at the time of payment thereof to such
e-commerce participant by any mode, whichever is earlier.
(3) Deemed credit
Any payment made by a purchaser of goods or recipient of services directly to an e-commerce
participant for the sale of goods or provision of services or both, facilitated by an e-commerce
operator, would be deemed to be amount credited or paid by the e-commerce operator to the
e-commerce participant. Accordingly, such payment would be included in the gross amount
of such sales or services for the purpose of deduction of income-tax under this section.
(4) Non-applicability of TDS under section 194-O
No tax is required to be deducted under section 194-O in case of any sum credited or paid to
an e-commerce participant, being an individual or HUF,
where the gross amount of such sale or services or both
during the previous year does not exceed ` 5 lakh and
such e-commerce participant has furnished his PAN/ Aadhaar number to e-commerce
operator.

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(5) Non-applicability of TDS under any other section

A transaction in respect of which tax has been deducted by the e-commerce operator under
this section or which is not liable to tax deduction under this section on account of the
exemption discussed in point (4) above, would not be liable to tax deduction at source under
any other provision of this Chapter.
However, this exemption from TDS under this would not apply to any amount or aggregate of
amounts received or receivable by an e-commerce operator for hosting advertisements or
providing any other services which are not in connection with the sale of good s or services
referred to in point (1) above.
(6) Power of CBDT to issue guidelines
In case any difficulty arises in giving effect to the provisions of this section, the CBDT may
issue guidelines for the purpose of removing the difficulty with the approval of the Central
Government.
Every guideline issued by the CBDT shall be laid before each House of Parliament and shall
be binding on the income-tax authorities and on the e-commerce operator.
Accordingly, the CBDT has, vide Circular no. 17/2020
dated 29.9.2020 and Circular no. 20/2021 dated
25.11.2021, issued the following guidelines for removing
certain difficulties-
1. Applicability on transactions carried through various Exchanges:
In order to remove practical difficulties in implementing section 194-O in case of certain
exchanges and clearing corporations, it has been provided that section 194 -O shall
not be applicable in relation to-
- transactions in securities and commodities which are traded through
recognized stock exchanges or cleared and settled by the recognized clearing
corporation, including recognized stock exchanges or recognized clearing
corporation located in International Financial Service Centre;
- transactions in electricity, renewable energy certificates and energy saving
certificates traded through power exchanges registered in accordance with
Regulation 21 of the CERC (Central Electricity Regulatory Commission).

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2. Applicability on payment gateway:

In e-commerce transactions, the payments are generally facilitated by payment
gateways. Consequently, it is possible that there may be applicability of section
194-O twice i.e., once on the main ecommerce operator who is facilitating sale of
goods or provision of services or both and once on payment gateway who also
happens to qualify as e-commerce operator for facilitating the service. To illustrate, a
buyer buys goods worth ` 1 lakh on e-commerce website "XYZ". He makes payment
of ` 1 lakh through the digital platform of "ABC". On these facts, the liability to deduct
tax under section 194-O may fall on both "XYZ" and "ABC".
In order to remove this difficulty, it is provided that the payment gateway will not be
required to deduct tax under section 194-O on a transaction, if the tax has been
deducted by the e commerce operator under section 194-O, on the same transaction.
Hence, in the above example, if "XYZ" has deducted tax under section 194 -O on
` 1 lakh, "ABC" will not be required to deduct tax under section 194-O on the same
transaction. To facilitate proper implementation, "ABC" may take an undertaking from
XYZ" regarding deduction of tax.
3. Applicability on insurance agent or insurance aggregator:
Insurance agents or insurance aggregators, in many cases, have no involvement in
transactions between the insurance company and the buyer for subsequent years.
Therefore, in subsequent years, the liability to deduct tax may arise on the insurance
agents or insurance aggregators, even if the transactions have bee n completed
directly with the insurance company. This may result in hardship for the insurance
agents/aggregators.
In order to remove the difficulty, it is provided that in years subsequent to the first year,
if the insurance agent or insurance aggregator has no involvement in transactions
between the insurance company and the buyer of insurance policy, he would not be
liable to deduct tax under section 194-O for those subsequent years. However, the
insurance company shall be required to deduct tax on commission payment, if any,
made to the insurance agent or insurance aggregator for those subsequent years
under the relevant provision of the Act.
4. Applicability on E-auction services carried out by e-auctioneers through
electronic portal: The provisions of section 194-O would not apply in relation to e-
auction activities carried out by e-auctioneers if all the facts listed in (a) to (f) are
satisfied:

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(a) The e-auctioneer conducts e-auction services for its clients in its electronic
portal and is responsible for the price discovery only which is reported to the
client.
(b) The price so discovered through the e-auction process is not necessarily the
price at which the transaction takes place, and it is up to the discretion of the
client to accept the price or to directly negotiate with the counter-party.
(c) The transaction of purchase/sale takes place directly between the buyer and
the seller party outside the electronic portal maintained by the e-auctioneer and
price discovery only acts as the starting point for negotiation and conclusion
of purchase/sale.
(d) The e-auctioneer is not responsible for facilitating the purchase and sale
of goods for which e-auction was conducted on its electronic portal except to
the extent of price discovery.
(e) Payments for the transactions are carried out directly between the buyer and
the seller outside the electronic portal and the e-auctioneer does not have
any information about the quantum and the schedule of payment which is
decided mutually by the client and the counterparty.

(f) For payment made to the e-auctioneer for providing e-auction services, the
client deducts tax under the relevant provisions of the Act other than section
194-O.
If any of these facts are not satisfied, the provisions of section 194-O will apply.
Further, the buyer would still be liable to deduct tax as per the provisions of
section 194Q.
The CBDT further issued, vide Circular No. 20/2023 dated 28.12.2023, guidelines for tax
deduction at source under section 194-O encompassing transactions that involve multiple
e-commerce operators in respect of the following issues:
1. Who should deduct tax at source where there are multiple e-commerce operators
(ECO) involved in a transaction?
There may be a platform or network (e.g. the Open Network for Digital Commerce) on
which multiple e-commerce operators are participating in a single transaction. For
example, there could be a buyer side ECO involved in buyer-side functions and a
seller-side ECO involved in seller side functions. In this case, there may be two
situations:

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Situation 1: Where multiple ECOs are involved in a single transaction of sale of goods
or provision of services through ECO platform or network and where the seller-side
ECO is not the actual seller of the goods or services:
On the buying side, a buyer-side ECO could be providing an interface to the buyer and
on the selling side, a seller-side ECO could be providing an interface to the seller.

Movement of Goods/Services

Buyer Buyer side Seller-side Seller

ECO ECO (E-
(E-commerce
commerce
Participant) Participant)
TDS is to be deducted
by this ECO

Consideration

In this situation, the compliance under section 194-O is to be done by the seller-side
ECO who finally makes the payment or the deemed payment to the seller for goods
sold or services provided.

Situation 2: Where multiple ECOs are involved in a single transaction of sale of goods
or provision of services through ECO platform or network and where the seller-side
ECO is the actual seller of the goods or services.
On the buying side, an ECO could be providing an interface to the buyer and on the
selling side, the seller itself is an ECO and is directly interacting with an ECO.

Movement of Goods/Services

Buyer ECO-2 (making Seller

(E-commerce ECO-1
payment to Seller) (also an
Participant) ECO)

TDS is to be
deducted by ECO 2

Consideration

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In this situation, since on the selling side, the seller itself is an ECO and is directly
interacting with an ECO, the compliance under section 194-O is to be done by the ECO
which finally makes the payment or the deemed payment to the seller for goods or
services sold.

Note - In both the above situations, the tax shall be deducted on the "gross amount"
of such sale of goods or provision of services and shall be deducted by seller-side
ECO/ECO-2, as the case may be, at the time of credit to the account of a seller (being
e-commerce participant) or at the time of the payment or the deemed payment thereof
to such seller by any mode, whichever is earlier.

2. E-commerce operators may be levying convenience fees or charging

commission for each transaction and seller might levy logistics & delivery fees
for the transaction. Payments may also be made to the platform or network (e.g.
ONDC) provider for facilitating the transaction. Would these form part of the
“gross amount" for the purposes of TDS under section 194-O of the Act?
In e-commerce, it is common for an order to be shipped to the buyer from the seller. It
is therefore common for the sellers to charge the buyer additionally for shipping in the
form of logistics/delivery/shipping/packaging fees.
Further, the buyer-side ECO and seller-side ECO may charge a commission to the
seller to enable the online transaction, and the seller may choose to recoup all or part
of that amount from the buyer.
Example 1: A buyer purchases goods worth ` 100 from the Seller and opts for home
delivery. The Seller charges the Buyer an additional ` 5 as packing fees, ` 10 as
shipping fees, and ` 3 as a convenience charge (to recoup the fees charged by the
seller-side ECO, which includes ` 1 charged by the Buyer-side ECO and ` 2 charged
by the Seller-side ECO itself). So, the seller will issue an invoice for ` 118 (i.e. 100 +
5 + 10 + 2 + 1) to the buyer. The shipping fees, packaging fees and convenience fees
are separately charged to the buyer to provide services in relation to the main supply.
In such a case, TDS is to be deducted by the seller-side ECO under section 194-O on
` 118 since this is the gross amount of sales.

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Movement of Goods/Services

Buyer (E- Buyer side Seller-side Seller (E-

commerce ECO ECO commerce
Participant) Receives Participant)
Buys ` 100 Receives ` 117 Sells goods worth
worth of ` 118 Retains Retains ` 100 to the Buyer
goods (Home with itself `1 ` 2 as fees and charges
delivery) and as fees additional:
pays with all Pays ` 117 to Pays ` 115 (i) ` 5 packing fees
fees: ` 118 Seller-side to Seller (ii) ` 10 shipping
ECO fees
(iii) ` 3 convenience
fees
Total amount: ` 118
charges to buyer
Receives ` 115 from
Seller-side ECO
Deduct TDS on
` 118
Consideration
It is thus clarified that TDS shall be deducted by the seller-side ECO on the gross
amount of sales of goods (` 118) or provision of services at the time of payment
(including deemed payment) or credit.
As per section 194-O(3), a transaction on which tax has been deducted by an ECO
under section 194-O(1), such transaction shall not be liable to TDS under any other
provision of Chapter XVII-B. Accordingly, this exclusion will also apply to the amount
received by ECO for the provision of services which are in connection with the main
transaction of sale of goods or provision of service or both referred to in section
194-O(1). However, section 194S(4) overrides section 194-O and states that if tax is
deducted under section 194-S, no tax is deductible under section 194-O.
In this example, fees charged by the seller-side ECO (` 3 charged to the seller) and
buyer-side ECO (` 1 charged to the seller-side ECO) for services provided would
ordinarily have been subjected to TDS under section 194H and the seller and seller -
side ECO respectively would have had to deduct tax and file TDS return with respect
to the fees paid.

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However, as tax has been deducted under section 194-O(1) on the gross amount of
sales of ` 118, this amount (which includes buyer-side ECO fee of ` 1 and seller-side
ECO fee of ` 2 charged to the end customer) will not be subject to TDS under any
other provision. However, this is subject to provisions of section 194S(4).

Payments may also be made to the platform or network (e.g., the ONDC) provider to
facilitate the transaction. These would form part of the “gross amount" for the purposes
of TDS under section 194-O if they are included in the payment for the transaction. If
these payments are being paid on a lump-sum basis and are not linked to a specific
transaction, then these need not be included in the "gross amount".
Example 2:
Money Flow

` 100 ` 95 ` 85
Buyer Buyer-side ECO Seller-side ECO Seller
Buyer-side ECO retains Seller-side ECO retains
` 5 as commission. ` 10 as commission.

Invoices the seller-side ECO for ` 5. Invoices the seller-side ECO for ` 15.

Invoicing Flow

The Seller's label-price for a product is ` 85, the seller-side ECO's fee (for listing the
Seller catalogue and facilitating the transaction) is ` 10, and the Buyer- side ECO's
fee (to provide an interface to enable the Buyer to discover the seller/product and to
enable them to place an order) is ` 5. The Seller charges the Buyer a total of ` 100
(` 85 + ` 10 + ` 5) and issues an invoice for ` 100 (gross amount) as shown in the
above diagram.

The TDS under section 194-O has to be calculated on ` 100 (gross invoice value)
@1% by the seller ECO.

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3. How will GST, various state levies and taxes other than GST such as VAT/ Sales
tax/ Excise duty / CST be treated when calculating gross amount of sales of
goods or provision of services as per the provisions of section 194-O?

Condition Amount on which tax is to be deducted

u/s 194-O
Where tax is deducted at the time of Tax has to be deducted under section 194-O
credit of amount in the account of on the amount credited without including
the seller and the component of such GST/ various state levies and taxes.
GST/various state levies and taxes
comprised in the amount payable to
the seller is indicated separately
Where tax is deducted on payment Tax has to be deducted on the whole amount
basis because payment is earlier (since it is not possible to identify the
than the credit payment with GST/various state levies and
taxes component to be invoiced in the future)
4. How will the adjustment for purchase returns take place?
Tax is required to be deducted under section 194-O at the time of payment or credit,
whichever is earlier. Thus, before purchase-return happens, the tax must have already
been deducted under section 194-O on that purchase. In such case -
(i) Where the money is refunded against purchase returns
Tax deducted, if any, may be adjusted against the next transaction by the
deductor with the same deductee in the same financial year. Further, the tax
deducted and deposited will be allowed as credit to the seller.
(ii) Where goods are replaced by the seller against the purchase return

No adjustment is required as in that case the transaction on which tax was

deducted under section 194-O has been completed with goods replaced.
5. How will discounts given by the seller as an e-commerce participant or by any
of the multiple e-commerce operators be treated while calculating "gross
amount"?
(i) Treatment of discounts offered by the actual seller
Where the discount is given by the seller itself, the seller would reduce the price
of the products sold or services provided.

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For example, if the label-price of a product is ` 100, and the seller offers a discount
of ` 10, ` 90 will be receivable from the buyer. In this case, the seller will invoice
the buyer for ` 90, and hence the TDS has to be calculated on ` 90.
(ii) Treatment of discounts offered by the buyer ECO or Seller ECO
Where discount is given by the buyer ECO/seller ECO, usually the seller
receives full consideration for the product, however part of it is received from
the buyer and the balance is discharged to the seller by the buyer ECO/seller
ECO, as the case may be.

Movement of Goods/Services

Buyer (E- Buyer side Seller-side Seller (E-

commerce ECO Gives ECO commerce
Participant) discount of Participant)
Pays ` 90 to ` 10 to buyer Pays ` 100 to Sells for ` 100
Buyer-side Pays ` 100 to Seller Receives ` 100
ECO seller-side
ECO

Consideration

In the above diagram, if the price quoted by the seller is ` 100, and the buyer ECO
gives a discount of ` 10, ` 90 (i.e. 100 - 10) will be collected from the buyer and
remitted to the seller, and the buyer ECO will pay the remaining ` 10 to the seller via
the seller ECO. The invoice on the buyer will be raised for ` 100 and tax will therefore
be deducted by the seller-side ECO on ` 100, which is the gross amount of sales.
(7) Person responsible for paying

For the purpose of this section, the e-commerce operator shall be deemed to be the person
responsible for paying to the e-commerce participant.

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(8) Meaning of certain terms

Term Meaning
Electronic commerce The supply of goods or service or both, including digital
products, over digital or electronic network.
E-commerce operator A person who owns, operates or manages digital or
electronic facility or platform for electronic commerce.
E-commerce participant A person resident in India selling goods or providing
services or both, including digital products, through digital
or electronic facility or platform for electronic commerce.
Services It includes fees for technical services and fees for
professional services as defined in section 194J.

13.3.24 Deduction of tax by a specified bank in case of specified senior

citizen [Section 194P]
(1) Applicability and rate of TDS
(i) Where the deductee exercises the option to shift out of the default tax regime
under section 115BAC: Section 194P
requires deduction of tax at source on the basis
of rates in force by a specified bank, being a
notified banking company, on the total income
of specified senior citizen for the relevant
assessment year, computed after giving effect to -
- deduction allowable under Chapter VI-A; and
- rebate allowable under section 87A.
(ii) Where the deductee does not exercise the option to shift out of the default tax
regime under section 115BAC: In such case, the specified bank shall deduct tax at
source in accordance with the rates provided under section 115BAC(1A) subject to
certain conditions, including the condition that the specified senior citizen does not
avail of specified exemptions and deductions.
(2) Exemption from filing return of income

The specified senior citizen is exempted from filing his return of income for the assessment
year relevant to the previous year in which the tax has been deducted under this section.

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(3) Meaning of certain terms

Term Meaning
Specified bank A banking company which is a scheduled bank and has been
appointed as agents of Reserve Bank of India under section 45 of the
Reserve Bank of India Act, 1934.
Specified An individual, being a resident in India, who
senior citizen 1. is of the age of 75 years or more at any time during the previous
year;
2. is having pension income [Also, he should have no other income
except interest income received or receivable from any account
maintained by such individual in the same specified bank in which
he is receiving his pension income]; and
3. has furnished a declaration to the specified bank containing such
particulars, in the prescribed form and verified in the prescribed
manner. Accordingly, CBDT has inserted Rule 26D to prescribe
the form and manner for furnishing the declaration discussed
below.

(4) Prescribed form and manner for furnishing declaration with the bank [Rule 26D]
Sub-rule Provision
1 Form No. and manner of furnishing the form:
The declaration required to be furnished by the specified senior citizen to the
specified bank shall be in Form no. 12BBA to be furnished in paper form duly
verified.
2&3 Specified bank deducts tax at source considering the declaration
furnished: On furnishing of the declaration in Form No. 12BBA, the specified
bank would compute the total income of such specified senior citizen for the
relevant assessment year, after giving effect to the deduction allowable
under Chapter VI-A and rebate allowable under section 87A and deduct
income-tax on such total income on the basis of the rates in force.
The effect of the deduction allowable under Chapter VI-A has to be given
based on the evidence furnished by the specified senior citizen during the
previous year.
4 Specified bank responsible for keeping and maintaining declaration
and evidence furnished by the senior citizen: The declaration referred to
in sub-rule (1) and evidence for claiming deduction under Chapter VI-A
referred to in sub-rule (3) shall be properly maintained by the Specified Bank
and shall be made available to the Principal Chief Commissioner of Income -
tax or Chief Commissioner of Income-tax, as and when required

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ILLUSTRATION 16
Mr. Sharma, a resident Indian aged 77 years, gets pension of ` 82,000 per month from the UP State
Government. The same is credited to his savings account in SBI, Lucknow Branch. In addition, he
gets interest@8% on fixed deposit of ` 40 lakhs with the said bank. Out of the deposit of ` 40 lakhs,
` 2 lakh represents a five-year term deposit made by him on 1.4.2025. Interest on savings bank
credited to his SBI savings account for the P.Y.2025-26 is ` 9,500.
(I) From the above facts, compute the total income and tax liability of Mr. Sharma for the
A.Y. 2026-27, assuming that he has exercised the option of shifting out of the default tax
regime under section 115BAC(1A).
(II) What would be the amount of tax deductible at source by SBI, assuming that the same is a
specified bank? Is Mr. Sharma required to file his return of income for A.Y.2026-27, if tax
deductible at source has been fully deducted? Examine.
(III) Is Mr. Sharma required to file his return of income for A.Y.2026-27, if the fixed deposit of
` 40 lakhs was with Canara Bank instead of SBI, other facts remaining the same?
SOLUTION
(I) Computation of total income of Mr. Sharma for A.Y. 2026-27
Particulars ` `
I Salaries
Pension (` 82,000 x 12) 9,84,000
Less: Standard deduction u/s 16(ia) 50,000
9,34,000
II Income from Other Sources
Interest on fixed deposit (` 40 lakhs x 8%) 3,20,000
Interest on savings account 9,500 3,29,500
Gross total income 12,63,500
Less: Deductions under Chapter VI-A
Under Section 80C
Five years term deposit (` 2 lakh, restricted to 1,50,000
` 1.5 lakh)
Under section 80TTB
Interest on fixed deposit and savings account, restricted to
` 50,000, since Mr. Sharma is a resident Indian of the age
of 77 years. 50,000 2,00,000
Total Income 10,63,500

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.87

Computation of tax liability

Tax payable [` 63,500 x 30% + ` 1,10,000] 1,29,050
Add: Health and Education Cess@4% 5,162
Tax liability 1,34,212
Tax liability (rounded off) 1,34,210
(II) SBI, being a specified bank, is required to deduct tax at source u/s 194P and remit the same
to the Central Government. In such a case, Mr. Sharma would not be required to file his return
of income u/s 139.
(III) If the fixed deposit of ` 40 lakh is with a bank other than SBI, which is the bank where his
pension is credited, then, Mr. Sharma would not qualify as a “specified senior citizen” . In this
case, Mr. Sharma would have to file his return of income u/s 139, since his total income
(without giving effect to deduction under Chapter VI-A) exceeds the basic exemption limit.

13.3.25 Deduction of tax at source on purchase of goods [Section 194Q]

(1) Applicability and rate of TDS
Section 194Q requires any person, being a buyer who is responsible for paying any sum
to any resident-seller for purchase of goods of the
value or aggregate of such value exceeding ` 50
lakhs in a previous year, to deduct tax at source
@0.1% of such sum exceeding ` 50 lakhs.
(2) Time of deduction
The deduction is to be made at the time of credit of such sum to the account of the resident -
seller or at the time of payment thereof by any mode, whichever is earlier.
Where such sum is credited to any account in the books of account of the person liable to
pay such income, such credit of income is deemed to be credit of such income to the account
of the payee and tax has to be deducted at source. The account to which such sum is credited
may be called “Suspense account” or by any other name.
(3) Non-applicability of TDS under section 194Q [Section 194Q(5)]
Tax is not required to be deducted under this section in respect of a transaction on which -
(a) tax is deductible under any of the provisions of this Act;
and
(b) tax is collectible under the provisions of section 206C.

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Persons notified by the Central Government, on payment to whom no tax is required

to be deducted at source [Notification No. 3/2025 dated 2.1.2025]
Section 197A(1F) empowers the Central Government to notify such person or class of
persons, including institution, association or body or class of institutions or associations or
bodies, on payment to whom no tax is required to deducted or deducted at lowe r rate.
Accordingly, the CBDT has, vide Notification No. 3/2025, dated 02.01.2025, has notified
that no deduction of tax shall be made under the provisions of section 194Q by a person ,
being a buyer, in respect of purchase of goods from a Unit of IFSC, being a seller, subject
to the following conditions:
(a) The seller has to -

(i) furnish a statement-cum-declaration to the buyer giving the details of the

previous year relevant to the ten consecutive assessment years for which the
seller opts for claiming deduction under section 80LA(1A) and (2) and

(ii) such statement cum declaration has to be furnished and verified for each
previous year relevant to the ten consecutive assessment years for which the
seller opts for claiming deduction under section 80LA(1A) and (2).
(b) The buyer would -
(i) not deduct tax on payment made or credited to the seller after the date of
receipt of copy of statement cum-declaration from the seller; and
(ii) furnish the particulars of all the payments made to the seller on which tax has
not been deducted in view of this notification in the statement of deduction of
tax.
The above relaxation is available to the seller only during the said previous years relevant
to the ten consecutive assessment years as declared by the seller for which deduction
under section 80LA is being opted. The buyer shall be liable to deduct tax on payment
made or credited for any other year.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.89

(4) Meaning of buyer

Buyer means a person whose total sales, gross receipts or turnover from the business
carried on by him exceeds ` 10 crores during the
financial year immediately preceding the financial
year in which the purchase of goods is carried out.
However, the buyer does not include a person as notified by the Central Government for this
purpose, subject to fulfillment of the stipulated conditions.
(5) Power of the CBDT to issue guidelines

In case of any difficulty arises in giving effect to the provisions of this section, CBDT is
empowered to issue guidelines, with the approval of the Central Government, for the purpose
of removing the difficulty.

Every guideline issued by the CBDT shall be laid before each House of Parliament, and shall
be binding on the income-tax authorities and on the person liable to deduct tax.
Accordingly, the CBDT has, vide Circular no. 13/2021 dated
30.6.2021 and Circular No. 20/2021 dated 25.11.2021,
issued the following guidelines for removing certain
difficulties-

1. Applicability on transactions carried through various Exchanges

There are practical difficulties in implementing the provisions of TDS contained in
section 194-Q in case of certain exchanges and clearing corporations. In these
transactions, sometimes, there is no one-to-one contract between the buyers and the
sellers.
In order to remove such difficulties, it is provided that the provisions of section 194Q
would not be applicable in relation to,-
(i) transactions in securities and commodities which are traded through
recognized stock exchanges or cleared and settled by the recognized clearing
corporation, including recognized stock exchanges or recognized clearing
corporation located in International Financial Service Centre (IFSC)
(ii) transactions in electricity, renewable energy certificates and energy saving
certificates traded through registered power exchanges.

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2. Adjustment for GST, various state levies and taxes other than GST, purchase
returns
It has been clarified in Circular No.23/2017 dated 19th
July 2017 as under –
“Wherever in terms of the agreement or contract
between the payer and the payee, the component of 'GST on services' comprised in
the amount payable to a resident is indicated separately, tax shall be deducted at
source under Chapter XVII-B on the amount paid or payable without including such
'GST on services' component. GST for these purposes shall include Integrated Goods
and Services Tax, Central Goods and Services Tax, State Goods and Services Tax
and Union Territory Goods and Services Tax.”

Treatment of tax deduction on GST component included in the invoice and in case of
purchase of goods which are not covered within the purview of GST, but which are
subject to VAT/Sales tax/Excise duty/CST has been clarified vide CBDT Circular No.
13/2021 dated 30.6.2021 and Circular No. 20/2021 dated 25.11.2021, respectively.
Condition Amount on which tax is to be
deducted u/s 194Q
(i) Where tax is deducted at the time of Tax has to be deducted on the
credit of amount in the account of the amount credited (without including
seller such GST/ VAT/ Sales tax/ Excise
and duty/ CST)
In terms of the agreement or contract
between the buyer and seller,
component of GST is indicated
separately in the invoice and where
purchase of goods are not covered
within the purview of GST, VAT/
Sales tax/ Excise duty/ CST is
indicated separately in the invoice
(ii) Where tax is deducted on payment Tax has to be deducted on the whole
basis (if payment is earlier than the amount (since it is not possible to
credit) identify the payment with the tax
component to be invoiced in the
future)
(iii) In case of purchase returns, where Tax deducted earlier u/s 194Q on
the money is refunded by the seller such purchase (which is now

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returned) may be adjusted against

the next purchase from the same
seller
(iv) In case of purchase returns, where No adjustment is required as in that
goods are replaced by the seller case the purchase on which tax was
deducted under section 194Q has
been completed with goods replaced

3. Can non-resident be a buyer under section 194Q?

The provisions of section 194Q would not apply to a non-resident whose purchase of
goods from a seller resident in India is not effectively connected with the permanent
establishment of such non-resident in India. For this purpose, "permanent
establishment" shall mean to include a fixed place of business through which the
business of the enterprise is wholly or partly carries on.
4. Should tax be deducted when the seller is a person whose income is exempt?
The provisions of section 194Q would not apply on purchase of goods from a person,
being a seller, who as a person is exempt from income tax under the Act (like person
exempt under section 10) or under any other Act passed by the Parliament ( like the
RBI Act, ADB Act etc.).

The above clarification would not apply if only part of the income of the person (being
a buyer) is exempt.
5. Should tax be deducted on advance payment?
Since the provisions apply on payment or credit whichever is earlier, the provisions of
section 194Q shall apply to advance payment made by the buyer to the seller.
6. Would provisions of section 194Q apply to buyer in the year of incorporation?
Under section 194Q, a buyer is required to have total sales or gross receipts or
turnover from the business carried on by him exceeding ` 10 crore during the financial
year immediately preceding the financial year in which the purchase of goods is carried
out. Since this condition would not be satisfied in the year of incorporation, the
provisions of section 194Q shall not apply in the year of incorporation.

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7. Would provisions of section 194Q apply to buyer if the turnover from business
is ` 10 crore or less?
As regards whether the provisions of section 194Q would apply to a buyer who has
turnover or gross receipts exceeding ` 10 crore but total sales or gross receipts or
turnover from business is ` 10 crore or less, it is clarified that, for the purposes of
section 194Q, a buyer is required to have total sales or gross receipts or turnover from
the business carried on by him exceeding ` 10 crore during the financial year
immediately preceding the financial year in which the purchase of goods is carried out.
Hence, the sales or gross receipts or turnover from business carried on by him
must exceed ` 10 crore. His turnover or receipts from non-business activity is not to
be counted for this purpose.

8. Cross application of section 194-O and section 194Q

Clarification of how section 194-O and section 194Q apply on the same transaction.
Under section 194-O(3), a transaction in respect of which tax has been deducted by
the e-commerce operator under sub-section (1), or which is not liable to deduction
under sub-section (2), shall not be liable to tax
deduction at source under any other provision of
Chapter XVII of the Act.
Under section 194Q(5), the provisions of this section would not apply to a transaction
on which -
(i) tax is deductible under any of the provisions of this Act; and
(ii) tax is collectible under the provisions of section 206C
After conjoint reading of these provisions, it is clarified that:
(i) If tax has been deducted by the e-commerce operator on a transaction u/s
194-O [including transactions on which tax is not deducted on account of section
194-O(2)], that transaction shall not be subjected to tax deduction u/s 194Q.
(ii) If a transaction is both within the purview of section 194-O as well as section
194Q, tax is required to be deducted u/s 194-O and not u/s 194Q.

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9. Applicability of section 194Q in cases where exemption has been provided under
section 206C(1A)

Section 194Q does not apply in respect of transactions where tax is collectible u/s
206C.

In accordance with section 206C(1A), tax is not required to be collected in the case of
a resident buyer who furnishes declaration to the effect that the goods u/s 206C(1) are
to be utilised for the purposes of manufacturing, processing or producing articl es or
things or for the purposes of generation of power and not for trading purposes.

In case of goods which are covered u/s 206C(1) but exempted u/s 206C(1A), tax would
not be collectible u/s 206C(1).

It is clarified that the provisions of section 194Q will apply in such cases covered under
section 206C(1A) and the buyer is to be liable to deduct tax u/s 194Q, if the conditions
specified therein are fulfilled.
10. Applicability of the provisions of section 194Q in case of department of
Government not being a public sector undertaking or corporation

As per the provisions of section 194Q, for a person to be considered as a buyer,

following conditions are required to be fulfilled:
(a) Such person shall be carrying out a business/ commercial activity;
(b) The total sales, gross receipts or turnover from such business/ commercial
activity shall be more than ` 10 crore during the financial year immediately
preceding the financial year in which goods are being purchased by such
person.
Issue Would TDS u/s 194Q be
attracted?
(i) Can Department of Government be a
“buyer” for the purposes of section 194Q?
- If it is carrying on business/ Yes
commercial activity (subject to fulfillment of other
conditions)
- If it is not carrying on any business/ No, since it will not be
commercial activity considered as a buyer

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(ii) Can Department of Central/State No

Government be considered as “seller” for [Hence, no tax can be deducted
the purpose of section 194Q? u/s 194Q by the buyer]

Note - A Public Sector Undertaking or corporation established under Central or State

Act or any other such body, authority or entity, would, however, be required to comply
with the provisions of section 194Q and tax shall be deducted accordingly.

13.3.26 Deduction of tax at source on benefit or perquisite in respect of

business or profession [Section 194R]
(1) Applicability and rate of TDS [Section 194R(1)]
Any person who is responsible for providing, to a resident,
- any benefit or perquisite whether convertible into
money or not,
- arising from business or the exercise of a profession,
by such resident

has to, before providing such benefit or perquisite, as the case may be, to such resident,
ensure that tax has been deducted in respect of such benefit or perquisite @10% of the
value or aggregate of value of such benefit or perquisite.

The provisions of section 194R(1) would apply to any benefit or perquisite whether in cash or
in kind or partly in cash and partly in kind.
(2) Meaning of “Person responsible for providing” [Explanation 1 to section 194R]
“Person responsible for providing” means the person providing such benefit or perquisite. In
case of a company, it means the company itself, including the principal officer thereof.
(3) Cases where benefit or perquisite is wholly in kind or partly in kind and partly in cash
[First Proviso to section 194R(1)]
Where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and
partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in
respect of whole of such benefit or perquisite, the person responsible for providing such
benefit or perquisite has to, before releasing the benefit or perquisite, ensure that tax required
to be deducted has been paid in respect of the benefit or perquisite.

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(4) Cases where no tax is required to be deducted under section 194R [Second and Third
Proviso to section 194R(1)]
No tax is required to be deducted under section 194R in the following cases –
- In case of a resident, where the value or aggregate of the value of the benefit or
perquisite provided or likely to be provided to such
resident during the financial year does not exceed
` 20,000; or
- Where a person responsible for providing such benefit or perquisite is an individual or
HUF, whose total sales, gross receipts or turnover from business or profession does
not exceed ` 1 crore in case of business or ` 50 lakhs in case of profession, during
the financial year immediately preceding the financial year in which such benefit or
perquisite, as the case may be, is provided by such person.
(5) Power of CBDT to issue guidelines [Section 194R(2)/(3)]
In case any difficulty arises in giving effect to the provisions of this section, the CBDT may
issue guidelines for the purpose of removing the difficulty with the previous approval of the
Central Government.
Every guideline issued by the CBDT would be laid before each House of Parliament, and
would be binding on the income-tax authorities and on the person providing such benefit or
perquisite.
Accordingly, the CBDT has, with the prior approval of the
Central Government, vide Circular no. 12/2022 dated
16.6.2022 and Circular no. 18/2022 dated 13.9.2022,
issued the following guidelines –
Question 1: Is it necessary that the person providing benefit or perquisite needs to
check if the amount is taxable under section 28(iv), before deducting tax under section
194R?

Answer: No. The deductor is not required to check whether the amount of benefit or
perquisite that he is providing would be taxable in the hands of the recipient under section
28(iv). The amount could be taxable under any other section, like section 41(1), etc. Section
194R casts an obligation on the person responsible for providing any benefit or perquisite to
a resident, to deduct tax at source 10%. There is no further requirement to check whether the
amount is taxable in the hands of the recipient or under which section it is taxable.

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In the context of section 195, it is a requirement to know whether the payment made by the
deductor is income in the hands of the non-resident recipient, as section 195 requires
deduction on any other sum chargeable under the provisions of this Act at the rates in force.
Thus, there is a requirement that the deductor needs to verify if the “sum is chargeable under
the Income-tax Act”. The term “rate in force” is defined under section 2(37A) and it allows
benefit of agreement under section 90 or section 90A, if eligible, in determining the rate of
tax at which the tax is to be deducted at source. Hence, there is further requirement of
checking if the amount is taxable under tax treaty and if yes, at what rate. Such a requirement
is not there in section 194R, in the absence of these two terms in this section. Hence, there
is no requirement for deductor to verify whether the amount is taxable in the hands of the
recipient or section under which it is taxable.

These two terms are also not there in section 194E and the Supreme Court in the case of
PILCOM vs. CIT West Bengal, held that tax is to be deducted under section 194E at a specific
rate indicated there in and there is no need to see the taxability or the rate of taxability in the
hands of the non-resident.
Question 2: Is it necessary that the benefit or perquisite must be in kind for section
194R to operate?

Answer: Tax under section 194R is required to be deducted whether the benefit or perquisite
is in cash or in kind.
First proviso to section 194R(1) clearly indicates the intent of the legislature that there could
also be situations where the benefit or perquisite is in cash or the benefit or perquisite is in
kind or partly in cash and partly in kind. Thus, section 194R clearly brings in its scope the
situation where the benefit or perquisite is in cash or in kind or partly in cash or partly in kind.
Question 3: Is there any requirement to deduct tax under section 194R, when the
benefit or perquisite is in the form of a capital asset?
Answer: As has been stated in answer to question no 1, there is no requirement to check
whether the perquisite or benefit is taxable in the hands of the recipient and the section under
which it is taxable.
Further, Courts have held many benefits or perquisites to be taxable even though one can
argue that they are in the nature of a capital asset. The following judgments illustrate this
point:
• Assessee entered into an agreement with “J” for purchase of a plot of land and certain
amount was paid as earnest money. However, possession of land was not given to

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assessee, and seller entered into another agreement with a third party to develop the
said plot. Assessee filed suit in which a consent decree was passed, and in pursuance
of same certain amount as paid to assessee. On appeal, it was held that such sum
received in pursuance of the consent decree was liable to tax as business income
under section 28(iv) [Ramesh Babulal Shah v CIT (2015) 53 [Link] 277(Bom)].
• The amount representing principal loan waived by bank under one time settlement
scheme would constitute income falling under section 28(iv) relating to value of any
benefit or perquisite, arising from business or exercise of profession [CIT v
Ramaniyam Homes (P) Ltd (2016) 68 [Link] 289 (Mad)].
• Value of rent free accommodation, furniture and fixtures given to director was held as
taxable under section 28(iv). CIT v Subrata Roy (2016) 385 ITR 547 (All).
• Where a car was given to an assessee by his disciple, who had been benefited from
his preaching, the value of car was held to be taxable in the hands of the assessee
being a receipt from the exercise of the vocation carried on by him [CIT (Addl) v Ram
Kripal Tripathi (1980) 125 ITR 408 (All)].
• The assessee was a director of a company. In terms of an agreement with the
promoters, shares were allotted to the director. On these facts, it was held that the
shares received by the director were benefit or perquisite received from a company by
the director and it was a benefit assessable to tax [D. M. Neterwala v CIT (1986) 122
ITR 880 (Bom)].
• Value of gift of land was held as a receipt by the assessee in carrying on of his vocation
and was held as taxable [Amarendra Nath Chakraborty v CIT (1971) 79 ITR 342 (Cal)]
Thus, the asset given as benefit or perquisite may be a capital asset in general sense of the
term, like car, land, etc, but in the hands of the recipient, it is benefit or perquisite and has
accordingly been held to be taxable. In any case, as stated earlier, the deductor is not
required to check if the benefit or perquisite is taxable in the hands of recipient. Thus, the
deductor is required to deduct tax under section 194R in all cases where benefit or perquisite
(of whatever nature) is provided.

Question 4: If loan settlement/waiver by a bank is to be treated as benefit/ perquisite, it

would lead to hardship as the bank would need to incur the additional cost of tax deduction
in addition to the haircut that he has taken. Will section 194R apply in such a situation?
As per the judgment of CIT v. Ramaniyam Homes (P) Ltd (2016) 68 [Link] 289 (Mad)
mentioned above, the amount representing principal loan waived by bank under one time

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settlement scheme would constitute income falling under section 28(iv) relating to value of
any benefit or perquisite, arising from business or exercise of profession
However, it has been clarified, vide Circular no. 18/2022 dated 13.9.2022, that one-time loan
settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers
by the following would not be subjected to tax deduction at source under section 194R:
(i) Public Financial Institution
(ii) Scheduled Bank
(iii) Cooperative bank (other than a primary agricultural credit society)

(iv) Primary Co-operative Agricultural and Rural Development Bank

(v) State Financial Corporation
(vi) State Industrial Investment Corporation, being a Government company, engaged in
the business of providing long-term finance for industrial projects;
(vii) Deposit taking Non-Banking Financial Company
(viii) Systemically Important Non-Deposit Taking Non-Banking Financial Company

(ix) Public company engaged in providing long-term finance for construction or purchase
of houses in India for residential purpose and which is registered in accordance with
the guidelines/ direction issued by the National Housing Bank formed under the
National Housing Bank Act 1987;
(x) Registered Asset Reconstruction Companies
This clarification is only for the purposes of section 194R. The treatment of such settlement/
waiver in the hands of the person who had got benefitted from such waiver would not be
impacted by this clarification. Taxability of such settlement/ waiver in the hands of the
beneficiary will be governed by the relevant provisions of the Act.
Question 5: Whether sales discounts, cash discounts and rebates are benefit or
perquisite?
Answer: Sales discounts, cash discounts or rebates allowed to customers from the listed
retail price represent a lesser realization of the sale price itself. To that extent, the purchase
price of a customer is also reduced.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.99

These are also benefits though related to sales/purchase.

Since TDS under section 194R is applicable on all forms of
benefit/perquisite, tax is required to be deducted. However,
subjecting these to tax deduction would put the seller to
difficulty. To remove such difficulty, it has been clarified that no tax is required to be deducted
under section 194R on sales discounts, cash discounts and rebates allowed to customers.
Where a seller is selling its items from its stock in trade to a buyer, the seller offers two items
free with purchase of 10 items. In substance, the seller is actually selling 12 items at a price
of 10 items. Let us assume that the price of each item is ` 12. In this case, the selling price
for the seller would be ` 120 for 12 items. For buyer, he has purchased 12 items at a price of
10. Just like seller, the purchase price for the buyer is ` 120 for 12 items and he is expected
to record so in his books.
In such a situation, again, there could be difficulty in applying section 194R provision. Hence,
to remove difficulty it has been clarified that on the above facts no tax is required to be
deducted under section 194R.
It has been clarified that the situation is different when free samples are given and the above
relaxation would not apply to a situation of free samples.

Similarly, this relaxation should not be extended to other benefits provided by the seller in
connection with its sale. To illustrate, the following are some of the examples of
benefits/perquisites on which tax is required to be deducted under section 194R (the list is
not exhaustive):
• When a person gives incentives (other than discount, rebate) in the form of cash or
kind such as car, TV, computers, gold coin, mobile phone etc.
• When a person sponsors a trip for the recipient and his/her relatives upon achieving
certain targets
• When a person provides free ticket for an event
• When a person gives medicine samples free to medical practitioners.
The above examples are only illustrative. The relaxation provided from the non-deduction of
tax for sales discounts and rebates is only for those items and should not be extended to
others.
It has been further clarified that these benefits/perquisites may be used by owner/ director/
employee of the recipient entity or their relatives who in their individual capacity may not be

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carrying on business or exercising a profession. However, the tax is required to be deducted

by the person in the name of recipient entity since the usage by owner/ director/ employee/
relative is by virtue of their relation with the recipient entity and in substance the
benefit/perquisite has been provided by the person to the recipient entity.
To illustrate, the free medicine sample may be provided by a company to a doctor who is an
employee of a hospital. The TDS under section 194R is required to be deducted by the
company in the hands of hospital as the benefit/perquisite is provided to the doctor on account
of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is
provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the
perquisite given to its employees (if the person who used it is his employee) under section
17 and deduct tax under section 192. In such a case, it would first be taxable in the hands of
the hospital and then allowed as a deduction as salary expenditure. Thus, ultimately the
amount would get taxed in the hands of the employee and not in the hands of the hospital.
Hospital can get credit of tax deducted under section 194R by furnishing its tax return. It has
been further clarified that the threshold of ` 20,000 is also required to be seen with respect
to the recipient entity.
Similarly, the tax is required to be deducted under section 194R if the benefit or perquisite is
provided to a doctor who is working as a consultant in the hospital. In this case the benefit or
perquisite provider may deduct tax under section 194R with hospital as the recipient and then
hospital may again deduct tax under section for providing the same benefit or perquisite to the
consultant. To remove difficulty, as an alternative, the original benefit or perquisite provider may
directly deduct tax under section 194R in the case of the consultant as a recipient.
The provisions of section 194R would not apply if the benefit or perquisite is being provided
to a Government entity, like Government hospital, not carrying on business or profession.
Question 6: How is the valuation of benefit/perquisite required to be carried out?
Answer: The valuation would be based on the fair market
value of the benefit or perquisite, except in following cases:-

Situation Value for such

benefit/perquisite
(i) The benefit/perquisite provider has purchased the purchase price
benefit/perquisite before providing it to the recipient
(ii) The benefit/perquisite provider manufactures such the price that it charges to its
items given as benefit/perquisite customers for such items

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It has been further clarified that GST would not be included

for the purposes of valuation of benefit/perquisite for TDS
under section 194R.
Question 7: Many times, a social media influencer is given a product of a manufacturing
company so that he can use that product and make audio/video to speak about that
product in social media. Is this product given to such influencer a benefit or perquisite?
Answer: Whether this is benefit or perquisite will depend upon the facts of the case.
In case of benefit or perquisite being a product like car, mobile, outfit, cosmetics , etc. and if
the product is returned to the manufacturing company after using for the purpose of rendering
service, then it will not be treated as a benefit/perquisite for the purposes of section 194R.
However, if the product is retained, then it would be in the nature of benefit/perquisite and tax
is required to be deducted accordingly under section 194R.
Question 8: Whether reimbursement of out-of-pocket expenses incurred by service
provider in the course of rendering service is benefit/perquisite?

Answer: Any expenditure which is the liability of a person carrying out business or profession,
if met by the other person is in effect a benefit/perquisite provided by the second person to
the first person in the course of business/profession.

For example, a consultant is rendering service to a

person “X” for which he is receiving consultancy fee. In
the course of rendering that service, he has to travel to a different city from the place where
is regularly carrying on business or profession. For this purpose, he pays for boarding and
lodging expenses incurred exclusively for the purposes of rendering the service to “X”.
Ordinarily, the expenditure incurred by the consultant is part of his business expenditure
which is deductible from the fee that he receives from company “X”. In such a case, the fee
received by the consultant is his income and the expenditure incurred on travel is his
expenditure deductible from such income in computing his total income.
If this travel expenditure is met by the company “X”, it is benefit or perquisite provided by “X”
to the consultant.
However, sometimes the invoice is obtained in the name of “X” and accordingly, if paid by the
consultant, is reimbursed by “X”. In this case, since the expense paid by the consultant (for
which reimbursement is made) is incurred wholly and exclusively for the purposes of
rendering services to “X” and the invoice is in the name of “X”, then the reimbursement made

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by “X” being the service recipient will not be considered as benefit/perquisite for the purposes
of section 194R.
If the invoice is not in the name of “X” and the payment is made by “X” directly or reimbursed,
it is the benefit/perquisite provided by “X” to the consultant for which deduction is required to
be made under section 194R.
However, it has been clarified, vide circular no. 18/2022 dated 13.9.2022, that in case of a
supplier who is a “pure agent” fulfilling the following conditions, the reimbursement would not
be treated as benefit/ perquisite for the purpose of section 194R -

i. the supplier acts as a pure agent of the recipient of the supply, when he makes
payment to the third party on authorization by such recipient;
ii. the payment made by the pure agent on behalf of the recipient of supply has been
separately indicated in the invoice issued by the pure agent to the recipient of service;
and
iii. the supplies procured by the pure agent from the third party as a pure agent of the
recipient of supply are in addition to the services he supplies on his own account.

In case these conditions are not satisfied, such expenditure incurred is included in the value
of supply under GST. However, in the abovementioned case of "pure agent", if all the
conditions are satisfied, the GST input credit is allowed to the recipient and it is not considered
as supply of the pure agent. In such a case, it is clarified that the amount incurred by such
"pure agent" for which he is reimbursed by the recipient would not be treated as
benefit/perquisite for the purpose of section 194R.

Meaning of “Pure Agent” – A "pure agent" means a person who

a) enters into a contractual agreement with the recipient of supply to act as his pure agent
to incur expenditure or costs in the course of supply of goods or services or both;

b) neither intends to hold nor holds any title to the goods or services or both, so procured
or provided as pure agent of the recipient of supply;

c) does not use for his own interest such goods or services so procured; and

d) receives only the actual amount incurred to procure such goods or services in addition
to the amount received for supply he provides on his own account.

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Question 9: Tax deduction under sections 194C and 194J is required to be made from
the gross amount of bill, including the reimbursement. A person has provided service
to a company and out-of-pocket expenses are charged by him to the company along
with service fee in the same bill. Company deducts tax under section 194J on both
service fee components as well as on out-of-pocket expense. Is there a noncompliance
with the provision of section 194R?
If out-of-pocket expenses (reimbursement) are already part of the consideration in the bill on
which tax is deducted under the relevant provisions of the Act, other than section 194R, it is
clarified, vide circular no. 18/2022 dated 13.9.2022, that there will not be further liability for
tax deduction under section 194R.
In the above example, out-of-pocket expense is part of the consideration in the bill for
professional fee that is charged to the company and the tax is deducted under section 194J
on the entire consideration, including out-of-pocket expense. In such a case, the out-of-
pocket expense is already included as part of professional fee. Hence, there is no further
benefit/perquisite which requires tax deduction under section 194R.
Question 10: If there is a dealer conference to educate the dealers about the products
of the company - Is it benefit/perquisite?

Answer: The expenditure pertaining to dealer/ business conference would not be considered
as benefit/ perquisite for the purposes of section 194R
in a case where dealer/ business conference is held
with the prime object to educate dealers/customers
about any of the following or similar aspects:
(i) new product being launched
(ii) discussion as to how the product is better than others
(iii) obtaining orders from dealers/customers
(iv) teaching sales techniques to dealers/customers

(v) addressing queries of the dealers/customers

(vi) reconciliation of accounts with dealers/customers
However, such conference must not be in the nature of incentives/ benefits to select
dealers/customers who have achieved particular targets.

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 13.104 DIRECT TAX LAWS

Further, in the following cases the expenditure would be considered as benefit or perquisite
for the purposes of section 194R -
(i) Expense attributable to leisure trip or leisure component, even if it is incidental to the
dealer/ business conference.
(ii) Expenditure incurred for family members accompanying the person attending dealer/
business conference
(iii) Expenditure on participants of dealer/ business conference for days which are on
account of prior stay or overstay beyond the dates of such conference. However, a
day immediately prior to actual start date of the conference and a day immediately
following the actual end date of conference would not be considered as over stay.
Question 11: If there is a dealer conference to educate the dealers about the products
of the company - (i) is there a requirement that all dealers must be invited in the
conference, (ii) how to identify benefit against individual dealers in a group activity?
It has been clarified, vide circular no. 18/2022 dated 13.9.2022, that it is not necessary that
all dealers are required to be invited in a dealer/business conference for the expenses to be
not considered as benefit/perquisite for the purposes of tax deduc tion under section 194R.
There may be expenses during such dealer/business conference which need to be classified
as benefit/perquisite and tax is required to be deducted under section 194R. However, there
may be practical difficulties in identifying such benefit/perquisite to actual recipient due to the
fact that it is a group activity and reasonable allocation is not possible. Non compliance of the
provision of section 194R, in such a case, would not only result in disallowance under section
40(ia) but may also result in treating the benefit/perquisite provider as assessee in default
under section 201 with all other consequences.
In order to remove these practical difficulties, it has been clarified that if benefit/perquisite is
provided in a group activity in a manner that it is difficult to match such benefit/perquisite to
each participant using a reasonable allocation key, the benefit/perquisite provider may at his
option not claim the expense, representing such benefit/perquisite, as deductible expenditure
for calculating his total income. If he decides to opt so, he will not be required to deduct tax
under section 194R on such benefit/perquisite, and therefore, he will not be treated as an
assessee in default under section 201. Thus, in such a case, he must add back the
expenditure, representing such benefit/perquisite, to calculate his total income if such
expenditure is debited in the account.

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Question 12: Section 194R provides that if the benefit/ perquisite is in kind or partly in
kind (and cash is not sufficient to meet TDS) then the person responsible for providing
such benefit or perquisite is required to ensure that tax required to be deducted has
been paid in respect of the benefit or perquisite, before releasing the benefit or
perquisite. How can such person be satisfied that tax has been deposited?

Answer: The requirement of law is that if a person is providing benefit in kind to a recipient
and tax is required to be deducted under section 194R, the
person is required to ensure that tax required to be deducted
has been paid by the recipient. Such recipient would pay tax
in the form of advance tax. The tax deductor may rely on a
declaration along with a copy of the advance tax payment challan provided by the recipient
confirming that the tax required to be deducted on the benefit/perquisite has been d eposited.
This would then be required to be reported in TDS return along with challan number. Form
26Q has included provisions for reporting such transactions.
In the alternative, as an option to remove difficulty if any, the benefit provider may deduct the
tax under section 194R and pay to the Government. The tax should be deducted after taking
into account the fact the tax paid by him as TDS is also a benefit under section 194R. In the
Form 26Q he will need to show it as tax deducted on benefit provided.

Question 13: Company “A” gifts a car to its dealer “B” and deducted tax on this benefit
under section 194R. Dealer “B” uses this car in his business. Will he get deduction for
depreciation in calculating his income under the head “profits and gains of business
or profession”?

It has been clarified, vide circular no. 18/2022 dated 13.9.2022, that once Company “A” has
deducted tax on gifting of car in accordance with section 194R (or released the car after
dealer “B” showed him payment of tax on such benefit) and dealer “B” has included this
benefit as income in his income tax return, it would be deemed that the "actual cost" of the
car for the purposes of section 32 shall be the amount of benefit included by dealer “B” as
income in his income-tax return. Hence, dealer “B” can get depreciation on fulfilment of other
conditions for claiming depreciation.

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Question 14: Whether Embassy/High Commissions are required to deduct tax under
section 194R?

Answer: It has been clarified, vide circular no. 18/2022 dated 13.9.2022, that the provision
of section 194R is not applicable on benefit/perquisite provided by, an organization in scope
of The United Nations (Privileges and Immunity Act) 1947, an international organization
whose income is exempt under a specific Act of Parliament (such as the Asian Development
Bank Act 1966), an embassy, a High Commission, legation, commission, consulate and the
trade representation of a foreign state.
Question 15: Whether issuance of bonus share/right share is a benefit or perquisite if
issued by a company in which the public are substantially interested and whether tax
is required to be deducted under section 194R?
Answer: In case of bonus shares which are issued to all shareholders by a company in which
the public are substantially interested as defined in clause (18) of section 2 of the Act, it has
been represented that this does not result in any benefit to shareholders a s the overall value
and ownership of their holding does not change. Further cost of acquisition of bonus share is
taken as nil for capital gains computation when this share is sold. Similar representations
have been received seeking clarity on issuance of right shares.
It has been clarified, vide circular no. 18/2022 dated 13.9.2022, that the tax under section
194R is not required to be deducted on the issuance of bonus or right shares by a company
in which the public are substantially interested, where bonus shares are issued to all
shareholders by such a company or right shares are offered to all shareholders by such a
company, as the case may be.

13.3.27 Deduction of tax at source on salary, remuneration, commission,

bonus or interest to a partner of the firm [Section 194T]
(1) Applicability of TDS under section 194T
Any person, being a firm, responsible for paying any sum in the nature of salary,
remuneration, commission, bonus or interest to its partner has to deduct tax on such sum.

(2) Rate of TDS

The rate of deduction of tax in respect of such sum is 10%.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.107

(3) Time of tax deduction at source

The deduction of tax must be made at the time of crediting such sum to the account of the
partner (including the capital account) or at the time of its payment, whichever is earlier.
(4) Non-applicability of TDS under section 194T
No deduction of tax shall be made where such sum or the aggregate of such sums credited
or paid or likely to be credited or paid to the partner of the firm does not exceed ` 20,000
during the financial year.

13.3.28 Non-applicability of TDS provisions on payments made to

Corporations whose income is exempt under section 10(26BBB)
[Circular No.7/2015, dated 23-04-2015]
The CBDT had earlier issued Circular No.4/2002 dated 16.07.2002 which laid down that there would
be no requirement for tax deduction at source in respect of payments made to such entities, whose
income is unconditionally exempt under section 10 of the
Income-tax Act, 1961 and who are statutorily not required to
file return of income as per the section 139. The said Circular
also lists the entities which are unconditionally exempt under
section 10 and who are statutorily not required to file return of income as per section 139.

Section 10(26BBB) provides that any income of a corporation established by a Central, State or
Provincial Act for the welfare and economic upliftment of ex-servicemen being the citizens of India
does not form part of the total income. The corporations covered under section 10(26BBB ) are also
statutorily not required to file return of income as per the section 139.

The corporations covered under section 10(26BBB) satisfy the two conditions of Circular No. 4/2002
i.e., such corporations are statutorily not required to file return of income as per section 139 and
their income is also unconditionally exempt under section 10 of the Income-tax Act, 1961.
Accordingly, the CBDT has examined the matter and extended the benefit of the said Circular to
such corporations whose income is exempt under section 10(26BBB). Hence, there would be no
requirement for tax deduction at source from the payments made to such corporations, since their
income is anyway exempt under the Income-tax Act, 1961.

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13.3.29 Income payable “net of tax” [Section 195A]

(1) Where, under an agreement or other arrangement, the tax chargeable on any income referred
to in the foregoing provisions of this Chapter is to be
borne by the person by whom the income is payable,
then, for the purposes of deduction of tax under those
provisions such income shall be increased to such
amount as would, after deduction of tax thereon, be equal to the net amount payable under
such agreement or arrangement.
(2) However, no grossing up is required in the case of tax paid under section 192(1A) by an
employer on the non-monetary perquisites provided to the employee.
ILLUSTRATION 17
'X' while making payment "net of tax" to a non-resident for providing technical services on a world
bank aided project had deducted tax out of such payments as per rates prescribed but says that the
payee is not entitled for the TDS certificate. Examine.
SOLUTION
A payment made of ‘net of tax’ in terms of section 195A, refers to an agreement/arrangement, where
the tax chargeable on any income is borne by the payer of the income, and for the purpose of
deduction of tax at source, such income is increased to such an amount as would after deduction of
tax thereon, be equal to the net amount payable under the agreement.
As per section 198, any sum deducted in accordance with the provisions of Chapter
XVII-B of the Income-tax Act, 1961 is deemed to be income received while computing the income of
the payee. Further, section 199 provides that credit for the tax deducted at source and paid to the
Central Government shall be given to the person from whose income the deduction was made on
the production of a certificate furnished under section 203 of the Income-tax Act.
As per section 203, every person deducting tax at source shall furnish to the payee a certificate in
the prescribed form within the prescribed time.

Even in a case where X undertakes to pay the tax on the grossed-up amount, the non-resident shall
be entitled for issue of certificate for tax deducted at source in respect of payment made ‘net of tax’.
This has been clarified vide CBDT Circular No.785 dated 24.11.1999.

Therefore, X has a legal obligation to issue TDS certificate to the non-resident, even if he has made
payment of income “net of tax” to him.

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 DEDUCTION, COLLECTION AND RECOVERY OF TAX 13.109

13.3.30 Interest or dividend or other sums payable to Government, Reserve

Bank or certain corporations [Section 196]
(1) No deduction of tax shall be made by any person from any sums payable to –
(i) the Government; or
(ii) the Reserve Bank of India; or
(iii) a corporation established by or under a Central Act, which is, under any law for the
time being in force, exempt from income-tax on its income; or
(iv) a Mutual Fund specified under section 10(23D).
(2) This provision for non-deduction is applicable when such sum is payable to the above entities
by way of –
(i) interest or dividend in respect of securities or shares –
(a) owned by the above entities; or
(b) in which they have full beneficial interest or
(ii) any other income accruing or arising to them.
The following is the summary of those TDS provisions which are discussed in detail in other
chapters of the Study Material as mentioned in Column (4):

Section Nature of payment Rate of TDS Chapter

(1) (2) (3) (4)

194E Income referred to under section 115BBA 20%

payable to non-resident sportsmen/sports
21: Non-
association or an entertainer
resident
Taxation
194LB Interest payable by infrastructure debt 5%
(Module 4)
fund to a non-corporate non-resident or
foreign company

194LBA(1)/(2) Distribution of any interest income, 10% (resident)

10: Assessment
received or receivable by a business trust
5% (Non-resident of Trusts,
from a SPV, to its unit holders.
and foreign Political Parties
company) and Other

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Special Entities
Distribution of any dividend income, 10% (resident,
(Module 2)
received or receivable by business trust non-resident and
from a SPV exercising option to pay tax at foreign Co.)
concessional rate under section 115BAA,
to its unit holders.
However, if the SPV is not exercising the
option to pay tax at concessional rate
under section 115BAA, dividend income
would be exempt in the hands of unit
holders and tax would not be deductible at
source.

194LBA(1)/(3) Distribution of any income received from

10% (resident)
renting or leasing or letting out any real
estate asset directly owned by the At the rates in
business trust, to its unit holders. force (Non-
resident and
194LBB Investment fund paying income to a unit foreign company)
holder [other than income which is exempt
under section 10(23FBB)].

194LBC(1)/(2) Income in respect of investment made in 10% (resident)

a securitisation trust (specified in
At the rates in
Explanation to section 115TCA)
force (Non-
resident and
foreign company)

194LC Interest payable by an Indian Company or

a business trust to a non-corporate non-
resident or foreign company
- in respect of money borrowed in
foreign currency from a source outside
India 21: Non
• under a loan agreement between resident
5%
1.7.2012 and 30.6.2023 or Taxation
(Module 4)
• by way of issue of long-term
infrastructure bonds during the
period between 1.7.2012 and
30.9.2014
• by way of issue of long term bonds
(including long term infrastructure

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bond) between 1.10.2014 and

30.6.2023
as approved by Central
Government or
- in respect of money borrowed from
source outside India by way of rupee
denominated bond on or before
30.6.2023

Interest payable by an Indian company or

a business trust to a non-corporate non-
resident or foreign company, in respect of
monies borrowed by it from a source
outside India by way of issue of any long-
term bond or rupee denominated bond -
(i) between 1.4.2020 and 30.6.2023,
which is listed only on a recognised
stock exchange located in any
4%
International Financial Services
Centre.

(ii) on or after 1.7.2023, which is listed

only on a recognised stock exchange
9%
located in any International Financial
Services Centre.

Interest payable by an Indian company or Nil

a business trust to a non-resident,
(Since such
including a foreign company, in respect of
interest is exempt
rupee denominated bond issued outside
u/s 10(4C), no tax
India during the period from 17.9.2018 to
is deductible u/s
31.3.2019
194LC)

194S Payment of any sum to any resident by 12: Taxation of

way of consideration for transfer of virtual digital
1%
digital asset transactions
(Module 2)

195 Any other sum payable to a non-resident At the rates in 21: Non
force resident
Taxation
196A Income on units of a mutual fund specified 20% or the rates (Module 4)
under section 10(23D) or from the specified in DTAA,

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specified company referred to in section whichever is lower

10(35) payable to non-corporate (provided tax
non-resident or foreign company residency
certificate is
furnished by the
non-resident)

196B Income from units of a mutual fund or UTI 10% in respect of

purchased in foreign currency (including income from units
long term capital gain on transfer of such
12.5% in respect
units) payable to an Offshore Fund
of long term
capital gain on
transfer of such
units

196C Income by way of interest or dividend on 10% in respect of

bonds of an Indian company or public interest or
sector company sold by the Government dividend from
and purchased by a non-resident in bonds or GDRs
foreign currency or GDRs referred to in
12.5% in respect
section 115AC (including long term capital
of long-term
gain on transfer of such bonds or GDRs)
capital gains on
payable to a non-resident
transfer of such
bonds or GDRs

196D Income of Foreign Institutional Investors 20%

(FIIs) from securities (not being capital
In case DTAA
gain arising from such securities)
applies to FII, and
if FII furnishes a
TRC, tax would be
deducted @20%
or rate provided in
DTAA, whichever
is lower.

Income of specified fund from securities 10%

[not being income exempt u/s 10(4D)]

Note: In the above cases, wherever payment is made to a non-corporate non-resident or a foreign
company, the rate of TDS would be further increased by a surcharge, wherever applicable, and
health and education cess @4% except in case of deduction u/s 196D on income of a specified fund.

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13.4 CERTIFICATE FOR DEDUCTION OF TAX AT A LOWER

RATE [SECTION 197]
(1) This section applies where, in the case of any income of any
person or sum payable to any person, income-tax is
required to be deducted at the time of credit or payment, as
the case may be at the rates in force as per the provisions
of sections 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA,
194LBA, 194LBB, 194LBC, 194M, 194-O,194Q and 195.
(2) In such cases, the assessee can make an application to the Assessing Officer for the
deduction of tax at a lower rate or for non-deduction of tax.
(3) If the Assessing Officer is satisfied that the total income of the recipient justifies the deduction
of income-tax at lower rates or no deduction of income-tax, as the case may be, he may give
to the assessee such certificate, as may be appropriate.
(4) Where the Assessing Officer issues such a certificate, then the person responsible for paying
the income shall deduct income-tax at such lower rates specified in the certificate or deduct
no tax, as the case may be, until such certificate is cancelled by the Assessing Officer.
(5) Enabling powers have been conferred upon the CBDT to make rules for prescribing the
procedure in this regard.

13.5 NO DEDUCTION IN CERTAIN CASES [SECTION 197A]

(1) Enabling provision for filing of declaration for receipt of dividend and NSS payment
without deduction of tax [Sub-section (1)]
(i) This section enables an individual, who is resident in India and whose estimated total
income of the previous year is less than the basic exemption limit, to receive dividends
and any sum out of National Savings Scheme Account, without deduction of tax at
source under sections 194 and 194EE, on furnishing a declaration in duplicate in the
prescribed form and verified in the prescribed manner.
(ii) The declaration in the above form is to be furnished in writing in duplicate by the
declarant to the person responsible for paying any income of the nature referred to in
sections 194 or 194EE. The declaration will have to be to the effect that the tax on the
estimated total income of the declarant of the previous year in which such income is
to be included in computing his total income will be Nil.

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(2) Enabling provision for filing of declaration for non-deduction of tax under section 192A
or 193 or 194A or 194D or 194DA or 194-I or 194K by persons, other than companies and
firms [Sub-section (1A)]
No deduction of tax shall be made under the above provisions of the Act, where a person,
who is not a company or a firm, furnishes to the person
responsible for paying any income of the nature referred to
in these sections, a declaration in writing in duplicate in the
prescribed form to the effect that the tax on his estimated total income of the previous year
in which such income is to be included in computing his total income will be Nil.
(3) Filing declaration not permissible if income/aggregate of incomes exceed basic
exemption limit [Sub-section (1B)]
Declaration cannot be furnished as per the above provisions, where -
(i) payments of dividend; or
(ii) payments in respect of deposits under National Savings Schemes, etc.; or
(iii) payment of premature withdrawal from Employee Provident Fund; or
(iv) income from interest on securities or
(v) interest other than “interest on securities”; or
(vi) insurance commission; or
(vii) payment in respect of life insurance policy; or
(viii) rent; or
(ix) income from units; or
(x) the aggregate of the amounts of such incomes in (i) to (ix) above
credited or paid or likely to be credited or paid during the previous year in which such income
is to be included exceeds the basic exemption limit.
(4) Enabling provision for filing of declaration by resident senior citizens for non-
deduction of tax at source [Sub-section (1C)]
For a resident senior citizen, who is of the age of 60 years or more at any time during the
previous year, no deduction of tax shall be made under
section 192A or section 193 or section 194 or section 194A
or section 194D or section 194DA or section 194EE or
section 194-I or section 194K, if such individual furnishes a declaration in writing in duplicate
in Form 15H to the payer, that tax on his estimated total income of the previous year in which

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such income is to be included in computing his total income is Nil. The restriction contained
in sub-section (1B) will not apply to resident senior citizens.
Further, declaration in Form 15H can also be made in a case where income of the assessee,
who is eligible for rebate of income-tax under section 87A, is higher than the basic exemption
limit (after allowing for deduction(s) under Chapter VI-A, if any, or set off of loss, if any, under
the head “Income from house property” for which, the declarant is eligible) but his tax liability
would be “Nil” after taking into account the rebate available to him under section 87A.
(5) Non-deduction of tax in certain cases

(i) Interest payments by an Offshore Banking Unit to a non-resident/not ordinarily

resident in India [Sub-section (1D)]
No deduction of tax shall be made by an Offshore Banking Unit from the interest paid
on -
(a) deposit made by a non-resident/not-ordinarily resident on or after 1.4.2005; or
(b) borrowing from a non-resident/not-ordinarily resident on or after 1.4.2005.
Applicability of section 197A(1D) and section 10(15)(viii) to interest paid by
IFSC Banking Units (IBUs) [Circular No 26/2016 dated 4.7.2016]
The CBDT Circular clarifies that in accordance with the provisions of section
197A(1D), tax is not required to be deducted on interest paid by IFSC Banking Units,
on deposit made on or after 1.4.2005 by a non-resident or a person who is not
ordinarily resident in India, or on borrowings made on or after 1.4.2005 from such
persons.

(ii) Payment to any person for, or on behalf of, the NPS Trust [Sub-section (1E)]
No deduction of tax at source shall be made from any payment to any person for, or
on behalf of, the New Pension System Trust referred in section 10(44).
(iii) Payments to notified institutions/class of institutions etc. [Sub-section (1F)]
No deduction of tax shall be made or deduction of tax shall be made at such lower
rate, from such payment to such person or class of persons, including institution,
association or body or class of institutions or associations or bodies as may be notified
by the Central Government in the Official Gazette in this behalf. Therefore, in respect
of such payments made to a notified person or class of persons, no tax is to be
deducted at source or tax is to be deducted at a lower rate.

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Non-applicability of TDS provisions in respect of certain payments made to

specified units located in IFSC [Notification No. 28/2024 dated 7.3.2024 and
Notification No. 67/2025 dated 20.6.2025]
In accordance with the provisions of section 197A(1F) read with section
80LA(1A)/(2), the Central Government has, vide notification no. 28/2024, notified
that no tax is required to be deducted at source in respect of the specified payments
made by any ‘payer’ to a payee, being a Unit of IFSC, as specified in the following
Table:-
Table: List of payments receivable by a Unit of (IFSC)
Sl. IFSC Unit Nature of receipt Relevant TDS
No. (Payee) provisions
1. Banking Unit Interest income on External Section 195
Commercial Borrowings/ Loans
Professional fees Section 194J
Referral fees Section 194H
Brokerage income Section 194H
Commission income on factoring Section 194H
and forfaiting services
2. IFSC Insurance Insurance commission Section 194D
Intermediary
office
3. Finance Interest income on External Section 195/ 194A
Company Commercial Borrowings / Loans
Dividend income Section 194
Commission income on factoring Section 194H
and forfaiting services
4. Finance Unit Interest income on External Section 195/ 194A
Commercial Borrowings / Loans
Dividend income Section 194
Commission income on factoring Section 194H
and forfaiting services
5. Fund Professional fee Section 194J
Management
entity
6. Broker Dealer Dividend income Section 194

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7. Investment Investment advisory fee Section 194J

advisor
8. Registered Distribution fee and Commission Section 194H
Distributor fee
9. Custodian Professional fee Section 194J
Commission fee Section 194H
10. Credit rating Credit rating fee Section 194J
agency
11. Investment Investment banker fee Section 194J
banker
12. Debenture Trusteeship fee Section 194J
trustee
13. International Commission income Section 194H
Trade Finance
Service or
“ITFS”
14. FinTech Entity Technical fee/ Professional fee Section 194J
Commission income Section 194H
Further, w.e.f. 1.7.2025, the Central Government has, vide notification no. 67/2025,
notified that no tax is required to be deducted at source in respect of the specified
payments made by any ‘payer’ to a payee, being a Unit of IFSC, as specified in the
following Table:-
Table: List of payments receivable by a Unit of (IFSC)
Sl. IFSC Unit Nature of receipt Relevant TDS
No. (Payee) provisions
1. BATF Professional or Consulting or Section 194J
Service Advisory fees
Provider
2. Broker- Payment made by Recognised Section 194J
Dealers Stock Exchanges
Commission Incentives Section 194H/ 194C

3. Finance Interest on account of lease Section 194A

Company
Freight Charges or Hire Charges Section 194C

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4. Fund Portfolio management fees Section 194J

Management
Investment advisory fees
Entity
Management Fees

Performance Fees

5. Recognised Professional or Technical Section 194J

Clearing Services fees
Corporation Interest Income Section 194A

Penalty levied on clearing Section 194J

members
6. Recognised Professional or Technical or Section 194J/ 194C
Depository Contractual fees
7. Recognised Professional or Technical Section 194J
Stock Exchange Services fees
Rent for Data Centres Section 194I

Interest Income Section 194A

Penalty levied on Members by Section 194J

Stock Exchanges
The following conditions are required to be satisfied for non-applicability of TDS
provisions in respect of above specified payments.

The ‘payee’ has to furnish a statement-cum-declaration to the payer containing the

details of the previous years relevant to the ten consecutive assessment years for
which the ‘payee’ opts for claiming deduction under section 80LA(1A)/(2) and

Such statement-cum-declaration has to be furnished and verified for each previous

year relevant to the ten consecutive assessment years for which the ‘payee’ opts
for claiming deduction under section 80LA(1A)/(2).

The ‘payer’ would not deduct tax on such payments made or credited to the ‘payee’
after the date of receipt of copy of such statement-cum-declaration from the ‘payee’;

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and furnish the particulars of all the payments made to ‘payee’ on which tax has not
been deducted in view of this notification in the statement of deduction of tax at
source.
The above relaxation is available to the ‘payee’ only during the said previous years
relevant to the ten consecutive assessment years as declared by the ‘payee’ for
which deduction under section 80LA is being opted. The ‘payer’ shall be liable to
deduct tax on payments as referred above for any other year.
Note – Please refer the above notification for the purpose of definitions of these
specified IFSC units.
Persons notified by the Central Government, on payment to whom no tax is
required to be deducted at source [Notification No. 128/2024, dated 18.12.2024,
Notification No. 1/2025 and 2/2025, dated 2.1.2025]
The Central Government has, vide Notification No. 128/2024, w.e.f. 18.12.2024,
Notification No. 1/2025 and 2/2025, w.e.f. 2.1.2025, notified that no tax is required
to be deducted on the payments received by
- the Credit Guarantee Fund Trust for Micro and Small Enterprises as referred
to in section 10(46B) or
- the National Credit Guarantee Trustee Company Limited, being a company
established and wholly financed by the Central Government for the purposes
of operating credit guarantee funds established and wholly financed by the
Central Government as referred to in section 10(46B)(i) or
- a credit guarantee fund established and wholly financed by the Central
Government and managed by the National Credit Guarantee Trustee
Company Limited as referred to in section 10(46B)(ii).
(6) Time limit for delivery of one copy of declaration [Sub-section (2)]
On receipt of the declaration referred to in sub-sections (1), (1A) or (1C), the person
responsible for making the payment will be required to deliver or cause to be delivered to the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner, one copy of the declaration on or before the 7th of the month following
the month in which the declaration is furnished to him.

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13.6 MISCELLANEOUS PROVISIONS

13.6.1 Tax deducted is income received [Section 198]
(1) All sums deducted in accordance with the foregoing
provisions and the income tax paid outside India by way
of deduction, in respect of which an assessee is allowed
a credit against the tax payable, shall, for the purpose of
computing the income of an assessee, be deemed to be income received.
(2) However, the following tax paid or deducted would not be deemed to be income received by
the assessee for the purpose of computing the total income –
(i) the tax paid by an employer under section 192(1A) on non-monetary perquisites
provided to the employees
(ii) tax deducted under section 194N.

13.6.2 Credit for tax deducted at source [Section 199]

(1) Tax deducted at source in accordance with the above provisions and paid to the credit of the
Central Government shall be treated as payment of tax on behalf of the -
(i) person from whose income the deduction was made; or
(ii) owner of the security; or
(iii) depositor; or
(iv) owner of property; or
(v) unit-holder; or
(vi) shareholder.
(2) Any sum referred to in section 192(1A) and paid to the Central Government, shall be treated
as the tax paid on behalf of the person in respect of whose income, such payment of tax has
been made.
(3) The CBDT is empowered to frame rules for the purpose of giving credit in respect of tax
deducted or tax paid under Chapter XVII. The CBDT also has the power to make rules for
giving credit to a person other than the persons mentioned in (1) and (2) above. Further, the
CBDT can specify the assessment year for which such credit may be given.

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(4) Rule 37BA – Credit for tax deducted at source for the purposes of section 199
Rule 37BA(1) provides that credit for tax deducted at source and paid to the Central
Government shall be given to the person to whom the payment has been made or credit has
been given (i.e., the deductee) on the basis of information relating to deduction of tax furnished
by the deductor to the income-tax authority or the person authorized by such authority.
Rule 37BA(2) provides that where under any provision of the Act, the whole or any part of the
income on which tax has been deducted at source is assessable in the hands of a person
other than the deductee, credit for the whole or any part of the tax deducted at source, as the
case may be, shall be given to the other person and not to the deductee.
However, the deductee should file a declaration with the deductor and the deductor should
report the tax deduction in the name of the other person in the information relating to
deduction of tax referred to in Rule 37BA(1).
Rule 37BA(3), provides that credit for tax deducted at source and paid to the Central
Government, shall be given for the assessment year for which such income is assessable.
Where tax has been deducted at source and paid to the Central Government and the income
is assessable over a number of years, credit for tax deducted at source shall be allowed
across those years in the same proportion in which the income is assessable to tax.
Rule 37BA(3A), provides that, for the purposes of section 194N, credit for tax deducted at
source shall be given to the person from whose account tax is deducted and paid to the
Central Government account for the assessment year relevant to the previous ye ar in which
such tax deduction is made.

13.6.3 Duty of person deducting tax [Section 200]

(1) The persons responsible for deducting the tax at source should deposit the sum so deducted
to the credit of the Central Government or as the Board
directs, within the prescribed time [Sub-section (1)].
(2) Further, an employer paying tax on non-monetary
perquisites provided to employees in accordance with section 192(1A), should deposit within
the prescribed time, the tax to the credit of the Central Government or as the Board directs
[Sub-section (2)].

(3) For the purpose of improving the reporting of payment of TDS made through book entry and
to make existing mechanism enforceable, section 200(2A) provides that where the tax

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deducted or tax referred to in section 192(1A) has been paid without the production of a
challan, the Pay and Accounts Officer or the Treasury Officer or the Cheque Drawing and
Disbursing Officer (PAO/TO/CDDO) or any other person, by whatever name called, who is
responsible for crediting such sum to the credit of the Central Government, shall deliver or
cause to be delivered within the prescribed time a statement in the prescribed form, verified
in the prescribed manner and setting forth prescribed particulars to the prescribed income-
tax authority or the person authorised by such authority.
(4) Sub-section (3) casts responsibility on the following persons for preparing such statements
for such periods as may be prescribed, after paying the tax deducted to the credit of the
Central Government within the prescribed time –
(i) any person deducting any sum on or after 1st April, 2005 in
accordance with the foregoing provisions of this chapter; or,
(ii) any person being an employer referred to in section 192(1A).
(5) Such statements have to be delivered or caused to be delivered to the prescribed income -tax
authority or the person authorised by such authority.
(6) Such statements should be in the prescribed form and verified in the prescribed manner.
(7) It should set forth such particulars and should be delivered within such time as may be
prescribed.
(8) The deductor may also deliver to the prescribed authority, a correction statement -
(a) for rectification of any mistake; or
(b) to add, delete or update the information furnished in the statement delivered under
section 200(3).
(9) There is a time limit for furnishing statements detailing the TDS/TCS, however, there is no time
limit for furnishing correction statements. Hence, such statements may be revised multiple times
indefinitely. In order to put certainty and finality on the filing process of TDS and TCS statements,
it is provided that, w.e.f. 1.4.2025, the deductor cannot submit a correction statement after the
expiry of six years from the end of the financial year in which the original statement referred to in
section 200(3) is delivered.
Note – Refer diagram on page no.13.129 for the time limit for payment of TDS to the Government
account or tax paid under section 192(1A) prescribed under section 200(1)/(2) read with Rule 30
and furnishing statement of TDS under section 200(3) read with Rule 31A.

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13.6.4 Consequences of failure to deduct or pay

1. Deemed assessee-in-default [Section 201(1)]
Any person, including the principal officer of a company,
(i) who is required to deduct any sum in accordance with
the provisions of the Act; or
(ii) an employer paying tax on non-monetary perquisites under section 192(1A)
would be deemed to be an assessee-in-default, if he does not deduct, or does not pay or after
deducting, fails to pay, the whole or any part of the tax, as required by or under the provisions
of the Income-tax Act, 1961.
(2) Non-applicability of deeming provision
Any person (including the principal officer of the company) who fails to deduct the whole or
any part of the tax on the amount credited or paid to a payee shall not be deemed to be an
assessee-in-default in respect of such tax if such payee –
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of income; and
(iii) has paid the tax due on the income declared by him in such return of income,
and the payer furnishes a certificate to this effect from an accountant in such form as may be
prescribed.
(3) No penalty under section 221
No penalty shall be charged under section 221 from such person unless the Assessing Officer
is satisfied that such person has failed to deduct and pay the tax without good and sufficient
reasons.
(4) Interest Liability
(i) A person deemed to be an assessee-in-default under section 201(1), for failure to
deduct tax or to pay the tax after deduction, is liable to pay simple interest
- @1% for every month or part of month on the amount of such tax from the
date on which tax was deductible to the date on which such tax was actually
deducted and
- @1½% for every month or part of month from the date on which tax was
deducted to the date on which such tax is actually paid [Section 201(1A)].

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ILLUSTRATION 18
An amount of ` 40,000 was paid to Mr. X on 1.7.2025 towards fees for professional
services without deduction of tax at source. Subsequently, another payment of
` 50,000 was due to Mr. X on 28.2.206, from which tax @10% (amounting to ` 9,000)
on the entire amount of ` 90,000 was deducted. However, this tax of ` 9,000 was
deposited only on 22.6.2026. Compute the interest chargeable under section 201(1A).
SOLUTION
Interest under section 201(1A) would be computed as follows –

Particulars `
1% on tax deductible but not deducted i.e., 1% on ` 4,000 for 8 months 320
1½% on tax deducted but not deposited i.e. 1½% on ` 9,000 for 4 540
months1
860

(ii) Such interest should be paid before furnishing the statements in accordance with
section 200(3).

(iii) Where the payer fails to deduct the whole or any part of the tax on the amount credited
or payment made to a payee and is not deemed to be an assessee -in-default under
section 201(1) on account of payment of taxes by such payee, interest under section
201(1A)(i) i.e., @1% p.m. or part of month, shall be payable by the payer from the date
on which such tax was deductible to the date of furnishing of return of income by such
payee. The date of deduction and payment of taxes by the payer shall be deemed to
be the date on which return of income has been furnished by the payee.
(iv) Where any order is made by the Assessing Officer for the default under section 201(1),
the interest shall be paid by the person in accordance with such order.
(v) Where the tax has not been paid after it is deducted, the amount of the tax , together
with the amount of simple interest thereon, shall be a charge upon all the assets of the
person or the company, as the case may be.

1TRACES, the TDS Centralised Processing Cell, however, calculates interest @1½% for 5 months in the
above case.

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Guidelines for waiver of interest charged under section 201(1A) of the Income-
tax Act, 1961 – [Circular No. 11/2017, dated 24.03.2017]
In exercise of the powers conferred under section 119(2)(a), the CBDT has directed
that the Chief Commissioner of Income-tax and Director General of Income-tax may
reduce or waive interest charged under section 201(1A)(i) in the classes of cases
specified below for the period and to the extent the Chief Commissioner of Income -
tax/Director General of Income-tax may deem fit. However, no reduction or waiver
of such interest shall be ordered unless the principal demand under sections 200A,
201(1) or 234E, as the case may be, stands fully paid or satisfactory arrangements
for payment of the principal demand under these sections have been made. The
Chief Commissioner of Income-tax or Director General of Income-tax may also
impose any other condition as deemed fit for the said reduction or waiver of interest.
The class of cases in which the reduction or waiver of interest under section
201(1A)(i) can be considered, are as follows:
(a) Where during the course of proceedings for search and seizure under
section 132, or otherwise, the books of account and other documents
necessary for making deduction under Chapter XVII-B of the Act were seized
and the assessee was not able to, within the time specified, deduct tax at
source from any sum credited to any account (whether called "suspense
account" or by any other name) in his books of account.

(b) Where any sum paid or payable was not liable for deduction of tax at source
in the case of a deductor on the basis of any order passed by the
jurisdictional High Court, and as a result, he did not deduct tax at source in
relation to such sum, and subsequently, in consequence of any retrospective
amendment of law or a decision of the Supreme Court of India or a decision
of a Larger Bench of the jurisdictional High Court (which was not challenged
before the Supreme Court and has become final) in any proceedings, as the
case may be, tax was held to be deductible or the tax deducted by the
deductor during such financial year was found to be less than the tax
deductible on such sums paid or payable.

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(c) Where the default under section 201 relates to non-deduction or a lower
deduction of tax under section 195 in respect of a payment made to a non -
resident (including a foreign company) being a resident of a country or
specified territory outside India with whom India has entered into an
agreement referred to in section 90 or 90A of the Act, and where —
(i) a dispute regarding the tax payable in India in respect of the said
payment had been referred to the Competent Authority in India
mentioned in Rule 44H of the Income-tax Rules, 1962, under the said
agreement under section 90 or 90A of the Act;
(ii) such reference had been received by the Competent Authority in India
within a period of two years of the date on which the notice of demand
determining the tax payable was received by the person in default
under section 201;
(iii) the dispute has been settled by way of a resolution arrived at under
the Mutual Agreement Procedure (MAP) provided in the said
agreement; and
(iv) the person in default under section 201 has given his acceptance to
the resolution and has withdrawn his appeal(s) pending on the issue,
within the meaning of Rule 44H(4) of the Income-tax Rules, within a
period of one month of the date on which the resolution is
communicated to him.
Even if the interest under section 201(1A)(i) has already been paid by the deductor,
the same can be considered for a waiver, subject to the conditions above and a
refund may be given to the deductor, if waiver is ordered.
The Chief Commissioner of Income-tax or Director General of Income-tax
examining an application for waiver of interest under this order shall pass a
speaking order after providing adequate opportunity of being heard to the applicant.
The CBDT reserves the power to examine any grievance arising out of an order
passed or not passed by Chief Commissioner of Income-tax or Director General of
Income-tax, as the case may be, and issue suitable directions to these authorities
for proper implementation of this order. However, no review of or appeal against
the orders passed on merits by such authorities would be entertained by the CBDT.

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(5) Time limit for deeming a person to be an assessee-in-default for failure to deduct tax
at source

No order under section 201(1), deeming a person to be an assessee-in-default for failure to

deduct the whole or any part of the tax from a person, being a resident or non resident in
India, shall be passed at any time after the expiry of

- six years from the end of the financial year in which the payment is made or credit is
given, or

- two years from the end of the financial year in which the correction statement is
delivered under the proviso to section 200(3)

whichever is later.

Further, the exclusions from the time limit, as specified in Explanation 1 to section 153, would
also apply to the above time limit for passing an order deeming a person to be an assessee -
in-default. Also, the time limit would not apply to an order passed consequent to the direction
contained in an order of the Commissioner under sections 263 and 264, Commissioner
(Appeals) under section 250, Appellate Tribunal under section 254, Supreme Court/National
Tax Tribunal under section 260 and Supreme Court under section 262. Thus, the time limit
would be extended where effect is to be given to various appellate proceedings or where
proceedings are stayed.

(6) Non-specification of time limit where tax has been deducted but not paid

Section 201(1) deems a person to be an assessee-in-default if he –

(i) does not deduct tax; or

(ii) does not pay; or

(iii) after so deducting fails to pay

the whole or any part of the tax, as required by or under this Act.

Thus, section 201(1) contemplates three types of defaults. The default contemplated in (ii) is
covered by the default contemplated in (iii). However, the time limit has been specified only
for passing of orders relating to default contemplated in (i) above. There is no time limit
specified in respect of the other defaults.

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Therefore, no time-limits have been prescribed for the order under section 201(1) where –

(i) the deductor has deducted but not deposited the tax deducted at source, as this would
be a case of defalcation of government dues,

(ii) the employer has failed to pay the tax wholly or partly, under section 192(1A), as the
employee would not have paid tax on such perquisites,

13.6.5 Deduction only one mode of recovery [Section 202]

(1) Recovery of tax through deduction at source is only one method of recovery.

(2) The Assessing Officer can use any other prescribed methods of recovery in addition to tax
deducted at source.

13.6.6 Certificate for tax deducted [Section 203]

(1) Every person deducting tax at source shall issue a certificate to the effect that tax has been
deducted and specify the amount so deducted, the rate
at which tax has been deducted and such other
particulars as may be prescribed.

(2) Every person, being an employer, referred to in section 192(1A) shall, within such period, as
may be prescribed, furnish to the person in respect of whose income such payment of tax
has been made, a certificate to the effect that tax has been paid to t he Central Government,
and specify the amount so paid, the rate at which the tax has been paid and such other
particulars as may be prescribed

[Refer diagram given on the next page for the TDS certificate under section 203 read with
Rule 31].

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.129

Deduction of tax at source

Sections 193, 194A, 194C, 194D, 194E, 194G, 194H, Sections 192 2, 192A, 194, 194P 3, 194B, 194BA, 194BB,
194-I/IA/IB/IC, 194J, 194K, 194LB/LBA/ 194DA, 194EE, 194LA, 194N, 194R
194LBB/LBC/LC, 194M, 194O, 194Q, 194S,194T, 195

Deduct tax at the time of credit to Remittance Deduct tax at the time of payment
the a/c of the payee or payment, [Rule 30]
whichever is earlier

Tax deducted by an office of Govt. Other deductors

Where tax is Where tax is (i) Cases [other # (ii) (iii) (iv) (v) (vi)
paid without paid than (ii), (iii), (iv), u/s u/s u/s u/s u/s 194S (In
production of accompanied (v) & (vi)] 192/ 194 194 194 case of
challan by an IT 194/ -IA -IB M specified
challan 194D/ person)
194H
Income/Amt is
credited or paid
in
March Any other
month
On the same On or before Qtly payt 7 th 30 days from the end of the
day 7 days from 30 th On or July/ 7 th Oct/ 7 th month of deduction
the end of the April before 7 Jan/ 30 th April
month of days from
deduction the end of
the month
of dedn.

PAO/TO/CDDO Furnishing Stt of TDS [Rule 31A] Rule 31A – Furnish Challan-cum-
[Form 24Q 4/27Q5/ 26Q 6/26QF 7] stt in Form 26QB/26QC/26QD/
Qtr ending Due date 26QE within 30 days from the
Submit Statement in Form 30 th June 31 st July end of the month of deduction
24G to agency authorised by 30 Sep
th 31 st Oct
PDIT (Sys) 31 st Dec 31 st Jan
31 St March 31 st May

Where Stt Where Stt Furnishing Certificate of TDS [Rule Rule 31 -Furnish Certificate
relates to relates to 31] to the payee within 15 days
March other months Deduction u/s Deduction under from the above due date in
192, 194P other sections Form 16B/16C/16D/16E
Form 16 Form 16A
On or On or before 15 By 15th June of the Within 15 days from
before 30 th days from end of immediately the due date for
April the relevant month following F.Y. furnishing TDS
statement
# In special cases, the A.O. may, with the prior approval of the JC, permit quarterly payment of TDS

2 Except in case of TDS on perquisite of ESOP provided by eligible start-up

3 TDS required to be deducted at the time of payment, if declaration is furnished by the specified senior citizen in Form No. 12BBA
4 If deduction of tax is u/s 192 and section 194P
5 If deduction of tax is u/s 193 to 196D other than section 194P in respect of deductee who is non corporate non resident or a

foreign company or RNOR

6 If deduction of tax is u/s 193 to 196D other than section 194P in respect of all other deductees
7 If deduction of tax is u/s 194S by an Exchange in accordance with guidelines u/s 194S(6)

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13.6.7 Common number for TDS and TCS [Section 203A]

(1) Application for TAN: Persons responsible for deducting tax or collecting tax at source should
apply to the Assessing Officer for the allotment of a “tax-deduction and collection-account
number”.
(2) Quoting of TAN: Section 203A(2) enlists the documents/ certificates/ returns/ challans in
which the “tax deduction account number” or “tax collection account number” or “tax
deduction and collection account number” has to be compulsorily quoted. They are -
(i) challans for payment of any sum in
accordance with the provisions of section
200 or section 206C(3);
(ii) certificates furnished under section 203 or
section 206C(5);
(iii) statements prepared and delivered or caused to be delivered in accordance with the
provisions of section 200(3) or section 206C(3);
(iv) returns delivered in accordance with the provisions of section 206 or section 206C(5A)
or section 206C(5B); and
(v) in all other documents pertaining to such transactions as may be prescribed in the
interests of revenue.
(3) No requirement to obtain TAN in notified cases: The requirement of obtaining and quoting
of TAN under section 203A shall not apply to such person, as may be notified by the Central
Government in this behalf.
(4) Penalty for failure to comply with the provisions of section 203A: Penalty under section
272BB would be imposable of ` 10,000 for
- failure to comply with the provisions of section 203A or

- Quoting false TAN willfully in challans/certificates/statements/other documents

referred to in section 203A(2).
Such penalty is imposable by the Assessing Officer. However, no penalty is imposable unless
the person on whom penalty is to be imposed is given an opportunity of being heard in the
matter.

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13.6.8 Person responsible for paying tax deducted at source [Section 204]
For purposes of deduction of tax at source the expression “person responsible for paying” means:

Nature of income/payment Person responsible for paying tax

(1) Salary (other than payment of (i) the employer himself; or
salaries by the Central or State (ii) if the employer is a company, the company
Government) itself, including the principal officer thereof.
(2) Interest on securities (other than the local authority, corporation or company, including
payments by or on behalf of the the principal officer thereof.
Central or State Government)
(3) Any sum payable to a non- the “Authorised Person” responsible for remitting
resident Indian, representing such sum to the non-resident Indian or for crediting
consideration for the transfer by such sum to his Non-resident (External) Account
him of any foreign exchange maintained in accordance with the Foreign Exchange
asset, which is not a short term Management Act, 1999 and any rules made
capital asset thereunder.
(4) furnishing of information relating (i) the payer himself; or
to payment to a non corporate (ii) if the payer is a company, the company itself
non-resident, or to a foreign including the principal officer thereof.
company, of any sum, whether or
not chargeable under the
provisions of this Act
(5) Credit/payment of any other sum (i) the payer himself; or
chargeable under the provisions (ii) if the payer is a company, the company itself
of the Act including the principal officer thereof.
(6) Credit/payment of any sum (i) the drawing and disbursing officer; or
chargeable under the provisions (ii) any other person, by whatever name called,
of the Act made by or on behalf of responsible for crediting, or as the case may be,
the Central Government or the paying such sum.
Government of a State.
(7) In case of a person not resident in (i) the person himself; or
India (irrespective of the nature of (ii) any person authorized by such person; or
payment or income)
(iii) the agent of such person in India including any
person treated as an agent under section 163.

13.6.9 Bar against direct demand on assessee [Section 205]

Where tax is deductible at source under any of the aforesaid sections, the assessee shall not be
called upon to pay the tax himself to the extent to which tax has been deducted from that income.

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13.6.10 Furnishing of statements in respect of payment of any income to

residents without deduction of tax [Section 206A]
(1) This section casts responsibility on every banking company or co-operative society or public
company referred to in the proviso to section 194A(3)(i) [i.e., a public company formed and
registered in India with the main object of carrying on the business of providing long-term
finance for construction or purchase of residential houses in India and which is eligible for
deduction under section 36(1)(viii)] to prepare such statement, for such period as may be
prescribed –
— if they are responsible for paying to a resident,
— the payment should be of any income not exceeding ` 40,000, where the payer is a
banking company or a co-operative society, and ` 5,000 in any other case.
— such income should be by way of interest (other than interest on securities)
(2) The statements have to be delivered or caused to be delivered to the prescribed income -tax
authority or the person authorised by such authority.
(3) The statements have to be in the prescribed form, containing such particulars verified in the
prescribed manner. The statement has to be filed within the prescribed time.
(4) The CBDT may cast responsibility on any person other than a person mentioned in (1) above,
who is responsible for paying to a resident any income liable for deduction of tax at source.
(5) Such persons may be required to prepare statement for such period as may be prescribed in
the prescribed form and deliver or cause to be delivered such statement within the prescribed
time to the prescribed income-tax authority or the person authorized by such authority.
(6) Such statements should be in the prescribed form, containing such particulars and verified in
the prescribed manner.
(7) Such person referred to in (1) and (4) above may also deliver to the prescribed authority, a
correction statement -
(a) for rectification of any mistake; or

(b) to add, delete or update the information furnished in the statement delivered referred
in (2) & (5) above.
(8) Penalty under section 272A(2) would be levied for failure to
deliver or to be delivered the statement within the time specified
of ` 500 for every day during which default continues.

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13.6.11 Mandatory requirement to furnish PAN [Section 206AA]

(1) The non-furnishing of PAN by deductees in many cases led to delays in issue of refunds on
account of problems in the processing of returns of income and in granting credit for tax
deducted at source.
(2) With a view to strengthening the PAN mechanism, section 206AA provides that any person
whose receipts are subject to deduction of tax at source, i.e., the deductee, shall mandatorily
furnish his PAN to the deductor failing which the deductor
shall deduct tax at source at higher of the following rates –
(i) the rate prescribed in the Act;

(ii) at the rate in force, i.e., the rate mentioned in the

Finance Act; or
(iii) at the rate of 20% [5%, in case tax, is required to be deducted at source u/s 194-O
and u/s 194Q]

Example: In case of rental payment for plant and machinery, where the payee does not
furnish his PAN to the payer, tax would be deductible @20% instead of @2% prescribed
under section 194-I.
However, non-furnishing of PAN by the deductee in case of income by way of winnings from
lotteries, card games, etc., would result in tax being deducted at the existing rate of 30%
under section 194B. Therefore, wherever tax is deductible at a rate higher than 20%, this
provision would not have any impact.

(3) Tax would be deductible at the rates mentioned above also in cases where the taxpayer files
a declaration in Form 15G or 15H (under section 197A) but does not provide his PAN.
(4) Further, no certificate under section 197 will be granted by the Assessing Officer unless the
application contains the PAN of the applicant.
(5) Both the deductor and the deductee have to compulsorily quote the PAN of the deductee in
all correspondence, bills, vouchers and other documents exchanged between them.
(6) If the PAN provided to the deductor is invalid or it does not belong to the deductee, it shall be
deemed that the deductee has not furnished his PAN to the deductor. Accordingly, tax would
be deductible at the rate specified in (2) above.
(7) The provisions of section 206AA shall not apply in respect of payment of interest on long-term
bonds, as referred to in section 194LC, to a non-corporate non-resident or to a foreign company.

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(8) Non-applicability of section 206AA to non-residents subject to fulfilment of certain

conditions [Rule 37BC]:
For the purpose of reducing the compliance burden, Rule 37BC provides for relaxation to a
non-corporate non-resident or a foreign company not having PAN in respect of payment in
the nature of interest, royalty, fees for technical services,
dividends and payments on transfer of any capital asset,
subject to the deductee furnishing the following details and
documents to the deductor, namely:-
a. name, e-mail id, contact number;
b. address in the country or specified territory outside India of which the deductee is a
resident;
c. a certificate of his being resident in any country or specified territory outside India from
the Government of that country or specified territory if the law of that country or
specified territory provides for issuance of such certificate;
d. Tax Identification Number of the deductee in the country or specified territory of his
residence, and in case no such number is available, then a unique number on the
basis of which the deductee is identified by the Government of that country or the
specified territory of which he claims to be a resident.

13.7 TAX COLLECTION AT SOURCE

(1) Applicability and Rates

(I) Sale of certain goods [Section 206C(1)]

Under section 206C(1), sellers of certain goods are required to collect
tax from the buyers at the specified rates. The specified percentage
for collection of tax at source is as follows:
Nature of Goods Percentage
(a) Alcoholic liquor for human consumption 1%
(b) Tendu leaves 5%
(c) Timber or any other forest produce (not being tendu leaves) 2%
obtained under a forest lease
(d) Timber obtained by any mode other than (c) 2%
(e) Scrap 1%
(f) Minerals, being coal or lignite or iron ore 1%

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The tax should be collected at the time of debiting of the amount payable by the buyer to his
account or at the time of receipt of such amount from the buyer, whichever is earlier.
Forest Produce shall have the same meaning as defined in any State Act for the time being
in force, or in the Indian Forest Act, 1927
As per the Indian Forest Act, 1927, forest-produce means:

(a) Whether found in, or Timber, charcoal, caoutchouc, catechu, wood-oil,

brought from, a forest or resin, natural varnish, bark, lac, mahua flowers,
not mahua seed, kuth and myrabolams
(b) When found in, or brought (1) Trees and leaves, flowers and fruits, and all
from, a forest, that is other parts or produce not hereinbefore
mentioned, of trees
(2) plants not being trees (including grass,
creepers, reeds and moss), and all parts or
produce of such plants
(3) wild animals and skins, tusks, horns, bones, silk,
cocoons, honey and wax, and all other parts or
produce of animals, and
(4) peat, surface soil, rock, and minerals (including
limestone, laterite, mineral oils, and all products
of mines or quarries)

Non-applicability of TCS [Section 206C(1A)]

No collection of tax shall be made under section 206C(1) in the case of a resident buyer, if
such buyer furnishes to the person responsible for
collecting tax, a declaration in writing in duplicate in the
prescribed form and verified in the prescribed manner to
the effect that goods referred to in above table are to be utilised for the purpose of
manufacturing, processing or producing articles or things or for the purposes of generation of
power and not for trading purposes.

Furnishing of copy of declaration within specified time [Section 206C(1B)]

The person responsible for collecting tax under this section shall deliver or cause to be
delivered to the Principal Chief Commissioner or Chief Commissioner or Principal

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Commissioner or Commissioner one copy of the declaration referred to in 206C (1A) on or

before 7 th of the month next following the month in which the declaration is furnished to him.
(II) Lease or a licence of parking lot, toll plaza or mine or a quarry [Section 206C(1C)]
Section 206C(1C) provides for collection of tax by every person
who grants a lease or a licence or enters into a contract or
otherwise transfers any right or interest in any -
• parking lot or
• toll plaza or

• a mine or a quarry
to another person (other than a public sector company) for the use of such parking lot or toll
plaza or mine or quarry for the purposes of business. The tax shall be collected as provided,
from the licensee or lessee of any such licence, contract or lease of the specified nature, at
the rate of 2%.
Note – Mining and quarrying excludes mining and quarrying of mineral oil. Mineral oil includes
petroleum and natural gas. Thus, mining and quarrying excludes mining and quarrying of
petroleum and natural gas. Consequently, the oil exploration and incidental se rvices are
relieved from the applicability of TCS provisions, since these services are in the organized
sector.
The tax should be collected at the time of debiting of the amount payable by the licensee or
lessee to his account or at the time of receipt of such amount from the licensee or lessee ,
whichever is earlier.
(III) Sale of motor vehicle or other notified goods of value
exceeding ` 10 lakhs [Section 206C(1F)]
Section 206C(1F) provides that every person, being a
seller, who receives any amount as consideration for the
sale of a motor vehicle or other notified goods of the value exceeding ` 10 lakhs, shall collect
tax from the buyer @1% of the sale consideration.
The Central Government has, vide notification no. 36/2025 dated 22 nd April 2025, w.e.f.
22.4.2025, notified following goods of the value exceeding ` 10 lakh for collection of tax at
source:

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.137

S. No Nature of goods
1. any wristwatch
2. any art piece such as antiques, painting, sculpture
3. any collectibles such as coin, stamp
4. any yacht, rowing boat, canoe, helicopter
5. any pair of sunglasses
6. any bag such as handbag, purse
7. any pair of shoes
8. any sportswear and equipment such as golf kit, ski-wear
9. any home theatre system
10. any horse for horse racing in race clubs and a horse for polo
Clarification relating to certain issues with respect to section 206C(1F) [Circular No.
22/2016 dated 8.6.2016]
The CBDT has, vide Circular No. 22/2016 dated 8.6.2016,
clarified the following issues in “Question & Answer (Q &
A)” format.
Q.1 Whether TCS @1% is on sale of motor vehicle at the retail level or also on sale
of motor vehicles by manufacturers to dealers/ distributors?

A. To bring high value transactions within the tax net, section 206C has been amended
to provide that the seller shall collect the tax @ 1% from the purchaser on sale of motor
vehicle of the value exceeding ` 10 lakhs. This is brought to cover all transactions of
retail sales and accordingly, section 206C(1F) will not apply on sale of motor
vehicles by manufacturers to dealers/distributors.
Q.2 Whether TCS @1% on sale of motor vehicle is applicable only to luxury cars?
A. No, as per section 206C(1F), the seller shall collect tax @1% from the purchaser on
sale of any motor vehicle of the value exceeding ` 10 lakhs.
Q.3 Whether TCS @1% is applicable in the case of sale to Government Departments,
Embassies, Consulates and United Nation Institutions, of motor vehicle or any
other goods or provision of services?
A. Government, institutions notified under the United Nations (Privileges and Immunities)
Act 1947, and Embassies, Consulates, High Commission, Legation, Commission and
trade representation of a foreign State shall not be liable to levy of TCS @1% under
section 206C(1F).

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Q.4 Whether TCS is applicable on each sale of motor vehicle or on aggregate value
of sale during the year?
A. Tax is to be collected at source @1% on sale consideration of a motor vehicle
exceeding ` 10 lakhs. It is applicable to each sale and not to the aggregate value of
sale made during the year.
Q.5 Whether TCS @1% on sale of motor vehicle is applicable in case of an
individual?
A. The definition of "Seller" as given in clause (c) of the Explanation below sub-section
(11) of section 206C shall be applicable in the case of sale of motor vehicles also.
Q.6 How would the provisions of TCS on sale of motor vehicle be applicable in a
case where part of the payment is made in cash and part is made by cheque?

A. The provisions of TCS on sale of motor vehicle exceeding ` 10 lakhs is not dependent
on mode of payment. Any sale of motor vehicle exceeding ` 10 lakhs would attract
TCS @1%.
Meaning of certain terms referred to in Para (I) to (III)
Term Meaning
Buyer For section 206C(1):
A person who obtains in any sale, by way of auction, tender, or any other mode,
goods of the nature specified in the Table in point (1) or the right to receive any
such goods but does not include –
(A) a public sector company, the Central Government, a State Government,
and an embassy, a high commission, legation, commission, consulate and
the trade representation of a foreign State and a club, or
(B) a buyer in the retail sale of such goods purchased by him for personal
consumption [Explanation to section 206C]
For section 206C(1F):
A person who obtains in any sale, goods of the nature specified therein, but does
not include –
(A) the Central Government, a State Government and an embassy, a High
Commission, legation, commission, consulate and the trade representation
of a foreign State; or
(B) a local authority; or
(C) a public sector company which is engaged in the business of carrying
passengers. [Explanation to section 206C]

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Seller For section 206C(1) and section 206C(1F):

(i) The Central Government,
(ii) a State Government or
(iii) any local authority or
(iv) corporation or
(v) authority established by or under a Central, State or Provincial Act, or
(vi) any company or
(vii) firm or
(viii) co-operative society
Seller also includes an individual or a HUF whose total sales, gross receipts or
turnover from the business or profession carried on by him exceed ` 1 crore in
case of business and ` 50 lakhs in case of profession during the financial year
immediately preceding the financial year in which the goods of the nature
specified in the Table in point (1) are sold. [Explanation to section 206C]

Scrap Waste and scrap from the manufacture or mechanical working of materials which
is definitely not usable as such because of breakage, cutting up, wear and other
reasons. [Explanation to section 206C]

(IV) Remittance under LRS of RBI through an authorized dealer or purchase of an overseas
tour package [Section 206C(1G)]

As per section 206C(1G), every person,

- being an authorized dealer, who receives amount,

under the Liberalised Remittance Scheme of the
RBI, for remittance from a buyer, being a person
remitting such amount;

- being a seller of an overseas tour programme package, who receives any amount
from the buyer who purchases the package

is required to collect tax at source on such amount received from the buyer.

Tax has to be collected at the time of debiting the amount payable by the buyer or at the time
of receipt of such amount from the said buyer, by any mode, whichever is earlier.

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Rate of TCS in case of collection by an authorized dealer/ seller of an overseas tour

programme package
S. No. Particulars Rate of TCS
(i) Purchase of an overseas tour 5% upto ` 10 lakhs and 20% above
programme package ` 10 lakhs
(ii) Remittances for the purpose of Nil
pursuing any education and the
amount remitted is out of a loan
obtained from any financial institution
as defined in section 80E
(iii) Remittances for the purpose of No TCS upto ` 10 lakhs
education (other than mentioned in (ii) 5% of the amount or aggregate of
or medical treatment; amounts in excess of ` 10 lakhs
(iv) Remittances for purposes other than No TCS upto ` 10 lakhs
education and medical treatment 20% on the amount or aggregate of
amounts in excess of ` 10 lakhs
Cases where no tax is to be collected
(i) No TCS by the authorized dealer on an amount in respect of which the sum has
been collected by the seller.
(ii) No TCS, if the buyer is liable to deduct tax at source under any other provision of
the Act and has deducted such tax.
(iii) No TCS, if the buyer is the Central Government, a State Government, an embassy,
a High Commission, a legation, a commission, a consulate, the trade
representation of a foreign State, a local authority 8 or any other person notified by
the Central Government, subject to fulfillment of conditions stipulated thereunder .
Accordingly, the Central Government has, vide Notification No. 99/2022, dated
17.08.2022, notified that the provisions of section 206C(1G) would not be
applicable to a person (being a buyer) who is a non-resident in terms of section 6
and who does not have a permanent establishment in India.

Meaning of certain terms

Term Meaning

Authorised dealer A person authorised by the RBI to deal in foreign exchange or

foreign security. [Clause (i) of Explanation to section 206C(1G)]

8 as defined in Explanation to section 10(20)

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Overseas tour Any tour package which offers visit to a country/(ies) or

program package territory/(ies) outside India. It includes expenses for travel or hotel
stay or boarding or lodging or any other expenditure of similar
nature or in relation thereto. [Clause (ii) of Explanation to section
206C(1G)]
Power to issue guidelines [Section 206C(1-I): In case any difficulty arises to give effect to,
inter alia, the provisions of section 206C(1G), the CBDT is empowered to issue guidelines,
with the approval of the Central Government, for the purpose of removing the difficulty.
Every guideline issued by the CBDT shall be laid before each House of Parliament, and shall
be binding on the income-tax authorities and on the person liable to collect tax.

In exercise of the power to issue guidelines, the CBDT has, with the approval of Central
Government, vide Circular no. 10/2023 dated 30.6.2023,
issued the following guidelines for removing certain
difficulties-

Question 1: Whether the threshold of ` 10 lakhs, for TCS to become applicable on LRS,
applies separately for various purposes like
education, health treatment and others? For
example, if remittance of ` 10 lakh under LRS is
made in a financial year for education purpose and other remittances in the same
financial year of ` 10 lakh is made for medical treatment and ` 10 lakh for other
purposes, whether the exemption limit of ` 10 lakh shall be given to each of the three
separately?

Answer: lt is clarified that the threshold of ` 10 lakh for LRS is combined threshold for
applicability of the TCS on LRS irrespective of the purpose of the remittance. This is clear
from the first proviso to section 206C(1G). The first proviso states that the TCS is not required
if the amount or aggregate of the amounts being remitted by a buyer is less than ` 10 lakh
rupees in a financial year.

Thus, in the given example, upto ` 10 lakh remittance under LRS during a financial year shall
not be liable for TCS. However, subsequent ` 20 lakh remittance under LRS shall be liable
for TCS in accordance with the TCS rates applicable for such remittance. TCS rates would
be applicable as under:-

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Remittances Rate of TCS

First ` 10 lakhs remittance under LRS during No TCS
the financial year 2025-26 for education
purpose (or for that matter any purpose)
Remittances beyond ` 10 lakhs under LRS TCS will be Nil (if it is for education
during the financial year 2025-26 purpose financed by loan from a financial
institution), 5% (if it is for education or
medical treatment) and 20% (if it is for
other purposes)
Question 2: Whether the threshold of ` 10 lakh, for TCS to become applicable on LRS,
applies separately for each remittance through different authorised dealers? lf not, how
will authorised dealer know about the earlier remittances by that remitter through some
other authorised dealer?
Answer: lt is clarified that the threshold of ` 10 lakh
for LRS is qua remitter and not qua authorised
dealer. This is clear from the first proviso to section
206C(1G). The first proviso states that the TCS is not required if the amount or aggregate of
amounts being remitted by a buyer is less than ten lakh rupees in a financial year. The
threshold continues to apply qua remitter.
Since the facility to provide real time updates of remittance under LRS by remitter is still under
development by the RBl, it is clarified that the details of earlier remittances under LRS by the
remitter during the financial year may be taken by the authorised dealer through an
undertaking at the time of remittance. lf the authorised dealer correctly collects the tax at
source based on information given in this undertaking, he will not be treated as "assessee in
default". However, for any false information in the undertaking, appropriate action may be
taken against the remitter under the Act.
It is further clarified that same methodology of taking undertaking from the buyer of overseas
tour program package may be followed by the seller of such package.
Question 3: There is threshold of ` 10 lakh for remittance under LRS for TCS to become
applicable while there is another threshold of ` 10 lakh for purchase of overseas tour
program package. Whether these two thresholds apply independently?
Answer: Yes, these two thresholds apply independently. For LRS, the threshold of ` 10 lakh
applies to make TCS applicable. For purchase of overseas tour program package, the
threshold of ` 10 lakh applies to determine the applicable TCS rate as 5% or 20%.

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Question 4: A resident individual spends ` 3 lakh for the purchase of an overseas tour
program package from a foreign tour operator and remits money which is classified
under LRS. There is no other remittance under LRS or purchase of overseas tour
program during the financial year. Whether TCS is applicable?
Answer: ln case of purchase of overseas tour program package which is classified under
LRS, TCS provision for purchase of overseas tour program package shall apply and not TCS
provisions for remittance under LRS.
Since for the purchase of overseas tour program package, the threshold of ` 10 lakh for
applicability of TCS does not apply, TCS is applicable and tax is required to be collected by
the seller. ln this case the tax shall be required to be collected at 5% since the total amount
spent on purchase of overseas tour program package during the financial year is less than
` 10 lakh. The TCS should be made by the seller.
Question 5: There are different rates for remittance under LRS for medical
treatment/education purposes and for other purposes. What is the scope of remittance
under LRS for medical treatment/education purposes?
Answer: As per the clarification by the RBl, remittance for
the purposes of medical treatment shall include,-
(i) remittance for purchase of tickets of the person to
be treated medically overseas (and his attendant) for commuting between lndia and
the overseas destination;
(ii) his medical expense; and
(iii) other day to day expenses required for such purpose.
It may be noted that code 50304 (under the Purpose Group Name "Travel"), in RBI master
direction for LRS, pertains to travel for medical treatment. As per BPM6, A.P. (DlR Series)
Circular no 50, dated 11 Feb 2016 this code covers the transactions which are related to
health services acquired by residents travelling abroad for medical reasons, which includes
medical services, other healthcare, food, accommodation and local transport transactions.
ln addition, code 51108 (under the Purpose Group Name "Personal, Cultural & Recreational
services") covers transactions for health services rendered remotely or onsite (that is no
travel by service recipient is involved). This cover services from hospitals, doctors, nurses,
paramedical and similar services, etc.
TCS provision for purpose of medical treatment would apply when remittance is under code
50304 or under code 51108.

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 13.144 DIRECT TAX LAWS

Education
Remittance for purpose of education shall include,-
(i) remittance for purchase of tickets of the person undertaking study overseas for
commuting between lndia and the overseas destination;
(ii) the tuition and other fees to be paid to educational institute; and
(iii) other day to day expenses required for undertaking such study.
It may be noted that code 50305 (under the Purpose Group Name "Travel"), in RBI master
direction for LRS, pertains to travel for education (including fees, hostel expenses, etc). As
per BPM6, A.P. (DIR Series) Circular no 50, dated 11 Feb 2016 this code covers education
related services such as tuition, food, accommodation, local transport and health services
acquired by resident students while residing overseas.

In addition, code 51107 (under the Purpose Group Name "Personal, Cultural & Recreational
services") covers transactions for education (e.g., fees for correspondence courses abroad)
where the person receiving education does not travel overseas.

TCS provision for purpose of education would apply when the remittance is under code 50305
or under 51107.
Question 6: Whether purchase of international travel ticket or hotel accommodation on
standalone basis is purchase of overseas tour program package?
Answer: The term 'overseas tour program package' is defined as to mean any tour package
which offers a visit to a country or countries or territory or territories outside lndia and includes
expenses for travel or hotel stay or boarding or lodging or any other expenditure of similar
nature or in relation thereto.
It is clarified that purchase of only an international travel ticket or the purchase of only hotel
accommodation, by in itself is not covered within the definition of 'overseas tour program
package'. To qualify as an 'overseas tour program package', the package should include at
least two of the followings:-

(i) international travel ticket,

(ii) hotel accommodation (with or without food)/boarding/lodging,
(iii) any other expenditure of similar nature or in relation thereto.

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.145

(2) Higher rate of TCS for non-furnishers of PAN [Section 206CC]

(i) The provisions of section 206CC require tax collection at the higher of the following
two rates, in case of failure by the person paying any sum
or amount on which tax is collectible at source (collectee)
to furnish PAN [PAN or Aadhar number in case of
section 206C(1H)] to the person responsible for
collecting tax at source (collector) -
- at twice the rate specified in the relevant provision of the Act
- at 5% [1%, in case tax is required to be collected at source u/s 206C(1H)].
The higher rate of TCS leviable for non-furnishing of PAN should not exceed 20%.
(ii) Tax would be collectible at the rates mentioned above also in case where the person
furnishes a declaration under section 206C(1A) but does not furnish his PAN.
(iii) Both the collectee and collector have to compulsorily quote the PAN of the collectee
in all correspondence, bills, vouchers and other documents exchanged between them.
(iv) If the PAN provided to the collector is invalid or it does not belong to the collectee, it
shall be deemed that the collectee has not furnished his PAN to the collector.
Accordingly, tax would be collectible at the rate specified in (i) above.
(v) The provisions of section 206CC does not apply to a
non-resident who does not have a permanent
establishment in India.
(3) TCS to be paid within prescribed time [Section 206C(3)]

Any amount collected under this section shall be paid within

the prescribed time to the credit of the Central Government or as the Board directs.
Time limit for paying tax collected to the credit of the Central Government [Rule 37CA]
Person Period within which
collecting sums Circumstance such sum should be
in accordance paid to the credit of
with section the Central
206C Government
(1) An office of the (i) where the tax is paid without on the same day
Government production of an income-tax
challan

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(ii) where tax is paid accompanied by on or before 7 days

an income-tax challan from the end of the
month in which the
collection is made
(2) Collectors other within one week from
than the office of the last day of the
the Government month in which the
collection is made

(4) Statement of TCS to be prepared and delivered within prescribed time

(i) A person collecting tax in accordance with the provisions of the section is vested with
the responsibility of preparing such statements for
such periods as may be prescribed after paying the
tax collected to the credit of the Central Government
within the prescribed time.
(ii) The statement should be delivered or caused to be delivered to the prescribed income-
tax authority, i.e., DGIT (Systems) or the person authorised by such authority.
(iii) The statement should be in the prescribed form [Form No.27EQ] and verified in the
prescribed manner.
(iv) The statement should set forth the prescribed particulars and should be filed within
such time as may be prescribed.

Due dates for furnishing statement of TCS [Rule 31AA]

Quarter ending Due Date
I 30th June 15th July
II 30th September 15th October
III 31st December 15th January
IV 31st March 15th May

(5) Enabling provision for improving the reporting of payment of TCS made through
book entry and making the existing mechanism enforceable [Section 206C(3A)]

Where the tax collected has been paid without the production of a challan, the PAO/TO/CDDO
or any other person, by whatever name called, who is responsible for crediting such sum to
the credit of the Central Government, shall furnish a statement in the pr escribed form [Form
No.24G] for the prescribed period to the agency authorised by the Principal Director of
Income-tax (Systems) in respect of tax collected by the collectors and reported to him. Such

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.147

statement has to be furnished within the prescribed time by verifying the same in the
prescribed manner and setting forth prescribed particulars.
Relevant Period to which statement Prescribed Time
Rule relates
37CA(3A)(a) Where the statement relates to On or before 30 th April
the month of March
37CA(3A)(b) In any other case On or before 15 days from the end
of the relevant month
Such statement has to be furnished in the following manner:

(a) electronically under digital signature; or

(b) electronically along with verification of the statement in Form No.27A or verified
through an electronic process
in accordance with the procedures, formats and standards for the purpose of furnishing and
verification of the statements specified by the Principal DGIT (Systems)
Penalty: Failure to furnish such statement would
attracted a penalty under section 272A(2) of ` 500 for
every day during which default continues.
(6) Enabling provision for filing a correction statement of TCS [Section 206C(3B)]

The person collecting tax at source who is required to prepare statements to be delivered to
DGIT (Systems) / NSDL after paying the tax collected to the credit of the Central Government,
may also deliver to the said authority, a correction statement for rectification of any mistake
or to add, delete or update the information furnished in the statement so delivered in the
specified form and verified in the specified manner.
The collector cannot submit a correction statement after the expiry of six years from the end
of the financial year in which the original statement referred to in proviso to section 206C(3)
is delivered.
(7) Credit for TCS [Section 206C(4)]

Any amount collected in accordance with the provisions of this section and paid to the credit
of the Central Government shall be deemed to be payment of tax on behalf of the person
from whom the amount has been collected and credit shall be given to such person or any
other person eligible for credit for the amount so collected in a particular assessment year.
The CBDT may prescribe the rules based on which credit shall be given to such person for
the amount so collected in a particular assessment year.

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Rule Case Manner of allowing credit

Rule 37-I(2)(i) Where tax has been collected at Credit for TCS shall be given for
source and paid to the Central the A.Y. for which the income is
Government assessable to tax.
Rule 37-I(2)(ii) Where tax has been collected at Credit for TCS shall be allowed
source and paid to the Central across those years to which the
Government and the lease or lease or license relates in the
license is relatable to more than same proportion
one year

For the purposes of section 206C(1F)/ (1G), credit for tax collected at source shall be given
to the person from whose account tax is collected and paid to the Central Government
account for the assessment year relevant to the previous year in which such t ax collection is
made.
Income of the collectee assessable in the hands of any person other than the collectee
[W.e.f. 16.10.2024]

Where under any provisions of the Act, the income of the collectee is assessable in the hands
of any person other than the collectee, the credit for the TCS, shall be given to such other
person and not to the collectee.

However, the collectee has to file a declaration with the collector and the collector shall report
the tax collection in the name of the other person in the information relating to collection of
tax.
The declaration filed by the collectee shall contain the name, address, PAN of the person to
whom credit for the tax collectible at source is to be given, the amount of payment in relation
to which credit is to be given and reasons for giving credit to such person.
The collector shall issue the certificate for collection of tax at source under section 206C(3),
in the name of the person in whose name credit is shown in the information relating to
collection of tax and shall keep the declaration in his safe custody.
(8) Furnishing of Certificate of TCS within prescribed time [Section 206C(5)]

(i) Every person collecting tax in accordance with the provisions of this section shall,
within such period as may be prescribed from the
date of debit or receipt of the amount, furnish to the
buyer or licensee or lessee to whose account such

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.149

amount is debited or from whom such payment is received, a certificate to the effect
that tax has been collected specifying the sum so collected, the rate at which the tax
has been collected and such other particulars as may be prescribed.
(ii) Certificate of tax collected at source under section 206C(5) in Form No.27D shall be
furnished by the collector within 15 days from the due date for furnishing the quarterly
statement of TCS under Rule 31AA [Rule 37D].
(iii) The prescribed income-tax authority or the person authorized by such authority have
now been vested with the responsibility to prepare and deliver a statement in the
prescribed form specifying the amount of tax collected and such other particulars as
may be prescribed, within the prescribed time after the end of each financial year
beginning on or after 1.4.2008 [Proviso to sub-section (5)].
(9) Consequences of failure to collect tax at source

(i) Personal liability to pay tax collectible at source [Section 206C(6)] - A person who
is responsible for collecting the tax in accordance with the provisions of this section
shall be liable to pay the tax to the credit of the Central Government, even if he has
failed to collect the tax
(ii) Deemed assessee-in-default for failure to collect tax [Section 206C(6A)] - Any
person responsible for collecting tax shall be
deemed to be an assessee in default in respect of
the tax if such person -
(1) does not collect the whole or any part of the tax or
(2) fails to pay such tax after having collected the tax
(iii) Deeming provision not applicable if tax is paid by buyer/licensee/lessee [First
Proviso to section 206C(6A)] - Any person responsible for collecting tax at source in
accordance with the provisions of sub-section (1) and sub-section (1C) would not be
deemed to be an assessee-in-default for failure to collect tax on the amount received
from a buyer or licensee or lessee or on the amount debited to the account of the buyer
or licensee or lessee, if such buyer or licensee or lessee has furnis hed his return of
income under section 139, taking into account such amount for computing income and
paid the tax due on the income declared by him in such return of income. Further, the
person should also furnish a certificate to this effect from an accountant in the
prescribed form.

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(iv) Levy of penalty for failure to collect and pay tax [Second proviso to section
206C(6A)] - No penalty shall be charged under section 221 from such person unless
the Assessing Officer is satisfied that the person has without good and sufficient
reasons failed to collect and pay the tax.
(v) Interest payable for failure to collect and pay tax within the prescribed time
[Section 206C(7)] - If the person responsible for collecting tax does not collect the tax
or after collecting the tax fails to pay it as required
under this section, he shall be liable to pay simple
- interest at the rate of 1% p.m. or part thereof
on the amount of such tax from the date on
which such tax was collectible to the date on which such tax is collected; and
- interest at the rate of 1.5% p.m. or part thereof on the amount of such tax from
the date on which such tax was collected to the date on which such tax is
actually paid.
Such interest shall be paid before furnishing the quarterly statement for each quarter
in accordance with the provisions of section 206C(3).
In such cases where a person is not deemed to be an assessee-in-default on account
of the tax being paid by the buyer/licensee/lessee, interest shall be payable by the
collector from the date on which tax was collectible to the date of furnishing return of
income by such buyer or licensee or lessee.
However, where an order is made by the Assessing Officer for assesse-in-default, the
interest shall be paid by the person in accordance with such order.

Waiver of levy of interest under section 201(1A)(ii)/ 206C(7) in specified cases

[Circular No. 5/2025 dated 28.03.2025 and Circular No. 8/2025 dated
01.07.2025]
In exercise of the powers under section 119, the CBDT, directs that the Chief
Commissioner of Income-tax (CCIT) or Director General of Income-tax (DGIT) [or
in case there is no CCIT and DGIT, then Principal Chief Commissioner of Income-
tax (PCCIT)] may reduce or waive interest charged under section 201(1A)(ii)/
206C(7) where-
- the payment is initiated by the taxpayers/ deductors/ collectors and the
amounts are debited from their bank accounts on or before the due date, and

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.151

- the tax could not be credited to the Central Government, before due date
because of technical problems, beyond the control of the taxpayer/
deductor/collector.
The CCIT or DGIT or PrCCIT, as the case may be, examining an application for
waiver of interest under this order shall pass a speaking order after providing
adequate opportunity of being heard to the applicant and after verification of
technical glitches from the bank/Directorate of Systems.
Even if the interest under section 201(1A)(ii)/ 206C(7) has already been paid by the
taxpayer, the same can be considered for waiver and a refund may be given to the
deductor, if waiver is ordered.
No waiver application shall be entertained beyond one year from the end of the
financial year for which the interest under section 201(1A)(ii)/ 206C(7) is charged.
An application received for waiver of interest under section 201(1A)(ii)/ 206C(7)
shall be disposed of within a period of six months from the end of the month in which
such application is received.
The order issued by the CCIT or DGIT or PCCIT, as the case maybe, shall be final
and no petition against that order shall be entertained by the Board.
This will come into effect from the date of issue of this Circular i.e., 28.03.2025.
After issuance of the circular, a further question raised whether the prescribed
authorities empowered to pass waiver orders is deemed to be effective from
28.3.2025 or whether waiver application are to be entertained only in cases where
interest under section 201(1A)(ii)/ 206C(7) is charged on or after 28.3.2025.
It is clarified, vide circular no. 8/2025 dated 1.7.2025, that the prescribed authority
(i.e., CCIT/DGIT/PCCIT) is empowered to pass order for waiver from 28.3.2025.
Applications for waiver of interest can be entertained within one year from the end
of the financial year for which the interest is charged. For instance, if the interest
charged pertains to F.Y. 2024-25, the application for waiver of such interest can be
filed by 31.03.2026 i.e. one year from the end of F.Y. 2024-25.
Further, it is also clarified that waiver applications can be entertained for interest
u/s 201(1A)(ii)/ 206C(7) charged even before the issuance of the said Circular.

(vi) Time limit for issuing an order to treat a tax collector as assessee-in-default
[Section 206C(7A)] - No order under section 206C(6A) deeming a person to be an
assessee-in-default for failure to collect the whole or any part of the tax from any
person, shall be passed at any time after the expiry of -
- 6 years from the end of financial year in which tax was collectable; or
- 2 years from the end of the financial year in which the TCS correction statement
is delivered,
whichever is later.

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The provisions of sub-sections (3), (5), and (6) of section 153 and Explanation 1
thereof shall apply to the above time limit of 6 years/2 years.
(vii) Tax not collected to be a charge upon all assets of the collector
[Section 206C(8)] - Where the tax has not been paid as aforesaid, after it is collected,
the amount of tax together with the amount of simple interest thereon referred to in
sub-section (7) shall be a charge upon all the assets of the person responsible for
collecting tax.
(10) Other Provisions [Section 206C(9)/(10)/(11)/(12)]
(i) Certificate for collection of tax at lower rate
[Section 206C(9)] - The Assessing Officer can
issue certificate for collection of tax at a lower
rate than those specified in sub-section
(1)/(1C). Such certificate shall be issued on an application made by the buyer or
licensee or lessee in this behalf.
(ii) Tax to be collected at the rate specified in the certificate [Section 206C(10)] -The
person responsible for collecting tax shall collect the same at the rate specified in such
certificate until such certificate is cancelled by the Assessing Officer.
(iii) CBDT empowered to make rules relating to grant of certificates [Section
206C(11)] – The CBDT is empowered to make rules specifying the cases in which and
the circumstances under which an application may be made for the grant of such
certificate and the conditions subject to which certificate may be granted.
(iv) Government to notify certain persons or class of persons as exempt from TCS
or TCS at lower rate [Section 206C(12)] - No collection of tax shall be made or that
collection of tax shall be made at such lower rate in respect of specified transaction,
from such person or class of persons, including institution, association or body or class
of institutions, associations or bodies, as may be notified by the Central Government.
Accordingly, the Central Government has, vide Notification no. 115/2024 dated
16.10.2024 specified that no collection of tax shall be made under section 206C(1F)
on any payment received from the Reserve Bank of India.

13.8 PROCESSING OF TDS /TCS STATEMENTS [SECTION

200A/ SECTION 206CB]
(1) Section 200A facilitates processing of TDS statements and section 206CB deals with
processing of statements of tax collected at source.

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(2) The manner of processing a statement of tax deduction at source/tax collection at source or
a correction statement made by a person deducting/collecting, is as follows -
(a) Permissible adjustments - the sums deductible/collectible shall be computed after
making the following adjustments -
(i) any arithmetical error in the statement;
(ii) an incorrect claim, apparent from any
information in the statement (i.e., a claim, on
the basis of an entry, in the statement -
(1) of an item, which is inconsistent with another entry of the same or some
other item in such statement;
(2) in respect of rate of deduction/collection of tax at source, where such
rate is not in accordance with the provisions of the Income-tax
Act, 1961).
(b) Interest – The interest, if any, shall be computed on the basis of the sums
deductible/collectible as computed in the statement;
(c) Fee - The fee, if any, shall be computed in accordance with the provisions of section 234E.
Section 234E: A fee of ` 200 for every day would be levied under section 234E for
late furnishing of TDS/TCS statement from the due date of
furnishing of TDS/TCS statement to the date of furnishing of
TDS/TCS statement. However, the total amount of fee shall not
exceed the total amount of tax deductible/tax collectible and such fee has to be paid
before delivering the TDS/TCS statement.

(d) Determination of sum payable by, or the amount of refund due to, the collector
– Such sum shall be determined after adjustment of such interest and fee against any
amount paid under section 200 or section 201 or section 234E or under section 206C
or section 234E and any amount paid otherwise by way of tax or interest or fee;
(e) Intimation - An intimation shall be prepared or generated and sent to the
deductor/collector specifying the sum determined to be payable by, or the amount of
refund due to, him; and

(f) Grant of refund - The amount of refund due to the deductor/collector in pursuance of
such determination shall be granted to the deductor/collector:

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However, no intimation shall be sent after the

expiry of the period of one year from the end of
the financial year in which the statement is filed.
(3) The CBDT is empowered to make a scheme for centralised processing of statements of tax
deducted/collected at source to expeditiously determine the tax payable by, or the refund due to,
the deductor/collector, as required under section 200A or section 206CB(1), as the case may be.
(4) Section 200A provides for the manner in which statement of TDS or a correction statement
made by a person deducting any sum under section 200 is processed. There are statements,
such as Form No. 26QF which is filed by an Exchange wherein the deductee is filing details of
the tax. Accordingly, to widen the ambit of section 200A, the CBDT is further empowered to
make a scheme for processing of statements made by any other person, not being a deductor.

13.9 ADVANCE PAYMENT OF TAX [SECTION 207 TO 219]

13.9.1 Liability for payment of advance tax
(1) Tax shall be payable in advance during any financial year, in accordance with the provisions
of sections 208 to 219, in respect of an assessee’s current income, i.e., the total income of
the assessee which would be chargeable to tax for the assessment year immediately
following that financial year [Section 207].
(2) Under section 208, an obligation to pay advance tax arises in
every case where the advance tax payable is ` 10,000 or more.
Note - An assessee who is liable to pay advance tax of less
than ` 10,000 will not be saddled with interest under sections 234B and 234C for defaults in
payment of advance tax. However, the consequences under section 234A regarding interest for
belated filing of return would be attracted.
(3) In case of senior citizens who have passive source of income like interest, rent, etc., the
requirement of payment of advance tax causes genuine
compliance hardship. Therefore, in order to reduce the
compliance burden on such senior citizens, exemption from
payment of advance tax has been provided to a resident individual-
(i) not having any income chargeable under the head “Profits and gains of business or
profession”; and
(ii) of the age of 60 years or more.
Such senior citizens need not pay advance tax and are allowed to discharge their tax liability
(other than TDS) by payment of self-assessment tax.

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13.9.2 Computation of advance tax

(1) An assessee has to estimate his current income and pay advance tax thereon. He need not
submit any estimate or statement of income to the Assessing Officer, except where he has
been served with notice by the Assessing Officer.
(2) Where an obligation to pay advance tax has arisen, the assessee shall himself compute the
advance tax payable on his current income at the rates in force in the financial year and
deposit the same, whether or not he has been earlier assessed to tax.
(3) In the case of a person who has been already assessed by way of a regular assessment in
respect of the total income of any previous year, the Assessing Officer, if he is of the opinion
that such person is liable to pay advance tax, can serve an order u nder section 210(3)
requiring the assessee to pay advance tax.
(4) For this purpose, the total income of the latest previous year in respect of which the assessee
has been assessed by way of regular assessment or the total income returned by the
assessee in any return of income for any subsequent previous year, whichever is higher, shall
be taken as the basis for computation of advance tax payable.
(5) The above order can be served by the Assessing Officer at any time during the financial year
but not later than the last date of February.
(6) If, after sending the above notice, but before 1st March of the financial year, the assessee
furnishes a return relating to any later previous year or an assessment is completed in respect
of a later return of income, the Assessing Officer may amend the order for payment of
advance tax on the basis of the computation of the income so returned or assessed.
(7) If the assessee feels that his own estimate of advance tax payable would be less than the
one sent by the Assessing Officer, he can file an estimate of his current income and advance
tax payable thereon.
(8) Where the advance tax payable on the assessee’s estimation is higher than the tax computed
by the Assessing Officer, then, the advance tax shall be paid based upon such higher amount.
(9) In all cases, the tax calculated shall be reduced by the amount of tax deductible or collectible
at source.
No reduction of ‘tax deductible but not deducted’ or ‘tax collectible but not collected’
while computing advance tax liability
(i) As per the provisions of section 209, the amount of advance tax payable by a person
is computed by reducing the amount of income-tax which would be deductible at
source during the financial year from any income which has been taken into account
in computing the total income.

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(ii) Some courts have opined that in case where the payer pays any amount (on which tax
is deductible at source) without deduction of tax at source, the payee shall not be liable
to pay advance tax to the extent tax is deductible from such amount.
(iii) With a view to make such a person (payee) liable to pay advance tax, the proviso to
section 209(1)(d) provides that the amount of tax deductible at source but not so
deducted by the payer shall not be reduced from the income tax liability of the paye e
for determining his liability to pay advance tax.
(iv) In effect, only if tax has actually been deducted at source, the same can be reduced
for computing advance tax liability of the payee. Tax deductible but not so deducted
cannot be reduced for computing advance tax liability of the payee.
(v) Similarly, only if tax has actually been collected at source, the same can be reduced
for computing advance tax liability of the buyer or licensee or lessee. Tax collectible
but not so collected cannot be reduced for computing advance tax liability of the buyer
or licensee or lessee.

(10) The amount of advance tax payable by an assessee in the financial year calcu lated by -
(i) the assessee himself based on his estimation of current income; or
(ii) the Assessing Officer as a result of an order under section 210(3) or amended order
under section 210(4)
is subject to the provisions of section 209(2), as per which the net agricultural income has to
be considered for the purpose of computing advance tax.

13.9.3 Instalments of advance tax and due dates

(1) Common advance tax payment schedule for both corporates and non-corporates [other
than an assessee who declares profits and gains in accordance with section 44AD(1)
or section 44ADA(1)]:
Due date of instalment Amount payable
On or before 15 th June Not less than 15% of advance tax liability
On or before 15 th September Not less than 45% of advance tax liability, as reduced by
the amount, if any, paid in the earlier instalment.
On or before 15 th December Not less than 75% of advance tax liability, as reduced by
the amount or amounts, if any, paid in the earlier
instalment or instalments.
On or before 15 th March The whole amount of advance tax liability as
reduced by the amount or amounts, if any, paid in the
earlier instalment or instalments.
Note - Any amount paid by way of advance tax on or before 31 st March shall also be treated
as advance tax paid during each financial year ending on 31 st March.

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(2) Eligible assessee computing profits on presumptive basis under section 44AD(1) or
section 44ADA(1) to pay advance tax by 15 th March

An eligible assessee, opting for computation of profits or gains of business on presumptive

basis in respect of eligible business referred to in section 44AD(1) or for computation of profits
or gains of profession on presumptive basis in respect of eligible profession referred to in
section 44ADA(1), shall be required to pay advance tax
of the whole amount in one instalment on or before 15th
March of the financial year.

However, any amount paid by way of advance tax on or before 31 st March shall also be
treated as advance tax paid during each financial year ending on 31 st March.

(3) Where advance tax is payable by virtue of the notice of demand issued under section 156 by
the Assessing Officer, the whole or the appropriate part of the advance tax specified in such
notice shall be payable on or before each of such due dates as fall after the date of service
of notice of demand.

(4) Where the assessee does not pay any instalment by the due date, he shall be deemed to be
an assessee in default in respect of such instalment.

13.9.4 Credit for advance tax [Section 219]

Any sum, other than interest or penalty, paid by or recovered from an assessee as advance tax, is
treated as a payment of tax in respect of the income of the previous year and credit thereof shall be
given in the regular assessment.

13.10 INTEREST CHARGEABLE IN CERTAIN CASES

13.10.1 Interest for defaults in furnishing return of income [Section 234A]
(1) Rate and Period for calculation of interest - Where the return of income for any assessment
year under section 139(1) or section 139(4) or section
139(8A) or in response to a notice under section 142(1),
is furnished after the due date or is not furnished, the
assessee shall be liable to pay simple interest at the
rate of 1% for every month or part of a month comprised
in the period commencing on the day immediately following the due date and,

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(a) where the return is furnished after the due date, ending on that date of furnishing the
return; and
(b) where no return has been furnished, ending on the date of completion of assessment
under section 144.
The interest payable under section 234A shall be reduced by the interest, if any, paid under
section 140A towards interest chargeable under this section.
Note - ‘Due date’ means the date specified in section 139(1) as applicable in the case of the
assessee.

(2) Amount on which interest is payable - The amount on which interest will be payable will
be the amount of the tax on the total income as determined under section 143(1) or on regular
assessment, as reduced by the amount of -

(i) advance tax, if any, paid ;

(ii) any tax deducted or collected at source;
(iii) any relief of tax allowed under section 89;

(iv) any relief of tax allowed under section 90 or 90A;

(v) any deduction of tax allowed under section 91;
(vi) any tax credit allowed to be set-off in accordance with the provisions of section 115JAA
or section 115JD.
Notes:
(i) The tax on total income as determined under section 143(1) would not include
additional income-tax, if any, payable under section 140B or under section 143.
(ii) Tax on the total income determined under regular assessment would not include the
additional income-tax payable under section 140B.
(iii) Where in relation to an assessment year an assessment is made for the first time
under section 147, the assessment so made shall be regarded as regular assessment
for the purposes of this section.

(3) Computation of interest where return is furnished after the time period specified in
notice under section 148 - Where the return of income for any assessment year, required
by a notice under section 148 issued after the determination of income under section 143(1)
or after completion of assessment under section 143(3) or section 144 or section 147, is
furnished after the expiry of the time allowed under such notice, or is not furnished, the

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assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a
month comprised in the period commencing on the date immediately following the expiry of
the time allowed as aforesaid and ending on the following dates specified in column (3) below:
Case Ending date
(i) where the return is furnished on the date of furnishing the return
after the expiry of the time
aforesaid
(ii) where no return has been on the date of completion of the reassessment or
furnished re-computation under section 147

(4) Amount on which interest is payable - The amount on which the above interest is payable
is the amount by which the tax on the total income determined on the basis of such
reassessment or re-computation exceeds the tax on the total income determined under
section 143(1) or on the basis of the earlier assessment aforesaid.
(5) Consequence where interest is increased or reduced subsequently as a result of
rectification, appeal, revision, etc. - Where as a result of an order of rectification or
appellate order or an order of revision, the interest payable is reduced or increased, the
Assessing Officer shall proceed as follows:
Case Ending date
(i) Where the interest is The Assessing Officer shall serve on the assessee a
increased notice of demand in the prescribed form specifying
the sum payable and such demand notice shall be a
notice under section 156.
(ii) Where interest is reduced The excess paid shall be refunded

(6) Interest under section 234A not chargeable on self-assessment tax paid before the due
date of filing of return of income [Circular No. 2/2015, dated 10-2-2015]

The Hon’ble Supreme Court has, in the case of CIT vs Prannoy Roy (2009) 309 ITR 231, held
that interest under section 234A on default of furnishing return of
income shall be payable only on the amount of tax that has not been
deposited before the due date of filing of the -tax return for the relevant assessment year.

Accordingly, the CBDT has clarified that no interest under section 234A shall be charged on
self-assessment tax paid by the assessee on or before the due date of filing of return.

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13.10.2 Interest for non-payment or short-payment of advance tax

[Section 234B]
(1) Rate and period of interest: Interest under section 234B would be attracted where an
assessee, who is liable to pay
advance tax, fails to pay such tax
or the advance tax paid is less
than 90% of assessed tax. Accordingly, interest would be leviable at the rate of 1% for every
month or for part of month for the following period, if the advance tax paid falls short of 90%
of the ‘assessed tax’.

Period and Period ending on:

commencing
from:
the 1st April (i) Where regular assessment is The date of determination
of the not made of total income u/s 143(1)
following F.Y.
(ii) Where regular assessment is The date of regular
made assessment
Amount on which interest is payable:
(i) Where no advance tax is paid Assessed tax
(ii) Where advance tax paid falls short of 90% of Assessed tax minus
assessed tax Advance tax paid

(2) Meaning of the term ‘assessed tax’: The tax on the total income determined under section
143(1) or on regular assessment as reduced by the amount of -

(i) any tax deducted or collected at source on any income which is taken into account for
calculating the total income;

(ii) any relief of tax allowed under section 89;

(iii) any relief of tax allowed under section 90 or 90A;

(iv) any deduction of tax allowed under section 91;

(v) any tax credit allowed to be set-off in accordance with the provisions of section 115JAA
or section 115JD.

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Notes:
(i) An assessment made for the first time under section 147 shall be deemed to be regular
assessment.
(ii) Tax on total income as determined under section 143(1) would not include the
additional income-tax, if any, payable under section 140B or section 143.
(iii) Tax on the total income determined under such regular assessment would not include
the additional income-tax payable under section 140B.
(3) Interest paid on self-assessment: Where, before the date of determination of total income
under section 143(1) or completion of regular assessment, tax is paid by the assessee under
section 140A or otherwise, interest shall be calculated up to the date on which the tax is so paid
and reduced by the interest paid under section 140A towards interest under section 234B.
Thereafter, interest shall be calculated @1% on the amount by which the tax paid under
section 140A together with the advance tax paid falls short of the assessed tax.

(4) Where total income is increased on reassessment under section 147: As per section
234B(3), where the total income is increased on reassessment under section 147, the
assessee shall be liable for interest @1% for every month or part of a month on the amount
of the increase in tax on total income as a consequence of reassessment or recomputation
[Tax on total income determined on the basis of reassessment or recomputation ( –) Tax on
total income determined under section 143(1) or on the basis of regular a ssessment].
Period for which interest is payable
Period commencing from: Period ending on:
the 1st April next following the and the date of reassessment or
financial year recomputation under section 147.
(5) Consequence where interest payable is increased or reduced subsequently as a result
of rectification, appeal, revision etc. - Where as a result of an order of rectification or an
appellate order or an order of revision, the interest payable is reduced or increased, the
Assessing Officer shall proceed as follows:
Case Ending date
(i) Where the interest is The Assessing Officer shall serve on the assessee a notice
increased of demand in the prescribed form specifying the sum payable
and such demand notice shall be a notice under section 156.
(ii) Where interest is The excess paid shall be refunded
reduced

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13.10.3 Interest for deferment of advance tax [Section 234C]

(1) Manner of computation of interest under section 234C for deferment of advance tax by
corporate and non-corporate assessees:
In case an assessee, other than an assessee who declares profits and gains in
accordance with the provisions of section 44AD(1) or
section 44ADA(1), who is liable to pay advance tax under
section 208 has failed to pay such tax or the advance tax
paid by such assessee on its current income on or before
the dates specified in column (1) is less than the specified
percentage [given in column (2)] of tax due on returned income, then simple interest @1%
per month for the period specified in column (4) on the amount of shortfall, as per column (3)
is leviable under section 234C.
Specified date Specified% Shortfall in advance tax Period
(1) (2) (3) (4)
15th June 15% 15% of tax due on returned income 3 months
(-) advance tax paid up to 15 th June
15th September 45% 45% of tax due on returned income 3 months
(-) advance tax paid up to 15 th
September
15th December 75% 75% of tax due on returned income 3 months
(-) advance tax paid up to 15 th
December
15th March 100% 100% of tax due on returned income 1 month
(-) advance tax paid up to 15 th March

Note – However, if the advance tax paid by the assessee on the current income, on or before
15th June or 15th September, is not less than 12% or, 36% of the tax due on the returned
income, respectively, then, the assessee shall not be liable to pay any interest on the amount
of the shortfall on those dates.
(2) Computation of interest under section 234C in case of an assessee who declares
profits and gains in accordance with the provisions of section 44AD(1) or section
44ADA(1):

In case an assessee, who declares profits and gains in accordance with the section 44AD(1)
or section 44ADA(1), as the case may be, who is liable to pay advance tax under section 208
has failed to pay such tax or the advance tax paid by the assessee on its current income on
or before 15th March is less than the tax due on the returned income, then, the assessee

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shall be liable to pay simple interest at the rate of 1% on the amount of the shortfall from the
tax due on the returned income.

(3) Non-applicability of interest under section 234C in certain cases:

Interest under section 234C shall not be leviable in respect of any shortfall in payment of tax
due on returned income, where such shortfall is on account of
under-estimate or failure to estimate –

(i) the amount of capital gains;

(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries, crossword
puzzles etc.;

(iii) income under the head “Profits and gains of business or profession” in cases where
the income accrues or arises under the said head for the first time;

(iv) the amount of dividend income u/s 2(22)(a)/(b)/(c)/(d)/(f)

However, the assessee should have paid the whole of the amount of tax payable in respect
of such income referred to in (i), (ii), (iii) or (iv), as the case may be, had such income been
a part of the total income, as part of the remaining instalments of advance tax which are due
or where no such instalments are due, by 31 st March of the financial year.

(4) Tax due on the returned income: means the tax chargeable on the total income declared
in the return of income furnished by the assessee for the assessment year immediately
following the financial year in which the advance tax is paid or payable, as reduced by the
amount of –

(i) any tax deductible or collectible at source on any income which is taken into account
for calculating the total income;

(ii) any relief of tax allowed under section 89;

(iii) any relief of tax allowed under section 90 or 90A;

(iv) any deduction of tax allowed under section 91;

(v) any tax credit allowed to be set-off in accordance with the provisions of section 115JAA
or section 115JD.

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13.10.4 Interest on excess refund granted at the time of summary

assessment [Section 234D]
(1) Applicability: Where a regular assessment under section 143(3) or section 144 is made, any
tax or interest paid under section 143(1) shall be deemed to have been paid towards such
regular assessment and if no refund is due on regular assessment or the amount refunded
under section 143(1) exceeds the amount refundable on regular assessment, the whole or
the excess amount so refunded is deemed to be tax
payable by the assessee. In order to charge interest
for the period during which the refund amount has
been utilised by the assessee, section 234D levies
interest on excess refund granted at the time of summary assessment.
(2) Rate and period of interest: Where any refund is granted to the assessee under section
143(1) and no refund is due on regular assessment or the amount refunded under section
143(1) exceeds the amount refundable on regular assessment, then, the assessee shall be
liable to pay simple interest at the rate of ½% on the whole or the excess amount so refunded
for every month or part of the month from the date of grant of the refund to the date of such
regular assessment.
Note - An assessment made for the first time under section 147 shall be regarded as regular
assessment for the purpose of this section.
(3) Reduction of interest: The interest chargeable under sub-section (1) shall be reduced,
where, as a consequence to the order passed due to rectification, appeal, revisions etc. under
sections 154/155/250/254/260/262/263/264, the amount of refund granted under section
143(1) is held to be correctly allowed.

13.10.5 Fee/ penalty for default in furnishing TDS/ TCS Statements

(1) Quantum of fee: A fee of ` 200 for every day would be levied
under section 234E for late furnishing of TDS/ TCS statement
from the due date of furnishing of TDS/ TCS statement to the date of furnishing of TDS/ TCS
statement. However, the total amount of fee shall not exceed the total amount of tax
deductible/collectible and such fee has to be paid before delivering the TDS/ TCS statement.
(2) Penalty [Section 271H]: In addition to the said fee, a penalty ranging from a minimum of
` 10,000 to a maximum of ` 1,00,000 shall also be levied under section 271H for not
furnishing TDS/ TCS statements within the prescribed time or furnishing incorrect information
in the said statements in respect of tax deducted or collected at source.

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(3) Fee and penalty where TDS/ TCS statement is furnished after one year: Since late
furnishing of TDS/ TCS statements would attract levy of fees under section 234E, no penalty
under section 271H shall be levied for delay in furnishing of TDS/ TCS statement, if the TDS/
TCS statement is furnished within one month of the prescribed due date after payment of tax
deducted or collected along with applicable interest and fee. However, if the delay is beyond
the period of one month, both fee under section 234E and penalty under section 271H would
be leviable.

13.11 COLLECTION AND RECOVERY OF TAX - OTHER

METHODS
13.11.1 Payment of tax and defaults by the assessee [Section 220]
(1) Under section 220(1), any amount specified as payable in a notice of demand under section
156 shall be paid within thirty days of the service of notice
at the place and to the person mentioned in the notice. On
an application made by the assessee before the expiry of
the due date of thirty days, the Assessing Officer may
extend the time for payment or allow payment by instalments, subject to such conditions as
he may think fit to impose in the circumstances of the case.
The Assessing Officer may with the previous approval of the Joint Commissioner, direct that
the sum specified in the notice of demand shall be paid within such period being a period less
than the period of thirty days as may be specified by him in the notice of demand, if he has
any reason to believe that it will be detrimental to revenue if the full period of thirty days
aforesaid is allowed.
(2) If the amount specified in the notice is not paid within the period, the assessee shall be liable
to pay interest at 1% for every month or part of a month
comprised in the period commencing from the day
immediately following the end of the period mentioned in
section 220(1) and ending with the day on which the amount
is paid. This is provided for in section 220(2).
(3) The first proviso to section 220(2) states that where, as a result of an order under sections
154/155/250/254/260/262/264, the amount on which interest payable under this section had
been reduced, the interest shall be reduced accordingly and the excess interest paid, if any,
shall be refunded.

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(4) The liability of the assessee to pay interest is based on the theory of continuity of the
proceedings and the doctrine of relation back.
(5) Further, the second proviso to section 220(2) provides that if, as a result of an order under
the sections specified in the first proviso to section 220(2), the amount of interest payable
was reduced, and thereafter, as a result of another order under any of the sections given in
the first proviso or section 263, the interest payable was increased, the assessee would be
liable to pay interest under section 220(2) from the day immediately following the end of the
period mentioned in the first notice of demand referred to in section 220(1) till the date on
which the amount is paid.
(6) Accordingly, section 220(1A) provides that where any notice of demand has been served
upon an assessee and any appeal or other proceeding, as the
case may be, is filed or initiated in respect of the amount
specified in the said notice of demand, then such demand shall
be deemed to be valid till the disposal of appeal by the last
appellate authority or disposal of proceedings, as the case may
be, and any such notice of demand shall have effect as provided in section 3 of the Taxation
Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 [See Note below]

Note - Section 3 of the Taxation Laws (Continuation and Validation of Recovery

Proceedings) Act, 1964
Continuation and validation of certain proceedings
(1) Where any notice of demand in respect of any Government dues is served upon an
assessee by a Taxing Authority under any scheduled Act, and any appeal or other
proceeding is filed or taken in respect of such Government dues, then, -
(a) where such Government dues are enhanced in such appeal or proceeding, the
Taxing Authority shall serve upon the assessee another notice of demand only in
respect of the amount by which such Government dues are enhanced and any
proceeding in relation to such Government dues as are covered by the notice or
notices of demand served upon him before the disposal of such appeal or
proceeding may, without the service of any fresh notice of demand, be continued
from the stage at which such proceedings stood immediately before such disposal;
(b) where such Government dues are reduced in such appeal or proceeding,-
(i) it shall not be necessary for the Taxing Authority to serve upon the
assessee a fresh notice of demand;

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(ii) the Taxing Authority shall give intimation of the fact of such reduction to
the assessee. Further, where a certificate has been issued to the Tax
Recovery Officer for the recovery of such amount, intimation of the fact
of reduction shall also be given to him;
(iii) any proceedings initiated on the basis of the notice or notices of demand
served upon the assessee before the disposal of such appeal or
proceeding may be continued in relation to the amount so reduced from
the stage at which such proceedings stood immediately before such
disposal;
(c) no proceedings in relation to such Government dues (including the imposition
of penalty or charging of interest) shall be invalid by reason only that no fresh
notice of demand was served upon the assessee after the disposal of such
appeal or proceeding or that such Government dues have been enhanced or
reduced in such appeal or proceeding.

(2) No fresh notice of demand shall be necessary in any case where the amount of
Government dues is not varied as a result of any
order passed in any appeal or other proceeding
under any scheduled Act.
(3) The provisions of this section shall have effect notwithstanding any judgment, decree
or order of any court, tribunal or other authority.
ILLUSTRATION 19
The Assessing Officer issued a notice of demand under section 156 to Mr. X on 1.10.202 5
for payment of ` 15 lakhs towards his income-tax liability for the A.Y.2024-25, requiring him
to pay the said amount within 30 days.
(a) Is he required to issue fresh notice of demand and if so, for what amount, in the
following two cases (each case has to be considered independently) –
(i) If the tax demand is reduced to ` 12 lakhs by the Commissioner (Appeals) by
issue of order under section 250;
(ii) If the tax demand is increased to ` 20 lakhs by the Appellate Tribunal, by issue
of an order under section 254.
(b) How would the interest liability under section 220(2) be calculated if the tax demand
is reduced to ` 12 lakhs by the Commissioner (Appeals) by issue of order under

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section 250 and subsequently increased to ` 15 lakhs by the Appellate Tribunal by

way of issue of order under section 254?
SOLUTION
(a) (i) No fresh notice of demand is required to be served on Mr. X. The Assessing
Officer is only required to give an intimation of the fact of reduction of demand
to ` 12 lakhs to Mr. X. The proceedings initiated on the basis of the original
notice of demand may be continued in relation to the reduced amount of ` 12
lakhs from the stage at which such proceedings stood immediately before
disposal of appeal.
(ii) A fresh notice of demand has to be given only in respect of ` 5 lakhs, being the
amount of enhancement. Any proceedings in relation to ` 15 lakhs covered by
the original notice of demand served upon Mr. X may be continued from the
stage at which such proceedings stood immediately before the disposal of
appeal.

(b) The interest under section 220(2) has to be paid on ` 15 lakhs @1% per month or part of
the month comprised in the period commencing from 1.11.2025 and ending with the date
on which the amount is paid, assuming that Mr. X has not paid any interest so far.

(7) Reduction or waiver of interest payable under section 220(2) - Section 220(2A) empowers
the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner for reduction or waiver of any interest payable under section 220(2).
Accordingly, w.e.f. 4.11.2024, the CBDT has, vide Circular no. 15/2024, dated 4.11.2024, for
the proper administration of the Act, specified the monetary limits for reduction or waiver of
interest:
[Link]. Income-tax Authority Monetary limits for reduction or
waiver of interest
1 Principal Commissioner or Commissioner Upto ` 50 lakhs
of Income-tax
2 Chief Commissioner of Income-tax Above ` 50 lakhs to ` 1.5 crores
3 Principal Chief Commissioner of Icome- Above ` 1.5 crores
tax

The powers of reduction or waiver of the interest paid or payable under section 220(2) in respect
of any income-tax authority shall continue if he is satisfied that:

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(i) payment of such amount has caused or would cause genuine hardship to the
assessee;
(ii) default in the payment of the amount on which interest was made payable under the
said sub-section was due to circumstances beyond the control of the assessee; and
(iii) the assessee has co-operated in any enquiry relating to the assessment or any
proceeding for the recovery of any amount due from him.
The order accepting or rejecting the application of the assessee, either in full or in part, shall
be passed within a period of twelve months from the end of the month in which the
application is received.

Further, no order rejecting the application, either in full or in part, shall be passed unless the
assessee has been given an opportunity of being heard.

(8) Interest under section 220(2) not leviable where interest is charged u/s 201(1A) or
section 206C(7) -
Since the intimation generated after processing the TDS statement under section 200A(1)
would be deemed as a notice of demand under section 156, consequently, interest under
section 220 would be attracted for failure to pay the tax specified in the intimation. However,
interest under section 201(1A) is leviable for non-payment of tax specified in the intimation.
Therefore, it has been provided that in cases where interest is charged for any period under
section 201(1A) on the tax specified in the intimation under section 200A, then, interest under
section 220(2) would not be levied on the same amount for the same period.
Likewise, since the intimation generated after processing of TCS statement shall be deemed
as a notice of demand under section 156, failure to pay the tax specified in the intimation
shall attract a levy of interest as per the provisions of section
220(2). Section 206C(7) also provides for levy of interest for
non-payment of tax specified in the intimation to be issued. In
order to remove the possibility of charging interest on the same amount for the same period
of default both under section 206C(7) and section 220(2), sub-section (2C) of section 220
specifically provides that where interest is charged for any period under section 206C(7)
on the amount of tax specified in the intimation issued under 206CB(1), no interest
shall be charged under section 220(2) on the same amount for the same period.

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13.11.2 Penalty payable [Section 221]

(1) Penalty for default in payment of tax - Where an assessee is in default in payment of tax
including advance tax and interest payable thereon, the
Assessing Officer shall impose a penalty which, in cases of
continuing default, may be increased from time to time.
However, the total penalty should not exceed the tax in
arrears. The Assessing Officer should give the assessee a
reasonable opportunity of being heard before levying such a penalty.
No penalty shall be levied on the assessee for default in payment of tax in cases where he
proves to the satisfaction of the Assessing Officer that the default was for good and sufficient
reasons.
(2) Payment of tax before levy of penalty not to absolve the assessee from penalty - The
Explanation to section 221(1) provides that an assessee would not cease to be liable to pay
any penalty for his default or delay in payment of the tax merely by reason of the fact that
before the date of levy of such penalty, the tax which was in arrears had actually been paid
by him.
Thus, wherever there is a delay on the part of the assessee, he would be liable to penalty
even though by the time the Assessing Officer initiates action for the levy of penalty , the
amount of tax in arrears is actually paid.
An order imposing penalty is appealable and the
assessee’s right of appeal subject to the condition
that he must first pay the tax or penalty; the
assessee should first pay the tax before filing the appeal.
(3) Circumstance when penalty levied will be cancelled – If, as a consequence of any final
order, the amount of tax, with respect to the default in the payment of which the penalty was
levied, has been wholly reduced, the penalty levied shall be cancelled and the amount of
penalty paid shall be refunded.

13.11.3 Certificate to Tax Recovery Officer (TRO) [Section 222]

(1) TRO to draw up statement specifying amount of arrears due from an assessee -in-
default [Section 222(1)] - When an assessee is in
default or is deemed to be in default in making a payment
of tax, the TRO may draw up under his signature a

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statement in the prescribed form and specifying the amount of arrears due from the assessee
and shall proceed to recover from such assessee the amount specified in the certificate by
one of more of the modes mentioned below, in accordance with the Second S chedule.

(2) Property to include property transferred to spouse/minor child/son’s wife/son’s minor

child for inadequate consideration [Explanation to section 222(1)] - For the purpose of
this section, the assessee’s movable or immovable property shall include any property which
has been transferred directly or indirectly by the assessee to his spouse or minor child or
son’s wife or son’s minor child otherwise than for adequate consideration and which is held
by any of the persons aforesaid. So far as the movable or immovable property so transferred
to his minor child or his son’s minor child is concerned, they shall, even after the date of
attainment of majority by such minor child or son’s minor child, continue to be included in the
assessee’s movable or immovable property for recovering any arrears from the assessee in
respect of any period prior to such date.
(3) The TRO may take action under sub-section (1), notwithstanding that proceedings or recovery
of the arrears by any special mode have been taken.

13.11.4 Tax Recovery Officer (TRO) by whom recovery is to be effected

[Section 223]
(1) TRO competent to take action under section 222: The TRO competent to take action under
section 222 shall be the TRO within whose jurisdiction:
(i) the assessee carries on business or profession.
(ii) the principal place of his business or profession is situated.

(iii) the assessee resides or any movable or immovable property of the assessee is situated.

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(2) Assignment of jurisdiction: The jurisdiction is assigned either by the CBDT or by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner who is authorised on this behalf by the CBDT under section 120.
(3) Procedure where an assessee has property within the jurisdiction of more than one
TRO: In such a case, if the TRO by whom the certificate is drawn up is not able to recover
the entire amount by the sale of the property within his jurisdiction or is of the opinion that,
for the purpose of expediting or securing the recovery of the whole or any part of the amount
under this Chapter, it is necessary so to do, he may send the certificate to a TRO within
whose jurisdiction the assessee has property. Thereupon, that TRO shall proceed to recover
the amount as if the certificate was drawn up by him.

13.11.5 Validity of certificate and cancellation and amendment thereof

[Section 224]
(1) The assessee cannot dispute the correctness of any certificate drawn up by the TRO on any
ground whatsoever.
(2) However, the TRO is empowered to cancel the certificate if, for any reason, he thinks it
necessary so to do, or to correct any clerical or arithmetical mistake therein.

13.11.6 Stay of proceedings in pursuance of certificate and amendment

or cancellation thereof [Section 225]
(1) TRO empowered to grant time for payment of tax: It shall be lawful for the TRO to grant
time for the payment of any tax and when he does so he
shall stay proceedings for the recovery of such tax until
the expiry of the time so granted.
(2) TRO empowered to stay proceedings where demand is reduced in appeal but subject
matter of further proceedings: Where as a result of appeal, the demand is reduced but the
order is the subject matter of further proceedings, the TRO shall stay the recovery of such
part of the amount specified in the certificate as pertains to such deduction for the period in
which an appeal or other proceedings remains pending.
(3) TRO empowered to modify or cancel certificate where demand is reduced on appeal:
Where a certificate has been drawn up and subsequently, as a result of appellate order, the
amount is reduced, the TRO shall modify the certificate or cancel it if it is necessary, when the
order which was the subject matter of appeal or other proceeding becomes final and conclusive.

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13.11.7 Other modes of recovery [Section 226 & 227]

(1) Recovery of tax where a certificate has/has not been drawn up under section 222:
Whether Certificate has Income-tax authority empowered to recover
been drawn up under taxes by one or more of the modes specified
section 222? in section 226
(i) No Assessing Officer
(ii) Yes TRO, without prejudice to the modes of recovery
specified in section 222

Note - This section enumerates the various modes of recovery by the Assessing Officer and
TRO. Students may refer to the section in the Bare Act for details.
(2) Non-validity of claim in regard to any property where notice is issued: Any claim in
regard to any property in relation to which a notice under this section is issued, shall be void
as against any demand contained therein.
(3) Consequences where the person on whom notice is served objects on oath: Where a
person, on whom a notice (garnishee order) under this section has been served, objects on
oath that the amount demanded from him is not due to the assessee or that he does not hold
any money for or on account of the assessee, he cannot be compelled by the Assessing
Officer to make the payment. However, if it is later on found that such a statement made by
him was false, he would personally become liable to pay the amount to the Assessing Officer
or TRO to the extent of his own liability to the assessee or to the extent of the assessee’s
liability, whichever is less.
Such personal liability would arise even in cases where the person in receipt of a notice from
the Assessing Officer or TRO, makes a payment in disregard of the notice served on him.
(4) Recovery of tax dues from money in custody of a Court or Receiver by distraint and
sale of movable property: Money belonging to the assessee-in-default which are in the
custody of a Court or Receiver is also liable for attachment. Further, on being authorised by
the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/
Commissioner, the Assessing Officer or the TRO is also empowered, by general or special
order to recover any arrears of tax due by distraint and sale of movable property as laid down
in the Third Schedule. For details, students may refer to the Third Schedule in the Act.
(5) Recovery through State Government: In addition, tax may be recovered through the State
Government if the recovery of tax in any area has been entrusted to it under the Constitution.
In such a case, the State Government may direct that the tax shall be recovered in respect
of any particular area together with the municipal taxes or local rates, if any, by the
municipality or local authority [Section 227].

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13.11.8 Recovery of tax in pursuance of agreements with foreign countries

[Section 228A]
(1) Section 228A provides for the procedure of recovery of tax in pursuance of an agreement
entered into by the Central Government with the
Government of any country outside India or any authority
under that Government.
(2) Where the Government of the foreign country or any
authority under that Government sends a certificate to the CBDT for the recovery of any tax
due under that law from a resident, or a person having any property in India, the CBDT may
forward such certificate to any TRO having jurisdiction over the resident, or within whose
jurisdiction such property is situated.
(3) The TRO shall proceed to recover the amount specified in the certificate in the manner in
which he would proceed to recover the amount specified in a certificate drawn up by him
under section 222.
(4) Thereafter, the TRO has to remit any sum so recovered to the CBDT after deducting the
expenses in connection with the recovery proceedings.
(5) Where an assessee is in default or is deemed to be in default in making a payment of tax,
the TRO may, if the assessee is a resident of a country (being a country with which the Central
Government has entered into an agreement for the recovery of income-tax under the Income-
tax Act, 1961 and the corresponding law in force in that country) or has any property in that
country, forward to the CBDT a certificate drawn up by him under section 222 and the CBDT
may take such action thereon as it may deem appropriate having regard to the terms of the
agreement with such country.

13.11.9 Tax Clearance Certificate [Section 230]

(1) Undertaking to be furnished by a person not domiciled in India visiting India in
connection with business, profession or employment [Section 230(1)]
(i) No person, who is not domiciled in India and who has come to India in connection with
business, profession or employment; and who has income derived from any source in
India, shall leave the territory of India by land, sea or air unless he furnishes to the
prescribed authority an undertaking in the prescribed form.

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(ii) The said undertaking should be furnished from the employer of the said person or
through whom such person is in receipt of the income.
(iii) The undertaking should be to the effect that tax payable
by such person who is not domiciled in India shall be paid
by the employer or the person through whom any income
is receivable by the first-mentioned person.
(iv) The prescribed authority shall, on receipt of the undertaking, immediately give to such
person a no objection certificate, for leaving India.

(v) However, the provisions contained in sub-section (1) shall not apply to a person who
is not domiciled in India but visits India as a foreign tourist or for any other purpose
not connected with business, profession or employment.
(2) Furnishing of PAN by person domiciled in India at the time of departure [Section
230(1A)]
(i) Every person, who is domiciled in India at the time of his
departure, shall furnish, to the income-tax authority or
such other authority as may be prescribed, his PAN
allotted to him under section 139A, the purpose of his
visit and the estimated period of his stay outside India.

(ii) In case, no such PAN has been allotted to him, or his

total income is not chargeable to income-tax or he is not required to obtain a PAN
under the Income-tax Act, 1961, a certificate in the prescribed form shall be furnished
to the income-tax authority or such other authority, as may be prescribed.
(iii) However, where an income-tax authority opines that there exist circumstances which
render an Indian domiciled to obtain a certificate under this section, such person shall
not leave the territory of India by land, sea or air unless -
(a) he obtains a certificate from the income-tax authority stating that he has no
liabilities under the Income-tax Act, 1961 or the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015, or
(b) that satisfactory arrangements have been made for the payment of all or any of
such taxes which are or may become payable by that person [First proviso to
sub-section (1A)]

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(iv) No income-tax authority shall make it necessary for any person who is domiciled in
India to obtain a certificate under this section unless he records the reasons therefor
and obtains the prior approval of the Principal Chief Commissioner or Chief
Commissioner of Income-tax.
(3) Personal liability of owner or charterer of ship or aircraft carrying such persons
[Section 230(2) & (3)]
If the owner or charterer of any ship or aircraft carrying persons from any place in India to
any place outside India allows any of the above-mentioned persons to travel by such ship or
aircraft without first satisfying that such person is in possession of a certificate as required,
he shall be personally liable to pay the whole or any part of the tax payable by such person
as the Assessing Officer, may determine. In such a case, the owner or charterer shall be
deemed to be an assessee in default for such sum and recovery shall be made in the manner
as if it were an arrear of tax.
Note - The expressions “owner” and “charterer” include any representative, agent or employee
empowered by the owner or charterer to allow persons to travel by the ship or aircraft.

(4) Power to make Rules [Section 230(4)]

The CBDT is empowered to make rules for carrying out the provisions of this section.

13.11.10 Faceless collection and recovery of tax [Section 231]

Section 231 empowered the Central Government to notify scheme for faceless collection and
recovery of tax for eliminating physical interface.
(1) Faceless scheme [Section 231(1)] - The Central Government is empowered to make a
scheme [faceless collection and recovery of tax scheme] by notification in the Official Gazette
for the purpose of:

a. issuing certificate for deduction of income-tax at any lower rates or no deduction of

income-tax under section 197 or
b. deeming a person to be an assessee-in-default under section 201(1) or section
206C(6A) or
c. issuance of certificate for lower collection of tax under 206C(9) or
d. passing of order or amended order under
section 210(3)/(4) or

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e. reduction or waiver of the amount of interest paid or payable by an assessee u/s

220(2A); or
f. extending the time for payment or allowing payment by instalment u/s 220(3); or
g. treating the assessee as not being in default u/s 220(6) or u/s 220(7); or
h. levy of penalty u/s 221; or
i. drawing of certificate by the Tax Recovery Officer u/s 222; or
j. jurisdiction of Tax Recovery Officer u/s 223 or
k. stay of proceedings in pursuance of certificate and amendment or cancellation thereof
by the Tax Recovery Officer u/s 225 or
l. other modes of recovery u/s 226 or
m. issuance of tax clearance certificate u/s 230
so as to impart greater efficiency, transparency, and accountability by:
(i) eliminating the interface between the income-tax authority and the assessee or any
person to the extent technologically feasible
(ii) optimising utilisation of the resources through economies of scale and functional
specialisation;
(iii) introducing a team-based issuance of certificate for deduction or collection of income-
tax at lower rate, or for no deduction, or for deeming a person to be an assessee -in-
default, or for passing of an order or amended order, or extending the time for
payment, or allowing payment by instalment, or reduction or waiver of interest, or for
treating the assessee as not being in default, or for levy of penalty or for drawing of
certificate or stay of proceedings in pursuance of certificate and amendment or
cancellation thereof, by, or jurisdiction of, Tax Recovery Officer or other modes of
recovery or issuance of tax clearance certificate, with dynamic jurisdiction.
(2) Applicability or non-applicability of other provisions of the Act [Section 231(2)] - The
Central Government may, for the purpose of giving effect to the scheme, by notification in the
Official Gazette, direct that any provision of this Act shall not apply or shall apply with such
exception, modification and adaptations as specified in the notification.
No such direction can, however, be issued by the Central Government after 31 st March, 2022.
(3) Notification issued above to be laid before each House of Parliament [Section 231(3)]
- Every such notification issued by the Central Government either under sub section (1) or
(2) of the section 231 has to be laid before each House of Parliament as soon as possible.

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13.11.11 Recovery by suit or under other law [Section 232]

Section 232 provides that the Assessing Officer or the Government can have recourse to the other
modes of recovery under any other law for the time being in force, over the various modes specified
above to recover the tax dues under the Act, in the same way as other debts due to the Government.
It shall also be lawful for the Assessing Officer or the Government to take recourse to any other law
or file a suit in any manner for the recovery of the arrears due from the assessee.

13.12 REFUNDS
(1) Eligibility [Section 237]
(i) An assessee is entitled to claim a refund of tax if the tax actually paid (and not merely
payable) by him or on his behalf or treated as paid by him or on his behalf for any
assessment year exceeds the amount of tax with which he is properly chargeable
under the Act for that year.
(ii) This may usually arise as a result of excess deduction of tax at source from salaries,
dividends, interest, to or as a result of excess payment of advance tax or when the tax
originally paid on assessment is reduced on appeal, revision, rectification or reference.
(2) Persons entitled to claim refund in certain cases [Section 238]
(i) Generally, a claim for a refund can be made only by the person on whose account the
tax was already paid.

(ii) However, in cases where the income of one person is included in the total income of
another person under sections 60 to 65, the latter
person alone is entitled to claim the refund.
(iii) If any person is not able to claim or receive the
refund due to him on account of his death,
incapacity, insolvency, dissolution, liquidation, etc., his legal representative or trustee
or guardian or receiver, as the case may be, is entitled to claim or receive the refund
on behalf of such person or his estate.
(3) Claim for refund [Section 239]
In order to simplify the procedure for a claim of refund, it has been provided that every claim
for refund should be made by furnishing a return in accordance with the provisions of
section 139.

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(4) Refund for denying liability to deduct tax under section 195 [Section 239A]:
(i) Application for refund of tax - This section provides that where under an agreement
or other arrangement, in writing, the tax deductible on any income, other than interest,
under section 195 is to be borne by the person by whom the income is payable, and
such person having paid such tax to the credit of the Central Government, claims that
no tax was required to be deducted on such income, he may file an application before
the Assessing Officer for a refund of such tax in prescribed form and manner.
(ii) Time limit for filing application - Such application may be filed within 30 days from
the date of payment of such tax.
(iii) Passing of order by Assessing Officer - The Assessing Officer has to, by an order
in writing, allow or reject the application. However, no application would be rejected
unless an opportunity of being heard has been given to the applicant. The Assessing
Officer, may, before passing an order make such inquiry as he considers necessary.
(iv) Time limit for passing order - The order has to be passed within 6 months from the
end of the month in which the application for refund is received.
(5) Refund on appeal etc. [Section 240]
(i) Where a refund becomes due to the assessee as a result of an order passed in appeal
or any other proceeding under the Income-tax Act, 1961, he need not make an
application to claim the same.
(ii) In such a case, the Assessing Officer is bound to pass an order of refund without
waiting for the application from the assessee.
(iii) Where, by the order aforesaid, an assessment is set aside or cancelled and an order
of fresh assessment is directed to be made, the refund shall become due only on the
making of such fresh assessment.
(iv) Where the assessment is annulled, the refund shall become due only of the amount
of tax paid in excess of the tax chargeable on the total income returned by the
assessee.
(6) Correctness of assessment not to be questioned [Section 242]
(i) While making a claim for refund, an assessee cannot question the correctness of any
assessment or other matter decided which has become final and conclusive or ask for
a review of the same.

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(ii) The assessee shall not be entitled to any relief on such claim except for a refund of
tax wrongly paid or paid in excess.
(7) Interest on Refunds [Section 244A]

(i) Applicability and Rate: Interest at 0.5% for every

month or part of a month shall be payable on tax or
penalty becoming refundable on account of excess
payment of advance tax, tax deducted at source or
collected at source and other tax or penalty becoming refundable.

(ii) Period of interest: Interest @0.5% for every month or part of a month for the period
specified in the following table for each of the cases mentioned in column (2)
hereunder–
Case Period for grant of interest on
refund
Beginning from Ending
with
(1) (2) (3) (4)
(a) Where the refund is out of TCS u/s
206C or paid by way of advance tax
or treated as paid u/s 199, during
the financial year immediately
preceding the A.Y.
(1) Where the return is filed on or 1st April of the Date of
before the due date u/s 139(1) assessment year grant of
(2) Where the return is filed after the date of filing of refund
the due date return
(b) Where the refund is out of self- Date of furnishing Date of
assessment tax paid u/s 140A return of income or grant of
payment of tax, refund
whichever is later
(c) In any other case Date of payment of tax Date of
or penalty grant of
refund
Note – The assessee can claim interest on refund due also in pursuance of
determination of total income u/s 143(1) or on regular assessment. However, no
interest shall be payable if the amount of refund due is less than 10% of the tax
determined u/s 143(1) or on regular assessment, in case of (a) and (b) above.

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(iii) Additional interest payable on refund arising out of fresh assessment order
giving effect to appellate or revisionary order: Where a refund arises as a result of
giving effect to an order under section 250/254/260/262/263/264, wholly or partly,
otherwise than by making a fresh assessment or reassessment, the assessee shall be
entitled to receive, in addition to the interest payable under section 244A(1), an
additional interest on such refund amount calculated at the rate of 3% p.a., for the
period beginning from the date following the date of expiry of the time allowed under
section 153(5) to the date on which the refund is granted.
However, if proceedings for assessment or reassessment are pending in respect of an
assessee, the period beginning from the date on which such refund is withheld by the
Assessing Officer and ending with the date upto which such refund is withheld, will be
excluded for computing additional interest payable.
Further, in cases where extension is granted by the Principal Commissioner or
Commissioner by invoking proviso to section 153(5), the period of additional interest,
if any, shall begin from the expiry of such extended period.
Circumstance Period beginning from 9
Where a refund arises as a result of giving From the expiry of 3 months from the
effect to an order under section end of the month in which the order
250/254/260/262/263/264, wholly or partly, u/s 250/254/260/262 is received by
otherwise than by making a fresh PCC/CC/PC/CIT, or order u/s 263 or
assessment or reassessment or resh order 264 is passed, by the PC/CIT.
u/s 92CA
Where extension is granted by the Principal From the expiry of 9 months from the
Commissioner or Commissioner by end of the month in which the order
invoking proviso to section 153(5) u/s 250/254/260/262 is received by
PCC/CC/PC/CIT, or order u/s 263 or
264 is passed, by the PC/CIT.
Where the order of rectification, appeal or From the expiry of 9 months from the
revision requires verification of any issue end of the F.Y. in which order u/s 254
by way of submission of any document by is received by the PCC/CC/PC/CIT or
the assessee or any other person or where order u/s 263 or 264 is passed by the
an opportunity of being heard is to be PC/CIT.
provided to the assessee

9Period for which assessee would be entitled to receive additional interest on refund

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(iv) Interest on refund payable to deductor [Section 244A(1B)]: Interest @0.5% for
every month or part of a month for the period specified in the following table for each
of the cases mentioned in column (1) hereunder –
Case Period for grant of interest on refund
Beginning from Ending with
(1) (2) (3)
Where the refund of any amount
becomes due to the deductor in respect
of any amount paid to the credit of the
Central Government under Chapter
XVII-B
(1) Where refund arises on account of Date on which tax is
giving effect to an order u/s paid Date of grant
250/254/260/262 of refund
(2) In any other case Date on which claim
for refund is made in
prescribed form

(v) Consequence where delay in granting refund is attributable to the assessee or

the deductor [Section 244A(2)] : Where there is a delay in granting refund and the
reasons for such delay are attributable to the assessee or the deductor, as the case
may be, either wholly or in part, the period of the delay so attributable to the assessee
shall be excluded from the period for which interest is payable. In case any question
arises as to the period of delay attributable to the assessee, it shall be decided by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner.
(vi) Increase or reduction of interest of refund as a result of assessment/
rectification/ appellate/ revisionary order [Section 244A(3)]
(a) Where as a result of an order under sections 143(3)/144/147/154/155/
250/254/260/262/263/264, the amount on which interest payable under this
section has been increased or reduced, the interest shall be increased or
reduced accordingly.
(b) If the interest is reduced, the Assessing Officer has to serve a notice of demand
on the assessee in the prescribed form specifying the amount of excess interest
paid and require him to pay such amount.

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(c) Such notice of demand shall be deemed to be notice under section 156 and the
provisions of the Act shall accordingly apply.
(vii) Interest under section 244A is income of the P.Y. in which it is allowed
Interest allowed under section 244A is the income of the previous year in which it is
allowed and should be declared in the return of income furnished in the assessment
year relevant to the previous year.
(viii) Payment of interest on refund under section 244A of excess TDS deposited
under section 195 [Circular No.11/2016 dated 26.4.2016]

The procedure for refund of tax deducted at source under section 195 to the person
deducting the tax is set out in CBDT Circular No.7/2007 dated 23.10.2007. Circular
No.7/2007 states that no interest under section 244A is admissible on refunds to be
granted in accordance with the circular or on the refunds already granted in
accordance with Circular No.769 or Circular No.790 dated 20.4.2000.
The issue of eligibility for interest on refund of excess TDS to a tax deductor has been
a subject matter of controversy and litigation. The Supreme Court of India, in Tata
Chemical Limited, Civil Appeal No. 6301 of 2011 vide order dated 26.02.2014, held
that the refund due and payable to the assessee is debt-owed and payable by the
Revenue. The State, having received the money without right and having retained and
used it, is bound to make the party good, just as an individual would be under like
circumstances. The obligation to refund money received and retained without right
implies and carries with it the right to interest."
In view of the above judgment of the Apex Court, it is settled that if a resident deductor
is entitled for the refund of tax deposited under section 195, then, it has to be refunded
with interest under section 244A from the date of payment of such tax.
(8) Set off of refunds against tax remaining payable or withholding of refund [Section 245]
(i) Set-off of refunds against any sum payable: Where a refund becomes due or is
found to be due to any person, the Assessing Officer or Commissioner or Principal
Commissioner or Chief Commissioner or Principal Chief Commissioner, as the case
may be, may, in lieu of payment of the refund, set-off the amount to be refunded or
any part of that amount, against the sum, if any,
remaining payable by the person to whom the
refund is due, after giving an intimation in writing
to such person of the action proposed to be taken.

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(ii) Withholding of refund: Where a part of the refund is set-off as stated above or where
no such amount is set-off, and refund becomes due to a person, and the Assessing
Officer, having regard to the fact that proceedings for assessment or reassessment
are pending in the case of such person, he may, for reasons to be recorded in
writing and with the previous approval of the Principal Commissioner or the
Commissioner, as the case may be, withhold the refund up to sixty days from the
date on which such assessment or reassessment is made

13.13 PENAL CONSEQUENCES FOR FAILURE TO DEDUCT

OR COLLECT OR PAY TAX AT SOURCE
The following penal consequences would be attracted for failure to deduct or collect or pay
tax at source:
Section Nature of Default Penalty Rigorous Remarks
Leviable/ imprisonment
271C Failure to deduct A sum equal to - Penalty imposable
the whole or any the amount of tax by the Assessing
part of tax at source which he failed to Officer
as per Chapter deduct
XVII-B
276B Failure to pay to the 3 months to 7 No limit specified
credit of the Central years (+) fine with respect to fine
Government, tax [See Note
deducted at source below]
under Chapter
XVII-B
However, if the
payment has been
made to the credit
of the Central
Government on or
before the time
prescribed for filing
the statement
under section
200(3), no
prosecution would
be attracted.

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271C & Failure to pay or A sum equal to 3 months to 7 Penalty imposable

276B ensure payment of the amount of years (+) fine by the Assessing
whole or any part tax which such [See Note Officer
thereof in cases person has failed below]
where the to pay or ensure
consideration/bene payment of
fit/ perquisite,
winnings as the
case may be, is
wholly or partly in
kind and the tax
deductor has to
ensure that tax to
be deducted has
been paid as
required
- by the proviso to
section 194B
[Winnings from
lottery or
crossword
puzzle]; or
- the first proviso
to section
194R(1) [on
benefits and
perquisites in
respect of
business or
profession] or
- the proviso to
section 194S(1)
[on transfer of
virtual digital
assets] or
- as per section
194BA(2) [winning
from online]
271CA Failure to collect the A sum equal to - Penalty imposable
whole or any part of the amount of tax by the Assessing
the tax as required which he failed to Officer
by or under the collect.
provisions of
Chapter XVII-BB

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276BB Failure to pay to the - 3 months to 7 No limit specified

Central years (+) fine with respect to fine
Government tax
collected under
section 206C
However, w.e.f.
1.4.2025, if the
payment has been
made to the credit
of the Central
Government any
time on or before
the time
prescribed for
filing the
statement under
section 206C(3),
no prosecution
would be
attracted.
278A Second and 6 months to 7 No limit specified
subsequent years for every with respect to fine
offences under subsequent
section 276B & offence (+) fine
276BB

Section 278AA provides that where a reasonable cause for the failure is proved, punishment shall
not be imposed for offences inter alia specified in sections 276B and 276BB.
Note - The CBDT has, vide Circular No. 24/2019 dated 9.9.2019, in the exercise of the powers under
section 119, listed out the offences covered under Chapter XXII of the Income -tax Act, 1961 in
respect of which prosecution proceedings shall be launched by Approving Authority being the
Sanctioning Authority where the quantum of offences exceed the prescribed monetary threshold.
Accordingly, in case of failure to pay TDS under section 276B or failure to pay TCS u/s 276BB, no
prosecution will be processed if the TDS/TCS amount does not exceed ` 25 lakhs and the delay in
deposit is less than 60 days. However, for these offences, in exceptional cases like habitual
defaulters, based on particular facts and circumstances of each case, prosecution may be initiated
only with the previous administrative approval of the Collegium of two CCIT/DGIT rank officers,
though the amount involved does not exceed the threshold limit of ` 25 lakhs. Students may read
the detailed circular available at the following link –
[Link]

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.187

SIGNIFICANT SELECT CASES

S. No. Case Law
1. ITC Ltd v. CIT (2016) 384 ITR 14 (SC)
Issue Analysis & Decision
Whether “tips” received by Section 15 applies when an employee has a vested right
the hotel-company from its to claim any salary from an employer or former
customers (who made employer. However, in the case on hand, there is no
payment through credit vested right on the part of the employee to claim any
card) and distributed to the amount of tips from the employer, since tips are purely
employees would fall within voluntary amounts that may or may not be paid by
the meaning of “Salaries” to customers for services rendered.
attract tax deduction at The amount of tips paid by the employer to the
source u/s 192? employees had no reference to the contract of
employment at all. Tips were received by the employer in
a fiduciary capacity as trustee for payments that were
received from customers, which they disbursed to their
employees for service rendered to the customer. There
was, therefore, no reference to the contract of employment
when these amounts were paid by the employer to the
employee.
Therefore, the tips received by the employees could
not be regarded as “profits in lieu of salary” in terms
of section 17(3). The payment by the employer of tips
collected from the customers to the employees would
not be a payment made “by or on behalf of” an employer.
Such payments would be outside the purview of section
15(b) of the Act.
The person who paid the tip was the customer and
not the employer. Even though the amounts were with
the employer, he had no title to the money, and it was
held in a fiduciary capacity as trustee for and on behalf
of the employees.
Therefore, in such a case, no liability to deduct tax at
source u/s 192 arises, and hence, the assessee
company cannot be treated as an assessee in default for
non-deduction of tax at source from the amount of tips
collected and distributed to its employees.

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2. Japan Airlines Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372 (SC)
Issue Analysis & Decision
Are landing and parking The charges which are fixed by the AAI for landing and
charges paid by an airline take-off services as well as for parking of aircrafts are
company to Airports not for the "use of the land". These charges are for
Authority of India in the services and facilities offered in connection with the
nature of rent to attract tax aircraft operation at the airport which include providing
deduction at source u/s of air traffic services, ground safety services,
194-I? aeronautical communication facilities, installation and
maintenance of navigational aids and meteorological
services at the airport. Hence, the charges are not for
use of the land per se and, therefore, it cannot be
treated as "rent" within the meaning of section
194-I.
3. CIT v. Ahmedabad Stamp Vendors Association (2012) 348 ITR 378 (SC)
Issue Analysis & Decision
Can discount given to Although the Government has imposed a number of
stamp vendors on purchase restrictions on the licensed stamp vendors regarding the
of stamp papers be treated manner of carrying on the business, the stamp vendors
as ‘commission or are required to purchase the stamp papers on payment
brokerage’ to attract the of price less discount on “principal to principal” basis and
provisions for tax deduction there is no “contract of agency” at any point of time. The
u/s 194H? definition of “commission or brokerage” under clause (i)
of the Explanation to section 194H indicates that the
payment should be received, directly or indirectly, by a
person acting on behalf of another person, inter alia, for
services in the course of buying or selling goods.
Therefore, the element of agency is required in case of
all services and transactions contemplated by the
definition of “commission or brokerage” under
Explanation (i) to section 194H.
When the licensed stamp vendors take delivery of
stamp papers on payment of full price less discount
and they sell such stamp papers to the retail
customers, neither of the two activities (namely,
buying from the Government and selling to the
customers) can be termed as service in the course
of buying and selling of goods. The discount on

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purchase of stamp papers, therefore, does not fall

within the expression “commission or brokerage” to
attract the provisions of tax deduction at source u/s
194H.
4. CIT v. Kotak Securities Ltd (2016) 383 ITR 1 (SC)
Issue Analysis & Decision
Would transaction charges The assessee company was engaged in the business of
paid by the members of the share broking, depositories, mobilisation of deposits and
stock exchange for availing marketing public issues. Being a member of the BSE, it
fully automated online made payment to the Stock Exchange by way of
trading facility, being a transaction charges in respect of a fully automated
facility provided by the online trading facility and other facilities.
stock exchange to all its • The services provided by the stock exchange are
members, constitute fees available to all members in respect of every
for technical services to transaction that is entered into. There is nothing
attract the provisions of tax special, exclusive or customized in the service that
deduction at source u/s is rendered by the stock exchange.
194J?
• A member who wants to conduct his daily business
in the stock exchange has no option but to avail
such services. Each and every transaction by a
member involves the use of such services provided
by the stock exchange for which the member is
required to pay transaction charges based on the
transaction value besides charges for the
membership of the stock exchange.
• Technical services like managerial and
consultancy service are in the nature of specialised
services made available by the service provider to
cater to the special needs of the customer-user as
may be felt necessary. It is the above feature that
would distinguish or identify a service provider from
a facility offered.
The service provided by the BSE for which transaction
charges are paid failed to satisfy the test of specialized,
exclusive and individual requirements of the user or the
consumer who may approach the service provider for
such assistance or service.

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Therefore, the transaction charges paid to BSE by its

members are not for technical services but are in the
nature of payments made for facilities provided by the
stock exchange. Such payments would, therefore, not
attract the provisions of tax deduction at source u/s
194J.
5. UCO Bank v. Dy. CIT (2014) 369 ITR 335 (Del)
Issue Analysis & Decision
Is section 194A applicable The expression “payee” u/s 194A would mean the
in respect of interest on recipient of income whose account is maintained by the
fixed deposits in the name person paying interest. The Registrar General is
of Registrar General of neither recipient of the amount credited to his
High Court? account nor to interest accruing thereon. Therefore,
he cannot be considered as a ‘payee’ for the
purposes of section 194A. In the absence of a payee,
the machinery provisions for deduction of tax to his
credit are ineffective. The credit by the bank in the
name of the Registrar General would, thus, not
attract the provisions of section 194A.
Note - The CBDT has accepted the aforesaid judgment
and accordingly, vide Circular No.23/2015 dated
28.12.2015, clarified that interest on FD ` made in the
name of Registrar General of the Court or the depositor
of the fund on the directions of the Court, will not be
subject to TDS till the matter is decided by the Court.
However, once the Court decides the ownership of the
money lying in the fixed deposit, the provisions of
section 194A will apply to the recipient of the income.
6. Indus Towers Ltd v. CIT (2014) 364 ITR 114 (Del)
Issue Analysis & Decision
Is payment made for the The assessee owned a network of telecom towers and
use of passive infrastructure services which were let out to major
infrastructure facility such telecom operators in the country. The infrastructure was
as mobile towers be subject given for the use of mobile operators. The towers were
to tax deduction u/s 194C the neutral platform, and without them, the mobile
or 194-I? operators could not operate. Each mobile operator has
to carry out this activity, by necessarily renting premises
and installing the same equipment. The dominant

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intention was the use of equipment or plant or

machinery i.e., the passive infrastructure, and the
use of premises was only incidental. Hence, tax has
to be deducted@2% as per section 194-I(a), the rate
applicable for payment made for use of plant and
machinery.
7. CIT v. Senior Manager, SBI (2012) 206 Taxman 607 (All.)
Issue Analysis & Decision
In respect of a co-owned Since the share of each co-owner is definite and
property, would the ascertainable, they cannot be assessed as an
threshold limit mentioned in association of persons as per section 26. The income
section 194-I for non- from such property is to be assessed in the individual
deduction of tax at source hands of the co-owners. Therefore, it is not necessary
apply for each co-owner that there should be a physical division of the property
separately or is it to be by metes and bounds to attract the provisions of section
considered for the 26.
complete amount of rent In this case, since the payment of rent is made to each
paid to attract liability to co-owner by way of separate cheque and their share is
deduct tax at source? definite, the threshold limit mentioned in section 194-I
has to be seen separately for each co-owner.
8. CIT (TDS) v. Shree Mahalaxmi Transport Co. (2011) 339 ITR 484 (Guj.)
Issue Analysis & Decision
Can the payment made by Since the assessee had given contracts to the parties for
an assessee engaged in the transportation of goods and not for renting out
transportation of building machinery and equipment, such payments could not be
material and transportation termed as rent paid for the use of machinery. The
of goods to contractors for provisions of section 194-I would, therefore, not be
hiring dumpers, be treated applicable. The transactions being in the nature of
as rent for machinery or contracts for the shifting of goods from one place to
equipment to attract another, would be covered under works contracts,
provisions of tax deduction thereby attracting the provisions of section 194C.
at source u/s 194-I?
9. CIT v. V.S. Dempo & Co P Ltd (2016) 381 ITR 303 (Bom) (FB)
Issue Analysis & Decision
Is tax is required to be Since section 172, dealing with the shipping business of
deducted u/s 195 on the non-residents contains a non-obstante clause and

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demurrage charges paid to applies both for the purpose of the levy and recovery of
a foreign shipping company tax in the case of any ship carrying passengers etc.,
which is governed by belonging to or chartered by a non-resident and shipping
section 172 for the purpose at a port in India, there would be no obligation on the
of levy and recovery of tax? payer-assessee to deduct the tax at source u/s 195
on payment of demurrage charges to the non-
resident shipping company.
10. Sun Outsourcing Solutions Private Limited v. CIT (Appeals) (2018) 407 ITR 480
(T&AP)
Issue Analysis & Decision
Is interest u/s 201(1A) The assessee is a private limited company engaged in
attracted even in a case the business of software development with its office in
where non-deduction of tax Hyderabad and branch office in London. In the course of
at source was under a bona executing software projects in the U.K., the assessee
fide belief that tax was not had deputed some employees from Hyderabad to
deductible and the default London. The assessee did not deduct tax at source on
was not wilful? the allowances paid to the staff deputed to the U. K.
Since the company had failed to deduct tax on the
payments made to its employees, being Indian
residents deputed to work in the U.K., section
201(1A) is automatically attracted; even if such non-
deduction was due to the bona fide belief that tax is
not deductible in such case, the company is,
nevertheless, liable to pay interest u/s 201(1A).
11. Director, Prasar Bharati v. CIT [2018] 403 ITR 161 (SC)
Issue Analysis & Decision
Are the provisions of tax The assessee, Prasar Bharati Doordarshan Kendra,
deduction at source under functions under the Ministry of Information and
section 194H attracted in Broadcasting, Government of India and runs the
respect of amount retained television channel called Doordarshan. For the purpose
by accredited advertising of telecasting advertisements of consumer companies
agencies out of remittance on its channel, the assessee entered into agreements
of sale proceeds of with advertising agencies, on the basis of the application
“airtime” purchased from made by such agencies to the assessee for gaining
Doordarshan and sold to “accredited status”. The agencies were to give a
customers? minimum annual business of ` 6 lakhs to the assessee
in a financial year and furnish a bank guarantee for a
sum of ` 3 lakhs. The agreement provided that the

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accredited agencies would retain 15% by way of

commission out of the amount collected from customers
and paid to the assessee. The agencies were to retain
the commission earned and not to part with the same
either directly or indirectly to any other person.
In the relevant assessment years, the agencies retained
` 4.87 crores towards commission as per the terms of the
agreement.
The definition of “commission or brokerage” under
section 194H is inclusive and covers any payment
received or receivable directly or indirectly by a person
acting on behalf of another person for the services
rendered. The agreement itself uses the expression
“commission” in all relevant clauses. The payment
clause is free of ambiguity and the terms of the
agreement indicate that both parties intended that the
amount to be paid/retained is in the nature of
commission. It is for this reason that the parties used the
expression “commission” in the agreement. The
relationship in question was a pure agency arrangement
because the agency acted on behalf of the assessee and
the actions of the agency were binding on the assessee.
Moreover, the agreement itself contained a clause for
deduction of tax at source on trade discount.
Thus, the amount retained by the accredited advertising
agencies is commission and consequently, the provisions
of tax deduction at source under Section 194H are
attracted. Consequently, for failure to deduct tax at source
under section 194H, the assessee would be treated as an
assessee-in-default.
Note - It may be noted that the CBDT has, vide Circular
No.5/2016 dated 29.2.2016, clarified that TDS under
section 194H is not attracted on retentions by an
advertising agency (for booking or procuring of or
canvassing for advertisements) from payments remitted
to television channels/newspaper companies. The
CBDT has issued this clarification on the basis of the
Allahabad High Court ruling in Jagran Prakashan Ltd.’s
case and Delhi High Court ruling in Living Media Ltd.’s
case that the relationship between the media company

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and advertising agency is that of a “principal to

principal”. However, the Supreme Court, in this case,
has distinguished from the Allahabad High Court ruling,
on the basis of the fact that an agreement has been
entered into by Doordarshan with the accredited
agencies specifically appointing them as agents; and the
agreement also contains a specific clause for deduction
of tax at source on trade discount, which is in the nature
of commission. Accordingly, the Supreme Court held
that the relationship between Doordarshan and its
accredited agencies is that of a principal and agent,
consequent to which TDS provisions under section 194H
would get attracted in respect of retentions by accredited
advertising agencies from payments remitted to
Doordarshan. Therefore, the applicability or otherwise of
the CBDT Circular will depend on the facts of the specific
case.
12. Bharti Cellular Ltd. vs. ACIT [2024] 462 ITR 247 (SC)
Issue Relevant provision of law, analysis and decision
Are cellular mobile Analysis and Decision: The obligation to deduct tax at
telephone service source in terms of section 194H arises when the legal
providers required to relationship of principal and agent is established.
deduct tax at source under Agency is a triangular relationship between the principal,
section 194H on the agent and the third party.
difference between the To decide whether a contracting party acts for himself as
discounted price at which it an independent contractor (and not as an agent), it
sold start-up kits and needs to be examined whether in the course of work, he
recharge vouchers to intends to make profits for himself, or is entitled to
franchisees or distributors receive pre-arranged remuneration. If the party is
and the sale price at which concerned about acting for himself and making the
these products were maximum profits possible, he is usually regarded as a
subsequently sold by the buyer, or an independent contractor and not as an agent
franchisees or distributors? of the principal.
The legal position of a distributor is generally regarded
as different from that of an agent. The distributor buys
goods on his account and sells them in his territory. The
profit made is the margin of difference between the
purchase price and the sale price. Unlike an agent, he
does not act as a communicator or creator of a

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relationship between the principal and a third party.

Based on perusal of agreement between assessee and
distributors / franchisee, the franchisee/distributor paid
the discounted price regardless of, and even before, the
pre-paid products being sold and transferred to the
retailers or the actual consumer. The
franchisee/distributor was free to sell the prepaid
products at any price below the price printed on the
pack. The franchisee/distributor determined his profits/
income.
Section 194H fixes the liability to deduct tax at source
on the 'person responsible to pay' and the liability to
deduct tax at source arises when the income is credited
or paid by the person responsible for paying. The
expression "direct or indirect" used in Explanation (i) to
section 194H is meant to ensure that "the person
responsible for paying" does not dodge the obligation to
deduct tax at source, even when the payment is
indirectly made by the principal-payer to the agent-
payee. However, deduction of tax at source in terms of
section 194H is not to be extended and widened in ambit
to apply to true/genuine business transactions, where
the assessee is not the person responsible for paying or
crediting income. In the present case, the assessee
neither pays nor credit any income to the person with
whom he has contracted.
The assessee is not privy to the transactions between
distributors/franchisees and third parties. It is, therefore,
impossible for the assessee to deduct tax at source and
comply with section 194H, on the difference between the
total/sum consideration received by the
distributors/franchisees from third parties and the
amount paid by the distributors/ franchisees to them.
Accordingly, the Apex Court held that the contractual
obligations of the franchises or distributors did not reflect
a fiduciary character of the relationship, or the business
being done on the Principal’s account. Hence, section
194H is not applicable to the facts and circumstances of
this case and the assessee would not be under a legal
obligation to deduct tax at source on the income/profit

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component in the payments received by the distributors/

franchisees from the third parties/customers, or while
selling/transferring the pre-paid coupons or starter-kits
to the distributors.
13. DIT (International Taxation) v. Wizcraft International Entertainment (P) Ltd (2014)
364 ITR 227 (Bom)
Issue Analysis & Decision
Is payment made to an The assessee, an event management company,
overseas agent, who did engaged the services of an agent to bring artistes to
not perform any service in India. The assessee-company paid commission to
India, liable for tax overseas agent. The assessee-company did not deduct
deduction at source? tax at source on the commission paid to the agent.
With regard to the payment of commission, the agent did
not act as a performing artist or entertainer. He was
concerned only with the services rendered outside India.
Thus, the income of the agent did not arise from the
personal activities in the contracting state of an
entertainer or artist. He only contacted the artists and
negotiated with them for performance in India in terms
of the authority given by the assessee. Hence, the
commission paid to the overseas agent was not liable to
tax in India. Consequently, there was no obligation for
deducting tax at source at the time of making payment
to the overseas agent.
14. BDR Finvest Pvt. Ltd. v. DCIT [2024] 462 ITR 141 (Delhi)
Issue Facts, Relevant provision of law, analysis and
decision
Is the deductee entitled to The assessee received interest income from “Ninex”
claim credit for tax (Deductor). In the return of income filed for the relevant
deducted at source (TDS) if year, the assessee offered the entire interest income
the amount of TDS is not and claimed the credit for tax deducted at source (TDS)
reflected in Form 26AS by the said deductor.
because the deductor has
not deposited it with the TDS credit was not allowed by the department, pursuant
Government? to intimation issued u/s 143(1) and application filed
under section 154 was also rejected for the reason that
TDS credit is not reflected in Form 26AS and

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consequently, the said tax was recovered from the

assessee itself.
The High Court referring the Delhi High Court ruling in
case of Sanjay Sudan v. Asst. CIT [2023] 452 ITR 107
emphasized that deduction of taxes at source is one of
the methods of collecting tax. The tax deducted at
source is part of the assessee's income and therefore,
the gross amount is included in the total income and
offered to tax. It is on this premise that the tax deducted
at source would have to be treated as tax paid on behalf
of the assessee.
Section 205 provides for restriction against direct
demand on assessee to the extent to which tax has been
deducted from that income. Thus, no recovery of TDS
can be made from the deductee.
The amount retained against remittance made by the
payer is nothing but tax which the assessee/deductee
has offered for tax by grossing up the remittance. If
credit is not given, the Department would end up doing
indirectly what they cannot do directly i.e., that recover
tax directly from the deductee.
Accordingly, the High Court held that section 199 cannot
come in the way of the deductee in case deductor failed
to deposit the TDS. Therefore, the deductee should be
given credit for TDS though it was not reflected in form
26AS and no recovery towards TDS could be made from
the assessee in terms of the provisions of section 205.
The assessee had followed the regime put in place in
the Act for collecting tax albeit, through an agent
(deductor) of the Government. The recovery
proceedings could only be initiated against the deductor
as the deductor, an agent for collecting tax had failed to
deposit the tax with the Government.
15. CIT (International Taxation) v. Air India Ltd. [2023] 456 ITR 139 (SC)
Issue Facts, Analysis and Decision
Can the provisions of Facts of the case: Assessee had taken an engine on
section 206AA, which lease under an agreement with a foreign company
prescribe a higher rate of (lessor), a tax resident of the Netherlands, having no

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tax deduction at source in permanent establishment (PE) in India. The foreign

case of non-furnishing of company also does not have PAN in India. The
PAN, override the Double assessee company deducted tax at source @ 10% on
Taxation Avoidance lease rental as per provisions contained under DTAA
Agreement (DTAA) that between India and the Netherlands.
specify a lower rate of tax? However, revenue contended that in the absence of
furnishing of PAN, the assessee was under an obligation
to deduct tax at a higher rate of 20% following the
provisions of section 206AA.
Analysis and Decision: The High Court noted that
section 90(2) provides that the provisions of the DTAAs
would override the provisions of the Act in cases where
the provisions of DTAAs are more beneficial to the
assessee. Even the charging sections 4 and 5 of the Act,
which deal with the principle of ascertainment of total
income under the Act, are also subordinate to the
principle enshrined in section 90(2). Thus, in so far as
the applicability of the scope/rate of taxation with respect
to the impugned payments made to the non-residents is
concerned, no fault can be found with the rate of taxation
invoked by the assessee based on the DTAAs, which
prescribe a beneficial rate of taxation.
The provisions of tax withholding, i.e., section 195 of the
Act, would apply only to sums that are otherwise
chargeable to tax under the Act. The provisions of
DTAAs, along with sections 4, 5, 9, 90 & 91 of the Act,
are relevant while applying the provisions of tax
deduction at source. Therefore, section 206AA of the Act
cannot be understood to override charging sections 4
and 5 of the Act.
Accordingly, the High Court upheld the Tribunal’s ruling
which held that where the tax has been deducted on the
strength of the beneficial provisions of DTAAs, the
provisions of section 206AA cannot be invoked to insist
on the tax deduction @ 20%, having regard to the
overriding nature of the provisions of section 90(2).
The Supreme Court upheld the decision of the High
Court, resulting in the dismissal of the SLP filed by the
Revenue.

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16. CIT v. Priya Blue Industries (P) Ltd (2016) 381 ITR 210 (Guj)
Issue Analysis & Decision
Can items of finished The assessee-company, engaged in ship breaking
products from ship activity, sold old and used plates, wood etc. The
breaking activity which are assessee did not collect tax at source on the sale of
usable as such be treated certain items, viz. old and used plates; non-excisable
as “Scrap” to attract (exempted) goods like wood etc.
provisions for tax collection The products obtained from the ship breaking activity
at source under section were finished products which constituted a sizable
206C? chunk of production done by the ship breakers. Such
products though commercially known as ‘scrap’ were
definitely not “waste and scrap”. For the purpose of
collection of tax at source u/s 206C, the ‘waste and
scrap’ must be from manufacture or mechanical working
of material which is definitely not usable as such
because of breakage, cutting up, wear and other reasons.
However, in this case, these items were usable as such
and, therefore, do not fall within the definition of "scrap"
as given in clause (b) of Explanation to section 206C(1).
17. Pioneer Overseas Corporation USA (India Branch) v. CIT (International Taxation)
(2022) 449 ITR 186 (SC)
Issue Analysis & Decision
Is pendency of dispute Relevant provision of law: Section 220(2) provides for
resolution under MAP a levy of simple interest@1% for every month or part of a
valid ground for a waiver of month comprised in the period commencing from the day
interest under section immediately following the 30 days period specified in
220(2A)? section 220(1) (from service of notice of demand under
section 156) and ending on the day on which the amount
is paid.
Section 220(2A) provides for reduction or waiver of
interest payable under section 220(2), if the
PCC/CC/PC/Commissioner is satisfied that payment of
such amount has caused or would cause genuine
hardship to the assessee, default in payment of amount
specified in notice of demand was due to circumstances
beyond the control of the assessee and the assessee
has co-operated in any enquiry relating to the
assessment or any proceeding for the recovery of any
amount due from him.

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Facts of the case: The assessee applied for waiver of

interest under section 220(2A) on the ground that the
dispute was pending for resolution under the mutual
agreement procedure under the Double Taxation
Avoidance Agreement between India and the United
States of America, which subsequently culminated in the
year 2012 and the liability to pay the tax arose thereafter.
The Commissioner, however, rejected the assessee’s
application. The same was confirmed by the High Court.
Decision: The Supreme Court observed that merely
raising the dispute before any authority cannot be a
ground not to levy the interest and/or waiver of interest
under section 220(2A). Otherwise, each and every
assessee may raise a dispute and thereafter, may
contend that since the litigation was bona fide, no
interest is leviable. It is required to be noted that under
section 220(2), the levy of simple interest on non-
payment of the tax at 1 per cent. per annum is, as such,
mandatory.
Note – It may be noted that under section 220(2A), the
Commissioner may reduce or waive the interest payable
by an assessee on the ground of genuine hardship. In
this case, the assessee is a part of a global
conglomerate which had in the earlier year $ 37.96
billion in net sales and $ 6.253 billion as operating profit,
cannot be an irrelevant factor in considering whether any
‘genuine hardship’ was undergone by the petitioner.
Further, in comparison to the profitability of the petitioner
over the years, the amount paid by it towards interest
under section 220(2) was merely $ 0.004 billion
(approx.). In the circumstances, the Commissioner of
Income-tax concluded that no ‘genuine hardship’ can be
said to have been caused to the petitioner on account of
payment of interest.
18. Singapore Airlines Ltd/ KLM Royal Dutch Airlines v. CIT/ British Airways Plc v.
CIT(TDS) [2022] 49 ITR 203 (SC)
Issue Analysis & Decision

Would the additional Facts of the case:

income (supplementary Within the aviation industry, the base fare for air tickets
commission) earned by a was set by the International Air Transport Association
travel agent over and (IATA) with discretion provided to airlines to sell their
above the minimum fare tickets for a net fare lower than the base fare, but not
fixed by the airlines be also higher. The air carriers were also required to provide a

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subjected to tax deduction fare list to the Director General of Civil Aviation (DGCA)
at source under section for approval. The prices that were rubber stamped by the
194H besides the standard DGCA may be equivalent to or lower than the base fare
commission on base fare? set by the IATA.
• Simultaneously, the IATA would provide blank
tickets to the travel agents acting on behalf of the
airlines to market and sell the travel tickets. The
arrangement between the airlines and the travel
agents would be governed by Passenger Sales
Agency Agreements ("PSA"). The PSA set the
conditions under which the travel agents carry out
the aforementioned sale of flight tickets, along
with other ancillary services, and the
remuneration they are entitled to for these
activities.
• Once these tickets were sold, a fixed per cent
commission designated by the IATA would, be
paid to the travel agent for its services as
"standard commission" based on base fare set by
the IATA. This would be independent of the net
fare quoted by the air carriers themselves. The
standard commission is subjected to TDS under
section 194H. The details of the amounts at which
the tickets were sold would be transmitted by the
travel agents to an organization known as the
Billing and Settlement Plan ("BSP"), which
functions under the aegis of the IATA. The BSP
stores a plethora of financial information,
including the net amount payable to the aviation
companies, discounts, and commission payable
to the agents.
• Within this framework, the airlines would have no
control over the actual fare at which the travel
agents would sell the tickets. The additional
amount that the travel agents charged over and
above the net fare that was quoted by the airline
would be retained by the agent as its own income.
This auxiliary amount charged on top of the net
fare was portrayed on the BSP as a
"supplementary commission" in the hands of the
travel agent. The airline companies had failed to
deduct tax at source on the supplementary
commission amounts earned by the travel agent.
They were declared “assessee-in-default” under

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section 201 and subject to payment of interest

under section 201(1A). Penalty proceedings were
directed to be initiated against the airlines under
section 271C.
• Relevant provision of the Income-tax Act, 1961:
Explanation (i) to section 194H defines the
expression 'commission or brokerage'. It is an
inclusive definition and includes therein any
payment received or receivable, directly or
indirectly, by a person acting on behalf of another
person for services rendered (not being
professional services) or for any services in the
course of buying or selling of goods or in relation to
any transaction relating to assets, valuable article
or thing, not being securities.
• Analysis and Conclusion:
• Section 194H does not distinguish between direct
and indirect payments. Both fall within the meaning
of “commission” under clause (i) of the Explanation
thereto. Therefore, if the ambit of section 194H is
viewed in an expansive manner, TDS would be
attracted even on an indirect payment stemming
from the consumer.
• Section 194H is to be read with section 182 of the
Contract Act, 1872. If a relationship between two
parties as culled out from their intentions as
manifested in the terms of the contract between
them indicates the existence of a principal-agent
relationship as defined under section 182 of the
Contract Act, the definition of “commission” under
section 194H stands attracted, and the requirement
to deduct tax at source arises.
• The Apex Court noted that the tickets remained the
property of the airline. There was no transfer in
terms of the title in the tickets, and they remained
the property of the airline company throughout the
transaction. Every action taken by the travel agents
is on behalf of the air carriers and the services they
provide is with express prior authorization. The
terms of the PSA also indicated that the actions of
the agents in procuring customers were done on
behalf of the airlines and not independently.

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 DEDUCTION COLLECTION AND RECOVERY OF TAX 13.203

• Accordingly, the Apex Court concluded that the

contract is one of agency that does not distinguish
in terms of stages of the transaction involved in
selling flight tickets. The fact that the travel agent
had discretion to set an actual fare above the net
fare had no effect on the nature of the relationship
between the parties. The accretion of the
supplementary commission to the travel agents
was an accessory to the actual principal-agent
relationship under the PSA agreement.
• Apart from this, the PSA agreement set out that any
payments collected by an agent pursuant to sale of
air transportation and ancillary services were held
in a fiduciary capacity for the carrier until a proper
accounting was made. Notwithstanding the lack of
control over the actual fare, the contract definitively
stated that “all monies” received by the agent were
held as the property of the air carrier until they were
recorded on the billing and settlement plan and
properly gauged. The billing and settlement plan
demarcated “supplementary commission” under a
separate heading.
• Hence, once the IATA made the payment of the
accumulated amounts shown on the billing and
settlement plan, it would be feasible for the
assessees, being the airlines to deduct tax at
source on this additional income earned by the
agent.
• Further, as regards penalty under section 271C,
the Apex Court stated that there were contradictory
pronouncements by different High Courts, which
clearly highlighted the genuine and bona fide legal
conundrum that was raised by the prospect of
section 194H being applied to the supplementary
commission. Hence, there was clearly an arguable
and “nascent” legal issue that required resolution
by the Supreme Court. Thus, there was
“reasonable cause” for the air carriers not to have
deducted tax at source at the relevant period. Thus,
penalty proceedings against the airlines under
section 271C were to be quashed.
• As regards applicability of interest u/s 201(1A), if
the recipient of income on which tax has not been
deducted at source, even though it was liable to

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such deduction as per the provisions of the Income-

tax Act, 1961, has already included that amount in
its income and paid taxes on the same, the
assessee can no longer be proceeded against for
recovery of the short fall in TDS. However, it would
be open to the Revenue to seek payment of interest
u/s 201(1A) for the period between the date of
default in deduction of tax at source and the date
on which the recipient actually paid income-tax on
the amount for which there had been a shortfall in
such deduction.
• Notes – An illustration showing how additional
income arises in the hands of travel agent is given
hereunder -
Base fare for Net fare Actual Standard Supplement-
Wingfly (Set by fare (Set commission ary
Airline, Delhi the by the (7% of the commission
(Set by the airline) travel base fare) (Actual fare
IATA) agent) – net fare)
` 1 lakh ` ,000 ` 0,000 7% of ` 1 lakh ` 80,000 (-)
= ` 7,000 60,000 =
` 20,000
Seiling price Income of ` 20,000 Income of the Additional
the left after travel agent Income of the
assessee payment of travel agent
(Airline) net fare to
the
assessee
Applying the rationale of the Apex Court in the above case, TDS
u/s 194H is required to be deducted both on the standard
commission of ` 7,000 and on the supplementary commission of
` 20,000.

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TEST YOUR KNOWLEDGE

QUESTIONS
1. Mr. Madhusudan is regular in deducting tax at source and depositing the same. In respect of
the quarter ended 31 st December, 2025, a sum of ` 80,000 was deducted at source from the
contractors. The statement of tax deducted at source under section 200 was filed on 23 rd
March, 2026 for the quarter ended 31.12.2025.
(i) Is there any delay on the part of Mr. Madhusudan in filing the statement of TDS?
(ii) If the answer to (i) above is in the affirmative, how much amount can be levied on
Mr. Madhusudan for such default under section 234E?
(iii) Is there any remedy available to him for reduction/waiver of the levy?
2. Smt. Vijaya, proprietor of Lakshmi Enterprises, made a turnover of ` 210 lakhs during the
previous year 2024-25. Her turnover for the year ended 31.3.2026 was ` 90 lakhs.
Decide whether provisions relating to deduction of tax at source are attracted for the following
payments made during the financial year 2025-26:
(i) Purchase commission paid to one agent ` 25,000 on 13.6.2025 towards purchases
made during the year.
(ii) Payments to a Civil engineer of ` 5,00,000 on 23 rd August, 2025 for construction of a
residential house for self-use.
3. What is the rate at which the tax is either to be deducted or collected under the provisions of
the Act in the following cases?
(i) A partnership firm making sales of timber in September 2025, which was procured and
obtained under a forest lease.
(ii) A nationalized bank receiving professional services from a registered society made
provision on 31-03-2026 of an amount of ` 25 lakh against the service charges bills to
be received.
4. Examine the liability for tax deduction at source in the following cases for the A.Y.202 6-27:
(i) Wings Ltd. has paid amount of ` 15 lakhs during the year ended 31-3-2026 to Airports
Authority of India towards landing and parking charges.

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(ii) ` 4,45,000 paid to Mr. X on 01-02-2026 by Karnataka State Government on

compulsory acquisition of his urban land. What would be your answer if the land is
agricultural land?
5. "Come Air Ltd." has paid a sum of ` 12 lakhs during the year ended 31-3-2026 to the Airports
Authority of India towards landing and parking charges. The company has deducted tax at
source @2% under section 194C on the said payment and remitted the tax deducted within
the prescribed time. The Assessing Officer contended that landing and parking charges were
levied for use of the land of the airport and hence, the payment was in the nature of rent
attracting TDS @10% under section 194-I. Discuss the correctness or otherwise of the
contention of the Assessing Officer.
6. Mr. Harish, Vice President of ABC Bank, sold his house property in Chennai as well as his
rural agricultural land for a consideration of ` 60 lakh and ` 15 lakh, respectively, to
Mr. Suresh, a retail trader of garments, on 10.10.2025. Mr. Harish had purchased the house
property and rural agricultural land in December 2023 for ` 40 lakh and ` 10 lakh,
respectively. The stamp duty value on the date of transfer, i.e., 10.10.202 5, is ` 85 lakh and
` 20 lakh for the house property and rural agricultural land, respectively.
(a) Determine the capital gain tax implications in the hands of Mr. Harish and Mr. Suresh,
if the date of agreement for sale of house property and rural agricultural land is
1.7.2025 and the stamp duty value on the said date was ` 75 lakh and ` 15 lakh,
respectively. On the said date, Mr. Suresh made payment of ` 5 lakh by way of an
account payee cheque to Mr. Harish for purchase of house property.
(b) Would your answer be different if Mr. Harish is a property dealer and sold the house
property in the course of his business?
7. Siddharth Hospitals Pvt. Ltd. has recently been accorded recognition by several insurance
companies to admit and treat patients on cashless hospitalization basis. Payment to the
assessee hospital will be made by Third Party Administrators (TPA) who will pr ocess the
claims of the patients admitted and make payments to the various hospitals , including the
assessee. All TPAs are corporate entities. The assessee wants to know whether the TPAs
are bound to deduct tax at source under section 194J or under sect ion 194C. Examine.
8. Examine in the context of provisions contained in Chapter XVII-B of the Act and also work
out the amount of tax to be deducted by the payer of income in the following cases:

(i) Payment of ` 5 lakh made by JCP & Co. to Pingu Events Co. Ltd. on 4 th September,
2025 for organizing a debate competition on the subject "Preservation of Rural
Heritage of Rajasthan".

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(ii) KD, a part-time director of DAF Pvt. Ltd., was paid an amount of ` 2,25,000 as fees
which was actually in the nature of commission on sales for the period 1.7.202 5 to
30.9.2025.
9. Examine the applicability of the provisions relating to deduction of tax at source in the
following transactions:
(i) Max Limited pays ` 1,02,000 to Mini Limited, a resident contractor who, under the
contract dated 15 th October, 2025, manufactures a product according to the
specification of Max Limited by using materials purchased from Max Limited.

(ii) A company operating a television channel makes payment of ` 5 lakh to a former

Indian cricketer on 10 th March, 2026 for making running commentary of a one-day
cricket match.

10. Examine in the following cases, the obligation of the person paying the income in respect of
tax deduction at source:
(i) MNO Ltd., the employer, credited salary due for the month of March 2026 amounting
to ` 15,40,000 to the account of Q, an employee, in its books of account on 31.3.202 5.
Q has not intimated his intended tax regime.
(ii) T, an individual whose total sales in business during the year ended 31.3.202 5 was
` 2.20 crores, paid ` 9 lakh by cheque on 1.1.2026 to a contractor (an individual), for
construction of his factory building. No amount was credited earlier to the account of
the contractor in the books of T.
(iii) BCD Ltd. credited ` 28,000 towards fees for professional services and ` 27,000
towards fees for technical services to the account of HG in its books of account on
6.10.2025. The total sum of ` 55,000 was paid by cheque to HG on 18.12.2025.
11. Examine the liability for tax deduction at source in the following cases for the assessment
year 2026-27:
(i) Mr. Anand has been running a sole proprietary business with turnover of ` 202 lakhs
for the F.Y.2024-25. He pays a monthly rent of ` 15,000 for the office premises to
Mr. R, the owner of building and an individual.
(ii) By virtue of an agreement with a nationalised bank, a catering organisation receives
a sum of ` 50,000 per month towards supply of food, water, snacks, etc., during office
hours to the employees of the bank.

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(iii) An Indian company pays gross salary, including allowances and monetary perquisites
amounting to ` 12,30,000 to its General Manager (aged 45 years). Besides, the
company provides non-monetary perquisites to him, whose value is estimated at
` 1,20,000. The general manager has not given any declaration regarding opting out
of section 115BAC.
12. The following issues arise in connection with the deduction of tax at source under Chapter
XVII-B. Examine the liability for tax deduction in these cases:
(a) An employee of the Central Government receives arrears of salary for the earlier 3
years. He enquires whether he is liable for deduction of tax on the entire amount during
the current year.
(b) ` 10 lakh is payable by a T.V. Channel on 1.9.2025 as prize money to the winner of a
quiz programme, “Who will be a Millionaire”.
(c) State Bank of India pays ` 55,000 per month as rent to the Central Government for a
building in which one of its branches is situated.

(d) ` 80,000 is payable by a television company to a cameraman on 6 th January, 2026 for

shooting of a documentary film.
(e) ` 22,000 is payable by the Maharashtra State Government on 2.7.2025 as commission
to one of its agents on the sale of lottery tickets.
(f) A Turf Club awards a jackpot of ` 5 lakh to the winner of one of its races on 1.2.2026.
13. Examine and compute the liability for deduction of tax at source, if any, in the cases stated
hereunder, for the financial year ended 31 st March, 2026:
(i) On 20.6.2025, Mr. X, a resident, made three separate transactions for acquiring house
property at Mumbai from Mr. Y for a consideration of ` 90 lakhs, an urban plot in
Kolkata from Mr. C for a sum of ` 49,50,000 and rural agricultural land from Mr. D for
a consideration of ` 60 lakhs. Stamp duty value of house property, plot and rural
agricultural land is ` 95 lakhs, ` 48 lakhs and ` 65 lakhs, respectively.

(ii) On 17.6.2025, a commission of ` 50,000 was retained by the consignee 'ABC Packaging
Ltd.' and not remitted to the consignor 'XYZ Developers', while remitting the sale
consideration. Examine the obligation of the consignor to deduct tax at source.

(iii) Raj (aged 35 years) is working with AB Ltd. He is entitled to a salary of ` 85,000 per
month w.e.f. 1.4.2025. He has a house property which is self-occupied. He paid an

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interest of ` 1,95,000 on loan during the previous year 2025-26. The loan was taken
for construction of house. He has notified his employer AB Ltd. that there will be a loss
of ` 1,95,000 in respect of this house property for financial year ended 31.3.2026. Raj
declared that he has exercised option to shift out of default regime of section 115BAC.
14. "Tax Recovery Officer, can recover the arrear demands from the assessee in default out of
sale proceeds of the property attached after making a proclamation". How can such a
proclamation be made under the Act? Is there any time limit for sale of the attached
immovable property? Discuss.

ANSWERS
1. (i) Yes, there has been a delay on the part of Mr. Madhusudan in filing the statement
of TDS.
As per section 200(3) read with Rule 31A, the statement of tax deducted at source for
the quarter ended 31st December, 2025 has to be filed on or before 31 st January, 2026.
However, the same was filed only on 23rd March, 2026. Hence, there has been a delay
of 51 days on the part of Mr. Madhusudan in filing the statement of TDS.
(ii) As per section 234E of the Income-tax Act, 1961, where a person fails to file deliver
or cause to be delivered the statement of tax deducted at source within the prescribed
time, then, he shall be liable to pay, by way of fee, a sum of ` 200 for every day during
which the failure continues.
The amount of fee shall not, however, exceed the amount of tax deductible.
In this case, since Mr. Madhusudhan has delayed filing the statement of TDS by 51
days, he would be liable to pay a fee of ` 10,200 (` 200 x 51 days) under section
234E. The said fee does not exceed the tax deductible (` 80,000, in this case).
(iii) Under section 119, the CBDT is empowered to issue general or special orders,
whether by way of relaxation of any of the provisions of sections 139, 143, 144, 147 ,
etc., or otherwise, in respect of any class of incomes or class of cases. The CBDT may
issue such order(s) from time to time, if it considers it expedient to do so, for the
purpose of proper and efficient management of the work of assessment and collection
of revenue. Section 234E is included in the list of sections in respect of which the
CBDT is empowered to issue order for relaxation of the provisions of the Act.

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Hence, the remedy available to Mr. Madhusudhan is that he can file an application to
the CBDT under section 119 and seek a waiver/reduction of the penalty levied/leviable
under section 234E.
2. Since Smt. Vijaya’s turnover from business was ` 210 lakhs in the immediately preceding
financial year (i.e., F.Y. 2024-25), she is liable to deduct tax at source in the P.Y.2025-26,
irrespective of her turnover being only ` 90 lakhs in the F.Y.2025-26.
(i) Tax @2% has to be deducted under section 194H in respect of purchase commission
of ` 25,000 to an agent for purchases made during the year, since the same exceeds
the threshold limit of ` 20,000 for non-deduction of tax at source thereunder.
(ii) Tax has to be deducted under section 194C in case of payment to resident contractors.
The rate of tax is 1% if the payee is an individual or HUF and 2% in case of payees,
other than individuals and HUFs.
However, as per section 194C(4), no individual or HUF shall be liable to deduct income
tax on the sum credited or paid to the account of the contractor where such sum is credited
or paid exclusively for personal purposes of such individual or any member of the HUF. In
such case, the provisions of section 194M would be attracted if the aggregate payment to
the contractor exceeds ` 50 lakhs.

In this case, since Smt. Vijaya, an individual, makes payment of ` 5 lakh to a civil
engineer for the construction of residential house for self-use, she is not liable to
deduct tax at source either under section 194C or under section 194M from such sum.
3. (i) As per section 206C(1), tax has to be collected at source@2% by the partnership
firm, being a seller, at the time of debiting of the amount payable by the buyer to the
account of the buyer or at the time of receipt of such amount, whichever is earlier.
(ii) Tax has to be deducted at source@10% under section 194J, by the nationalized bank
at the time of credit of fees for professional services to the account of the registered
society (i.e., on 31.3.2026), even though payment is to be made after that date.
4. (i) TDS on landing and parking charges: The landing and parking charges which are
fixed by the Airports Authority of India are not merely for the "use of the land". These
charges are also for services and facilities offered in connection with the aircraft
operation at the airport, which include providing of air traffic services, ground safety
services, aeronautical communication facilities, installation and maintenance of
navigational aids and meteorological services at the airport [Japan Airlines Co. Ltd.
v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372 (SC)]. Thus, tax is not

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deductible under section 194-I, which provides deduction of tax for payment in the
nature of rent.
Hence, tax is deductible @2% under section 194C by the airline company, Wings Ltd.,
on payment of ` 15 lakhs made towards landing and parking charges to the Airports
Authority of India for the previous year 2025-26.
(ii) TDS on compensation for compulsory acquisition: Tax is deductible at source
@2% under section 194LA, where payment is made to a resident as compensation or
enhanced compensation on compulsory acquisition of any immovable property (other
than agricultural land).
However, no tax deduction is required if the aggregate payments in a year do not
exceed ` 5,00,000.

Therefore, no tax is required to be deducted at source on payment of ` 4,45,000 to

Mr. X, since the aggregate payment does not exceed ` 5,00,000.
If the land is agricultural land, no tax would be deductible under section 194LA,
irrespective of the amount of compensation.
5. The issue as to whether the charges fixed by the Airport Authority of India (AAI) for landing
and take-off facilities and parking facilities for the aircraft are for the “use of the land” by the
airline company came up before the Supreme Court in Japan Airlines Co. Ltd. v. CIT / CIT v.
Singapore Airlines Ltd. (2015) 377 ITR 372.
The Supreme Court observed that the charges which are fixed by the AAI for landing and
take-off services as well as for parking of aircrafts are not for the "use of the land". These
charges are for services and facilities offered in connection with the air craft operation at the
airport, which include providing of air traffic services, ground safety services, aeronautical
communication facilities, installation and maintenance of navigational aids and
meteorological services at the airport.
Various international protocols mandate all authorities manning and managing these airports
to construct the airport of desired standards, which are stipulated in the protocols. The
services that are required to be provided by these authorities, like AAI, are aimed at
passengers' safety as well as safe landing and parking of aircraft. Therefore, the services are
not restricted to merely permitting "use of the land" of airport. On the contrary, it encompasses
all the facilities that are to be compulsorily offered by the AAI in tune with the requirements
of the protocol.

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The Supreme Court observed that the charges levied on air traffic include landing charges,
lighting charges, approach and aerodrome control charges, aircraft parking charges,
aerobridge charges, hangar charges, passenger service charges, cargo charges, etc. Thus,
when the airlines pay for these charges, treating such charges as charges for "use of the
land" would be tantamount to adopting a totally simplistic approach, which is far away from
reality.
The Supreme Court opined that the substance behind such charges has to be considered ,
and when the issue is viewed from this angle, keeping the larger picture in mind, it becomes
very clear that the charges are not for use of the land per se and, therefore, it cannot be
treated as "rent" within the meaning of section 194-I. The Supreme Court, thus, concurred
with the view taken by the Madras High Court in Singapore Airlines case and overruled the
view taken by the Delhi High Court in United Airlines/Japan Airlines case.
Applying the rationale of the Supreme Court ruling to the facts of this case, the contention of
the Assessing Officer that landing and parking charges are levied for the use of the land of
airport and, hence, the charges are in the nature of rent to attract the provisions of tax
deduction at source under section 194-I is not correct.

6. (a) Tax implications on sale of rural agricultural land and house property
representing a capital asset in the hands of Mr. Harish, a salaried employee

(i) Tax implications in the hands of Mr. Harish, a salaried employee

Since rural agricultural land is not a capital asset, the gains arising on sale
of such land is not taxable in the hands of Mr. Harish. However, capital
gains would arise on the sale of house property, being a capital asset.
As per section 50C(1), the stamp duty value of house property on the date
of agreement (i.e., ` 75 lakh) would be deemed to be the full value of
consideration arising on transfer of property. Therefore, ` 35 lakh (i.e.,
` 75 lakh – ` 40 lakh, being the purchase price) would be taxable as short-
term capital gains in the A.Y.2026-27.
It may be noted that as the date of the agreement is different from the date
of registration and part of the consideration was received on or before the
date of agreement by way of account payee cheque, the stamp duty value
on the date of agreement is to be adopted as the deemed sale
consideration.
(ii) Tax implications in the hands of the buyer – Mr. Suresh, a retail trader
The house property purchased would be a capital asset in the hands of
Mr. Suresh, who is a retail trader of garments. The provisions of section

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56(2)(x) are attracted in the hands of Mr. Suresh who has acquired the
immovable property, being a capital asset, for inadequate consideration. For
the purpose of section 56(2)(x), Mr. Suresh can take the stamp duty value on
the date of agreement instead of the date of registration since he has paid a
part of the consideration by account payee cheque on the date of agreement.
Therefore, ` 15 lakh, being the difference between the stamp duty value of
the property on the date of agreement (i.e., ` 75 lakh) and the actual
consideration (i.e., ` 60 lakh) would be taxable as per section 56(2)(x) under
the head “Income from other sources” in the hands of Mr. Suresh, since
such difference exceeds the higher of ` 50,000 or 10% of consideration.
As rural agricultural land is not a capital asset, the provisions of section
56(2)(x) are not attracted in respect of acquisition of agricultural land for
inadequate consideration, since the definition of “property” under section
56(2)(x) includes only capital assets specified thereunder.
(b) Tax implications on sale of house property representing stock-in-trade in the
hands of Mr. Harish, a property dealer:

(i) Tax implications in the hands of Mr. Harish

If Mr. Harish is a property dealer who has sold the house property in the
course of his business, the provisions of section 43CA would be attracted,
since the house property represents his stock-in-trade and he has
transferred the same for a consideration less than the stamp duty value.
For the purpose of section 43CA, Mr. Harish can take the stamp duty value
on the date of agreement instead of the date of registration, since he has
received part of the sale consideration by an account payee cheque on the
date of agreement and it exceeds 110% of the consideration. Therefore,
` 35 lakh, being the difference between the stamp duty value on the date
of agreement (i.e., ` 75 lakh) and the purchase price (i.e., ` 40 lakh), would
be chargeable as business income in the hands of Mr. Harish.
(ii) Taxability in the hands of Mr. Suresh
There would be no difference in the taxability in the hands of Mr. Suresh,
whether Mr. Harish is a property dealer or a salaried employee.
Therefore, the provisions of section 56(2)(x) would be attracted in the hands
of Mr. Suresh who has received house property, being a capital asset, for
inadequate consideration.

7. This issue has been clarified by the CBDT Circular No.8/2009 dated 24.11.2009. As per
provisions of section 194J(1), any person, who is responsible for paying to a resident any sum
by way of fees for professional services, shall, at the time of credit of such sum to the account
of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any
other mode, whichever is earlier, deduct an amount equal to 10% of such sum as TDS.

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Further, as per clause (a) of Explanation to section 194J “professional services” includes
services rendered by a person in the course of carrying on medical profession.
The services rendered by hospitals to various patients are primarily medical services and
therefore, the provisions of section 194J are applicable on payments made by TPAs to
hospitals, etc. Further, for invoking provisions of section 194J, there is no stipulation that the
professional services have to be necessarily rendered to the person who makes payment to
the hospital. Therefore, TPAs who are making payment on behalf of insurance companies to
hospitals for settlement of medical/ insurance claims, etc. under various schemes, including
Cashless Schemes, are liable to deduct tax at source under section 194J on all such
payments to hospitals, etc.
In view of the above, all such transactions between TPAs and hospitals would fall within the
ambit of provisions of section 194J.
8. (i) The services of Event Managers in relation to sports activities alone have been notified
by the CBDT as “professional services” for the purpose of section 194J. In this case,
payment of ` 5 lakh was made to an event management company for organization of a
debate competition. Hence, the provisions of section 194J are not attracted.
However, TDS provisions under section 194C relating to contract payments would
be attracted and consequently, tax has to be deducted @2% under section 194C.
The tax deductible under section 194C would be ` 10,000, being 2% of ` 5 lakh.
(ii) Section 194J provides for deduction of tax at source @10% on any remuneration or
fees or commission, by whatever name called, paid to a director, which is not in the
nature of salary in respect of which tax is deductible at source under section 192.
Hence, tax is to be deducted at source under section 194J @10% by DAF Pvt. Ltd.
on the commission of ` 2,25,000 paid to KD, a part-time director. The tax deductible
under section 194J would be ` 22,500, being 10% of ` 2,25,000.
9. (i) The definition of “work” under section 194C includes manufacturing or supplying a
product according to the requirement or specification of a customer by using material
purchased from such customer or its associate. In the instant case, Mini Limited
manufactures the product as per the specification given by Max Limited by using
the raw materials purchased from Max Limited. Therefore, it falls within the
definition of “work” under section 194C. Consequently, tax is to be deducted on
the invoice value, excluding the value of material purchased from such customer if
such value is mentioned separately in the invoice. If the material component is not

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mentioned separately in the invoice, tax is to be deducted on the whole of the invoice
value.
(ii) Provisions for deduction of tax at source under section 194J are attracted in respect
of payment of fees for professional services, if the amount of such fees exceeds
` 50,000 in the relevant financial year. The service rendered by a commentator in
relation to sports activities has been notified by the CBDT as a professional service
for the purposes of section 194J vide its Notification No. 88 dated 21st August, 2008.
Therefore, tax is required to be deducted @10% from the fee of ` 5 lakhs payable to
the former cricketer.
10. (i) Section 192 requires deduction of tax from salary at the time of payment. Thus, the
employer is not required to deduct tax at source when salary has not been paid but
is merely credited to the account of the employee in its books of account. MNO Ltd. ,
therefore, is not required to deduct tax at source in respect of the salary merely
credited to the account of employee Q which is not paid.
If salary has been paid during the year to Q, then, MNO Ltd., a deductor, being an
employer, shall seek information from each of its employees having income under
section 192 regarding their intended tax regime, and each such employee shall
intimate the same to the deductor, being his employer, regarding his intended tax
regime for each year and upon intimation, the deductor shall compute his total income,
and deduct tax at source thereon according to the option exercised.
If intimation is not made by the employee, it shall be presumed that the employee
continues to be in the default tax regime and has not exercised the option to opt out
of the new tax regime. Accordingly, in such a case, MNO Ltd. shall deduct tax at
source, on income under section 192, in accordance with the rates provided under
section 115BAC(1A).
(ii) An individual who has total sales, gross receipts or turnover from the business carried
on by him exceeding ` 1 crore in the immediately preceding financial year, i.e.,
F.Y. 2024-25, is liable to deduct tax at source under section 194C for the financial year
2025-26 in respect of the payment made to contractor exceeding ` 30,000 in a single
contract and ` 1,00,000 in aggregate of contracts during the financial year. Since,
turnover of the individual T is ` 2.20 crores in the financial year 2024-25 and as the
payment during financial year 2025-26 to the contractor has exceeded the limits
prescribed in section 194C, tax has to be deducted under section 194C.
The rate of tax deduction is 1% as the contractor is an individual.

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(iii) The limit of ` 50,000 for non-deduction of tax under section 194J would apply
separately for fees for professional services and fees for technical services. This
means that if a person has rendered services falling under both the categories, tax
need not be deducted if the fee for each category does not exceed ` 50,000, even
though the aggregate of the amounts credited to the account of such person or paid
to him for both categories of services exceeds ` 50,000. Therefore, BCD Ltd. is not
required to deduct tax at source in respect of the fees either at the time of credit or at
the time of payment.

11. (i) Where the payer is an individual or HUF whose total sales, gross receipts or turnover
from the business carried on by him exceeds ` 1 crore during the financial year
immediately preceding the financial year in which such rent was credited or paid, is
liable to deduct tax at source. Since the turnover from the business of Mr. Anand
was ` 202 lakhs for the F.Y. 2024-25, he is liable to deduct tax at source under
section 194-I in respect of rental payments during the financial year 2025-26.
Accordingly, Mr. Anand is liable to deduct tax at source under section 194-I on the
rental payments made. Since the monthly rental payments of ` 15,000 to Mr. R during
the financial year 2025-26 do not exceed ` 50,000, Mr. Anand is not liable to deduct
tax under section 194-I from rent paid to Mr. R.
(ii) The definition of “work” under Explanation to section 194C includes catering services
and therefore, TDS provisions under section 194C are attracted in respect of payments
to a caterer. As the payment exceeds ` 30,000, the nationalised bank is required to
deduct tax at source at 2% on the payments made to catering organisation. If the catering
organization is an individual or HUF, then, the tax deduction shall be made @1%
(iii) `
Gross salary, allowances and monetary perquisites 12,30,000
Non-Monetary perquisites 1,20,000
13,50,000
Less: Standard deduction under section 16(ia) 75,000
12,75,000

Tax Liability 74,100

Average rate of tax (` 74,100 / ` 12,75,000 × 100) 5.81%

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The company can deduct ` 74,100 at source from the salary of the General Manager
at the time of payment.
Alternatively, the company can pay tax on non-monetary perquisites as under –
Tax on non-monetary perquisites =5.81% of ` 1,20,000 = ` 6,972
Balance to be deducted from salary = ` 67,128
If the company pays a tax of ` 6,972 on non-monetary perquisites, the same is not a
deductible expenditure as per section 40(a)(v). The amount of tax paid towards non-
monetary perquisite by the employer, however, is not chargeable to tax in the hands
of the employee as per section 10(10CC).
12. (a) As per section 192, tax is deductible at source by any person who is responsible for
paying any income chargeable under the head ‘Salaries’. However, as per sub -
section (2A) of said section, the employee will be entitled to relief u/s 89 and
consequently, he will be required to furnish to the person responsible for making the
payment, such particulars in the prescribed form (i.e., Form No.10E). The person
responsible for making the payment shall compute the relief and take into account
the same while deducting tax at source from salary.
(b) Under section 194B, the person responsible for paying by way of winnings from any
card game and other game in an amount exceeding ` 10,000 shall, at the time of
payment, deduct income-tax at 30%. Therefore, tax of ` 3 lakh has to be deducted at
source from the prize money of ` 10 lakh payable to the winner.
(c) Section 194-I, which governs the deduction of tax at source on payment of rent,
exceeding ` 50,000 per month or part of the month, is applicable to all taxable entities
except individuals and HUFs, whose total sales, gross receipts or turnover from the
business or profession carried on by him does not exceed ` 1 crore in case of business
and ` 50 lakhs in case of profession during the financial year immediately preceding
financial year in which such rent was credited or paid, is liable to deduct tax at source.
Section 196, however, provides an exemption in respect of payments made to the
Government from the application of the provisions of tax deduction at source.
Therefore, no tax is required to be deducted at source by the State Bank of India from
rental payments to the Government.
(d) If the cameraman is an employee of the T.V. company, the provisions of section 192
will apply. However, if he is a professional, TDS provisions under section 194J will
apply. Tax at 10% will have to be deducted at the time of credit of ` 80,000 or on its
payment, whichever is earlier.

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(e) Under section 194G, the person responsible for paying to any person, stocking,
distributing, purchasing or selling lottery tickets shall at the time of credit of the
commission or payment thereof, whichever is earlier, amounting to more than
` 20,000, deduct income-tax at source @2%.
Accordingly, tax @2% under section 194G amounting to ` 440 has to be deducted
from the commission payment of ` 22,000 to the agent of the State Government.
(f) The TDS on payment by way of winnings from horse race is governed by section
194BB. Under this section, the person responsible for payment shall, at the time of
payment, deduct tax at source @ 30%, if the payment exceeds `10,000.
Accordingly, tax @30% amounting to ` 1,50,000 has to be deducted from the winnings
of ` 5 lakh payable to the winner of the race.
13. Liability for deduction of tax at source

Reasoning Amount of
TDS (`)
(i) Since the consideration and stamp duty value for transfer of house
property in Mumbai both are not less than ` 50 lakhs, Mr. X, being 95,000
the transferee, is required to deduct tax @1% under section
194-IA on ` 95 lakhs, being higher of stamp duty value and the
amount of consideration for transfer of property, at the time of
credit to the transferor account or payment, whichever is earlier.
Mr. X is not required to deduct tax as source under section
194-IA from the consideration of ` 49,50,000 paid to Mr. C for Nil
transfer of urban plot, since the consideration and stamp duty
value, both are less than ` 50 lakhs.
Mr. X is also not required to deduct tax at source under section
194-IA for transfer of rural agricultural land, since the same is Nil
specifically excluded from the scope of immovable property for the
purpose of tax deduction under section 194-IA.
Note - Section 194-IA requires every transferee responsible for
paying any sum as consideration for transfer of immovable
property (land, other than agricultural land, or building or part of
building) to deduct tax, at the rate of 1% of higher of consideration
and stamp duty value, at the time of credit of such sum to the
account of the resident transferor or at the time of payment of such
consideration to the resident transferor, whichever is earlier.
However, no tax is required to be deducted where the
consideration for transfer of an immovable property and stamp
duty value of such property, both are less than ` 50 lakhs.

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(ii) Section 194H requires the deduction of tax at source @2% from
commission and brokerage payments to a resident. However, no
tax is to be deducted at source where the amount of such payment
does not exceed ` 20,000.
In the given case, ‘ABC Packaging Ltd.’, the consignee, has not
remitted the commission of ` 50,000 to the consignor ‘XYZ
Developers’ while remitting the sales consideration.
Since the retention of commission by the consignee/agent
amounts to constructive payment of the same to him by the
consignor/principal, deduction of tax at source is required to be
made from the amount of commission [CBDT Circular No.619
dated 4/12/1991].
Therefore, XYZ Developers has to deduct tax at source on 1,000
` 50,000 at the rate of 2%.
(iii) Section 192 provides that tax is required to be deducted on the
payment made as salaries. Tax is to be deducted on the estimated
income at the rates specified under section 115BAC(1A) or at the
average of income tax computed on the basis of the rates in force
for the financial year in which payment is made in case the
employee submitted a declaration of opt out of the default regime
under section 115BAC.
The employee may declare details of his other incomes (including
loss under the head “Income from house property” but not any
other loss) to his employer. In this case, since Mr. Raj has
submitted a declaration of opt out of section 115BAC and also
notified his employer AB Ltd. of loss from self-occupied house
property, the employer has to take the same into consideration for
deduction of tax at source.
Therefore, AB Ltd. is required to deduct tax at source on the salary
of ` 85,000 per month paid to Mr. Raj, in the following manner:
Income under the head salaries (` 85,000 x 12) 10,20,000
Less: Standard deduction under section 16(ia) 50,000
9,70,000
Income under the head “house property” (1,95,000)
Gross total income 7,75,000
Less: Deduction under Chapter VI-A Nil
Total Income 7,75,000

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Tax on ` 7,75,000 67,500

Add: Health and Education cess@4% 2,700
Tax to be deducted at source 70,200 70,200
14. Manner of making a proclamation
Movable Property [Rules 38 & 39 of Schedule II to the Income-tax Act, 1961]
Where the Tax Recovery Officer orders sale of movable property, he should issue a
proclamation in the language of the district of the intended sale, specifying the time and place
of sale and whether the sale is subject to confirmation or not.
The proclamation should be made by the beat of drum or other customary mode, -
(a) in the case of property attached by actual seizure –
(i) in the village in which the property was seized, or, if the property was seized in
a town or city, then, in the locality in which it was seized; and
(ii) at such other places as the Tax Recovery Officer may direct;
(b) in the case of property attached otherwise than by actual seizure, in such places, if
any, as the Tax Recovery Officer may direct.
A copy of the proclamation should also be affixed in a conspicuous part of the office of the
Tax Recovery Officer.
Immovable Property [Rule 54 of Schedule II to the Income-tax Act, 1961]

The Tax Recovery Officer shall make a proclamation for the sale of immovable property at
some place on or near such property by beat of drum or other customary mode. A copy of
the proclamation shall be affixed on a conspicuous part of the property and also upon a
conspicuous part of the office of the Tax Recovery Officer.
Where the Tax Recovery Officer directs, such proclamation shall also be published in the
Official Gazette or in a local newspaper or in both, and the cost of such publication shall be
deemed to be cost of the sale.
Where the property to be sold is divided into lots for the purpose of being sold separately,
then it is not necessary to make a separate proclamation for each lot of property, unless , in
the opinion of the Tax Recovery Officer, proper notice of sale cannot otherwise be given.

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Time limit for the sale of attached immovable property [Rule 68B of Schedule II to the
Income-tax Act, 1961]
The sale of immovable property attached has to be made on or before the expiry of 7 years
from the end of the financial year in which the order giving rise to a demand of any tax,
interest, fine, penalty or any other sum, for the recovery of which the immovable property has
been attached,
- has become conclusive under the provisions of section 245-I (where the order of
settlement under section 245D(4) is deemed to be conclusive as to the matters stated
therein) or
- has become final in terms of the provisions of Chapter XX (Appeals and Revision).
However, the CBDT may, for reasons to be recorded in writing, extend the aforesaid period
for a further period not exceeding 3 years.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER a 14
7
INCOME TAX AUTHORITIES

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ identify the various income-tax authorities and comprehend the
provisions of law relating to their appointment, control and jurisdiction;
❑ appreciate the powers of income-tax authorities under the Income-tax
Act, 1961;
❑ examine the provisions relating to survey, search and seizure and the
related powers of various income-tax authorities;
❑ analyse and apply such provisions to address related issues.

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 14.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Income-tax
Authorities
- Appointment
and Control Powers of
[Sections 116 Taxpayer's Income-tax Disclosure of
to 119] Charter Authorities Information
- Jurisdiction [Section 119A] [Sections 131 to [Section 138]
[Sections 120 136]
to 130]

14.1 APPOINTMENT AND CONTROL [SECTIONS 116 TO

119A]
(1) Income-tax Authorities [Section 116]
The following are the classes of income-tax authorities-
Income-tax Authorities
1. Central Board of Direct Taxes (CBDT) or Board-
- A statutory body constituted under the Central Board
of Revenue Act, 1963. It comprises of Chairman &
Members.
- It functions under the jurisdiction of the Ministry of
Finance.
- It is the highest executive authority, exercises control and supervision over
all officers of the Income-tax Department.
- It is authorised to exercise certain powers conferred upon it by the Income-
tax Act, 1961.
- The CBDT frames rules as empowered u/s 295 subject to the control and
approval of the Central Government for the proper administration of Act.

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 INCOME TAX AUTHORITIES
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14.3

Authority with nomenclature Authority with nomenclature

“Director” “Commissioner”
2. Principal Directors-General of Principal Chief Commissioners of Income-
Income-tax (PDGIT) tax (PCCIT)
3. Directors-General of Income-tax Chief Commissioners of Income-tax (CCIT)
(DGIT)
4. Principal Directors of Income-tax Principal Commissioners of Income-tax
(PDIT) (PCIT)
5. Directors of Income-tax (DIT) Commissioner of Income-tax (CIT) or
Commissioner of Income-tax (Appeals)
[CIT(A)]
6. Additional Directors of Income- Additional Commissioners of Income-tax
tax (Add. DIT) (Add. CIT) or Additional Commissioners of
Income-tax (Appeals) [Add. CIT(A)]
7. Joint Directors of Income-tax Joint Commissioners of Income-tax (JCIT)
(JDIT) or Joint Commissioners of Income-tax
(Appeals)
8. Deputy Directors of Income-tax Deputy Commissioners of Income-tax
(DDIT) (DCIT) or Deputy Commissioners of Income-
tax (Appeals) [DCIT(A)]
9. Assistant Directors of Income- Assistant Commissioners of Income-tax
tax (ADIT) (ACIT)
10. Income-tax Officers (ITOs)
11. Tax Recovery Officers (TROs)
12. Inspectors of Income-tax

Note - As per section 2(7A), “Assessing Officer” means -

- ACIT or DCIT or ADIT or DDIT; or
- ITO who is vested with the relevant jurisdiction by virtue of directions or orders issued
by CBDT; and
- the Add. CIT or Add. DIT or JCIT or JDIT who is directed to exercise or perform all or
any of the powers and functions conferred on, or assigned to, an Assessing Officer.

(2) Appointment and Control of Income-tax Authorities [Sections 117 & 118]
(i) Section 117 empowers the Central Government to appoint such persons as it thinks
fit to be income-tax authorities.

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 14.4 DIRECT TAX LAWS

(ii) It may also authorise the Board or a Principal Director General or Director General, a
Principal Chief Commissioner or Chief Commissioner or a Principal Director or Director
or a Principal Commissioner or Commissioner to appoint income-tax authorities below
the rank of an Assistant Commissioner or Deputy Commissioner.
(iii) An income-tax authority authorised by the CBDT may appoint such executive or
ministerial staff as may be necessary to assist it in the execution of its functions.
(iv) Section 118 authorises the CBDT to also direct, by way of notification, that any income -
tax authority or authorities shall be subordinate to such other income-tax authority or
authorities, as may be specified.
(3) Instruction to Subordinate Authorities [Section 119]
(i) The CBDT has been empowered under section 119 to issue orders, instructions and
directions to its subordinates for the proper administration of the Act.
(ii) It is obligatory for the various authorities and all other
persons employed in the execution of the Act to
observe and follow such orders, instructions and
directions of the CBDT.
(iii) The CBDT, however, is not empowered to issue orders, instructions or directions in
such a way as to –
(1) require any income-tax authority to make a particular assessment or to dispose
of a particular case in a particular manner; or
(2) interfere with the discretion of the Joint Commissioner (Appeals) or
Commissioner (Appeals) in the exercise of his appellate functions.
(iv) The CBDT may, if it considers necessary or expedient to do so, for the purpose of
proper and effective management of the work of assessment and collection of revenue,
issue general or special orders from time to time in respect of any class of incomes or
class of cases setting forth directions and instructions not being prejudicial to the
assessee.
(v) In appropriate cases, the CBDT may relax the provisions of sections 139, 143, 144,
147, 148, 154, 155, 158BFA, 201(1A), 210, 211, 234A, 234B, 234C, 234E, 234F,
270A, 271C, 271CA and 273.

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 INCOME TAX AUTHORITIES
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14.5

The following table gives a brief glimpse of what these sections relate to –
Section Particulars of section
139 Filing of Return of income
143 Scrutiny Assessment of income
144 Best Judgment Assessment of income
147 Income escaping assessment
148 Issue of notice where income has escaped assessment
154 Rectification of mistake apparent on record
155 Other amendments relating to assessment of income
158BFA Interest and penalty in certain cases of search
201(1A) Interest for non-deduction of tax or non-payment of tax after deduction
by such person/principal officer/company, as the case may be.
210 Payment of advance tax by the assessee of his own accord or in
pursuance of order of Assessing Officer.
211 Installments of advance tax and due dates
234A Interest for default in furnishing return of income
234B Interest for default in payment of advance tax
234C Interest for deferment of advance tax
234E Fee for failure to deliver the statement of deduction of tax at source
under section 200(3) and for failure to deliver the statement of
collection of tax at source under section 206C(3) within the prescribed
time.
234F Fee for default in furnishing return of income under section 139(1)
270A Penalty for underreporting and misreporting of income
271C Penalty for failure to deduct tax at source
271CA Penalty for failure to collect tax at source
273 Penalty for false estimate of, or failure to pay, advance tax

(vi) The CBDT is empowered to authorise any income-tax authority [not being a Joint
Commissioner (Appeals) or a Commissioner(Appeals)] by general or special order to
admit an application or claim for any exemption, deduction, refund or any other relief
under the Act after the expiry of the period specified under the Act, to avoid genuine
hardship in any case or class of cases. The claim for carry forward of loss in case of
late filing of a return is relatable to a claim arising under the category of “any other
relief available under the Act”.

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 14.6 DIRECT TAX LAWS

Accordingly, the CBDT issued Circular No. 11/2024 dated 1.10.2024, to deal with the
applications for condonation of delay in filing returns claiming refund and returns claiming
carry forward of loss and set off thereof containing comprehensive guidelines on the
conditions for condonation and the procedures to be followed for deciding such matters:
(1) Monetary Limits: The Income-tax Authorities have vested with the powers of
acceptance/rejection of such applications/claims upto certain threshold
monetary limits:
Quantum of claim Income-tax authority
with whom powers of
acceptance/rejection
is vested
Where the claim is upto ` 1 crore for any one A.Y. Principal CIT or CIT
Where the claim is above ` 1 crore but upto ` 3 CCIT
crores for any one A.Y.
Where the claim is above ` 3 crores for any one A.Y. Principal CCIT

(2) Condonation of delay in verifying the return: The Commissioner of Income-

tax, Central Processing Centre (CPC), Bengaluru shall be vested with the
powers for acceptance/rejection of petitions under section 119(2)(b) of the Act
seeking condonation of delay in verifying the return of income by sending the
ITR-V to centralized processing Cell (CPC), Bengaluru within the prescribed
time limit.
(3) Period for which application can be made: No condonation application for
claim of refund/loss shall be entertained beyond five years from the end of the
assessment year for which such application/claim is made.
A condonation application should be disposed of within six months from the end
of the month in which the application is received by the competent authority, as
far as possible.
Note: However, for the application filed before 1.10.2024, time period upto
which application can be made is six years from the end of the assessment
year.
(4) In case of updated return u/s 139(9A): In view of the amendment in section
139(9A) vide Finance Act, 2024, the powers of acceptance/rejection of the
application within the monetary limits delegated to the authorities in case of
such claims will be subject to following conditions:

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 INCOME TAX AUTHORITIES
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14.7

- At the time of considering the case under Section 119(2)(b), it shall be

ensured that assessee was prevented by reasonable cause from filing
the return of income within the due date and that the case is of genuine
hardship on merits.
- The authorities dealing with the case shall be empowered to direct the
jurisdictional Assessing Officer to make necessary inquiries in
accordance with the provisions of the Act to ensure that the application
is dealt on merits in accordance with law.
(5) Refund consequent to Court order: In a case where refund claim has arisen
consequent to a Court order, the period for which any such proceedings were
pending before any Court of Law shall be ignored while calculating the said
period of five or six years, as the case may be, provided such condonation
application is filed within six months from the end of the month in which the
Court order was issued or the end of financial year, whichever is later.
(6) Application claiming additional amount of refund: A belated application for
supplementary claim of refund (claim of additional amount of refund after
completion of assessment for the same year) can be admitted for condonation
provided other conditions as referred above are fulfilled. The powers of
acceptance/rejection within the monetary limits delegated to the Principal CCIT/
CCIT/Principal CIT/CIT in case of returns claiming refund and supplementary
claim of refund would be subject to the following further conditions:
(a) The income of the assessee is not assessable in the hands of any other
person under any of the provisions of the Act.
(b) No interest will be admissible on belated claim of refunds.
(c) The refund has arisen as a result of excess tax deducted/collected at
source and/or excess advance tax payment and/or excess payment of
self-assessment tax as per the provisions of the Act.
(vii) The CBDT is empowered to relax the requirements specified in Chapter IV or Chapter
VI-A, by general or special order, where the assessee failed to comply with such
requirements for claiming deduction due to circumstances beyond the control of the
assessee and such requirements were complied with before completion of the
assessment for that year. Every order issued under this clause shall, however, to be
laid before each House of Parliament by the Central Government.

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 14.8 DIRECT TAX LAWS

(4) Taxpayer’s Charter [Section 119A]

The CBDT shall adopt and declare a taxpayer’s charter and issue orders, directions,
instructions and guidelines to other Income tax authorities for the administration of such
Charter.

Taxpayer’s Charter

Income-tax department is committed to

1. Provide fair, courteous, and reasonable treatment: The Department shall provide
prompt, courteous, and professional assistance in all dealings with the taxpayer.

2. Treat taxpayer as honest: The Department shall treat every taxpayer as honest
unless there is a reason to believe otherwise.
3. Provide mechanism for appeal and review: The Department shall provide fair and
impartial appeal and review mechanism.
4. Provide complete and accurate information: The Department shall provide accurate
information for fulfilling compliance obligations under the law.

5. Provide timely decisions: The Department shall take decision in every income-tax
proceeding within the time prescribed under law.
6. Collect the correct amount of tax: The Department shall collect only the amount due
as per the law.
7. Respect privacy of taxpayer: The Department will follow due process of law and be
no more intrusive than necessary in any inquiry, examination, or enforcement action.
8. Maintain confidentiality: The Department shall not disclose any information provided
by taxpayer to the department unless authorized by law.
9. Hold its authorities accountable: The Department shall hold its authorities
accountable for their actions.
10. Enable representative of choice: The Department shall allow every taxpayer to
choose an authorized representative of his choice.
11. Provide mechanism to lodge complaint: The Department shall provide mechanism
for lodging a complaint and prompt disposal thereof.
12. Provide a fair & just system: The Department shall provide a fair and impartial
system and resolve the tax issues in a time-bound manner.

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13. Publish service standards and report periodically: The Department shall publish
standards for service delivery in a periodic manner.
14. Reduce cost of compliance: The Department shall duly take into account the cost of
compliance when administering tax legislation.
Income-tax department expects taxpayers to:
1. Be honest and compliant: Taxpayer is expected to honestly disclose full information
and fulfil his compliance obligations.
2. Be informed: Taxpayer is expected to be aware of his compliance obligations under
tax law and seek help of department if needed.
3. Keep accurate records: Taxpayer is expected to keep accurate records required as
per law.
4. Know what the representative does on his behalf: Taxpayer is expected to know
what information and submissions are made by his authorised representative.
5. Respond in time: Taxpayer is expected to make submissions as per tax law in timely
manner.
6. Pay in time: Taxpayer is expected to pay amount due as per law in a timely manner.

14.2 JURISDICTION
(1) Jurisdiction of income-tax authorities [Section 120]
(i) Income-tax authorities to exercise powers in accordance with CBDT directions
[Section 120(1)]: The income-tax authorities shall
exercise all or any of the powers and perform all or any
of the functions conferred on, or assigned to, such
authorities in accordance with the directions issued by the CBDT for the exercise of
such powers and performance of the functions by all or any of those authorities.
(ii) Deemed directions under section 120(1) by CBDT [Explanation to section
120(1)]: Any income-tax authority, being an authority higher in rank, may exercise the
powers and perform the functions of the income-tax authority lower in rank, if so
directed by the CBDT. Such direction issued by the CBDT shall be deemed to be a
direction issued under the said section 120(1).
(iii) CBDT may authorize income-tax authorities to exercise powers/perform
functions: The directions of the Board may authorise any other income-tax authority

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to issue orders in writing for the exercise of the powers and performance of the
functions by all or any of the other income-tax authorities who are subordinate to it.
(iv) Criteria for issue of directions [Section 120(3)]: In issuing such directions, the
Board may have regard to the following criteria:
(a) Territorial area.
(b) Persons or classes of persons.
(c) Incomes or classes of incomes.
(d) Cases or classes of cases.
(v) CBDT authorisation assigning functions [Section 120(4)]: The CBDT may
authorise any Principal Director General or Director General or Principal Director or
Director of Income-tax to perform such functions of any other income-tax authority as
may be assigned to him. Such authorisation may be through a general or special order.
The CBDT can empower the Principal Director General or Director General or Principal
Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner to issue orders in writing to the effect that the powers and functions
conferred on or assigned to the Assessing Officer under this Act in respect of any
specified area or person or class of person or persons or incomes or classes of income
or cases or classes of cases shall be exercised or performed by an Additional
Commissioner or Additional Director or a Joint Commissioner or Joint Director.
The CBDT or any other authority authorised in this behalf can confer jurisdiction with
more than one income-tax authority in relation to any case.
(2) Jurisdiction of Assessing Officers [Section 124]
(i) Persons in respect of whom Assessing Officer has jurisdiction: Where the
Assessing Officer has been vested with jurisdiction over any area within the limits of
such area, he shall have jurisdiction:
(a) in respect of any person carrying on business or profession within that area or in
respect of a person whose business or profession is carried on in more than one
place, if his principal place of business or profession is in that area and
(b) in respect of any other person residing within the area.
(ii) Income-tax Authorities higher in rank to determine question of Assessing
Officer’s jurisdiction: Where a question arises under this section as to whether an
Assessing Officer has jurisdiction to assess any person, the question shall be

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determined by the Principal Director General or Director General or the Principal Chief
Commissioner or Chief Commissioners or Principal Commissioner or Commissioner.
In case the question relates to an area within the jurisdiction of different Principal
Director General or Director General or Principal Chief Commissioner or Chief
Commissioners or Principal Commissioner or Commissioner, then the question shall
be determined by the Principal Directors General or Directors General or Principal
Chief Commissioners or Chief Commissioners or Principal Commissioners or
Commissioner concerned or if they are not in agreement, then the same shal l be
determined by the Board or by such Principal Director General or Director General or
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner as the Board may specify by way of notification in the Official Gazette.

(iii) Time limit for calling in question jurisdiction of the Assessing Officer:
S. Case Time Limit
No.
(a) Where a return of Income One month from the date of service of
has been filed under section notice under section 142(1) or 143(2) or
139(1) completion of assessment, whichever is earlier.
(b) Where no return of income Time allowed by notice under section 142(1)
has been filed or 148 for filing return of income or by notice
under the first proviso to section 144 to show
cause why the best judgement assessment
should not be made, whichever is earlier.
(c) Where search is initiated One month from the date on which notice
under section 132 or books was served under section 153A(1) or 153C(2)1
of accounts or other or completion of assessment, whichever is
documents or any assets are earlier.
requisitioned under section
132A

(iv) Assessing Officer may refer matter for determination: Where the assessee
questions the jurisdiction of an Assessing Officer, then, the Assessing Officer shall, if
not satisfied with the correctness of the claim refer the matter for determination under
(ii) above before the assessment is made.

1These provisions (i.e., sections 153A and 153C) were applicable in case of search, initiated under section
132 or books of accounts or other documents or any assets requisitioned under section 132A before
1.4.2021..

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(v) Jurisdictional Powers of Assessing Officer: Every Assessing Officer shall have all
the powers conferred by or under this Act on an Assessing Officer in respect of the
income accruing or arising or received within the area, if any, over which he has been
vested with jurisdiction by virtue of the direction or order issued under section 120(1)
and 120(2).
(3) Power to transfer cases [Section 127]
(i) Authorities empowered to transfer cases from one Assessing Officer to another:
The power to transfer a case from one Assessing Officer to another subordinate
Assessing Officer or Officers is
vested with the Principal Director
General or Director General or
Principal Chief Commissioner or
Chief Commissioner or Principal
Commissioner or Commissioner of Income-tax. However, this power can be exercised
only after giving the assessee a reasonable opportunity of being heard and after
recording reasons for doing so, wherever possible.
(ii) Mutual agreement between higher authorities to transfer cases: There may be
situations where the Assessing Officer(s) from whom the case is transferred and the
Assessing Officer to whom the case is transferred do not fall under the control of the
same Principal Director General or Director General or Principal Chief Commissioner
or Chief Commissioner or Principal Commissioner or Commissioner of Income-tax. In
such cases, the Principal Director General or Director General of Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or Commissioner of
Income-tax from whose jurisdiction the case is transferred shall pass an order, if such
concerned higher authorities mutually agree for such transfer.
If the higher authorities are not in agreement about the transfer, then, the CBDT or
any such authority authorized by the Board may pass the order.
(iii) No requirement of giving opportunity to be heard in certain cases: If the case is
transferred between Assessing Officers within the same city or locality or place, then,
it is not necessary to give the assessee an opportunity of being heard.
(iv) Re-issue of notice not required: The transfer of a case may be made at any stage
of the proceedings and it is not necessary to re-issue any notice already issued.

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(v) Meaning of ‘Case’: For the purpose of section 120 and section 127, “case” in relation
to any person whose name is specified in any order or direction issued thereunder,
means all proceedings under this Act in respect of any year which may be pending on
the date of such order or direction or which may have been completed on or before
such date, and includes also all proceedings under this Act which may be commenced
after the date of such order or direction in respect of any year.
(4) Change of Income-tax Authority [Section 129]
(i) Stage from which the succeeding Income-tax authority would continue: In cases
where an income-tax authority succeeds another income-tax authority, who ceases to
exercise jurisdiction, then, the succeeding income-tax authority may continue the
proceedings from the stage at which the proceedings was left by his predecessor.
(ii) Opportunity to be reheard: The assessee concerned may demand that before
continuance of proceedings as in (i) above, the previous proceedings or any part thereof
be reopened or be reheard before passing of any assessment order against him.
(5) Faceless jurisdiction of income-tax authorities [Section 130]
(i) Section 130(1) empowered the Central Government to notify scheme for faceless
jurisdiction of income-tax authorities. The Central Government may make a scheme,
by notification in the Official Gazette, for the purposes of—
(a) exercise of all or any of the powers and performance of all or any of the functions
conferred on, or, as the case may be, assigned to income-tax authorities by or
under this Act as referred to in section 120; or
(b) vesting the jurisdiction with the Assessing Officer as referred to in section 124; or
(c) exercise of power to transfer cases under section 127; or
(d) exercise of jurisdiction in case of change of incumbency as referred to in section
129,
so as to impart greater efficiency, transparency and accountability by —
(i) eliminating the interface between the income-tax authority and the assessee or
any other person, to the extent technologically feasible;
(ii) optimising utilisation of the resources through economies of scale and functional
specialisation;
(iii) introducing a team-based exercise of powers and performance of functions by
two or more income-tax authorities, concurrently, in respect of any area or

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persons or classes of persons or incomes or classes of income or cases or

classes of cases, with dynamic jurisdiction.
(ii) Every notification issued shall, as soon as may be after the notification is issued, be
laid before each House of Parliament.
(iii) Accordingly, the Central Government has, vide Notification No. 15/2022 dated
28.03.2022 issued the Faceless Jurisdiction of Income-tax Authorities Scheme, 2022.

14.3 POWERS OF INCOME TAX AUTHORITIES [SECTIONS

131 TO 136]
Powers of Income-tax Authorities [Sections 131 to 136]
• Power regarding discovery, production of evidence, etc [Section 131]
• Search and seizure [Section 132]
• Powers to requisition books of account, etc [Section 132A]
• Application of seized or requisitioned assets [Section 132B]
• Power to call for information [Section 133]
• Power of survey [Section 133A]
• Power to collect certain information [Section 133B]
• Power to call for information by prescribed income-tax authority [Section 133C]
• Power to inspect registers of companies [Section 134]
• Power of certain income-tax authorities [Section 135]

(1) Powers regarding discovery, production of evidence etc. [Section 131]

(i) Income-tax Authorities to have powers vested in a Civil Court in certain matters
[Section 131(1)]: The Assessing Officer, Joint
Commissioner, Joint Commissioner (Appeals),
Commissioner (Appeals), Principal Chief
Commissioner or Chief Commissioner, Principal Commissioner or Commissioner and the
Dispute Resolution Panel referred to in section 144C have the powers vested in a Civil
Court under the Code of Civil Procedure, 1908, while dealing with the following matters:

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking
company and examining him on oath;

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(c) compelling the production of books of account and documents; and

(d) issuing commissions.

The powers aforementioned are normally those exercisable by a Court when it is trying
a suit. While exercising these powers, the authorities act in a quasi-judicial capacity
and ought to conform to the principles of judicial procedure.
(ii) Powers under section 131(1) to be exercised in certain cases, even if no
proceeding is pending [Section 131(1A)/(2)]:
(a) If the Principal Director General or
Director General or Principal Director or
Director or Joint Director or Assistant
Director or Deputy Director or the
authorized officer referred to in section
132(1), before he takes action under the
said sub-section, has reason to suspect that any income has been concealed,
or is likely to be concealed, by any person or class of persons, within his
jurisdiction, then for the purposes of making an enquiry or investigation relating
thereto, it shall be competent for him to exercise the powers conferred in section
131(1) on the income-tax authorities referred to therein, even if no proceedings
with respect to such person or class of persons are pending before him or any
other income-tax authority.
(b) For facilitating quick collection of information on request from tax authorities
outside India, income-tax authorities (not below the rank of Assistant
Commissioner of Income-tax), as may be notified by the Board, to have powers
under section 131(1) for making an inquiry or investigation in respect of any
person or class of persons relating to an agreement under section 90 or 90A,
even if no proceeding is pending before it or any other income-tax authority with
respect to the concerned person or class of persons.

(iii) Power to impound or retain books of account [Section 131(3)]: The income-tax
authority is vested with the power to impound or
retain in its custody for such period as it may
think fit, any books of account or other
documents produced before it in any
proceeding under this Act.

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The powers are unrestricted in the case of all the authorities except the Assessing
Officer or an Assistant Director or Deputy Director, whose powers are subjected to two
restrictions;
(a) he must record his reasons for impounding books of account or other
documents; and
(b) if he desires to retain in his custody any such books or documents for a period
exceeding 15 days (excluding holidays), he must obtain the prior approval of
the Principal Chief Commissioner or Chief Commissioner or Principal Director
General or Director General or Principal Commissioner or Commissioner or
Principal Director or Director, as the case may be, for the purpose .
(2) Search and Seizure [Section 132]: Under this section, wide powers of search and
seizure are conferred on the income-tax authorities.
(I) Authorities empowered to issue authorisation [Section 132(1)]: Search and
seizure can be authorised by Principal Director General or Director General or
Principal Director or Director or the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner. However, the said
operations can be authorised by Additional Director or Additional Commissioner or
Joint Director or Joint Commissioner if they are empowered by the Board.
The authorities mentioned above (Authorising officer) shall authorise their subordinates
(Authorised officer) specified below to conduct the search and seizure operations:
Authorising Officer Authorised Officer
A Principal Director General or Joint Director, Joint Commissioner,
Director General or Principal Director Additional Director or Additional
or Director or the Principal Chief Commissioner, Assistant Director, or
Commissioner or Chief Commissioner Deputy Director, Assistant
or Principal Commissioner or Commissioner or Deputy
Commissioner Commissioner or Income-tax Officer.
Additional Director or Additional Assistant Director or Deputy Director or
Commissioner, Joint Director or Joint Assistant Commissioner or Deputy
Commissioner (If empowered by the Commissioner or Income-tax Officer.
Board)

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(II) ‘Reason to believe’ pre-requisite for authorisation [Section 132(1)]: Such

authorisation could take place if the authorising officer has reason to believe, on the
basis of information in his possession:
(a) that the person to whom a
summons under section 131(1) or
notice under section 142(1) was
issued to produce or cause to
produced, any books of account or
other documents has omitted or
failed to do so; or
(b) that a person to whom a summons or a notice aforesaid has been or might be
issued, will not or would not produce or caused to be produced, any books of
account or other documents which will be useful or relevant to any proceeding
under the Income-tax Act, 1961; or
(c) that a person is in possession of any valuable articles or things, including
money, bullion or jewellery etc. representing either wholly or partly income or
property which has not been disclosed or would not be disclosed by such
person concerned for income-tax purposes.
However, the reason to believe, as recorded by the income-tax authority, shall not
be disclosed to any person or any authority or the Appellate Tribunal.

(III) Powers of Authorised Officer [Section 132(1)]

(A) Power with reference to search of person: The authorized officer is
empowered to-
(i) enter and search any building or place or vehicle or vessel or aircraft,
where he has reason to suspect that such books of account, other
documents, money, bullion,
jewellery, other valuable article or
thing are kept;
(ii) break open the locks of any door, box, safe, almirah or other
receptacle, in case keys are not readily available for discharge of duties
mentioned above;
(iii) search any person who has got out of, or is able to get into, or is in, the
building, place, vessel, vehicle or aircraft in respect of which a search
has been authorised, if he has reason to suspect that such person has

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secreted about his person any books of account or other documents,

money, bullion, jewellery or other valuable article or thing for which the
search is being made.
Power exercisable outside jurisdiction, if delay would be prejudicial to the
interests of the revenue: The Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner has the power to
authorise the search of any building, place, vessel, vehicle, aircraft etc., within
his territorial jurisdiction and also in cases where he has no jurisdiction over the
persons concerned, if he has reason to believe that any delay in obtaining
authorisation from the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner having jurisdiction over the person
would be prejudicial to the interests of revenue [First proviso to section 132(1)].
(B) Power with reference to money, jewellery, valuable article or thing: The
authorized officer is empowered to
(i) seize money, bullion, jewellery, valuable articles, etc. found as a
result of search.
However, any bullion, jewellery or other valuable article or thing, which
is in the nature of stock-in-trade of the business, found as a result of
search shall not be seized but the
authorised officer shall make a note or
inventory of such stock-in-trade of the
business.
Second proviso to section 132(1) provides that where it is not possible
or practicable to take physical possession of any valuable article or thing
and remove it to a safe place due to
its volume, weight or other physical
characteristics or due to its being of a
dangerous nature, the authorized
officer may serve an order on the
owner or the person who is in
immediate possession thereof that he shall not remove, part with or
otherwise deal with it, except with the previous authorised officer shall
be deemed to be seizure of such valuable article or thing. However, such
a deeming seizure would not apply to stock-in-trade of the business.
Further, where it is not practicable to seize any such money, bullion,
jewellery or other valuable permission of such authorised officer and

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such action of the article or thing (for reasons other than those
mentioned above), the authorized officer may serve an order on the
owner or the person who is in immediate possession or control thereof
that he shall not remove, part with or otherwise deal with it except with
the previous permission of such officer and such officer may take such
steps as may be necessary for ensuring compliance [Section 132(3)].
However, serving of such an order shall not be deemed to be seizure of
such valuable article or thing. Such order shall not be in force for a period
exceeding 60 days from the date of the order [Section 132(8A)].
(ii) Make a note or inventory of any such money, bullion, jewellery or other
valuable article or thing.

(C) Power with reference to books of account/other documents: The

authorized officer is empowered to –
(i) inspect books of account and other documents.
The person who is in possession or control of books of account or other
documents maintained in the form of electronic records, shall be
required to afford the necessary facility to authorised officer to inspect
all such books of account or other documents.
“Electronic record” as defined in section 2(1)(t) of the Information
Technology Act, 2000 means data, record or data generated, image or
sound stored, received or sent in an electronic form or microfilm or
computer-generated micro fiche.
(ii) seize books of account and other documents.
Where it is not practicable to seize any such books of account and other
documents, the authorized officer may serve an order on the owner or
the person who is in immediate possession or control thereof that he
shall not remove, part with or otherwise deal with it, except with the
previous permission of such officer and such officer may take such steps
as may be necessary for ensuring compliance [Section 132(3)].
However, serving of such an order shall not be deemed to be seizure of
such books of account and other documents. Such order shall not be in
force for a period exceeding 60 days from the date of the order [Section
132(8A)].
(iii) place marks of identification on books and other documents.
(iv) make or cause to be made extracts or copies from the books or
documents.

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Authorisation for search in other place not specified in the warrant:

Where a search for any books of account or other documents or assets has
been authorised by any authority who is competent to do so, and the Principal
Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner, in consequence of information in his possession, has reason
to suspect that such books of account, other documents, money, bullion,
jewellery or other valuable article or things of the assessee are kept in a ny
building, place, vessel, vehicle or aircraft not specified in the search warrant,
he may authorise the authorised officer to search such other building, place,
vessel, vehicle or aircraft. Accordingly, if a search warrant is issued by the
Principal Commissioner or Commissioner of Income-tax, authorising the
search of a premises in a particular place specified in the search warrant and
the authorised officer finds that the books of account or other documents
and/or assets have been secreted in a building or place not specified in the
search warrant, he could request the Commissioner to authorise him to search
that building or place [Section 132(1A)].

However, the reason to suspect, as recorded by the income-tax authority, shall not
be disclosed to any person or any authority or the Appellate Tribunal [Explanation
below to section 132(1A)].

(D) Other powers:

(i) The authorized officer may requisition the service of
- any police officer or any officer of Central Government or of both;
or
- any person or entity as may be approved by the Principal Chief
Commissioner or the Chief Commissioner or the Principal
Director General or the Director General in accordance with
prescribed procedure,
to assist him in carrying out the search operations and it shall be duty of
every such officer or person or entity to comply with such requisition
[Section 132(2)].
(ii) The authrorised officer may examine on oath any person who is found
to be in possession or control of any books, documents, money, bullion
jewellery etc. However, the examination of any person may be not
merely in respect of any books of account, other documents or assets

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found as a result of the search but also in respect of all matters relevant
for the purposes of any investigation under the Act [Section 132(4)].
Other points relating to books, other documents, money, bullion, jewellery
etc. seized:
(i) The person from whose custody any books of account or other
documents are seized under sub-section (1) or sub-section (1A) may
make copies thereof, or take extracts therefrom, in the presence of
the authorised officer or any other person empowered by him in this
behalf, at such place and time as the authorised officer may appoint in
this behalf [Section 132(9)].
(ii) The books of account and other documents seized should be returned
within a period of one month from the end of the quarter in which
the order of assessment or
Seized books of account to
reassessment or recomputation be returned within one
is made under section 143(3) or month from end of the
section 144 or section 147 or under quarter of assessment order.
section 153A2 or section 158BC(c),
unless the reasons for retaining the same are recorded in writing and
approved by the Principal Chief Commissioner or Chief Commissioner
or Principal Commissioner or Commissioner or Principal Director
General or Director General or Principal Director or Director. With the
approval, the books or other records can be retained but however the
same cannot be retained for a period exceeding 30 days after the
assessment proceedings in respect of the years for which the books of
account or other documents are relevant are completed [Section 132(8)].
(iii) Where the authorised officer has no jurisdiction over the person referred
to in clause (a) or clause (b) or clause
Handover to other
(c) of point (ii) above, the books of
AO within 60 days
account or other documents, or any
money, bullion, jewellery or other
from the date of
valuable article or thing seized under last authorisation
that sub-section shall be handed over for search

2Section 153A deals with assessment in case of search, initiated under section 132 or books of accounts
or other documents or any assets requisitioned under section 132A before 1.4.2021.

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by the authorised officer to the Assessing Officer having jurisdiction over

such person within a period of 60 days from the date on which the last
of the authorizations for search was executed and thereupon, the powers
exercisable by the authorized officer under sub-section (8) or sub-
section (9) shall be exercisable by such Assessing Officer [Section
132(9A)].
(iv) If a person, legally entitled to the books of account or other documents
seized, objects for any reason to the approval given by the Principal
Chief Commissioner or Chief Commissioner, Principal Commissioner or
Commissioner, Principal Director General or Director General or
Principal Director or Director to extend the period of retention of the
same by the Assessing Officer beyond one month, he may make an
application to the Board stating therein the reasons for such objection
and requesting for the return of the books of account or other
documents. The Board may, after giving the applicant an opportunity of
being heard, pass such orders as it thinks fit. [Section 132(10)]

(IV) Rebuttable presumption [Section 132(4A)]: The law presumes in the course of
search and seizure proceedings that
(a) the books of account or other documents and
assets found in the possession of any person
belong to such person
(b) the contents of such books of account and other
documents are true
(c) the signature and every other part of such books of account and other documents
are in the handwriting of the persons who can reasonably be assumed to have
signed or written the books of account or other documents. In the case of a
document stamped, executed or attested, that it was duly stamped and executed
or attested by the person by whom it purports to have been so executed or
attested.
It may be noted that this is a rebuttable presumption. On facts and with evidence
the assessee may rebut the above presumption and prove that the facts are
otherwise.
(V) Provisional attachment of property [Section 132(9B)]: For the purpose of
protecting the interest of the revenue and safeguarding recovery in search cases, the

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authorized officer during the course of search or seizure or within a period of sixty
days from the date on which the last of the authorisations for search was executed is
satisfied for reasons to be recorded in writing, it is necessary so to do, he may with
the prior approval of the Principal Director General or Director General or the
Principal Director or Director, by order in writing, attach provisionally any property
belonging to the assessee.

(VI) Period of provisional attachment [Section 132(9C)]: Every provisional attachment

made under sub-section (9B) shall cease to have effect after the expiry of a period
of six months from the date of the order referred to in sub-section (9B).

(VII) Reference to Valuation Officer or any other person or entity [Section 132(9D)]:
The authorised officer may, during the course of the search or seizure or within a
period of 60 days from the date on which the last of the authorisations for search was
executed, make a reference

- to a Valuation Officer referred to in section 142A,

- any other person or entity or any valuer registered by or under any law for the
time being in force, as may be approved by the Principal Chief Commissioner
or the Chief Commissioner or the Principal Director General or the Director
General, in accordance with the prescribed procedure,

who shall estimate the fair market value of the property in the prescribed manner and
submit a report of the estimate to the said officer or the Assessing Officer within a
period of 60 days from the date of receipt of such reference.
Last of authorisation for search
For the purpose of sub-sections (9A), (9B) and (9D) of section 132, the last of
authorisations for search shall be deemed to have been executed -
(a) in the case of search, on the conclusion of search as recorded in the last
panchnama drawn in relation to any person in whose case the warrant of
authorisation has been issued; or
(b) in the case of requisition under section 132A, on the actual receipt of the books
of account or other documents or assets by the authorised officer. [Explanation
1 to section 132].

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(VIII) Rules providing for procedure to be followed by Authorised Officer [Section

132(14)]: The Board may make rules in relation to any search or seizure under this
section; in particular, and without prejudice to the generality of the foregoing power,
such rules may provide for the procedure to be followed by the authorised officer—
(a) for obtaining ingress into any building, place, vessel, vehicle or aircraft to be
searched where free ingress thereto is not available;
(b) for ensuring safe custody of any books of account or other documents or assets
seized.
Rule 112 states the procedure to be followed by authorised officer while exercising the
power of search and seizure under section 132.
(IX) Meaning of ‘Proceeding’ [Explanation 2 below Section 132]: For the purpose of
this section, the word "proceeding" means any proceeding in respect of any year under
this Act, which may be pending on the date on which a search is authorised under this
section or which may have been completed on or before such date and includes also
all proceedings under this Act which may be commenced after such date in respect of
any year.
(X) Applicability of CrPC: The provisions of the Criminal Procedure Code relating to
searches and seizure would, as far as possible, apply to the searches and seizures
under this Act. Contravention of the orders issued under this section would be
punishable with imprisonment for upto 2 years and fine under section 275A.
(3) Power to requisition books of account etc. [Section 132A]
(i) Requirement of “reasons to believe” for requisition of books of account [Section
132A(1)]: Where the Principal Director General or Director General or Principal
Director or Director or the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner
(authorising officer) on the basis of information
in his possession, has reason to believe that-
(a) any person to whom a summons under section 131(1) or a notice under section
142(1) was issued to produce, or cause to be produced, any books of account
or other documents has omitted or failed to produce, or cause to be produced,
such books of account or other documents, as required by such summons or
notice and the said books of account or other documents have been taken into
custody by any officer or authority under any other law for the time being in
force, or

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(b) any books of account or other documents will be useful for, or relevant to, any
proceeding under this Act and any person to whom a summons or notice as
aforesaid has been or might be issued will not, or would not, produce or cause
to be produced, such books of account or other documents on the return of
such books of account or other documents by any officer or authority by whom
or which such books of account or other documents have been taken into
custody under any other law for the time being in force, or
(c) any assets represent either wholly or partly income or property which has not
been, or would not have been, disclosed for the purposes of this Act by any
person from whose possession or control such assets have been taken into
custody by any officer or authority under any other law for the time being in force
then, the authorising officer may authorise any Additional Director, Additional
Commissioner, Joint Director, Joint Commissioner, Assistant Director or Deputy
Director, Assistant Commissioner, Deputy Commissioner or Income-tax Officer
(referred to as the requisitioning officer) to require the officer or authority under any
other law referred above, as the case may be, to deliver such books of account, other
documents or assets to the requisitioning officer.
However, the reason to believe, as recorded by the income-tax authority, shall not be
disclosed to any person or any authority or the Appellate Tribunal.

Clarificatory provision for non-disclosure of reason to believe or reason to

suspect recorded by the Income-tax Authorities
✓ The need for this clarification arose because the Commissioner of Income-tax
(Appeals) & Benches of the Income-tax Appellate Tribunal, in the context of
appeals before them, started demanding copies of reasons to believe in search,
seizure and requisition cases, which the Income Tax Department has not been
giving to them on ground of secrecy.
✓ Though there are some decisions wherein it has already been held that search
cannot be held invalid on the ground that reasons to believe not disclosed to
assessee, the said amendment provides statutory recognition to such decisions
so as to avoid any further litigation on the issue. These decisions are:
(i) In M.S. Associates v. Union of India (2005) 275 ITR 502 (Gau), it was
observed that revenue authorities are not required to disclose to the
person challenging the warrant of authorisation as to what materials
were available against him, which had led to the issuance of the warrant.
It is required to be disclosed only when the authorities concerned resolve
to impose tax or penalties.

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(ii) In Genom Biotech (P) Ltd. & Ors. v. Director of IT (Investigation) & Ors.
(2009) 180 Taxman 395 (Bom), it was observed that it is not the mandate
of section 132 or any other provision in the Act that the reasonable belief
recorded by the designated authority before issuing the warrant of
authorisation must be disclosed to the assessee.

(ii) Delivery of books of accounts to the Requisition Officer [Section 132A(2)]: On a

requisition being made under (i), the officer or authority under any other law referred
above, as the case may be, shall deliver the books of account, other documents or
assets to the requisitioning officer either forthwith or when such officer or au thority is
of the opinion that it is no longer necessary to retain the same in his or its custody.

(iii) Certain provisions relating to search to apply in case of requisition also

[Section 132A(3)]: Where any books of account, other documents or assets have
been delivered to the requisitioning officer, the provisions of sections 132(4A) to
132(14) and section 132B shall, so far as may be, apply as if such books of account,
other documents or assets had been seized under section 132(1) by the requisitioning
officer from the custody of the concerned person.
(4) Penal provisions on undisclosed income found during search or assets
requisitioned [Section 158BFA(2)] :
The Assessing Officer or the Commissioner (Appeals) during the course of proceeding
under section 132 or section 132A may direct the assessee to pay a penalty of an
amount equal to 50% of tax so leviable in respect of the undisclosed income
determined by the Assessing Officer under section 158BC(1)(c).

The procedure for block assessment under section 158BC, along with penal provisions
under section 158BFA, are dealt with in detail in Chapter 15: Assessment Procedure.

(5) Presumption with regard to assets, books of account [Section 278D]

(i) Presumption with regard to books of account and other documents in search
cases - Section 278D provides that in case where, during the course of any search
made u/s 132, any money, bullion, jewellery or other valuable articles or things or any
books of account or other documents had been found in the possession or control of
any person and such assets or books of account or other documents are tendered by
the prosecution in evidence against such person and/or against any person who is

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convicted of an offence u/s 278, the provisions of section 132(4A) would apply, in
relation to all such books of account and other documents. Accordingly, it would be
presumed that such books of account or other documents and assets belong to the
person in whose control or possession they were found at the time of search and also
that the contents of such books of account and other documents are true.
(ii) Presumption with regard to books of account and documents in case of
requisition - Similarly, in cases where any books of accounts or other documents and
assets are taken into custody from the possession or control of any person by the
officer or authority specified in section 132A(1)(a) to (c) and these are delivered to the
requisitioning officer under section 132A(2), it would be presumed that the
presumption similar to the one mentioned earlier would operate in these cases as well.
(iii) Presumption rebuttable - It would be for assessee to rebut the presumption wherever
necessary by producing cogent and reliable evidence.
(6) Application of seized or requisitioned assets [Section 132B]
(i) Permissible adjustment of assets seized or requisitioned [Section 132B(1)(i)]:
The permissible adjustment of assets seized under section 132 or requisitioned under
section 132A are shown below:

Permissible adjustment of assets seized u/s

132 or requisitioned u/s 132A

The amount of liability determined on

completion of assessment or reassessment or
recomputation pursuant to search or
Any “existing liability” under the completion of the assessment under block
Income-tax Act, 1961, Black assessment of search cases, incl. penalty or
Money Act, 2015 etc. interest payable in connection therewith, and
in respect of which the assessee is in default
or deemed to be in default

Note - “Existing liability” does not include advance tax payable in accordance with
the provisions of Part C of Chapter XVII of the Income-tax Act, 1961.

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(ii) Manner of application of assets seized [Section 132B(1)(ii)/(iii)]: If the assets

consist solely of money or partly of money and partly of other assets, the Assessing
Officer may apply the money in discharge of the liabilities mentioned above. The
assessee shall be discharged of such liability to the
extent of the money so applied.
The assets other than money may also be applied for
the discharge of such liabilities which still remains undischarged. For this purpose,
such assets shall be deemed to be under distraint, as if such distraint was effected by
the Assessing Officer or, as the case may be, the Tax Recovery Officer under
authorisation from the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner under section 226(5). The Assessing Officer
or the Tax Recovery Officer, as the case may be, may recover the amount of such
liabilities by the sale of such assets in the manner laid down in the Third Schedule.
Any assets or proceeds thereof which remain after the liabilities referred above are
discharged shall be forthwith made over or paid to the persons from whose custody
the assets were seized.

(iii) Release of seized asset [Proviso to section 132B(1)(i) and section 132B(4)]:
Where the person concerned makes an application to the Assessing Officer within 30
days from the end of the month in which the asset was seized, for release of the asset
and explains the nature and source of acquisition of seized assets to the satisfaction
of the Assessing Officer, then, such assets are required to be released within a period
of 120 days from the date on which last of the authorisations for search under section
132 or requisition under section 132A was executed after meeting any existing
liabilities, with the prior approval of the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner.
(iv) Entitled to interest on the amount of assets seized exceeds the liabilities: The
assessee shall be entitled to simple interest at ½ % per month or part of a month, if
the amount of assets seized exceeds the liabilities eventually, for the period
immediately following the expiry of 120 days from the date on which the last of the
authorisations for search under section 132 or requisition under section 132A was
executed to the date of completion of the assessment or reassessment or
recomputation.

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(7) Power to call for information [Sections 133]

(i) Details of information to be furnished by different persons: The Assessing Officer,
the Joint Commissioner or the Joint Commissioner (Appeals) or the Commissioner
(Appeals)] may call for following information from the following persons for the
purposes of this Act-
S. Person Information to be furnished
No.
(1) Firm The names and addresses of the partners of the
firm and their respective shares.
(2) Hindu undivided The names and addresses of the manager and the
family members of the family.
(3) A trustee, guardian The names of the persons for or of whom he is
or agent trustee, guardian or agent, and of their addresses.
(4) Any assessee A statement of the names and addresses of all
persons to whom he has paid in any previous year
rent, interest, commission, royalty or brokerage, or
any annuity, not being any annuity taxable under
the head "Salaries" amounting to more than
` 1,000, or such higher amount as may be
prescribed, together with particulars of all such
payments made.
(5) Any dealer, broker A statement of the names and addresses of all
or agent or any persons to whom he or the exchange has paid any
person concerned sum in connection with the transfer, whether by way
in the management of sale, exchange or otherwise, of assets, or on
of a stock or whose behalf or from whom he or the exchange has
commodity received any such sum, together with particulars of
exchange all such payments and receipts.
(6) Any person, Information in relation to such points or matters, or
including a banking statements of accounts and affairs verified in the
company or any manner specified by the Assessing Officer, the Joint
officer thereof Commissioner or the Joint Commissioner (Appeals)
or the Commissioner (Appeals), giving information
in relation to such points or matters as, in the
opinion of the Assessing Officer, the Joint
Commissioner or the Joint Commissioner (Appeals)
or the Commissioner (Appeals), will be useful for,
or relevant to, any enquiry or proceeding under this
Act.

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(ii) Exercise of power by the Income-tax authorities u/s. 133(6): Although section 133
empowers only the Assessing Officer, Joint Commissioner, the Joint Commissioner
(Appeals) or and Commissioner of Income tax (Appeals) to call for any information from
any person which will be useful for or relevant to any
proceedings under the Act as mentioned in point (6)
of (i) above, such powers may also be exercised by
the Principal Director General or Director-General, the
Principal Chief Commissioner or Chief Commissioner,
the Principal Director or Director or the Principal
Commissioner or Commissioner or the Joint Director or Deputy Director or Assistant
Director.
(iii) Exercise of power of inquiry where no proceeding pending: The power in respect
of an inquiry, in a case where no proceeding is pending, shall not be exercised by any
income-tax authority below the rank of Principal Director or Director or Principal
Commissioner or Commissioner without the prior approval of the Principal Director or
Director or as the case may be, the Principal Commissioner or Commissioner.
However, the Joint Director or Deputy Director or Assistant Director can exercise such
power without prior approval from PDIT, DIT, PCIT or CIT.
(iv) Exercise of power to call for information under section 90 or 90A: For facilitating
quick collection of information on request from tax authorities outside India, notified
income-tax authorities (not below the rank of Assistant Commissioner of Income -tax)
to have powers under section 131(1) for making an inquiry or investigation in respect
of any person or class of persons relating to an agreement for exchange of information
under section 90 or 90A, even if no proceeding is pending before it or any oth er
income-tax authority with respect to the concerned person or class of persons. Such
notified authorities are also empowered, for the purposes of an agreement referred to
in section 90 or section 90A, to exercise the powers conferred under section 133 to
call for information, irrespective of whether any proceedings are pending before it or
any other income-tax authority.
(8) Power of Survey [Section 133A]
(i) Power to enter a place within jurisdiction to inspect books of account, to verify
cash, stock etc. [Section 133A(1)]: An income-tax authority may enter any place:
(a) within the limits of the area assigned to him, or

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(b) occupied by any person in respect of whom he exercises jurisdiction, or

(c) in respect of which he is authorised for the purposes of this section by such
income-tax authority, who is assigned the area within which such place is
situated or who exercises jurisdiction in respect of any person occupying such
place,
at which a business or profession or an activity for charitable purpose is carried on,
whether such place be the principal place or not of such business or profession or of
such activity for charitable purpose, and require any proprietor, trustee, employee or
any other person who may at that time and place be attending in any manner to, or
helping in, the carrying on of such business or profession or such activity for charitable
purpose.

This power may be exercised:

(a) to afford him the necessary facility to inspect such books of account or other
documents as he may require and which
may be available at such place;
(b) to afford him the necessary facility to
check or verify the cash, stock or other valuable articles or things which may
be found therein; and
(c) to furnish such information as he may require as to any matter which may be
useful for or relevant to any proceeding under the Income-tax Act, 1961.
This power may be exercised in respect of any place with which the assessee is
connected, whether or not such place is the principal place of business or profession
or activity for charitable purpose. It will also include any other place, whether any
business or profession or activity for charitable purpose is carried on therein or not, in
which the person carrying on the business or profession or activity for charitable
purpose states that any of his books of account or other valuable article or thing
relating to his business or profession or activity for charitable purpose are kept.
(ii) Permitted time for conduct of survey [Section 133A(2)]: The income-tax authority
may enter any place of business or profession
mentioned above only during the hours at which
such place is open for the conduct of business or
profession and in the case of any other place,
only after sunrise and before sunset.

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For example, if a place is open for business from 11 a.m. to 11 p.m., an income tax
authority may enter at 10 p.m. for survey operations. The survey can, however,
continue beyond 11 p.m.
(iii) Exercise of power of survey for verification of TDS/TCS [Section 133A(2A)]: An
income-tax authority may, for the purpose of verifying that tax has been deducted or
collected at source in accordance with the provisions of Chapter XVII-B or Chapter
XVII-BB, as the case may be, enter-
(a) any office, or a place where business or profession is carried on, within the
limits of the area assigned to him, or
(b) any such place in respect of which he is authorised for the purposes of this
section by such income-tax authority who is assigned the area within which
such place is situated, where books of account or documents are kept.
The income-tax authority may for this purpose
enter an office, or a place where business or
profession is carried on after sunrise and before
sunset. Further, such income-tax authority may
require the deductor or the collector or any other person who may at the time and
place of survey be attending to such work,—
(a) to afford him the necessary facility to inspect such books of account or other
documents as he may require and which may be available at such place, and
(b) to furnish such information as he may require in relation to such matter.
(iv) Permissible and impermissible acts while conducting survey [Section 133A(3)]:
An income-tax authority may -
(a) place marks of identification on the books of account or other documents
inspected by him and take extracts and copies thereof;
(b) impound and retain in his custody for
such period as he thinks fit any book of
account or other documents inspected by
him after recording reasons for doing so.
However, the income tax authority cannot retain in his custody such books of
account etc. for a period exceeding 15 days (excluding holidays) without obtaining
the approval of the Principal Chief Commissioner or Chief Commissioner or

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Principal Director General or Director General or the Principal Commissioner or

Commissioner or Principal Director or Director, as the case may be.
(c) make an inventory of any cash, stock or valuable article or thing checked or
verified by him; and
(d) record the statement of any person which may be useful for, or relevant to, any
proceeding under the Act.
However, while acting under sub-section (2A), the income-tax authority shall not
impound and retain in his custody, any books of account or documents inspected by
him or make an inventory of any cash, stock or other valuable articles or thing checked
or verified by him.
Any income-tax authority cannot remove or
cause to be removed from the place where he
has entered, any cash, stock or other valuable
article or thing [Section 133A(4)].
(v) Power to collect information and record statements in connection with any function,
ceremony or event [Section 133A(5)]: The income-tax authorities would also have the
power to collect information and record the statements of any of the persons concerned at
any time after any function, ceremony or event but even before the stage of
commencement of assessment proceedings for the following year for which the information
may be relevant, if they are of the opinion that having due regard to the nature, scale and
extent of the expenditure incurred, it is necessary or expedient to do so. This provision is
intended to help in collecting evidence about ostentatious expenditure incurred for any
function, etc., immediately after the event which may be used at the time of the
assessment.
(vi) Power to enforce compliance [Section 133A(6)]: If any person who is required to
provide facility to the income-tax authority to inspect the books of account or the other
documents or to check or verify any cash, stock or other valuable articles or to furnish
any information or to have his statement recorded, either refuses or evades do so, the
income-tax authority would be entitled to use all the powers vested in it under section
131(1) for enforcing proper compliance with the requirements.
(vii) Meaning of ‘proceeding’ [Clause (b) of Explanation to Section 133A]: For the
purpose of this section, “proceeding" means any proceeding under this Act in respect
of any year which may be pending on the date on which the powers under this section
are exercised or which may have been completed on or before such date and includes
also all proceedings under this Act which may be commenced after such date in
respect of any year.

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(viii) Meaning of “Income tax authority” and restriction to exercise the power under
this section [Clause (a) of Explanation to section 133A]:
“Income tax authority”, for the purpose of this section, means –
(i) a Principal Commissioner or Commissioner, a Principal Director or Director, a
Joint Commissioner or Joint Director, an Assistant Director or Deputy Director
or an Assessing Officer or a Tax Recovery Officer; and
(ii) includes an inspector of Income tax (only for the purpose of inspection of books
of account or other documents, placing marks of identification on such books
of account or other documents inspected by him and making or causing to be
made extracts or copies therefrom and recording statements from any person
in connection with any ceremony, function or event mentioned in section
133A(5) above).
who is subordinate to the Principal Director General or the Director General or the
Principal Chief Commissioner or the Chief Commissioner, as may be specified by the
Board.
All income-tax authorities have to take approval from Principal Director General or the
Director General or Principal Chief Commissioner or the Chief Commissioner in all
cases of survey.
(9) Power to collect certain information [Section 133B]
(i) Under this section, an income-tax authority may enter
- any building or place within its jurisdiction or

- any building or place which is occupied by any person in respect of whom the
said authority exercises jurisdiction

at which a business or profession is carried on for the purpose of collecting any

information which may be useful for or relevant for the purposes of the Act. It is not
necessary that such a place should be the principal place of the business or profession.

(ii) The authority may require any proprietor, employee or any other person who may at
the time and place be attending in any manner to or helping in carrying on such
business or profession to furnish such information as may be prescribed.

(iii) An income-tax authority may enter any place of business or profession referred to
above only during the hours at which such place is open for business.

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(iv) Such authority shall on no account remove or cause to be removed from the
building or place wherein he has entered any books of account or other valuable
articles or things.

(v) In this section, ‘income-tax authority’ means a Joint Commissioner, an Assistant

Director or Deputy Director or an Assessing Officer, and includes an Inspector of
Income-tax who has been authorised by the Assessing Officer to exercise the power
conferred under this section in relation to the area in respect of which the Assessing
Officer exercises jurisdiction or any part thereof.

(vi) Penalty under section 272AA for failure to furnish the prescribed information:
Fail to furnish the prescribed information as required as per section 133B would attract
penalty of upto ` 1000 under section 272AA. Such penalty is imposable by the joint
Commissioner or Assistant Director or Deputy Director or the Assessing Officer after
giving the person an opportunity of being heard in the matter.

(10) Prescribed income-tax authorities empowered to call for information [Section

133C]
(i) Section 133C enables the prescribed income-tax authority to verify the information in
its possession relating to any person, which may be useful for or relevant to any inquiry
or proceedings under this Act.

(ii) Under this section, for the purposes of verification of information in its possession
relating to any person, prescribed income-tax authority, may, issue a notice to such
person requiring him,
- on or before a date to be therein specified,
- to furnish information or documents,
- verified in the manner specified therein
- which may be useful for, or relevant to, any inquiry or proceeding under the Act.

(iii) The prescribed income-tax authority may process and utilise such information and
document in accordance with the provisions of section 135A empowering the Central
Government to make a scheme for faceless collection of information.

The Central Government has, vide Notification No. 137/2021 dated 13.12.2021 made
e-Verification Scheme, 2021 as empowered under section 135A.

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The prescribed income-tax authority under section 133C shall be an income-tax

authority not below the rank of Assistant Commissioner of Income-tax who has been
authorised by the CBDT to act as such authority for the purposes of the section.
(iv) The term “proceeding” means any proceeding under the Act in respect of any year
which may be pending on the date on which the
powers under this section are exercised or which
may have been completed on or before such date.
The term “proceeding” also includes all proceedings under the Income-tax Act, 1961
which may be commenced after such date in respect of any year.
(11) Power to inspect registers of companies [Section 134]: The Assessing Officer, the
Joint Commissioner or the Joint Commissioner (Appeals) or the Commissioner (Appeals), or
any person subordinate to him authorised in writing in this behalf by the Assessing Officer,
the Joint Commissioner or the Joint Commissioner (Appeals) or the Commissioner (Appeals),
as the case may be, may inspect and if necessary, take copies, or cause copies to be taken,
of any register of the members, debenture holders or mortgagees of any company or of any
entry in such register.
(12) Other powers [Sections 135 and 136]: The Principal Director General or Director
General or Principal Director or Director, the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner and the Joint Commissioner are
competent to make any enquiry under this act and for all purposes they shall have the powers
vested in an Assessing Officer in relation to the making of enquiries.
If the Investigating officer is denied entry into the premises, the said Officer shall have all the
powers vested in him under sections 131(1) and (2). All the proceedings before Income -tax
authorities are judicial proceedings for purposes of section 196 of the Indian Penal Code,
1860 (Bharatiya Nyaya Sanhita, 2023), and fall within the meaning of sections 193 and 228
of the Code.
An income-tax authority shall be deemed to be a Civil Court for the purposes of section 195
of the Criminal Procedure Code, 1973.
(13) Faceless collection of information [Section 135A]:
(i) Section 135A provides for faceless collection of information.
(ii) Section 135A(1) empowers the Central Government to make a scheme, by notification
in the Official Gazette, for the following purposes –

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calling for information u/s 133

collecting certain information u/s 133B

calling for information by prescribed income-tax authority u/s 133C

exercise of power to inspect register of companies u/s 134

exercise of power of Assessing Officer u/s 135

Scheme formulated u/s 135A

To impart greater efficiency,

transparency and
accountability
by

eliminating the interface optimising utilisation of introducing a team-

between the income-tax resources through based exercise of
authority or any other economies of scale and powers, including to call
person to the extent functional specialisation for, or collect, or process,
techonologically feasible utilise, the information,
with dynamic jurisdiction

(iii) For the purpose of giving effect to the scheme, section 135A(2) empowers the Central
Government to direct , by notification in the Official Gazette, that any of the provisions
of the Income-tax Act, 1961 would not apply or would apply with specified exceptions,
modifications and adaptations.
(iv) Section 135A(3) requires that every notification to be laid before each House of
Parliament, as soon as may be after notification is issued.
Accordingly, the Central Government has, vide Notification No. 137/2021 dated 13.12.2021
made e-Verification Scheme, 2021 3.

3To know the scheme in detail, please refer -

[Link]

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(14) Disclosure of information respecting assessees [Section 138]

(i) Under section 138(1)(a), the CBDT, or any other income-tax authority specified by it
by a general or special order, may furnish or cause to be furnished, any information
received or obtained by any income-tax authority, in the performance of his functions
under the Act which may be necessary for the purpose of enabling any officer, or
authority or body performing any function:
(a) under any law relating to the imposition of any tax, duty or cess or to dealings
in foreign exchange

(b) under any other law as the Central Government may notify in the Official
Gazette in the public interest.
As per section 138(1)(b), if a person makes an application in accordance with Rule
113 of the Income-tax Rules, 1962 to the Principal Chief Commissioner or Chief
Commissioner or the Principal Commissioner or Commissioner of Income-tax in the
prescribed form for obtaining any information relating to any assessee received or
obtained by any income-tax authority in the performance of his functions under the
Income-tax Act, 1961, the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner, may, if he is satisfied that it is in the public
interest, furnish or cause to be furnished the information asked for. His decision in this
regard cannot be called in question in any court of law.
(ii) Nevertheless, section 138(2) empowers the Central Government to direct, having
regard to practice and usage customary or otherwise, and any other relevant factors,
that no information or documents shall be furnished or produced by a public servant
in respect of such matters relating to a particular class of assessees or except to
certain authorities which may be specified.
For instance, in exercise of the powers conferred by section 138(2), the Central
Government having regard to all the relevant factors, has directed, vide Notification
No.56/2016 dated 6.7.2016, that no public servant shall produce before any person or
authority any such document or record or any information or computerised data or part
thereof as comes into his possession during the discharge of official duties in respect
of a valid declaration made under the Income Declaration Scheme, 2016’, contained
in Chapter IX of the Finance Act, 2016.

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SIGNIFICANT SELECT CASES

S. Case Law
No.
1. CIT and Anr v. SV Gopala and Others (2017) 396 ITR 694 (SC)
Issue Decision
Does the CBDT have the The CBDT does not have the power to amend legislative provisions
power to amend in exercise of its powers u/s 119 of the Income-tax Act, 1961 by
legislative provisions issuing a Circular.
through a Circular?
2. Hemant Kumar Sindhi & Another v. CIT (2014) 364 ITR 555 (All)
Issue Analysis & Decision
Can the assessee’s Consequent to a search in the premises of the assessee, some
application, for adjustment gold bars were seized from the locker. The assessee voluntarily
of tax liability on income disclosed some income during the course of search. The
surrendered during assessee filed an application for sale of the gold bars and
search by sale of seized adjustment of tax liability on undisclosed income out of the
gold bars, be entertained sale proceeds. This would obviate his liability to pay interest
where assessment has under sections 234B and 234C.
not been completed? Section 132B(1)(i) uses the expression “the amount of any
existing liability” and “the amount of the liability determined”.
The words “existing liability” postulates a liability that is
crystallized by adjudication; Likewise, “a liability is determined”
only on completion of the assessment. Until the assessment
is complete, it cannot be postulated that a liability has been
crystallized.
As per the first proviso to section 132B(1)(i), the assessee may
make an application to the Assessing Officer for release of the
assets seized. However, he has to explain the nature and
source of acquisition of the asset to the satisfaction of the
Assessing Officer. It is not the ipse dixit of the assessee but
the satisfaction of the Assessing Officer on the basis of the
explanation tendered by the assessee which is material.
Only when the liability is determined on the completion of
assessment that it would stand crystallized and in pursuance
of which a demand can be raised and recovery can be
initiated. Therefore, in the present case, the first proviso to section
132B(1)(i) would not be attracted.

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3. Kathiroor Service Co-operative Bank Ltd. v. CIT (CIB) (2014) 360 ITR 0243 (SC)
Issue Analysis & Decision
Where no proceeding is The Assessing Officer has been empowered to requisition
pending against a information which will be useful for or relevant to any enquiry or
person, can the proceeding under the Income-tax Act, 1961 in the case of any
Assessing Officer call person. However, an income-tax authority below the rank of the
for information under Principal Director or Director or Principal Commissioner or
section 133(6), which is Commissioner can exercise this power in respect of an enquiry in
useful or relevant to any a case where no proceeding is pending, only with the prior approval
enquiry, with the of the Principal Director or Director or Principal Commissioner or
permission of Director or Commissioner.
Commissioner? Note – The power in respect of an inquiry, in a case where no
proceeding is pending, can, however, be exercised by the
Joint Director, Deputy Director and Assistant Director, without
the prior approval of the Principal Director/Director/Principal
Commissioner/Commissioner.

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TEST YOUR KNOWLEDGE

Questions
1. ABC Ltd. regularly files its return of income electronically. While trying to upload return of
income for assessment year 2025-26 on 31st October, 2025, ABC Ltd found it extremely
difficult to do the same due to network problems and ultimately, became successful in making
e-filing of its return only at 1 a.m. on 1 st November,2025. The return contained a claim for
carry forward of business loss of ` 3.10 crores. This circumstance was recorded in an e-mail
addressed to the competent income-tax authority on 1 st November, 2025. ABC Ltd. made a
request to the Principal Chief Commissioner of Income-tax (PCCIT) for condonation of delay
in filing return of income.
Discuss whether the PCCIT has the power to condone the delay in filing the return of income
and permit carry forward of loss in the given circumstance.
2. Examine the correctness of the statement “the jurisdiction of an Assessing Officer cannot be
objected by the assessee”.
3. The Director General of Income-tax after getting the information that Mr. Mogambo is in
possession of unaccounted cash of ` 50 lakhs, issued orders by invoking powers vested in
him as per section 131(1A), for its seizure. Is the order for seizure of cash issued by the
Director General of Income-tax correct? If not, does the Director General of Income-tax have
any other power to seize such cash?
4. The premises of Ganesh were subjected to a search under section 132 of the Act. The search
was authorized and the warrant was signed by the Joint Commissioner of Income -tax having
jurisdiction over the assessee, consequent to information in his possessi on. The assessee
challenged the validity of search on the ground that section 132(1) does not empower Joint
Commissioner to authorise a search under the Act. Decide the correctness of the contention
raised by the assessee.
5. Examine whether the information regarding possession of unexplained assets and income
received from the Central Bureau of Investigation, a Government agency, can constitute
“information” for action under section 132. Discuss.
6. Cash of ` 25 lakhs was seized on 12.9.2025 in a search conducted as per section 132 of the
Act. The assessee moved an application on 27.10.2025 to release such cash after explaining
the sources thereof, which was turned down by the department. The assessee seeks your
opinion on the following issues:
(i) Can the department withhold the explained money?

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(ii) If yes, then to what extent and upto what period?

7. The business premises of Ram Bharose Ltd. and the residence of two of its directors at Delhi
were searched under section 132 by the DDI, Delhi. The search was concluded on 9.8.2025
and following were also seized besides other papers and records:
(i) Papers found in the drawer of an accountant relating to Shri Krishna Ltd., Mumbai
indicating details of various business transactions. However, Ram Bharose Ltd. is not
having any direct or indirect connection of any nature with these transactions and S hri
Krishna Ltd., Mumbai and its directors.
(ii) Jewellery worth ` 5 lakhs from the bed room of one of the directors, which was claimed
by him to be of his married daughter.

(iii) Papers recording certain transactions of income and expenses having direct nexus
with the business of the company for the period from 16.4.2020 to date of search. It
was admitted by the director that the transactions recorded in such papers have not
been incorporated in the books.
You are required to answer on the basis of aforesaid and the provisions of Act, following
questions:

(a) What action the DDI shall be taking in respect of the seized papers relating to Shri
Krishna Ltd., Mumbai?
(b) Whether the contention raised by the director as to jewellery found from his bed -room
will be acceptable?
(c) What presumption shall be drawn in respect of the papers which indicate transactions
not recorded in the books?
8. In the course of search on 25.03.2026, assets were seized. Examine the procedure laid down
to deal with such seized assets under the Act.

Answers
1. Section 119(2)(b) empowers the CBDT to authorise any income tax authority to admit an
application or claim for any exemption, deduction, refund or any other relief under the Act
after the expiry of the period specified under the Act, to avoid genuine hardship in any case
or class of cases. The claim for carry forward of loss in case of late filing of a return is relatable
to a claim arising under the category of “any other relief available under the Act”. Therefore,
CBDT has the power to condone delay in filing of such loss return due to genuine reasons.

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The facts of the case are similar to the case of Lodhi Property Company Ltd. v. Under
Secretary, (ITA-II), Department of Revenue (2010) 323 ITR 0441, where the Delhi High Court
held that the Board has the power to condone the delay in case of a return which was filed
late and where a claim for carry forward of losses was made. The delay was only one day
and the assessee had shown justifiable reason for the delay of one day in filing the return of
income. If the delay is not condoned, it would cause genuine hardship to the assessee.
Therefore, the Court held that the delay of one day in filing of the return had to be condoned.
The CBDT has, vide Circular No. 11/2024 dated 1.10.2024, specified the monetary limits
along with following authorities to be approached for this purpose.
Quantum of claim Concerned Income-
tax Authority
Where the claim is upto ` 1 crore for one A.Y. Principal CIT or CIT
Where the claim is above ` 1 crore but upto ` 3 crores for any one CCIT
A.Y.
Where the claim is above ` 3 crores for any one A.Y. Principal CCIT

Applying the rationale of the above court ruling and the clarification given in CBDT Circular
to the case on hand, the Principal CCIT has the power to condone the delay in filing the return
of income of ABC Ltd. and permit carry forward of business loss of ` 3.10 crores, since the
delay of one hour was due to a genuine and justifiable reason i.e., network problem while e-
filing the return.

2. According to section 124(3), the assessee can raise a question as to the jurisdiction of an
Assessing Officer within the prescribed time limit as under:

(i) where a return has been filed under section 139(1) then, within one month from the
date of service of notice under section 142(1) or section 143(2) or before the
completion of assessment, whichever is earlier.

(ii) where no return has been filed, then, within the expiry of time allowed by the notice
under section 142(1) or section 148 for filing the return or within the time allowed in
show cause notice issued seeking as to why a best judgment assessment under
section 144 should not be made, whichever is earlier.

(iii) where search is initiated under section 132 or books of accounts, other documents or
any assets are requisitioned under section 132A, within one month from the date on

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which he was served with a notice under section 153A(1) or 153C(2) 4 or before the
completion of assessment, whichever is earlier.

Where the assessee calls in question the jurisdiction of an Assessing Officer and the
Assessing Officer is not satisfied with such claim, he shall refer the matter for determination
by the Principal Director General or Director General or Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner before the assessment is made.

Therefore, in view of the above provisions, the statement that “the jurisdiction of an Assessing
Officer cannot be objected by the assessee” is not correct.

3. The powers under section 131(1A) deal with power of discovery and production of evidence.
They do not confer the power of seizure of cash or any asset. The Director General, for the
purposes of making an enquiry or investigation relating to any income conc ealed or likely to
be concealed by any person or class of persons within his jurisdiction, shall be competent to
exercise powers conferred under section 131(1), which confine to discovery and inspection,
enforcing attendance, compelling the production of books of account and other documents
and issuing commissions. Thus, the power of seizure of unaccounted cash is not one of the
powers conferred on the Director General under section 131(1A).

However, under section 132(1), the Director General has the power to authorize any
Additional Director or Additional Commissioner or Joint Director or Joint Commissioner etc.
to seize money found as a result of search [Clause (iii) of section 132(1)], if he has reason to
believe that any person is in possession of any money which represents wholly or partly
income which has not been disclosed [Clause (c) of section 132(1)]. Therefore, the proper
course open to the Director General is to exercise his power under section 132(1) and
authorize the Officers concerned to enter the premises where the cash is kept by Mr.
Mogambo and seize such unaccounted cash.

4. Under section 132(1), the income-tax authorities listed therein are empowered to authorise
other income-tax authorities to conduct search and seizure operations. The authorities
empowered to issue authorisation include such Additional Director, Additional Commissioner,
Joint Director and Joint Commissioner as are empowered by the CBDT to do so.

4Section 153A deals with assessment in case of search, initiated under section 132 or books of accounts
or other documents or any assets requisitioned under section 132A before 1.4.2021.

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However, a Joint Commissioner can issue warrant of authorisation only if he has been
specifically empowered to do so by the CBDT. Therefore, only if the Joint Commissioner has
not been specifically empowered by the CBDT to do so, the contention of the assessee would
hold good. If the Joint Commissioner has been duly empowered by the CBDT, then the
contention raised by the assessee would not be valid.
5. As per section 132(1)(c), authorisation for search and seizure can take place if the authority,
in consequence of information in his possession, has reason to believe that any person is in
possession of money, bullion, jewellery or other valuable article or thing and these assets
represent, either wholly or partly, income or property which has not been, or would not be
disclosed by such person for the purposes of this Act. In the absence of such information, a
search cannot be validly authorised.

The Apex Court in UOl v Ajit Jain [2003] 260 ITR 80 has held that mere intimation by the CBI
that money was found in the possession of the assessee, which according to the CBI was
undisclosed, without something more, does not constitute “information” within the meaning of
section 132, on the basis of which a search warrant could be issued. Consequently, the
Supreme Court held that the search conducted on this basis and the assessment made
pursuant to such search was not valid.

6. The proviso to section 132B(1)(i) provides that where the person concerned makes an
application to the Assessing Officer, within 30 days from the end of the month in which the
asset was seized, for release of the asset and the nature and source of acquisi tion of the
asset is explained to the satisfaction of the Assessing Officer, then, the Assessing Officer
may, with the prior approval of the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner, release the asset after recovering the existing
liability under the Income-tax Act, 1961, etc. out of such asset. ‘Existing liability’, however,
does not include advance tax payable. Such asset or portion thereof has to be released within
120 days from the date on which the last of the authorisations for search under section 132
was executed.

In this case, since the application was made to the Assessing Officer within 30 days from the
end of the month in which search was conducted, the department may retain only the amount
of existing liability, if any, and the balance may have to be released within 120 days from the
date on which the last of the authorisations for search under section 132 was executed.

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 14.46 DIRECT TAX LAWS

Note: It may be noted that one of the conditions mentioned above for release of an asset is
that the nature and source of acquisition of the asset should be explained to the satisfaction
of the Assessing Officer. However, in this case, it has been given that th e assessee’s
application for release of the asset, explaining the sources thereof, was turned down by the
Department. If the application was turned down by the Department due to the reason that it
was not satisfied with the explanation given by the assessee as to the nature and source of
acquisition of the asset, then, the asset (in this case, cash) cannot be released, since the
condition mentioned above is not satisfied.

7. (a) The authorised officer being DDI, Delhi is not having any jurisdiction over Shri Krishna
Ltd., Mumbai, and therefore, as per section 132(9A), the papers seized relating to this
company shall be handed over by him to the Assessing Officer having jurisdiction over
Shri Krishna Ltd., Mumbai within a period of 60 days from the date on which the last
of the authorisations for search was executed for taking further necessary action
thereon.

(b) The contention raised by the Director will not be acceptable because as per the
provisions of sub-section (4A)(i) of section 132, where any books of account, other
documents, money, bullion, jewellery or other valuables are found in the possession
or control of any person in the course of search, then, in respect thereof, it may be
presumed that the same belongs to that person.

(c) As per section 132(4A), the presumptions in respect of the papers, indicating
transactions not recorded in the books but having direct nexus with the business of
the company, are that the same belong to the company, contents of such papers are
true and the handwriting in which the same are written is/are of the persons(s) whose
premises have been searched.

8. Section 132B of the Income-tax Act, 1961 deals with the application of assets seized under
section 132. Such assets will be first applied towards the existing liability under the Income -
tax Act, 1961, etc. ‘Existing liability’, however, does not include advance tax payable. Further,
the amount of liability determined on completion of assessment or reassessment or
recomputation pursuant to search or completion of the assessment under block assessment
of search cases (including any penalty levied or interest payable in connection with such
assessment) and in respect of which the assessee is in default or deemed to be in default,
may be recovered out of such assets.

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Where the nature and source of acquisition of such seized assets is explained to the
satisfaction of the Assessing Officer, the amount of any existing liability mentioned above
may be recovered out of such asset and the remaining portion, if any, of the as set may be
released, with the prior approval of the Principal Chief Commissioner or Chief Commissioner
or Principal Commissioner or Commissioner, as the case may be. The release must be made
within 120 days from the date on which the last of the authorisations for search under section
132 or for requisition under section 132A was executed. The assets would be released to
the person from whose custody they were seized.

When the assets consist of solely of money, or partly of money and partly of other assets, the
Assessing Officer may apply such money in the discharge of the liabilities referred to above
and the assessee shall be discharged of such liability to the extent of the money so applied.
However, the assets other than money may also be applied for the discharge of such liabilities
if the complete recovery could not be made from the money seized or the money seized was
not sufficient.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER a
15
7
ASSESSMENT PROCEDURE

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ appreciate when return filing becomes mandatory for different persons;
❑ identify and recall the due dates for filing of return in case of such
persons;
❑ comprehend and apply the provisions relating to belated return, revised
return and defective return;
❑ appreciate the statutory provisions relating to special audit directed by
the Assessing Officer;
❑ appreciate the procedure for assessment (including faceless
assessment) – self-assessment, summary assessment, scrutiny
assessment and best judgement assessment;
❑ appreciate the circumstances when the Assessing Officer can issue
notice for reassessment of income and the time limit for issuance of such
notice;
❑ know and recall the time limits for completion of assessments;
❑ appreciate the provisions for rectification of mistake apparent from the
record.
 15.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Filing of return of income [Section 139]

- ROI on or before due date [Section 139(1)]
- Loss returm [Section 139(3)] Permanent Account Quoting of Aadhaar
- Belated return [Section 139(4)] Number Number
- Revised Return [Section 139(5)] [Section 139A] [Section 139AA]
- Updated Return [Section 139(8A)]

Persons authorised
to verify Return of Self-assessment Provisions contained Assessment
Income [Section 140A] under section 142 [Section 143]
[Section 140]

Best Judgement Faceless Reference to Dispute Income Escaping

Assessment Assessment [Section Resolution Panel Assessment
[Section 144] 144B] [Section 144C] [Sections 147 to 151]

Time limits for

Assessment for Other Provisions Rectification of
completion of
Search Cases [Section 152] Mistake
assessments
[Chapter XIV-B] [Section 154]
[Section 153]

Faceless rectification,
amendments and
Other amendments Notice of Demand Intimation of loss
issuance of notice or
[Section 155] [Section 156] [Section 157]
intimation
[Section 157A]
 ASSESSMENT PROCEDURE 15.3
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15.1 RETURN OF INCOME

The Income-tax Act, 1961 contains provisions for filing of return of income. Return of income is the
format in which the assessee furnishes information as to his total income and tax payable. The
format for filing of returns by different assessees is notified by the CBDT. The particulars of income
earned under different heads, gross total income, deductions from gross total income, total income
and tax payable by the assessee are generally required to be furnished in a return of income. In
short, a return of income is the declaration of income by the assessee in the prescribed format.

15.1.1 Compulsory filing of return of income [Section 139(1)]

(1) As per section 139(1), it is compulsory for companies
and firms to file a return of income or loss for every
previous year on or before the due date in the prescribed
form.

(2) A return of income or loss for the previous year in the

prescribed form and verified in the prescribed manner on
or before the due date, has to be filed by every person,
being a resident other than not ordinarily resident in India within the meaning of section 6(6),
who is not required to furnish a return under section 139(1) if such person, at any time during
the previous year –

(a) holds, as a beneficial owner or otherwise, any asset (including any financial interest in
any entity) located outside India or has a signing authority in any account located
outside India; or

(b) is a beneficiary of any asset (including any financial interest in any entity) located
outside India.

However, an individual being a beneficiary of any asset (including any financial interest in
any entity) located outside India would not be required to file return of income, where, income,
if any, arising from such asset is includible in the income of the person referred to in (a) above
in accordance with the provisions of the Income-tax Act, 1961.
 15.4 DIRECT TAX LAWS

Meaning of “beneficial owner” and “beneficiary” in respect of an asset for the purpose of
section 139:

An individual who has provided, directly or

Beneficial Owner indirectly, consideration for the asset for the
immediate or future benefit, direct or indirect, of
himself or any other person.

An individual who derives benefit from the asset

Beneficiary during the previous year and the consideration for
such asset has been provided by any person,
other than such beneficiary.

Requirement of filing of return of income as per the fourth and fifth proviso to section 139(1)

A resident other than not ordinarily resident within the

meaning of section 6(6)

Who is not required to furnish a return of income

u/s 139/(1)
AND
Who at any time during the P.Y.

A B

is a beneficiary of any asset

has a signing authority (including financial interest in
holds, as beneficial owner any entity) located outside
or otherwise, any asset OR in any account located
India
(including financial interest outside India
in any entity) located
outside India

However, where any income arising from such asset is includible in the hands of the person specified
in (A) in accordance with the provisions of the Act, an individual, being a beneficiary of such asset, is
not required to file return of income.
 ASSESSMENT PROCEDURE 15.5
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(3) Further, every person, being an individual or a HUF or an AOP or BOI or an artificial
juridical person -
− whose total income or the total income of any
other person in respect of which he is assessable under
this Act during the previous year
− without giving effect to the exemption provisions
contained in sections 54/54B/54D/ 54EC/54F/54G/54GA in
respect of capital gains or deductions under Chapter VI-A
− exceeds the basic exemption limit

is required to file a return of his income or income of such

other person on or before the due date.

For the A.Y. 2026-27, the basic exemption limit is ` 4,00,000 for individuals/HUF/AOPs/BOIs
and artificial juridical persons under the default regime under section 115BAC. These
amounts denote the level of total income, which is arrived at after claiming the admissible
deductions under Chapter VI-A, i.e., 80CCD(2), 80CCH(2) and 80JJAA under default regime
and exemption under section 54/54B/54D/54EC/54F/54G/54GA in respect of capital gain.
However, the level of total income to be considered for the purpose of filing a return of income
is the income before claiming the admissible deductions under Chapter VI-A and exemption
under section 54/54B/54D/54EC/54F/54G/54GA.
However, where the assessee being an individual/HUF/AOPs/BOIs and artificial juridical
persons have exercised the option of shifting out of the default tax regime provided under
section 115BAC(1A), the basic exemption limit would be ` 2,50,000 for individuals/HUFs/
AOPs/BOIs and artificial juridical persons, ` 3,00,000 for resident individuals of the age of 60
years or more but less than 80 years and ` 5,00,000 for resident individuals of the age of 80
years or more at any time during the previous year. These amounts denote the level of total
income, which is arrived at after claiming exemption under sections 54/54B/54D/54EC/
54F/54G/54GA in respect of capital gains and the admissible deductions under Chapter VI-A.
However, the level of total income to be considered for the purpose of filing a return of income
is the income before claiming exemption under sections 54/54B/54D/54EC/54F/54G/54GA in
respect of capital gains and the admissible deductions under Chapter VI-A.
(4) Any person other than a company or a firm, who is not required to furnish a return under
section 139(1), would have to file income-tax return in the prescribed form and manner on or
before the due date if, during the previous year, such person –
 15.6 DIRECT TAX LAWS

(a) has deposited an amount or aggregate of the amounts exceeding ` 1 crore in one or
more current accounts maintained with a banking company or a co-operative bank; or
(b) has incurred expenditure of an amount or aggregate of the amounts exceeding
` 2 lakh for himself or any other person for travel to a foreign country; or
(c) has incurred expenditure of an amount or aggregate of the amounts exceeding
` 1 lakh towards consumption of electricity; or
(d) fulfils such other prescribed conditions.
Accordingly, CBDT, vide Notification No. 37/2022 dated 21.4.2022, inserted Rule 12AB
stating the conditions wherein any person other than a company or a firm, who is not required
to furnish a return under section 139(1), would have to file
income-tax return in the prescribed form and manner on
or before the due date if, during the previous year:
(i) his total sales, turnover or gross receipts, as the
case may be, in the business exceed ` 60 lakh;
or
(ii) his total gross receipts in profession exceed ` 10 lakh; or
(iii) the aggregate of tax deducted at source and tax collected at source during the
previous year, in the case of the person, is ` 25,000 or more (in the case of a resident
individual who is aged ≥ 60 years at any time during the relevant P.Y, the limit will
be ` 50,000 or more); or
(iv) the deposit in one or more savings bank accounts
of the person, in aggregate, is ` 50 lakh or more.
(5) Meaning of due date: ‘Due date’ means -
Assessee Due Date
(i) Where the assessee, other than an 31st October of the assessment
assessee referred to in clause (ii), is - year
(a) a company,
(b) a person (other than a company) whose
accounts are required to be audited
under the Income-tax Act, 1961 or any
other law in force; or
(c) a partner of a firm whose accounts are
required to be audited under the
 ASSESSMENT PROCEDURE 15.7
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Income-tax Act, 1961 or any other law

for the time being in force or the spouse
of such partner if the provisions of
section 5A applies to such spouse.
(ii) in the case of an assessee including the 30th November of the assessment
partners of the firm or the spouse of such year
partner (if the provisions of section 5A
applies to such spouse), being such
assessee who is required to furnish a report
referred to in section 92E.
(iii) in the case of any other assessee. 31st July of the assessment year

(6) Apportionment of income between spouses governed by Portuguese Civil Code

[Section 5A]
Where the husband and wife are governed by the system of community of property (known
under the Portuguese Civil Code of 1860 as "COMMUNIAO DOS BENS") in force in the State
of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu :
• Income under the head “Salaries”: Where the husband or, as the case may be, the
wife governed by the aforesaid system of community of property has any income under
the head "Salaries", such income shall be included in the total income of the spouse
who has actually earned it [Section 5A(2)]

• Income under any head of income (other than under the head "Salaries"): The
income of the husband and of the wife under any head of income shall not be assessed
as that of such community of property (whether treated as an association of persons
or a body of individuals), but such income of the husband and of the wife under each
head of income (other than under the head "Salaries") shall be apportioned equally
between the husband and the wife and the income so apportioned shall be included
separately in the total income of the husband and of the wife respectively, and the
remaining provisions of this Act shall apply accordingly [Section 5A(1)]

15.1.2 Interest for default in furnishing return of income

[Section 234A]
(1) Interest under section 234A is attracted for failure to file a return
of income on or before the due date mentioned above, i.e. interest
is payable where an assessee furnishes the return of income after
the due date or does not furnish the return of income.
 15.8 DIRECT TAX LAWS

(2) Simple interest@1% per month or part of the month is payable for the period commencing
from the date immediately following the due date and ending on the following dates -
Circumstances Ending on the following dates
Where the return is furnished after the the date of furnishing of the return
due date
Where no return is furnished the date of completion of assessment

(3) The interest has to be calculated on the amount of tax on total income as determined under
section 143(1) or on regular assessment, as reduced by the advance tax paid, any tax
deducted or collected at source, any relief of tax allowed under section 89/90/90A/91 and any
tax credit allowed to be set-off in accordance with section 115JAA or 115JD.

Note – For detailed understanding of section 234A, refer to Chapter 13: Tax deduction, collection
and recovery of tax of this module.

15.1.3 Specified class or classes of persons to

be exempted from filing return of income [Section
139(1C)]
(1) Persons required to furnish return of income: Every person who falls within the ambit of
the conditions mentioned under section 139 has to furnish a return of his income on or before
the due date specified under section 139(1).
(2) Exemption from filing return of income: To reduce the compliance burden of certain types
of taxpayers, the Central Government has been
empowered to notify the class or classes of persons who
will be exempted from the requirement of filing of return of
income, subject to satisfying the prescribed conditions. Accordingly, the Central Government
has, vide Notification No.55/2019 dated 26.7.2019 and Notification No. 49/2023 dated
14.7.2023, exempted non-corporate non-residents and foreign companies, having any
income chargeable under the Income-tax Act, 1961 during a previous year from any
investment fund set up in an International Financial Services Centre (IFSC) located in
India, from the requirement of furnishing a return of income under section 139(1) from
A.Y.2019-20 onwards:
 ASSESSMENT PROCEDURE 15.9
a

Exemption from the requirement of

Exemption from filing return of income
furnishing a return of income would not
would be available to such notified
be available to such notified class of
class of persons only if
persons

• any income-tax due on income of the • where a notice under section 142(1) or
said class of persons has been section 148 or section 153A or section
deducted at source and remitted to the 153C [relevant in respect of search
Central Government by the investment initiated or books of accounts
fund at the tax-rate in force as per requistioned on or before 31.3.2021]
provisions of section 194LBB; and has been issued for filing a return of
• there is no other income during the income for the assessment year
previous year for which the said class of specified therein to such notified class
persons, is otherwise liable to file the of persons
income-tax return.

Meaning of Investment fund

• any fund established or incorporated in India in the form of a trust or a
company or a limited liability partnership or a body corporate which has
been granted a certificate of registration as a Category I or Category II
Alternative Investment Fund (AIF) and is regulated under the SEBI (AIF)
Regulations, 2012 or regulated under the IFSC Authority (Fund
Management) Regulations, 2022.

The Central Government has, vide Notification No. 119/2021 dated 11.10.2021, also
exempted the following class of persons mentioned in column (2) of the Table below, subject
to the conditions specified in column (3) of the said Table, from the requirement of furnishing
a return of income under section 139(1) from the assessment year 2021-22 onwards:
S. Class of Persons Conditions
No.
(1) (2) (3)
1. (i) Non-corporate The said class of person should not earn any income in
non-resident; India, during the previous year, other than the income from
or investment in the specified fund referred to in sub-clause
(ii) a foreign (i) of clause (c) of Explanation to section 10(4D).
company. The provisions of section 139A are not applicable to the
said class of persons subject to fulfillment of the conditions
mentioned in Rule 114AAB(1) [Read discussion under
section 139A in this chapter]
[Refer Chapter 2: Non-resident Taxation in Module 4 for
detailed reading of section 10(4D)]
 15.10 DIRECT TAX LAWS

2. a non-resident, (i) The said class of persons, during the previous year,
being an eligible has made transaction only in capital asset referred
foreign investor. to in section 47(viiab) (bonds or GDRs under
section 115AC, rupee denominated bonds of an
Indian company, derivative and other notified
securities) which are listed on a recognised stock
exchange located in any International Financial
Services Centre and the consideration on transfer
of such capital asset is paid or payable in foreign
currency;
(ii) The said class of persons does not earn any
income in India, during the previous year, other
than the income from transfer of capital asset
referred to in section 47(viiab) (bonds or GDRs
under section 115AC, rupee denominated bonds of
an Indian company, derivative and other notified
securities); and
(iii) The provisions of section 139A are not applicable
to the said class of persons subject to fulfillment of
the conditions mentioned in Rule 114AAB(2A)
(Read discussion under section 139A in this
Chapter).

15.1.4 Return of Loss [Section 139(3)]

(1) Return of loss: This section requires the assessee to file a return of loss in the same manner
as in the case of return of income within the time allowed under section 139(1).
(2) Compulsory filing return of loss on or before the due date to carry forward and set-off
certain losses: Section 80 requires mandatory filing of return of loss under section 139(3)
on or before the due date specified under section
139(1) for carry forward of the following losses -
(a) Business loss under section 72(1)
(b) Speculation business loss under section 73(2)

(c) Loss from specified business under section 73A(2)

(d) Loss under the head “Capital Gains” under section 74(1)
(e) Loss from the activity of owning and maintaining race horses under section 74A(3)
Consequently, section 139(3) requires the filing of a return of loss mandatorily within the time
allowed under section 139(1) for claiming carry forward of the losses mentioned in (2) above.
 ASSESSMENT PROCEDURE 15.11
a

However, loss under the head “Income from house property” under section 71B and
“unabsorbed depreciation” under section 32 can be carried forward for set-off even though
return of loss has not been filed before the due date.
(3) Non-receipt of a notice from the Assessing Officer to file a return not a valid excuse: A
return of loss has to be filed by the assessee in his own interest, and the non-receipt of a
notice from the Assessing Officer requiring him to file the return cannot be a valid excuse
under any circumstances for the non-filing of such return.

15.1.5 Belated Return [Section 139(4)]

(1) Furnishing of belated return of income: Any person who has not furnished a return within
the time allowed to him under section 139(1), may furnish the return for any previous year at
any time -
(i) before three months prior to the end of the relevant assessment year (i.e.,
31.12.2026 for P.Y. 2025-26); or
(ii) before the completion of the assessment,
whichever is earlier.
Thus, a belated return can be filed only in case a
person has not furnished his return within the time allowed under section 139(1).
(2) Consequences of filing a belated return:
(i) Certain losses computed under specified sections (refer to para (2) of 15.5 above)
cannot be carried forward for set-off in the subsequent years.
(ii) Interest under section 234A for the delay in furnishing the return shall be leviable.
(iii) Fee of ` 5,000 under section 234F would be leviable where return is filed after the due
date. However, the late fee shall not exceed ` 1,000 where the total income does not
exceed ` 5,00,000.
(iv) Further, as per section 80AC, deductions in respect of certain incomes under Chapter
VI-A [Heading C- Deduction in respect of certain incomes] would not be available.
(v) Additionally, no deduction under section 10AA shall be available to an eligible unit
established in SEZ if it fails to furnish its return of income on or before the due date.
(vi) Assessee can not opt out of default tax regime under section 115BAC while filing a
belated return, i.e., he/she/it has to file a belated return by paying taxes as per default
tax regime only.
 15.12 DIRECT TAX LAWS

15.1.6 Return of Income of Charitable Trusts and Institutions

[Section 139(4A)]
(1) Person required to furnish return under section 139(4A): Every person in receipt of income -
(i) derived from property held under a trust or any other legal obligation wholly or partly
for charitable or religious purposes; or
(ii) by way of voluntary contributions on behalf of
such trust or institution
must furnish a return of income if the total income in respect of which he is assessable as a
representative assessee (computed before allowing any exemption under sections 11 and
12) exceeds the basic exemption limit.
Such persons should furnish the return in the prescribed form and verif y in the prescribed
manner, containing all the particulars prescribed for this purpose.
(2) Return filed by the representative-assessee: This return must be filed by the
representative-assessee voluntarily within the time limit. Any failure on the part of the
assessee would attract liability to pay interest, fees, and a penalty.
(3) Due date for filing return of income in case books of account are required to be audited: It
may be noted that a charitable trust or other legal obligation is required to get its accounts audited
when its income before claiming exemption under sections 11 and 12 exceeds basic exemption
limit. In such a case, the due date would be 31st October of the relevant assessment year.

15.1.7 Return of Income of Political Parties [Section 139(4B)]

(1) Political party required to furnish return of income under section 139(4B): Under this
section, the Chief Executive Officer of the political party is statutorily required to file a return
of income of the political party if, before claiming exemption under section 13A, the political
party has income exceeding the basic exemption limit.
The return must be filed in the prescribed form and verified in the prescribed manner setting
forth such other particulars as may be prescribed by
the CBDT. The provisions of the Act would apply as
if it were a return required to be furnished under
section 139(1).
(2) Furnishing of return mandatory to claim exemption under section 13A: The grant of
exemption from income-tax to any political party under section 13A is subject to the condition
 ASSESSMENT PROCEDURE 15.13
a

that the political party submits a return of its total income within the time limit prescribed under
section 139(1) and gets the accounts audited.
(3) Due date for filing return of income: Since the audit of accounts is mandatory for the
political party for claiming exemption under section 13A, the due date for filing of return of
income would be 31st of October of the relevant assessment year.

15.1.8 Mandatory filing of returns by research associations,

news agency, trade unions, etc. [Section 139(4C)]
(1) It will be mandatory for the following institutions/associations/persons etc. to file the return of
income if their total income without giving effect to exemption under respective clauses of
section 10, exceeds the basic exemption limit –

Institution/Association/Persons etc. Applicable section

(a) Research association 10(21)
(b) News agency 10(22B)
(c) Association or institution 10(23A)
(d) Fund for the welfare of employees or their dependents 10(23AAA)
(e) Institution 10(23B)
(f) Fund or institution 10(23C)(iv)
(g) Trust or institution 10(23C)(v)
(h) University or other educational institution 10(23C)(vi)/(iiiad)/(iiiab)
(i) Hospital or other medical institution 10(23C)(via)/(iiiae)/(iiiac)
(j) Mutual Fund 10(23D)
(k) Securitisation Trust 10(23DA)
(l) Investor Protection Fund 10(23EC)/(23ED)
(m) Core Settlement Guarantee Fund 10(23EE)
(n) Venture Capital Company/Venture Capital Fund 10(23FB)
(o) Trade Union/association 10(24)(a)/(b)
(p) Board or Authority 10(29A)
(q) Body or Authority or Board or Trust or Commission 10(46)
(r) Infrastructure Debt Fund 10(47)
 15.14 DIRECT TAX LAWS

(2) Such return of income should be in the prescribed form and verified in the prescribed manner
and setting forth such other particulars as may be prescribed.
(3) Then, the provisions of the Act would apply as if it were a return required to be furnished
under section 139(1).

15.1.9 Mandatory filing of returns by universities, colleges etc.

[Section 139(4D)]
(1) It will be mandatory for every university, college or other institution referred to in clause (ii)
and clause (iii) of section 35(1), which is not required to furnish its return of income or loss
under any other provision of section 139, to furnish its return in respect of its income or loss
in every previous year.
(2) All the provisions of the Income-tax Act, 1961 shall apply to such return as if it were a return
under section 139(1).

15.1.10 Filing of return of income by a business trust

[Section 139(4E)]
(1) Every business trust, which is not required to furnish return of income or loss under any other
provisions of this section, has to furnish the return of its income in respect of its income or
loss in every previous year.
(2) All the provisions of the Income-tax Act, 1961 shall apply as if it were a return required to be
filed under section 139(1).

15.1.11 Filing of return of income by investment fund

[Section 139(4F)]
(1) Every investment fund referred to in section 115UB, which is not required to furnish return of
income or loss under any other provisions of this section, shall furnish the return of income
in respect of income or loss in every previous year.
(2) All the provisions of the Income-tax Act, 1961 shall apply as if it were a return required to be
filed under section 139(1).
 ASSESSMENT PROCEDURE 15.15
a

15.1.12 Revised return [Section 139(5)]

(1) If any person having furnished a return under section 139(1) or section 139(4), discovers any
omission or any wrong statement therein, he may furnish a revised return

- at any time before three months prior to the end of the relevant assessment year
(i.e., 31.12.2026 for P.Y. 2025-26) or
- before completion of assessment,

whichever is earlier.
(2) The return can be revised for any number of times within the given time limit. In this case, the
latest revised return filed replaces all other returns filed earlier.
(3) It may be noted that the returns filed under sub-sections (1A), (3), (4A) to (4F) of section 139
are treated as having been filed under section 139(1). Hence, these returns can also be
revised subject to satisfying the conditions of section 139(5).

15.1.13 Particulars to be furnished with the return

[Section 139(6)]
The return form prescribed under section 139(1)/ (3) and section 142(1)(i) in certain specified cases,
require the assessee to furnish the particulars of -
(1) income exempt from tax.
(2) assets of the prescribed nature and value, held by him as a beneficial owner or otherwise or
in which he is a beneficiary.
(3) his bank account and credit card held by him.
(4) expenditure exceeding the prescribed limits incurred by him under prescribed heads .
(5) such other outgoings as may be prescribed.

15.1.14 Particulars to be furnished with return of income in case

of an assessee engaged in business or profession
[Section 139(6A)]
The prescribed form of the return shall, in the case of an assessee engaged in any business or
profession, also require him to furnish -
 15.16 DIRECT TAX LAWS

(1) the report of any audit referred to in section 44AB [such tax audit report is required to be
furnished one month prior to the due date of filing return of income u/s 139(1)].
(2) the particulars of the location and style of the principal place where he carries on the business
or profession and all the branches thereof.
(3) the names and addresses of his partners, if any, in such business or profession.
(4) if he is a member of an association or body of individuals,
(a) the names of the other members of the association or the body of individuals; and
(b) the extent of the share of the assessee and the shares of all such partners or members,
as the case may be, in the profits of the business or profession and any branches thereof.

15.1.15 Defective Return [Section 139(9)]

(1) Under this sub-section, the Assessing Officer has the power to call upon the assessee to
rectify a defective return.
(2) Where the Assessing Officer considers that the return
of income furnished by the assessee is defective, he
may intimate the defect to the assessee and give him
an opportunity to rectify the defect within a period of
15 days from the date of such intimation. The Assessing Officer has the discretion to extend
the time period beyond 15 days, on an application made by the assessee.
(3) If the defect is not rectified within the period of 15 days or such further extended period, then
the return would be treated as an invalid return. The consequential effect would be the same
as if the assessee had failed to furnish the return.
(4) Where, however, the assessee rectifies the defect after the expiry of the period of 15 days or
the further extended period, but before assessment is made, the Assessing Officer can
condone the delay and treat the return as a valid return.
(5) A return of income shall be regarded as defective unless all the following conditions are
fulfilled, namely:
(i) The annexures, statements and columns in the return of income relating to
computation of income chargeable under each head of income, computations of gross
total income and total income have been duly filled in.
(ii) The return of income is accompanied by the following, namely:
 ASSESSMENT PROCEDURE 15.17
a

(a) a statement showing the computation of the tax payable on the basis of the
return.
(b) the report of the audit obtained under section 44AB [such tax audit report is
required to be furnished one month prior to the due date of filing return of
income u/s 139(1)].
(c) the proof regarding the tax, if any, claimed to have been deducted or collected
at source and the advance tax and tax on self-assessment, if any, claimed to
have been paid. (However, the return will not be regarded as defective if ( i) a
certificate for tax deducted or collected was not furnished under section 203 or
section 206C to the person furnishing his return of income, (ii) such certificate
is produced within a period of 2 years).

(d) the proof of payment of tax as required under section 140B, if the return of
income is an updated return furnished under section 139(8A).
(iii) Where regular books of account are maintained by an assessee, the return of income
is accompanied by the following -
(a) copies of manufacturing account, trading account, profit and loss account or income
and expenditure account, or any other similar account and balance sheet;
(b) the personal accounts as detailed below -
(1) Proprietary business or profession The personal account of the
proprietor

(2) Firm, association of persons or body Personal accounts of

of individuals partners or members
(3) Partner or member of a firm, Partner’s personal account in
association of persons or body of firm, member’s personal
individuals account in the association of
persons or body of individuals

(iv) Where the accounts of the assessee have been audited, the return should be
accompanied by copies of the audited profit and loss account and balance sheet and
the auditor’s report.
(v) Where the cost accounts of an assessee have been audited under section 148 of the
Companies Act, 2013, the return should be accompanied by such report (Cost Audit).
(vi) Where regular books of account are not maintained by the assessee, the return should
be accompanied by -
 15.18 DIRECT TAX LAWS

(a) a statement indicating the amount of turnover or gross receipts, gross profit,
expenses and net profit of the business or profession;
(b) the basis on which such amounts mentioned in (1) above have been computed,
(c) the amounts of total sundry debtors, sundry creditors, stock-in-trade and cash
balance as at the end of the previous year.
It may be noted that a return which is otherwise valid would not be treated as defective
merely because self-assessment tax and interest payable in accordance with the
provisions of section 140A has not been paid on or before the date of furnishing the return.

Notes:
(i) Many of these particulars are now required to be incorporated as part of the relevant
return form, for example, details of tax deducted at source, advance tax paid, self -
assessment tax paid, amount of turnover/gross receipts, etc.
(ii) Section 292B provides that no return of income, order of assessment, notice, summons
or other proceedings furnished or made or taken or purported to have been furnished or
made in pursuance of any of the provisions of the Income-tax Act, 1961 shall be invalid
or shall be deemed to be invalid merely by reason of any mistake, defect or omission in
such return of income, assessment, notice, summons or other proceeding, if they are in
substance and effect in conformity with or according to the intent and purposes of the
Income-tax Act, 1961. The provision, thus, enables tax authorities to accept returns and
other documents and tax payers to accept orders, notice, etc., received from tax
authorities even in cases where there are a few typographical, arithmetical or other
mistakes which do not materially affect the objects with which the document was
submitted by the assessee or order was issued by the department.

15.1.16 Return filed in pursuance of CBDT’s order under section

119(2)(b) [Section 139(9A)]
Where any return of income is furnished in pursuance of an order under section 119(2)(b), then the
provisions of section 139 shall apply. This amendment will help in reducing litigation, quick
processing of returns, and selection of returns for scrutiny assessment just like for any other return
under section 139.

Note: Students may refer Chapter 14 ”Income Tax Authorities” for Sec 119(2)(b).
 ASSESSMENT PROCEDURE 15.19
a

15.1.17 Fee for default in furnishing return of income

[Section 234F]
Where a person, who is required to furnish a return of income
under section 139, fails to do so within the prescribed time
limit under section 139(1), he shall pay, by way of fee, a sum
of ` 5,000. However, if the total income of the person does not
exceed ` 5 lakhs, the fees payable shall not exceed
` 1,000.

15.1.18 Modified return - Effect of order of Tribunal or Court in

respect of business reorganisaton [Section 170A]
(1) Requirement and timeline to file Modified Return in ITR-A [Section 170A(1)] - In a case
of business reorganisation, where prior to the date of order of a High Court or Tribunal or
an Adjudicating Authority as defined in section 5(1) of the Insolvency and Bankruptcy Code,
2016, as the case may be, any return of income has been furnished by an entity to which
such order applies under the provisions of section 139 for any assessment year relevant to
the previous year to which such order applies, such successor entity has to furnish, within a
period of six months from the end of the month in which the said order was issued , a
modified return in Form ITR-A in accordance with and limited to the said order. The said
return of income has to be furnished electronically under digital signature.
This provision will apply notwithstanding anything contained in section 139.
(2) Assessment on the basis of modified return [Section 170A(2)]

Status of Assessment or Completion of Assessment by the

reassessment proceedings for an A.Y. A.O. on the basis of modified return
relevant to a P.Y. to which the order of
the business reorganisation applies
(i) Completed proceedings - If the The A.O. has to pass an order
proceedings have been completed on the modifying the total income of the
date of furnishing of the modified return in relevant A.Y. determined in such
accordance with the provisions of section assessment or reassessment
170A(1) proceedings in accordance with the
order of the business reorganisation
and the modified return so furnished.
 15.20 DIRECT TAX LAWS

(ii) Pending proceedings - If the The A.O. has to proceed to complete

proceedings are pending on the date of the assessment or reassessment
furnishing of the modified return in proceedings and pass an order
accordance with the provisions of section assessing or reassessing the total
170A(1) income of the relevant assessment
year in accordance with the order of
the business reorganisation and the
modified return so furnished.

All other provisions of the Act shall apply to such assessment or reassessment made in
respect of the assessment year to which the order of business reorganisation applies , and
the tax shall be chargeable at the rate or rates applicable to such assessment year.
(3) Meaning of “business reorganization” – “Business reorganization” means the
reorganization of business involving the amalgamation or demerger or merger of business or
one or more persons.

(4) Meaning of “successor” – “Successor” means all resulting companies in a business

reorganization, whether or not the company was in existence prior to such business reorganization.
Example: If A Ltd. merges with B Ltd. with effect from 1.4.2024 vide order of the High Court
dated 1.11.2025, and B Ltd. has already filed its return of income for the A.Y.2025-26 on 30th
October, 2025, then, B Ltd. has to file a modified return for A.Y.2025-26 in accordance with
and limited to the Order of the High Court on or before 31 st May, 2026.

15.2 PERMANENT ACCOUNT NUMBER (PAN) [SECTION

139A]
(1) Persons mandatorily required to apply for allotment of PAN: Section 139A(1) requires
the following persons mentioned in column (2), who have not been allotted a permanent
account number (PAN), to apply to the Assessing Officer within the time specified in column
(3) for the allotment of a PAN –
(1) (2) (3)
Persons required to apply for PAN Time limit for making such
application
(i) Every person, if his total income or the total On or before 31st May of the
income of any other person in respect of which assessment year for which such
he is assessable under the Act during any income is assessable
 ASSESSMENT PROCEDURE 15.21
a

previous year exceeds the maximum amount

which is not chargeable to income-tax
(ii) Every person carrying on any business or Before the end of that financial
profession whose total sales, turnover or gross year (previous year).
receipts are or is likely to exceed ` 5 lakhs in
any previous year
(iii) Every person who is required to furnish a return Before the end of the financial
of income under section 139(4A) year
(iv) Every person being a resident, other than an On or before 31 st May of the
individual, which enters into a financial immediately following financial
transaction of an amount aggregating to year in which financial
` 2,50,000 or more in a financial year transaction is made.
(v) Every person who is a managing director, On or before 31 st May of the
director, partner, trustee, author, founder, karta, immediately following financial
chief executive officer, principal officer or office year in which the person
bearer of any person referred in (iv) above or referred in (v) enters into
any person competent to act on behalf of such financial transaction specified
person referred in (iv) above therein.

Further, for widening the tax base, every person who has not been allotted a PAN and
intends to enter into such transaction as prescribed by the CBDT is also required to apply
to the Assessing Officer for allotment of PAN.
Accordingly, Rule 114BA prescribe the following transactions:
(i) Every person, who intends to deposit cash in his Atleast 7 days before the date
one or more accounts with a banking company, on which he intends to deposit
co-operative bank or post office, if the aggregate cash over the specified limit,
amount of cash deposit in such accounts during i.e., ` 20 lakh or more.
a financial year is ` 20 lakh or more
(ii) Every person, who intends to withdraw cash from Atleast 7 days before the date
his one or more accounts with a banking on which he intends to withdraw
company, co-operative bank or post office, if the cash over the specified limit,
aggregate amount of cash withdrawal from such i.e., ` 20 lakh or more.
accounts during a financial year is ` 20 lakh or
more
(iii) Any person, who intends to open a current Atleast 7 days before the date
account or cash credit account with a banking on which he intends to open
company or a co-operative bank, or a Post Office such account.

(2) The Central Government is empowered to specify, by notification in the Official Gazette, any
class or classes of persons by whom tax is payable under the Act or any tax or duty is payable
under any other law for the time being in force. Such persons are required to apply within
 15.22 DIRECT TAX LAWS

such time as may be mentioned in that notification to the Assessing Officer for the allotment
of a PAN [Sub-section (1A)].
(3) For the purpose of collecting any information which may be useful for or relevant to the
purposes of the Act, the Central Government may notify any class or classes of persons, and
such persons shall within the prescribed time, apply to the Assessing Officer for allotment of
a PAN [Sub-section (1B)].
(4) The Assessing Officer, having regard to the nature of transactions as may be prescribed, may
also allot a PAN to any other person (whether any tax is payable by him or not) in the manner
and in accordance with the procedure as may be prescribed [Sub-section (2)].
(5) Any person, other than the persons mentioned in (1) to (4) above, may apply to the Assessing
Officer for the allotment of a PAN and the Assessing Officer shall allot a PAN to such person
immediately.

Note – Rule 114(4) requires submission of application for allotment of PAN by the applicant in the
prescribed form accompanied by the prescribed documents as proof of identity, address and date of
birth of such applicant. Rule 114(1A) provides that any person, who has not been allotted a PAN but
possesses the Aadhaar number and has furnished or intimated or quoted his Aadhaar number in lieu
of the PAN in accordance with section 139A(5E), shall be deemed to have applied for allotment of
PAN and he shall not be required to apply or submit any documents under Rule 114.

Further, Rule 114(1B) provides that any person, who has not been allotted a PAN but possesses
the Aadhaar number may apply for allotment of the PAN under section 139A(1)/(1A)/(3) by intimating
his Aadhaar number and he shall not be required to apply or submit any documents under Rule 1 14.

(6) Quoting of PAN is mandatory for transactions

prescribed under Rule 114B: As per section 139A(5)
quoting of PAN is mandatory in the following
documents/prescribed transactions:
(a) in all returns to, or correspondence with, any income-tax authority;

(b) in all challans for the payment of any sum due under the Act;
(c) in all documents pertaining to such transactions entered into by him, as may be
prescribed by the CBDT in the interests of revenue. In this connection, CBDT has
prescribed the following transactions vide Rule 114B, namely:
 ASSESSMENT PROCEDURE 15.23
a

S. No. Nature of transaction Value of transaction

1. Sale or purchase of a motor vehicle All such transactions
or vehicle, as defined in the Motor
Vehicles Act, 1988 which requires
registration by a registering authority
under that Act, other than two
wheeled vehicles.
2. Opening an account [other than a All such transactions
time-deposit referred to at Sl. No.12
and a Basic Savings Bank Deposit
Account] with a banking company or a
co-operative bank to which the
Banking Regulation Act, 1949 applies
(including any bank or banking
institution referred to in section 51 of
that Act).
3. Making an application to any banking All such transactions
company or a co-operative bank to
which the Banking Regulation Act,
1949, applies (including any bank or
banking institution referred to in
section 51 of that Act) or to any other
company or institution, for issue of a
credit or debit card.
4. Opening of a demat account with a All such transactions
depository, participant, custodian of
securities or any other person
registered under section 12(1A) of the
SEBI Act, 1992.
5. Payment to a hotel or restaurant Payment in cash of an amount
against a bill or bills at any one time. exceeding ` 50,000.
6. Payment in connection with travel to Payment in cash of an amount
any foreign country or payment for exceeding ` 50,000.
purchase of any foreign currency at
any one time.
7. Payment to a Mutual Fund for Amount exceeding ` 50,000.
purchase of its units
8. Payment to a company or an Amount exceeding ` 50,000.
institution for acquiring debentures or
bonds issued by it.
9. Payment to the Reserve Bank of India Amount exceeding ` 50,000.
for acquiring bonds issued by it.
15.24 DIRECT TAX LAWS

10. Deposit with Cash deposits exceeding

- a banking company or a co- ` 50,000 during any one day.
operative bank to which the
Banking Regulation Act, 1949,
applies (including any bank or
banking institution referred to in
section 51 of that Act); or
- post office
11. Purchase of bank drafts or pay orders Payment in cash of an amount
or banker’s cheques from a banking exceeding ` 50,000 during
company or a co-operative bank to any one day.
which the Banking Regulation Act,
1949 applies (including any bank or
banking institution referred to in
section 51 of that Act).
12. A time deposit with, - Amount exceeding ` 50,000
(i) a banking company or a co- or aggregating to more than
operative bank to which the ` 5 lakh during a financial
Banking Regulation Act, 1949 year.
applies (including any bank or
banking institution referred to
in section 51 of that Act);
(ii) a Post Office;
(iii) a Nidhi referred to in section
406 of the Companies Act,
2013; or
(iv) a non-banking financial
company which holds a
certificate of registration under
section 45-IA of the Reserve
Bank of India Act, 1934, to hold
or accept deposit from public.
13. Payment for one or more pre-paid Payment in cash or by way of
payment instruments, as defined in a bank draft or pay order or
the policy guidelines for issuance and banker’s cheque of an
operation of pre-paid payment amount aggregating to more
instruments issued by Reserve Bank than ` 50,000 in a financial
of India under the Payment and year.
Settlement Systems Act, 2007, to a
banking company or a co-operative
bank to which the Banking Regulation
Act, 1949, applies (including any
bank or banking institution referred to
 ASSESSMENT PROCEDURE 15.25
a

in section 51 of that Act) or to any

other company or institution.
14. Payment as life insurance premium to Amount aggregating to more
an insurer as defined in the Insurance than ` 50,000 in a financial
Act, 1938. year.
15. A contract for sale or purchase of Amount exceeding ` 1 lakh
securities (other than shares) as per transaction.
defined in section 2(h) of the
Securities Contracts (Regulation)
Act, 1956.
16. Sale or purchase, by any person, of Amount exceeding ` 1 lakh
shares of a company not listed in a per transaction.
recognised stock exchange.
17. Sale or purchase of any immovable Amount exceeding ` 10 lakh
property. or valued by stamp valuation
authority referred to in section
50C at an amount exceeding
` 10 lakh.
18. Sale or purchase, by any person, of Amount exceeding ` 2 lakh
goods or services of any nature other per transaction.
than those specified at Sl. No. 1 to 17
of this Table, if any.

Minor to quote PAN of the parent or guardian

Where a person, entering into any transaction referred to in this rule, is a minor and who does
not have any income chargeable to income-tax, he shall quote the PAN of his father or mother
or guardian, as the case may be, in the document pertaining to the said transaction.
Declaration by a person not having PAN
Further, any person not being a company or a firm who does not have a PAN and who enters
into any transaction specified in the Table above, shall make a declaration in Form No.60
giving therein the particulars of such transaction.
However, a foreign company who,—
- does not have any income chargeable to tax in India; and
- does not have a permanent account number,
and enters into any transaction referred to at Sl. No. 2 or 12 of the Table (given in previous
paras), in an IFSC banking unit, shall make a declaration in Form No. 60.
 15.26 DIRECT TAX LAWS

Meaning of IFSC banking unit – A financial institution defined under section 3(1)(c) of the
IFSC Authority Act, 2019, that is licensed or permitted by the IFSC to undertake permissible
activities under the IFSC Authority (Banking) Regulations, 2020.
Non-applicability of Rule 114B
Also, the provisions of Rule 114B shall not apply to the following class or classes of persons,
namely:-
(i) the Central Government, the State Governments and the Consular Offices;
(ii) the non-residents referred to in section 2(30) in respect of the transactions other than
a transaction referred to at Sl. No. 1 or 2 or 4 or 7 or 8 or 10 or 12 or 14 or 15 or 16 or
17 of the Table.
Meaning of certain phrases:

Phrase Inclusion
(i) Payment in Payment towards fare, or to a travel agent or a tour operator, or
connection with to an authorized person as defined in section 2(c) of the Foreign
travel Exchange Management Act, 1999
(ii) Travel agent or A person who makes arrangements for air, surface or maritime
tour operator travel or provides services relating to accommodation, tours,
entertainment, passport, visa, foreign exchange, travel-related
insurance or other travel-related services either severally or in
package
(iii) Time deposit Any deposit which is repayable on the expiry of a fixed period.

(7) Every person who receives any document relating to any transaction cited above shall ensure
that the PAN is duly quoted in the document.
(8) If there is a change in the address or in the name and nature of the business of a person, on
the basis of which PAN was allotted to him, he should intimate such change to the Assessing
Officer [Sub-section 5(d)]
(9) Intimation of PAN to person deducting tax at source
Every person who receives any amount from which tax has been deducted at source shall
intimate his PAN to the person responsible for deducting such tax [Sub-section (5A)].
A person, however, shall intimate the General Index Register Number till such time PAN is
allotted to him.
 ASSESSMENT PROCEDURE 15.27
a

(10) Quoting of PAN in certain documents of tax deduction

Where any amount has been paid after deducting tax at source, the person deducting tax
shall quote the PAN of the person to whom the amount was paid in the following documents:
(i) in the statement furnished under section 192(2C) giving particulars of perquisites or
profits in lieu of salary provided to any employee;
(ii) in all certificates for tax deducted issued to the person to whom payment is made
u/s 203;
(iii) in all returns made to the prescribed income-tax authority under section 206;

(iv) in all statements prepared and delivered or caused to be delivered in accordance with
the provisions of section 200(3) [Sub-section (5B)].
(11) Requirement to intimate PAN and quote PAN not to apply to certain persons

The above sub-sections (5A) and (5B) shall not apply to a person who –
(i) does not have taxable income or
(ii) who is not required to obtain PAN

if such person furnishes a declaration under section 197A in the prescribed form and manner
that the tax on his estimated total income for that previous year will be nil.
(12) Intimation of PAN to person collecting tax at source

Likewise, every buyer or licensee or lessee referred to in section 206C shall intimate his PAN
to the person responsible for collecting tax.
(13) Quoting of PAN in certain documents of tax collection

Every person collecting tax in accordance with section 206C shall quote PAN of every buyer
or licensee or lessee referred to therein –
(i) in all certificates furnished in accordance with the provisions of section 206C(5);
(ii) in all returns prepared and delivered or caused to be delivered in accordance with the
provisions of section 206C(5A) or section 206C(5B) to an income-tax authority;
(iii) in all statements prepared and delivered or caused to be delivered in accordance with
the provisions of section 206C(3).
 15.28 DIRECT TAX LAWS

(14) Inter-changeability of PAN with the Aadhaar number

Every person who is required to furnish or intimate or quote his PAN, may furnish or intimate
or quote his Aadhaar Number in lieu of the PAN w.e.f.
1.9.2019, if he -
- has not been allotted a PAN but possesses the
Aadhaar number
- has been allotted a PAN and has intimated his Aadhaar number to prescribed authority
in accordance with the requirement contained in section 139AA(2)

PAN would be allotted in prescribed manner to a person who has not been allotted a PAN but
possesses Aadhaar number [Sub-section (5E)]
(15) Quoting and authentication of PAN or Aadhaar number

(a) Every person entering into such prescribed transactions is required to quote his PAN
or Aadhaar number, as the case may be, in the documents pertaining to such
transactions. Such persons are also required to authenticate such PAN or Aadhaar
number in the prescribed manner [Sub-section (6A)].
(b) Every person receiving such document relating to transactions referred to in (a) has
to ensure that PAN or Aadhaar number has been duly quoted in such document. They
also have to ensure that such PAN or Aadhaar number is so authenticated.
[Sub-section (6B)].
Accordingly, Rule 114BB prescribe that every person has to, at the time of entering into a
transaction specified in column (2) of the Table below, quote his permanent account number
or Aadhaar number, as the case may be, in documents pertaining to such tra nsaction, and
every person specified in column (3) of the said Table, who receives such document, has to
ensure that the said number has been duly quoted and authenticated:
(1) (2) (3)
S. No. Nature of transaction Person
1. Cash deposit or deposits aggregating to A bank or a co-operative bank
` 20 lakhs or more in a financial year, in one or Post Master General of a
or more account of a person with a bank or a Post Office.
co-operative bank or Post Office.
 ASSESSMENT PROCEDURE 15.29
a

2. Cash withdrawal or withdrawals aggregating A bank or a co-operative bank

to ` 20 lakhs or more in a financial year, in or Post Master General of a
one or more account of a person with a bank Post Office.
or a co-operative bank or Post Office
3. Opening of a current account or cash credit A bank or a co-operative bank
account by a person with a bank or a co- or Post Master General of a
operative bank or Post Office Post Office.

Note – Quoting of PAN or Aadhaar number is, however, not required in case where the person
depositing money as per Sl. No.1 or withdrawing money as per Sl. No.2 or opening a current
account or cash credit account as per Sl. No.3 is the Central Government, the State
Government or the Consular Office [Notification No. 105/2022 dated 1.9.2022]
Additionally, the CBDT has, vide Notification No. 88/2023 dated 10.10.2023 provide that a
person is not required to apply for PAN or quote PAN, in a case –
(a) where the person, making the deposit or withdrawal of an amount otherwise than by way
of cash as per (1) or (2) above, or opening a current account not being a cash credit account
as per (3) above, is a non-resident (not being a company) or a foreign company;
(b) the transaction is entered into with an IFSC banking unit; and
(c) such non-resident (not being a company) or the foreign company does not have any
income chargeable to tax in India.
(16) Power to make rules

The CBDT is empowered to make rules with regard to the following:

(a) the form and manner in which an application for PAN may be made and the particulars
to be given therein;
(b) the categories of transactions in relation to which PAN or the Aadhaar number, as the
case may be, is to be quoted on the related documents;
(c) the categories of documents pertaining to business or profession in which PAN or the
Aadhaar number, as the case may be, shall be quoted by every person;
(d) the class or classes of persons to whom the provisions of this section shall not apply;
 15.30 DIRECT TAX LAWS

Accordingly, Rule 114AAB provides that the provisions of section 139A shall not apply:
- to a non-corporate non-resident, or a foreign
company, who has made investment in a
specified fund during the previous year;
- to a non-resident, being an eligible foreign investor, who has made transaction
only in a capital asset referred to in section 47(viiab) (bonds or GDRs under
section 115AC, rupee denominated bonds of an Indian company, derivative and
other notified securities) which are listed on a recognised stock exchange located
in any IFSC and the consideration on transfer of such capital asset is paid or
payable in foreign currency, if the following conditions are satisfied:
(i) the non-resident does not earn any income in India, other than the
income from investment in the specified fund during the previous
year. Similarly, the eligible foreign investor does not earn any income
in India, other than the income from transfer of a capital asset
referred to in section 47(viiab) (bonds or GDRs under section 115AC,
rupee denominated bonds of an Indian company, derivative and other
notified securities)
(ii) any income-tax due on income of non-resident has been deducted at
source and remitted to the Central Government by the specified fund at
the rates specified in section 194LBB of the Act (this condition is not
applicable in case of eligible foreign investor); and
(iii) the non-resident/eligible foreign investor furnishes the following
details and documents respectively to the specified fund/stock broker
through which the transaction is made, respectively:-
(A) name, e-mail id, contact number;
(B) address in the country or specified territory outside India of which
he is a resident;
(C) a declaration that he is a resident of a country or specified
territory outside India; and
(D) Tax Identification Number in the country or specified territory of
his residence and in case no such number is available, then a
unique number on the basis of which the non-resident is identified
by the Government of that country or the specified territory of
which he claims to be a resident.
 ASSESSMENT PROCEDURE 15.31
a

Specified Fund/Stock Broker to furnish such details received from

non-resident: The specified fund/stock broker, as the case may be, has
to electronically furnish a quarterly statement for the quarter of the
financial year, in which the details and documents furnished by such
non-resident/eligible foreign investor are received by it.
It also required to upload the declaration received from such non-
resident/eligible foreign investor within fifteen days from the end of
the quarter of the financial year to which such statement relates.
Meaning of Certain Terms:
Term Meaning
Specified Fund Any fund established or incorporated in India in
the form of a trust or a company or a limited
liability partnership or a body corporate which has
been granted a certificate of registration as a -
- Category I or Category II Alternative
Investment Fund and is regulated under
the Securities and Exchange Board of
India (Alternative Investment Funds)
Regulations, 2012 made under the
Securities and Exchange Board of India
Act, 1992 or International Financial
Services Centres Authority Act, 2019 and
which is located in any IFSC.
- Category III Alternative Investment Fund
and is regulated under the Securities and
Exchange Board of India (Alternative
Investment Fund) Regulations, 2012 or
regulated under the International Financial
Services Centres Authority (Fund
Management) Regulations, 2022
- Specified fund referred in sub-clause (i) of
clause (c) of Explanation to section 10(4D)
[Refer Chapter 21 for detail definition].
 15.32 DIRECT TAX LAWS

Eligible Foreign A non-resident who operates in accordance

Investor with the guidelines issued by SEBI in its Circular
No. IMD/HO/FPIC/CIR/P/2017/003 dated 04th
January, 2017.
Stock Broker A person having trading rights in a recognised
stock exchange located in any IFSC and the
member of such exchange.

(e) the form and manner in which a person who has not been allotted a PAN shall make
a declaration;
(f) the manner in which PAN/Aadhaar number shall be quoted for transactions cited in (b)
above;
(g) the time and manner in which such transactions cited in (b) above shall be intimated
to the prescribed authority.
(17) Meaning of certain terms for the purpose of section 139A

Term Definition
(i) Aadhaar An identification number issued to an individual by the Unique
Number Identification Authority of India, after verification of the
demographic information and biometric information submitted by
the individual.
(ii) Assessing Includes an income-tax authority who is assigned the duty of
Officer allotting PANs.
(iii) Authentication The process by which –
(i) the PAN or Aadhaar number along with demographic
information or biometric information of an individual is
submitted to the income-tax authority or such other
prescribed authority or agency for its verification; and
(ii) Such authority or agency verifies the correctness or the lack
thereof, on the basis of the information available with it.
(iv) Permanent A number which the Assessing Officer may allot to any person for
Account the purpose of identification and includes a PAN allotted under
Number (PAN) the new series i.e., PAN having 10 alphanumeric characters.
 ASSESSMENT PROCEDURE 15.33
a

(18) Penalty for failure to comply with the provisions of section 139A [Section 272B]

Section Default Penalty

272B(1) Failure to comply with the provisions of section 139A ` 10,000

272B(2) Failure to quote PAN/Aadhaar number in any document

referred to in section 139A(5)(c)
` 10,000 for
Failure to intimate PAN/Aadhaar number to persons each such
deducting or collecting tax at source default
Knowingly quoting or intimating a number which is false
272B(2A) Failure to quote PAN/Aadhaar Number in documents ` 10,000 for
referred to in section 139A(6A) or authenticate such number each such
in accordance with the provisions contained therein default
272B(2B) (i) Failure to ensure that PAN/Aadhaar Number is duly
quoted in the documents relating to transactions ` 10,000 for
referred to in section 139A(5)(c) or section 139A(6A) each such
(ii) Failure to ensure that PAN/Aadhaar Number has been default
duly authenticated in respect of transactions referred to
under section 139A(6A)
Note – It is necessary to give an opportunity to be heard to the person on whom the penalty
under section 272B is proposed to be imposed.

15.3 QUOTING OF AADHAAR NUMBER [SECTION 139AA]

(1) Mandatory quoting of Aadhaar Number [Section 139AA(1)]

Every person who is eligible to obtain Aadhaar Number is required to mandatorily quote
Aadhaar Number, on or after 1 st July, 2017:

(a) in the application form for allotment of Permanent Account Number (PAN)
(b) in the return of income [Sub-section (1)]
(2) Mandatory quoting of Enrolment ID, where person does not have Aadhaar Number
[Proviso to section 139AA(1)]

Every person who has been allotted PAN before 01.10.2024 on the basis of Aadhaar
Enrolment ID shall intimate his Aadhaar Number to the Principal Director General of Income-
tax (Systems) or Director General of Income-tax (Systems) or the person authorised by the
 15.34 DIRECT TAX LAWS

said authorities on or before 31 st December, 2025 or such date as may be specified by the
CBDT in this behalf. [Notification No. 25/2025 and 26/2025 dated 03.04.2025].
(3) Intimation of Aadhaar Number to prescribed Authority [Section 139AA(2)]

Every person who has been allotted PAN as on 1 st July, 2017, and who is eligible to obtain
Aadhaar Number, shall intimate his Aadhaar Number to the Principal Director General of
Income-tax (Systems) or Principal Director of Income-tax (Systems) on or before 31.3.2022.
Notwithstanding the last date of intimating/linking of Aadhaar Number with PAN being
31.3.2022, it is clarified that it is mandatory to quote and
link Aadhaar number while filing the return of income,
either manually or electronically, unless specifically
exempted in cases referred to in para (5) below.

As per the proviso to section 139AA(2), in case of failure to intimate the Aadhaar Number,
PAN would made inoperative after the date so notified i.e., 31.3.2022 in such manner as may
be prescribed.

Manner of making PAN inoperative [Rule 114AAA]

Accordingly, Rule 114AAA specifies the manner of making PAN inoperative. Rule 114AAA(1)
provides that where a person, who has been allotted PAN as on the 1.7.2017 and is required
to intimate his Aadhaar number under section 139AA(2), has failed to intimate the same on
or before 31.3.2022, the PAN of such person shall become inoperative, and he shall be liable
for payment of fee specified under section 234H read with Rule 114(5A).
Where the person has intimated his Aadhaar number after 31.3.2022, after payment of fee
specified under section 234H read with Rule 114(5A), his PAN would become operative within
30 days from the date of intimation of Aadhaar number.
Further consequences of failure to intimate Aadhaar Number: As per section 114AAA(3),
a person, whose PAN has become inoperative, shall be liable for further consequences for
the period commencing from 01.07.2023 till the date it becomes operative, namely –

(i) refund of any amount of tax or part thereof, due under the provisions of the Act shall
not be made;
(ii) interest shall not be payable on such refund for the
period, beginning with the date specified and ending
with the date on which it becomes operative;
 ASSESSMENT PROCEDURE 15.35
a

(iii) where tax is deductible under Chapter XVIIB in case of such person, such tax shall be
deducted at higher rate, in accordance with provisions of section 206AA;
(iv) where tax is collectible at source under Chapter XVII-BB in case of such person, such
tax shall be collected at higher rate, in accordance with provisions of section 206CC .
It is hereby clarified vide Circular No. 9/2025 dated 21 st July, 2025 that there shall be no
liability on the deductor/collector to deduct/collect the tax at higher rates specified
under section 206AA/206CC, as the case maybe, in the following cases:
- Where the amount is paid or credited from 01.04.2024 to 31.07.2025 and the PAN
is made operative (as a result of linkage with Aadhaar) on or before 30.09.2025.
- Where the amount is paid or credited on or after 01.08.2025 and the PAN is made
operative (as a result of linkage with Aadhaar) within two months from the end
of the month in which the amount is paid or credited.
(4) Fee for late intimation of Aadhaar Number i.e., after the notified date [Section 234H
read with Rule 114(5A)]

As per section 234H, where a person, who is required to intimate his Aadhaar Number under
section 139AA(2), fails to do so on or before the notified date i.e., 31st March, 2022, he shall
be liable to pay such fee, as may be prescribed, at the time of making intimation under section
139AA(2) after 31st March, 2022. However, such fee shall not exceed ` 1,000.
Accordingly, Rule 114(5A) provides that if such person fails to intimate his Aadhaar Number
on or before the date notified in section 139AA(2) i.e., 31st March, 2022, then, at the time of
subsequent intimation of his Aadhaar number to the prescribed authority, such person would
be liable to pay, by way of fee, an amount equal to ` 1,000. However, if a person fails to link
Aadhaar with PAN on or before 31.3.2022, his PAN shall become inoperative after the said
date in the prescribed manner [Proviso to section 139AA(2)].
(5) Provision not to apply to certain person or class of persons

The provisions of section 139AA relating to quoting of Aadhaar Number would, however, not
apply to such person or class or classes of persons or any State or part of any State as may
be notified by the Central Government [Sub-section (3)].
Accordingly, the Central Government has, vide Notification No. 37/2017, dated 11.05.2017,
effective from 01.07.2017, notified that the provisions of section 139AA relating to quoting of
Aadhaar Number would not apply to an individual who does not possess the Aadhaar number
or Enrolment ID and is:
 15.36 DIRECT TAX LAWS

(i) residing in Assam, Jammu & Kashmir and

Meghalaya;
(ii) a non-resident as per Income-tax Act, 1961;
(iii) of the age of 80 years or more at any time during the previous year;
(v) not a citizen of India

15.4 SCHEME FOR SUBMISSION OF RETURNS THROUGH

TAX RETURN PREPARERS [SECTION 139B]
(1) This section provides that, for the purpose of enabling any specified class or classes of
persons to prepare and furnish their returns of income, the CBDT may notify a Scheme to
provide that such persons may furnish their returns of income through a Tax Re turn Preparer
authorised to act as such under the Scheme.

(2) The Tax Return Preparer shall assist the persons furnishing the return in a manner that will
be specified in the Scheme and shall also affix his signature on such return.

(3) A Tax Return Preparer can be an individual, other than

(i) any officer of a scheduled bank with which

the assessee maintains a current account or
has other regular dealings.

(ii) any legal practitioner who is entitled to practice in any civil court in India.

(iii) an accountant (being a chartered accountant).

(iv) an employee of the ‘specified class or classes of persons’.

who has been authorised to act as a Tax Return Preparer under the Scheme.

(4) The “specified class or classes of persons” for this purpose means any person other than
a company or a person whose accounts are required to be audited under section 44AB (tax
audit) or under any other existing law, who is required to furnish a return of income under the
Income-tax Act, 1961.

(5) The Scheme notified under the said section may provide for the following -

(i) the manner in which and the period for which the Tax Return Preparers shall be
authorised,
 ASSESSMENT PROCEDURE 15.37
a

(ii) the educational and other qualifications to be possessed, and the training and other
conditions required to be fulfilled, by a person to act as a Tax Return Preparer,
(iii) the code of conduct for the Tax Return Preparers,
(iv) the duties and obligations of the Tax Return Preparers,
(v) the circumstances under which the authorisation given to a Tax Return Preparer may
be withdrawn, and
(vi) any other relevant matter as may be specified by the Scheme.
(6) Accordingly, the CBDT has, in exercise of the powers conferred by this section, framed the
Tax Return Preparer Scheme, 2006, which came into force from 1.12.2006.
Particulars Contents
Applicability of the scheme The scheme is applicable to all eligible persons.
Eligible person Any person being an individual or a Hindu undivided
family.
Tax Return Preparer Any individual who has been issued a "Tax Return
Preparer Certificate" and a "unique identification
number" under this Scheme by the Partner Organisation
to carry on the profession of preparing the returns of
income in accordance with the Scheme.
However, the following person are not entitled to act as
Tax Return Preparer:
(i) any officer of a scheduled bank with which the
assessee maintains a current account or has other
regular dealings.
(ii) any legal practitioner who is entitled to practice in
any civil court in India.
(iii) an accountant.
Educational qualification for An individual, who holds a bachelor’s degree from a
Tax Return Preparers recognised Indian University or institution, or has
passed the intermediate level examination conducted by
the Institute of Chartered Accountants of India or the
Institute of Company Secretaries of India or the Institute
of Certified Management Accountants of India, shall be
eligible to act as Tax Return Preparer.
Preparation of and An eligible person may, at his option, furnish his return
furnishing the Return of of income under section 139 for any assessment year
Income by the Tax Return after getting it prepared through a Tax Return Preparer:
Preparer
 15.38 DIRECT TAX LAWS

However, the following eligible person (an individual or

a HUF) cannot furnish a return of income for an
assessment year through a Tax Return Preparer:
(i) who is carrying out business or profession during
the previous year and accounts of the business or
profession for that previous year are required to be
audited under section 44AB or under any other law
for the time being in force; or
(ii) who is not a resident in India during the previous
year.
An eligible person cannot furnish a revised return of
income for any assessment year through a Tax Return
Preparer unless he has furnished the original return of
income for that assessment year through such or any
other Tax Return Preparer.
Also, a return of income which is required to be
furnished in response to a notice under section 142(1)(i)
or section 148 shall not be prepared and furnished
through a Tax Return Preparer.

Note - It may be noted that as per section 139B(3), an employee of the “specified class or
classes of persons” is not authorised to act as a Tax Return Preparer. Therefore, it follows that
employees of companies and persons whose accounts are required to be audited under section
44AB or any other law for the time being in force (since they do not fall in the category of
specified class or classes of persons), are eligible to act as Tax Return Preparers.

15.5 PERSONS AUTHORISED TO VERIFY RETURN OF

INCOME [SECTION 140]
This section specifies the persons who are authorised to verify the return of income u/s 139.
Assessee Circumstance Authorised Persons
1. Individual (i) In circumstances not covered under - the individual himself
(ii), (iii) & (iv) below
(ii) where he is absent from India - the individual himself; or
- any person duly authorised
by him in this behalf holding a
valid power of attorney from
the individual (Such power of
attorney should be attached
to the return of income)
 ASSESSMENT PROCEDURE 15.39
a

(iii) Where he is mentally - his guardian; or

incapacitated from attending to - any other person competent
his affairs to act on his behalf
(iv) where, for any other reason, it is - any person duly authorised
not possible for the individual to by him in this behalf holding a
verify the return valid power of attorney from
the individual (Such power of
attorney should be attached
to the return of income)
2. Hindu Undivided (i) in circumstances not covered - the karta
Family under (ii) and (iii) below
(ii) where the karta is absent from - any other adult member of the
India HUF
(iii) where the karta is mentally - any other adult member of the
incapacitated from attending to HUF
his affairs
3. Company (i) in circumstances not covered - the managing director of the
under (ii) to (vi) below company
(ii) (a) where for any unavoidable
reason such managing any director of the company or
director is not able to verify any other person as may be
the return; or prescribed for this purpose
(b) where there is no managing [See Note below]
director
(iii) Where the company is not - the managing director of the
resident in India company or a person who
holds a valid power of
attorney from such company
to do so (such power of
attorney should be attached
to the return).
(iv) (a) Where the company is - Liquidator
being wound up (whether
under the orders of a court
or otherwise); or
(b) where any person has been - Liquidator
appointed as the receiver of
any assets of the company
(v) Where the management of the - the principal officer of the
company has been taken over company
by the Central Government or
any State Government under
any law
 15.40 DIRECT TAX LAWS

(vi) Where an application for - insolvency professional

corporate insolvency resolution appointed by such
process has been admitted by Adjudicating Authority
the Adjudicating Authority under
the Insolvency and Bankruptcy
Code, 2016.
4. Firm (i) in circumstances not covered - the managing partner of the
under (ii) below firm
(ii) (a) where for any unavoidable - any partner of the firm, not
reason such managing being a minor
partner is not able to verify
the return; or
(b) where there is no managing - any partner of the firm, not
partner. being a minor
5. LLP (i) in circumstances not covered - Designated partner
under (ii) below
(ii) (a) where for any unavoidable any partner of the LLP or any
reason such designated other person as may be
partner is not able to verify prescribed for this purpose
the return; or [See Note Below]
(b) where there is no
designated partner.
6. Local authority - - the principal officer
7. Political party - - the chief executive officer of
[referred to in such party (whether he is
section 139(4B)] known as secretary or by
any other designation)
8. Any other - - any member of the
association association or the principal
officer of such association
9. Any other person - - that person or some other
person competent to act on
his behalf.

Note – In case of a company and LLP, "any other person” as may be prescribed for the purpose of
verification of return of income, shall be the person, appointed by the adjudicating authority i.e.,
National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013 for
discharging the duties and functions of an interim resolution professional, a resolution professional,
or a liquidator, as the case may be, under the Insolvency and Bankruptcy Code, 2016 and the rules
and regulations made thereunder [Rule 12AA].
 ASSESSMENT PROCEDURE 15.41
a

15.6 SELF ASSESSMENT [SECTION 140A]

(1) Payment of tax, interest and fee before furnishing return of income

Where any tax is payable on the basis of any return required to be furnished under section
139, or section 142 or section 148, after taking into account -
(i) the amount of tax, already paid, under any provision of the Income-tax Act, 1961

(ii) any tax deducted or collected at source;

(iii) any relief of tax claimed under section 89;
(iv) relief of tax claimed under section 90 or 90A;
(v) deduction of tax claimed under section 91;
(vi) any tax credit claimed to be set-off in accordance with the provisions of section 115JAA
or section 115JD.
(vii) any tax or interest payable as per the provisions of section 191(2).
the assessee shall be liable to pay such tax together with interest and fee pay able under any
provision of this Act for any delay in furnishing the return or any default or delay in payment
of advance tax before furnishing the return. The return shall be accompanied by the proof of
payment of such tax, interest and fee.
(2) Order of adjustment of amount paid by the assessee

Where the amount paid by the assessee under section 140A(1) falls short of the aggregate
of the tax, interest and fee as aforesaid, the amount so paid shall first be adjusted towards
the fee payable and thereafter towards interest and the balance, if any, shall be adjusted
towards the tax payable.
(3) Interest under section 234A

For the above purpose, interest payable under section 234A shall be computed on the amount
of tax on the total income as declared in the return, as reduced by the amount of -
(i) advance tax paid, if any;

(ii) any tax deducted or collected at source;

(iii) any relief of tax claimed under section 89;
(iv) relief of tax claimed under section 90 or 90A;
 15.42 DIRECT TAX LAWS

(v) deduction of tax claimed under section 91;

(vi) any tax credit claimed to be set-off in accordance with the provisions of section 115JAA
or section 115JD.
(4) Interest under section 234B

Interest payable under section 234B shall be computed on the assessed tax or on the amount
by which the advance tax paid falls short of the assessed tax.
For this purpose, “assessed tax” means the tax on total income declared in the return as
reduced by –
(i) the amount of tax deducted or collected at source;
(ii) any relief of tax claimed under section 89;
(iii) relief of tax claimed under section 90 or 90A
(iv) deduction of tax claimed under section 91
(v) any tax credit claimed to be set-off in accordance with the provisions of section 115JAA
or section 115JD.
(5) Self-assessment tax deemed to have been paid towards regular assessment

After regular assessment under section 143 or section 144, any amount paid under section
140A shall be deemed to have been paid towards such regular assessment or assessment.
(6) Consequence of failure to pay tax, interest or fee

If any assessee fails to pay the whole or any part of such tax or interest or fees, he shall be
deemed to be an assessee in default in respect of such tax or interest or fees remaining
unpaid and all the provisions of this Act shall apply accordingly.

15.7 UPDATED RETURN OF INCOME [SECTION 139(8A)]

(1) Option to furnish updated return: Any person may furnish an updated return of his income
or the income of any other person in respect of which he is assessable, for the previous year
relevant to the assessment year at any time within 48 months from the end of the relevant
assessment year.
This is irrespective of whether or not he has furnished a return under section 139(1) or belated
return under section 139(4) or revised return under section 139(5) for that assessment year.
For example, an updated return for A.Y. 2026-27 can be filed till 31.3.2031.
 ASSESSMENT PROCEDURE 15.43
a

(2) Non-applicability of the provisions of updated return: The provisions of updated return
would not apply, if the updated return of such person for that assessment year –
(i) is a loss return; or
(ii) has the effect of decreasing the total tax liability determined on the basis of return
furnished under section 139(1) or section 139(4) or section 139(5); or
(iii) results in refund or increases the refund due on the basis of return furnished under
section 139(1) or section 139(4) or section 139(5).
Additionally, no updated return shall be furnished in the following scenarios –

S. No. Scenarios Updated return can not

be furnished
(i) In case of a person
• Where a search has been initiated under
section 132 or books of account or other
documents or any assets are requisitioned
under section 132A.
- for the
• Where a survey has been conducted under Assessment Year
section 133A (other than survey conducted relevant to the
in relation to TDS or TCS) Previous Year in
• Where a notice has been issued to the effect which the search is
that: initiated or survey is
- any money, bullion, jewellery or valuable conducted, or
article or thing, seized or requisitioned requisition is made
under section 132 or section 132A in and
case of any other person belongs to such - for any A.Y.
person; or preceding such
- any books of account or documents, assessment year.
seized or requisitioned under section
132 or section 132A in the case of any
other person, pertain or pertains to, or
any other information contained therein,
relate to, such person.
(ii) Where a person has furnished an updated return
under this sub-section for the relevant assessment
year.
 15.44 DIRECT TAX LAWS

(iii) Where any proceeding for assessment, for such relevant

reassessment, recomputation, or revision of Assessment Year
income under this Act is pending or has been
completed for the relevant assessment year.
(iv) Where the Assessing Officer has information in his
possession for the relevant assessment year in
respect of a person under
- the Smugglers, and Foreign Exchange
Manipulators (Forfeiture of Property) Act,
1976 or
- the Prohibition of Benami Property
Transactions Act, 1988 or
- the Prevention of Money laundering Act,
2002 or
- the Black Money (Undisclosed Foreign
Income and Assets) and Imposition of Tax
Act, 2015 and
the same has been communicated to him, prior to for such relevant
the date of furnishing of updated return. Assessment Year.
(v) Where information for the relevant assessment
year has been received under an agreement
referred to in section 90 or section 90A in respect
of such person and the same has been
communicated to him, prior to the date of furnishing
of updated return.
(vi) If any prosecution proceedings under the Chapter
XXII have been initiated for the relevant
assessment year in respect of a person prior to the
date of furnishing of return under this sub-section.

W.e.f. 01.04.2025, no updated return shall be furnished by any person where any notice
to show-cause under section 148A has been issued in his case after 36 months from
the end of the relevant assessment year.
However, where subsequently an order is passed under section 148A(3)
determining that it is not a fit case to issue notice under section 148, updated
return may be filed upto 48 months from the end of the relevant assessment
year.
 ASSESSMENT PROCEDURE 15.45
a

(3) Updated return can be filed if the original return is a loss return and updated return is
a return of income: If any person has a loss in any previous year and has furnished a return
of loss on or before the due date of filing return of income under section 139(1), he shall be
allowed to furnish an updated return if such updated return is a return of income.
For example, if Mr. X has furnished his return of loss for A.Y. 2025-26 on 31.5.2025 consisting
of ` 5,00,000 as business loss, he can furnish an updated return for A.Y. 202 5-26 upto
31.3.2030, if such updated return is a return of income.
(4) Updated return to be furnished for subsequent previous year in case (3) above - If the
loss or any part thereof carried forward under Chapter VI or unabsorbed depreciation carried
forward under section 32(2) or tax credit carried forward under section 115JD is to be reduced
for any subsequent previous year as a result of furnishing of updated return of income for a
previous year, an updated return is required to be furnished for each such subsequent
previous year.
(5) Updated return for the relevant assessment year cannot be furnished by such person or
belongs to such class of persons, as may be notified by the Board in this regard.

15.8 TAX ON UPDATED RETURN [SECTION 140B]

(1) Payment of tax, additional tax, interest and fee before furnishing an updated return of
income
(a) In a case where no return is furnished earlier [Section 140B(1)]
(I) Tax to be paid along with interest and fee before furnishing of updating return:
Where no return of income under section 139(1) or 139(4) has been furnished by an assessee
and tax is payable, on the basis of updated return
to be furnished by such assessee under section
139(8A), the assessee would be liable to pay such
tax together with interest and fee payable under
any provision of this Act for any delay in furnishing the return or any default or delay
in payment of advance tax, along with the payment of additional income-tax computed under
section 140B(3), before furnishing the return.
The updated return shall be accompanied by proof of payment of such tax, additional income -
tax, interest and fee.
 15.46 DIRECT TAX LAWS

(II) Manner of computation of tax payable on the basis of updated return

The tax payable is to be computed after taking into account the following -
(i) the amount of tax, if any, already paid as advance tax;
(ii) any tax deducted or collected at source;
(iii) any relief of tax claimed under section 89;
(iv) any relief of tax or deduction of tax claimed under section 90 or section 91 on account
of tax paid in a country outside India;
(v) any relief of tax claimed under section 90A on account of tax paid in any specified
territory outside India referred to in that section; and
(vi) any tax credit claimed to be set off in accordance with the provisions of section 115JAA
or section 115JD.
(III) Interest under section 234A if no earlier return has been furnished
In a case, where no earlier return has been furnished, the interest payable under section
234A has to be computed on the amount of the tax on the total income as declared in the
updated return under section 139(8A), in accordance with the provisions of section 140A(1A).
(b) In a case where return is furnished earlier [Section 140B(2)]
(I) Tax to be paid along with interest before furnishing updated return:
Where, return of income under section 139(1) or 139(4) or 139(5) has been furnished by an
assessee and tax is payable, on the basis of updated return to be furnished by such assessee
under section 139(8A), the assessee would be
liable to pay such tax together with interest payable
under any provision of this Act for any default or
delay in payment of advance tax, along with the
payment of additional income-tax computed under section 140B(3) (as reduced by the
amount of interest paid under the provisions of this Act in the earlier return) before
furnishing the return.
The updated return shall be accompanied by proof of payment of such tax, additional income -
tax and interest.
(II) Manner of computation of tax payable on the basis of updated return:
The tax payable has to be computed after taking into account the following -
(i) the amount of relief or tax referred to in section 140A(1), the credit for which has been
taken in the earlier return;
 ASSESSMENT PROCEDURE 15.47
a

(ii) tax deducted or collected at source, in accordance with the provisions of Chapter
XVII-B, on any income which is subject to such deduction or collection and which is
taken into account in computing total income and which has not been included in
the earlier return;
(iii) any relief of tax or deduction of tax claimed under section 90 or section 91 on account
of tax paid in a country outside India on such income which has not been included
in the earlier return;
(iv) any relief of tax claimed under section 90A on account of tax paid in any specified
territory outside India referred to in that section on such income which has not been
included in the earlier return;
(v) any tax credit claimed, to be set off following the provisions of section
115JAA or section 115JD, which has not been claimed in the earlier return; and
The aforesaid tax would be increased by the amount of refund, if any, issued in respect of
such earlier return.
(III) Interest under section 234B where earlier return has been furnished [Section
140B(4)]
In a case where an earlier return has been furnished, interest payable under section 234B
has to be computed on the assessed tax.
“Assessed tax” means the tax on the total income as declared in the updated return to be
furnished under section 139(8A), after taking into account the following:
(i) the amount of relief or tax referred to in section 140A(1), the credit for which has been
claimed in the earlier return, if any;
(ii) tax deducted or collected at source, in
accordance with the provisions of Chapter
XVII-B, on any income which is subject to such deduction or collection and which is
taken into account in computing such total income, which has not been included in the
earlier return;
(iii) any relief of tax or deduction of tax claimed under section 90 or section 91 on account
of tax paid in a country outside India on such income which has not been included in
the earlier return;
(iv) any relief of tax claimed under section 90A on account of tax paid in any specified
territory outside India referred to in that section on such income which has not been
included in the earlier return;
 15.48 DIRECT TAX LAWS

(v) any tax credit claimed, to be set off in accordance with the provisions of section
115JAA or section 115JD, which has not been claimed in the earlier return; and
The aforesaid tax would be increased by the amount of refund, if any, issued in respect of
such earlier return.
(IV) Interest under section 234C if earlier return has been furnished
Interest payable under section 234C, where an earlier return has been furnished, has to be
computed after taking into account the total income furnished in the updated return as
returned income.

(2) Additional income-tax payable at the time of updated return [Section 140B(3)]
The additional income-tax payable at the time of furnishing the updated return under section
139(8A) would be –

S. Time of furnishing updated return Additional Income-tax

No. Payable

(i) If such return is furnished after expiry of the time 25% of aggregate of tax
available under section 139(4) or 139(5) of the and interest payable, as
assessment year and before completion of the determined in (1) above
period of 12 months from the end of the relevant
assessment year;

(ii) If such return is furnished after the expiry of 12 50% of aggregate of tax
months from the end of the relevant assessment and interest payable, as
year but before completion of the period of 24 determined in (1) above
months from the end of the relevant assessment
year.

(iii) If such return is furnished after the expiry of 24 60% of aggregate of tax
months from the end of the relevant assessment and interest payable, as
year but before completion of the period of 36 determined in (1) above
months from the end of the relevant assessment
year.

(iv) If such return is furnished after the expiry of 36 70% of aggregate of tax
months from the end of the relevant assessment and interest payable, as
year but before completion of the period of 48 determined in (1) above
months from the end of the relevant assessment
year.
 ASSESSMENT PROCEDURE 15.49
a

Computation of Additional income-tax

For the purpose of computation of Additional income-tax -
- tax would include surcharge and cess, by whatever name called, on such tax.
- the interest payable would be interest chargeable under any provision of the Act, on
the income as per updated return furnished under section 139(8A), as reduced by
interest paid in the earlier return, if any.
However, the interest paid in the earlier return would be considered to be nil, if no earlier
return has been furnished.

Note - An updated return furnished under section 139(8A) would be regarded as defective
return as referred u/s 139(9) unless such return of income is accompanied by the proof of
payment of tax as required under section 140B.

(3) Power to CBDT to issue guidelines

In case of any difficulty arises in giving effect to the provisions of this section, the CBDT may
issue guidelines for the purpose of removing the difficulty, with the approval of the Central
Government. Every guideline issued shall be laid before each House of Parli ament.
ILLUSTRATION

Mr. X would like to furnish his updated return for the A.Y. 2025-26. In case he furnished his updated
return of income, he would be liable to pay ` 2,50,000 towards tax and ` 35,000 towards interest
after adjusting tax and interest paid at the time filing earlier return. You are required to examine
whether Mr. X can furnish updated return-

(i) as on 31.3.2027

(ii) as on 28.2.2028

(iii) as on 31.5.2028

If yes, compute the amount of additional income-tax payable by Mr. X at the time of filing his updated
return.

Would your answer be different with respect to filing of the updated return in case of (ii) above,
where he has received a notice under section 148 for the said A.Y. 2025-26 on 23.7.2027.
 15.50 DIRECT TAX LAWS

SOLUTION

Mr. X may furnish an updated return of his income for A.Y. 2025-26 at any time within 48 months
from the end of the relevant assessment year, i.e., 31.3.2030.
Accordingly, Mr. X can furnish updated return for A.Y. 2025-26 for all the above cases i.e. 31.3.2027,
28.2.2028 and 31.5.2028.

Mr. X would be liable to pay additional income-tax

- @25% of tax and interest payable, if updated return is furnished after the expiry of the time
limit available under section 139(4) or 139(5), i.e., 31st December 2025 and before the expiry
of 12 months from the end of relevant assessment year, i.e., 31.3.2027.

- @50% of tax and interest payable, if updated return is furnished after the expiry of 12 months
from the end of relevant assessment year, i.e., after 31.3.2027 but before the expiry of 24
months from the end of relevant assessment year, i.e., 31.3.2028.

- @60% of tax and interest payable, if updated return is furnished after the expiry of 24 months
from the end of the relevant assessment year, i.e., after 31.3.2028 but before the expiry of
36 months from the end of the relevant assessment year, i.e., 31.3.2029.

Accordingly, Mr. X is liable to pay additional income-tax in case he furnished his updated return as on

(i) 31.3.2027 - ` 71,250 [25% of 2,85,000, being tax of ` 2,50,000 plus interest of ` 35,000]

(ii) 28.2.2028 - ` 1,42,500 [50% of 2,85,000, being tax of ` 2,50,000 plus interest of ` 35,000]

(iii) 31.05.2028 - ` 1,71,000 [60% of 2,85,000, being tax of ` 2,50,000 plus interest of ` 35,000]

He cannot furnish an updated return where he has received notice u/s 148, since proceeding for
income escaping assessment for the A.Y. 2025-26 are pending.

15.9 INQUIRY BEFORE ASSESSMENT [SECTION 142]

A. Issue of Notice to any person for making assessment [Section 142(1)]

For the purpose of making an assessment, the Assessing Officer may serve on any person who has
made a return under section 139 or in whose case the time allowed under section 139(1) for
furnishing the return has expired, a notice under section 142. The purposes for which such notice
can be served are depicted in the following diagram:
 ASSESSMENT PROCEDURE 15.51
a

Notice u/s 142

To furnish a return of To furnish in writing , information on

To produce or cause to be such points or matters (including a
his income or the produced, such accounts
income of any other statement of all assets and liabilities of
or documents as the A.O. the assessee, whether included in the
person in respect of may require
which he is assessable accounts or not) as the A.O. may
under the Act require

In a case where a AO shall not require Previous approval of JC to be

person has not filed production of any obtained for requiring assessee to
return within the accounts relating to a furnish stt of all assets and
time specified u/s period more than 3 years liabilities not included in the
139(1) or before the prior to the P.Y. accounts
end of the relevant
A.Y.

Notes – (1) Notice to furnish return of income may also be served by the prescribed income-tax
authority in addition to the Assessing Officer. Accordingly, Rule 12F provide that the prescribed
income-tax authority shall be an income-tax authority not below the rank of Income-tax Officer who
has been authorised by the CBDT to act as such authority for the purposes of this clause.

(2) It may be noted that the time-limit provided under section 153(1) for completion of assessment
is 21 months/18 months/12 months/9 months [Refer to table on time limits for completion of
assessment given later in this chapter], as the case may be, from the end of the assessment year in
which the income was first assessable. Therefore, since the assessment has to be completed within
the said period, it appears that notice under section 142(1) should also be issued within that period.

B. Inquiry by Assessing Officer [Section 142(2)]

For the purpose of obtaining full information in respect of income or loss of any person, the Assessing
Officer may make such inquiry as he considers necessary.

15.10 SPECIAL AUDIT AND INVENTORY VALUATION

UNDER SECTION 142
Sub-sections (2A), (2B), (2C), and (2D) of section 142 contain the statutory provisions relating to
the conduct of audit.
 15.52 DIRECT TAX LAWS

(1) Basis for direction to get accounts audited or inventory valued: If at any stage of the
proceedings before him, the Assessing Officer, having regard
- to the nature and complexity of the accounts,
- volume of the accounts,
- doubts about the correctness of the accounts,
- multiplicity of transactions in the accounts or
- specialized nature of business activity of the assessee, and
- the interests of the revenue,
is of the opinion that it is necessary so to do, he may, with the previous approval of the
Principal Chief Commissioner or Chief Commissioner or the Principal Commissioner or
Commissioner, direct the assessee to get either or both of the following -
- the accounts audited by an accountant and furnish a report of such audit.
- the inventory valued by a cost accountant and furnish a report of such inventory
valuation.
Opportunity of being heard is to be given to the assessee before directing to get the accounts
audited or inventory valued.
‘Accountant’ means a ‘chartered accountant’ within the meaning of the Chartered
Accountants Act, 1949.
"Cost Accountant" means a cost accountant as defined in the Cost and Works Accountants
Act, 1959 and who holds a valid certificate of practice under the said Act.
(2) Accountant and cost accountant nominated by the Principal Chief
Commissioner/Chief Commissioner/Principal Commissioner/Commissioner - The
accountant by whom the audit should be carried out and the cost accountant by whom
inventory should be valued are nominated by the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner of Income-tax specifically for the
purpose. The assessee is required to furnish an audit report and inventory valuation report
in the prescribed form duly signed and verified by such accountant or cost accountant,
respectively and setting forth such other particulars as may be prescribed and such other
particulars as the Assessing Officer may require.
(3) Special audit may be directed even if accounts are audited under any other law - The
Assessing Officer is empowered to direct the audit to be carried out in the case of any
particular assessee even if the accounts of the assessee have already been audited under
any other law for the time being in force or otherwise.
 ASSESSMENT PROCEDURE 15.53
a

(4) Time limit - The audit report or inventory valuation report, or both, must be furnished to the
Assessing Officer by the assessee within the period specified by the Assessing Officer in his
order.
The Assessing Officer is, however, entitled, suo motu or on receipt of an application made in
this behalf by the assessee for any good any sufficient reason to extend the time-limit by such
further period or periods as he deems fit. Further, the aggregate of the period originally fixed
and the period or periods so extended should not exceed 180 days in any case. This time
of 180 days must be reckoned from the date on which the Assessing Officer’s direction is
received by the assessee.

(5) Expenses of special audit or inventory valuation to be paid by the Central

Government - Where the direction for special audit or inventory valuation is issued by the
Assessing Officer, the expenses of, and incidental
to, such special audit or inventory valuation,
including remuneration of the Accountant or
Cost Accountant, shall be determined by the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner in accordance with the prescribed guidelines. The expenses so determined
shall be paid by the Central Government.

Rule 14B lays down the guidelines for the purposes of determining expenses for audit under
section 142(2A). Every Chief Commissioner would maintain a panel of

- Accountants, out of persons referred to in Explanation to section 288(2) or

- Cost accountants, out of the persons referred to in Explanation to section 142

for the purposes of section 142(2A). The expenses of, and incidental to, audit (including the
remuneration of the accountant, cost accountants, qualified assistants, semi-qualified and
other assistants who may be engaged by such Accountant or Cost Accountant) should not be

- less than ` 3,750 and

- not more than ` 7,500

for every hour of the period as specified by the Assessing Officer under section 142(2C).
Such period shall be specified in terms of the number of hours required for completing the
report.
 15.54 DIRECT TAX LAWS

(6) Assessee to be given an opportunity of being heard - The assessee should, however,
be given an opportunity of being heard in respect of any material gathered on the basis of –
(i) any inquiry under section 142(2); or
(ii) any audit or inventory valuation under section 142(2A)
which is proposed to be utilized for the purposes of the assessment. If, however, the
assessment is in nature of a best judgment assessment under section 144, it is not obligatory
for the Assessing Officer to give the assessee an opportunity to be heard, before passing the
assessment order on the basis of the inquiry conducted under section 142(2) or audit report
or inventory valuation report under section 142(2A).
(7) Consequence of failure to get special audit done - In any case, where the assessee is
directed to get audit done or get inventory valued and the assessee fails to do so, the
Assessing Officer is entitled to make a best judgment assessment under section 144 in
addition to imposing penalty or taking such steps as may be necessary under the law.
Would the assessee be liable to consequences for failure to get the accounts audited if the
nominated Chartered Accountant refused to audit the accounts of the assessee? [Swadeshi
Polytex Ltd. v. ITO [1983] 144 ITR 171 (SC)]
In a case where a Principal Chief Commissioner or Chief Commissioner or Principal Commissioner
or Commissioner issued instructions under section 142(2A) nominating a Chartered Account ant for
auditing the assessee’s accounts and though the concerned assessee was willing to produce the
records, the concerned Chartered Accountant refused to audit the accounts, a question arose as to
whether there was a failure on the assessee’s part to comply with the directions under section
142(2A) and consequently the best judgement assessment could be made under section 144(b).
The Supreme Court held that if, for a frivolous reason, the Chartered Accountant declined to
undertake the audit of the assessee’s accounts, the assessee could not be held responsible .
In such a case, there was no default or failure to comply with the direction issued under section
142(2A) on the assessee’s part so as to attract the provisions of section 144(b). The best judgement
made by the Assessing Officer was set aside with the directions to appoint another Chartered
Accountant within one month to get the accounts audited.

Note - The above ruling is with respect to a special audit refused by a nominated Chartered
Accountant. The rationale of the said Apex Court ruling can also be applied in case inventory
valuation is refused by the Cost Accountant.
 ASSESSMENT PROCEDURE 15.55
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15.11 POWER OF ASSESSING OFFICER TO MAKE A

REFERENCE TO THE VALUATION OFFICER
[SECTION 142A]
(1) Reference to the Valuation Officer - As per section 142A, the Assessing Officer may, for
the purposes of assessment or reassessment, make a reference to a Valuation Officer to
estimate the value, including fair market value, of any asset, property or investment and
submit the report to him.
Section 142A further clarifies that the Assessing Officer may make a reference to the
Valuation Officer whether or not he is satisfied about the correctness or completeness of the
accounts of the assessee.
(2) Estimation of value of asset, property or investment - The Valuation Officer is required
to estimate the value of the asset, property or investment after taking into account the
evidence produced by the assessee and any other evidence in his possession gathered, after
giving an opportunity of being heard to the assessee.
If the assessee does not co-operate or comply with the directions of the Valuation Officer
he may, estimate the value of the asset, property or investment to the best of his judgment.
(3) Time limit for submission of valuation report - The Valuation Officer shall send a copy of
his estimate to the Assessing Officer and the assessee within a period of six months from
the end of the month in which the reference is made. Thus, a specific time limit has now
been provided, within which the Valuation Officer has to send his report to the Assessing Officer.
(4) Completion of assessment by taking into account valuation report - On receipt of the
report from the Valuation Officer, the Assessing Officer may, after giving the assessee an
opportunity of being heard, take into account such report in making the assessment or
reassessment.

15.12 FACELESS INQUIRY & VALUATION [SECTION 142B]

Section 142B empowers the Central Government to notify scheme for faceless processes for
eliminating physical interface.
(1) Faceless scheme [Section 142B(1)] - The Central Government is empowered to make a
scheme (faceless inquiry and valuation scheme) by notification in Official Gazette for the
purpose of:
 15.56 DIRECT TAX LAWS

a. issuing notice under section 142(1) or

b. making inquiry to obtain full information in respect of the income or loss of any person
under section 142(2) or
c. directing the assessee to get the accounts audited by an accountant or inventory
valuation by a cost accountant under section 142(2A) or
d. making a reference to the valuation officer to estimate the value of any asset, property
or investment under section 142A.
The objective of the scheme is to impart greater efficiency, transparency and accountability
by:
(i) eliminating the interface between the income-tax authority or Valuation Officer and the
assessee or any person to the extent technologically feasible;

(ii) optimising utilisation of the resources through economies of scale and functional
specialisation;
(iii) introducing a team-based issuance of notice or making of enquiries or issuance of
directions or valuation with dynamic jurisdiction.
(2) Applicability or non-applicability of other provisions of the Act [Section 142B(2)] -
The Central Government may, for the purpose of giving effect to the Faceless Inquiry and
Valuation Scheme, by notification in the Official Gazette, direct that any provision of this Act
shall not apply or shall apply with such modification, exceptions and adaptations as
necessary.
(3) Notification issued above to be laid before each House of Parliament [Section
142B(3)] Every such notification issued by the Central Government either under sub section
(1) or (2) of the section 142B has to be laid before each House of Parliament as soon as
possible.
Accordingly, Central Government has issued Notification no. 19/2022 dated 30.3.2022, to
provide that the Faceless Inquiry and Valuation for the purpose of -

a. issuing notice under section 142(1) or

b. making inquiry to obtain full information in respect of the income or loss of any person
under section 142(2) or
c. directing the assessee to get the accounts audited by an accountant or inventory
valuation by a cost accountant under section 142(2A) or
 ASSESSMENT PROCEDURE 15.57
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d. making a reference to the valuation officer to estimate the value of any asset, property
or investment under section 142A
shall be made in a faceless manner, through automated allocation, in accordance with and to
the extent provided in section 144B with reference to making the faceless assessment of total
income or loss of assessee.
“Automated allocation” means an algorithm for randomised allocation of cases by using
suitable technological tools, including artificial intelligence and machine learning, with a view
to optimise the use of resources.

15.13 ASSESSMENT [SECTION 143]

(1) Summary assessment [Section 143(1)]

Where a return has been made under section 139 or in response to a notice under section
142(1), such return shall be processed under section 143(1). Thus, summary assessment,
commonly referred to as intimation, is a computerised preliminary assessment or processing
of the return of income filed by an assessee.
(i) Section 143(1)(a) provides for computation of the total income of an assessee
after making the following adjustments to the returned income:-
(a) any arithmetical error in the return;
(b) an incorrect claim, if such an incorrect claim is apparent from any information in the
return;
(c) any such inconsistency in the return, with
respect to the information in the return of
any preceding previous year, as may be prescribed;
(d) Disallowance of loss claimed, if return of the previous year for which set-off is
claimed was filed beyond due date u/s 139(1);
(e) Disallowance of expenditure or increase in income indicated in the audit report
but not taken into account in computing the total income in the return;

(f) Disallowance of deduction claimed under section 10AA or under any of the
provisions of Chapter VI-A under the heading "C.—Deductions in respect of
certain incomes", if return is filed beyond due date u/s 139(1);
 15.58 DIRECT TAX LAWS

However, before making any such adjustments, in the interest of natural justice,
intimation has to be given to the assessee requiring him to respond to such
adjustments. Such intimation may be in writing or through electronic mode. The
response received, if any, has to be duly considered before effecting any adjustment.
However, if no response is received within 30 days of the issue of such
intimation, the processing shall be carried out incorporating the adjustments.
(ii) The term “an incorrect claim apparent from any information in the return” shall
mean such claim on the basis of an entry, in the return, –
(a) of an item, which is inconsistent with another entry of the same or some other
item in such return;
(b) in respect of which, information required to be furnished to substantiate such
entry, has not been furnished in the return;
(c) in respect of a deduction, where such deduction exceeds specified statutory limit
which may have been expressed as monetary amount or percentage or ratio or
fraction.
(iii) Tax, interest and fee should be computed on the basis of the total income computed
after making the adjustments in (i) above.

(iv) The sum payable by, or the amount of refund due to, the assessee shall be determined
after adjustment of such tax, interest and fee, if any, so computed by any tax deducted
at source, any tax collected at source, any advance tax paid, any relief allowable under
section 89, any relief allowable under an agreement under section 90 or section 90A,
or any relief allowable under section 91, any rebate under section 87A, any tax paid
on self-assessment and any amount paid otherwise by way of tax, interest or fee.
(v) Based on the above adjustments, an
intimation shall be prepared or generated
and sent to the assessee within a period
of nine months from the end of the
financial year in which the return was
made. The intimation shall specify the sum
determined to be payable by, or the amount of refund due to, the assessee.
(vi) If any amount is payable by the assessee, the communication sent to the assessee is
considered a 'Notice of Demand'. The assessee must pay the tax liability within 30
days of receiving the intimation; otherwise, he will be treated as an assessee -in-
 ASSESSMENT PROCEDURE 15.59
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default. Where any amount of refund is due to the assessee, the same shall be granted
to the assessee.
(vii) An intimation shall also be sent to the assessee in a case where the loss declared
in the return by the assessee is adjusted but no tax, interest or fee is payable by,
or no refund is due to, him.
(viii) On the other hand, where there is neither any adjustment nor any tax due from or
refund payable to the assessee, the acknowledgement of the return shall be deemed
to be the intimation under section 143(1).
(ix) The scheme contemplates avoiding human interface and therefore, provides for
computerised processing of returns for making the above adjustments, i.e., the software
will be designed to detect arithmetical inaccuracies and internal inconsistencies and
make appropriate adjustments in the computation of the total income.
(2) Mandatory processing of return of income before issuance of assessment order
[Section 143(1D)]

(i) Section 143(1) requires processing of return of income filed under section 139(1) or in
response to a notice issued under section 142(1).

(ii) An intimation has to be prepared or generated and sent to the assessee specifying the
sum payable or the refund due, to the assessee.
(iii) No intimation can be sent after the expiry of nine months from the end of the financial
year in which the return is made. This is provided in the second proviso to
section 143(1).
(iv) In respect of returns furnished for A.Y.2017-18 or thereafter, processing of a return
under section 143(1) is necessary even where a notice has been issued to the
assessee under section 143(2).
(3) Regular assessment/Scrutiny assessment [Section 143(2)/(3)] - If the Assessing Officer or
the prescribed income-tax authority [i.e., an income-tax authority not below the rank of an Income-
tax Officer who has been authorised by the CBDT to act as income-tax authority] considers it
necessary or expedient to ensure that the assessee has
not understated his income or has not computed
excessive loss or has not underpaid his tax in any
manner he can issue a notice for making the
assessment in the normal manner as at present. This
will be a scrutiny assessment.
 15.60 DIRECT TAX LAWS

It may be noted that notice for detailed scrutiny under section 143(2) cannot be served after the
expiry of 3 months from the end of the financial year in which the return of income is furnished.

On the day specified in the notice issued under section 143(2), or as soon afterwards as may be,
after hearing such evidence as the assessee may produce and such other evidence as the Assessing
Officer may require on specified points, and after taking into account all relevant material which he
has gathered, the Assessing Officer shall, by an order in writing, make an assessment of total income
or loss of the assessee, and determine the sum payable by him or refund of any amount due to him
on the basis of such assessment.
It is also obligatory for research associations, news agency, associations and other institutions
exempt under clauses (21), (22B), (23A) and (23B) of section 10 to file their returns of income. In
these cases, the Assessing Officer cannot make an assessment denying exemption under section
10 without intimating the Central Government or the prescribed authority of the contravention of the
provisions of the relevant sections and till the approval granted to these research associations, news
agency, associations and other institutions has been withdrawn or notification rescinded [First
proviso to section 143(3)].
If any trust or institution or educational institution or hospital or medical institution referred in section
10(23C)(iv), (v), (vi) and (via) or any trust or institution referred to in section 11, has committed any
“specified violation” as mentioned under section 10(23C) or under section 12AB(4), the Assessing
Officer shall
- send a reference to the Principal Commissioner or Commissioner to withdraw the approval
or registration, as the case may be, and
- no order making an assessment of the total income or loss of such fund or institution or trust
or any university or other educational institution or any hospital or other medical institution
shall be made by him without giving effect to the order passed by the Principal Commissioner
or Commissioner either cancelling the approval or refusing to cancel the approval of such
trust or institution or educational institution or hospital or medical institution under section
10(23C) or section 12AB(4) [Second proviso to section 143(3)].
The time period for completing the assessment in such cases will exclude the period between the
date on which the Assessing Officer makes a reference to the Principal Commissioner or
Commissioner and date on which copy of the order is received by the Assessing Officer [Clause
(xiii) of Explanation 1 of section 153].
 ASSESSMENT PROCEDURE 15.61
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Meaning of Specified Violation: The following are considered as Specified Violation

(a) where any income derived from property held under trust, wholly or in part for charitable or
religious purposes, has been applied, other than
for the objects of the trust or institution; or
(b) the trust or institution has income from profits and
gains of business which is not incidental to the attainment of its objectives or separate
books of account are not maintained by such trust or institution in respect of the business
which is incidental to the attainment of its objectives; or

(c) the trust or institution has applied any part of its income from the property held under a trust
for private religious purposes, which does not enure for the benefit of the public; or
(d) the trust or institution established for charitable purpose created or established after the
commencement of this Act, has applied any part of its income for the benefit of any particular
religious community or caste; or
(e) any activity being carried out by the trust or institution—

(i) is not genuine; or

(ii) is not being carried out in accordance with all or any of the conditions subject to
which it was registered; or

(f) the trust or institution has not complied with the requirement of any other law, and the
order, direction or decree, by whatever name called, holding that such non-compliance has
occurred, has either not been disputed or has attained finality.
(g) where the registration application filed by the trust or institution is incomplete or contains false
or incorrect information.
Note – The situations mentioned in (c) and (d) are mentioned only in the case of a trust or institution
registered under section 11.

The Assessing Officer is empowered to send a proposal to the Central Government recommending
withdrawal of approval of research association, university, college or other institution approved
under section 35(1)(ii) and (iii), if the activities are not being carried out in accordance with all or any
of the conditions subject to which any of the said entities had been approved. The Assessing Officer
may, after giving a reasonable opportunity of showing cause to the concerned entity, send a proposal
to the Central Government recommending withdrawal of approval.
The Central Government may, by order, withdraw the approval and forward a copy of the order to
the concerned university, college or other institution and to the Assessing Officer.
 15.62 DIRECT TAX LAWS

(4) Best judgment assessment [Section 144]

Fails to file return u/s 139(1) and

has not filed belated return u/s
139(4) or revised return u/s 139(5)
or updated return u/s 139(8A)

Fails to comply with all the

terms of a notice issued u/s Having filed a return, fails to
142(1) or a direction issued comply with all the terms of
u/s 142(2A) a notice issued u/s 143(2)
A.O. shall
make a best
judgement
assessment

After taking into account all After giving the assessee an

relevant material which he has opportunity of being heard
gathered

(i) Best judgement assessment mandatory in all the three cases stated above - It is
mandatory for the Assessing Officer to make a best judgment assessment, and he has no
discretion to make or not to make such assessment. These three cases are alternative and
not cumulative for the purpose of making an ex parte assessment.
(ii) Opportunity of being heard - Before making the best judgement assessment, the Assessing
Officer has to take into account all relevant material which he has gathered. The assessee
must be given an opportunity of being heard. Such opportunity shall be given by an Assessing
Officer by serving a notice calling upon the assessee to show cause on a date and time to be
specified in the notice, why the assessment should not be completed to the best of his judg -
ment. Thereafter, the Assessing Officer shall make the assessment of total income or loss to
the best of his judgment and determine the sum payable on the basis of such assessment. It
may be noted that no refund can be granted under section 144.
However, where a notice under section 142(1) has been issued prior to the making of an
assessment under this section, it is not necessary to give such an opportunity.
 ASSESSMENT PROCEDURE 15.63
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Where assessment u/s 143(3)

or u/s 144 is made

Tax or interest paid u/s 143(1) If no refund is due or amount refunded >
amount refundable on regular assessment

Whole or excess amount so refunded shall

Deemed to have been paid
be deemed to be tax payable by the
towards regular assessment
assessee

15.14 POWER OF JOINT COMMISSIONER TO ISSUE

DIRECTIONS IN CERTAIN CASES [SECTION 144A]
(1) A Joint Commissioner may, on his own motion or on a reference being made to him by the
Assessing Officer or on the application of an assessee, call for and examine the record of
any proceeding in which an assessment is pending and, if he considers that, having regard
to the nature of the case or the amount involved or for any other reason it is necessary so to
do, he may issue such directions as he thinks fit for the guidance of the Assessing Officer to
enable him to complete the assessment. Such directions shall be binding on the Assessing
Officer.
(2) No directions which are prejudicial to the assessee shall be issued before an opportunity is
given to the assessee to be heard. However, directions given as to the lines on which
investigation is to be made shall not be construed as one prejudicial to the assessee.

15.15 FACELESS ASSESSMENT [SECTION 144B]

The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 has
introduced faceless assessment under section 144B w.e.f. 1 st April, 2021. “Faceless assessment”
means the assessment proceedings conducted electronically in the 'e -Proceeding' facility through
the assessee's registered account in the designated portal. CBDT has ordered
[Link] as the “designated portal” for the purpose of Faceless Assessment.
 15.64 DIRECT TAX LAWS

(1) Procedure for Faceless Assessment [Section 144B(1)] - Section 144B(1) provides that
assessment under section 143(3) or best judgment assessment under section 144 or income
escaping assessment under section 147 in
respect of such territorial area or persons or classes
of persons or incomes or class of incomes or cases
or class of cases, as specified by the CBDT under
section 144B(2), has to be made in a faceless manner in accordance with the following
procedure:

Clause Provision
Assignment of the case to a Specific Assessment Unit
(i) The National Faceless Assessment Centre (NFAC) has to assign the case
selected for the purposes of faceless assessment under this section to a
specific assessment unit through an automated allocation system.
Intimation by NFAC to the assessee
(ii) The NFAC has to intimate the assessee that the assessment in his case would
be completed following the procedure laid down under this section.
Serving of notice on the assessee
(iii) Service of notice: Notice shall be served on the assessee through the NFAC
under section 143(2) or section 142(1).
(iii) Filing of response to the notice by the assessee: The assessee may file his
response to the notice within the date specified therein to the NFAC which
shall forward the same to the assessment unit.
Request by Assessment Unit to NFAC for obtaining information/conducting
enquiry
(iv) Where a case is assigned to the assessment unit, it may make a request to the
NFAC for—
(a) obtaining such further information, documents or evidence from the
assessee or any other person, as it may specify;
(b) conducting of enquiry or verification by verification unit; and
(c) seeking technical assistance in respect of the determination of arm's
length price, valuation of property, withdrawal of registration, approval,
exemption or any other technical matter from the technical unit.
Course of Action when Assessment Unit requests for obtaining further information to
NFAC as per sub-clause (a) of clause (iv)
 ASSESSMENT PROCEDURE 15.65
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(v) Notice or requisition to the assessee or any other person for obtaining the
information: The NFAC has to issue appropriate notice or requisition to the
assessee or any other person for obtaining the information, documents or
evidence requisitioned by the assessment unit.
Assessee to file a response to the notice within the specified time: The assessee
would be required to file a response to the notice within the time specified
therein or such time as may be extended based on an application in this regard
to the NFAC, which shall forward the reply to the assessment unit.
Course of Action when Assessment Unit makes request for conducting an enquiry
or seeks technical assistance to NFAC as per sub-clauses (b) and (c) of clause (iv)
(vi) Request for conducting inquiry or verification to be assigned to
Verification Unit by NFAC: Where a request for conducting of certain enquiry
or verification by the verification unit has been made by the assessment unit,
the request would be assigned by the NFAC to a verification unit through an
automated allocation system.
Request for seeking technical assistance to be assigned to Technical Unit
by NFAC: Where a request for seeking technical assistance from the technical
unit has been made by the assessment unit, the request would be assigned by
the NFAC to a technical unit through an automated allocation system.
(vii) Report received from the Verification Unit/Technical Unit to be sent to
Assessment Unit: The NFAC has to send the report received from the
verification unit or the technical unit to the concerned assessment unit.
Failure on the part of the assessee
(viii) NFAC to intimate the failure to assessment unit: Where the assessee fails
to comply with the notice served for obtaining the information, documents or
evidence or notice issued under section 142(1) or the terms of a notice issued
under section 143(2), the NFAC shall intimate such failure to the assessment
unit.
(ix) Serving notice u/s 144 for failure on the part of the assessee: The
assessment unit shall serve upon such assessee a notice, through the NFAC,
under section 144, giving him an opportunity to show-cause on a date and time
as specified in such notice as to why the assessment in his case should not be
completed to the best of its judgment.
(x) Assessee to file response to a notice under section 144: The assessee has
to, within the time specified in the notice or such time as may be extended on
the basis of an application in this regard, file his response to the NFAC which
shall forward the same to the assessment unit.
(xi) Intimation to Assessment Unit, of failure on the part of the assessee to file
response to notice issued u/s 144: Where the assessee fails to file response
 15.66 DIRECT TAX LAWS

to the notice within the time specified therein or within the extended time, if any,
the NFAC has to intimate such failure to the assessment unit.
Step to be taken by Assessment Unit after assessee files his response or fails to
file his response
(xii) The assessment unit shall, after taking into account all the relevant material
available on the record, prepare, in writing—
(a) an income or loss determination proposal, where no variation prejudicial to
the assessee is proposed and send a copy of such income or loss determination
proposal to the NFAC; or
(b) in any other case, a show cause notice stating the variations prejudicial to
the interest of the assessee proposed to be made to the income of the assessee
and calling upon him to submit as to why the proposed variation should not be
made and serve such show cause notice, on the assessee, through the NFAC
Assessee to file reply of show cause notice served under sub-clause (b) of clause
(xii)
(xiii) Assessee to file a response to the notice within the specified time: The
assessee shall file his reply to the show-cause notice on a date and time as
specified therein or such time as may be extended based on an application
made in this regard, to the NFAC which shall forward the reply to the
assessment unit.
(xiv) Intimation to Assessment Unit in case of no response from assessee:
Where the assessee fails to file a response to the notice served within the time
specified therein or within the extended time, if any, the NFAC shall intimate
such failure to the assessment unit.
Procedure to be followed after assessee files his response or fails to file his
response to the show cause notice served under sub-clause (b) of clause (xii)
(xv) Assessment unit to prepare an income or loss determination proposal: The
assessment unit shall, after considering the response received under clause
(xiii) or after receipt of intimation under clause (xiv), as the case may be, and
taking into account all relevant material available on record, prepare an income
or loss determination proposal and send the same to the NFAC.
(xvi) Upon receipt of the income or loss determination proposal, as referred to in sub-
clause (a) of clause (xii) [where no variations prejudicial to the assessee
were proposed] or clause (xv) [where variations prejudicial to the assessee
were proposed and then show cause notice was issued to him], as the case
may be, the NFAC may, on the basis of guidelines issued by the Board -
(a) convey to the assessment unit to prepare draft order in accordance with
the income or loss determination proposal, which shall thereafter prepare
a draft order; or
(b) assign the income or loss determination proposal to a review unit through
an automated allocation system, for conducting a review of such proposal.
 ASSESSMENT PROCEDURE 15.67
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Where the proposal is assigned to a review unit

(xvii) Review Unit to prepare the review report: The review unit shall conduct a review
of the income or loss determination proposal assigned to it by the NFAC, after
that, it shall prepare a review report and send the same to the NFAC;
(xviii) NFAC to forward the review report to the assessment unit, which has proposed
the income or loss determination proposal.
Preparation of Draft Order
(xix) Assessment Unit to prepare draft order: The assessment unit shall, after
considering such review report, accept or reject some or all of the modifications
proposed therein and, after recording reasons in case of rejection of such
modifications, prepare a draft order.
(xx) Draft order to be sent to NFAC: The assessment unit shall send such draft
order prepared under sub-clause (a) of clause (xvi) [where a proposal is not
forwarded to review unit] or under clause (xix) [where a proposal is assigned to
review unit] to the NFAC.
Preparation of final assessment order (other than cases in relation to eligible
assessee)
(xxii) Passing of final assessment order by Assessment Unit: The NFAC shall
convey to the assessment unit to pass the final assessment order in accordance
with such draft order. After that, the assessment unit shall pass the final
assessment order, initiate penalty proceedings, if any, and send it to the NFAC.
(xxiii) NFAC to serve a copy of such order to the assessee: The NFAC shall serve
a copy of the final assessment order and notice for initiating penalty
proceedings, if any, on the assessee, along with the demand notice, specifying
the sum payable by, or refund of any amount due to, the assessee on the basis
of such assessment.
Procedure to be followed by NFAC in case of an eligible assessee (as defined
under section 144C)
(xxi) NFAC to serve draft order to the eligible assessee: Where there is a proposal
to make any variation which is prejudicial to the interest of an eligible assessee,
as mentioned under section 144C(1), the NFAC shall serve the draft order
referred to in clause (xx) on such assessee.
(xxiv) Procedure to be followed by the assessee: Where a draft order is served on
the assessee, he shall—
(a) file his acceptance of the variations proposed in such draft order to the
NFAC; or
(b) file his objections, if any, to such variations, with—
(I) the Dispute Resolution Panel, and
 15.68 DIRECT TAX LAWS

(II) the NFAC,

within 30 days of the receipt by him of the draft order.
(xxv) Intimation by NFAC to Assessment Unit: The NFAC shall intimate the
assessment unit to complete the assessment based on the draft order:
(a) upon receipt acceptance from of the eligible assessee; or
(b) if no objections are received from the eligible assessee within 30 days
of his receipt of the draft order.
(xxvi) Assessment Unit to pass the assessment order: Upon receipt of intimation
from NFAC under clause (xxv), the assessment unit shall pass the assessment
order, in accordance with the relevant draft order within one month from the end
of the month in which
- the acceptance is received or
- the period of 30 days for filing an objection expired
and initiate penalty proceedings, if any, and send the order to the NFAC.
Procedure in case eligible assessee files objection with Dispute Resolution Panel
(DRP)
(xxvii) NFAC to intimate assessment unit about objections filed by assessee:
Where the eligible assessee files objections with the DRP, under sub-clause (b)
of clause (xxiv), the NFAC shall send such intimation along with a copy of
objections filed to the assessment unit.
(xxviii) NFAC to forward directions of Dispute Resolution Panel (DRP) to
Assessment Unit: Where the eligible assessee files his objections with the
DRP, the NFAC has to, upon receipt of the directions issued by the DRP under
section 144C(5), forward such directions to the Assessment Unit.
(xxix) Assessment Unit to prepare the assessment order: In conformity with the
directions issued by the DRP under section 144C(5), the Assessment Unit has
to complete the assessment within the time allowed under section 144C(13) and
initiate penalty proceedings, if any and send a copy of such order to the NFAC.
Serving a copy of the assessment order in case of an eligible assessee
(xxx) NFAC to serve a copy of the order to the assessee: The NFAC shall, upon
receipt of the assessment order referred to in clause (xxvi) or clause (xxix), as
the case may be, serve a copy of such order and notice for initiating penalty
proceedings, if any, on the assessee, along with the demand notice, specifying
the sum payable by, or the amount of refund due to, the assessee based on
such assessment.
Procedure to be followed by NFAC on completion of the assessment
(xxxi) On completion of the assessment, the NFAC shall transfer all the electronic
records of the case to the Assessing Officer having jurisdiction over the said
case for such action as may be required under the provisions of this Act.
 ASSESSMENT PROCEDURE 15.69
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(2) NFAC/AUs/VUs/TUs/RUs to be set up for the purpose of faceless assessment [Section

144B(3)]- For the purpose of faceless assessment, the CBDT, may set up the following
Centers and Units and specify their function and jurisdiction –

National Faceless To facilitate the conduct of faceless assessment proceedings in

Assessment Center a centralised manner.
(NFAC)
Assessment Units To conduct the faceless assessment, to perform the function of
(AUs) making assessment, which includes
• identification of points or issues material for the
determination of any liability (including refund) under the
Act,
• seeking information or clarification on points or issues so
identified,
• analysis of the material furnished by the assessee or any
other person, and
such other functions as may be required for making the faceless
assessment.
The term "assessment unit", shall refer to an Assessing Officer
having powers assigned by the Board.
Verification Units To facilitate the conduct of faceless assessment, to perform the
(VUs) function of verification, which includes
- enquiry, cross verification, examination of books of account,
examination of witnesses and recording of statements, and
such other functions as may be required for the purposes of
verification.
The term "verification unit", shall refer to an Assessing Officer
having powers assigned by CBDT.
The function of the verification unit under section 144B may also
be performed by a verification unit located in any other faceless
centre set up under the provisions of this Act or under any scheme
notified under the provisions of this Act. The request for
verification may also be assigned through the NFAC to such a
verification unit.
 15.70 DIRECT TAX LAWS

Technical Units (TUs) To facilitate the conduct of faceless assessment, to perform the
function of providing technical assistance which includes any
assistance or advice on legal, accounting, forensic, information
technology, valuation, transfer pricing, data analytics,
management or any other technical matter under this Act or an
agreement entered into under section 90 or 90A, which may be
required in a particular case or a class of cases, under this
section.
The term "technical unit" shall refer to an Assessing Officer
having powers assigned by CBDT.
Review Units (RUs) To facilitate the conduct of faceless assessment, to perform the
function of the review of the income determination proposal
assigned to it by NFAC after receiving from the assessment unit
under sub-clause (b) of clause (xvi) of sub-section (1). The
function of review includes checking whether-
• the relevant and material evidence has been brought on
record,
• the relevant points of fact and law have been duly
incorporated,
• the issues requiring addition or disallowance have been
incorporated, and
such other functions as may be required for the purposes of
review.
The term "review unit”, shall refer to an Assessing Officer having
powers assigned by CBDT.

(3) Authorities constituting AU/TU/VU/RU [Section 144B(4)]: The assessment unit,

verification unit, technical unit and review unit will have the following authorities:

Deputy Commissioner or Such other income-tax

Additional Commissioner or
Deputy Director or Assistant authority, ministerial staff,
Additional Director or Joint
Commissioner or Assistant executive or consultant, as
Commissioner or Joint
Director, or Income-tax considered necessary by the
Director, as the case may be
Officer, as the case may be CBDT
 ASSESSMENT PROCEDURE 15.71
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(4) Communication among the units or with assessee [Section 144B(5)]:

(i) Communication among units to be routed through NFAC: All communication

among the assessment unit, review unit, verification unit or technical unit or with the
assessee or any other person with respect to the information or documents or evidence
or any other details, as may be necessary for the purposes of making a faceless
assessment has to be through the NFAC.

(ii) Communication to be exchanged exclusively in electronic mode: All

communications between the NFAC, the assessee, his authorised representative, or
any other person shall be exchanged exclusively in electronic mode. Similarly, all
internal communications between the NFAC and various units must be exchanged
exclusively in electronic mode.

However, in certain circumstances, enquiry or verification may be conducted by the

verification unit otherwise than by electronic mode. Such circumstances may be
specified by the CBDT.

(5) Authentication of electronic record through digital signature [Section 144B(6)] : For the
purposes of faceless assessment, an electronic record has to be authenticated by —

(a) NFAC: by way of an electronic communication

(b) Various Units: by affixing digital signature

(c) Assessee or any other person: by affixing his digital signature or under electronic
verification code (EVC), or by logging into his registered account in the designated
portal.

(6) Delivery of notice/order electronically to the assessee or any other person [Section
144B(6)(ii)/(iii)/(iv)/(v)]: All notices, orders, and other electronic communication have to be
delivered to the addressee, being the assessee, by way of—

(a) placing an authenticated copy thereof in the assessee's registered account; or

(b) sending an authenticated copy thereof to the

registered email address of the assessee or
his authorised representative; or

(c) uploading an authenticated copy on the assessee's Mobile App and followed by a real -
time alert.
 15.72 DIRECT TAX LAWS

All notices, orders and other electronic communication have to be delivered to the addressee,
being any other person, by sending an authenticated copy thereof to the registered e -mail
address of such person, followed by a real-time alert.

The assessee has to file his response to any notice or order or any other electronic
communication, through his registered account. Once an acknowledgement is sent by the
NFAC containing the hash result generated upon successful submission of response, the
response shall be deemed to be authenticated.

The time and place of dispatch and receipt of electronic record has to be determined in
accordance with section 13 of the Information Technology Act, 2000.

(7) No personal appearance required [Section 144B(6)(vi)]: A person shall not be required to
appear either personally or through an authorised representative in connection with any
proceedings before any unit set up under this section.

(8) Request by the assessee for a personal hearing in specific cases [Section 144B(6)(vii)]:
In a case where a variation is proposed in the income or loss determination proposal or the
draft order, and an opportunity is provided to the assessee by serving a notice calling upon
him to show cause as to why the assessment should not be completed as per such income
or loss determination proposal, the assessee or his authorised representative, as the case
may be, may request for personal hearing to make his oral submissions or present his case
before the income-tax authority of the relevant unit.

(9) Approval of request for personal hearing [Section 144B(6)(viii)]: Where the request for a
personal hearing has been received, the income-tax authority of relevant unit shall allow such
hearing, through NFAC. Such hearing has to be conducted exclusively through video
conferencing or video telephony, including the use of any telecommunication application
software which supports video conferencing or video telephony, to the extent technologically
feasible, in accordance with the procedure laid down by the CBDT.

(10) Examination or recording of statement exclusively through video conferencing or

video telephony [Section 144B(6)(ix)/(x)]: Other than enquiry or verification conducted by
the verification unit, otherwise than by electronic mode, in the circumstances specified by the
CBDT, any examination or recording of the statement of the assessee or any other person
(other than statement recorded in the course of survey under section 133A) has to be
conducted by an income-tax authority in the relevant unit, exclusively through video
 ASSESSMENT PROCEDURE 15.73
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conferencing or video telephony, including use of any telecommunication application software

which supports video conferencing or video telephony, to the extent technologically feasible,
in accordance with the procedure laid down by the CBDT.

For this purpose, suitable facilities for video conferencing or video telephony shall be
established, including telecommunication application software which supports video
conferencing or video telephony at such locations as may be necessary, so as to ensu re that
the assessee, or his authorized representative, or any other person is not denied the benefit
of faceless assessment merely on the consideration that such assessee or his authorised
representative, or any other person does not have access to video conferencing or video
telephony at his end.

(11) Standards to be laid down for effective function of NFAC and other units [Section
144B(6)(xi)]: The Principal Chief Commissioner or the Principal Director General, as the case
may be, in-charge of the NFAC shall, with the prior approval of CBDT, lay down the standards,
procedures and processes for effective functioning of the NFAC and the units set u p, in an
automated and mechanised environment.

(12) Audit may be invoked under section 142(2A) during faceless assessment [Section
144B(1)(xxxii)]: If, at any stage of the proceedings before it, the assessment unit is of the
opinion that it is necessary to do so,

- having regard to the nature and complexity of the accounts,

- volume of the accounts,

- doubts about the correctness of accounts,

- multiplicity of transactions in the accounts or

- specialised nature of the business activity of the assessee,

it may, upon recording its reasons in writing, refer the case to the NFAC stating that the
provisions of section 142(2A) may be invoked. Such a case may be dealt with in accordance
with section 144B(7).

NFAC’s discretion to forward the reference of invoking audit or inventory valuation

under section 142(2A) [Section 144B(7)]:

(a) The Principal Chief Commissioner or the Principal Director General, as the case may
be, in-charge of the NFAC shall, in accordance with the procedure laid down by CBDT
 15.74 DIRECT TAX LAWS

in this regard, if he considers appropriate that the provisions of section 142(2A) may
be invoked in the case,—

(i) forward the reference received from an assessment unit to the Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner having jurisdiction over such case. The assessment unit shall be
informed accordingly.

(ii) transfer the case to the Assessing Officer having jurisdiction over such case
with the prior approval of CBDT.

(b) Once the reference has been received by the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner, he shall direct the
Assessing Officer, having jurisdiction over the case, to invoke the provisions of section
142(2A).

(c) It can happen that NFAC may not consider appropriate to forward the reference to the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner, having jurisdiction over the case.

In such a case, the assessment unit has to proceed to complete the assessment in
accordance with the procedure laid down in this section.

(13) Transfer of case to jurisdictional Assessing Officer [Section 144B(8)]: The Principal
Chief Commissioner or the Principal Director General in charge of NFAC may, at any stage
of the assessment, if considered necessary, transfer the case to the Assessing Officer having
jurisdiction over such case. However, prior approval of the CBDT may be required in such
cases.

15.16 REFERENCE TO PRINCIPAL COMMISSIONER OR

COMMISSIONER IN CERTAIN CASES [SECTION
144BA]
The diagram given on the next page will give you an understanding of the procedure for declaring
any arrangement as an impermissible avoidance arrangement. The short forms used in the diagram
are:
 ASSESSMENT PROCEDURE 15.75
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PC/C Principal Commissioner/Commissioner AP Approving Panel

IAA Impermissible Avoidance Arrangement AO Assessing Officer

A.O. to make reference to PC/C at any stage of Asst./Reassessment

proceedings, on the basis of material & evidence available to declare an
arrangement as IAA and determine its consequence

The PC/C to issue notice to assessee for submitting

objections and providing an opportunity of being heard within
a period not exceeding 60 days

If assessee does not furnish If assessee objects to the proposed

objection to the notice within action
prescribed time

PC/C to issue such directions If PC/C is not satisfied If PC/C is satisfied with the
as he deems fit for declaring with the explanation of explanation of the assessee
the arrangement to be an IAA the assessee

PC/C to make reference PC/C to communicate the

to the AP for declaring same to the AO by order in
arrangement as IAA writing with a copy to the
assessee

AP to give an opportunity of being heard to the assessee

For further inquiry, direct the Call for and examine such Require the assessee to
PC/C to make such inquiry records relating to the furnish such docs and
and furnish report matter as it deems fit evidence as it may direct

AP to issue directions for declaration as an IAA and Directions

specifying the PYs in respect of which it is so declared within binding on
6 months from the end of the month of receipt of reference# the
assessee,
AO to complete the proceedings in accordance with such PC/C and
No appeal shall directions and provisions of Chapter X-A subordinate
lie against such IT authorities
directions
Prior approval of the PC/C required for passing assessment
order, if any tax consequences have been determined in the
order as per the provisions of Chapter X-A
 15.76 DIRECT TAX LAWS

# The following period has to be excluded in computing the said period:

(i) The period commencing from the date on which the first direction is issued by the
Approving Panel to the Principal Commissioner or the Commissioner for getting
inquiries conducted through the authority competent under an agreement referred to
in section 90 or section 90A and ending with the date on which the information so
requested is last received by the Approving Panel or one year, whichever is less.
(ii) The period commencing on the date on which stay on the proceeding of the Approving
Panel was granted by an order or injunction of any court and ending on the date on
which certified copy of the order vacating the stay was received by the Approving
Panel.
Note – If, immediately after the exclusion of the aforesaid time or period, the period available
to the Approving Panel for issue of directions is less than 60 days, such remaining period shall
be extended to 60 days. Consequently, the aforesaid period of six months shall be deemed to
have been extended accordingly.

Approving Panel
Particulars Provisions
(1) Constitution The Central Government may constitute one or more Approving
Panels as may be necessary
(2) Composition Each Approving Panel may shall consist of three members including
a Chairperson
(3) Qualification of (i) The Chairman shall be a person who is or has been a judge of
members a High Court
(ii) One member shall be a member of IRS not below the rank of
PCCIT/CCIT
(iii) One member shall be an academic or scholar having special
knowledge of matters, such as direct taxes, business accounts
and international trade practices.
(4) Term Ordinarily for one year; May be extended from time to time upto a
period of three years.
(5) Frequency of The Chairperson and members of the Approving Panel shall meet, as
Meeting and when required, to consider the references made to the Panel.
They shall be paid the remuneration as may be prescribed.
(6) Powers (i) The Approving Panel has to issue such directions, as it deems
fit, in respect of declaration of the arrangement as an
impermissible avoidance arrangement in accordance with the
provisions of Chapter X-A including specifying the previous year
 ASSESSMENT PROCEDURE 15.77
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or years to which such declaration of an arrangement as an

impermissible avoidance arrangement shall apply.
(ii) The Approving Panel, may, before issuing any direction under
section 144BA(6), if it is of the opinion that any further inquiry in
the matter is necessary, direct the PC/C to make such inquiry or
cause the inquiry to be made by any other IT authority and
furnish a report containing the result of such inquiry to it.
(iii) Call for and examine such records relating to the matter as it
deems fit.
(iv) Require the assessee to furnish such documents and evidence
as it may direct
(v) All the powers which are the vested in the AAR u/s 245U
(7) Officers The CBDT shall provide to the Approving Panel such officials as may
be necessary for the efficient exercise of powers and discharge of
functions of the Approving Panel under the Income-tax Act, 1961.
(8) Rules The CBDT may make rules for the purpose of the constitution and
efficient functioning of the Approving Panel and expeditious disposal
of the references received.

15.17 REFERENCE TO DISPUTE RESOLUTION PANEL

[SECTION 144C]
An alternate dispute resolution mechanism which will aid in speedy resolution of disputes on a fast-
track basis are provided for under the Income-tax Act, 1961.
The provisions of this section shall not apply to any proceedings under Chapter XIV -B, i.e. for
assessments of search cases.
The significant features of the alternate dispute resolution mechanism are briefed hereunder –
(1) In the case of assessment of an eligible assessee, the Assessing Officer shall, forward a draft
proposed order of assessment to the eligible
assessee if he proposes to make any variation which
is prejudicial to the interest of such assessee.
“Eligible assessee” means,-
(i) any person in whose case such variation arises as a consequence of the order of the
Transfer Pricing Officer passed under sub-section (3) of section 92CA; and
(ii) any non-corporate non-resident or any foreign company.
 15.78 DIRECT TAX LAWS

Such eligible assessee shall not include person referred to in section 158BA(1) or other
person referred to in section 158BD.
(2) The eligible assessee shall, within thirty days of the receipt by him of the draft order, -
(a) file his acceptance of the variations to the
Assessing Officer; or
(b) file his objections, if any, to such variation
with,—
(i) The Dispute Resolution Panel; and

(ii) The Assessing Officer.

“Dispute Resolution Panel” means a collegium comprising of three Principal Commissioners

or Commissioners of Income-tax constituted by the CBDT for this purpose.

(3) The Assessing Officer has to complete the assessment on the basis of the draft order, if —

(a) the assessee intimates the acceptance of the variation to the Assessing Officer; or

(b) no objections are received within the period of 30 days specified in (2) above.

(4) The Assessing Officer shall, notwithstanding anything contained in section 153 or section
153B, pass the assessment order within one month from the end of the month in which -

(a) the acceptance is received; or

(b) the period of filing of objections expires.

(5) The Dispute Resolution Panel shall, in a case where any objections are received, issue such
directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete
the assessment.

(6) The Dispute Resolution Panel shall issue such directions, after considering the following,
namely -

(a) Draft order;

(b) Objections filed by the assessee;

(c) Evidence furnished by the assessee;

(d) Report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or
any other authority;
 ASSESSMENT PROCEDURE 15.79
a

(e) Records relating to the draft order;

(f) Evidence collected by, or caused to be collected by, it; and

(g) Result of any enquiry made by, or caused to be made by it.

(7) The Dispute Resolution Panel may, before issuing any such directions -

(a) make such further enquiry, as it thinks fit; or

(b) cause any further enquiry to be made by any income tax authority and report the result
of the same to it.

(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the
draft order. However, it cannot set aside any proposed variation or issue any direction as
mentioned in (5) above, for further enquiry and passing of the assessment order.

The power of the DRP to enhance the variation, as mentioned in section 144C(8), shall
include and shall be deemed to have always included the power to consider any matter arising
out of the assessment proceedings relating to the draft order. This power to consider any
issue shall be irrespective of whether the matter was raised by the eligible assessee or not.

While exercising the aforesaid power for considering any matter arising out of the assessment
proceedings relating to the draft order, the DRP can only enhance the variation. The power
of reducing the variation is not accorded to DRP in respect of such mat ters.

(9) If the members of the Dispute Resolution

Panel differ in opinion on any point, the point
shall be decided according to the opinion of
the majority of the members.

(10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing
Officer.

(11) If any direction is prejudicial to the interest of the assessee or the interest of the revenue,
then, the same can be issued only after an opportunity of being heard is given to the assessee
or the Assessing Officer, as the case may be.
 15.80 DIRECT TAX LAWS

(12) Such direction has to be issued within nine months from the end of the month in which the
draft order is forwarded to the eligible assessee.
(13) Upon receipt of such direction, the Assessing
Officer has to complete the assessment in
accordance with the same, within one month from
the end of the month in which the direction is
received. This is notwithstanding anything
contained in section 153 or section 153B. There is no requirement of providing any further
opportunity of being heard to the assessee.
(14) The CBDT is empowered to make rules for the efficient functioning of the Dispute Resolution
Panel and speedy resolution of the objections filed by the eligible assessee.

(15) The provisions of this section shall not apply to any assessment or reassessment order
passed by the Assessing Officer with the prior approval of the Principal Commissioner or
Commissioner as provided in 144BA(12) where GAAR has been invoked.

(16) Section 144C(14B)/(14C) and (14D) provide that the Central Government may make a
scheme, by notification in the Official Gazette, for the purposes of issuance of directions by
the dispute resolution panel, so as to impart greater efficiency, transparency and
accountability by—
(a) eliminating the interface between the dispute resolution panel and the eligible
assessee or any other person to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialisation;
(c) introducing a mechanism with dynamic jurisdiction for issuance of directions by dispute
resolution panel.
For the purpose of giving effect to this faceless scheme for DRP, the Central Government
may, by notification in the Official Gazette, direct that any of the provisions of the Income-tax
Act, 1961 would not apply or would apply with such exceptions, modifications and adaptations
as may be specified in the notification.
Every such notification issued has to be laid before each House of Parliament, as soon as
may be after the notification is issued.
 ASSESSMENT PROCEDURE 15.81
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15.18 INCOME ESCAPING ASSESSMENT [SECTIONS 147

TO 151]
The concept of block assessment under Chapter XIV-BB (section 158B-158BI) was introduced by
the Finance (No. 2) Act, 2024 for the cases where a search is initiated under section 132 or
requisition is made under section 132A on or after 1st September 2024. For all other cases, the
provisions of sections 147 to 151 will continue to apply.

(1) Income escaping assessment [Section 147] - If any income chargeable to tax, in the
case of an assessee, has escaped assessment for any assessment year, the Assessing
Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income
or recompute the loss or the depreciation allowance or any other allowance or deduction for
such assessment year (i.e., relevant assessment year).
 15.82 DIRECT TAX LAWS

The Assessing Officer may also, assess or reassess the income in respect of any issue, which
has escaped assessment, and such issue comes to his notice subsequently in the course of
the proceedings under this section, irrespective of the fact that the provisions of section
148A have not been complied with (Explanation to Section 147).
In other words, Assessing Officer may assess any income in respect of any issue that has
escaped assessment which comes to his notice subsequently in the course of the proceeding,
even if the steps prescribed in section 148A were not followed in relation thereto.

If any income chargeable to The AO may assess or

tax has escaped assessment reassess the income in
for any A.Y., the AO may respect of any issue, which
has escaped assessment,
• assess or reassess such A.Y. for which income has
and such issue comes to
income or escaped assessment is
his notice subsequently in
known as Relevant
• recompute the loss or the the course of the
Assessment Year (RAY)
depreciation allowance or proceedings under this
any other allowance or section. In such a case,
deduction for such compliance stipulated u/s
assessment year 148A is not necessary.

(2) Conducting inquiry, providing opportunity before issue of notice [Section 148A] -

(i) Where the Assessing Officer has information which suggests that income chargeable
to tax has escaped assessment in the case of an assessee for the relevant assessment
year, he shall, before issuing any notice under section 148 provide an opportunity of
being heard to such assessee by serving upon him a notice to show cause as to why
a notice under section 148 should not be issued in his case and such notice to show
cause shall be accompanied by the information which suggests that income
chargeable to tax has escaped assessment in his case for the relevant assessment
year.
(ii) On receipt of the notice, the assessee may furnish his reply within such period, as may
be specified in the notice.
(iii) The Assessing Officer shall, on the basis of material available on record and taking
into account the reply of the assessee, if any, pass an order with the prior approval of
the specified authority determining whether or not it is a fit case to issue notice under
section 148.
 ASSESSMENT PROCEDURE 15.83
a

(iv) The provisions of this section shall not apply to income chargeable to tax escaping
assessment for any assessment year in the case of an assessee where the Assessing
Officer has received information under the scheme notified under section 135A.

Section 151- “Specified authority” for the purposes of sections 148 and 148A shall be
the Additional Commissioner or the Additional Director or the Joint Commissioner or the
Joint Director, as the case may be.
(3) Issue of notice where income has escaped assessment [Section 148] – Before making
the assessment, reassessment or recomputation under section 147,
a) the Assessing Officer shall, subject to the provisions of section 148A, issue a notice under
section 148 to the assessee, along with a copy of the order passed under section 148A.
b) requiring the assessee to furnish, within such period as may be specified in the notice,
not exceeding three months from the end of
the month in which such notice is issued, a
return of his income or income of any other
person in respect of whom he is assessable
under this Act during the previous year
corresponding to the relevant assessment year
c) The return of income shall be furnished in the prescribed form and verified in the
prescribed manner and setting forth such other particulars as may be prescribed and
the provisions of this Act shall apply accordingly as if such return were a return
required to be furnished under section 139.
However, where a return of income is furnished beyond the period allowed above,
such return would not be deemed to be a return under section 139 and accordingly,
the assessing officer can proceed with best judgment assessment in such a case.
Conditions: Notice under section 148 can be issued only if the following conditions are
satisfied -
- There is information with the Assessing Officer which suggests that the income
chargeable to tax has escaped assessment in the case of the assessee for the relevant
assessment year.
- In case the Assessing Officer has received information under the scheme notified
under section 135A, the prior approval of the specified authority is obtained.
For the purposes of this section and section 148A, the ‘information’ with the Assessing
Officer which suggests that the income chargeable to tax has escaped assessment means —
 15.84 DIRECT TAX LAWS

(i) any information in the case of the assessee for the relevant assessment year in
accordance with the risk management strategy formulated by the Board from time
to time; or
(ii) any audit objection to the effect that the assessment in the case of the assessee for
the relevant assessment year has not been made in accordance with the provisions of
this Act; or
(iii) any information received under an agreement referred to in section 90 or section 90A ; or
(iv) any information made available to the Assessing Officer under the scheme notified
in respect of faceless collection of information under section 135A; or
(v) any information which requires action in consequence of the order of a Tribunal or a Court.
(vi) any information emanating from a survey conducted under section 133A (other than
conducted under section 133A(2A) for verifying TDS and TCS) on or after 01.09.2024.
(4) Time limit for notices under sections 148 and 148A [Section 149]

(i) No notice under section 148 shall be issued for the relevant assessment year -

(a) if three years and three months have elapsed from the end of the relevant
assessment year, unless the case falls under clause (b)
(b) if three years and three months, but not more than five years and three months,
have elapsed from the end of the relevant assessment year unless the
Assessing Officer has in his possession books of account or other documents
or evidence related to any asset or expenditure or transaction or entries which
show that the income chargeable to tax, which has escaped assessment,
amounts to or is likely to amount to ` 50 lakhs or more.
(ii) No notice to show cause under section 148A shall be issued for the relevant
assessment year -
(a) if three years have elapsed from the end of the relevant assessment year,
unless the case falls under clause (b)
(b) if three years, but not more than five years, have elapsed from the end of the
relevant assessment year unless the income chargeable to tax which has
escaped assessment, as per the information with the Assessing Officer,
amounts to or is likely to amount to ` 50 lakh or more.
 ASSESSMENT PROCEDURE 15.85
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(5) Time limit for notice [Section 149] – Section 149(1) provides time limit upto which notice
under section 148 can be issued for the relevant assessment year. However, section 149(2)
provides time limit upto which notice under section 148A can be issued for the relevant
assessment year.
(6) Provision for cases where assessment is in pursuance of an order on appeal, etc.
[Section 150]

(i) Notwithstanding anything contained in section 149, the notice under section 148 may
be issued at any time for the purpose of making an assessment or reassessment or
recomputation in consequence of or to give effect to any finding or direction contained
in an order passed by any authority in any proceeding under this Act by way of appeal,
reference or revision or by a Court in any proceeding under any other law.
(ii) These provisions shall not apply in any case where any such assessment,
reassessment or recomputation as is referred to in that sub-section relates to an
assessment year in respect of which an assessment, reassessment or recomputation
could not have been made at the time the order which was the subject-matter of the
appeal, reference or revision, as the case may be, was made by reason of any other
provision limiting the time within which any action for assessment, reassessment or
recomputation may be taken.
 15.86 DIRECT TAX LAWS

15.19 FACELESS ASSESSMENT OF INCOME ESCAPING

ASSESSMENT [SECTION 151A]
Section 151A provide for faceless assessment of income escaping assessment.

(1) Faceless assessment scheme for income escaping assessment: Faceless assessment
scheme for income escaping assessment may be notified by the Central Government, for
the purposes of assessment, reassessment or re-computation under section 147 or issuance
of notice under section 148 or issuance of show-cause notice or passing of order
under section 148A or sanction for issue of such notice under section 151, so as to impart
greater efficiency, transparency and accountability by—

(a) eliminating the interface between the income-tax authority and the assessee or any
other person to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialisation;
(c) introducing a team-based assessment, reassessment, re-computation or issuance or
sanction of notice with dynamic jurisdiction.
(2) Notification to be laid before each House of Parliament: Every notification issued has to
be laid before each House of Parliament, as soon as may be after the issue.
Accordingly, the Central Government has, vide Notification no. 18/2022 dated 29.3.2022
specified that:
(a) assessment, reassessment or recomputation under section 147 or
(b) issuance of notice under section 148
would be through automated allocation, in accordance with risk management strategy
formulated by the Board as referred to in section 148 for issuance of notice, and in a faceless
manner, to the extent provided in section 144B with reference to making asse ssment or
reassessment of total income or loss of assessee.
(3) Applicability or non-applicability of any of the provisions of the Act as may be notified
by the Central Government to give effect to the Scheme: The Central Government may, for
the purpose of giving effect to the scheme, direct that any of the provisions of the Income-tax
Act, 1961 shall not apply or shall apply with such exceptions, modifications and adaptations as
may be specified in the notification. However, no direction shall be issued after
31st March, 2022.
 ASSESSMENT PROCEDURE 15.87
a

15.20 OTHER PROVISIONS [SECTION 152]

(1) Income escaping assessment to be charged to tax at rates applicable for respective
years [Section 152(1)]

In the case of any assessment or reassessment or recomputation made under section 147,
the income escaping assessment would be chargeable to tax at the rate applicable to the
respective years in which such income is liable to be taxed.
(2) Assessee entitled to claim dropping of proceedings under section 147 in certain
cases [Section 152(2)]

Where an assessment is reopened under section 147, the assessee may claim that the
proceedings under section 147 shall be dropped on his showing that he had been assessed
on an amount not lower than what he would be rightly liable for, even if the income alleged
to have escaped assessment had been taken into account. Alternatively, he can make such
a claim on showing that the assessment or computation had been properly made. An
assessee can avail of this benefit only if he had not challenged any part of the original
assessment order either by filing an appeal or filing a revision petition.
The assessee, while making such claim, shall not be entitled to reopen matters concluded by
an order under sections 154,155, 260, 262 or 263.

15.21 TIME LIMIT FOR COMPLETION OF ASSESSMENTS

AND REASSESSMENTS [SECTION 153]
(1) Time limits in different cases/circumstances –

Section Proceeding Case/Circumstanc Time limit for completion of assessment

e or reassessment
153(1) Order of In respect of an
assessment order relating to:
u/s 143 or 144 A.Y.2017-18 or any 21 months from the end of the assessment
earlier A.Y. and year in which the income was first
made on or after assessable
1.6.2016
A.Y.2018-19 18 months from the end of the assessment
year in which the income was first
assessable
 15.88 DIRECT TAX LAWS

A.Y.2019-20 12 months from the end of the assessment

year in which the income was first
assessable
A.Y. 2020-21 18 months from the end of the assessment
year in which the income was first
assessable
A.Y.2021-22 9 months from the end of the assessment
year in which the income was first
assessable
A.Y. 2022-23 and 12 months from the end of the assessment
thereafter year in which the income was first
assessable
Where an updated return under section 139(8A) is furnished, an order of assessment
under section 143 or section 144 may be made at any time before the expiry of 12
months from the end of the financial year in which such return was furnished.
Where a return is furnished in consequence of an order under section 119(2)(b), an
order of assessment under section 143 or section 144 may be made at any time
before the expiry of 12 months from the end of the financial year in which such return
was furnished.
153(2) Order of Where notice u/s 9 months from the end of the financial year
assessment, 148 is served in which the notice was served
reassessment before 1.4.2019
or
Where notice u/s 12 months from the end of the financial year
recomputation
148 is served on or in which the notice was served
u/s 147
after 1.4.2019
153(3) Fresh If order u/s 250 or 9 months from the end of the financial year
assessment 254 is received or in which the said order u/s 250 or 254 is
u/s 143/144/ order u/s 263/264 is received by the PCC/CC/PC/CIT 1 or the
147 or an passed before order u/s 263 or u/s 264 is passed by the
fresh order u/s 01.04.2019 PCC/CC/ PC/CIT
92CA
If order u/s 250 or 12 months from the end of the financial year
(reference to
254 is received or in which the said order u/s 250 or 254 is
TPO), as the
order u/s 263/264 is received by the PCC/CC/PC/CIT or the
case may be,
passed on or after order u/s 263 or u/s 264 is passed by the
where the
01.04.2019 PCC/ CC/ PC/CIT
original
assessment or
order u/s

1Principal
Chief Commissioner (PCC) / Chief Commissioner (CC) / Principal Commissioner (PC) / Commissioner of
Income-tax (CIT).
 ASSESSMENT PROCEDURE 15.89
a

92CA, has
been set
aside,
cancelled and
referred back
to the
Assessing
Officer by an
order u/s 250 /
254/ 263/264
153(3A) Where an Period available for completion of
assessment or assessment or reassessment referred under
reassessment section 153(1)/(1A)/(2)/(3) shall be
is pending on extended by 12 months in -
the date of - a case where such search is initiated u/s
initiation of 132 or such requisition is made u/s 132A;
search u/s 132
- the case of an assessee, to whom any
or making of
money, bullion, jewellery or other
requisition u/s
valuable article or thing seized or
132A.
requisitioned belongs to;
- the case of an assessee, to whom any
books of account or documents seized or
requisitioned pertains or pertain to, or any
information contained therein, relates to.
153(4) Where a An additional time period of 12 months is
reference is available for completion of assessment/
made to the reassessment in such cases. Thus, the
TPO u/s revised time limit shall be as follows:
92CA(1)
during the
course of
proceeding for
assessment or
reassessment
Completion of In relation to 33 months from the end of the assessment
assessment A.Y.2017-18 or year in which the income was first
u/s 143 or u/s earlier A.Y. assessable.
144. In relation to A.Y. 30 months from the end of the assessment
2018-19 year in which the income is first assessable
In relation to A.Y. 24 months from the end of the assessment
2019-20 year in which the income is first assessable
 15.90 DIRECT TAX LAWS

In relation to A.Y. 30 months from the end of the assessment

2020-21 year in which the income is first assessable
A.Y.2021-22 21 months from the end of the assessment
year in which the income was first
assessable
A.Y.2022-23 and 24 months from the end of the assessment
thereafter year in which the income was first
assessable
Where an updated return under section 139(8A) is furnished, an order of assessment
under section 143 or section 144 may be made at any time before the expiry of 24
months from the end of the financial year in which such return was furnished.
Completion of Where notice u/s 21 months from the end of the financial year
assessment/ 148 is served in which notice u/s 148 is served.
reassessment before 1.4.2019
/re- Where notice u/s 24 months from the end of the financial year
computation 148 is served on or in which the notice u/s 148 is served
u/s 147 after 1.4.2019
Completion of Where order u/s 21 months from the end of the financial year
fresh 250 or 254 is in which such order u/s 250 or 254 is
assessment or received or order received by the PCC or CC/PC or CIT or
fresh order u/s u/s 263/264 is such order u/s 263 or 264 is passed by the
92CA in passed before PCC or CC or PC or CIT, as the case may
pursuance of 01.04.2019 be.
an order u/s
Where order u/s 24 months from the end of the F.Y. in which
250 or 254 or
250 or 254 is the said order u/s 250 or 254 is received by
an order
received or order the PCC/CC/PC/CIT or the order u/s 263 or
passed u/s
u/s 263/264 is u/s 264 is passed by the PCC/CC/PC/CIT
263 or u/s 264
passed on or after
01.04.2019
Completion of An additional time period of 12 months is
pending available for completion of assessment/
assessment or reassessment referred under section
reassessment 153(1)/(1A)/(2)/(3)/(3A).
on the date of
initiation of
search u/s 132
or making of
requisition u/s
132A.
153(5) Effect to be Where order u/s The order u/s 250/254/ 260/262/263/264
given by the 250/ 254/ 260/ 262/ shall be made within time specified in
Assessing 263/264 requires section 153(3) i.e., within 9 months in
 ASSESSMENT PROCEDURE 15.91
a

Officer or the verification of issue respect of order passed on or before

Transfer by submission of 31.03.2019 and 12 months in respect of an
Pricing officer, any document by order passed on or after 1.4.2019.
as the case assessee or any
may be, to an other person or
order u/s 250/ where opportunity
254/ 260/ 262/ of being heard is to
263/ 264, be provided to the
wholly or assessee.
partly,
otherwise than
by making a
fresh
assessment or
reassessment
or fresh order
u/s 92CA, as
the case may
be
In any other case 3 months from the end of the month in which
the order u/s 250/254/ 260/262 is received
by the PCC/CC/PC/CIT or the order u/s
263/264 is passed by the PCC/CC/PC/CIT.
Note – Additional period of 6 months may
be allowed to the A.O./T.P.O. to give effect
to order if the PC/CIT is satisfied, on an
application from the A.O. /T.P.O., that the
order could not be given effect to within 3
months due to reasons beyond the control
of the A.O./T.P.O.
153(5A) Where the The Assessing Officer shall proceed to
Transfer modify the order of assessment or
Pricing Officer reassessment or recomputation, in
gives effect to conformity with such order of the Transfer
an order or Pricing Officer, within 2 months from the end
direction u/s of the month in which such order of the
263 by an Transfer Pricing Officer is received by him.
order u/s
92CA and
forwards such
order to the
Assessing
Officer
 15.92 DIRECT TAX LAWS

153(6)(i) Where the 12 months from the end of the month in

assessment, which the order is received or passed by the
reassessment PCC or CC or PC or CIT.
or
recomputation
is made on the
assessee or
any person in
consequence
of or to give
effect to any
finding or
direction
contained in
an order u/s
250/254/260/2
62/ 263/264 or
in an order of
any court in a
proceeding
otherwise than
by way of
appeal or
reference.
153(6)(ii) Where, in the 12 months from the end of the month in
case of a firm, which the assessment order in the case of
an the firm is passed.
assessment is
made on a
partner of the
firm in
consequence
of an
assessment
made on the
firm under
section 147

Notwithstanding anything contained in the above provisions of this section or section 158BE, the
order of assessment or reassessment, relating to any assessment year, which stands revived under
section 158BA(5), shall be made within a period of one year from the end of the month of such
revival or within the period specified in this section or section 158BE, whichever is later.
[Section 153(8)].
 ASSESSMENT PROCEDURE 15.93
a

(2) Exclusion of period [Explanation 1 to section 153] - In computing the period of limitation
for the purposes of section 153, the following time periods shall be excluded:
Case Exclusion of Period
Commencing from Ending with
(i) Contravention of the date on which the the date on which the copy of
the provisions of A.O. intimates the the order withdrawing the
section Central Government or approval or rescinding the
10(21)/(22B)/ the prescribed authority, notification, as the case may
(23A)/ (23B) the said contravention as be, is received by the A.O.
required under clause (i)
of the first proviso to
section 143(3)
(ii) Direction to get the date on which the the last date on which the
accounts audited or A.O. directs the assessee is required to
inventory valued assessee to get his furnish a report of such audit
under section accounts audited or or inventory valuation
142(2A) inventory valued under (or)
section 142(2A) the date on which the order
setting aside such direction is
received by the PC/CIT, if
such direction is challenged
before a Court.
(iii) Reference to the the date on which the the date on which the report
Valuation Officer Assessing Officer makes of the Valuation Officer is
under section a reference to the received by the Assessing
142A(1) Valuation Officer Officer.
(iv) Where the the date on which the the date on which the order
assessee furnishes Assessing Officer under section 158A(3) is
declaration received the declaration made by him
claiming that any under section 158A(1) Note – However, such period
question of law cannot exceed 60 days.
arising in his case
for an assessment
year which is
pending before the
A.O. or any
appellate authority
is identical with a
question of law
arising in his case
for another A.Y.
which is pending
 15.94 DIRECT TAX LAWS

before the High

Court or Supreme
Court.
(v) Where an the date on which an the date on which the order
application is made application is made rejecting the application is
before the Board for before the Board for received by the PC/CIT u/s
Advance Rulings Advance Rulings u/s 245R(3)
u/s 245Q(1) 245Q(1) (or)
the date on which the
advance ruling pronounced
by it is received by the PC/CIT
u/s 245R(7)
(vi) Where reference(s) the date on which a the date on which the
for exchange of reference or first of the information requested is last
information is made references for exchange received by the PC/CIT
by a competent of information is made by (or)
authority an authority competent a period of one year,
under an agreement
whichever is less
referred to in section 90
or section 90A
(vii) Where a reference the date on which a the date on which a direction
is made by A.O. u/s reference for declaration under section 144BA(3) is
144BA(1) to PC/CIT of an arrangement to be issued by PC/CIT, if no
at any stage of an IAA is received by the objections are filed by the
assessment or PC/CIT under section assessee (or)
reassessment 144BA(1) the date on which Approving
proceedings, on the Panel issue directions in
basis of material & respect of the declaration of
evidence available the arrangement as an IAA
to declare an under section 144BA(6) (or)
arrangement as IAA the date on which order of
and determine its PC/CIT not invoking the
consequence provisions of Chapter X-A,
under section 144BA(5), is
received by the A.O.
(viii) Where the books of the date on which a on the date on which the
account or other search is initiated under books of account or other
documents, or any section 132 or a documents, or any money,
money, bullion, requisition is made under bullion, jewellery or other
jewellery or other section 132A valuable article or thing
valuable article or seized under section 132 or
thing seized under requisitioned under section
section 132 or 132A, as the case may be, are
 ASSESSMENT PROCEDURE 15.95
a

requisitioned under handed over to the Assessing

section 132A, as Officer having jurisdiction
the case may be, over the assessee—
are handed over by (a) in whose case such search
the Authorising is initiated under section 132
Officer to the or such requisition is made
Assessing Officer under section 132A; or
having jurisdiction (b) to whom any money,
over the assessee bullion, jewellery or other
valuable article or thing
seized or requisitioned
belongs to; or
(c) to whom any books of
account or documents seized
or requisitioned pertains or
pertain to, or any information
contained therein, relates to
(However, such period should
not be more than 180 days)
Where after exclusion of this
period, the period of limitation
for making an order of
assessment, reassessment or
recomputation, as the case
may be, ends before the end
of the month, such period
shall be extended to the end
of such month.
(ix) Where the the date on which the the date on which the copy of
Assessing Officer is Assessing Officer makes the order either cancelling the
satisfied that any a reference to the approval/ registration, as the
fund or institution or Principal Commissioner case may be or refusing to
trust or any or Commissioner under cancel the approval/
university or other section 143(3) registration under section
educational 10(23C) or section 12AB(4),
institution or any as the case may be, is
hospital or other received by the Assessing
medical institution Officer
referred to in
section
10(23C)(iv)/(v)/(vi)/
(via) or any trust or
institution referred
to in section 11, has
 15.96 DIRECT TAX LAWS

committed any
specified violation
under section
10(23C) or section
12AB(4), as the
case may be
(x) the time taken in reopening the whole or any part of the proceeding or in
giving an opportunity to the assessee to be re-heard under the proviso to
section 129; or
(xi) the period commencing on the date on which the stay on the assessment
proceeding was granted by an order or injunction of any court and
ending on the date on which a certified copy of the order vacating the
stay was received by the jurisdictional Principal Commissioner or
Commissioner.
(3) Period of limitation in certain cases

Case Period of limitation

(i) Where immediately after the exclusion of Such remaining period shall be
the aforesaid period, the period of limitation extended to 60 days and the
referred to in section 153(1)/(1A)/(2)/(3)/(8) aforesaid period of limitation shall be
available to the Assessing Officer for deemed to be extended accordingly.
making an order of assessment,
reassessment or re-computation, as the
case may be, is less than 60 days
(ii) Where the period available to the Transfer Such remaining period shall be
Pricing Officer is extended to 60 days in extended to 60 days and the
accordance with the proviso to section aforesaid period of limitation shall be
92CA(3A), and the period of limitation deemed to be accordingly extended.
available to the Assessing Officer for
making an order of assessment,
reassessment or re-computation, as the
case may be, is less than 60 days

(4) Deeming provisions in respect of assessment of excluded income for another

assessment year or on another person

Case Consequence
(a) Where, by an order referred to An assessment of such income for another
in section 153(6)(i), any assessment year shall, for the purposes of
income is excluded from the sections 150 and 153, be deemed to be one made
total income of the assessee in consequence of or to give effect to any finding
for an assessment year or direction contained in the said order.
 ASSESSMENT PROCEDURE 15.97
a

(b) Where, by an order referred to An assessment of such income on such other

in section 153(6)(i), any person shall, for the purposes of section 150 and
income is excluded from the section 153, be deemed to be one made in
total income of one person consequence of or to give effect to any finding or
and held to be the income of direction contained in the said order, provided
another person such other person was given an opportunity of
being heard before the said order was passed.

15.22 RECTIFICATION OF MISTAKES [SECTION 154]

(1) Manner of rectification of a mistake apparent from the record - With a view to rectifying
any mistake apparent from the record, an income tax authority referred to in section 116 may:

Amend any
order passed
by it under the
provisions of
this Act

Amend any Recitification Amend any

intimation of mistake intimation or
u/s apparent from deemed
206CB(1) the record intimation u/s
143(1)

Amend any
intimation u/s
200A(1)

(2) Mistake apparent from the record - The jurisdiction of any authority under the Act to
make an order under section 154 depends upon the existence of a mistake apparent on the
face of the record.
(i) Mistake apparent from the record may be a mistake of fact as well as a mistake
of law - For instance, the treatment of non-agricultural income as agricultural income
and granting exemption in respect of such income is an obvious mistake of law, which
could be rectified under section 154.
 15.98 DIRECT TAX LAWS

(ii) Mere change of opinion cannot be a basis for rectification - A mere change of
opinion, however, cannot be the basis on which the same or the successor Assessing
Officer can treat a case as one of rectification of mistake. A mistake is one apparent
from the record in case, where it is a glaring, obvious, patent or self -evident. Mistake,
which has to be discovered by a long-drawn process of reasoning or examination or
arguments on points, where there may be two opinions, cannot be said to be a mistake
or error apparent from the record.
(iii) Subsequent decision of Supreme Court - A mistake arising as a result of
subsequent interpretation of law by the
Supreme Court would also constitute
an error apparent from the record.

(iv) Retrospective amendment of law - could also lead to rectification if an order is plainly
and obviously inconsistent with the specific and clear provision, as amended
retrospectively.
(3) Doctrine of Partial Merger - Where any matter has been considered and decided in any
proceeding by way of appeal or revision relating to a rectifiable order, the authority passing
such order may, amend the order in relation to any matter other than the matter which has
been so considered and decided.
(4) Amendment may be suo motu or the same may be brought to notice by the assessee
or deductor or collector - The concerned authority may make an amendment on its own
motion. However, he should mandatorily make the amendment for rectifying any such mistake
which has been brought to its notice by the assessee or the deductor or the collector. Where
the authority concerned is the Joint Commissioner (Appeals) or Commissioner (Appeals), the
mistake can be pointed out by the Assessing Officer also.
(5) Opportunity of being heard to be given to the assessee or deductor or collector
before enhancing an assessment or reducing a refund- An amendment which has the
effect of enhancing an assessment or reducing a refund or otherwise increasing the liability
of the assessee or the deductor or the collector, shall not be made unless the authority
concerned has given notice to the assessee or the deductor or the collector of its intention
so to do and has allowed the assessee or the deductor or the collector a reasonable
opportunity of being heard.
 ASSESSMENT PROCEDURE 15.99
a

(6) Action to be taken by the Assessing Officer depending upon the effect of the
amendment made
Case Action to be taken by A.O.
(i) Where an amendment is made under An order shall be passed in writing by
this section the authority concerned
(ii) Where any such amendment has the The Assessing Officer shall make any
effect of reducing the assessment, or refund due to such assessee or the
otherwise reducing the liability of the deductor or the collector
assessee or the deductor or the
collector
(iii) Where any such amendment has the The Assessing Officer shall serve on
effect of enhancing the assessment or the assessee or the deductor or the
reducing the refund already made or collector, as the case may be a notice
otherwise increasing the liability of the of demand in the prescribed form
assessee or the deductor or the collector specifying the sum payable

(7) Time limit for rectification - Except in cases which are specifically covered by section
155, no amendment under this section shall be made after the expiry of four years from end
of the financial year in which the order sought to be amended was passed.
Where an application for amendment is made by the assessee or by the deductor or by the
collector, the income-tax authority shall pass an order within a period of six months from
the end of the month in which the application is received by it, either making the
amendment or refusing the claim.
It may be noted that the time limit of 6 months from the end of the month in which the
application is received from the assessee or deductor or collector cannot exceed the outer
time limit of 4 years from the end of the financial year in which the order sought to be rectified
was passed.

Time limit for rectification

Suo moto rectification [Except Where application is made by the

cases covered u/s 155] assessee/deductor/ collector

4 years from the end of the F.Y. in which the 6 months from the end of the month in which
order sought to be amended was passed the application is received
 15.100 DIRECT TAX LAWS

15.23 OTHER AMENDMENTS [SECTION 155]

Where any assessment made in respect of any assessment year is required to be amended on
account of any specific provisions in the Act mentioned hereunder, such an order can be passed
within the time mentioned below and in these cases, the time limit of 4 years would not be reckoned
from the end of the year in which the order sought to be amended was passed but would be reckoned
from the end of the financial year mentioned in column (4) in the table below -
Sub- Circumstances – head Circumstances – details Time limit
section note
(1) (2) (3) (4)
(1A) Rectification of order of Where a partner is assessed The four years period for
assessment of partners in respect of any making the amendment in
consequence to remuneration from a firm the assessment of
disallowance of the under section 28(v) and later partners would be
remuneration in the in the assessment or reckoned from the end of
hands of the firm reassessment of the firm or the financial year in which
reduction or enhancement the final order was passed
made in the income of the in the case of the firm.
firm under sections
154/250/254/263/264, such
remuneration is found not
deductible under section
40(b), the assessment order
of the partner shall be
amended to exclude such
remuneration which is not
deductible in the firm’s case.
This is in view of the proviso
to section 28(v) which states
that the remuneration
disallowed in the firm’s case
cannot be charged to tax in
the partner’s hands.
(2) Rectification of Where a member is The four years period for
member’s assessment assessed in respect of any making the amendment in
consequent to income from the AOP/BOI the case of member would
enhancement or and later in the assessment be reckoned from the end
reduction of income of of such AOP/BOI, an of the financial year in
the AOP/BOI addition or disallowance is which the final order was
made resulting in variation of passed in the case of the
the income of the AOP/BOI, AOP/BOI.
or where there is any
 ASSESSMENT PROCEDURE 15.101
a

enhancement or reduction in
the income of the AOP/BOI
as a result of an order in
appeal, reference, revision
or rectification,
consequential amendment
in the assessment of a
member of an AOP/BOI is to
be made.
(4) Rectification of Losses incurred in one year The four year period for
assessment consequent is claimed by the assessee making the amendment of
to disallowance of excess in the subsequent year(s). the subsequent years’
loss or depreciation However, the year of order or intimation or
allowed as a result of incurring loss may be deemed intimation would
proceedings initiated subject to reassessment be reckoned from the end
under section 147 proceedings u/s 147 leading of the financial year in
re-computation of total which the order was
income, where excessive passed under section 147.
loss or depreciation
allowance had been
allowed.
This would result in
amending the
order/intimation/deemed
intimation of the subsequent
years in which the
loss/allowance (computed
as per return/intimation or
original assessment) was
claimed.
The order / intimation /
deemed intimation of the
subsequent years may need
to be amended to give effect
to the reduced loss or
allowance in consequence
of any proceedings initiated
u/s 147.
(7B) Rectification Under the provisions of Four years from the end of
necessitated on account section 47A, capital gains the previous year in which
of capital gains, which which were not charged to the relevant capital asset
were not charged to tax tax by virtue of section 47(iv) was converted into or
by virtue of section or (v) may be deemed to be treated as stock-in-trade
47(iv) or 47(v), chargeable to tax, if, before or, as the case may be,
 15.102 DIRECT TAX LAWS

becoming chargeable the expiry of 8 years from the the parent company
under section 47A date of transfer. ceases to hold the entire
(i) the relevant capital share capital of the
asset was converted subsidiary company.
into or treated as
stock-in-trade or, as
the case may be,
(ii) the parent company
ceases to hold the
entire share capital of
the subsidiary
company
In such circumstances, the
Assessing Officer, may,
accordingly, make an order
amending the original order
for withdrawal of the
exemption granted under
section 47(iv)/(v).
(11A) Rectification to give Deduction u/s 10AA has not The period of four years
effect to deduction been allowed on the ground shall be reckoned from the
under section 10AA that such income has not end of the previous year in
which was not allowed been received in convertible which such income is so
earlier. foreign exchange in India or received in, or brought
has not been brought into into, India.
India, and subsequently such
income or part thereof has
been or is received in, or
brought into, India. In such
case, the AO shall amend the
order of assessment so as to
allow deduction u/s 10AA in
respect of such income or part
thereof as is so received in, or
brought into, India.
(14) Rectification to give Where credit for TDS/TCS The law does not explicitly
effect to TDS/TCS not has not been given owing to state that the time limit of
deducted while TDS/TCS certificates not 4 years for the purpose of
computing tax liability being furnished along with section 154(7) would get
the return of income and extended from the end of
such certificates are the year in which the
produced subsequently TDS/TCS certificates are
before the Assessing Officer produced before the
within two years from the Assessing Officer.
 ASSESSMENT PROCEDURE 15.103
a

end of the assessment year All that it says is that the

in which such income is provisions of section 154
assessable, the Assessing shall apply in all such
Officer can amend the order cases.
of assessment or intimation Therefore, one view would
or deemed intimation under be that the time limit of 4
section 143(1). years would be reckoned
However, such rectification from the end of the year in
under section 155(14) is which the order /intimation/
possible only if the income deemed intimation was
from which tax has been passed.
deducted or the income on The second view could be
which tax has been collected that the time limit of 4
has been disclosed in the years should be reckoned
return of income filed by the from the end of the year in
assessee for the relevant which the TDS/TCS
assessment year. certificates are produced
before the Assessing
Officer.
Going by the purpose of
introduction of section
155, it appears that the
second view seems more
reasonable.
(14A) Rectification to give The assessee may claim The law does not explicitly
effect to credit for rebate or relief u/s 90, 90A state that the time limit of
income-tax paid outside or 91 in respect of tax paid 4 years for the purpose of
India outside India on income section 154(7) would get
which was subject matter of extended from the end of
double taxation. The credit the year in which the
shall be allowed in India application is made by the
based on the proof of assessee after the
payment of such tax outside settlement of the dispute.
India. Sometimes the levy of All that it says is that the
tax outside India on the provisions of section 154
assessee may be in dispute shall apply in all such
and therefore, the assessee cases.
might not have paid the Therefore, one view would
same. In the absence of the be that the time limit of 4
proof of payment, the credit years would be reckoned
for the same cannot be from the end of the year in
given in Indian Income tax which the order /
proceedings. When the intimation / deemed
dispute is finally settled, the intimation was passed.
assessee may pay the tax
 15.104 DIRECT TAX LAWS

outside India and seek to The second view could be

claim the same u/s. 90, 90A that the time limit of 4
or 91, to the extent years should be reckoned
permissible. from the end of the year in
In such cases, the assessee which the assessee files
is required to make the claim the application after the
within a period of six months dispute in the other
from the end of the month in country got settled.
which the dispute is settled Going by the purpose of
with introduction of section
a) evidence of settlement 155, it appears that the
of dispute second view seems more
b) evidence of payment of reasonable.
such tax
c) undertaking that no
credit for such tax has
been directly or
indirectly claimed or
shall be claimed in any
other assessment year.
In such cases, the
Assessing Officer shall
amend the order of
assessment or any
intimation or deemed
intimation under section
143(1), as the case may be,
and the provisions of section
154 shall, so far as may be,
apply thereto.
However, the credit of tax
which was under dispute
shall be allowed for the year
in which such income is
offered to tax or assessed to
tax in India.
(15) Rectification Where the Assessing Officer The period of four years
consequent to revision adopts stamp duty value as shall be reckoned from the
of full value of full value of consideration end of the previous year in
consideration in appeal under section 50C and later, which the order revising
or revision such value is revised in any the value was passed in
appeal or revision, the that appeal or revision.
Assessing Officer shall
amend the assessment
 ASSESSMENT PROCEDURE 15.105
a

order to compute the capital

gain by taking the full value
of consideration to be the
value so revised in such
appeal or revision.
(16) Recomputation of Where capital gains are The four years time period
capital gains on account computed u/s 45(5) based shall be reckoned from the
of reduction of any on the original or enhanced end of the previous year in
compensation in a compensation in a which the order reducing
compulsory acquisition compulsory acquisition and the compensation was
by any Court, Tribunal the same is required to be passed by the Court,
or any other authority recomputed on account of Tribunal or other authority.
any reduction of any
compensation by any Court,
Tribunal, or any other
authority, the Assessing
Officer shall amend the
assessment order so as to
re-compute the capital gain
by taking the compensation
or consideration as reduced
by any Court, Tribunal or
other authority.
(17) Rectification Where deduction under For the purpose of
consequent to revoking section 80RRB is allowed amending the order (in
of patent or exclusion of and subsequent to the which deduction under
name of the assessee allowance of such deduction section 80RRB was
from patents register as in respect of any patent, the originally granted), the
patentee Controller or the High Court period of 4 years is to be
passes an order under the reckoned from the end of
Patents Act, 1970 revoking the previous year in which
the patent or excluding the such order of the
name of the assessee from Controller or High Court,
the Patents Register as as the case may be, is
patentee in respect of that passed.
patent, the Assessing
Officer shall recompute the
total income of assessee for
the relevant previous year
and make necessary
amendments

(18) Where any deduction in Explanation 3 to Section Four year period will begin
respect of any 40(a)(ii), inserted by Finance from the end of the
 15.106 DIRECT TAX LAWS

surcharge or cess, Act, 2022 with retrospective previous year

which is not allowable effect from A.Y. 2005-06, commencing on 1.4.2021.
as deduction under provides that the term ‘tax’ (i.e., from 31.3.2022).
section 40, has been shall include and be deemed Note: If the assessee
claimed and allowed in to have always included makes an application to
the case of an assessee ‘surcharge’ or ‘cess’ and the Assessing Officer in
in any previous year hence shall be an the prescribed form and
inadmissible deduction within the prescribed time
under section 40(a)(ii). (on or before 31.3.2023),
If an assessee has claimed requesting for
the deduction on account of recomputation of the total
‘surcharge’ or ‘cess’ in any income of the previous
previous year, it shall be year without allowing the
deemed that the assessee claim for deduction of
has under-reported income surcharge or cess and
for such previous years for pays the amount due
the purpose of Section thereon within the
270A(3) and the Assessing specified time, such claim
Officer shall recompute the shall not be deemed to be
total income of the assessee under-reported income for
for such previous year and the purposes of section
make necessary 270A(3).
amendment. The A.O., on receipt of
such application, has to
recompute the total
income by amending the
relevant order and issuing
notice u/s 156 specifying
the time period within
which amount of tax
payable, if any, is to be
paid –
(i) for the A.Y. relevant
to the P.Y. for which the
assessee has made an
application for
recomputation of total
income; and
(ii) for the A.Y.s
subsequent to such A.Y.
referred to in (i) above, if
the order for such A.Y.
results in variation in carry
forward of loss or
 ASSESSMENT PROCEDURE 15.107
a

allowance or unabsorbed
depreciation or credit for
tax u/s 115JAA or 115JD
[Rule 132 of Income-tax
Rules, 1962]
After paying the tax
determined, the assessee
has to furnish the details
of payment of tax to the
Assessing Officer within
30 days from the date of
making the payment.
(20) Where any income has The Assessing Officer shall, The period of four years
been included in the on an application made by shall be reckoned from the
return of income the assessee in such end of the financial year in
furnished by an prescribed form, within a which such tax has been
assessee u/s 139 for period of 2 years from the deducted.
any assessment year end of the financial year in
(being the relevant which such tax was
assessment year) and deducted at source, amend
tax on such income has the order of assessment or
been deducted at any intimation allowing
source and paid to the credit of such tax deducted
credit of the Central at source in the relevant
Government in assessment year.
accordance with the The credit of such tax
provisions of Chapter deducted at source shall not
XVII-B in a subsequent be allowed in any other
financial year. assessment year.
(21) Where the TPO Where the arm's length price (a) If assessment,
determines the ALP is determined in relation to intimation or deemed
and has validated the an international transaction intimation of consecutive
assessee's option for a or a specified domestic
two years is made:
block TP assessment transaction under section
covering the next two 92CA(3) for any previous The Assessing Officer is
previous years year and the Transfer required to recompute
Pricing Officer has declared within 3 months from the
that an option exercised by end of the month in which
the assessee is valid under the assessment is
section 92CA(3B) in respect
of such transaction for two completed in the case of the
consecutive previous years assessee for such previous
immediately following such year (i.e. year for which the
previous year, the Assessing TPO determines the ALP).
 15.108 DIRECT TAX LAWS

Officer shall proceed to (b) If assessment,

recompute the total income intimation or deemed
of the assessee for the said intimation of such
two consecutive previous
consecutive two years is
years, by amending the
order of assessment or any not made within said 3
intimation or deemed months period:
intimation under section The Assessing Officer is
143(1), as the case may required to recompute
be,— within 3 months from the
(a) in conformity with end of the month in which
the arm's length such order of assessment
price so determined or any intimation or deemed
by TPO under intimation under section
section 92CA(4A) in 143(1) for such consecutive
respect of such two years, as the case may
transaction; and
be, is made.
(b) taking into account
the directions
issued by DRP
under section
144C(5), if any, for
such previous year,

15.24 NOTICE OF DEMAND [SECTION 156]

(1) When any tax, interest, penalty or fine or any other sum is payable consequent to any order
passed under this Act, the Assessing Officer shall serve upon the assessee, a notice of
demand in the prescribed form, specifying the sum so payable.
An intimation under section 143(1) or section 200A(1) or section 206CB(1) would be
deemed to be a notice of demand for the
purpose of section 156, where any sum is
determined to be payable by the assessee
under section 143(1) or by the deductor under section 200A(1) or by the collector under
section 206CB(1).
 ASSESSMENT PROCEDURE 15.109
a

The Apex Court has, in Sri Mohan Wahi v. CIT (2001) 248 ITR 799, held that failure to
serve notice of demand renders the recovery proceedings invalid.
Note - As per section 292BB, where an assessee had appeared in any proceedings or co -
operated in any enquiry relating to an assessment or reassessment, it shall be deemed that
any notice required to be served upon him, has been duly served upon him in time in
accordance with the provisions of the Act and such assessee shall be precluded from raising
any objection in any proceeding or enquiry that the notice was (a) not served upon him or (b)
not served upon him in time or (c) served upon him in an improper manner. However, the
above provision shall not be applicable where the assessee has raised such objection before
the completion of such assessment or reassessment.
(2) Tax on perquisite of specified securities and sweat equity shares must be paid in the year of
exercising of option. However, where such shares or securities are allotted by the current
employer, being an eligible start-up referred to in section 80-IAC, the perquisite is taxable in
the year -

- after the expiry of 48 months from the end of the relevant assessment year
- in which sale of such security or share are made by the assessee
- in which the assessee ceases to be the employee of the employer,

whichever is earliest.
In such cases, tax or interest on such income included in the notice of demand referred to in
(1) above shall be payable by the assessee within 14 days –
- after the expiry of 48 months from the end of the relevant assessment year
- from the date of sale of such security or share are made by the assessee
- from the date when the assessee ceases to be the employee of the employer,
whichever is earliest.

15.25 MODIFICATION AND REVISION OF NOTICE IN

CERTAIN CASES [SECTION 156A]
Where any tax, interest, penalty, fine or any other sum in respect of which a notice of demand has
been issued under section 156, is reduced as a result of an order of the Adjudicating Authority as
defined in section 5 (1) of the Insolvency and Bankruptcy Code, 2016 , the Assessing Officer shall
 15.110 DIRECT TAX LAWS

modify the demand payable in conformity with such order and shall thereafter serve on the assessee
a notice of demand specifying the sum payable, if any . Such notice of demand shall be deemed to
be a notice under section 156 and the provisions of this Act shall accordingly, apply in relation to
such notice.
Where the order referred to above is modified by the National Company Law Appellate Tribunal or
the Supreme Court, as the case may be, the modified notice of demand issued by the Assessing
Officer earlier shall be revised accordingly.

15.26 INTIMATION OF LOSS [SECTION 157]

When, in the course of the assessment of total income of any assessee, it is established that a loss
has taken place which the assessee is entitled to have carried forward and set -off business loss
under section 72(1), speculation business loss under section 73(2), losses under the head “Capital
Gains” under section 74 and loss from activity of owning and maintain race horses under section
74A(3), the Assessing Officer shall notify the assessee by an order in writing the amount of the loss
as computed by him for this purpose.

15.27 FACELESS RECTIFICATION, AMENDMENTS AND

ISSUANCE OF NOTICE OR INTIMATION [SECTION
157A]
Section 157A provide for faceless rectification, amendments and issuance of notice or intimation.
(1) Faceless rectification, amendments and issuance scheme for income escaping
assessment: The Central Government may make a scheme, by notification in the Official
Gazette, for the purposes of rectification of any mistake apparent from record under section
154 or other amendments under section 155 or issue of notice of demand under section 156,
or intimation of loss under section 157, so as to impart greater efficiency, transparency and
accountability by—

(a) eliminating the interface between the income-tax authority and the assessee or any
other person to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialisation;
 ASSESSMENT PROCEDURE 15.111
a

(c) introducing a team-based rectification of mistakes, amendment of orders, issuance of

notice of demand or intimation of loss, with dynamic jurisdiction.
(2) Applicability or non-applicability of any of the provisions of the Act as may be notified by the
Central Government to give effect to the Scheme: The Central Government may, direct that
any of the provisions of this Act would not apply or would apply with such exceptions,
modifications and adaptations as may be specified in the notification. However, no direction
shall be issued after 31.03.2022.
(3) Notification to be laid before each House of Parliament: Every notification issued has to
be laid before each House of Parliament, as soon as may be after the notification is issued.

15.28 BLOCK ASSESSMENT IN SEARCH AND REQUISITION

CASES
The Finance Act, 2021, amended search and reassessment provisions, abolishing separate search
assessments and streamlining processes under sections 147 to 151A. Challenges like staggered
assessments, prolonged litigation, and inconsistent outcomes were identified, emphasizing the need
for consolidated assessments to reduce taxpayer burden, improve efficiency, and ensure
coordinated investigations in search cases.
Accordingly, in order to make the procedure of assessment of search cases cost effective, efficient
and meaningful, the Finance (No. 2) Act, 2024 reintroduced the scheme of block assessment by
substituting Chapter XIV-B (Sections 158B to 158BI) in cases where a search under section 132 or
a requisition under section 132A has been made on or after 01.09.2024. The main objectives for the
introduction of this scheme are early finalisation of search assessments, coordinated investigation
during search assessments and reduction in multiplicity of proceedings.
(1) Definitions of certain terms

Before we proceed to the procedure of block assessment, let’s understand crucial terms
defined under section 158B:
Term Meaning
Block Period The period comprising previous years relevant to six assessment years
preceding the previous year in which the search was initiated under
section 132 or any requisition was made under section 132A.
It also includes the period starting from 1st April of the previous year in
which the search was initiated, or requisition was made and ending on
 15.112 DIRECT TAX LAWS

the date of the execution of the last of the authorizations for such
search or such requisition.
The last of the authorisations shall be deemed to have been
executed,—
(a) in the case of on the conclusion of search as recorded in
search the last panchnama drawn in relation to
any person in whose case the warrant of
authorisation has been issued
(b) in the case of on the actual receipt of the books of
requisition under account or other documents or assets by
section 132A the Authorised Officer
For example, if the search was initiated on 10-12-2025 and last of authorization executed
on 18.12.2025, the block period will comprise of assessment years relevant to previous
years 2024-25, 2023-24, 2022-23, 2021-22, 2020-21 and 2019-20 including period from
01.04.2025 to 18.12.25.
Undisclosed It includes:
Income - any money, bullion, jewellery, virtual digital assets or other
valuable article or thing or any expenditure or any income based
on any entry in the books of account or other documents or
transactions, where such money, bullion, jewellery, virtual
digital assets, valuable article, thing, entry in the books of
account or other document or transaction represents wholly or
partly income or property which has not been or would not have
been disclosed for the purposes of this Act, or
- any expense, exemption, deduction or allowance claimed under
this Act which is found to be incorrect, in respect of the block
period.

(2) Assessment of total undisclosed income as a result of search [Section 158BA]

(i) Assess or reassess the total undisclosed income of the block period: Where on or
after 1.9.2024, a search is initiated under section 132, or books of account, other
documents or any assets are requisitioned under section 132A, in the case of any
person, then, the Assessing Officer shall proceed to assess or reassess the total
undisclosed income of the block period in accordance with the provisions of this
Chapter XIV-B.
(ii) Abatement of pending assessment or reassessment or re-computation: The
assessment or reassessment or re-computation under any other provisions of this Act
 ASSESSMENT PROCEDURE 15.113
a

(other than this Chapter), if any, pertaining to any assessment year falling in the block
period, pending on the date of initiation of the search under section 132, or making of
requisition under section 132A, as the case may be, shall abate and shall be deemed
to have abated on the date of initiation of search or making of requisition.
(iii) Abatement of pending assessment or reassessment or re-computation even if
notice is issue during search: Any proceeding for assessment or
reassessment or recomputation under any provision of this Act (other than this
Chapter) pertaining to any assessment year falling in the block period (other
than the assessment year in which the last of the authorisations for a search is
executed or requisition is made), for which a notice has been issued during the
period commencing on the date of initiation of search under section 132 or
making of requisition under section 132A and ending on the date of making of
order under section 158BC(1)(c), shall abate and shall be deemed to have been
abated on the date of issue of such notice.
(iv) Abatement of pending assessment or reassessment or re-computation on
reference or order passed under section 92CA: Where during the course of any
pending proceeding for the assessment or reassessment or recomputation under the
provisions of this Act (other than this Chapter), a reference under section 92CA(1) has
been made, or an order under section 92CA(3) has been passed, such assessment or
reassessment or recomputation, along with such reference made or order passed, as
the case may be, shall also abate and shall be deemed to have abated on the date of
initiation of search or making of requisition.
(v) Completion of assessment in case of subsequent search: Where any assessment
under the provisions of this Chapter is required to be made in the case of an
assessee in whose case a subsequent search is initiated or a requisition is made, such
assessment shall be duly completed, and thereafter, the assessment in respect of
such subsequent search or requisition shall be made under the provisio ns of this
Chapter, i.e. the AO must complete the initial assessment before starting the new one.
Where the period of completing the assessment with respect to the subsequent search
is less than 3 months, such period shall be extended to 3 months from the end of the
month in which the assessment with respect to the earlier search was completed.
(vi) Revival of assessment orders due to annulment of block assessment: If any
proceeding initiated under this Chapter or any order of assessment or reassessment
made under section 158BC(1)(c) has been annulled in appeal or any other legal
 15.114 DIRECT TAX LAWS

proceeding, then, notwithstanding anything in this Chapter or section 153, the

assessment or reassessment or recomputation or reference (to TPO under
Section 92CA(1)) or order relating to any assessment year which has abated
above, shall revive with effect from the date of receipt of the order of such annulment
by the Principal Commissioner or Commissioner. It is to be noted that such revival
shall cease to have effect, if such order of annulment is set aside.
The consequential impacts have been made under section 153 to provide the time limit
to complete such revived assessment or reassessment.
(vii) Separate assessment of Total Income (other than undisclosed income) of the
year of Search/Requisition: The total income (other than undisclosed income) of the
assessment year relevant to the previous year in which the last of the authorisations
for a search is executed or a requisition is made shall be assessed separately in
accordance with the other provisions of this Act. Thereby, only undisclosed income of
the block period of six years shall be subject to the provisions of this chapter.

(viii) Taxation of total undisclosed income of block period: The total undisclosed
income relating to the block period shall be charged to tax, at the rate specified in
section 113, as income of the block period irrespective of the previous year or years
to which such income relates.
As per section 113, the total undisclosed income of the block period, determined under
section 158BC, shall be chargeable to tax @60% as increased by the surcharge, if
any, and Health and Education Cess.
(3) Computation of total undisclosed income of block period [Section 158BB]

(i) Determination of Undisclosed Income for Block Period: The total undisclosed
income of the block period shall be an aggregate of the following:
(a) Undisclosed income declared in the return furnished under section 158BC.
(b) Undisclosed income determined by the AO on the basis of evidence found as
a result of search or survey or requisition of books of account or other
documents and any other material or information as are either available with
the Assessing Officer or come to his notice during the course of proceed ings
under this Chapter.
(ii) Income not included in Total Undisclosed Income: The following income shall not
be included in the total undisclosed income of the block period:
 ASSESSMENT PROCEDURE 15.115
a

(a) The total income determined under section 143(1) or assessed under section
143 or section 144 or section 147 or section 153A or section 153C or assessed
earlier under section 158BC(1)(c) or section 245D(4), prior to the date of
initiation of the search or the date of requisition, in respect of any of the previous
year comprising the block period;
(b) The total income declared in the return of income filed under section 139 or in
response to a notice under section 142(1), prior to the date of initiation of the
search or the date of requisition, in respect of any of the previous year
comprising the block period and not covered in (a) above
(c) the income computed by the assessee, in respect of-
(i) a previous year, where such previous year has ended and the due date
for furnishing the return for such year has not expired prior to the date of
initiation of the search or the date of requisition, on the basis of entries
relating to such income or transactions as recorded in the books of
account and other documents maintained in the normal course before
the date of initiation of search or the date of requisition
(ii) the period commencing from the 1st April of the previous year in which
the search is initiated or requisition is made and ending on the day
immediately preceding the date of initiation of search or requisition, on
the basis of entries relating to such income or transactions as recorded
in the books of account and other documents maintained in the normal
course for such period on or before the day immediately preceding the
date of initiation of search or the date of requisition;
(iii) the period commencing from the date of initiation of the search or the
date of requisition and ending on the date of the execution of the last of
the authorisations for search or requisition, on the basis of entries
relating to such income or transactions as recorded in the books of
account and other documents maintained in the normal course for such
period on or before the date of the execution of the last of the
authorisations.
However, where the Assessing Officer is of the opinion that any part of
the income as computed by the assessee is undisclosed, he may
recompute such income.
 15.116 DIRECT TAX LAWS

(d) the total income computed under the provisions where return filing is not
mandatory and tax on such income is paid by TDS under section 115A(5) or
section 115G or section 194P(1).

Note - Losses brought forward from the previous year (prior to the first previous year
comprising the block period) or unabsorbed depreciation under section 32(2) shall not
be set off against the undisclosed income determined in the block assessment under
this Chapter. However, it may be carried forward for being set off in the previous year
subsequent to the assessment year in which the block period ends, for the remaining
period, taking into account the block period and such assessment year, and in
accordance with the provisions of this Act [Section 158BB(7)].

(iii) Treatment of Income Relating to International and Specified Domestic

Transactions during Search Proceedings: Where any income required to be
determined as a result of search or requisition of books of account or other documents
and any other material or information as are either available with the Assessing Officer
or come to his notice during the course of proceedings under this Chapter, or
- determined on the basis of entries relating to such income or transactions as
recorded in books of account and other documents maintained in the normal
course on or before the date of the execution of the last of the authorisations,
- relates to any international transaction or specified domestic transaction
referred to in section 92CA, pertaining to the period beginning from the 1 st April
of the previous year in which last of the authorisations was executed and ending
with the date on which last of the authorisations was executed,
- such income shall not be considered for the purposes of determining the total
undisclosed income of the block period and
- such income shall be considered in the assessment made under the other
provisions of this Act.
(iv) Special provision for the determination of the undisclosed income:
- For a firm - such income assessed for each of the previous years falling within
the block period shall be the income determined before allowing deduction of
salary, interest, commission, bonus or remuneration by whatever name called
to any partner not being a working partner;
 ASSESSMENT PROCEDURE 15.117
a

- The provisions of sections 68, 69, 69A, 69B, and 69C shall, so far as may be, apply
and references to "financial year" in those sections shall be construed as references
to the relevant previous year falling in the block period;
- The provisions of section 92CA shall, so far as may be, apply and references to
"previous year" in that section shall be construed as reference to the relevant
previous year falling in the block period excluding the period beginning from the
April 1st of the previous year in which last of the authorisations was executed and
ending with the date on which last of the authorisations was executed .
(4) Procedure for block assessment [Section 158BC]

Where any search has been initiated under section 132 or books of account, other documents
or assets are requisitioned under section 132A, in the case of any person, then:

(i) The Assessing Officer shall, in respect of search initiated, or books of account or other
documents or any assets requisitioned, issue a notice to such person, requiring him to
furnish within such period, not exceeding a period of sixty days, as may be specified in the
notice, a return in the form and verified in the manner, as may be prescribed, setting forth
his undisclosed income for the block period:
- Such return shall be considered as if it was a return furnished under the provisions
of section 139 and notice under section 143(2) shall thereafter be issued.
- Returns filed under this section and furnished beyond the period allowed in the
notice are not deemed to be a return under section 139.
- No notice under section 148 is required to be issued for the purpose of proceeding
under this Chapter:
- A person who has furnished a return under this clause shall not be entitled to furnish
a revised return.
- The time allowed for furnishing a return under this clause may be extended by
a further period of thirty days by AO, where:
o The due date for furnishing the return of the previous year immediately
preceding the year of search or requisition has not expired before the
date of initiation of the search or the date of requisition;
o the assessee was liable for audit under section 44AB for such previous
year;
 15.118 DIRECT TAX LAWS

o The accounts (maintained in the normal course) of such previous year

have not been audited on the date of issuance of such notice; and
o The assessee requests in writing for an extension of time for furnishing such
a return so that he may get such accounts audited.
(ii) The Assessing Officer shall proceed to determine the total undisclosed income of
the block period, in the manner laid down in section 158BB and the provisions of
section 142, 143(2), 143(3), 144, 145, 145A and 145B shall apply.
(iii) The Assessing Officer, on determination of the total undisclosed income of the block
period in accordance with this Chapter, shall pass an order of assessment or
reassessment and determine the tax payable by him on the basis of such
assessment or reassessment.
However, the provisions of section 144C, which deals with the Dispute
Resolution Panel, do not apply to orders made under this scheme.
(iv) The assets seized under section 132 or requisitioned under section 132A shall be
dealt with in accordance with the provisions of section 132B.
(v) The computerised processing of returns under Section 143(1) does not apply to returns
filed under this section.
(vi) The Assessing Officer must obtain prior approval from an Additional Commissioner,
Additional Director, Joint Commissioner, or Joint Director before issuing a notice under
this section 158BC.
(5) Undisclosed income of any other person [Section 158BD]

Where the Assessing Officer is satisfied that any undisclosed income belongs to or pertains
to or relates to any person (referred as “other person”), other than the person (referred as
“specified person”) with respect to whom search was made under section 132 or whose books
of account or other documents or any assets were requisitioned under section 132A, then,
any money, bullion, jewellery, virtual digital assets or other valuable article or thing, or assets,
or expenditure, or books of account, other documents, seized or requisitioned or any other
material or information relating to the aforesaid undisclosed income shall be handed over
to the Assessing Officer having jurisdiction over such other person and that Assessing
Officer shall proceed under section 158BC against such other person and the provisions of
this Chapter shall apply accordingly.
 ASSESSMENT PROCEDURE 15.119
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Cases Block period of the other person

Where there is one specified person the block period for such other person shall be the
relevant to such other person same as that for the specified person.

Where there is more than one the block period for such other persons shall be the
specified persons relevant to such same as that for the specified person in whose case the
other person block period ends on a later date.

Additionally, in case of such other person, for the purposes of abatement under Section
158BA(2)/(3), the reference to the date of initiation of the search or making of requisition shall
be construed as a reference to the date on which such money, bullion, jewellery, virtual digital
asset or other valuable article or thing or any books of account or other documents seized or
requisitioned or any other material or information relating to the aforesaid undisclosed income
were received by the Assessing Officer having jurisdiction over such other person.
(6) Time-limit for completion of block assessment [Section 158BE]

Notwithstanding the provisions of section 153, the order under section 158BC shall be passed
within twelve months from the end of the quarter in which the last of the authorisations
for search under section 132, or requisition under section 132A, was executed or made,
as the case may be. For example, the time limits for completing the block assessment where
the last authorisation of a search is falling between 1st April and 30th June 2025 will be 30th
June 2026.
The period of limitation for completion of assessment or reassessment for the block period in
the case of the other person referred to in section 158BD shall be twelve months from the
end of the quarter in which the notice under section 158BC in pursuance of section 158BD,
was issued to such other person.
The Finance Act 2025, under section 158BC(1)(a), enabled the extension by AO in the time
allowed to file the return by a further period of 30 days if certain conditions are fulfilled. The
corresponding extension in the limitation period to complete the block assessment is inserted
under section 158BE in such cases. The period of limitation shall be thirteen months from the
end of the quarter in which the last authorisation for a search under or requisition is executed
or made. A similar extension in the limitation period for the completion of block assessment
in the case of other person is inserted.
 15.120 DIRECT TAX LAWS

Where a reference is made under section 92CA(1) (to Transfer pricing officer) during the
assessment or reassessment of the total undisclosed income for the relevant block period,
the time limit for making the order is extended by an additional twelve months.
Exclusion from the limitation period
- The period (not exceeding 180 days) commencing from the date on which a search is
initiated under section 132 or a requisition is made under section 132A and ending on
the date on which the books of account, or other documents or money or bullion or
jewellery or other valuable article or thing seized under section 132 or requisitioned
under section 132A, as the case may be, are handed over to the Assessing Officer
having jurisdiction over the assessee, in whose case such search is initiated under
section 132 or such requisition is made under section 132A, as the case may be, shall
be excluded.
Where after exclusion of the period referred above, the period of limitation for making
an order of assessment or reassessment, as the case may be, expires before the end
of a month, such period shall be extended to the end of such month.
- the period commencing on the date on which stay on assessment proceedings was
granted by an order or injunction of any court and ending on the date on which certified
copy of the order vacating the stay was received by the jurisdictional Principal
Commissioner or Commissioner: or
- the period commencing from the date on which a reference or first of the references for
exchange of information is made by an authority competent under an agreement referred
to in section 90 or section 90A and ending with the date on which the information
requested is last received by the Principal Commissioner or Commissioner or a period
of one year, whichever is less; or
- the time taken in reopening the whole or any part of the proceeding or giving an
opportunity to the assessee to be re-heard under the proviso to section 129; or
- the period commencing from the date on which the Assessing Officer directs the
assessee to get his accounts audited or inventory valued under section 142(2A) and —
(a) ending with the last date on which the assessee is required to furnish a report of
such audit or inventory valuation; or
 ASSESSMENT PROCEDURE 15.121
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(b) where such direction is challenged before a court, ending with the date on which
the order setting aside such direction is received by the Principal Commissioner
or Commissioner; or
- the period commencing from the date on which the Assessing Officer makes a reference
to the Valuation Officer under section 142A(1A) and ending with the date on which the
report of the Valuation Officer is received by the Assessing Officer; or
- the period commencing from the date on which the Assessing Officer intimates the
Central Government or the prescribed authority, the contravention of the provisions of
clause (21) or clause (22B) or clause (23A) or clause (23B) of section 10, under sub-
clause (i) of the first proviso to section 143(3) and ending with the date on which the
copy of the order withdrawing the approval or rescinding the notification, as the case
may be, under those clauses is received by the Assessing Officer; or
- the period commencing from the date on which the Assessing Officer makes a reference
to the Principal Commissioner or Commissioner under the second proviso to section
143(3) and ending with the date on which the copy of the order under clause (ii) or clause
(iii) of the fifteenth proviso to section 10(23C) or clause (ii) or clause (iii) of section
12AB(4), as the case may be, is received by the Assessing Officer; or

- the period commencing from the date on which a reference for declaration of an
arrangement to be an impermissible avoidance arrangement is received by the Principal
Commissioner or Commissioner under section 144BA(1) and ending on the date on
which a direction under section 144BA(3)/(6) or an order under section 144BA(5) is
received by the Assessing Officer; or
- the period commencing from the date on which an application is made before the Board
for Advance Rulings under section 245Q(1) and ending with the date on which the order
rejecting the application is received by the Principal Commissioner or Commissioner
under section 245R(3); or
- the period commencing from the date on which an application is made before the Board
for Advance Rulings under section 245Q(1) and ending with the date on which the
advance ruling pronounced by it is received by the Principal Commissioner or
Commissioner under section 245R(7).
Where immediately after excluding the period specified above, the period of limitation
available with the Assessing Officer for making the assessment is less than 60 days, then
such period shall be extended to 60 days, and the period of limitation shall be deemed to be
 15.122 DIRECT TAX LAWS

extended accordingly. Further, if the period of limitation expires before the end of a month
after an extension, it is extended to the end of that month.
(7) Certain interests and penalties not to be levied or imposed [Section 158BF]

No interest under section 234A, 234B or 234C or penalty under section 270A shall be levied
or imposed upon the assessee in respect of the undisclosed income assessed or reassessed
for the block period.
(8) Levy of interest and penalty in certain cases [Section 158BFA]

(i) Interest for delay in filing of return - When the assessee fails to furnish the return
of undisclosed income, within the specified time in the notice issued under section
158BC or does not file it at all, the assessee is liable to pay interest at the rate of 1.5%
of the tax on the undisclosed income. The interest shall be charged for each month
or part thereof, and the period shall start from the day immediately following the expiry
of the time specified in the notice and ending on the date of completion of the
assessment under section 158BC.

(ii) Penalty for undisclosed income - The Assessing Officer or the Commissioner
(Appeals) in the course of any proceedings under this Chapter, may direct that the
person shall pay by way of penalty a sum which shall be equal to 50% of tax so
leviable in respect of the undisclosed income determined by the Assessing Officer
under section 158BC.
(iii) Immunity from Penalty - No order imposing penalty under this section or section
271AAD(1) or section 271D or section 271DA or section 271E shall be made for the
block period in respect of a person if—
- such person has furnished a return under section 158BC;
- the tax payable on the basis of such return has been paid or, if the assets seized
consist of money, the assessee offers the money so seized to be adjusted
against the tax payable;

- evidence of tax paid is furnished along with the return; and

- an appeal is not filed against the assessment of that part of income which is
shown in the return.

However, no immunity shall be available where the undisclosed income determined by

the Assessing Officer is in excess of the income shown in the return. In such cases,
 ASSESSMENT PROCEDURE 15.123
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the penalty shall be imposed on that portion of undisclosed income determined which
is in excess of the amount of income shown in the return.
(iv) Procedure to impose the penalty: No order imposing penalty shall be made -
(a) unless an assessee has been given a reasonable opportunity of being heard;
(b) by the Deputy Commissioner or Assistant Commissioner or the Deputy Director
or Assistant Director, as the case may be, where the amount of penalty exceeds
` 2 lakhs except with the previous approval of the Additional Commissioner or
the Additional Director or the Joint Commissioner or the Joint Director, as the
case may be
(c) in a case where the assessment is the subject-matter of an appeal to the
Commissioner (Appeals) under section 246A or an appeal to the Appellate
Tribunal under section 253, after the expiry of the financial year in which the
proceedings, in the course of which action for the imposition of penalty has
been initiated, are completed, or six months from the end of the financial year
in which the order of the Commissioner (Appeals) or, as the case may be, the
Appellate Tribunal is received by the Principal Commissioner or Commissioner,
whichever period expires later.

(d) in a case where the assessment is the subject-matter of revision under section
263, after the expiry of six months from the end of the financial year in which
such order of revision is passed.
(e) in any case other than those mentioned in clause (c) and clause (d), after the
expiry of the financial year in which the proceedings, in the course of which
notice for the imposition of penalty has been issued, are completed, or six
months from the end of the financial year in which notice for imposition of
penalty is issued, whichever period expires later.
In computing the period of limitation under this section, the following period shall be
excluded:
- the time taken in giving an opportunity to the assessee to be reheard under the
proviso to section 129 (change of incumbent of an office),

- the period commencing on the date on which stay on the proceedings above,
was granted by an order or injunction of any court and ending on the date on
 15.124 DIRECT TAX LAWS

which certified copy of the order vacating the stay was received by the
jurisdictional Principal Commissioner or Commissioner.
If the remaining period after such exclusions is less than 60 days, it shall be extended
to 60 days. Further, if the period of limitation expires before the end of a month after
an extension, it is extended to the end of that month.
(v) A copy of the order imposing penalty shall be sent to an Assessing Officer unless such
order is passed by Assessing Officer himself.
(9) Authority competent to make assessment of block period [Section 158BG]

The order of assessment for the block period shall be passed by an Assessing Officer not
below the rank of a Deputy Commissioner or an Assistant Commissioner or a Deputy Director
or an Assistant Director, as the case may be.

However, no such order shall be passed without the previous approval of the Additional
Commissioner or the Additional Director or the Joint Commissioner or the Joint Director, as
the case may be, in respect of search initiated under section 132, or books o f account, other
documents or any assets requisitioned under section 132A..

Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to
assessment made under this Chapter [Section 158BH].
 ASSESSMENT PROCEDURE 15.125
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SIGNIFICANT SELECT CASES

S. No. Case Law

1. CIT v. Govind Nagar Sugar Ltd. (2011) 334 ITR 13 (Delhi)
Issue Analysis & Decision
Can unabsorbed depreciation The provisions of section 80 and section 139(3),
be allowed to be carried forward requiring the return of income claiming loss to be
in case the return of income is filed within the due date, applies to, inter alia, carry
not filed within the due date? forward of business loss and not for the carrying
forward of unabsorbed depreciation. As per the
provisions of section 32(2), the unabsorbed
depreciation becomes part of the next year’s
depreciation allowance and is allowed to be set-off
as per the provisions of the Income-tax Act, 1961,
irrespective of whether the return of earlier year was
filed within due date or not.
2. Orissa Rural Housing Development Corpn. Ltd. v. ACIT (2012) 343 ITR 316 (Orissa)
Issue Analysis & Decision
Can an assessee revise the The assessee can make a fresh claim before the
particulars filed in the original Assessing Officer or make a change in the originally
return of income by filing a filed return of income only by filing revised return of
revised statement of income income under section 139(5). There is no provision
other than by way of filing under the Income-tax Act, 1961 to enable an
revised return as contemplated assessee to revise his income by filling a revised
u/s 139(5) of the Act? statement of income. Therefore, filling of revised
statement of income is of no value and will not be
considered by the Assessing Officer for assessment
purposes.
Therefore, the Assessing Officer has no power to
entertain a fresh claim made by the assessee after
filing of the original return except by way of filing a
revised return.
Note: As per section 139(8A) an updated return of
income by any person, whether he has filed a return
previously for the relevant assessment year, or not,
can be furnished within 24 months from the end of
the relevant assessment year. However, an
assessee cannot file a return of loss or decrease the
tax liability determined or increase its refund based
on return furnished under section 139(1) or 139(4) or
 15.126 DIRECT TAX LAWS

139(5). For making a fresh claim, the assessee only

has an option to file a revised return under section
139(5).
3. CIT v. Tony Electronics Limited (2010) 320 ITR 378 (Delhi)
Issue Analysis & Decision
Whether the time limit of 4 years Once an appeal against the order passed by an
as per section 154(7) would authority is preferred and is decided by the appellate
apply from the date of original authority, the order of the Assessing Officer merges
assessment order or the order with the order of the appellate authority. After
of the Appellate Authority. merger, the order of the original authority ceases to
exist and the order of the appellate authority prevails.
Thus, the period of limitation of 4 years for the
purpose of section 154(7) has to be counted from the
date of the order of the Appellate Authority.
4. DCIT vs Travel Designer India Pvt. Ltd. vs (2025) 482 ITR 283 (SC)
Issue Facts, Relevant Provision of Law, Analysis and
Decision
Whether, for the purpose of Facts of the Case: The assessee filed its return of
computing limitation period under income under section 139(1) on 29th November, 20242.
section 143(2), the relevant date The return was found to be defective, and accordingly,
is the date of filing of the original the assessee received an intimation on 10th July, 20253
return of income or the date of to correct the defects within a period 15 days from the
removal of defects in response to receipt of the said notice. The defects were rectified on
a notice issued under section 19th July, 20254. Subsequently, the Assessing Officer
139(9)? issued a notice under section 143(2) on 11th June,
2026 5 . The assessee contended that the notice u/s
143(2) can be issued within three months6 from the end
of the financial year in which return is furnished. Thus,
the said notice was barred by limitation as per the
provisions of the Act.
Relevant Provision: Section 139(1) mandates the
filing of a return of income by an assessee, while
section 139(9) provides an opportunity to rectify defects
in the return within a prescribed time frame without filing
a fresh return. Section 143(2) requires the Assessing
Officer to issue a notice for scrutiny assessment within

2
2016, was the original date in the case law
3 2017, was the original date in the case law
4 2017, was the original date in the case law
5 11 th August 2018, was the original date in the case law
6 Time limit for issue of notice was six months for the financial year 2016-17
 ASSESSMENT PROCEDURE 15.127
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three months from the end of the financial year in which

the return was filed, and such notice is a prerequisite
for assessment under section 143(3).
Analysis and Decision: Since the return was
defective, the assessee was called upon to remove
such defects, which was removed on 19th July, 2025,
which is within the time allowed by the Assessing
Officer. Therefore, upon such defects being removed,
the return would relate back to the date of filing original
return i.e., 29th November, 2024. Consequently, the
limitation for issuance of notice under section 143(2)
would be 30th June, 2025 i.e., three months from the
end of the financial year in which the return under
section 139(1) was filed.
In the present case, notice under section 143(2) has
been issued on 11th June, 2026, which is much beyond
the period of limitation. Therefore, such notice is barred
by limitation and cannot be sustained.
Accordingly, the Gujarat High Court held that the notice
issued under section 143(2) and the assessment
proceedings initiated based on such notice are
quashed and set aside.
The Apex Court dismissed the special leave petition in
the present case.
5. IBS Software Services (P.) Ltd. v UOI (2025) 478 ITR (Ker.)
Issue Facts, Analysis and Decision
Whether the Assessing Officer is Facts of the Case: The assessee filed a writ petition
bound to pass assessment order challenging the assessment orders issued by the
within one month from the end of competent authority mainly on the ground that they
the month in which directions of were issued beyond the time limit under section
the Dispute Resolution Panel is 144C(13). The Department contended that a breach of
issued in accordance with section the time limit prescribed under section 144C(13) cannot
144C(13)? be considered as a vitiating factor affecting the very
validity of the assessment order. It was further
submitted that the Assessing Officer is not vested with
any discretion under section 144C when the DRP
issues directions. Department contended that even if
the Assessing Officer takes more time than that is
provided, no prejudice is caused and the assessment
need not be considered as vitiated.
15.128 DIRECT TAX LAWS

Analysis and Decision: The High Court noted that

section 144C was incorporated to the Act by an
amendment. Amendments are thoughtful, purpose-
driven changes made to an existing legislation by the
legislature. When an amendment is made, it must be
assumed that the legislature felt it was appropriate to
alter the law as it existed prior to the amendment.
Section 144C was incorporated with the objective of
providing a speedy mechanism for assessments
involving transfer pricing, to reduce the possibility of
disputes and to avoid time consuming litigations. The
High Court, thus, held that the Assessing Officer is
bound to adhere to the time limit stipulated in section
144C(13), and assessment order issued in breach of it
shall be invalid and was accordingly set aside.
 ASSESSMENT PROCEDURE 15.129
a

TEST YOUR KNOWLEDGE

Questions
1. Teachwell Education is a trust approved under section 10(23C)(vi) which runs various
educational institutions. During the course of assessment under section 143(3), the
Assessing Officer finds that the trust has carried out its activities in contravention of the
section under which it was approved for exemption. Hence, the Assessing Officer wants to
pass an order without giving exemption under section 10, which the assessee objects. You
are required to examine the following with respect to the provisions of Income -tax Act, 1961.
(a) Whether the Assessing Officer can pass an order without giving exemption under
section 10?
(b) Can the Assessing Officer get any additional time limit in completing this assessment?
2. State with reasons whether return of income is to be filed in the following cases for the
Assessment Year 2026-27:
(i) Mr. X, a resident individual, aged 80 years, has a total income of ` 2,85,000. He has
claimed deduction of ` 1,50,000 under section 80C. Long-term capital gains of ` 80,000
is not taxable by virtue of the exemption available upto specified threshold under section
112A. Assume that he has opted for the normal provisions of the Income-tax Act.
Would your answer change if Mr. X has incurred ` 1,05,000 towards payment of
electricity bills for F.Y. 2025-26?
(ii) ABC, a partnership firm, has a loss of ` 10,000 during the previous year 2025-26.
(iii) A registered association, eligible for exemption under section 10(23B), has income
from house property of ` 6,60,000.
(iv) Mr. Y, aged 45 years, an employee of ABC (P) Ltd, draws a salary of ` 5,90,000 and
has income from fixed deposits with bank of ` 10,000.
3. The Assessing Officer issued a notice under section 142(1) on the assessee on 24 th February,
2026 calling upon him to file return of income for Assessment Year 2025-26. In response to
the said notice, the assessee furnished a return of loss and claimed carry forward of business
loss and unabsorbed depreciation. State whether the assessee would be entitled to carry
forward as claimed in the return.
 15.130 DIRECT TAX LAWS

4. State whether the following assessees have to file return of income and if so, the due date
for the assessment year 2026-27:
(i) A registered trade union having income from let out property of ` 1,00,000.
(ii) A public trust hospital having an aggregate annual receipt of ` 505 lacs and availing
exemption of ` 3,10,000 under section 10(23C)(via) with total income of ` 2,40,000
5. What will be the consequences when Mr. Raghav paid ` 75,000 in cash to a travel agent for
his travel to Saudi Arabia to be undertaken for business purposes by intentionally quoting the
wrong PAN? Would your answer be different if such cash payment was made for his travel to
Nepal, instead of Saudi Arabia?
6. For facilitating expeditious resolution of disputes relating to international transactions
involving transfer pricing and foreign companies, the Income-tax Act, 1961, has provided for
"alternate dispute resolution mechanism". In this context, you are required to answer the
following:
(i) What meanings have been assigned to "dispute resolution panel” and the "eligible
assessee" under this mechanism?
(ii) When can a grievance for resolution be filed by an assessee?
(iii) What evidences are being considered by the panel to redress the grievance of the
assessee?
7. The Assessing Officer has the power to make an assessment to the best of his judgment, in
certain situations. What are they?
8. Mr. Sanskar is engaged in the business of retail trade and has been declaring income of
` 10 lakhs to ` 15 lakhs every year in the last 10 years. A search was conducted under
section 132 in the business premises of Sanskar on 5th July, 2025. The search was concluded
by executing last of authorisation for search on 10thAugust, 2025. The A.O. has in his
possession documents which revealed that Mr. Sanskar has incurred ` 5 crores in May 2019
for the marriage of his daughter. The A.O intends to issue notice under section 148 to Sanskar
for the Assessment Year relevant to the previous year 2019-20. Can he do so?
9. Examine whether the Assessing Officer has the power to make any adjustment to income
disclosed by the assessee in the return of income in course of processing the return under
section 143(1)?
10. Tai Ltd. filed its return of income for assessment year 2025-26 on 26th September, 2025. The
return is selected for regular assessment under section 143(3) for which notice under section
143(2) is served on the company on 3rd July, 2026. The company responded to the notice
 ASSESSMENT PROCEDURE 15.131
a

under section 143(2). Examine whether the service of the notice is within time and if not,
whether the assessment order can be challenged by the assessee.
11. Discuss the correctness or otherwise of the following proposition in the context of the Income-
tax Act, 1961:
“A fresh claim before the Assessing Officer can be made only by filing a revised return and not
otherwise”.
12. The Assessing Officer within the powers vested in him under section 142(2A), while
examining the accounts of PNF Ltd., had ordered to get the same audited. The company
challenges this order on the ground “that the opportunity was not provided to them by the
Assessing Officer prior to passing of such an order”. Decide the correctness of the action of
the Assessing Officer.
13. Smt. Kanti, aged 49 years engaged in the business of growing, curing, roasting and grounding
of coffee in India after mixing chicory had income of ` 6,00,000 from this business which was
her only source of income during the year ended on 31.3.2026. She consults you to have an
opinion whether she is required to file return of income for the A.Y. 2026-27 as per provisions
of section 139(1).
Would your answer change if she had travelled to the USA during the P.Y.2025-26 and
incurred ` 2.20 lakhs for the same?
14. Ram, an individual, filed his return of income for the assessment year 2026-27 on 15.6.2026.
He later discovered that he had not claimed deduction under section 80C in the said return
though he had opted for the normal provisions of the Act. He claimed the said deduction
through a letter addressed to the Assessing Officer. The Assessing Officer completed the
assessment without allowing the deduction claimed by Ram. Is the Assessing Officer justified
in doing so?
15. Examine the correctness or otherwise of the following statements in the context of provisions
contained in the Income-tax Act, 1961 and the decided case laws:
“The Assessing Officer is bound to allow the set-off of brought forward losses under section
72 even if the assessee has not claimed the same in the return filed”.
16. X, an individual, has got his books of account for the year ending 31.3. 2026 audited under
section 44AB. His total income for the assessment year 2026-27 is ` 5,20,000. He desires to
know if he can furnish his return of income for the assessment year 2025-26 through a Tax
Return Preparer.
 15.132 DIRECT TAX LAWS

Answers
1. (a) As per second proviso to section 143(3), if any educational institution referred to in
section 10(23C)(iv) has committed any “specified violation” as mentioned under
section 10(23C), the Assessing Officer shall send a reference to the Principal
Commissioner or Commissioner to withdraw the approval or registration, as the case
may be. Specified violation inter alia includes a case where income of the institution
has been applied other than for the objects for which it is established.

No order making an assessment of the total income or loss of such educational

institution shall be made by AO without giving effect to the order passed by the
Principal Commissioner or Commissioner either cancelling the approval or refusing to
cancel the approval of such educational institution 7.
Therefore, in the aforesaid case, the Assessing Officer can pass an assessment order
without giving exemption under section 10 to Teachwell Education, which is an
educational institution approved under section 10(23C)(vi), if he has referred the
matter to Principal Commissioner or Commissioner and they have subsequently
cancelled the approval of such educational institution under clause (ii) of fifteenth
proviso section 10(23C).
(b) As per Explanation 1 to section 153, the period commencing from the date on which
the Assessing Officer makes a reference to the Principal Commissioner or
Commissioner under section 143(3)8 and ending with the date on which the copy of
the order either cancelling the approval or refusing to cancel the approval under
section 10(23C)9 is received by the Assessing Officer, shall be excluded for computing
the period of limitation for completing the assessment.
Further, in case the time limit available to the Assessing Officer for passing an
assessment order, after such exclusion is less than 60 days, such remaining period of
assessment shall be deemed to have been extended to 60 days.
Therefore, the Assessing Officer will get the above mentioned additional time for
completing the assessment of Teachwell Education.

7 under clause (ii) or clause (iii) of the fifteenth proviso to section 10(23C)
8 second proviso to section 143(3)
9 under clause (ii) or clause (iii) of the fifteenth proviso to section 10(23C)
 ASSESSMENT PROCEDURE 15.133
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2.

S. Is filing of Reason
No. return
required?
(i) No As per the provisions of section 139(1), every person, whose total
income without giving effect to the provisions of Chapter VI-A
exceeds the maximum amount not chargeable to tax, is required to
furnish the return of income for the relevant assessment year on or
before the due date. The gross total income of Mr. X before giving
effect to the deduction of ` 1,50,000 under section 80C is ` 4,35,000,
which is less than the basic exemption limit of ` 5,00,000 applicable
to an individual aged 80 years or more. Therefore, Mr. X need not
furnish his return of income for the A.Y. 2026-27.
Yes, the answer would change, since Mr. X has incurred expenditure
of an amount exceeding ` 1 lakh towards the consumption of
electricity and he is not liable to file a return of income under other
provisions of section 139(1). In such a case, he would have to file his
return for A.Y.2026-27 on or before the due date u/s 139(1).
(ii) Yes As per section 139(1), it is mandatory for a firm to furnish its return
of income or loss on or before the specified due date. Therefore, M/s
ABC has to furnish its return of loss for the A.Y. 2026-27 on or before
the due date under section 139(1), even if it has incurred a loss.
(iii) Yes As per section 139(4C), every institution referred to, inter alia, in
section 10(23B), whose total income without giving effect to the
provisions of section 10 exceeds the maximum amount not
chargeable to tax, is required to furnish the return of income for the
relevant assessment year on or before the due date u/s 139(2).
In the above case, the registered association has income from house
property of ` 6,60,000 before exemption under section 10, which
exceeds the basic exemption limit of ` 3,00,000. Therefore, it is under
an obligation to furnish its return of income for the A.Y. 2026-27.
(iv) Yes As per the provisions of section 139(1), every person, whose gross
total income exceeds the maximum amount not chargeable to tax, is
required to furnish the return of income for the relevant assessment
year on or before the due date. Mr. Y’s salary income is ` 5,15,000
(i.e., ` 5,90,000 less standard deduction of ` 75,000). The gross total
income of Mr. Y is ` 5,25,000 (` 5,15,000 + ` 10,000), which exceeds
the basic exemption limit of ` 4,00,000 applicable to an individual as
per default regime of section 115BAC. Therefore, Mr. Y has to furnish
his return of income for the A.Y. 2026-27.
 15.134 DIRECT TAX LAWS

3. As per the provisions of section 139(3), any person who has sustained loss under the head
‘Profit and gains of business or profession’ is allowed to carry forward such a loss under
section 72(1) or section 73(2), only if he has filed the return of loss wit hin the time allowed
under section 139(1). Also, the provisions of section 80 specify that a loss which has not been
determined as per the return filed under section 139(3) shall not be allowed to be carried
forward and set-off under, inter alia, section 72(1) (relating to business loss) or section 73(2)
(losses in speculation business) or section 74(1) (loss under the head “Capital gains”) or
section 74A(3) (loss from the activity or owning and maintaining race horses) or section 73A
(loss relating to a “specified business”). However, there is no such condition for carry forward
of loss from house property under section 71B or unabsorbed depreciation under section 32.
In the given case, the assessee has filed its return of loss in response to notice under section
142(1). As per the provisions stated above, assessee furnished return in response to notice
under section 142(1) after the due date specified under section 139 (1) and therefore, the
benefit of carry forward of business loss under section 72(1) or section 73(2) or section 73A
shall not be available. The assessee shall, however, be entitled to carry forward the
unabsorbed depreciation as per provisions of section 32(2).
4. (i) A registered trade union is having income from house property, which is exempt under
section 10(24). Section 139(4C) mandates filing of return only when the total income
exceeds the maximum amount which is not chargeable to tax without giving effect to
the provisions of section 10. In this case, even without giving effect to section 10(24),
the total income of the registered trade union is below basic exemption limit and
therefore, there is no mandatory requirement to file the return of income.
(ii) Since the total income without giving effect to the exemption under section 10(23C)(via) is
` 5,50,000, which exceeds ` 4,00,000, the trust has to file its return of income by
31st October 2026.
5. If a person who is required to quote his permanent account number in any document referred
to in section 139A(5)(c), quotes a number which is false, and which he either knows or
believes to be false or does not believe to be true, the Assessing Officer may direct that such
a person shall pay by way of penalty a sum of ` 10,000 under section 272B(2).
In the given case, if Mr. Raghav travels to Saudi Arabia and pays his travel agent cash in
excess of ` 50,000, such a transaction is covered by section 139A(5)(c) read with Rule 114B
and therefore, Mr. Raghav has to quote his PAN. Since Mr. Raghav has misquoted his PAN,
a penalty under section 272B(2) is leviable. Mr. Raghav has to be given an opportunity of
being heard in the matter. If Mr. Raghav is not able to prove that there was a reasonable
cause for the said failure, penalty under section 272B(2) would be imposable.
The answer would remain the same even if such cash payment was made for his travel to Nepal.
 ASSESSMENT PROCEDURE 15.135
a

6. (i) The term “Dispute Resolution Panel” has been defined to mean a collegium comprising
of three Principal Commissioners or Commissioners of Income-tax constituted by the
Board for this purpose.
The term “Eligible Assessee” means any person in whose case the variation referred
to in section 144C(1) arises as a consequence of the order of the Transfer Pricing
Officer passed under section 92CA(3) and any non-corporate non-resident or any
foreign company.
However, an eligible assessee shall not include a persons referred under section
158BA(1) or any other person referred under section 158BD.

(ii) In case of an assessment of the eligible assessee, the Assessing Officer shall forward
a draft of the proposed order of assessment. The eligible assessee shall file his
objections to such variation within 30 days of receipt of such order, with the Dispute
Resolution Panel and with the Assessing Officer.
(iii) The Dispute Resolution Panel shall, in a case where any objections are received, take
into consideration:-
(a) the draft order
(b) the objections filed by the assessee
(e) the evidence furnished by the assessee
(d) the report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing
Officer or any other authority
(e) the records relating to the draft order
(f) the evidence collected by, or caused to be collected by it
(g) the result of any enquiry made by or caused to be made by it.
7. Under section 144, the Assessing Officer, after taking into account all relevant material which he
has gathered, is under an obligation to make an assessment of the total income or loss to the best
of his judgment and determine the sum payable by the assessee in the following cases –
(1) Where any person fails to make the return under section 139(1) and has not filed a
belated return under section 139(4) or a revised return under section 139(5) or an
updated return under section 139(8A).
(2) Where any person fails to comply with all the terms of a notice issued under section
142(1) or fails to comply with a direction issued under section 142(2A) for getting the
accounts audited.
 15.136 DIRECT TAX LAWS

(3) Where any person, having made a return, fails to comply with all the terms of a notice
issued under section 143(2).
Further, section 145(3) of the Income-tax Act, 1961 permits the Assessing Officer to make an
assessment in the manner provided in section 144:
(i) where the Assessing Officer is not satisfied about the correctness or completeness of
the accounts of the assessee; or
(ii) where the method of accounting under section 145(1) has not been regularly followed
by the assessee;
(iii) where the income has not been computed in accordance with “Income Computation
and Disclosure Standards” notified by the Central Government under section 145(2).
Faceless assessment as per section 144B shall be applicable to best judgement assessment under
section 144, i.e., the assessment proceedings shall be conducted electronically in e-proceeding
facility through assessee’s registered account in the designated portal. The faceless assessment
shall be made in respect of such territorial area, or persons or class of persons, or incomes or class
of incomes, or cases or class of cases, as may be specified by the Board.
8. In the given case, Mr. Sanskar, a retail trader, has been regularly filing returns of income over
the past ten years. A search under section 132 was initiated at his business premises on
5th July 2025 and was concluded by executing the last of the authorisations on 10th August
2025. During the course of the search, the Assessing Officer came into possession of
documents evidencing that Mr. Sanskar had incurred an expenditure of `5 crores towards
the marriage of his daughter in May 2019, which was not recorded in the books of account.
Pursuant to the amendments made by the Finance Act (No. 2), 2024 and Finance Act, 2025,
the provisions of Chapter XIV-B (Sections 158B to 158BI) have been reintroduced and are
applicable to search and requisition cases where the search is initiated under section 132 or
requisition is made under section 132A on or after 1st September 2024. As the search in this
case was initiated after the said date, the case falls within the ambit of the block assessment
scheme as reintroduced and not under section 147.
As per section 158BA, the “block period” is defined to include the six assessment years
immediately preceding the previous year in which the search is conducted, as well as the
period commencing from the first day of the relevant previous year up to the date of
conclusion of the search. Accordingly, for a search conducted in the previous year 2025–26,
the block period would comprise PYs 2019–20 to 2024–25, along with the period from
1st April 2025 to 10th August 2025.
 ASSESSMENT PROCEDURE 15.137
a

Given that the expenditure of ` 5 crores pertains to the previous year 2019–20 (relevant to
Assessment Year 2020–21), the same falls within the block period. Once the provisions of
Chapter XIV-B become applicable pursuant to a search initiated on or after 1st September
2024, the assessment of undisclosed income for the block period must be undertaken under
section 158BC, and not under the regular assessment or reassessment provisions, including
section 148.

Therefore, the Assessing Officer cannot issue a notice under section 148 for Assessment
Year 2020–21 in this case. Instead, he is required to proceed by issuing a notice under
section 158BC, requiring the assessee to furnish a return of income in the prescribed Form
for the block period. The undisclosed expenditure identified during the search would be
assessed as undisclosed income in the block assessment in accordance with the procedure
laid down under Chapter XIV-B.

9. The procedure to be followed for summary assessment is contained in section 143(1). As per
section 143(1), the total income or loss of an assessee shall be computed after making the
following adjustments to the returned income:

(i) any arithmetical error in the return

(ii) an incorrect claim, if such incorrect claim is apparent from any information in the return

(iii) any such inconsistency in the return, with respect to the information in the return of
any preceding previous year, as may be prescribed.

(iv) disallowance of loss claimed, if return is filed beyond due date u/s 139(1)

(v) disallowance of expenditure or increase in income indicated in the audit report but not
taken into account in computing the total income in the return

(v) disallowance of deduction claimed under section 10AA or under any of the provisions
of Chapter VI-A under the heading "C.—Deductions in respect of certain incomes", if
return is filed beyond due date u/s 139(1)

No such adjustment shall be made unless an intimation is given to the assessee of such
adjustment either in writing or electronic mode. Further, Assessing Officer shall make any
adjustment after considering the response received from the assessee, if any. Where no
response is received within 30 days of the issue of such notice, the above adjustment can be
made.
 15.138 DIRECT TAX LAWS

For the purpose of section 143(1), “an incorrect claim apparent from any information in the
return” means such claim on the basis of an entry, in the return of income:
(i) of an item, which is inconsistent with another entry of the same or some other item in
such return;
(ii) in respect of which, the information required to be furnished under the Income-tax Act,
1961 to substantiate such entry, has not been so furnished;
(iii) in respect of a deduction, where such deduction exceeds specified statutory limit which
may be expressed as monetary amount or percentage or ratio or fraction.

10. The time limit for service of notice under section 143(2) is three months from the end of the
financial year in which the return of income was furnished by the assessee. The return of
income for assessment year 2025-26 was filed by the assessee on 26 th September, 2025.
Therefore, the notice under section 143(2) has to be served by 30 th June, 2026. However,
the notice was served on the assessee only on 3 rd July, 2026. Hence, the notice issued under
section 143(2) is time-barred.

However, as per section 292BB, where an assessee had appeared in any proceedings or co -
operated in any enquiry relating to an assessment or reassessment, it shall be deemed that
any notice required to be served upon him, has been duly served upon him in ti me in
accordance with the provisions of the Act and such assessee shall be precluded from raising
any objection in any proceeding or enquiry that the notice was (a) not served upon him or (b)
not served upon him in time or (c) served upon him in an improper manner.
The above provision shall not be applicable where the assessee has raised such an objection
before the completion of such assessment or reassessment. Therefore, in the instant case,
if the assessee, Tai Limited, had raised an objection to the proceeding on the ground of non -
service of the notice under section 143(2) upon it on time, then, the validity of the assessment
order can be challenged. In the absence of such objection, the assessment order cannot be
challenged.
11. This proposition is correct.
A return of income filed within the due date under section 139(1) or a belated return filed
under section 139(4) may be revised by filing a revised return under section 139(5) where the
assessee finds any omission or wrong statement in the original return subject to satisfying
other conditions. There is no provision in the Income-tax Act, 1961, to make changes or
modification in the return of income by filing a letter before the Assessing Officer. The revised
return can be filed at any time before three months prior to the end of the relevant assessment
 ASSESSMENT PROCEDURE 15.139
a

year or before the completion of assessment, whichever is earlier. In a case where a return
of income has been filed within the due date under section 139(1) or a belated return is filed
under section 139(4), the only option available to the assessee to make an amendment to
such return is by way of filing a revised return under section 139(5). Therefore, a fresh claim
can be made before the Assessing Officer only by filing a revised return and not otherwise.
The Supreme Court, in Goetze (India) Ltd. vs. CIT (2006) 284 ITR 323, has held that there is
no power available under the provisions of the Income-tax Act, 1961 enabling the Assessing
Officer to allow a claim made by the assessee except by way of filing a revised return.
Note – Section 139(8A), provides an option to an assessee to file an updated return for an
assessment year, at any time within 48 months from the end of the relevant assessment
year. But such updated return should not be a return of a loss or have the effect of decreasing
the total tax liability determined on the basis of return furnished under section 139(1) or 139(4)
or 139(5) or result in refund or increases the refund due on the basis of return furnished under
section 139(1) or 139(4) or 139(5). Hence, for making a fresh claim, the only option available
to the assessee is to file a revised return under section 139(5).
12. As per the proviso to section 142(2A), the Assessing Officer shall not direct the assessee to
get the accounts so audited unless the assessee has been given a reasonable opportunity of
being heard.
Therefore, in this case, the order of the Assessing Officer is not valid, since the assessee
was not given an opportunity of being heard prior to passing of such order.
13. The clarification regarding filing return of income by the coffee growers being individuals
covered by Rule 7B of the Income-tax Rules, 1962 is given in Circular No.10/2006 dated
16.10.2006. According to the Circular, an individual deriving income from growing, curing,
roasting and grounding of coffee with or without mixing chicory would not be required to file
the return of income if the aggregate of 40% of his or her income from growing, c uring,
roasting and grounding of coffee with or without mixing chicory and income from all other
sources liable to tax in accordance with the provisions of this Act, is equal to or less than the
basic exemption limit prescribed in the First Schedule of the Finance Act of the relevant year.
In this case, Smt. Kanti has a total income of ` 6,00,000 from this business, which was her
only source of income for P.Y. 2025-26. 40% of her income works out to ` 2,40,000, which is
less than the basic exemption limit of ` 4,00,000 (under section 115BAC, being default
regime) / ` 2,50,000 (if opting for normal provisions) in respect of an individual assessee.
Therefore, Smt. Kanti is not required to file a return of income for the A.Y. 2026-27 as per the
provisions of section 139(1).
 15.140 DIRECT TAX LAWS

If Smt. Kanti had travelled to the USA during the P.Y. 2025-26 and incurred ` 2.20 lakhs on
such travel, she would be required to mandatorily file a return of income for A.Y. 2026-27 on
or before the due date u/s 139(1), even though her total income does not exceed the basic
exemption limit.
14. The Supreme Court has, in Goetze (India) Ltd. v. CIT (2006) 284 ITR 323, ruled that the
Assessing Officer has no power to entertain a claim for deduction made after filing of the
return of income otherwise than by way of a revised return. In the instant case, Ram has
claimed the deduction under section 80C, which he omitted to claim in the original return of
income, through a letter addressed to the Assessing Officer and not by filing a revised return
under section 139(5). In view of the decision of the Supreme Court cited above, the Assessing
Officer was justified in completing the assessment without allowing the deduction under
section 80C.
15. The statement is correct.
The Supreme Court has, in CIT v. Mahalakshmi Sugar Mills Co. Ltd. (1986) 160 ITR 920,
held that it is the duty of the Assessing Officer to apply the relevant provisions of the Act for
the purpose of determining the true figure of the assessee’s total income and consequential
tax liability. Merely because the assessee has not claimed the set-off in the return filed, it
cannot relieve the Assessing Officer of his duty to apply section 72 in the appropriate case.
As per CBDT Circular No.14 (XL-35) of 1955 dated 11.04.1955, it is the duty of the Assessing
Officer to assist a taxpayer in every reasonable way, particularly in the matter of claiming and
securing reliefs and in this regard, they should take the initiative in guiding a taxpayer where
proceedings or other particulars before them indicate that some refund or relief is due to him.
Therefore, on the basis of the above Supreme Court ruling and the CBDT Circular, the
Assessing Officer is bound to allow the set-off of brought forward losses under section 72,
even if the assessee has not claimed the same in the return filed, provided the loss was
determined in pursuance of a return filed under section 139(3) in any earlier previous year.
Moreover, the wording used in section 72 is “shall”, indicating that the provisions relating to
set off of brought forward business loss are mandatory.
Therefore, the Assessing Officer is bound to allow the claim for set off of brought forward
business losses even if the assessee has not claimed the same in the return filed.
 ASSESSMENT PROCEDURE 15.141
a

16. Section 139B provides for submission of return of income through Tax Return Preparers. It
empowers the Central Board of Direct Taxes (CBDT) to frame a scheme for the purpose of
enabling any specified class or classes of persons to prepare and furnish their returns of
income through Tax Return Preparers. Specified class or classes of persons have been
defined to mean any person, other than a company or a person whose accounts are required
to be audited under section 44AB or under any other existing law, who is required to furnish
a return of income under the Act. Thus, companies and persons whose accounts are liable
for tax audit under section 44AB do not fall within the definition of ‘specified class or classes
of persons’ and consequently, cannot furnish their returns of income through Tax Return
Preparers. In the instant case, the books of account of X for the year ending 31.3.202 6 have
been audited under section 44AB. As such, he cannot furnish his return of income for the
A.Y. 2026-27 through a Tax Return Preparer.
CHAPTER 16

APPEALS AND REVISION

LEARNING OUTCOMES
After studying this chapter, you would be able to -
❑ identify the orders appealable before different appellate authorities;
❑ recall the time limit for filing appeals before different appellate authorities;
❑ appreciate the powers of different appellate authorities;
❑ comprehend and appreciate the provision in law for avoiding repetitive
appeals;
❑ appreciate the procedure for appeal by Revenue when an identical question of
law is pending before Supreme Court;
❑ identify the circumstances when an order passed by the Assessing Officer shall
be deemed to be erroneous in so far as it is prejudicial to the interests of the
Revenue, for initiation of revision proceedings under section 263;
❑ appreciate the procedure for revision of other orders under section 264;
❑ recall the time limit for revision of orders;
❑ identify the cases where doctrine of total merger and doctrine of partial merger
are applicable;
❑ analyse and apply the above provisions to determine whether an order is
appealable before a particular appellate authority, the time limit for filing of
appeal and address other issues in non-complex to moderately complex
scenarios.

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 1.2 16.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Joint Commissioner (Appeals) or

First Appeal Commissioner (Appeals)

Second Appeal Appellate Tribunal

Third Appeal High Court

Final Appeal Supreme Court

Appeals & Procedure when assessee claims identical question is

Revision pending before High Court or Supreme Court u/s 158A

Deferment of appeal by Revenue u/s 158AB

Revision of orders u/s 263 and 264

Monetary limits for filing appeal by Income-tax Authority

Doctrine of Partial Merger and Total Merger

16.1 APPEALS BEFORE JOINT COMMISSIONER

(APPEALS) OR COMMISSIONER (APPEALS)
(1) Appealable Orders before Joint Commissioner (Appeals) [Section 246(1)]: Any assessee
aggrieved by any of the following orders of an Assessing Officer
(below the rank of Joint Commissioner) may appeal to the Joint
Commissioner (Appeals) against -

(a) an order being an intimation under section 143(1), where

the assessee objects to the making of adjustments, or
any order of assessment under section 143(3) or section
144, where the assessee objects to-
(i) the amount of income assessed, or

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 APPEALS AND REVISION 16.3 a

(ii) the amount of tax determined, or

(iii) the amount of loss computed, or
(iv) the status under which he is assessed;

Status means the category under which the assessee is assessed as "individual",
"Hindu undivided family" and so on.

(b) an order of assessment, reassessment or recomputation under section 147;

(c) an order being an intimation under section 200A(1) where the deductor objects to the
making of adjustments;
(d) an order under section 201 deeming a person to be an assessee-in-default for failure
to deduct the whole or any part of the tax deductible at source;

(e) an order under section 206C(6A) deeming a person to be an assessee-in-default for

failure to collect or pay tax;
(f) an order being an intimation under section
206CB(1) where the collector objects to
the making of adjustments;
(g) an order imposing a penalty under Chapter
XXI; and
(h) an order under section 154 or section 155
amending any of the orders mentioned in clauses (a) to (g):
No appeal can, however, be filed before the Joint Commissioner (Appeals), if any of the above
orders is passed by or with the prior approval of an income-tax authority above the rank of
Deputy Commissioner.
(2) Appeal pending before Commissioner (Appeals) in respect of appealable orders
mention in (1) above may be transferred to Joint Commissioner (Appeals): Where any
appeal filed against an order referred in section 246(1) is pending
before the Commissioner (Appeals), the Board or an income-tax
authority so authorised by the Board in this regard, may transfer
such appeal and any matter arising out of or connected with such appeal and which is so
pending, to the Joint Commissioner (Appeals). The Joint Commissioner (Appeals) may then
proceed with such appeal or matter from the stage at which it was before it was so transferred
[Section 246(2)].

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 1.4 16.4 DIRECT TAX LAWS

(3) Appeal pending before Joint Commissioner (Appeals) may be transferred to the
Commissioner (Appeals): The Board or an income-tax authority so authorised by the Board
in this regard, may transfer any appeal which is pending before a Joint Commissioner
(Appeals) and any matter arising out of or connected with such appeal and which is so
pending, to the Commissioner (Appeals). The Commissioner (Appeals) may then proceed
with such appeal or matter from the stage at which it was before it was so transferred [Section
246(3)].

(4) Opportunity of being reheard is to be given before transferring the pending appeals:
Where an appeal is transferred under the provisions of section 246(2)/(3), the appellant shall
be given an opportunity of being reheard.

(5) Central Government empowered to notify faceless appeal scheme: For the purposes of
disposal of appeal by the Joint Commissioner (Appeals), the Central Government may make
a scheme, by notification in the Official Gazette. This scheme will facilitate disposal of appeals
in an expedient manner with transparency and accountability, by eliminating the interface
between the Joint Commissioner (Appeals) and the appellant, in the course of appellate
proceedings to the extent technologically feasible. The Central government may direct that
any of the provisions of this Act relating to jurisdiction and procedure for disposal of appeals
by the Joint Commissioner (Appeals), shall not apply or shall apply with such exceptions,
modifications and adaptations as may be specified in the notification.

Accordingly, in the exercise of powers under section 246(5), the Central Government has
notified E-Appeals Scheme, 2023.1

(6) Cases or Class of Cases where appeal cannot be made before Joint Commissioner
(Appeals): The Board may specify that the provisions of section 246(1) shall not apply to any
case or any class of cases.

(7) Appealable Orders before Commissioner (Appeals) [Section 246A]: An assessee or any
deductor or any collector aggrieved by any of the following orders may appeal to the
Commissioner (Appeals) against the following orders under section 246A -

1 For detailed reading of the E-Appeals Scheme, 2023, students are advised to visit
[Link]

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 APPEALS AND REVISION 16.5 a

(i) an order passed by a Joint Commissioner under section 115VP(3)(ii) refusing to

approve the option for tonnage tax scheme; or
(ii) an order against the assessee where the assessee
denies his liability to be assessed under this Act; or
(iii) an intimation under section 143(1) or section
200A(1) or section 206CB(1), where the assessee
or the deductor or the collector objects to the making of adjustments; or
(iv) any order of assessment under section 143(3) except an order passed in pursuance
of the directions of Dispute Resolution Panel or an order of assessment or
reassessment passed by the Assessing Officer with the prior approval of Principal
Commissioner or Commissioner, where tax consequences have been determined in
the order under the provisions of Chapter X-A relating to General Anti Avoidance Rules
or a best judgement order under section 144, in relation to the income assessed, or to
the amount of tax determined, or to the amount of loss computed, or to the status
under which he is assessed;
(v) an order of assessment, reassessment or recomputation under section 147 except an
order passed in pursuance of the directions of Dispute Resolution Panel or an order
of assessment or reassessment passed by the Assessing Officer with the prior
approval of Principal Commissioner or Commissioner, where tax consequences have
been determined in the order under the provisions of Chapter X-A relating to General
Anti Avoidance Rules or section 150 where assessment is in pursuance of an order
on appeal;
(vi) an order made under section 92CD(3) modifying the total income of the relevant
assessment year in accordance with the arm’s length price (ALP) determined as
per the Advance Pricing Agreement (APA) entered into.
(vii) a rectification order made under section 154 or section 155 having the effect of
enhancing the assessment or reducing a refund or an order refusing to allow the claim
made by the assessee under either of the said sections except an order of assessment
or reassessment passed by the Assessing Officer with the prior approval of Principal
Commissioner or Commissioner, where tax consequences have been determined in
the order under the provisions of Chapter X-A relating to General Anti Avoidance
Rules;
(viii) an order made under section 163 treating the assessee as the agent of a non-resident;
(ix) an order made under section 170(2)/(3) assessing income of business prior to
succession in the hands of the successor;

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 1.6 16.6 DIRECT TAX LAWS

(x) an order made under section 171 relating to assessment after partition of HUF;
(xi) an order made under section 201 deeming a person to be an assessee-in-default for
failure to deduct the whole or any part of the tax deductible at source;
(xii) an order made under section 206C(6A) deeming a person to be an assessee-in-default
for failure to collect or pay tax;
(xiii) a refund order made under section 237;
(xiv) an order made under section 239A with respect to refund for denying liability to deduct
tax at source.
(xv) an order imposing a penalty under section 221; or
(xvi) an order imposing a penalty under Chapter XXI of the Income-tax Act;
(xvii) an order of assessment made by an Assessing Officer under section 158BC(1)(c) in
respect of search initiated under section 132 or books of account, other documents or
any assets requisitioned under section 132A on or after 1.9.2024.
(xviii) an order made by an Assessing Officer other than a Deputy Commissioner under the
provisions of this Act in the case of such person or class of persons, as the Board
may, having regard to the nature of the cases, the complexities involved and other
relevant considerations direct.
It is also provided that an appellant may demand that before proceeding further with the
appeal and the matter, the previous proceedings or any part thereof be re -opened or the
appellant be re-heard.
(8) Form of appeal and prescribed fees [Section 249(1)]: Every appeal shall be in the pre-
scribed form and shall be verified in the prescribed manner.
Prescribed fees - In case of an appeal made to the Commissioner
(Appeals) or to the Joint Commissioner (Appeals) irrespective of the
date of initiation of the assessment proceedings, the appeal shall be
accompanied by a fee of:
Case Prescribed fees
(i) where the total income of the assessee as computed by the ` 250
Assessing Officer is ` 1,00,000 or less
(ii) where the total income of the assessee computed as above ` 500
is more than ` 1,00,000 but not more than ` 2,00,000
(iii) where the total income of the assessee computed as ` 1,000
above is more than ` 2,00,000
(iv) in any case other than (i), (ii) and (iii) above ` 250

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 APPEALS AND REVISION 16.7 a

(9) Time limit [Section 249(2) & (3)]: An appeal to Joint Commissioner (Appeals) or to the
Commissioner (Appeals) against any order which is appealable is to be presented within 30
days from the date specified below in the particular cases.
However, Joint Commissioner (Appeals) or the Commissioner
(Appeals) may admit an appeal even after the expiry of the said
period of thirty days, if he is satisfied that the appellant had
sufficient cause for not presenting the appeal within the specified time. The dates from which
the limitation period of 30 days has to be reckoned are as follows:

Appeal relating to 30 days to be reckoned from

1. Assessment/penalty Date of service of notice of demand
2. Any other case Date on which intimation of the order sought to be
appealed against is served.

Period to be excluded while computing 30 days in case of appeal relating to

assessment/penalty

Application Period to be excluded

From To
Under section The date on which the The date on which the order rejecting the
270AA(1) application is made application is served on the assessee

(10) Tax to be paid at the time of filing the appeal [Section 249(4)]: No appeal to the Joint
Commissioner (Appeals) or the Commissioner (Appeals) shall
be admitted for consideration unless, at the time of filing the
appeal,
- In a case where return has been filed: The assessee
has paid the tax on the amount of income returned by him in a case where a return
has been filed by the assessee.
- In a case where no return has been filed: If, however, no return has been filed by
the assessee and an assessment has been made on him by the Assessing Officer,
then, the assessee must pay an amount equal to the amount of advance tax which
was payable by him before filing the appeal. In this case, the Joint Commissioner
(Appeals) or the Commissioner (Appeals) is, however, empowered for good and
sufficient reasons to be recorded in writing, to exempt an appellant from the
requirement of payment of advance tax, on receipt of an application from the appellant
made specifically for this purpose.

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 1.8 16.8 DIRECT TAX LAWS

(11) Procedure in appeal [Section 250]:

(i) The Joint Commissioner (Appeals) or the
Commissioner (Appeals) shall fix a day and place for
the hearing of the appeal and shall give notice of the
same to the assessee and to the Assessing Officer,
against whose order the appeal is made.
(ii) Both the appellant and the Assessing Officer have the right to be heard at the hearing
of the appeal either in person or by an authorised representative.

(iii) The Joint Commissioner (Appeals) or the Commissioner (Appeals) has the power to
adjourn the hearing of the appeal from time to time.
(iv) The Joint Commissioner (Appeals) or the Commissioner (Appeals), before passing an
order on an appeal, may make such further enquiries as he thinks fit or direct the
Assessing Officer to make further enquiries and report the result of the same to him.
(v) The Joint Commissioner (Appeals) or the Commissioner (Appeals) may also allow the
appellant to go into any grounds of appeal not specified previously by the appellant if
he is satisfied that the omission of that ground was not wilful or unreasonable.
(vi) The order of the Joint Commissioner (Appeals) or the Commissioner (Appeals)
disposing of the appeal shall be in writing and shall state the points for determination,
the decision thereon and the reasons for the decision. On disposal of the appeal , the
Joint Commissioner (Appeals) or the Commissioner (Appeals) must communicate the
order passed by him to the assessee as well as to the Principal Chief Commissioner
or Chief Commissioner or Principal Commissioner or Commissioner.
(vii) In every appeal, the Joint Commissioner (Appeals) or the
Commissioner (Appeals), as the case may be, where it is
possible, may hear and decide such appeal within a period
of one year from the end of the financial year in which such
appeal is filed before him under section 246(1) or transferred
to him under section 246(2)/(3) or under section 246A(1), as
the case may be.

(viii) Section 250(6B) empowers the Central Government to make a scheme, by notification
in the Official Gazette, for the purposes of disposal of appeal by Commissioner
(Appeals), so as to impart greater efficiency, transparency and accountability by —

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 APPEALS AND REVISION 16.9 a

(a) eliminating the interface between the Commissioner (Appeals) and the
appellant in the course of appellate proceedings to the extent technologically
feasible;
(b) optimising utilisation of the resources through economies of scale and
functional specialisation;
(c) introducing an appellate system with dynamic jurisdiction in which appeal shall
be disposed of by one or more Commissioner (Appeals).
Accordingly, in the exercise of powers under section 250(6B), the Central Government
has notified Faceless Appeal Scheme, 2021.2

(12) Powers of the Joint Commissioner (Appeals) or Commissioner (Appeals) [Section

251(1)/(1A)]: While disposing of an appeal the Joint Commissioner (Appeals) or
Commissioner (Appeals) is vested with the following powers viz.,

2 For detailed reading of the Faceless Appeal Scheme, 2021, students are advised to visit
[Link]

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 1.10 16.10 DIRECT TAX LAWS

(i) In an appeal against an order of assessment, he

may confirm, reduce, enhance or annul the
assessment.
Where such appeal is against an order of
assessment made under section 144, he may set
aside the assessment and refer the case back to
the Assessing Officer for making a fresh assessment.
(ii) In an appeal against an order imposing a penalty, he may confirm or cancel such order
or vary it in such a way as to enhance or reduce the penalty.
(iii) In any other case, he may pass such orders in the appeal as he deems fit.
The Joint Commissioner (Appeals) or Commissioner (Appeals), however, is not empowered
to enhance an assessment or a penalty or to reduce a refund due to the assessee without
giving the assessee a reasonable opportunity of showing cause against such an
enhancement or reduction.
In disposing of an appeal, the Joint Commissioner (Appeals) or the Commissioner (Appeals)
may consider and decide any matter arising out of the proceedings in which the order
appealed against was passed even if such matters were not raised before the Joint
Commissioner (Appeals) or the Commissioner (Appeals), as the case may be by the
appellant.

16.2 APPEALS TO THE APPELLATE TRIBUNAL

[SECTIONS 252 TO 255]
(1) Constitution [Section 252(1)] - The Central Government shall constitute an Appellate
Tribunal consisting of judicial and accountant members to exercise the powers and discharge
the functions conferred on the Tribunal by the Act.
(2) Orders appealable before the Appellate Tribunal [Section
253]: Section 253(1) provides that an assessee aggrieved by
any of the following orders may appeal to the Appellate
Tribunal against such order –

Order passed by Section Particulars

Assessing Officer 115VZC(1) Power of Assessing Officer to exclude a
tonnage tax company from the tonnage tax
scheme if such company is a party to any

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 APPEALS AND REVISION 16.11 a

transaction or arrangement which amounts to

an abuse of such scheme.
143(3)/147 An order of assessment passed by an
Assessing Officer in pursuance of the
directions of Dispute Resolution Panel or an
order passed under section 154 in respect of
such order.
143(3)/147 An order of assessment passed by an
Assessing Officer with the approval of
Principal Commissioner or Commissioner as
referred to in section 144BA(12), where tax
consequences have been determined under
the provisions of Chapter X-A relating to
general anti-avoidance rules, or an order
passed under section 154 or section 155 in
respect of such order.
Joint commissioner 250 Order of the Joint Commissioner (Appeals) or
(Appeals) or Commissioner (Appeals) disposing of the
Commissioner appeal
(Appeals)
270A Order levying penalty for under-reporting and
misreporting of income.
271A Order imposing penalty for failure to keep,
maintain or retain books of account,
documents etc.
271AAC Order imposing penalty in a case where
income determined includes income referred
under section 68, 69, 69A, 69B, 69C or 69D.
271AAD Order imposing penalty if during any
proceedings it is found that in the books of
account maintained by any person there is a
false entry or an omission of any entry which is
relevant for computation of total income of
such person to evade tax liability.
271J Order imposing penalty for furnishing incorrect
information in any report or certificate by an
accountant, merchant banker or registered
valuer.
154 Order rectifying a mistake

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 1.12 16.12 DIRECT TAX LAWS

Commissioner 158BFA Order imposing levy of interest and penalty in

(Appeals) certain cases.
271AAB Order imposing penalty in a case where search
is initiated under section 132 before 1.9.2024.
272A Order imposing penalty for failure to answer
questions, sign statements, furnish information
returns or statements, allow inspections etc.
Principal 12AA/12AB Order refusing/canceling registration of trust or
Commissioner or institution
Commissioner
80G(5)(vi) Refusal to grant approval to the Institutions or
Fund
263 Revision of erroneous order passed by
Assessing Officer
270A Order imposing penalty for under-reporting of
income and mis-reporting of income.
272A Order imposing penalty for failure to answer
questions, sign statements, furnish information
returns or statements, allow inspections etc.
154 Amending any of the orders passed by him
Principal Chief 263 Revision of erroneous order passed by
Commissioner or Assessing Officer
Chief Commissioner
or Principal Director 272A Order imposing penalty for failure to answer
General or Director questions, sign statements, furnish information
General or Principal returns or statements, allow inspections etc.
Director or Director 154 Amending any of the orders passed by him
Principal 10(23C)(iv)/ Order passed by the prescribed authority
Commissioner or (v)/(vi)/(via) refusing approval of a fund/ institution for
Commissioner charitable purposes or trust or institution for
public religious purposes or wholly for public
religious and charitable purposes, university or
other educational institution solely for
educational purposes and not for purposes of
profit or hospital or other institution solely for
philanthropic purposes and not for purposes of
profit under section 10(23C)(iv)/(v)/(vi)/(via).

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 APPEALS AND REVISION 16.13 a

Section 253(2) provides that the Principal Commissioner or Commissioner may, if he objects
to any order passed by the Joint Commissioner (Appeals) or the Commissioner (Appeals)
under section 154 or section 250, direct the Assessing Officer to appeal to the Appellate
Tribunal against such order.
(3) Time limit for filing appeal or memorandum of cross objection under section 253(1) &
(2) [Section 253(3), (4) & (5)]
(i) Every appeal to the Appellate Tribunal has to be filed within two months from the end
of the month in which the order sought to be appealed against is communicated to the
assessee or the Principal Commissioner or Commissioner, as the case may be.
(ii) Further, on receipt of notice that appeal against an order has been preferred by the
Assessing Officer or the assessee, as the case
may be, the other party can file memorandum
of cross objections within 30 days of receipt
of notice against any part of such order. The
Appellate Tribunal has to dispose of the
memorandum of cross objections as if it were an appeal filed within the given time
limit.

(iii) However, the Appellate Tribunal may admit an appeal or permit the filing of a
memorandum of cross objection even after expiry of the prescribed time limit, if he is
satisfied that there was sufficient cause for not presenting it within that period.
(4) Fees [Section 253(6) & (7)]
Case Prescribed fees
(i) Where the total income of the assessee as computed by the ` 500
Assessing Officer in the case to which the appeal relates is
` 1,00,000 or less
(ii) Where the total income exceeds ` 1,00,000 but is not more ` 1,500
than ` 2,00,000
(iii) Where the total income is more than ` 2,00,000 1% of the
assessed income,
subject to a
maximum of
` 10,000.
(iv) In any other case ` 500

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(v) Where appeal is filed to the Appellate Tribunal by an No fees

Assessing Officer on the direction of the Commissioner or
Principal Commissioner, against the order of the Joint
Commissioner (Appeals) or the Commissioner (Appeals)
under section 154 or 250
(vi) Filing of memorandum of cross-objections. No fees
(vii) Application for stay of demand ` 500

(5) Scheme for Appeal to Appellate Tribunal [Section 253(8), (9) & (10)]
Section 253(8) empowers the Central Government to make a scheme, by notification in the
Official Gazette, for the purposes of appeal to the Appellate Tribunal, so as to impart greater
efficiency, transparency and accountability by—
(a) optimising utilisation of the resources through economies of scale and functional
specialisation;

(b) introducing a team-based mechanism for appeal to Appellate Tribunal, with dynamic
Jurisdiction.
The Central Government may, for the purpose of giving effect to such scheme, by notification
in the Official Gazette, direct that any of the provisions of the Income-tax Act, 1961 would not
apply or would apply with such exceptions, modifications and adaptations as may be specified
in the notification [Section 253(9)].

Every such notification issued under section 253(8) or section 253(9) has to be laid before
each House of Parliament as soon as may be after issue of the notification.
(6) Order [Section 254 (1), (2), (3) & (4)]: The Appellate Tribunal may, after giving both the
parties to the appeal a reasonable opportunity of being heard, pass such orders on any appeal
as it thinks fit. The Tribunal must send a copy of any orders passed by it to the assessee and
to the Principal Commissioner or Commissioner. Such orders passed by the Appellate
Tribunal shall be final unless appeal is made to the High Court under section 260A .
(7) Rectification: The Appellate Tribunal may, at any time within 6 months from the end of the
month in which order is passed, with a view to rectifying any mistake apparent from
record, amend any order passed by it. However, if
the mistake is brought to its notice by the assessee
or the Assessing Officer, the Tribunal is bound to
rectify the same. In cases where the amendment
has the effect of enhancing the assessment or

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 APPEALS AND REVISION 16.15 a

reducing a refund or otherwise increasing the liability of the assessee, the Tribunal shall not
pass any order of amendment unless it has given notice to the assessee of its intention to do
so and has allowed him a reasonable opportunity of being heard.
(8) Fees for rectification: Any application for rectification filed by the assessee shall be
accompanied by a fee of ` 50.
(9) Time limit: In every appeal, the Appellate Tribunal, where it is possible, may hear and decide
such appeal within a period of four years from
the end of the financial year in which such
appeal is filed under sub-section (1)/(2) of
section 253.
Under section 254(2A), the Appellate Tribunal can
grant stay of demand
of tax which can
extend only up to 180 days from the date of granting such stay
subject to the condition that the assessee deposits not less than
20% of the amount of tax, interest, fee, penalty, or any other sum payable under the
provisions of this Act, or furnishes security of equal amount in respect thereof .

No extension of stay shall be granted by the Appellate Tribunal, where such appeal is not
so disposed of within the said period of stay as specified in the order of stay, unless –
(i) the assessee makes an application and has complied with the condition of depositing
20% of tax, interest, fee, penalty or funishes security of equal amount and
(ii) the Appellate Tribunal is satisfied that the delay in disposing of the appeal is not
attributable to the assessee,
However, the aggregate of the period of stay
originally allowed and the period of stay so extended
should not exceed 365 days and the Appellate
Tribunal has to dispose of the appeal within the period
or periods of stay so extended or allowed.
If such appeal is not so disposed of within 180 day period or the period or periods extended
not exceeding 365 days, the order of stay shall stand vacated after the expiry of such
period or periods, even if the delay in disposing of the appeal is not attributable to the
assessee.

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(10) Cost of appeal: The cost of any appeal to the Appellate Tribunal shall be at the discretion of
that Tribunal [Section 254(2B)].
(11) Final authority on facts: On all questions of fact the orders passed by the Appellate Tribunal
on appeal shall be final and binding on the assessee as well as the Department
[Section 255].
(12) Benches:
(i) Section 255(1) provides that the powers and functions of the Appellate Tribunal may
be exercised and discharged by Benches constituted by the President of the Appellate
Tribunal among the members thereof.
(ii) As per section 255(2), a Bench should normally consist of one judicial member and
one accountant member.

(iii) However, section 255(3) provides for constitution of a single

member bench and a Special Bench.
(iv) Section 255(3) provides that the President or any
other member of the tribunal authorized by the Central
Government in this behalf may dispose of any case
which pertains to an assessee whose total income as computed by the Assessing
Officer in the said case does not exceed ` 50 lakh.

(v) The President may, for the disposal of any particular case constitute a special Bench
consisting of three or more members, one of whom must necessarily be a judicial
member and one an accountant member.
Where members differ [Section 255(4)] - If the members of a Bench differ in opinion on any
point the point shall be decided according to the opinion
of the majority, if there is a majority. However, if the
members are equally divided, they should state the
points on which they differ and the case shall be referred
by the President of the Tribunal for hearing on such point by one or more of the other
members of the Tribunal: then, such points shall be decided according to the opinion of the
majority of the members of the Tribunal who have heard the case, including those who first
heard it.
Regulating power [Section 255(5) & (6)] - The Appellate Tribunal is empowered to regulate
its own procedure and the procedure of its Benches in all matters arising out of the exercise

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of its power or of the discharge of its functions, including the places at which the Benches
shall hold their sittings. The Tribunal is vested with all the powers which are exercisable by
Income-tax authorities under section 131 for the purpose of discharging its function s. Any
proceeding before the Appellate Tribunal shall be deemed to be a judicial proceeding for the
purpose of the Income-tax Act, 1961 and the Indian Penal Code (Bharatiya Nyaya Sanhita,
2023) and that Appellate Tribunal shall be deemed to be a Civil Court for all the purposes of
the Income-tax Act, 1961 and the Code of Criminal Procedure, 1898.
Scheme for disposing of appeal [Section 255(7), (8) & (9)] - Section 255(7) empowers the
Central Government to make a scheme, by notification in the Official Gazette, for the
purposes of disposal of appeals by the Appellate Tribunal, so as to impart greater efficiency,
transparency and accountability by—
(a) eliminating the interface between the Appellate Tribunal and the parties to the appeal
in the course of appellate proceedings to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialisation;
(c) introducing an appellate system with dynamic Jurisdiction.
The Central Government may, for the purpose of giving effect to such scheme, by notification
in the Official Gazette, direct that any of the provisions of the Income-tax Act, 1961 would not
apply or would apply with such exceptions, modifications and adaptations as may be specified
in the notification. [Section 255(8)].
Every such notification issued under section 255(7) or section 255(8) has to be laid before
each House of Parliament as soon as may be after issue of the notification.

16.3 APPEALS TO HIGH COURT [SECTIONS 260A & 260B]

Section 260A provides for direct appeal to the High Court against the orders of the Appellate
Tribunal.

(1) Appeal - Section 260A(1) provides that an appeal

shall lie to the High Court from every order passed
in appeal by the Appellate Tribunal, if the High Court
is satisfied that the case involves a substantial
question of law. If the High Court is so satisfied, it
shall formulate that question.

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The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or

Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may
file an appeal to the High Court under this section.
(2) Form for appeal - The appeal shall be in the form of a memorandum of appeal, precisely
stating in it the substantial question of law involved.
(3) Time limit for appeal - The appeal shall be filed within 120 days from the date on
which the order appealed against is received by the assessee, or
the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner.
The High Court has and always had the power to condone the
delay and admit an appeal after the expiry of the period of 120 days, if it is satisfied that there
was sufficient cause for not filing the appeal within that period.
(4) Matters on which appeal can be heard - The appeal shall be heard only on the question
formulated. However, the respondent shall at the hearing of appeal, be allowed to argue that
the case does not involve such question. Further, the Court shall also have power to hear the
appeal on any other substantial question of law not formulated by it, if it is satisfied that the
case involves such question. However, such power shall be exercised by the Court only after
recording the reasons for hearing such other question.
Further, the High Court may determine any issue which -
(a) has not been determined by the Appellate Tribunal; or
(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on
such question of law as is referred to in section 260A(1).
(5) Delivery of judgment - After the appeal is heard, the High Court shall decide the question
of law so formulated and deliver such judgment thereon, but such judgment should contain
the grounds on which such decision is founded.
(6) Award of costs - The High Court is empowered to award such costs as it deems fit.
(7) Code of Civil Procedure - Unless otherwise provided in this Act, the Code of Civil Procedure,
1908, relating to appeals to the High Court, shall apply to appeals under this section.
(8) Case before High Court to be heard by not less than two judges [Section 260B]
Strength of the bench hearing the appeal - The appeal shall be heard by a bench of not
less than 2 judges of the High Court.
Decision of the majority - The appeal shall be decided in accordance with the opinion of the
judges or the majority, if any.

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Where there is no such majority, the point of law upon which the judges differ shall be referred
to one or more of the other judges of the High Court and such point shall be decided accord-
ing to the opinion of the majority of the Judges who have heard the case, including those who
first heard it.

16.4 APPEAL TO THE SUPREME COURT [SECTION 261]

According to section 261, an appeal shall lie to the Supreme Court from any judgment of the High
Court, in a case which the High Court certifies to be a fit one for appeal to the Supreme Court. The
provisions of the Code of Civil Procedure, 1908 in regard to appeal shall apply in the case of all
appeals to the Supreme Court in the same manner as in the case of all appeals from decrees of a
High Court. The cost of appeal shall be decided at the discretion of the Supreme Court. Where the
judgment of a High Court is varied in the appeal, effect should be given to the order of the Supreme
Court in the same manner as provided in the case of a judgment of the High Court .

Time limit for filing appeals

Before Joint Commissioner

(Appeals) u/s 246 or Commissioner Before Appellate Before High Court
(Appeals) u/s 246A Tribunal u/s 253 u/s 260A

Within 30 days from within 2 months from the

Appeal related Date of end of the month in which
to the order sought to be Within 120 days
appealed against is from the date of
Assessment / Service of Notice of
communicated. receipt of order
Penalty Demand.
appealed against.
Any other case Service of intimation
of order sought to be
appealed against.

Note: The above time period can be extended by the Appellate Authority if the appellant shows
sufficient cause for not presently the appeal within the specified time.

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16.5 PROCEDURE WHEN ASSESSEE CLAIMS IDENTICAL

QUESTION OF LAW IS PENDING BEFORE THE HIGH
COURT OR SUPREME COURT [SECTION 158A]
(1) Identical question of law pending before High Court/Supreme Court: Section 158A
makes provision for avoiding repetitive appeals when identical question of law is pending
before High Court or Supreme Court. This is applicable to a situation where an assessee
claims that any question of law arising in his case for an assessment year which is pending
before the Assessing Officer or any appellate authority is identical with a question of law
arising in his case for another assessment year which is pending in appeal under section
260A before the High Court or in appeal under section 261 before the Supreme Court.
(2) Assessee to furnish declaration: In such a situation, notwithstanding anything contained in
the Act, the assessee may furnish a declaration in the prescribed form that if the Assessing
Officer or the appellate authority, as the case may be, agrees to apply in the present case,
the final decision passed on the other case, the assessee shall not raise again the same
question of law in appeal before any appellate authority or in appeal before the High Court
under section 260A or in appeal before the Supreme Court under section 261.
(3) Assessing Officer’s report on correctness of claim: Where such a declaration is furnished
by the assessee to an appellate authority, the appellate authority shall call for a report from
the Assessing Officer on the correctness of the claim. Where the Assessing Officer makes a
request to the appellate authority to give him an opportunity of being heard, it shall allow him
such opportunity.
(4) Admission or rejection of claim by order in writing: The Assessing Officer or the appellate
authority, as the case may be, may, by order in writing –
(i) admit the claim if satisfied that the question of law is identical in the present as well
as the other case; or
(ii) reject the claim, if not so satisfied.
(5) Consequences where claim is admitted: Where a claim is admitted, -
(i) the Assessing Officer or appellate authority, as the case may be, may make an order
disposing of the present case without waiting for the final decision on the other case.
(ii) the assessee would then not be entitled to raise in relation to the relevant case, such
question of law in appeal before any appellate authority or in appeal before the High
Court under section 260A or the Supreme Court under section 261.

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(6) Final decision of Supreme Court/High Court to be applied to the case: When the final
decision on the question of law is passed in the other case, the Assessing Officer or the
appellate authority, as the case may be would apply it to the present case and amend the
order passed, if necessary, in order to conform to such decision.
(7) Finality of the order: An order admitting or rejecting the claim of the assessee, as the case
may be, would be final. Such order cannot be called in question in any proceeding by way of
appeal, reference, revision under the Act.
(8) Meaning of certain terms:
Term Meaning
Appellate authority Joint Commissioner (Appeals) or Commissioner (Appeals) or
Appellate Tribunal.
Case Any proceeding under the Act for assessment of the total
income of the assessee or for the imposition of any penalty or
fine on him.

16.6 DEFERMENT OF APPEAL BY REVENUE WHEN AN

IDENTICAL QUESTION OF LAW IS PENDING BEFORE
HIGH COURT OR SUPREME COURT [SECTION
158AB]
(1) Deferment of any appeal against an identical question of law pending before the High
Court or Supreme Court: Section 158AB provides that where
the collegium (comprising of two or more Chief Commissioners
or Principal Commissioners or Commissioners, as may be
specified by the CBDT in this behalf) is of the opinion that
- any question of law arising in the case of an assessee for any assessment year (i.e.,
relevant case) is identical with a question of law already raised
• in his case for any other A.Y. or
• in the case of any other assessee for any assessment year,
which is pending before the jurisdictional High Court under section 260A or the
Supreme Court in an appeal under section 261 or in a special leave petition under
article 136 of the Constitution, against the order of the Appellate Tribunal or the
jurisdictional High Court, as the case may be, in favour of such assessee (i.e., other
case), the collegium may, decide and inform the Principal Commissioner or

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Commissioner not to file any appeal, at this stage, to the Appellate Tribunal under
section 253(2) or to the jurisdictional High Court under section 260A(2) in the relevant
case against the order of the Joint Commissioner (Appeals) or the Commissioner
(Appeals) or the Appellate Tribunal, as the case may be.
(2) Direction to Assessing Officer to make an application
to the Tribunal or High Court: On receipt of a
communication from the collegium, the Principal
Commissioner or Commissioner shall direct the Assessing
Officer to make an application to the Appellate Tribunal or
jurisdictional High Court, as the case may be, in the
prescribed form
- within 120 days from the date of receipt of the order of the Joint Commissioner (Appeals)
or the Commissioner (Appeals) or the Appellate Tribunal, as the case may be,
- stating that an appeal on the question of law arising in the relevant case may be filed
when the decision on the question of law becomes final in the other case.

This is notwithstanding anything contained in section 253(3) or 260A(2)(a) which provide the
time limit for filing appeal before Tribunal or High Court.
(3) Application to be made only if the assessee accepts that the question of law is
identical: The Principal Commissioner or Commissioner shall direct the Assessing Officer to
make such an application only if an acceptance is received from the assessee to the effect
that the question of law in the other case is identical to that arising in the relevant case. In
case no such acceptance is received, the Principal Commissioner or Commissioner shall,
notwithstanding anything contained in section 253(3) or 260A(2)(a), proceed in accordance
with the provisions contained in section 253(2) or section 260A(2)(c).
(4) Consequences where the order of Joint Commissioner (Appeals) or CIT (Appeals) or
the Appellate Tribunal is not in conformity with High Court’s or Supreme Court’s
decision in the other case: Where the order of the Joint Commissioner (Appeals) or
Commissioner (Appeals) or the order of Appellate Tribunal, as the case may be, is not in
conformity with the final decision on the question of law in the other case (if the High Court
or Supreme Court decides the other case in favour of the Department), as and when such
order is received, the Principal Commissioner or the Commissioner may direct the Assessing
Officer to appeal to the Appellate Tribunal or Jurisdictional High Court, as the case may be,
against such order.

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Unless otherwise provided in section 158AB, all other provisions of Part B-“Appeals to
Appellate Tribunal” and Part CC – “Appeals to High Court” of Chapter XX would apply
accordingly.
(5) Time limit for filing appeal in the relevant case: The appeal
in the relevant case shall be filed within 60 days to the Tribunal
or 120 days to the High Court, as the case may be, from the
date on which the order of the High Court or the Supreme Court
in any other case, is communicated to the Principal Commissioner or Commissioner, in
accordance with the procedure specified by the CBDT.
Example: Let us suppose a question of law (Q1) has arisen in case of an assessee
Mr. X and he has received a favourable decision on Q1 from the Commissioner
(Appeals). Further, in case of another assessee Mr. Y, where Department’s appeal on
identical question of law (Q2) in his case is pending before the jurisdictional High Court or the
Supreme Court. The collegium is of the opinion that Q1 in case of Mr. X and Q2 in case of Mr. Y are
identical questions of law. In this situation, the provisions of section 158AB can be invoked by
Revenue to defer filing of appeal in respect of Q1 in case of Mr. X to the higher appellate authority
till a decision on Q2 in case of Mr. Y is communicated to the Principal Commissioner or
Commissioner having jurisdiction over the assessee, Mr. X. Such a decision on deferment will be
subject to acceptance by the assessee Mr. X that question of law in his case Q1 is identical to Q2
in the case of the assessee Mr. Y.

16.7 REVISION OF ORDERS [SECTIONS 263 AND 264]

(1) Revision of Orders prejudicial to the Revenue [Section 263]
(i) Under section 263(1), if the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner considers that any order passed by the
Assessing Officer or the Transfer Pricing Officer (TPO) under section 92CA, as the
case may be, is erroneous in so far as it is prejudicial to the interests of the Revenue,
he may, after giving the assessee an opportunity of being
heard and after making an enquiry, pass an order,
including an order
(a) enhancing or modifying the assessment or
cancelling the assessment and directing a fresh
assessment; or

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(b) an order modifying the order under section 92CA; or

(c) an order cancelling the order under section 92CA and directing a fresh order
under the said section.
(ii) An order passed by the Assessing Officer or the Transfer Pricing Officer (TPO), as the
case may be, shall be deemed to be erroneous in so far as it is prejudicial to the
interests of the Revenue, if, in the opinion of the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner,—
(a) the order is passed without making inquiries or verification which should have
been made;
(b) the order is passed allowing any relief without inquiring into the claim;
(c) the order has not been made in accordance with any order, direction or
instruction issued by the CBDT under section 119;
(d) the order has not been passed in accordance with any decision which is
prejudicial to the assessee, rendered by the jurisdictional High Court or
Supreme Court in the case of the assessee or any other person.
(iii) The term ‘record’ shall include and shall be deemed always to have included all
records relating to any proceedings under the Act available at the time of examination
by the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner.
(iv) Where any order referred to in section 263(1) passed by the Assessing Officer or the
TPO, as the case may be, had been the subject-matter of any appeal, the powers of the
Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner under section 263(1) shall extend and shall be deemed always to have
extended to such matters as had not been considered and decided in such appeal.
(v) No order shall be made after the expiry of 2 years from the end of the financial
year in which the order sought to be revised was passed.

(vi) In computing the period of 2 years, the time taken in giving an opportunity to the
assessee to be reheard under section 129 and the period commencing on the date
on which stay on any proceeding under this section was granted by an order or
injunction of any court and ending on the date on which certified copy of the
order vacating the stay was received by the jurisdictional Principal
Commissioner or Commissioner shall be excluded.

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(vii) The time limit, however, does not apply in case where the effect has to be given to a
finding or direction contained in the order of the Appellate Tribunal, High Court or the
Supreme Court.
(2) Revision of other orders [Section 264]
(i) In the case of any other order (not being an order prejudicial to the Revenue) passed
by any subordinate authority, the Principal Chief Commissioner or Chief Commissioner
or Principal Commissioner or Commissioner may either on his own motion or on
receipt of an application from the assessee, call for the record of any proceedings
under the Act in the course of which the order was passed. After making such enquiries
as may be necessary the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner may pass such order as he thinks fit.

(ii) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner

or Commissioner is not empowered to revise any order on his own motion if a
period of more than one year has
expired from the date of the order
sought to be revised.
(iii) If the application for revision is made by
the assessee, it must be made within one
year from the date on which the order in
question was communicated to him or the
date on which he otherwise comes to
know of it, whichever is earlier.
(iv) However, the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner may admit an application even after the expiry of one
year, if he is satisfied that the assessee was prevented by sufficient cause from making
the application within that period.
(v) The application to the Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner
for revision must be accompanied by a fee of ` 500.
(vi) If an order is passed by the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner declining to interfere in any proceeding, it
shall not be deemed to be an order prejudicial to the assessee.

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(vii) However, the Principal Chief Commissioner or Chief Commissioner or Principal

Commissioner or Commissioner is not empowered to revise any order in the
following cases, viz.,
(a) where an appeal against the order lies to
the Joint Commissioner (Appeals) or the
Commissioner (Appeals) or the Tribunal
but has not been made and the time within
which the appeal may be made has not
expired or in the case of an appeal to the
Joint Commissioner (Appeals) or to the
Commissioner (Appeals) or to the Tribunal
the assessee has not waived his right of
appeal;
(b) where the order has been made subject to
an appeal to the Joint Commissioner (Appeals) or the Commissioner (Appeals)
or the Appellate Tribunal.
(3) Limitation of time for revision of orders by Principal Commissioner or Commissioner
of Income-tax under section 264
Under section 264, the Principal Chief Commissioner or Chief Commissioner or Principal
Commissioner or Commissioner of Income-tax is empowered to revise an order passed by
the subordinate authority where no appeal has been filed. There is a limitation of one year
for filing the application.
(a) It shall be obligatory on the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner to
pass an order within a period of one year
from the end of financial year in which
such application is made by the
assessee for revision.
(b) In computing the above referred period of limitation, the time taken in giving an
opportunity to the assessee to be re-heard under the proviso to section 129 and the
period commencing on the date on which stay on any proceeding under this
section was granted by an order or injunction of any court and ending on the
date on which certified copy of the order vacating the stay was received by the

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jurisdictional Principal Commissioner or Commissioner shall be excluded

[Explanation to section 264(6)].
(c) The aforesaid time limit shall not apply to any order which has been passed in
consequence of or to give effect to any finding or direction contained in an order of the
Appellate Tribunal, High Court or the Supreme Court.

(4) Faceless Revision [Section 264A]

(i) The Central Government may make a scheme, by notification in the Official Gazette,
for the purposes of revision of orders under section 263 or section 264, so as to impart
greater efficiency, transparency and accountability by—

(a) eliminating the interface between the income-tax authority and the assessee or
any other person to the extent technologically feasible;

(b) optimising utilisation of the resources through economies of scale and

functional specialisation;

(c) introducing a team-based revision of orders, with dynamic jurisdiction.

(ii) Every notification has to be laid before each House of Parliament, as soon as may be
after the notification is issued.

(5) Faceless Effect of Orders [Section 264B]

(i) The Central Government may make a scheme, by notification in the Official Gazette,
for the purposes of giving effect to an order under section 250, 254, 260, 262, 263 or
264, so as to impart greater efficiency, transparency and accountability by —

(a) eliminating the interface between the income-tax authority and the assessee or
any other person to the extent technologically feasible;

(b) optimising utilisation of the resources through economies of scale and

functional specialisation;

(c) introducing a team-based giving of effect to orders, with dynamic jurisdiction

(ii) Every notification has to be laid before each House of Parliament, as soon as may be
after the notification is issued.

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Time Limit for Revision of Orders

Revision of orders prejudicial Revision of other orders

to the interests of the revenue
[Section 264]
[Section 263]

1 year from the date of the order, in case of

suo moto revision by the
2 years from the end of PCC/CCPC/Commissioner; where the
the FY in which the order assessee submits an application for revision,
sought to be revised was the time limit is 1 year from the end of the FY
passed in which the application is made.

Time to be excluded in both cases Non-applicability of Time Limit

Order in
consequence of or to
give effect to any
Time taken in giving an Period commencing on the date on which
finding or direction
opportunity to the stay on any proceeding was granted by
contained in an order
assessee to be reheard an order / injunction of any court and to
of the ITAT/HC/SC
the date on which certified copy of the
order vacating the stay was received by
the jurisdictional Principal Commissioner
or Commissioner

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16.8 MONETARY LIMITS FOR REGULATING FILING OF

APPEALS BY INCOME TAX AUTHORITIES [SECTION
268A]
(i) As per section 268A(1), the CBDT is empowered to issue orders, instructions or directions to
other income tax authorities, fixing such monetary limits as it may deem fit. Such fixing of
monetary limit is for the purpose of regulating filing of appeal or application for reference by
any income tax authority.
(ii) Where an income-tax authority has not filed any appeal or application for reference on any
issue in the case of an assessee for any assessment year, due to abovementioned
order/instruction/direction of the CBDT, such authority shall not be precluded f rom filing an
appeal or application for reference on the same issue in the case of –
(1) the same assessee for any other assessment year; or
(2) any other assessee for the same or any other assessment year.
(iii) Further, in such a case, it shall not be lawful for an assessee to contend that the income -tax
authority has acquiesced in the decision on the disputed issue by not filing an appeal or
application for reference in any case.
(iv) The Appellate Tribunal or Court should take into consideration the above mentioned
orders/instructions/directions of the CBDT and the circumstances under which such appeal
or application for reference was filed or not filed in respect of any case.
(v) Every order/instruction/direction which has been issued by the CBDT fixing monetary limits
for filing an appeal or application for reference shall be deemed to have been issued under
sub-section (1) and all the provisions of this section shall apply accordingly.
Monetary limits for filing of appeals by the Department before Income Tax Appellate Tribunal,
High Courts and SLPs/appeals before Supreme Court
The CBDT has specified the monetary limits and other conditions
for filing departmental appeals before Income Tax Appellate
Tribunal, High Courts and SLPs/ appeals before Supreme Court
vide Circular No. 5/2024, Dated 15-3-2024 and Circular No.
09/2024 dated 17.9.2024.

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It has been decided by the CBDT that departmental appeals may be filed on merits before Income
Tax Appellate Tribunal and High Courts and SLPs/ appeals before Supreme Court keeping in view
the monetary limits and conditions specified below.

Monetary Limits specified:

Appeals/ SLPs shall not be filed in cases where the tax effect does not exceed the monetary limits
given hereunder:
S. No. Appeals/ SLPs in Income-tax matters Monetary Limit (`)
1. Before Appellate Tribunal 60,00,000
2. Before High Court 2,00,00,000
3. Before Supreme Court 5,00,00,000

It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the
monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the
case.
Exceptions where the decision to appeal/file SLP shall be taken on merits, without regard to
the tax effect and the monetary limits:
Monetary limits given above with regard to filing appeal/SLP would be applicable to all cases
including those relating to TDS/TCS with the following exceptions where the decision to appeal/file
SLP shall be taken on merits, without regard to the tax effect and the monetary limits:
a. Where any provision of the Act or the Rules or notification issued thereunder has been held
to be constitutionally invalid, or
b. Where any order, notification, instruction or circular of the Board or the Government has been
held to be illegal or ultra vires the Act or otherwise constitutionally invalid, or
c. Where the assessment is based on information in respect of any offence alleged to have been
committed under any other law received from any of the law enforcement or intelligence
agencies such as CBI, ED, DR!, SFIO, NIA, NCB, DGGI, state law enforcement agencies
such as State Police, State Vigilance Bureau, State Anti-Corruption Bureau, State Excise
Department, State Sales/Commercial Taxes or GST Department, or
d. Where the case is one in which prosecution has been filed by the Department in the relevant
case and the trial is pending in any Court or conviction order has been passed and the same
has not been compounded, or

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 APPEALS AND REVISION 16.31 a

e. Where strictures/adverse comments have been passed and/or cost has been levied against
the Department of Revenue, CBDT or their officers, or
f. Where the tax effect is not quantifiable or not involved, such as the case of registration of
trusts or institutions under sections 10(23C), 12AAl12AB order passed u/s 263 etc. The
reference to cases involving sections referred here, where it is not possi ble to quantify tax
effect or tax effect is not involved, is for the purpose of illustration only.
g. Where addition relates to undisclosed foreign income/undisclosed foreign assets (including
financial assets)/undisclosed foreign bank account, or
h. Cases involving organized tax evasion including cases of bogus capital gain/loss through
penny stocks and cases of accommodation entries, or
i. Where mandated by a Court's directions, or
j. Writ matters, or
k. Matters related to any matter other than the Income Tax Act, or
l. In respect of litigation arising out of disputes related to TDS/TCS matters in both domestic
and International taxation charges:-
- Where dispute relates to the determination of the nature of transaction such that the
liability to deduct TDS/TCS thereon or otherwise is under question, or
- Appeals of International taxation charges where the dispute relates to the applicability
of the provisions of a Double Taxation A voidance Agreement or otherwise
m. Any other case or class of cases where in the opinion of the Board it is necessary to contest
in the interest of justice or revenue and specified so by a circular issued by Board in this
regard.
In respect of deferral of appeals under section 158AB, exceptions where the decision to appeal/file
SLP shall be taken on merits, without regard to the tax effect and the monetary limits :
(a) When judicial finality is achieved in favour of Revenue in the “other case”, appeal in the
“relevant case” is contested on merits subsequent to the decision in the “other case”
irrespective of the extant monetary limits.
(b) If the judicial outcome in the “other case” is not in favour of Revenue and is not accepted by
the Department, appeal against the same may be contested on merits in the “other case”
irrespective of the extant monetary limits, to arrive at judicial finality.

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Meaning of Tax Effect:

Case Tax Effect
i. In case not covered in ii, iii and iv The tax on the total income assessed
below (-)
The tax that would have been chargeable had
such total income been reduced by the amount
of income in respect of the issues against which
appeal is intended to be filed (“disputed
issues”).
Note – However, the tax will not include any
interest thereon, except where chargeability of
interest itself is in dispute.
ii. In case the chargeability of interest is The amount of interest
the issue under dispute
iii. In case where returned loss is reduced The tax effect would include notional tax on
or assessed as income disputed additions
iv. In case of penalty orders Quantum of penalty deleted or reduced in the
order to be appealed against
Note – Tax effect shall be tax including applicable surcharge and cess.

For calculating the tax effect of cases involving TDS/TCS, the cumulative effect, of all orders passed
for an assessment year of a deductor, to be taken into account and would include interest u/s
201(1A).
Computation of tax on the total income assessed where income is computed under the
provisions of section 115JB or section 115JC:
In such case, tax on the total income assessed would be computed as given below -
(A - B) + (C - D)
Where,
A= the total income assessed as per the provisions other than the provisions contained in section
115JB or section 115JC (i.e., the general provisions)

B= the total income that would have been chargeable had the total income assessed as per the
general provisions been reduced by the amount of the disputed issues under general
provisions
C= the total income assessed as per the provisions contained in section 115JB or section 115JC

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D= the total income that would have been chargeable had the total income assessed as per the
provisions contained in section 115JB or section 115JC was reduced by the amount of the
disputed issues under said provisions

However, where the amount of disputed issues is considered both under the provisions contained
in section 115JB or section 115JC and under general provisions, such amount shall not be reduced
from total income assessed while determining the amount under item D.

Manner of calculation of tax effect of different assessment years

The Assessing Officer has to calculate the tax effect separately for every assessment year in respect
of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed
issues arise in more than one assessment year, appeal can be filed in respect of such assessment
year or years in which the tax effect in respect of the disputed issues exceeds the specified monetary
limit. No appeal shall be filed in respect of an assessment year or years in which the tax effect is
less than the monetary limit specified. Further, even in case of a composite order of any High Court
or appellate authority, which involves more than one assessment year and common issues in more
than one assessment year, no appeal shall be filed in respect of an assessment year or years in
which the 'tax effect' is less than the prescribed monetary limit. In case where a composite
order/judgement involves more than one assessee, each assessee shall be dealt with separately.

Department not precluded from filing an appeal against disputed issues for subsequent
assessment years if the tax effect exceeds the specified monetary limits in those years

In a case where appeal before a Tribunal or a Court is not

filed only on account of the tax effect being less than the
monetary limit specified above, the Principal Commissioner
or Commissioner of Income-tax shall specifically record that
"even though the decision is not acceptable, appeal is not
being filed only on the consideration that the tax effect is less than the
monetary limit specified in the Circular". Further, in such cases, there will be no presumption that
the Income-tax Department has acquiesced in the decision on the disputed issues. The Income-tax
Department shall not be precluded from filing an appeal against the disputed issues in the case of
the same assessee for any other assessment year, or in the case of any other assessee for the
same or any other assessment year, if the tax effect exceeds the specified monetary limits.

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Cases in respect of which appeal is not filed due to tax effect being less than specified
monetary limit not to have any precedent value

In the past, a number of instances have come to the notice of the Board, whereby an assessee has
claimed relief from the Tribunal or the Court only on the ground that the Department has implicitly
accepted the decision of the Tribunal or Court in the case of the assessee for any other assessment
year or in the case of any other assessee for the same or any other assessment year, by not filing
an appeal on the same disputed issues. The Departmental representatives/counsels must make
every effort to bring to the notice of the Tribunal or the Court that the appeal in such cases was not
filed or not admitted only for the reason of the tax effect being less than the specified monetary limit
and, therefore, no inference should be drawn that the decisions rendered therein were acceptable
to the Department. Accordingly, they should impress upon the Tribunal or the Court that such cases
do not have any precedent value and also bring to the notice of the Tribunal/ Court the provisions of
section 268A(4).

As the evidence of not filing appeal due to this Circular may have to be produced in courts, the
judicial folders in the office of Pr. CsIT/ CsIT must be maintained in a systemic manner for easy
retrieval.

In cases where appeals are not being filed due to low tax effect despite the judgment not being
acceptable on merits or appeals are being filed despite low tax effect in view of exceptions, the Pr.
CIT/CIT shall submit a monthly report, to the CIT(J)/Addl./Jt. CIT(J) office. Further, the CIT(J)/
Addl/Jt CIT(J) office shall collate and disseminate the departmental stand, as regards filing of
appeals, in respect of the issues involved in such appeals, within the region.

16.9 DOCTRINE OF PARTIAL MERGER AND DOCTRINE OF

TOTAL MERGER
Section 154 provides that the doctrine of partial merger shall apply where any matter has been
considered and decided in any proceeding, appeal or revision relating to rectifiable order. The
authority passing such order may, amend the order in relation to any matter other than the matter
which has been so considered and decided. The doctrine of partial merger also holds good for
section 263.

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However, the concept of total merger would apply in the case

of section 264. The Principal Chief Commissioner or Chief
Commissioner or Principal Commissioner or Commissioner of
Income-tax has no power to revise any order under section
264, if the order has been made subject to an appeal to the
Appellate Tribunal, even if the relief claimed in the revision is
different from the relief claimed in the appeal and irrespective of the fact whether the appeal is by
the assessee or by the Department.

Doctrine of Merger

Partial Merger Total Merger

Rectification under Revision under section Revision under section

section 154 263 264

Where the order passed by The

Amendment of order for
the A.O. has been the subject PCC/CC/PC/Commissioner
rectification of mistake
matter of any appeal, the cannot revise any order
apparent from the record, in
powers of the which has been made the
relation to a matter other than
PCC/CC/PC/Commissioner subject matter of an appeal to
the matter considered and
u/s 263 shall extend to such the Joint Commissioner
decided in any proceeding by
matters as had not been (Appeals) or Commissioner
way of appeal or revision
considered and decided in (Appeals) or the Appellate
relating to such order
such appeal Tribunal

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SIGNIFICANT SELECT CASES

[Link]. Case Law

1. CIT v. Industrial Development Bank of India Ltd. [2023] 454 ITR 811(SC)
Issue Relevant Provision, Analysis and Decision
Does the limitation period Section 263 provides that where the Principal Chief
for exercising the powers Commissioner, Chief Commissioner, Principal
under section 263 reckoned Commissioner or Commissioner of Income-tax
from date of passing of the considers that an order passed by the Assessing Officer
original assessment order or Transfer Pricing Officer is erroneous in so far as
rather than the date of prejudicial to the interests of the Revenue, he may pass
reassessment order for the a revisionary order. The order for revision shall be made
issues covered under the within a period of two years from the end of the financial
original assessment but not year in which the order sought to be revised was passed.
covered in the
As observed and held by the Court in the earlier
reassessment
decisions, once an order of assessment is re-opened,
proceedings?
the previous order of assessment will be held to be set
aside. The whole proceedings would start afresh, but the
same would not mean that even when the subject matter
of reassessment is distinct and different, the entire
proceedings would be deemed reopened.
It means that only in a case where the issues before the
Commissioner at the time of exercising powers under
section 263 relate to the subject matter of reassessment
would the limitation start from the date of the
reassessment order. However, if the subject matter of
the reassessment is distinct and different, in that case,
the relevant date for the purpose of determining the
period of limitation for exercising powers under section
263 would be the date of the original Assessment Order.
Accordingly, the Supreme Court held that the issues
before the Commissioner while exercising the powers
under section 263 related back to the original
assessment order which were not covered in the
reassessment proceedings and, therefore, the limitation
would start from the original assessment order and not
from the reassessment order.

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2. CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336 (Bom.)
Issue Analysis & Decision
Can an assessee make an The appellate authorities have jurisdiction to permit
additional/ new claim additional claims before them, however, the exercise of
before an appellatesuch jurisdiction is entirely the authorities’ discretion.
authority, which was not In case an additional ground was raised before the
claimed by the assessee in appellate authority which could not have been raised at
the return of income the stage when the return was filed or when the
(though he was legally assessment order was made, or the ground became
entitled to), otherwise thanavailable on account of change of circumstances or law,
by way of filing a revised the appellate authority can allow the same.
return of income?
Additional grounds can be raised before the
Appellate Authority even otherwise than by way of
filing return of income. However, in case the claim
has to be made before the Assessing Officer, the
same can only be made by way of filing a revised
return of income.
Note – This view of the High Court has been endorsed
by the Apex Court in Wipro Finance Ltd. v. CIT (2022)
443 ITR 250 (SC)
3. Wipro Finance Ltd. v. CIT (2022) 443 ITR 250 (SC)
Issue Analysis & Decision
Would the loss incurred in Under section 37, any expenditure (not being in the
foreign currency fluctuation nature of expenditure described in sections 30 to 36),
at the time of repayment of and not being in the nature of capital expenditure or
loan taken for financing personal expenses of the assessee), laid out or
acquisition of plant and expended wholly and exclusively for the purposes of the
machinery on lease/hire business or profession shall be allowed in computing
purchase by Indian income chargeable under the head “Profits and gains of
enterprises with whom the business or profession”.
assessee-company has Section 254(1) empowers the Appellate Tribunal to pass
lease/hire purchase such orders as it thinks fit, after giving both the parties
agreement be treated as to the appeal an opportunity of being heard.
allowable revenue
Facts of the case:
expenditure?
The assessee-company, which was in the leasing
Can the Tribunal entertain a business, obtained a loan in foreign currency from
fresh claim for the first time Commonwealth Development Corporation (CDC),
in exercise of its powers having its registered office in the United Kingdom, to be
under section 254? utilised by the assessee for financing the procurement of
capital equipment by existing Indian enterprises on hire
purchase or lease basis. While repaying the loan, due to
the difference in the rates of foreign exchange, the

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assessee had to pay a higher amount, resulting in loss

to the assessee. For the relevant assessment year, the
assessee declared, inter alia, a loss of ` 1.11 crores
owing to fluctuation in the rates of foreign exchange.
The assessee in its return had taken a conscious explicit
plea with regard to part of the claim being ascribable to
capital expenditure (` 2.46 crores) and partly to revenue
expenditure (` 1.11 crores). Thereafter, for the first time
before the Tribunal it pleaded that the entire claim must
be treated as revenue expenditure. The Tribunal was
conscious that this claim was made by the assessee for
the first time before it and the same was contrary to the
stand taken in the return filed by the assessee for the
assessment year including the notings made by the
officials of the assessee. Yet, the Tribunal entertained
the claim as permissible, relying on the dictum of the
court in National Thermal Power Co. Ltd. v. CIT [1998]
229 ITR 383 (SC), wherein it was held that the Tribunal
has the power to entertain question raised for the first
time. The Tribunal is not confined only to the issues
arising out of the appeal before the Commissioner
(Appeals). It has the power to allow the assessee to urge
any ground not raised before the Commissioner
(Appeals). However, the relevant facts in respect of such
ground should be on record.
Accordingly, in this case, the Tribunal held that the entire
loan and the utilisation thereof was in trading operations
of the company more profitably leaving the fixed capital
untouched and hence the expenditure was on revenue
account and allowable. The Tribunal allowed the entire
claim of ` 3.57 crores.
Analysis:
The activity of the assessee of financing existing Indian
enterprises for procurement or acquisition of plant,
machinery and equipment on lease and hire purchase
basis, was an independent transaction or activity being
the business of the assessee. The transaction of loan
between the assessee and CDC was in the nature of
borrowing money by the assessee, which was necessary
for carrying on its business of financing. It was not for
creation of an asset of the assessee as such or
acquisition from a country outside India for the purpose
of its business. In such a scenario, the assessee would
be justified in availing of deduction of the entire

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expenditure or loss suffered by it in connection with such

a transaction in terms of section 37. The loan was wholly
and exclusively used for the purpose of business of
financing existing Indian enterprises, which in turn, had
to acquire plant, machinery and equipment to be used
by them. It was a different matter that they may do so
because of the leasing and hire purchase agreement
with the assessee. That would, nevertheless, be an
activity concerning the business of the assessee. The
Supreme Court held that the analysis and the conclusion
arrived at by the Tribunal in respect of the claim of the
assessee were correct.
As regards the restriction in powers to accept a new
claim for the first time, such limitation on accepting new
claims would apply to the “assessing authority”, but
would not impinge upon the plenary powers of the
Tribunal bestowed under section 254.
Decision:
As a result of allowing the entire claim of the appellant
to the tune of ` 3.57 crores being revenue expenditure,
suitable amendment will have to be effected in the final
assessment order passed by the Assessing Officer for
the concerned assessment year, thereby treating the
consequential benefits such as depreciation availed of
by the appellant-assessee in relation to the stated
amount towards exchange fluctuation related to leased
assets capitalized (being ` 2.46 crores), as unavailable.
Note – The crux of this case is that the assessee was
engaged in leasing business. The assessee also
financed the enterprises with whom it had entered into a
lease agreement to enable them to obtain the plant,
machinery on lease from it. For such financing, the
assessee had obtained loan in foreign currency and
incurred loss on account of currency fluctuation while
repaying the loan. It was held that since the loan was
borrowed for the financing activity, which was an activity
concerning the business of the assessee, the loss was
allowable under section 37. It was not a loan borrowed
for acquisition of asset, in which case, the loss would
have had to be adjusted against the actual cost of the
asset.

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4. Smt. Ritha Sabapathy v. DCIT [2019] 416 ITR 191 (Mad)

Issue Analysis & Decision
Can the Appellate Tribunal Even if the assessee could not appear, the Tribunal
dismiss an appeal, without could have decided the appeal only on merits, ex parte,
deciding the case on its after hearing the Revenue's contentions. It reiterates
merits, solely on the ground that the fact-finding Appellate Tribunal should not shirk
that the assessee had not its responsibility to decide a case on its merits.
appeared on the appointed A legal and binding responsibility, therefore, lies upon
date of hearing? the Tribunal to decide the appeal on merits, irrespective
of the appearance or otherwise of the assessee or his
counsel before it.
5. CIT v. Earnest Exports Ltd. (2010) 323 ITR 577 (Bom.)
Issue Analysis & Decision
Does the Appellate Tribunal The power u/s 254(2) is limited to rectification of a
have the power to review or mistake apparent on record and therefore, the Tribunal
re-appreciate the must restrict itself within those parameters. Section
correctness of its earlier 254(2) is not a carte blanche for the Tribunal to
decision u/s 254(2)? change its own view by substituting a view which it
believes should have been taken in the first
instance. Section 254(2) is not a mandate to unsettle
decisions taken after due reflection.
In this case, the Tribunal, while dealing with the
application u/s 254(2), virtually reconsidered the
entire matter and came to a different conclusion.
This amounted to a reappreciation of the
correctness of the earlier decision on merits, which
is beyond the scope of the power conferred u/s
254(2)
6. Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330 ITR 243 (Delhi)(FB)
Issue Analysis & Decision
Can the Tribunal exercise One of the important reasons for giving the power of
its power of rectification u/s rectification to the Tribunal is to see that no prejudice is
254(2) to recall its order in caused to either of the parties appearing before it by its
entirety, where there is a decision based on a mistake apparent from the record.
mistake apparent from When prejudice results from an order attributable to the
record? Tribunal’s mistake, error or omission, then, it is the duty
of the Tribunal to set it right. In that case, the Tribunal
had not considered the material which was already on
record while passing the judgment. The Apex Court in
Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR
466 took note of the fact that the Tribunal committed a

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mistake in not considering material which was already

on record and the Tribunal acknowledged its mistake
and accordingly, rectified its order.
The Tribunal, while exercising the power of
rectification u/s 254(2), can recall its order in entirety
if it is satisfied that prejudice has resulted to the
party which is attributable to the Tribunal’s mistake,
error or omission and the error committed is
apparent.
7. Reliance Telecom Ltd./Reliance Communications Ltd. (2022) 440 ITR 1 (SC)
Issue Analysis & Decision
Can the powers under Section 254(1) empowers the Appellate Tribunal to pass
section 254(2) be exercised such order thereon as it thinks fit, after giving both the
by the Tribunal to recall an parties to the appeal an opportunity of being heard.
order and rehear the entire Under section 254(2), the Appellate Tribunal, may
order on merits? amend an order passed by it u/s 254(1) with a view to
rectifying any mistake apparent from the record. Such
amendment may be suo moto or if the mistake is brought
to its notice by the assessee or the Assessing Officer.
Facts of the Case:
The Department filed an appeal before the Tribunal
against the order of Commissioner (Appeals). By a
detailed order dated September 6, 2013, the Tribunal
allowed the Department’s appeal. Against this order, the
assessee filed a miscellaneous application for
rectification u/s 254(2).
The contentions of the applicants in the miscellaneous
applications, briefly summarized, were that in the initial
order of the Tribunal on the income-tax appeals dated
September 6, 2013, there are inadvertent errors and
which need to be modified/rectified. The first main
heading ‘Agreement and general terms and conditions
of purchase’. The complaint of the assessee is that it
was not considered in arriving at the final conclusion.
Then comes heading No. 2 which reads thus: ‘Mistake in
reading the ratio of the Delhi High Court’s decision in the
case of DIT v. Ericsson A. B. reported in [2012] 343 ITR
470’. The third main heading is ‘Ignoring the decisions
of the co-ordinate Benches and not constituting larger
Bench in case a different view is taken’. Such application
was made to the Tribunal seeking correction of the
mistakes which are styled as ‘apparent from the record’.

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On being served with such applications, the petitioner-

Department raised an objection to the maintainability
thereof.
Simultaneously, the assessee also filed an appeal
before the High Court against the Tribunal’s order dated
September 6, 2013. By order dated November 18, 2016,
the Tribunal allowed the assessee’s miscellaneous
application filed under section 254(2) and recalled its
original order dated September 6, 2013. Immediately
thereafter, the assessee withdrew the appeal preferred
before the High Court against the original order dated
September 6, 2013.
Against the order passed by the Tribunal allowing the
miscellaneous application under section 254(2) of the
Act and recalling its order dated September 6, 2013, the
Department preferred a writ petition before the High
Court. The High Court dismissed the writ petition
observing that, inter alia, the Department itself had gone
into the merits of the case in detail before the Tribunal
and the parties had filed detailed submissions based on
which the Tribunal passed its order recalling its earlier
order.
Analysis:
The order dated November 18, 2016 passed by the
Tribunal recalling its earlier order dated September 6,
2013 was beyond the scope and ambit of the powers u/s
254(2). While allowing the application u/s 254(2) and
recalling its earlier order dated September 6, 2013, the
Tribunal had reheard the entire appeal on the merits as
if the Tribunal was deciding the appeal against the order
passed by the Commissioner (Appeals). A detailed order
was passed by the Tribunal on September 6, 2013
holding in favour of the Department. That order could not
have been recalled by the Appellate Tribunal in exercise
of powers u/s 254(2). If the assessee was of the opinion
that the order passed by the Tribunal was erroneous,
either on the facts or in law, the only remedy available to
the assessee was to prefer an appeal before the High
Court. In this case, the assessee had already filed
appeal before the High Court, and the same was
withdrawn by it after the Tribunal, by order dated
November 18, 2016, recalled its earlier order dated
September 6, 2013.

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Decision:
The order passed by the Tribunal dated November 18,
2016 recalling its earlier order dated September 6, 2013
was unsustainable, and ought to have been set aside by
the High Court.
Notes -(1) In this case, the Supreme Court directed that
the original order passed by the Tribunal dated
September 6, 2013 passed in the respective appeal
preferred by the Department be restored; and that the
assessee may prefer appeal before the High Court
against the original order dated September 6, 2013.
(2) The Delhi High Court’s ruling in case of Lachman
Dass Bhatia Hingwala (P) Ltd. reported above at SI. No.
7 still hold good since it is with respect to power of the
Tribunal to recall its order solely to rectify the mistake
apparent from record. In the present case, the Supreme
Court held that the Tribunal do not have power to recall
an order and rehear the entire order on merits. The crux
of the both the rulings is that Tribunal have the power to
recall its order only for the purpose of rectifying mistake
apparent from records. However, it cannot recall its
order in entirety to rehear/review its order on merits.
8. DCIT v. Pepsi Foods Ltd (2021) 433 ITR 295 (SC)
Issue Analysis & Decision
Would automatic vacation The third proviso to section 254(2A) provides that where
of stay order upon expiry of the appeal filed before the Appellate Tribunal is not
extended period of stay of disposed of within the period of stay or extended period
365 days be valid, where of stay granted by the Tribunal, the order of stay shall
the delay in disposing of the stand vacated after the expiry of 365 days, even if the
appeal is not attributable to delay in disposing of the appeal is not attributable to
the assessee? the assessee.
The Apex Court observed that the Appellate Tribunal,
wherever possible, has to hear and decide appeals
within a period of four years from the end of the financial
year in which such appeal is filed. It is only when a stay
is granted by the Appellate Tribunal, the appeal is
required to be disposed of within 365 days. So far as the
disposal of an appeal by the Appellate Tribunal is
concerned, this is a directory provision. However, the
condition of automatic vacation of stay on expiry of the
period becomes mandatory so far as the assessee is
concerned.

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The Apex Court also pointed out that the said proviso
would result in the automatic vacation of a stay upon the
expiry of 365 days, even if the Appellate Tribunal could
not take up the appeal in time for no fault of the
assessee. Further, vacation of stay in favour of the
Department would ensue even if the Department is itself
responsible for the delay in hearing the appeal. In this
sense, the proviso is manifestly arbitrary being a
provision which is capricious, irrational and
disproportionate so far as the assessee is concerned.
Accordingly, the Apex Court held that the third proviso to
section 254(2A) has to be read without the word “even” and
the word “not” after the words “delay in disposing of the
appeal”. Thus, any order of stay shall stand vacated
after the expiry of the period or periods mentioned in
the section, only if the delay in disposing of the appeal
is attributable to the assessee.
9. CIT v. Fortaleza Developers (2015) 374 ITR 510 (Bom)
Issue Analysis & Decision
Can the Commissioner When the order of the first appellate authority is
invoke revisionary complete and the appeal is pending before the
jurisdiction u/s 263, when Tribunal, the Commissioner is precluded from
the subject matter of invoking section 263 for revision of the very same
revision (i.e., whether the matter decided by the first appellate authority since
manner of allocation of clause (c) of the Explanation 1 to section 263 debars
revenue amongst the the same.
members of AOP would Accordingly, the High Court held that the order passed
affect the allowability by the Assessing Officer got merged with the order of
and/or quantum of the first appellate authority. The very same issue cannot
deduction u/s 80-IB) has be revised by invoking revisionary jurisdiction u/s 263
been decided by the
Commissioner (Appeals)
and the same is pending
before the Tribunal?
10. Sunil Vasudeva & Others v. Sundar Gupta & Others (2019) 415 ITR 281 (SC)
Issue Analysis & Decision
Does the High Court have The High Court can review its own order, where the
the inherent power to grounds for review were:
review its own order to (i) discovery of new and important matter or evidence
correct a mistake apparent which, after the exercise of due diligence, was not
from the record? within knowledge of the petitioner or could not be
produced by him;

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(ii) mistake or error apparent on the face of the record;

(iii) any other sufficient reason.
A review will, however, not be maintainable in the
following cases:
(i) repetition of old and overruled argument;
(ii) minor mistakes of inconsequential import.
The following observations were also made by the
Supreme Court in relation to entertaining a review
application:
(i) review proceedings cannot be equated with the
original hearing of the case.
(ii) a review is not maintainable unless the material
error, manifest on the face of the order, undermines
its soundness or results in miscarriage of justice.
(iii) a review is by no means an appeal in disguise
whereby an erroneous decision is reheard and
corrected but lies only for patent error.
(iv) The mere possibility of two views on the subject
cannot be a ground for review.
(v) The error apparent on the face of the record should
not be an error which has to be fished out and
searched.
(vi) The appreciation of evidence on record is fully
within the domain of the appellate court, it cannot
be permitted to be advanced in the review petition.
(vii) A review is not maintainable when the same relief
sought at the time of arguing the main matter had
been negatived.
11. CIT v. Meghalaya Steels Ltd. (2015) 377 ITR 112 (SC)
Issue Analysis & Decision
Does the High Court have High Courts being courts of record under Article 215 of
an inherent power under the Constitution of India, the power of review would
the Income-tax Act, 1961 to inhere in them. There is nothing in Article 226 of the
review an earlier order Constitution to preclude a High Court from
passed on merits? exercising the power of review which inheres in
every court of plenary jurisdiction to prevent
miscarriage of justice or to correct grave and
palpable errors committed by it.

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Section 260A(7) does not purport in any manner to

curtail or restrict the application of the provisions of the
Code of Civil Procedure. Section 260A(7) only states
that all the provisions that would apply qua appeals in
the Code of Civil Procedure would apply to appeals u/s
260A. That does not in any manner suggest either that
the other provisions of the Code of Civil Procedure are
necessarily excluded or that the High Court's inherent
jurisdiction is in any manner affected.
12. CIT v. A.A. Estate Pvt. Ltd. (2019) 413 ITR 438 (SC)
Issue Analysis & Decision
Considering the procedure There lies a distinction between the questions proposed
as prescribed u/s 260A, is by the appellant for admission of the appeal to the High
the High Court justified in Court and the questions framed by the High Court. The
not framing any substantial substantial questions of law, which are proposed by the
question of law itself and appellant fall u/s 260A(2)(c) whereas the substantial
adjudicating merely on the question of law is required to be framed by the High
questions put forth by the Court fall u/s 260A(3). U/s 260A(4), the appeal is heard
appellant? on merits only on the substantial question of law
framed by the High Court u/s 260A(3). If the High
Court is of the view that the appeal did not involve any
substantial question of law, it should have recorded a
categorical finding to that effect saying that the
questions proposed by the appellant either do not arise
in the case or/and are not substantial questions of law
so as to attract the rigour of section 260A for its
admission and accordingly should have dismissed the
appeal in limine. However, this was not done. Instead,
the appeal was heard only on the questions urged by
the appellant u/s 260A(2)(c), which is not in line with
the requirement contained in section 260A(4). The
High Court, therefore, did not decide the appeal in
conformity with the mandatory procedure
prescribed in section 260A.
13. Spinacom India (P.) Ltd. v. CIT (2018) 258 Taxman 128 (SC)
Issue Analysis & Decision
Can the delay in filing The Supreme Court rejected the question of invoking
appeal u/s 260A be section 14 of the Limitation Act 1963 which allows
condoned where the stated condonation of delay on demonstration of sufficient
reason for delay is the cause. The Supreme Court refused to accept the
pursuance of an alternate submission that the application before the ITAT u/s
remedy by way of filing an 254(2) was an alternate remedy to filing of the

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application before the ITAT application u/s 260A. The former is an application for
u/s 254(2) for rectification rectifying a ‘mistake apparent from the record’ which is
of mistake apparent on much narrower in scope than the latter. U/s 260A, an
record? order of the ITAT can be challenged on substantial
questions of law. The Supreme Court stated that the
appellant had the option of filing an appeal u/s 260A
while also mentioning in the Memorandum of Appeal that
its application u/s 254(2) was pending before the ITAT.
The time period for filing an appeal u/s 260A does
not get suspended on account of the pendency of an
application before the ITAT u/s 254(2).
14. SAP Labs India Pvt. Ltd. v. ITO (and other appeals) [2023] 454 ITR 121 (SC)
Issue Analysis and Decision
In an appeal u/s 260A, is The Apex Court laid down the following with respect to
the High Court precluded the powers of High Court to consider the substantial
from examining the question of law involving determination of ALP :-
correctness of the - While determining the ALP, the Tribunal has to
determination of the ALP on follow the guidelines stipulated under Chapter X of
the ground that once the the Income-tax Act, 1961, namely, sections 92 to
Tribunal determines the 92F of the Act and Rules 10A to 10E of the Rules.
ALP, the same is final and Any determination of the ALP under Chapter X not
cannot be the subject in accordance with the relevant provisions of the
matter of scrutiny by the Income-tax Act and Rules can be considered as
High Court as it does not perverse and it may be considered as a substantial
give rise to a substantial question of law as perversity itself can be said to
question of law? be a substantial question of law. Therefore, there
cannot be any absolute proposition of law that in all
cases where the Tribunal has determined the ALP,
the same is final and cannot be the subject matter
of scrutiny by the High Court in an appeal u/s 260A.
When the determination of the ALP is challenged
before the High Court, it is always open for the High
Court to consider and examine whether the ALP
has been determined while taking into
consideration the relevant guidelines under the Act
and the Rules.
- The High Court can also examine the question of
comparability of two companies or selection of
filters and examine whether the same is done
judiciously and on the basis of the relevant
material/ evidence on record. The High Court can
also examine whether the comparable transactions
have been taken into consideration properly or not,

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i.e., to the extent as to whether non-comparable

transactions are considered as comparable
transactions or not.
Therefore, the view taken by the Karnataka High Court
in the case of Softbrands India (P.) Ltd. that in the
transfer pricing matters, the determination of the ALP by
the Tribunal is final and cannot be subject matter of
appeal under section 260A cannot be accepted. In an
appeal challenging the determination of the arm's length
price, it is always open for the High Court to examine in
each case, within the parameters of section 260A,
whether while determining the ALP, the guidelines laid
down under the Income-tax Act and the Rules are
followed or not and whether the determination of the ALP
and the findings recorded by the Tribunal while
determining the ALP are perverse or not.

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TEST YOUR KNOWLEDGE

Questions

1. "SVS Propcon" did not make a claim of ` 20 lakhs in the return of income filed for
A.Y. 2026-27 which was disallowed in the previous assessment year under section 43B.
However, the said claim was also not considered by the Assessing Officer during assessment
proceedings on the ground that no revised return was filed. Can the assessee now make
such claim before the appellate authority?
2. Examine the correctness or otherwise of the following statements with reference to the
provisions of the Income-tax Act, 1961:
(i) An appeal before Income-tax Appellate Tribunal cannot be decided in the event of
difference of opinion between the Judicial Member and the Accountant Member on a
particular ground.
(ii) A High Court does not have an inherent power to review an earlier order passed by it
on merits.
3. Does the Income-tax Appellate Tribunal have the following powers?
(i) Power to allow the assessee to urge any ground of appeal which was not raised by
him before the Commissioner (Appeals).
(ii) Power to recall its own order solely for rectification of mistake apparent from the
records.
4. Can a rectification order under section 254 of the Income-tax Act, 1961 be passed by the
Income-tax Appellate Tribunal beyond 6 months from the end of the month in which the order
sought to be rectified was passed?
5. What do you mean by substantial question of law? Examine.
6. An Income-tax authority did not file an appeal to the Income-tax Appellate Tribunal against
an order of the Commissioner (Appeals) decided against the Income-tax department on a
particular issue in case of one assessee, Alpi for assessment year 2025-26 on the ground
that the tax effect of such dispute was less than the monetary limit prescribed by CBDT. In
assessment year 2026-27, similar issue arose in the assessments of Alpi and her sister Palki,
which was decided by the Commissioner (Appeals) against the Department. Can the Income -
tax department move an appeal to the Tribunal in respect of A.Y. 2026-27 against the orders
of the Commissioner (Appeals) for Alpi and her sister Palki?

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7. A petition for stay of demand was filed by XYZ Ltd. before the Income -tax Appellate Tribunal
in respect of a disputed demand for which appeal was pending before it. The Appellate
Tribunal granted stay vide order dated 1.1.2025 for a period of 180 days from the date of
such order, on deposit of 20% of the amount of tax by XYZ Ltd. Thereafter, the bench was
functioning intermittently till 1.2.2026 and therefore, the disputed matter could not be
disposed of. In the meanwhile, in June 2025, XYZ Ltd. had made an application for extension
of stay and was granted extension of stay upto 31.12.2025. Thereafter, on 5.1.2026, the
Assessing Officer attached the bank account of XYZ Ltd. and recovered the amount of ` 15
lakhs against the arrear demand of ` 25 lakhs. The company requested the Assessing Officer
to refund the amount as it holds stay over it. The Assessing Officer, however, rejected the
contention of the assessee stating that the stay period expired on 31.12.2025, after which the
order of stay stood vacated automatically. Examine the correctness of contention of the
Assessing Officer.
8. An assessee who had been served with an order of assessment passed under section 143(3)
on 1.1.2026 had filed an application against this order before the CIT as per section 264 on
11.1.2026. However, the CIT refused to entertain the application on the pretext of premature
application. Assessee seeks your opinion.

9. (a) The Commissioner of Income-tax issued notice to revise the order passed by an
Assessing Officer under section 143. During the pendency of proceedings before the
Commissioner, on the basis of material gathered during survey under section 133A
after issue of the first notice, the Commissioner of Income-tax issued a second notice,
the contents of which were different from the contents of the first notice. Examine
whether the action of the Commissioner is justified as to the second notice.
(b) Examine the circumstances where the appellant shall be entitled to produce additional
evidence, oral or documentary, before the Commissioner of Income-tax (Appeals) other
than the evidence produced during the proceedings before the Assessing Officer.
10. Examine the correctness or otherwise of the following propositions in the context of the
Income-tax Act, 1961:
(a) The powers of the Commissioner of Income-tax (Appeals) to enhance the assessment
are plenary and quite wide.
(b) At the time of hearing of rectification application, the Income-tax Appellate Tribunal
can re-appreciate the evidence produced during the proceedings of the appeal
hearing.

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(c) The High Court cannot interfere with the factual finding recorded by the lower
authorities and the Tribunal, without any valid reasons.
11. An assessee, who is aggrieved by all or any of the following orders, is desirous to know the
available remedial recourse and the time limit against each order under the Income-tax Act, 1961:
(i) passed under section 143(3) by the Assessing Officer.
(ii) passed under section 263 by the Commissioner of Income-tax.
(iii) passed under section 272A by the Director General.
(iv) passed under section 254 by the ITAT.

12. Who can file memorandum of cross-objections before the Income-tax Appellate Tribunal?
What is the time limit? What is the fee for filing memorandum of cross objections?

Answers
1. Yes, the assessee is entitled to raise additional claims before the appellate authorities.
The restriction that an additional claim has to be made by filing a revised return applies only
in respect of a claim made before the Assessing Officer. An assessee cannot make a claim
before the Assessing Officer otherwise than by filing a revised return. It was so held by the
Supreme Court in Goetze (India) Ltd v. CIT (2006) 284 ITR 323.
However, this restriction does not apply to an additional claim made before an appellate
authority. The appellate authorities have jurisdiction to permit additional claims before them,
though, the exercise of such jurisdiction is entirely the authorities’ discretion. It was so held
by the Bombay High Court in CIT v. Pruthvi Brokers & Shareholders (2012) 349 ITR 336. This
view is also endorsed by the Supreme Court in case of Wipro Finance Ltd. v. CIT (2022) 443
ITR 250.

Thus, an additional claim can be raised before the Appellate Authority even if no revised
return is filed.
2. (i) The statement given is not correct. As per the provisions of section 255, in the event
of difference in opinion between the members of the Bench of the Income-tax Appellate
Tribunal, the matter shall be decided on the basis of the opinion of the majority of the
members. In case the members are equally divided, they shall state the point or points
of difference and the case shall be referred by the President of the Tribunal for hearing
on such points by one or more of the other members of the Tribunal. Such point or

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points shall be decided according to the opinion of majority of the members of the
Tribunal who heard the case, including those who had first heard it.
(ii) The statement given is not correct. The Supreme Court, in CIT v. Meghalaya Steels
Ltd. (2015) 377 ITR 112, observed that the power of review would inhere on High
Courts, being courts of record under article 215 of the Constitution of India. There is
nothing in article 226 2 of the Constitution to preclude a High Court from exercising the
power of review which is inherent in every court of plenary jurisdiction to prevent
miscarriage of justice or to correct grave and palpable errors committed by it. The
Supreme Court further observed that section 260A(7) does not purport in any manner
to curtail or restrict the application of the provisions of the Code of Civil Procedure.
Section 260A(7) only states that all the provisions that would apply qua appeals in the
Code of Civil Procedure would apply to appeals under section 260A. The Supreme
Court opined that this does not in any manner suggest either that the other provisions
of the Code of Civil Procedure are necessarily excluded or that the High Court’s
inherent jurisdiction is in any manner affected.
3. (i) The Income-tax Appellate Tribunal has the power to entertain question raised for the
first time. The Tribunal is not confined only to the issues arising out of the appeal
before the Commissioner (Appeals). It has the power to allow the assessee to urge
any ground not raised before the Commissioner (Appeals). However, the relevant facts
in respect of such ground should be on record. The decision of the Supreme Court in
the case of National Thermal Power Company Limited vs. CIT (1998) 229 ITR 383
(SC) supports this view.
(ii) The Delhi High Court, in Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330
ITR 243 observed that the justification of an order passed by the Tribunal recalling its
own order is required to be tested on the basis of the law laid down by the Apex Court
in Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR 466, dealing with the
Tribunal’s power under section 254(2) to recall its order where prejudice has resulted
to a party due to an apparent omission, mistake or error committed by the Tribunal
while passing the order. Such recalling of order for correcting an apparent mistake
committed by the Tribunal has nothing to do with the doctrine or concept of inherent
power of review. It is a well settled provision of law that the Tribunal has no inherent
power to review its own judgment or order on merits or reappreciate the correctness
of its earlier decision on merits. However, the power to recall has to be distinguished
from the power to review. While the Tribunal does not have the inherent power to

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review its order on merits, it can recall its order for the purpose of correcting a mistake
apparent from the record.
When prejudice results from an order attributable to the Tribunal’s mistake, error or
omission, then, it is the duty of the Tribunal to set it right. The Delhi High Court
observed that the Tribunal, while exercising the power of rectification under section
254(2), can recall its order in entirety, if it is satisfied that prejudice has resulted to the
party which is attributable to the Tribunal’s mistake, error or omission and the error
committed is apparent.
4. The issue as to whether a rectification order can be passed by the Income -tax Appellate
Tribunal under section 254 beyond six months from the end of the month in which order
sought to be rectified was passed, has been addressed in Sree Ayyanar Spinning and
Weaving Mills Ltd. v. CIT (2008) 301 ITR 434 (SC). Section 254(2), dealing with the power
of the Appellate Tribunal to pass an order of rectification of mistakes, is in two parts. The first
part refers to the suo motu exercise of the power of rectification by the Appellate Tribunal,
whereas the second part refers to rectification on an application filed by the assessee or
Assessing Officer bringing any mistake apparent from the record to the attention of the
Appellate Tribunal.

If Income-tax Appellate Tribunal, suo moto, makes the rectification of its order, then the order
has to be passed within 6 months from the end of the month in which the order sought to be
rectified was passed. Where the application for rectification is made by the Assessing Officer
or the assessee within 6 months from the end of the month in which the order sought to be
rectified was passed, the Appellate Tribunal is bound to decide the application on merits and
not on the ground of limitation i.e. order can be passed after expiry of 6 months from the end of
the month in which the order sought to be rectified was passed. However, the application for
rectification cannot be filed belatedly after 6 months from the end of the month in which the
order sought to be rectified was passed. [Ajith Kumar Pitaliya vs ITO (2009) 318 ITR 182 (M.P.)]
5. The expression “substantial question of law” has not been defined anywhere in the Act.
However, it has acquired a definite meaning through various judicial pronouncements. The
tests are:
(1) whether directly or indirectly it affects substantial rights of the parties; or
(2) the question is of general public importance; or
(3) whether it is an open question in the sense that issue is not settled by the
pronouncement of the Supreme Court or Privy Council or by the Federal Court; or

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 1.54 16.54 DIRECT TAX LAWS

(4) the issue is not free from difficulty; or

(5) it calls for a discussion for alternative view.
6. Under section 268A(1), the CBDT is empowered to issue orders, instructions or directions to
the other income-tax authorities, fixing such monetary limits, as it may deem fit, to regulate
filing of appeal or application for reference by any income-tax authority.
Under section 268A(2), where an income-tax authority has not filed any appeal or application
for reference on any issue in the case of an assessee for any assessment year, due to above-
mentioned order/instruction/direction of the CBDT, such authority shall not be precluded from
filing an appeal or application for reference on the same issue in the case of the same
assessee for any other assessment year or any other assessee for the same or any other
assessment year. Further, in such a case, it shall not be lawful for an assessee to contend
that the income-tax authority has acquiesced in the decision on the disputed issue by not
filing an appeal or application for reference in any case.
In view of above provision, it would be in order for the Income-tax Department to move an
appeal to the Tribunal against the orders of the CIT(A) in respect of A.Y. 2026-27 both for
Alpi and Palki.
7. As per section 254(2A), the Appellate Tribunal may, on merit, pass an order of stay in any
proceedings relating to an appeal. However, such period of stay cannot exceed 180 days
from the date of such order subject to the condition that the assessee deposits not less than
20% of the amount of tax, interest, fee, penalty, or any other sum payable under the
provisions of this Act, or furnishes security of equal amount in respect thereof .
No extension of stay shall be granted by the Appellate Tribunal, where such appeal is not so
disposed of within the said period as specified in the order of stay, unless the assessee makes
an application and has complied with the condition of depositing 20% of tax and the Appellate
Tribunal is satisfied that the delay in disposing of the appeal is not attributable to the
assessee, However, the aggregate of the period of stay originally allowed and the period of
stay so extended cannot exceed 365 days and the Appellate Tribunal has to dispose of the
appeal within the period or periods of stay so extended or allowed.
If such appeal is not so disposed of within 180 days or the period or periods extended not
exceeding 365 days, the order of stay shall stand vacated after the expiry of such period or
periods, only if the delay in disposing of the appeal is attributable to the assessee . It
was so held by the Supreme Court in DCIT v. Pepsi Foods Ltd (2021) 433 ITR 295.

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 APPEALS AND REVISION 16.55 a

Accordingly, if an appeal is not heard by the bench, due to the bench functioning
intermittently, the delay is not attributable to XYZ Ltd. In such a case, though the extended
stay period of 365 days expired on 31.12.2025, the recovery of ` 15 lakhs against the arrear
demand of ` 25 lakhs made by the Assessing Officer on 5.1.2026 is not in order, since the
delay in disposing of the appeal is not attributable to XYZ Ltd. Therefore, the contention of
the Assessing Officer is not correct. The order of stay would stand vacated after 31.12.2025,
only in a case where the delay in disposing of the appeal had been attributable to XYZ Ltd.

8. An assessee, who is aggrieved by the order of the Assessing Officer under section 143(3)
passed on 1.1.2026, had moved an application for revision of order under section 264 on
11.1.2026. The order passed by the Assessing Officer under section 143(3) is an order
appealable before the Joint Commissioner (Appeals) or the Commissioner (Appeals). The
time limit for filing an appeal is 30 days from the date of order i.e. , upto 31.1.2026. This time
limit had not expired on 11.1.2026 and the assessee had also not waived his right to appeal
while filing the application for revision on 11.1.2026 before the Commissioner of Income-tax.
The application filed before the Commissioner of Income-tax for revision under section 264
by the assessee will only be considered when the conditions specified under section 264(4)
have been complied with. One of the conditions is that the Commissioner shall not revise any
order where an appeal against the order lies to the Joint Commissioner (Appeals) or
Commissioner (Appeals) or Appellate Tribunal and the time within which such appeal may be
made has not expired, unless the assessee has waived his right of appeal. In the present
case, the time limit had not expired on 11.1.2026 and the assessee had also not waived the
right to appeal while filing the application for revision before the Commissioner of Income -tax
on 11.1.2026 under section 264. Therefore, the Commissioner’s refusal to entertain such
application is correct.

Note : In practical situations, the Commissioner could have kept the proceedings in abeyance
till the expiry of the time prescribed for filing appeal by the assessee and thereafter, could
have assumed jurisdiction for making revision besides taking an undertaking from the
assessee for waiving his right of appeal. In reality, taxpayers usually will not prefer revision
in such short time period nor would the Commissioner reject the application, the moment it is
received by him.

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 1.56 16.56 DIRECT TAX LAWS

9. (a) The action of the Commissioner in issuing the second notice is not justified. The term
“record” has been defined in clause (b) of Explanation 1 to section 263(1). According
to this definition “record” shall include and shall be deemed always to have included
all records relating to any proceeding under the Act available at the time of examination
by the Commissioner. In other words, the information, material, report etc. which were
not in existence at the time the assessment was made and came into existence
afterwards can be taken into consideration by the Commissioner for the purpose of
invoking his jurisdiction under section 263(1). However, at the same time, in view of
the express provisions contained in clause (b) of the Explanation 1 to section 263(1),
such information, material, report etc. can be relied upon by the Commissioner only if
the same forms part of record when the action under section 263 is taken by the
Commissioner.

Issuance of a notice under section 263 succeeds the examination of record by

Commissioner. In the present case, the Commissioner initially issued a notice under
section 263, after the examination of the record available before him. The subsequent
second notice was on the basis of material collected under section 133A, which was
totally unrelated and irrelevant to the issues sought to be revised in the first notice.
Accordingly, the material on the basis of which the second notice was issued could
not be said to be “record” available at the time of examination as emphasized in
Explanation 1(b) to section 263(1).

(b) As per Rule 46A(1) of the Income-tax Rules 1962, an appellant shall be entitled to
produce before the Commissioner (Appeals), evidence, either oral or documentary,
other than the evidence produced by him during the course of proceedings before the
Assessing Officer, only in the following circumstances -

(a) where the Assessing Officer has refused to admit evidence which ought to have
been admitted; or

(b) where the appellant was prevented by sufficient cause from producing the
evidence which he was called upon to produce by the Assessing Officer; or

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 APPEALS AND REVISION 16.57 a

(c) where the appellant was prevented by sufficient cause from producing before
the Assessing Officer any evidence which is relevant to any ground of appeal;
or

(d) where the Assessing Officer has made the order appealed against without
giving sufficient opportunity to the appellant to adduce evidence relevant to any
ground of appeal.

Further, no evidence shall be admitted unless the Commissioner (Appeals) records in

writing the reasons for its admission.

10. (a) The proposition is correct in law. The Supreme Court has, in CIT vs. McMilan & Co.
(1958) 33 ITR 182 and CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225, held that in
disposing of an appeal before him, the appellate authority can travel over a whole
range of the assessment order. The scope of his powers is co-terminus with that of
the Assessing Officer. He can do what the Assessing Officer can do and can also
direct him to do, what he has failed to do. He can assess income from sources which
have been considered by the Assessing Officer but not brought to tax. He can consider
every aspect of the assessment order and give appropriate relief.

The Allahabad High Court has, in CIT v. Kashi Nath Chandiwala (2006) 280 ITR 318,
held that the appellate authority is empowered to consider and decide any matter
arising out of the proceedings in which the order appealed against was passed
notwithstanding the fact that such matter was not raised before him by the assessee.
The Commissioner (Appeals) is entitled to direct additions in respect of items of
income not considered by the Assessing Officer.

Further, the Apex Court has, in the case of Jute Corporation of India Ltd. vs. CIT (1991)
187 ITR 688, held that the appellate authority is vested with all the plenary powers
which the subordinate authority may have in the matter.

Thus, the powers of the Commissioner of Income-tax (Appeals) in enhancing the

assessment are very wide and plenary.

(b) The proposition is not correct as per law. This is because section 254(2) specifically
empowers the Appellate Tribunal to amend any order passed by it, either suo-moto or
on an application made by the assessee or Assessing Officer, with a view to rectify any

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 1.58 16.58 DIRECT TAX LAWS

mistake apparent from record, at any time within 6 months from the end of the month of
the order sought to be amended.

The powers of the Tribunal under section 254(2) relating to rectification of its order are
very limited. Such powers are confined to rectifying any mistake apparent from the
record. The mistake has to be such that for which no elaborate reasons or inquiry is
necessary. Accordingly, the re-appreciation of evidence placed before the Tribunal
during the course of the appeal hearing is not permitted. It cannot re -adjudicate the
issue afresh under the garb of rectification [CIT vs. Vardhman Spinning (1997) 226
ITR 296 (P & H), CIT v. Ballabh Prasad Agarwalla (1998) 233 ITR 354 (Cal.) & Niranjan
& Co. Ltd. v. ITAT (1980) 122 ITR 519 (Cal.)]

(c) The proposition is correct in law. A finding of fact cannot be disturbed by the High
Court in exercise of its powers under section 260A. The Income-tax Appellate Tribunal
is the final fact finding authority and the findings of fact recorded by the Tribunal can
be interfered with by the High Court under section 260A only on the ground that the
same were without evidence or material, or if the finding is contrary to the evidence,
or is perverse or there is no direct nexus between conclusion of fact and the primary
fact upon which that conclusion is based.

In CIT vs. P. Mohanakala (2007) 291 ITR 278 and M. Janardhana Rao v. Joint CIT
(2005) 273 ITR 50, the Apex Court observed that the High Court had set aside the
factual findings of the lower authorities and the Tribunal without any valid reason. The
Apex Court held that the findings of fact could not be interfered with by the High Court
without carefully considering the facts on record, the surrounding circumstances and
the material evidence. There is no scope for interference with the factual findings,
unless the findings are per se without reason or basis, perverse and/or contrary to the
material on record.

Hence, only if the issue gives rise to a substantial question of law, an appeal shall lie
before the High Court.

11. (i) An assessee, aggrieved by the order passed under section 143(3) by the Assessing
Officer, can file an appeal before the Joint Commissioner (Appeals) under section 246
or the Commissioner of Income-tax (Appeals) under section 246A(1), within 30 days
of the date of service of the notice of demand relating to the assessment. However,
where the assessee does not want to prefer an appeal, then he can move a revision

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 APPEALS AND REVISION 16.59 a

petition before the Principal Commissioner or Commissioner of Income-tax under

section 264 within a period of one year from the date of on which the order was
communicated to him or the date on which he otherwise came to know of it, whichever
is earlier.

(ii) An assessee, aggrieved by the order passed under section 263 by the Commissioner
of Income-tax, can file an appeal to Income-tax Appellate Tribunal under section
253(1)(c) within two months from the end of the month in which order sought to be
appealed against is communicated to the assessee.

(iii) An assessee, aggrieved by the order passed under section 272A by the Director
General, can file an appeal before the Income-tax Appellate Tribunal under section
253(1)(c) within , two months from the end of the month in which order sought to be
appealed against is communicated to the assessee.

(iv) An assessee, aggrieved by the order passed under section 254 by the Income -tax
Appellate Tribunal, can file an appeal before the High Court under section 260A within
120 days from the date of receipt of order of Income-tax Appellate Tribunal, only where
the order gives rise to a substantial question of law.

12. Section 253(4) of the Income-tax Act, 1961 gives the respondent (assessee or the Assessing
Officer), in every appeal filed before the Income-tax Appellate Tribunal, a right to file a
memorandum of cross-objections against any order of the Joint Commissioner (Appeals) or
the Commissioner (Appeals). This right of filing a memorandum of cross-objections is an
independent right given to the respondent in an appeal and is in addition to the right of appeal
which may or may not be exercised by the assessee or the Assessing Officer under section
253(1) or section 253(2). The memorandum of cross-objections has to be in the prescribed
form and verified in the prescribed manner and has to be filed within 30 days of the receipt
of notice of the appeal. The Tribunal is empowered to permit filing of memorandum of cross-
objections after the expiry of the prescribed period if sufficient cause is shown. Such
memorandum of cross-objections will be disposed of by the Appellate Tribunal as if it were
an appeal presented within the time specified in section 253(3). There is no fee for filing a
memorandum of cross-objections.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER a 17

DISPUTE RESOLUTION

LEARNING OUTCOMES

After studying this chapter, you would be able to:

❑ appreciate the meaning of “specified order” and “specified conditions”, to
be satisfied for making an application before the Dispute Resolution
Committee (DRC);
❑ recognise the need for DRC and its composition and terms;
❑ comprehend the procedure to be followed by the DRC;
❑ comprehend the powers of the DRC to reduce or waive penalty or grant
immunity from prosecution.
❑ know the time limit for filing application and time limit for passing an order
by the Assessing Officer in conformity with the directions issued by the
DRC.

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 17.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Constitution and Composition of

DRC [Rule 44DAA] Specified order
Application for resolution of
dispute before the DRC Specified
conditions
[Rule 44DAB]
DISPUTE RESOLUTION COMMITTEE [SECTION 245MA]

Constitution of Dispute Specified Person

Time limit for filing application
Resolution Committee (DRC)
[Section 245MA(1)]
Screening of application by DRC
Powers to reduce or waive any
penalty imposable under this Act Procedure to be followed by the
or grant immunity from DRC
prosecution [Section 245MA(2)]
Termination of dispute resolution
Time limit for passing an order proceedings
by Assessing Officer in
conformity with directions issued
by the DRC [Section
245MA(2A)]

Faceless Scheme for Dispute

Resolution [Section 245MA(3)]

17.1 INTRODUCTION
Income-tax Settlement Commission (ITSC) constituted
by the Central Government for settlement of cases
ceases to operate with effect from 1 st February, 2021.
Consequently, no application under section 245C for
settlement of cases before the Settlement Commission can be made on or after 1 st February, 2021.
In order to dispose off the pending settlement applications as on 31.01.2021, the Central
Government has constituted seven Interim Boards for Settlement vide Notification No. 91 of 2021
dated 10.08.2021.

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 DISPUTE RESOLUTION 17.3
a

While pending disputes are being resolved or adjudicated through the Interim Boards for Settlement,
it is also necessary to prevent tax disputes in future and settle the issues at initial stage. Therefore,
in order to provide early tax certainty to small and medium taxpayers, with effect from 1 st April, 2021,
new scheme of Dispute Resolution has been formulated for constitution of one or more Dispute
Resolution Committee(s) (DRC).

17.2 DISPUTE RESOLUTION COMMITTEE [SECTION

245MA]
(1) Constitution of Dispute Resolution Committee (DRC) [Section 245MA(1)]: The Central
Government is empowered to constitute, one or more Dispute Resolution Committees, in
accordance with the rules made under this Act, for dispute resolution in the case of such
persons or class of persons, as may be specified by the Board, who may opt for dispute
resolution under this Chapter in respect of dispute arising from any variation in the specified
order in his case and who fulfils the specified conditions.
(I) Constitution and Composition of DRC [Rule 44DAA]: Part IX-AA – Dispute
Resolution Committee has been
inserted in the Income-tax Rules, 1962,
which comprises of Rules 44DAA,
44DAB, 44DAC and 44DAD. Rule
44DAA provides that the Central Government shall constitute a DRC for every region
of Principal Chief Commissioner of Income-tax for dispute resolution. Each DRC shall
consist of 3 members, as under -
(a) 2 members shall be retired officers from the Indian Revenue Service (Income-
tax), who have held the post of Commissioner of Income-tax or any equivalent
or higher post for 5 years or more; and
(b) 1 serving officer not below the rank of Principal Commissioner of Income-tax or
Commissioner of Income-tax as specified by the Board.
The members shall be appointed by the Central
Government for a period of three years. The
decision of the DRC shall be by majority.
The Central Government may fix a sum to be paid as fee to a member, who is retired
officer, on a per case basis, along with a sitting fee, so decided by the Board. The

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 17.4 DIRECT TAX LAWS

Central Government may remove any member from the DRC, by recording reasons in
writing and after giving an opportunity of being heard.
(II) Application for resolution of dispute before the DRC [Rule 44DAB]: DRC would
resolve dispute in the case of a person who opt for dispute resolution under Chapter
XIX-AA in respect of dispute arising from any variation in the specified order in his
case and who fulfils the specified conditions.
Such person has to make an application for
resolution of dispute before the DRC in the
prescribed form accompanied by a fee of ` 1,000.
(a) Specified order [Explanation (b) to the section 245MA read with Rule
44DAD(ii)]: Specified order in relation to a dispute under section 245MA
means:
(i) a draft order as referred to in section 144C(1) in respect of a person in
whose case variation arises as a consequence to order of the TPO
passed under section 92CA(3) or a non-corporate non-resident;
(ii) an intimation under section 143(1) after processing income-tax returns
or under section 200A(1) after processing of TDS statements or section
206CB(1) after processing of TCS statements, where the assessee or
the deductor or the collector objects to the adjustments made in the said
order;
(iii) an order of assessment or reassessment, except an order passed in
pursuance of directions of the Dispute Resolution Panel;
(iv) a rectification order made under section 154 having the effect of
enhancing the assessment or reducing the loss; or
(v) an order made under section 201 or an order made under section
206C(6A) deeming a person as an assessee-in-default for failure to
deduct/collect tax at source or remit the same as required under the Act,
after deduction/collection.
The variation in the specified order relating to default in deduction or
collection of tax at source would refer to the amount on which tax has
not been deducted or collected in accordance with the Act.

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 DISPUTE RESOLUTION 17.5
a

and in respect of which the following conditions are satisfied, namely: -

(A) the aggregate sum of variations
proposed or made in such order
does not exceed ` 10 lakhs;
(B) the return has been furnished by the assessee for the assessment year
relevant to such order and the total income as
per such return does not exceed
` 50 lakhs; and

(C) the order in the case of the assessee is not based on,
(I) search initiated under section 132 of the Act or requisition made
under section 132A of the Act in the case of the assessee or any
other person; or
(II) survey carried out under section 133A of the Act; or
(III) information received under an agreement referred to in section
90 or 90A
(b) Specified conditions [Explanation (a) to the section 245MA]: Specified
conditions” in relation to a person means a person who fulfils the following
conditions:
(i) He should not be a person,
(A) in respect of whom an order of detention
has been made under the provisions of
the Conservation of Foreign Exchange
and Prevention of Smuggling Activities Act, 1974.
Such order of detention should not have been revoked before the
expiry of the time stipulated under the relevant provisions of such
Act, either on the basis of report of Advisory Board or review
under the relevant provisions of that Act. Further, such order of
detention should not have been set aside by a court of competent
jurisdiction.

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 17.6 DIRECT TAX LAWS

The proviso to clause (a)(I)(A) of Explanation to section 245MA

reads as follows -
(i) such order of detention, being an order to which the
provisions of section 9 or section 12A of the said Act do
not apply, has been revoked on the report of the Advisory
Board under section 8 of the said Act or before the receipt
of the report of the Advisory Board; or
(ii) such order of detention being an order to which the
provisions of section 9 of the said Act apply, has not been
revoked before the expiry of the time for, or on the basis
of, the review under section 9(3), or on the report of the
Advisory Board under section 8, read with section 9(2),
of the said Act; or
(iii) such order of detention, being an order to which the
provisions of section 12A of the said Act apply, has not
been revoked before the expiry of the time for, or on the
basis of, the first review under sub-section (3) of the said
section, or on the basis of the report of the Advisory Board
under section 8, read with section 12A(6), of the said Act;
or
(iv) such order of detention should not have been set aside
by a court of competent jurisdiction;

Note - Conservation of Foreign Exchange and Prevention of

Smuggling Activities Act, 1974 provides for preventive detention
in certain cases for the purposes of conservation and
augmentation of foreign exchange and prevention of smuggling
activities and for matters connected therewith. Under this Act, the
Central and State Government are empowered to detain a person
(including a foreigner) to prevent such a person from smuggling
of goods or acting in a manner prejudicial to conservation of
foreign exchange.

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 DISPUTE RESOLUTION 17.7
a

(B) in respect of whom prosecution for any offence punishable under

the provisions of the Indian Penal Code (Bharatiya Nyaya
Sanhita, 2023), the
Unlawful Activities
(Prevention) Act, 1967,
the Narcotic Drugs and
Psychotropic Substances Act, 1985, the Prohibition of Benami
Transactions Act, 1988, the Prevention of Corruption Act, 1988
or the Prevention of Money-laundering Act, 2002 has been
instituted and he has been convicted of any offence punishable
under any of those Acts;

(C) in respect of whom prosecution has been initiated by an income-

tax authority for any offence punishable under the provisions of
this Act or the Indian Penal Code (Bharatiya Nyaya Sanhita,
2023) or for the purpose of enforcement of any civil liability under
any law for the time being in force, or such person has been
convicted of any such offence consequent upon the prosecution
initiated by an income-tax authority;
(D) who is notified under section 3 of the Special Court (Trial of
Offences Relating to Transactions in Securities) Act, 1992;
(ii) He should fulfill such other conditions, as may be prescribed.
Rule 44DAD(iii) provides that the “specified conditions” in relation to
a person who opts for dispute resolution under section 245MA, means a
person in respect of whom:
(A) the conditions mentioned in (b) above are satisfied.
(B) proceedings under the Black Money (Undisclosed Foreign
Income and Assets) and Imposition of Tax Act, 2015 have not
been initiated for the assessment year for which resolution of
dispute is sought.
(c) Specified Person: Rule 44DAD(iv) provides that the specified person is a
person who fulfils the specified conditions

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 17.8 DIRECT TAX LAWS

(III) Time limit for filing application - Such application has to be filed –

Case Time limit

(i) In cases where appeal has already within such time from the date of
been filed and is pending before constitution of the Dispute Resolution
the Commissioner (Appeals) Committee, as may be specified by
the Board
(ii) in any other case within one month from the date of
receipt of specified order

(IV) Screening of application by DRC

(i) Examination of application - The DRC has to
examine the application with respect to the
specified conditions and criteria for specified
order. Upon such examination, where the DRC
considers that the application for dispute resolution should be rejected, it has to
serve a notice calling upon the assessee to show cause as to why his application
should not be rejected, specifying a date and time for filing a response.

(ii) Provision of opportunity of being heard - The assessee can request for an
opportunity of being heard. If the DRC receives a request from the assessee, it
has to provide him an opportunity of being heard through video telephony or
video conferencing facility, to the extent technologically feasible.
(iii) Furnishing response to show cause notice within the specified date -The
assessee has to furnish a response to the show-cause notice referred to in (i)
above within the specified date and time or such extended time as may be
allowed on the basis of application made in this behalf, to the DRC;
(iv) Rejection of application by DRC - The DRC may, after considering the
response furnished by the assessee, reject the application or proceed to decide
the application on merits in accordance with the procedure laid out in (V) and
(VI) hereinafter. Where no such response is furnished by the assessee, the
DRC may reject the application.
Note - In such a case, the assessee may file an appeal to the Commissioner
(Appeals). The period taken by the DRC in deciding on the admission has to be
excluded from the period available to file such appeal.

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 DISPUTE RESOLUTION 17.9
a

(v) Communication of decision of DRC to assessee - The decision of the DRC

that the application for dispute resolution should be allowed to be proceeded
with or rejected, has to be communicated to the assessee on his registered e-
mail address;
(vi) Submission of proof of withdrawal of appeal/application before DRP -
Within 30 days of receipt of the communication that the application is admitted,
the assessee is required to submit a proof of withdrawal of appeal filed under
section 246A or withdrawal of application before the Dispute Resolution panel,
if any, to the DRC or convey that there is no aforesaid proceeding pending in
his case. If the assessee fails to do so, the DRC may reject the application.
(V) Procedure to be followed by the DRC

(i) Calling for records for further

examination - Upon admission of the
application and subsequent to the receipt
of the response of the assessee, the DRC may call for records from the income-
tax authority and further examine, as it may deem fit, with respect to the issues
covered in the application;

(ii) Seeking report from Assessing Officer - The DRC may seek a report from
the Assessing Officer on the issues covered in the application or on any other
issue arising during the course of proceedings;
(iii) Calling for further information - The DRC may before disposing off the
application, call for further information from the assessee or any other person
by sending an email to his registered email address;
(iv) Submission of response within specified time - The assessee has to
electronically submit its response to the DRC, within the time specified or such
time as may be extended by the DRC on the basis of an application in this
behalf;
(v) Decision of DRC - After considering the
material available on record, including any
further information or evidence received
from the assessee, income-tax authority or any other person, the DRC may
decide —

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 17.10 DIRECT TAX LAWS

(a) to make modifications to the variations in specified order, which are

not prejudicial to the interest of the assessee, and decide for waiver of
penalty and immunity from prosecution in accordance with the provisions
of Rule 44DAC, and pass an order of resolution, accordingly; or
(b) to not make modifications to the variations in the specified order.
However, the DRC may decide to waive penalty and grant immunity from
prosecution provisions in accordance with the provisions of Rule 44DAC
and pass an order of resolution accordingly. Such an order will be
treated as an order not prejudicial to the interest of the assessee; or
(c) to not make any modification to the specified order and pass an
order disposing off the application. Such an order will be treated as
an order ‘not prejudicial to the interest of the assessee’,
within six months from the end of the
month in which application for
dispute resolution is admitted by the
DRC. The order of the DRC for the
resolution of a dispute has to be in
accordance with the provisions of the
Act.
(vi) Serving copy of order to AO and assessee - The DRC has to serve a copy
of the order of resolution or order disposing off the application, as the case may
be, upon the assessee and also the Assessing Officer for giving effect to the
same, if so required;
(vii) No appeal or reference will lie against the modified order - Where the
specified order is an order of the eligible assessee as referred to in section
144C(1), the assessee will not be eligible to file any reference to the DRP or an
appeal to the Commissioner (Appeals) against the modified order.
(viii) Serving copy of modified order to
assessee – The Assessing Officer has to
serve a copy of the modified order along
with notice of demand upon the assessee
specifying a date for making payment of demand. No appeal or revision would
lie against the modified order.

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 DISPUTE RESOLUTION 17.11
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(ix) Assessee to furnish proof of payment of demand -The assessee has to

furnish proof of payment of the said demand to the DRC and also to the
Assessing Officer.
(x) Grant of immunity from prosecution and waiver of penalty – The DRC shall,
on receipt of confirmation of payment of demand, by an order in writing, grant
immunity from prosecution and waiver of penalty if applicable, in accordance
with the provisions of rule 44DAC [discussed later on in this chapter].
(VI) Termination of dispute resolution proceedings: The DRC may, at any stage of the
dispute resolution proceedings, if considered necessary, for reasons to be recorded in
writing and after giving an opportunity of being heard to the assessee, decide to
terminate the dispute resolution proceedings if, -
(i) the assessee fails to cooperate during the course of dispute resolution
proceedings; or
(ii) the assessee fails to respond to, or submit any information in response to, a
notice issued to him; or
(iii) the Committee is satisfied that the assessee has concealed any particular
material to the proceedings or had given false evidence.
(iv) the assessee fails to pay the demand as required in notice of demand.
Where the dispute resolution proceedings are terminated, the DRC has to intimate the
income-tax authority for taking necessary action as per the provisions of the Act.
(2) Powers to reduce or waive any penalty imposable under this Act or grant immunity
from prosecution [Section 245MA(2)]: The Dispute Resolution Committee, subject to such
conditions, as may be prescribed, shall have the powers to reduce or waive any penalty
imposable under the Income-tax Act, 1961 or grant immunity from prosecution for any offence
punishable under the Act in case of a person whose dispute is resolved under Chapter XIX-
AA. Accordingly, Rule 44DAC prescribes the following:
(i) Conditions for grant of waiver of penalty or immunity from prosecution - The
DRC, upon receipt of confirmation from the assessee of payment of demand, should
grant to the person who made the application for
dispute resolution under section 245MA, waiver of
penalty imposable or immunity from prosecution or
both, in respect of the order which is the subject matter of resolution, if it is satisfied
that such person has,

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 17.12 DIRECT TAX LAWS

• paid the tax due on the returned income in full if available; and
• co-operated with the DRC in the proceedings before it.
(ii) Reasons to be recorded in writing - The DRC would grant such waiver of penalty or
immunity from prosecution or both, subject to such conditions as it may think fit to
impose for the reasons to be recorded in writing.
(iii) No immunity if prosecution proceedings were initiated before application - No
immunity would, however, be granted by the DRC in a case where the proceedings for
the prosecution for an offence have been initiated before the date of receipt of the
application for dispute resolution from the assessee fulfilling the specified cond itions.
(iv) Withdrawal of immunity - An immunity granted to a person would stand withdrawn,
if such person fails to comply with any of the conditions subject to which the immunity
was granted. On such withdrawal, the provisions of the Income-tax Act, 1961 would
apply as if such immunity or waiver had never been granted.
(3) Time limit for passing an order by Assessing
Officer in conformity with directions issued by
the DRC [Section 245MA(2A)]: Upon receipt of the
order of the Dispute Resolution Committee under
this section, the Assessing Officer shall:
(a) in a case where the specified order is a draft of the proposed order of assessment
under section 144C(1), pass an order of assessment, reassessment or recomputation
or
(b) in any other case, modify the order of assessment, reassessment or recomputation,
in conformity with the directions contained in the order of the DRC within a period of one
month from the end of the month in which such order is received.

An eligible assessee (being any person in whose case variation arises as a consequence of
order of Transfer Pricing Officer and any non-resident or a foreign company) may opt for
approaching either the Dispute Resolution Panel under section 144C or the DRC under
section 245MA. Accordingly, the Assessing Officer shall pass the final order in conformity
with the order by the DRC within a period of one month from the end of the month in which
such order is received.

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 DISPUTE RESOLUTION 17.13
a

(4) Faceless Scheme for Dispute Resolution: The Central Government may make a scheme,
by notification1 in the Official Gazette, for the purposes of dispute resolution under this
Chapter, so as to impart greater efficiency, transparency and accountability by -
(a) eliminating the interface between the Dispute Resolution Committee and the assessee
in the course of dispute resolution proceedings to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialization;
(c) introducing a dispute resolution system with dynamic jurisdiction.

1 Accordingly, e-Dispute Resolution Scheme, 2022 was notified vide Notification No. 27/2022, dated 5.4.2022

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 17.14 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Questions
1. What is the need for constitution of Dispute Resolution Committee (DRC)? Can an assessee
make an application before DRC against an order which is based on information received
under an agreement referred to in section 90 or section 90A?

2. Can an assessee opt for dispute resolution before DRC if prosecution for any offence
punishable under the provisions of the Indian Penal Code has been instituted against him
and he has been convicted in respect of the same under the said Act?
3. Mr. Vijay furnished his return of income for A.Y.2025-26 declaring total income of
` 28,00,000. He received an assessment order under section 143(3) on 26.11.202 6
enhancing the total income for the A.Y.2025-26 by ` 5,00,000. He is aggrieved by the said
order and is desirous of knowing whether he can file an application before the Dispute
Resolution Committee (DRC). He informs you that no order of detention has been made and
no prosecution proceedings have been initiated or instituted against him under any law for
the time being in force. However, penalty under section 271D has been levied on him for
failure to comply with the provisions of section 269SS.
Can Mr. Vijay file an application before the DRC?
(i) If yes, what is the time limit for making an application to DRC against such order under
the Income-tax Act, 1961. He is also keen to know, whether, in case he is aggrieved
by the order passed by the DRC, can he file appeal against such order of DRC?
(ii) Would your answer be different, if assessment order is based on information received
under a DTAA with Country X?

Answers
1. In order to provide early tax certainty to small and medium taxpayers, Dispute Resolution has
been formulated for constitution of one or more Dispute Resolution Committee(s) (DRC).

Specified order inter alia does not include an order which is based on information received
under an agreement referred to in section 90 or section 90A. Thus, an assessee can not opt
for dispute resolution before DRC in respect of an order which is based on information
received under an agreement referred to in section 90 or section 90A.

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 DISPUTE RESOLUTION 17.15
a

2. Dispute Resolution Committee would resolve dispute in the case of such persons or class of
persons, as may be specified by the Board, who may opt for dispute resolution under this
Chapter in respect of dispute arising from any variation in the specified order in his case and
who fulfils the specified conditions.
Specified conditions include the condition that the person should not be a person in respect
of whom prosecution for any offence punishable under the provisions of the Indian Penal
Code has been instituted and he has been convicted of any offence punishable under the
said Act.
Thus, a person in respect of whom any prosecution has been instituted and who is convicted
of any offence punishable under the Indian Penal Code, cannot opt for resolution of dispute
in respect of specified order before DRC.
3. Dispute Resolution Committee (DRC) would resolve dispute in the case of a person who opts
for dispute resolution under Chapter XIX-AA in respect of dispute arising from any variation
in the specified order in his case and who fulfils the specified conditions. Specified order
includes an assessment order passed under section 143(3), where the aggregate sum of
variations made vide such order does not exceed ` 10 lakh; the total income as per such
return furnished by the assessee for the assessment year relevant to such order does not
exceed ` 50 lakhs and such order is not based on search or requisition or survey or any
information received under a DTAA.
Accordingly, in the present case, Mr. Vijay can file an application before DRC, since the
assessment order received on 26.11.2026 is a specified order and he satisfies the specified
conditions on account of no order of detention being made and no prosecution proceedings
being initiated or instituted against him. Non-levy of penalty under income-tax law is not a
specified condition, therefore, the levy of penalty under section 271D on him does not result
in non-compliance with the specified condition. Mr. Vijay has to file an application for
resolution of dispute in the prescribed form on or before 25.12.202 6 i.e., within one month
from the date of receipt of the specified order.
However, once a modified order is passed by the DRC, no appeal or revision would lie against
such order.
If assessment order is based upon the information received under an DTAA entered with
India, Mr. Vijay, will not be eligible to make an application before DRC, since it is not a
specified order.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 18
7
MISCELLANEOUS
PROVISIONS

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ identify the permissible mode of taking or accepting certain loans, deposits and
money receivable in relation to transfer of immovable property and examine the
penal consequences for non-compliance;
❑ recognize the permissible mode of receipt of amounts exceeding a certain threshold
limit and examine the penal consequences for receipt of such amount by any other
mode;
❑ identify the permissible mode of repayment of certain loans or deposit or advance
money repayable in relation to transfer of immovable property and examine the
penal consequences for non-compliance;
❑ appreciate the provisions relating to provisional attachment of property to protect
the interest of the revenue;
❑ list out the permissible modes of service of notice and the persons on whom notice
should be served;
❑ comprehend the meaning of “specified financial transaction” and identify the
specified persons responsible for furnishing statement of financial transaction or
reportable account;
❑ list out the persons who can act as “authorised representatives” on behalf of the
assessee.

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 18.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Mode of taking or Mode of repayment of Mode of undertaking

accepting loan, deposit and certain loan or deposits transactions
specified sum [Section [Section 269T] [Section 269ST]
269SS]
• Penalty u/s 271E • Penalty u/s 271DA
• Penalty u/s 271D attracted for non-
attracted for non- attracted for non-
compliance compliance
compliance

Facility for accepting

payment through Statements by producers of
Statement of Financial
prescribed electronic cinematograph films or
Transaction or Reportable
modes [Section 269SU] persons engaged in
Account
• Penalty u/s 271DB specified activity
[Section 285BA]
attracted for non- [Section 285B]
compliance

Information on Annual Information Transfers to defraud

transaction of Statement revenue void
Crypto-Asset
[Section 285BAA] [Section 285BB] [Section 281]

Provisional Attachment to
Authentication of notices
protect the interest of the Service of Notice
and other documents
Revenue [Sections 282, 283 & 284]
[Section 282A]
[Section 281B]

Other Miscellaneous
Notice deemed to be valid Provisions
in certain circumstances Sections 287, 287A, 288,
[Section 292BB] 290, 291, 292, 293, 292A,
292B, 292C, 293C, 294,
295 and 296

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 MISCELLANEOUS PROVISIONS 18.3

18.1 MODE OF TAKING OR ACCEPTING CERTAIN LOANS,

DEPOSITS AND SPECIFIED SUM [SECTION 269SS]
Section 269SS provides that no person shall take or
accept any loan or deposit or specified sum from any
other person (depositor) except by account payee
cheque or account payee bank draft or by use of
electronic clearing system through a bank account or
through such other prescribed electronic mode, if –
(1) The amount of such loan or deposit or specified
sum or the aggregate amount of such loan, deposit of specified sum; or
(2) On the date of taking or accepting such loan or deposit or specified sum, any loan or deposit
or specified sum taken or accepted earlier by such person from the depositor is remaining
unpaid (whether repayment has fallen due or not), the amount or the aggregate amount
remaining unpaid; or
(3) The amount or the aggregate amount referred to in (1) together with the amount or the
aggregate amount referred to in (2)
is ` 20,000 or more.

However, higher limit of ` 2,00,000 is applicable in case of any deposit or loan where, -
- such deposit is accepted by a primary agricultural credit society
(PACS) or a primary cooperative agricultural and rural development
bank (PCARD) from its member or
- a loan is taken from a primary agricultural credit society or a
primary cooperative agricultural and rural development bank by its
member.
Non-applicability of the above requirement in certain cases
(1) Loan or deposit or specified sum taken or accepted from, or any loan or deposit taken from
or accepted by
- the Government;
- any banking company;

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 18.4 DIRECT TAX LAWS

- post office saving bank or

- any co-operative bank,
- any corporation established by a Central, State or Provincial Act or any Government
company as defined in 2(45) of the Companies Act, 2013.
- any institution, association or body or class of
institutions, associations, bodies which the Central
Government may, for reasons to be recorded in
writing notify in this behalf in the Official Gazette.

(2) Cases where the persons involved in the transaction derive

income only from agriculture or where neither of them has any income chargeable to tax
under the Act.
Meaning of certain terms
Term Meaning
(i) Loan or deposit Any loan or deposit of money
(ii) Specified sum any sum of money receivable, whether as advance or
otherwise, in relation to transfer of immovable property,
whether or not the transfer takes place.
(iii) Prescribed electronic (a) Credit Card;
modes (for the purposes (b) Debit Card;
of section 269SS,
269ST and 269T) (c) Net Banking;
(d) IMPS (Immediate Payment Service);
(e) UPI (Unified Payment Interface);
(f) RTGS (Real Time Gross Settlement);
(g) NEFT (National Electronic Funds Transfer), and
(h) BHIM (Bharat Interface for Money) Aadhar Pay.
Penalty for failure to comply with the provisions of section 269SS [Section 271D]
If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions
of section 269SS, he shall be liable to pay, by way of
penalty under section 271D, a sum of equal to the amount
of the loan or deposit or specified sum taken or accepted.
Further, any such penalty shall be imposed by the
Assessing Officer.

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 MISCELLANEOUS PROVISIONS 18.5

18.2 MODE OF UNDERTAKING TRANSACTIONS

[SECTION 269ST]
Section 269ST provides that no person receive an amount of ` 2,00,000 or more except by account
payee cheque or account payee bank draft or by use of electronic clearing system through a bank
account or through such other prescribed electronic mode, –
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person.

(1) The CBDT has, vide Circular No. 22/2017 dated 3.7.2017, clarified that in respect of
receipt by Non-banking Finance Companies(NBFCs) or
Housing Finance Companies (HFCs) in the nature of
repayment of loan, the receipt of one instalment of loan
repayment in respect of a loan shall constitute a ‘single
transaction’ as specified in clause (b) of section 269ST and
all the instalments paid for a loan shall not be aggregated for
the purposes of determining applicability of the provisions section 269ST.
(2) The CBDT has, vide Circular No. 25/2022 dated 30.12.2022, clarified that in respect of
Co -operative Societies, a dealership/ distributorship contract by itself may not constitute
an event or occasion for the purposes of clause (c) of section 269ST.
Moreover, the receipt related to such a dealership/distributorship contract by the Co -
operative Society on any day in a previous year, which is within 'the prescribed limit' and
complies with clause (a) as well as clause (b) of section 269ST, may not be aggregated
across multiple days for purposes of (c) of section 269ST for that previous year.
Non-applicability of the above requirement in certain cases

(1) any receipt by Government, any banking company,

post office savings bank or co-operative bank

(2) transactions of the nature referred to in section

269SS.
(3) such other persons or class of persons or receipts, notified by the Central Government.

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 18.6 DIRECT TAX LAWS

Accordingly, vide Notification No. 28/2017, dated 5-4-2017 and Notification No. 57/2017, dated
3-7-2017, the Central Government has specified that the provision of section 269ST shall not apply
to the following, namely:-
(a) receipt (cash withdrawals) by any person from a bank, co-operative bank or a post office
savings bank
(b) receipt by a business correspondent on behalf of a banking company or co -operative bank,
in accordance with the guidelines issued by the Reserve Bank of India;
(c) receipt by a white label automated teller machine operator from retail outlet sources on behalf
of a banking company or co-operative bank, in accordance with the authorisation issued by
the Reserve Bank of India under the Payment and Settlement Systems Act , 2007;
(d) receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the
authorisation issued by the Reserve Bank of India under the Payment and Settlement
Systems Act, 2007;
(e) receipt by a company or institution issuing credit cards against bills raised in respect of one
or more credit cards;
(f) receipt which is not includible in the total income under section 10(17A).
Penalty for failure to comply with the provisions of section 269ST [Section 271DA]
If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable
to pay, by way of penalty under section 271DA, a sum equal
to the amount of such receipt. However, no penalty shall be
imposed if such person proves that there were good and
sufficient reasons for the contravention. Further, any such
penalty shall be imposed by the Assessing Officer.

Applicability of income-tax provisions under section 40A(3), section 269ST and Rule 114B
to cash sale of agricultural produce by cultivators/agriculturists to traders [Circular No.
27/2017, dated 3-11-2017]
The provisions of section 40A(3) provide for the disallowance of expenditure exceeding ` 10,000
made otherwise than by an account payee cheque/draft or use of electronic clearing system
through a bank account. However, Rule 6DD carves out certain exceptions from application of the
provisions of section 40A(3) in some specific cases and circumstances, which , inter alia, include
payments made for purchase of agricultural produce to the cultivators of such produce. Therefore,

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 MISCELLANEOUS PROVISIONS 18.7

no disallowance under section 40A(3) can be made if the trader makes cash purchases of
agricultural produce from the cultivator.
Further, section 269ST, subject to certain exceptions, prohibits receipt of ` 2 lakh or more,
otherwise than by an account payee cheque/draft or by use of electronic clearing system through
a bank account from a person in a day or in respect of a single transaction or in respect of
transactions relating to an event or occasion from a person. Therefore, any cash sale of an amount
of ` 2 lakh or more by a cultivator of agricultural produce is prohibited under section 269ST.
Furthermore, the provisions relating to quoting of PAN or furnishing of Form No. 60 under Rule
114B do not apply to the sale transaction of ` 2 lakh or less.
In view of the above, it is clarified by the CBDT that cash sale of the agricultural produce by its
cultivator to the trader for an amount less than ` 2 lakh will not-
(a) result in any disallowance of expenditure under section 40A(3) in the case of trader.
(b) attract prohibition under section 269ST in the case of the cultivator; and
(c) require the cultivator to quote his PAN or furnish Form No. 60.

18.3 FACILITY FOR ACCEPTING PAYMENT THROUGH

PRESCRIBED ELECTRONIC MODES [SECTION
269SU]
(1) Legislative intent - In order to achieve the mission of the Government to move towards a
cash less economy to reduce generation and circulation of
black money and to promote digital economy, section 269SU
was inserted w.e.f. 1st November, 2019.
(2) Applicability - This section requires every person, carrying on
business to provide facility for accepting payment through the
prescribed electronic modes, in addition to the facility for other electronic modes of payment,
if any, being provided by such person, if his total sales, turnover or gross receipts in
business exceeds ` 50 crore during the immediately preceding previous year.

The CBDT has, vide Circular No. 12/2020 dated 20.5.2020 clarified that the provisions of
section 269SU shall not be applicable to a specified person having only B2B transactions
(i.e., no transaction with retail customer/consumer) if at least 95% of aggregate of all amounts
received during the previous year, including amount received for sales, turnover or gross
receipts, are by any mode other than cash.
Rule 119AA prescribe the following electronic modes for making payment, namely -
(a) Debit Card powered by RuPay;

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 18.8 DIRECT TAX LAWS

(b) Unified Payments Interface (UPI) (BHIM-UPI); and

(c) Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code).
(3) Penalty for non-compliance - In order to ensure compliance of the provisions of section
269SU, section 271DB provides that the failure to
provide facility for accepting electronic modes of
payment prescribed under section 269SU would attract
penalty of a sum of ` 5,000, for every day during which such failure continues. However, the
penalty shall not be imposed if the person proves that there were good and sufficient reasons
for such failure. Further, any such penalty shall be imposed by the Assessing Officer.
(4) Consequential amendment in the Payment and Settlement Systems Act, 2007 – This has
been effected to ensure that no bank or system provider imposes any charge upon anyone,
either directly or indirectly, for using the modes of electronic payment prescribed under
section 269SU of the Income-tax Act, 1961.
Further, the CBDT has, vide Circular No.16/2020 dated 30.8.2020 advised banks to
immediately refund the charges collected, if any, on or after 1" January, 2020 on transactions
carried out using the electronic modes prescribed under section 269SU and not to impose
charges on any future transactions carried through the said prescribed modes.

18.4 MODE OF REPAYMENT OF CERTAIN LOANS OR

DEPOSITS [SECTION 269T]
Section 269T provides that no branch of the banking company or a co-operative bank or any other
company or co-operative society or a firm or other person,
shall repay any loan or deposit made with it or any specified
advance received by it otherwise than by account payee
cheque or account payee bank draft, drawn in the name of
the person who has made the loan or depositor paid the specified advance, or by use of electronic
clearing system through a bank account or through such other prescribed electronic mode, if –
(1) the amount of loan or deposit or specified advance together with interest, if any, payable
thereon; or

(2) the aggregate amount of such loans or deposits held by such person with the branch of the
banking company or co-operative bank or, as the case may be, the other company or co-
operative society or the firm, or other person either in his own name or jointly with any other

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 MISCELLANEOUS PROVISIONS 18.9

person on the date of such repayment, together with the interest, if any, payable on such loan
or deposit; or
(3) the aggregate amount of the specified advances received by such person either in his own
name or jointly with any other person on the date of such repayment together with interest, if
any, payable on such specified advances
is ` 20,000 or more.

However, higher limit of ` 2,00,000 is applicable in case of any deposit or loan where –

- a deposit is paid by a primary agricultural credit society

(PACS) or a primary cooperative agricultural and rural
development bank (PCARD) to its member or

- a loan is repaid to a primary agricultural credit society

or a primary cooperative agricultural and rural
development bank by its member.
Non-applicability of the above requirement in certain cases

(1) Where the repayment is made by a branch of bank or a co-operative bank, such repayment
could be made by crediting the amount of such loan or deposit to the saving bank account or
the current account, if any, with such branch of the person to whom such loan or deposit has
to be repaid.

(2) Further, the provisions of this section shall not apply in case of repayment of any loan or
deposit or specified advance taken or accepted from -

(i) Government;
(ii) any banking company, post office savings bank
or co-operative bank;
(iii) any corporation established by a Central, State or Provincial Act;
(iv) any Government company as defined in section 617 of the Companies Act, 1956 1;
(v) such other institution, association or body or class of institutions, associations or
bodies which the Central Government may, for reasons to be recorded in writing, notify
in this behalf in the Official Gazette.

1Section 2(45) of the Companies Act, 2013

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 18.10 DIRECT TAX LAWS

Meaning of certain terms

Term Meaning
(1) Loan or Deposit Any loan or deposit of money which is repayable after notice or
repayable after a period.
In the case of any person other than a company, loan or deposit of
any nature will be covered by this section.
(2) Specified Advance Any sum of money in the nature of advance, by whatever name
called, in relation to transfer of an immovable property, whether or
not the transfer takes place.

Penalty for failure to comply with the provisions of section 269T [Section 271E]
If a person repays any loan or deposit or specified advance
referred to in section 269T otherwise than in accordance
with the provisions of that section, he shall be liable to pay,
by way of penalty under section 271E, a sum equal to the
amount of the loan or deposit or specified advance so
repaid. Further, any such penalty shall be imposed by the Assessing Officer.

18.5 TRANSFERS TO DEFRAUD REVENUE VOID

[SECTION 281]
(1) As a safeguard against non-realisation of revenue due to fraudulent transferring of assets by
a defaulting assessee it is provided under this section that, certain transfers specified therein
are deemed to be void for purpose of income-tax.
(2) Accordingly, in cases where, during the
pendency of any proceeding under the Income-
tax Act, 1961 or after the completion thereof, but
before the service of notice by the Tax Recovery
Officer, any assessee creates a charge on, or
parts with, the property by way of sale, mortgage, gift, exchange, or any other mode of
transfer whatsoever of any of his assets in favour of any other person, such a charge or
transfer must be deemed to be void as against any claim in respect of any tax, penalty,
interest or fine payable by the assessee as a result of the completion of the proceedings or
otherwise.

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 MISCELLANEOUS PROVISIONS 18.11

(3) This provision applies to all cases where the amount of tax or other sum of money which is
payable or likely to be payable exceeds ` 5,000 and the assets which are charged or
transferred by the assessee exceeds ` 10,000 in value, in the aggregate.
(4) The charge or transfer made by the assessee, however, would not be void in case where it
is made:
(a) for adequate consideration and without any
notice of the pendency of such proceeding or, as
the case may be, without any notice of such tax or other monies remaining payable by
the assessee; or
(b) with the previous permission of the Assessing Officer.

(5) For this purpose, the term ‘assets’ should be taken to mean land, buildings, machinery, plant,
shares, securities and fixed deposits in bank to
the extent to which any of these assets do not
form part of the stock-in-trade of the business
carried on by the assessee. In other words, if
these items of properties represent the stock-in-
trade of the assessee’s business, their transfer would not be treated as void.

18.6 PROVISIONAL ATTACHMENT TO PROTECT THE

INTEREST OF THE REVENUE [SECTION 281B]
(1) Assessing Officer’s power to provisionally attach property for protecting interests of
the revenue: Under section 281B, the Assessing Officer is empowered to provisionally attach
any property of the assessee, by an order in writing, during the
pendency of assessment or reassessment proceedings of any
income which has escaped assessment or for imposition of
penalty under section 271AAD (penalty leviable for false entry
etc. in books of accounts) where the amount or aggregate of
amounts of penalty likely to be imposed under the said section
exceeds ` 2 crores, with the prior approval of the Principal
Chief Commissioner or Chief Commissioner, Principal
Commissioner or Commissioner, Principal Director General or Director General, Principal
Director or Director, if he is of the opinion that it is necessary to do so for the purpose of

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 18.12 DIRECT TAX LAWS

protecting the interests of the revenue. Such provisional attachment has to be made in the
manner provided in the Second Schedule.
(2) Validity of provisional attachment: The provisional attachment shall be valid for a period
of 6 months from the date of the order. However, the Principal Chief Commissioner or Chief
Commissioner, Principal Commissioner or
Commissioner, Principal Director General or Director
General or Principal Director or Director may extend
the period of provisional attachment, for reasons to be
recorded in writing, by a further period as he thinks fit. However, the total period of extension
should not exceed two years or sixty days after the date of assessment or reassessment,
whichever is later.

(3) Recommendation of Income Tax Simplification Committee: The Income Tax

Simplification Committee under the chairmanship of Justice R.V. Easwar (Retd.) has
recommended that provisional attachment of property could be substituted by a bank
guarantee subject to fulfilment of certain conditions.
(4) Furnishing bank guarantee in lieu of provisional attachment of property: Section
281B(3) to (9) provides for furnishing of bank guarantee in lieu of provisional attachment of
property.
(5) Furnishing of bank guarantee in lieu of provisional attachment
[Section 281B(3)]: The Assessing Officer shall, by an order in writing,
revoke provisional attachment of property made under section 281B(1)
in a case where the assessee furnishes a guarantee from a scheduled
bank, for an amount not less than the fair market value of such
provisionally attached property or for an amount which is sufficient to
protect the interests of the revenue.
(6) Reference to Valuation Officer [Section 281B(4)]: For the purpose of determining the fair
market value of the property provisionally attached, the Assessing Officer may, make a
reference to the Valuation Officer, who is required to estimate of the fair market value of the
property and submit the report of such estimation to the Assessing Officer within a period of
30 days from the date of receipt of such reference.
(7) Time limit for passing order revoking the attachment of property [Section 281B(5)] : For
ensuring revocation of attachment of the property in lieu of bank guarantee in a time bound

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 MISCELLANEOUS PROVISIONS 18.13

manner, an order revoking the attachment has to be made by the Assessing Officer within
the following time period:
Case Time period for revoking attachment
(i) in a case where a reference is within 45 days from the date of receipt of such
made to the Valuation Officer guarantee
(ii) in any other case within 15 days from the date of receipt of such
guarantee
(8) Assessing Officer empowered to invoke bank guarantee for
failure to pay sum specified in notice of demand [Section
281B(6)]: Where a notice of demand specifying a sum payable is
served upon the assessee and the assessee fails to pay such sum
within the time specified in the notice of demand, the Assessing
Officer may invoke the bank guarantee, wholly or partly, to recover the said amount.
(9) Power to invoke bank guarantee on assessee’s failure to renew or furnish new
guarantee [Section 281B(7)]: In a case where the assessee fails to renew the bank
guarantee or fails to furnish a new guarantee from a scheduled bank for an equal amount
fifteen days before the expiry of such guarantee, the Assessing Officer shall, in the interests
of the revenue, invoke the bank guarantee.
(10) Manner of adjustment of amount realized by invoking bank guarantee [Section
281B(8)]:
(i) The amount realised by invoking the bank
guarantee shall be adjusted against the
existing demand which is payable by the assessee;
(ii) The balance amount, if any, has to be deposited in the Personal Deposit Account of
the Principal Commissioner or Commissioner in the branch of Reserve Bank of India
or the State Bank of India or of its subsidiaries or any bank as may be appointed by
the Reserve Bank of India as its agent at the place where the office of the Principal
Commissioner or Commissioner is situated.

(11) Release of bank guarantee [Section 281B(9)]: In a case where the Assessing Officer is
satisfied that the bank guarantee is not required anymore to protect the interests of the
revenue, he shall release that guarantee forthwith.

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18.7 SERVICE OF NOTICE [SECTIONS 282, 283 & 284]

(1) Permissible modes of service of notice [Section
282]: The service of a notice or summon or requisition
or order or any other communication under the Act may
be made by delivering or transmitting a copy thereof to
the person named therein -
(i) by post or such courier services as approved by the CBDT; or
(ii) in such manner as provided in the Code of Civil Procedure, 1908 for the purposes of
service of summons; or
(iii) in the form of any electronic record as provided in Chapter IV of the Information
Technology Act, 2000; or
(iv) by any other means of transmission as may be provided by rules made by the CBDT
in this behalf.
(2) Rules to provide for the addresses for communication: The CBDT is empowered to make rules
providing for the addresses (including the address for electronic mail or electronic mail message) to
which such communication may be delivered or transmitted to the person named therein.
(3) Addressee in case of different assessees: The following is a list of persons on whom notice
should be served and such a notice will be notice to the corresponding assessee mentioned.
Assessee Addressee
(i) An existing firm Any member of the firm
(ii) An existing H.U.F. The Manager or any adult member of the family.
(iii) A Company The Principal Officer thereof
(iv) Local authority The Principal Officer thereof
(v) An existing association or The Principal Officer or any member thereof
body of individuals
(vi) An individual The individual himself
(vii) Any other person The person incharge of the management and
control of his affairs.
(viii) A dissolved firm Any adult person who was a partner immediately
before dissolution.

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(ix) A partitioned H.U.F. The last manager of the family; if he is dead, all
adults who were members immediately before the
partition.
(x) A dissolved association of Any person who was a member immediately
persons before dissolution
(xi) A discontinued business The assessee;
In the case of a firm or an association of persons,
any person who was a member at the time of
discontinuance;
In the case of a company, its Principal Officer.

18.8 AUTHENTICATION OF NOTICES AND OTHER

DOCUMENTS [SECTION 282A]
(1) Section 282A provides that where any notice or other document is required to be issued by
any income-tax authority, such notice or other
document should be signed and issued in paper form
or communicated in electronic form by that authority
in accordance with the prescribed procedure. This
is in order to provide adequate legal framework for paperless assessment for improving
efficiency and reducing the compliance burden.
Accordingly, Rule 127A provides for authentication of notices and other documents. Every
notice or other document communicated in electronic form by an income-tax authority under
the Income-tax Act, 1961 shall be deemed to be authenticated –
Case When it will be deemed as authenticated?
(i) Electronic mail or Electronic
mail message
If the notice or other document If the name and office of such income-tax authority
is in the e-mail body itself is printed on the e-mail body and the e-mail is
issued from the designated e-mail address of such
income-tax authority.
If the notice or other document If the name and office of such income-tax authority
is in the attachment is printed on the attachment and the e-mail is
issued from the designated e-mail address of such
income-tax authority.

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 18.16 DIRECT TAX LAWS

(ii) An electronic record

If the notice or other document If the name and office of such income-tax authority
is contained as text or remark is displayed as a part of the electronic record and
in the electronic record itself such electronic record is displayed on the
designated website.
If the notice or other document If the name and office of such income-tax authority
is in the attachment is printed on the attachment in the electronic
record and such electronic record is displayed on
the designated website.

(2) Every notice or other document required to be issued, served or given for the purposes of
this Act by any income-tax authority, shall be deemed to be authenticated if the name and
office of a designated income-tax authority is printed, stamped or otherwise written thereon.
(3) A designated income-tax authority means any income-tax authority authorised by the CBDT
to issue, serve or give such notice or other document after authentication in the manner as
provided in (2) above.

18.9 SUBMISSION OF STATEMENTS BY PRODUCERS OF

CINEMATOGRAPH FILMS OR PERSONS ENGAGED IN
SPECIFIED ACTIVITY [SECTION 285B]
(1) Time limit for furnishing statement in prescribed form - Section 285B read with Rule
121A, requires a producer of a cinematograph film
or a person engaged in any specified activity, or
both, during the whole or any part of any financial
year to furnish a statement in the prescribed form 2
within 60 days from the end of the previous year, in respect of the period during which such
production or specified activity is carried on by him in such financial year.
(2) Manner of furnishing the statement - The said statement has to be furnished
electronically to the Principal Director General of Income-tax (Systems) or the Director
General of Income-tax (Systems), as the case may be, or any person authorised by the
Principal Director General of Income-tax (Systems) or Director General of Income-tax
(Systems).

2 Form No. 52A

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 MISCELLANEOUS PROVISIONS 18.17

(3) Threshold limit of payments in respect of which particulars have to be included in the
statement- Such statement would contain the particulars of all payments exceeding
` 50,000 in the aggregate made by him or due from him to
each such person as is engaged by him in such production or
specified activity.
(4) Meaning of “specified activity” - “Specified activity” means any –
(i) event management
(ii) documentary production,
(iii) production of programmes for telecasting on television or over the top platforms or any
other similar platform,
(iv) sports event management,

other performing arts or any other activity as the Central Government may, by notification in
the Official Gazette, specify in this behalf.

18.10 OBLIGATION TO FURNISH STATEMENT OF

FINANCIAL TRANSACTION OR REPORTABLE
ACCOUNT [SECTION 285BA]
(1) Section 285BA imposes an obligation on specified persons to furnish
statement of financial transaction or reportable account. Thus, the
section also provides for furnishing of statement by a prescribed
reporting financial institution in respect of a specified financial transaction or reportable
account to the prescribed income-tax authority.
(2) As per section 285BA(1), the following persons, who are responsible for registering or
maintaining books of account or other document containing a record of any specified financial
transaction or any reportable account as may be prescribed under any law for the time being
in force, are required to furnish a statement in respect of such specified financial transaction
or reportable account which is registered or recorded or maintained by him and information
relating to which is relevant and required for the purposes of the Income-tax Act, 1961 to the
income-tax authority or such other authority or agency as may be prescribed -
(a) an assessee;
(b) a prescribed person in the case of an office of Government;

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(c) a local authority or other public body or association; or

(d) the Registrar or Sub-Registrar appointed under the Registration Act, 1908; or
(e) the registering authority empowered to register motor vehicles under the Motor
Vehicles Act, 1988; or
(f) the Post Master General referred to in the Indian Post Office Act, 1898; or
(g) the Collector referred to in the Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2013; or
(h) the recognised stock exchange referred to in the Securities Contracts (Regulation)
Act, 1956; or
(i) an officer of the Reserve Bank of India; or
(j) a depository referred to in the Depositories Act, 1996; or
(k) a prescribed reporting financial institution; or
(l) a person, other than those referred to in clauses (a) to (k), as may be prescribed.
(3) “Specified financial transactions” means any of the following transactions which may be
prescribed -

(a) transaction of purchase, sale or exchange of goods or property or right or interest in a

property; or
(b) transaction for rendering any service; or
(c) transaction under a works contract; or
(d) transaction by way of an investment made or an expenditure incurred; or
(e) transaction for taking or accepting any loan or deposit,
(4) The CBDT may prescribe different values for different transactions in respect of different
persons having regard to the nature of such transaction.
(5) As per Rule 114E, the statement of financial transaction or reportable account shall be
furnished in Form No. 61A and shall be
verified in the manner indicated therein.
Accordingly, the statement of financial transactions has to be furnished on or before 31 st May,
immediately following the financial year in which the transaction is registered or recorded.

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(6) Where the prescribed income-tax authority considers that the statement furnished under
section 285BA(1) is defective, he may intimate the defect to the person who has furnished
such statement and give him an opportunity of
rectifying the defect within a period of 30 days from
the date of such intimation. The prescribed income-
tax authority may allow, on an application made in this behalf, a further period of time, at his
discretion.

(7) If the defect is not rectified within the said period of 30 days or, as the case may be, the
further period so allowed, then, notwithstanding anything contained in any other provision of
this Act, the provisions of this Act shall apply as if such person had furnished inaccurate
information in the statement.
(8) Where a person who is required to furnish a statement under section 285BA(1), has not
furnished the same within the specified time,
the prescribed income-tax authority may
serve upon such person a notice requiring
him to furnish such statement within a period not exceeding thirty days from the date of
service of such notice and he shall furnish the statement within the time specified in the notice
[Section 285BA(5)].
(9) If any person, having furnished a statement under section 285BA(1), or in pursuance of a
notice issued under section 285BA(5), comes to know or
discovers any inaccuracy in the information provided in the
statement, he shall, within a period of ten days inform the
income-tax authority or other authority or agency referred
to in section 285BA(1), the inaccuracy in such statement and furnish the correct information
in the prescribed manner [Section 285BA(6)]
(10) Under section 285BA(7), the Central Government may, by way of rules, specify —
(i) the persons referred to in section 285BA(1) to be registered with the prescribed
income-tax authority;

(ii) the nature of information and the manner in which such information shall be maintained
by the persons referred to in point (i); and
(iii) the due diligence to be carried out by the persons for the purpose of identification of
any reportable account referred to in section 285BA(1).

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(11) Furnishing of statement of financial transaction [Rule 114E: The statement of financial
transaction required to be furnished under section 285BA(1) of the Income-tax Act, 1961 shall
be furnished by every person mentioned in column (3) of the Table below in respect of all the
transactions of the nature and value specified in the corresponding entry in column (2) of the
said Table, which are registered and recorded by him on or after 1 st April, 2016.
S. Nature and value of transaction Class of person (reporting person)
No.
(1) (2) (3)
1. (a) Payment made in cash for A banking company or a co-operative
purchase of bank drafts or pay bank to which the Banking Regulation
orders or banker’s cheque of an Act, 1949 applies (including any bank or
amount aggregating to ` 10 lakh banking institution referred to in section
or more in a financial year. 51 of that Act)
(b) Payments made in cash
aggregating to ` 10 lakh or more
during the financial year for
purchase of pre-paid
instruments issued by Reserve
Bank of India under the Payment
and Settlement Systems Act,
2007.
(c) Cash deposits or cash
withdrawals (including through
bearer’s cheque) aggregating to
` 50 lakhs or more in a financial
year, in or from one or more
current account of a person.
2. Cash deposits aggregating to ` 10 (i) A banking company or a co-
lakhs or more in a financial year, in operative bank to which the
one or more accounts (other than a Banking Regulation Act, 1949
current account and time deposit) of a applies (including any bank or
person. banking institution referred to in
section 51 of that Act);
(ii) Post Master General as referred to
in the Indian Post Office Act, 1898.
3. One or more time deposits (other than (i) A banking company or a co-
a time deposit made through renewal operative bank to which the
of another time deposit) of a person Banking Regulation Act, 1949
aggregating to` 10 lakhs or more in a applies (including any bank or
financial year of a person. banking institution referred to in
section 51 of that Act);

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 MISCELLANEOUS PROVISIONS 18.21

(ii) Post Master General as referred to

in the Indian Post Office Act, 1898;
(iii) Nidhi referred to in section 406 of
the Companies Act, 2013;
(iv) NBFC which holds a certificate of
registration under section 45-IA of
the Reserve Bank of India Act,
1934, to hold or accept deposit
from public.
4. Payments made by any person of an A banking company or a co-operative
amount aggregating to- bank to which the Banking Regulation
(i) ` 1 lakh or more in cash; or Act, 1949 applies (including any bank or
banking institution referred to in section
(ii) ` 10 lakh or more by any other 51 of that Act) or any other company or
mode, institution issuing credit card.
against bills raised in respect of one
or more credit cards issued to that
person, in a financial year.
5. Receipt from any person of an A company or institution issuing bonds
amount aggregating to ` 10 lakh or or debentures.
more in a financial year for acquiring
bonds or debentures issued by the
company or institution (other than the
amount received on account of
renewal of the bond or debenture
issued by that company).
6. Receipt from any person of an A company issuing shares
amount aggregating to ` 10 lakh or
more in a financial year for acquiring
shares (including share application
money) issued by the company.
7. Buy back of shares from any person A company listed on a recognised stock
(other than the shares bought in the exchange purchasing its own securities
open market) for an amount or value under section 68 of the Companies Act,
aggregating to ` 10 lakh or more in a 2013.
financial year.
8. Receipt from any person of an A trustee of a Mutual Fund or such other
amount aggregating to ` 10 lakh or person managing the affairs of the
more in a financial year for acquiring Mutual Fund as may be duly authorised
units of one or more schemes of a by the trustee in this behalf.
Mutual Fund (other than the amount
received on account of transfer from

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 18.22 DIRECT TAX LAWS

one scheme to another scheme of

that Mutual Fund).
9. Receipt from any person for sale of Authorised person as referred to in
foreign currency including any credit section 2(c) of the Foreign Exchange
of such currency to foreign exchange Management Act, 1999.
card or expense in such currency
through a debit or credit card or
through issue of travelers cheque or
draft or any other instrument of an
amount aggregating to ` 10 lakh or
more during a financial year
10. Purchase or sale by any person of Inspector-General appointed under the
immovable property for an amount of Registration Act, 1908 or Registrar or
` 30 lakhs or more or valued by the Sub-Registrar appointed under that Act
stamp valuation authority referred to
in section 50C at ` 30 lakhs or more
11. Receipt of cash payment exceeding Any person who is liable for audit under
` 2 lakh for sale, by any person, of section 44AB.
goods or services of any nature (other
than those specified at Sl. Nos.1 to 10
above, if any).

Manner of application of threshold limit: The reporting person mentioned in column (3) of
the Table [other than the person at [Link].10 and 11] shall, while aggregating the amounts for
determining the threshold limit for reporting the amount in respect of any person as specified
in column (2) of the said table,-
(a) take into account all the accounts of the same nature as specified in column (2) of the
said Table maintained in respect of that person during the financial year;
(b) aggregate all the transactions of the same nature as specified in column (2) of the said
Table recorded in respect of that person during the financial year;
(c) attribute the entire value of the transaction or the aggregated value of all the
transactions to all the persons, in a case where the account is maintained, or
transaction is recorded in the name of more than one person;
(d) apply the threshold limit separately to deposits and withdrawals in respect of
transaction specified in item (c) under column (2), against Sl. No.1 of the said Table.
For the purposes of pre-filling the return of income, Rule 114E(5A) provides that the
information relating to capital gains on transfer of listed securities or units of Mutual Funds,
dividend income, and interest income mentioned in column (2) of Table below shall be

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furnished by the persons mentioned in column (3) of the said Table in such form, at such
frequency, and in such manner, as may be specified by the Principal Director General of
Income Tax (Systems) or the Director General of Income Tax (Systems), as the ca se may
be, with the approval of the CBDT:
Sl. Nature of Class of person (reporting person)
No. transaction
(1) (2) (3)
1. Capital gains (i) Recognised Stock Exchange;
on transfer of (ii) Depository as defined in section 2(1)(e) of the Depositories
listed Act, 1996
securities or
units of Mutual (iii) Recognised Clearing Corporation;
Funds (iv) Registrar to an issue and share transfer agent registered
under section 12(1) of the SEBI Act, 1992
2. Dividend A company
income
3. Interest (i) A banking company or a co-operative bank to which the
income Banking Regulation Act, 1949 applies (including any bank
or banking institution referred to in section 51 of that Act)
(ii) Post Master General as referred to in section 2(j) of the
Indian Post Office Act, 1898
(iii) Non-banking financial company which holds a certificate
of registration under section 45-IA of the Reserve Bank of
India Act, 1934, to hold or accept deposit from public.
Note - The information is to be reported for all account/deposit holders where any interest exceeds
zero per account in the financial year excluding Jan Dhan Accounts [Notification No. 1/2023, dated
5.01.2023].

Meaning of certain terms:

Term Meaning
Listed securities Securities which are listed on any recognised stock exchange in
India
Mutual Fund A Mutual Fund as referred to in section 10(23D) of the Income-tax
Act,1961
Recognised clearing It has the same meaning as assigned to it in regulation 2(1)(o) of
corporation the Securities Contracts (Regulation) (Stock Exchanges and
Clearing Corporations) Regulations, 2012 made under the
Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992

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Recognised stock A stock exchange which is for the time being recognised by the
exchange Central Government under section 4 of the Securities Contracts
(Regulation) Act, 1956
Securities It has the same meaning as assigned to it in section 2(h) of the
Securities Contracts (Regulation) Act, 1956
Penalty for Failure to Furnish Statement of Financial Transaction or Reportable Account
[Section 271FA]
Section 271FA provides that if a person who is required to furnish a statement of financial transaction
or reportable account, as required under section 285BA(1), fails to furnish such statement within the
time prescribed under section 285BA(2) [i.e., on or before 31 st
May, immediately following the financial year in which the
transaction is registered or recorded], the prescribed income-
tax authority [i.e., Director of Income-tax (Central Information Branch)] may direct that such person
shall pay, by way of penalty, a sum of ` 500 for every day during which the failure continues.
Further, where such person fails to furnish the statement of financial transaction or reportable account
within the period specified in the notice under section 285BA(5), he shall pay, by way of penalty, a sum
of ` 1,000 for every day during which the failure continues, beginning from the day immediately
following the day on which the time specified in such notice for furnishing the statement expires.
The penal provisions under section 271FA are summarized below -
Non- Penalty under Period
compliance of section 271FA
section

285BA(1) ` 500 per day of 1st June immediately following the financial year in which
continuing default the transaction is registered or recorded till the date of
furnishing the statement of financial transaction or
reportable account or the date of expiry of the time
specified in the notice under section 285BA(5), as the
case may be.
285BA(5) ` 1,000 per day of The day immediately following the day on which the time
continuing default specified in notice under section 285BA(5) for furnishing
the statement expires till the date of furnishing of
statement.
As per section 273B, no penalty is leviable under section 271FA, if the assessee proves that there
was reasonable cause for the said failure.

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ILLUSTRATION 1

A private bank has not filed its statement of financial transaction or reportable account in relation to
the specified financial transactions for the financial year 2025-26. A notice was issued by the
prescribed income-tax authority on 1 st October, 2026 requiring the bank to furnish the statement by
31st October, 2026. The bank, however, furnished the statement only on 15 th November, 2026. What
would be the penalty leviable under section 271FA?
SOLUTION
(1) (2) (3) (4)
Non- Penalty under Period Quantum of penalty under
compliance section 271FA section 271FA
of section (2) × (3) (`)
285BA(1) ` 500 per day of 1.6.2026 to 31.10.2026 153 days × ` 500 76,500
continuing default
285BA(5) ` 1,000 per day of 1.11.2026 to 15.11.2026 15 days × ` 1,000 15,000
continuing default
91,500

Penalty for furnishing inaccurate statement of financial transaction or reportable account

[Section 271FAA]
Section 271FAA(1) provides for levy of penalty in case of a person referred to in section 285BA(1)
who is required to furnish a statement of financial transaction or reportable account, where such
person provides inaccurate information in the statement.
In such a case, the income-tax authority prescribed under section 285BA
(I) may direct levy of penalty of ` 50,000, if the persons:
(i) provides inaccurate information in the statement or fails to furnish correct information
within the period specified under section 285BA(6); or
(ii) fails to comply with the due diligence requirement prescribed under section 285BA(7).
While reviewing India’s CRS legislative framework under the Automatic Exchange of
Information (AEOI) framework, the Global Forum on Transparency and Exchange of
Information for Tax purposes has formed a view that the penal sanction available under
section 271FAA for inaccuracies would not automatically extend to all cases where due
diligence was not correctly done if the information did not lead to incorrect reporting

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(II) shall direct levy of ` 5,000 for every reportable account, in addition to the levy of penalty of
` 50,000, in case of a prescribed reporting financial institution which is required to furnish a
statement under section 285BA, if it provides inaccurate information in the statement and the
inaccuracy in such statement is due to false or inaccurate information furnished by the holder
or holders of the relevant reportable account or accounts.
Where such penalty is paid by the reporting financial institution, such institution would be
entitled to recover the sum so paid on behalf of such reportable account holder, or to retain
out of any moneys that may be in its possession or may come to it from every such reportable
account holder, an amount equal to the sum so paid.

18.11 OBLIGATION TO FURNISH INFORMATION ON

TRANSACTION OF CRYPTO-ASSET [SECTION
285BAA]
(1) Section 285BAA(1) imposes an obligation on prescribed reporting entities to furnish a
statement in respect of a transaction of crypto-asset. The statement shall be furnished for
such period, within such time, in such form and manner and to such income -tax authority as
may be prescribed.

(2) Where the prescribed income-tax authority considers that the statement furnished under sub-
section (1) is defective, he may intimate the defect to the person who has furnished such
statement and give him an opportunity of rectifying the defect within 30 days from the date
of such intimation or such further period as may be allowed, and if the defect is not rectified
within such period, the provisions of the Income-tax Act, 1961 shall apply as if such person
had furnished inaccurate information in the statement.
(3) Where a person who is required to furnish a statement under sub-section (1) has not furnished
the same within the specified time, the prescribed income-tax authority may serve upon such
person a notice requiring him to furnish such statement within a period not exceeding 30 days
from the date of service of such notice and he shall furnish the statement within the time
specified in the notice.
(4) If any person, having furnished a statement under sub-section (1), or in pursuance of a notice
issued under sub-section (3), comes to know or discovers any inaccuracy in the information
provided in the statement, he shall within 10 days inform the prescribed income-tax authority

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the inaccuracy in such statement and furnish the correct information in such manner as may
be prescribed.
(5) The Central Government may, prescribe
(a) the persons to be registered with the prescribed income-tax authority;

(b) the nature of information and the manner in which such information shall be maintained
by the persons; and
(c) the due diligence to be carried out by the persons for the purpose of identification of
any crypto-asset user or owner.
(6) “Crypto-asset” being a digital representation of value that relies on a cryptographically
secured distributed ledger or a similar technology to validate and secure transactions as
defined in sub-clause (d) of clause (47A) of section 2.

18.12 ANNUAL INFORMATION STATEMENT [SECTION

285BB]
(1) The prescribed income-tax authority or the person authorised by such authority has to upload
in the registered account of the assessee, an annual information
statement in the prescribed form and manner and within the
prescribed time along with the prescribed information in possession
of the said authority.
(2) “Registered account” means the electronic filing account registered by the assessee in
designated portal, i.e., web portal designated by the prescribed income -tax authority or the
person authorised by such authority.

(3) Accordingly, Rule 114-I requires the Principal Director General of Income-tax (Systems) or
the Director General of Income-tax (Systems) or any person
authorised by him, under section 285BB, to upload in the
registered account of the assessee an annual information
statement in Form No. 26AS containing the information
specified in column (2) of the table below, which is in his
possession within 3 months from the end of the month in which the information is received by
him:─

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Sl. No. Nature of information

(i) Information relating to tax deducted or collected at source
(ii) Information relating to specified financial transaction
(iii) Information relating to payment of taxes
(iv) Information relating to demand and refund
(v) Information relating to pending proceedings
(vi) Information relating to completed proceedings

(4) The CBDT may also authorise the Principal DGIT (Systems) or the DGIT (Systems) or any
person authorised by him to upload the information received from any officer, authority or
body performing any function under any law or the information received under an agreement
referred to in section 90 or section 90A or the information received from any other person to
the extent as it may deem fit in the interest of the revenue in the annual information statement.
(5) The Principal DGIT (Systems) or the DGIT (Systems) has to specify the procedures, formats
and standards for the purposes of uploading of annual information statement .

18.13 PUBLICATION OF INFORMATION [SECTION 287]

The Central Government is empowered to publish the name and address of any assessee and other
particulars relating to any proceedings or prosecutions in respect of such assessees, if it considers
it necessary or expedient in the public interest to do so.
However, no such publication relating to any penalty or
prosecution shall be made until the time for presenting appeal
to the Joint Commissioner (Appeals) or Commissioner
(Appeals) has expired without an appeal having been presented or until the appeal, if presented,
has been disposed of.
In the case of a firm, company or other association of persons, the names of the partners of the firm,
directors, managing agents, secretaries and treasurers, or managers of the company or members of
the associations, as the case may be, may also be published if, in the opinion of the Central Government,
the circumstances of the case justify the same.

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18.14 APPEARANCE BY REGISTERED VALUERS

[SECTION 287A]
Any tax payer who is entitled to or required to attend before any income tax authority or the Appellate
Tribunal in connection with any matter relating to the valuation of any asset, otherwise than he is
required under section 131 to attend personally for examination on oath or affirmation, may attend
by a registered valuer.

18.15 APPEARANCE BY AUTHORISED REPRESENTATIVE

[SECTION 288]
(1) Section 288 deals with appearance by authorised representative. Accordingly, any assessee
who is entitled or required to attend before any income-tax authority or the Appellate Tribunal
in connection with any proceeding under this Act otherwise than when required under section
131 to attend personally for examination on oath or affirmation, may attend by an authorised
representative.
(2) For the purpose of this section, “authorised representative” means, a person authorised by
the assessee in writing to appear on his behalf. The following persons can be authorised
representatives:
(a) A person related to the assessee in any manner or a person regularly employed by
the assessee
(b) any officer of a Scheduled Bank with which the assessee maintains a current account
or has other regular dealings

(c) any legal practitioner who is entitled to practice in any Civil Court in India
(d) an Accountant i.e., a chartered accountant as defined in section 2(1)(b) of the
Chartered Accountants Act, 1949 who holds a valid certificate of practice under section
6(1) of that Act. However, the following persons are not included in the definition of
“accountant” -
Assessee Person
(i) Company A person who is not eligible for appointment as an auditor of
the said company under section 141(3) of the Companies
Act, 2013, namely,

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(a) A body corporate other than a limited liability

partnership registered under the Limited Liability
Partnership Act, 2008;
(b) an officer or employee of the company
(c) a person who is a partner, or who is in the
employment, of an officer or employee of the company
(d) a person who, or his relative or partner –
(i) is holding any security of or interest in the
company or its subsidiary, or of its holding or
associate company or a subsidiary of such
holding company 3
(ii) is indebted to the company, or its subsidiary, or
its holding or associate company or a subsidiary
of such holding company, in excess of ` 5 lakh.
(iii) has given a guarantee or provided any security
in connection with the indebtedness of any third
person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of
such holding company, in excess of ` 1 lakh.
(e) a person or a firm who, whether directly or indirectly,
has business relationship with the company, or its
subsidiary, or its holding or associate company or
subsidiary of such holding company or associate
company of such nature as may be prescribed.
(f) a person whose relative is a director or is in the
employment of the company as a director or key
managerial personnel.
(g) a person who is in full time employment elsewhere or
a person or a partner of a firm holding appointment as
its auditor, if such persons or partner is at the date of
such appointment or reappointment holding
appointment as auditor of more than 20 companies
(h) a person who has been convicted by a court of an
offence involving fraud and a period of 10 years has
not elapsed from the date of such conviction

3However, the relative may hold security or interest in the company of face value not exceeding ` 1,000
or such sum as may be prescribed.

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(i) any person whose subsidiary or associate company or

any other form of entity, is engaged as on the date of
appointment in consulting and specialised services as
provided in section 144 of the Companies Act, 2013.
(ii) Individual The assessee himself or his relative
(iii) Firm Partner of the firm or his relative
(iv) AOP Member of the AOP or his relative
(v) HUF Member of the HUF or his relative
(vi) Trust or (1) The author of the trust or founder of the institution or
Institution his relative
(2) Any person who has made a substantial contribution
to the trust or institution, i.e., any person whose total
contribution upto the end of the relevant previous year
exceeds ` 50,000, or his relative
(3) Where such author, founder or person is a HUF, a
member of the HUF or relative of such member
(4) Any trustee of the trust or manager of the institution,
or relative of the trustee or manager
(vii) Any other The person who is competent to verify the return under
person section 139 in accordance with the provisions of section 140
or his relative.
(viii) Any (1) An officer or employee of the assessee
assessee (2) An individual who is a partner, or who is in the
referred to employment, of an officer or employee of the
in (ii) to (vii) assessee.
(3) An individual who, or his relative or partner -
(I) is holding any security of, or interest in, the
assessee4.
(II) is indebted to the assessee 5.
(III) has given a guarantee or provided any security
in connection with the indebtedness of any third
person to the assessee 6.

4 However, the relative may hold security or interest in the assessee of the face value not exceeding
` 1 lakh
5However, the relative may be indebted to the assessee for an amount not exceeding ` 1 lakh
6However, the relative may give guarantee or provide any security in connection with the indebtedness of
any third person to the assessee for an amount not exceeding ` 1 lakh

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(4) a person who, whether directly or indirectly, has

business relationship with the assessee of such
nature as may be prescribed.
“Business relationship” shall be construed as any
transaction entered into for a commercial purpose,
other than –
(i) commercial transactions which are in the nature of
professional services permitted to be rendered by an
auditor or audit firm under the Income-tax Act, 1961
and the Chartered Accountants Act, 1949 and the
rules and regulations made thereunder;
(ii) commercial transactions which are in the ordinary
course of business of the company at ALP – like sale
of products or services to auditor, as customer, in the
ordinary course of business, by companies engaged
in the business of telecommunications, airlines,
hospitals, hotels and such other similar businesses.
(5) a person who has been convicted by a court of an
offence involving fraud and a period of ten years has
not elapsed from the date of such conviction.
However, the ineligibility for carrying out any audit or furnishing of any report/certificate
in respect of an assessee shall not make an accountant ineligible for attending income -
tax proceeding referred to in section 288(1) as authorised representative o n behalf of
that assessee.
(e) any person who has passed any accountancy examination recognised in this behalf
by the Board. Rule 50 prescribes the accountancy examination recognised for this
purpose. They are as follows:
(i) The National Diploma in Commerce awarded by the All India Council for
Technical Education under the Ministry of Education, New Delhi, provided the
diploma-holder has taken Advanced Accountancy and Auditing as an elective
subject for the Diploma Examination
(ii) Government Diploma in Company Secretaryship awarded by the Department
of Company Affairs under the Ministry of Industrial Development and Company
Affairs, New Delhi
(iii) Final Examination of the Institute of Company Secretaries of India, New Delhi
(iv) The Final Examination of the Institute of Cost and Work Accountants of India
constituted under the Cost and Works Accountants Act, 1959

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(v) The Departmental Examination conducted by or on behalf of the Central Board

of Direct Taxes for promotion
(vi) The Revenue Audit Examination for Section Officers conducted by the Office of
the Comptroller and Auditor General of India
(f) any person who has acquired such education qualifications as the CBDT may,
prescribe for this purpose. Rule 51 prescribes
the concerned educational qualifications as
follows:
A degree in Commerce or Law conferred by any of the following Universities:
(i) Indian Universities: Any Indian University incorporated by any law for the time
being in force.
(ii) Rangoon University
(iii) English and Welsh Universities: The Universities of Birmingham, Bristol,
Cambridge, Durham, Leeds, Liverpool, London, Manchester, Oxford, Reading,
Sheffield and Wales
(iv) Scottish Universities: The Universities of Aberdeen, Edinburgh, Glasgow andSt.
Andrews
(v) Irish Universities: The Universities of Dublin (Trinity College), the Queen’s
University, Belfast and the National University of Dublin
(vi) Pakistan Universities: Any Pakistan University incorporated by any law for the
time being in force.
(g) Any other person as may be prescribed.
Accordingly, Rule 51B prescribes that any other person, in respect of a company or a
limited liability partnership, as the case may be, shall be the person appointed by the
Adjudicating Authority (i.e., National Company Law Tribunal constituted under section
408 of the Companies Act, 2013) for discharging the duties and functions of an interim
resolution professional, a resolution professional, or a liquidator, as the case may be,
under the Insolvency and Bankruptcy Code, 2016 and the rules and regulations made
thereunder.
(3) The following persons shall not be qualified to represent an assessee:
(i) A person who has been dismissed or removed from government service.

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(ii) A person who has been convicted of an offence

connected with any income-tax proceeding or on
whom a penalty has been imposed under this Act
other than a penalty imposed on him under section
272A(1)(d) - In this case, the person will be disqualified for such time as the Principal
Chief Commissioner or Chief Commissioner or the Principal Commissioner or
Commissioner may, by order, determine.
(iii) A person has become insolvent - In this case, he will be disqualified for a period
during which the insolvency continues.
(iv) A person convicted by a court of an offence involving fraud - He shall not be
eligible to act as authorised representative for a period of 10 years from the date of
such conviction.
(4) If any person is a legal practitioner or an accountant and is found guilty of misconduct in his
professional capacity by any authority entitled to institute disciplinary proceedings against
him, an order passed by that authority shall have effect in relation to his right to attend before
an income-tax authority as it has in relation to his right to practice as a legal practitioner or
accountant.
(5) If a person is not a legal practitioner or an accountant and is found guilty of misconduct in
connection with any income-tax proceedings by the prescribed authority, the prescribed
authority, may direct that he shall henceforth be disqualified to represent an assessee.
(6) Before any order or direction of disqualification under point 3(ii) or 5 above is made, the
following conditions must be satisfied:
(a) No such order or direction shall be made in respect of any person unless he has been
given a reasonable opportunity of being heard
(b) any person against whom any such order or direction is made, may within one month
of the making of the order or direction, may appeal to the Board to have the order or
direction cancelled
(c) No such order or direction shall take effect until the expiration of one month from the
making thereof or, where an appeal has been preferred, until the disposal of the
appeal.
(7) A person disqualified to represent an assessee under Indian Income-tax Act, 1922 shall stand
disqualified under this Act also
(8) Meaning of the term “relative” for the purpose of section 288:

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18.16 POWER TO TENDER IMMUNITY FROM

PROSECUTION [SECTION 291]
The Central Government is empowered under section 291
to tender any person immunity from prosecution for any
offence under this Act if it is of the opinion that it is
necessary or expedient in the public interest to do so for
the purpose of obtaining the evidence directly or indirectly
concerned in or privy to the concealment of the income or to the evasion of payment to tax on any
income taxable under the Act.

A tender of immunity made to or accepted by the person concerned shall, to that extent, render him
immune from prosecution for any offence in respect of which tender was made or from the imposition
of any penalty under the Act. If it appears to the Central Government that any person to whom
immunity has been tendered under this section has not complied with the condition on which the
tender was made or is willfully concealing anything or is giving false evidence, the Central
Government may record a finding to that effect, and thereupon the immunity shall be deemed to
have been withdrawn. Further, any such person may be tried for the offence in respect of which
tender of immunity was made or for any other offence of which he appears to have been guilty in
connection with the same matter and shall also become liable to the imposition of any penalty under
this Act to which he would otherwise have been liable.

18.17 COGNIZANCE OF OFFENCES AND BAR OF SUITS IN

CIVIL COURTS [SECTIONS 292 AND 293]
(1) No Court inferior to that of a Presidency Magistrate or a Magistrate of the first class shall try
any offence under this Act.

(2) No suit can be brought in any Civil Court to set aside or modify any proceeding taken or order
made under this Act; and no prosecution, suit or other proceedings shall lie against the
Government or any Government Officer for anything done or intended to be done in good
faith under the Act.

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18.18 CERTAIN LAWS NOT TO APPLY [SECTION 292A]

This section provides that the provisions of section 360 of the Code of Criminal Procedure, 1973
Bharatiya Nagarik Suraksha Sanhita (BNSS)) or the Probation of Offenders Act, 1958 shall not be
applicable to any person who is convicted of an offence under the Income tax Act,1961 unless that
person is under 18 years of age.

18.19 RETURN OF INCOME ETC. NOT TO BECOME INVALID

[SECTION 292B]
Section 292B provides that no return of income, order of assessment, notice, summons or other
proceedings furnished or made or taken or purported to have been furnished or made in pursuance of
any of the provisions of the Income-tax Act, 1961 shall be invalid
or shall be deemed to be invalid merely by reason of any
mistake, defect or omission in such return of income,
assessment, notice , summons or other proceeding, if they are
in substance and effect in conformity with or according to the intent and purposes of the Income-tax
Act, 1961.

The provision, thus, enables tax authorities to accept returns and other documents and tax payers to
accept orders, notice, etc., received from tax authorities even in cases where there are a few
typographical, arithmetical or other mistakes which do not materially affect the objects with which the
document was submitted by the assessee or order was issued by the department.

18.20 NOTICE DEEMED TO BE VALID IN CERTAIN

CIRCUMSTANCES [SECTION 292BB]
(1) This section provides that the assessee would be precluded from raising any objection in any
proceeding or inquiry that the notice was not served upon him or was not served in time or
was served in an improper manner if he had appeared in
any proceedings or co-operated in any enquiry relating to
assessment or re-assessment.

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(2) In short, if the assessee had appeared in any proceedings or co-operated in any enquiry, it
shall be deemed that any notice required to be served on him has been duly served upon him
in time in accordance with the provisions of the Act.

However, such deeming provision would not apply where the assessee has raised an
objection (regarding non-service of notice or non-service of notice in time or improper service
of notice) before the completion of such assessment or reassessment.

18.21 PRESUMPTION AS TO ASSETS, BOOKS OF

ACCOUNT, ETC. [SECTION 292C]
(1) Under section 132(4A), it is provided that the books of account, money, bullion, jewellery or
other valuable article or thing found in the possession or control of any person in the course
of a search under section 132 will be presumed to belong to the said person.

(2) It is further provided that it will be presumed that -

(i) the contents of such books of account and other documents are true; and

(ii) the signature and every other part of such books

of account and other documents which purport to
be in handwriting of any particular person or
which may reasonably be assumed to have been
signed by, or to be in the handwriting of, any particular person, are in that person’s
handwriting, and

(iii) in the case of a document stamped, executed or attested, that it was duly stamped
and executed or attested by the person by whom it purports to have been so executed
or attested.

(3) Therefore, section 292C was inserted to clarify that presumptions provided in section 132(4A)
can be made in any proceeding under this Act. It would also be available for regular
assessment.

(4) This section provides that where any books of account, other documents, money, bullion,
jewellery or other valuable article or thing are or is found in the possession or control of any
person in the course of a search under section 132 or survey under section 133A, it may, in
any proceeding under this Act, be presumed that -

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(i) such books of account, other documents, money, bullion, jewellery or other valuable
article or thing belong or belongs to such person;
(ii) the contents of such books of account and other
documents are true; and
(iii) the signature and every other part of such books of account and other documents
which purport to be in the handwriting of any particular person or which may
reasonably be assumed to have been signed by, or to be in the handwriting of, any
particular person, are in that person’s handwriting;

(iv) In the case of a document stamped, executed or attested, that it was duly stamped
and executed or attested by the person by whom it purports to have been so executed
or attested.

(5) Further, this presumption has also been extended to books of account, other documents or
assets which have been delivered to the requisitioning officer in accordance with the
provisions of section 132A. For this purpose, section 132A(2) provides that where any books
of accounts, other documents or assets have been delivered to the requisitioning officer in
accordance with the provision of section 132A then, the presumption would apply as if such
books of accounts, other documents or assets which had been taken into custody from the
person referred to in clause (a) or clause (b) or clause(c), as the case may be, of section
132A(1), had been found in the possession or control of that person in the course of a search
under section 132.

18.22 AUTHORITY EMPOWERED TO GRANT AN

APPROVAL UNDER THE INCOME TAX ACT, 1961
DEEMED TO HAVE POWER TO WITHDRAW THE
APPROVAL GRANTED [SECTION 293C]
(1) The Central Government, CBDT and income-tax Authorities are empowered under the
various provisions of the Income-tax Act to grant approval to the assessees for availing the
benefit of incentives available under the Act.

(2) However, only some provisions of the Income-tax Act, 1961 specifically contain provisions
for withdrawal of approval. In all other cases,
there is no specific power to withdraw the
approval granted.

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(3) Therefore, section 293C provides explicitly, such power to withdraw an approval granted.
This section provides that an approval granting authority (i.e., the Central Government, CBDT
or income-tax authority, as the case may be) shall also have the powers to withdraw the
approval at any time.

(4) However, such withdrawal can be made only after giving a reasonable opportunity to the
concerned assessee of showing cause against the proposed withdrawal. Further, the
reasons for withdrawal of the approval should be recorded by the concerned authority .

18.23 ACT TO HAVE EFFECT PENDING LEGISLATIVE

PROVISION FOR CHARGE OF TAX [SECTION 294]
If on the 1st April in any assessment year, provision has not yet been made by a Central Act for the
charging of income-tax for that assessment year, this Act shall
nevertheless have effect until such provision is so made as if the
provision in force in the preceding assessment year or the
provision proposed in the Bill then before Parliament, whichever is more favourable to the assessee,
were actually in force.

18.24 RULES [SECTIONS 295 AND 296]

Section 295 authorises the CBDT to make rules for the whole or any part of India for carrying out
the purposes and to implement the provisions of the Act. The powers of the Board in this regard are
subject to the supervision and control of the Central Government. The Rules framed by the Board
and approved by the Central Government are required to be
placed before each House of the Parliament before enforcing
the same. In exercise of the powers conferred on it by this
section, the Board, with the approval and sanction of the Central Government and the Parliament,
has framed the Income-tax Rules, 1962 which have been amended from time to time.
This section also enumerates the important matters on which rules may be framed by the Board: the
rules framed under this Act have the same force of the section of the Act. The rules must be
interpreted in the light of the sections under which they have been made. But the rules should be so
framed as not to adversely affect or derogate from the full operative effect of the provisions of the
sections. The rules must be within the term of the mandate given to the Board and must be framed
in such a way as to be consistent with and supplementary to the provisions of the Act.

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18.25 SCHEDULES TO THE INCOME TAX ACT, 1961

There are fourteen Schedules to the Income-tax Act, 1961. The matters dealt with in certain
schedules are highlighted below:

Schedule I Method of computing profits and gains of Insurance business [Section 44]

Schedule II Procedure for Recovery of Tax

Schedule III Procedure for distraint by Assessing Officer or Tax Recovery Officer

Schedule IV Recognised Provident Funds, approved superannuation funds and approved

gratuity funds

Schedule VII List of minerals and group of associated minerals in the context of section 35E.

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SIGNIFICANT SELECT CASES

S. No. Case Law

1. CIT v. V. Sivakumar (2013) 354 ITR 9 (Mad.)
Issue Analysis & Decision
Can loan, exceeding the In the present case, the assessee was a partner in four firms
specified limit, advanced and also had a sole-proprietary business. In the relevant
by a partnership firm to previous year, the partnership firms had advanced loan to
the sole-proprietorship the assessee in cash exceeding the specified amount
concern of its partner be mentioned in section 269SS.
viewed as a violation of
section 269SS to attract There is no separate identity for the partnership firm and
levy of penalty? that the partner is entitled to use the funds of the firm. In the
present case, the assessee has acted bona fide and that
there was a reasonable cause within the meaning of section
273B. Therefore, the transaction cannot be said to be in
violation of section 269SS and no penalty is attracted in this
case.
2. CIT v. Muthoot Financiers (2015) 371 ITR 408 (Del)
Issue Analysis & Decision
Is penalty u/s 271D There are three different High Courts, which have held that
imposable for cash section 269SS would not be violative when money is
loans/deposits received exchanged inter se between the partners and the firm, since
from partners? the partnership firm is not a separate legal entity.
However, the Supreme Court has held that partners of the
firm are distinct as civil entities while the firm as such is a
separate and distinct unit for the purpose of assessment.
In this case, there was no dispute as regards the money
brought in by the partners of the assessee-firm. The source
of money was also not doubted. The transaction was bona
fide and not aimed to avoid any tax liability. The credit
worthiness of the partners and genuineness of the
transactions coupled with relationship between the ‘two
persons’ and two different legal interpretations put
forward, could constitute a reasonable cause in a given
case for not invoking sections 271D/271E read with
section 273B.

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3. CIT v. Triumph International Finance (I.) Ltd. (2012) 345 ITR 270 (Bom.)
Issue Analysis & Decision
Where an assessee The obligation to repay the loan or deposit by account payee
repays a loan merely cheque/bank draft as specified in section 269T is mandatory
by passing adjustment in nature. The contravention of the said section will attract
entries in its books of penalty under section 271E.
account, can such
repayment of loan by The cause shown by the assessee for repayment of the loan
the assessee be taken otherwise than by account payee cheque/bank draft was on
as a contravention of account of the fact that the assessee was liable to receive
the provisions of amount towards the sale price of the shares sold by the
section 269T to attract assessee to the person from whom loan was received by the
penalty under section assessee. In order to avoid the unnecessary circular
271E? transfer of shares, both the parties agreed to set-off the
amount payable and receivable by way of passing journal
entries and the balance loan amount was paid by the
assessee by way of an account payee cheque. The amount
of loan settled by way of passing journal entries exceeds
` 20,000. It would have been mere formality to repay the
loan amount by account payee cheque/draft and receive
back almost the same amount towards the sale price of the
shares. Also, neither the genuineness of the receipt of loan
nor the transaction of repayment of loan by way of
adjustment through book entries carried out in the ordinary
course of business has been doubted in the regular
assessment. Therefore, there is nothing on record to
suggest that the amounts advanced to the assessee
represented the unaccounted money of either party and also
it cannot be said that the whole transaction was entered into
to avoid tax. This is accepted as a reasonable cause under
section 273B.
Section 269T does not make a distinction between a
bonafide or a non-bonafide transaction neither does it
require the fulfillment of the condition mentioned therein
only in case where there is outflow of funds. It merely puts
a condition that in case a loan or deposit is repaid, it should
be by way of an account payee cheque/draft. Therefore, in
the present case, the assessee has repaid a portion of loan
in contravention of provisions of section 269T.
In effect, the assessee has violated the provisions of section
269T by repaying the loan amount by way of passing book
entries and therefore, penalty under section 271E is

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applicable. However, since the transaction is bona fide in

nature being a normal business transaction and has not
been made with a view to avoid tax and since the assessee
has shown reasonable cause for the failure under section
269T, no penalty under section 271E could be imposed on
the assessee for contravening the provisions of section
269T by virtue of the provisions of section 273B.
Note: In order to mitigate the hardship caused by certain
penalty provisions in case of genuine business transactions,
section 273B provides that no penalty under, inter alia,
section 271E shall be imposed on a person for any failure
referred to in the said section, if such person proves that
there was reasonable cause for such failure.
4. Dr. Manoj Kabra v. ITO (2014) 364 ITR 541 (All)
Issue Analysis & Decision
Can the Assessing The legislature had no intention to confer any exclusive
Officer suo moto power or jurisdiction upon the income-tax authority to decide
assume jurisdiction to any question arising under section 281. The Income-tax Act,
declare sale of 1961, does not prescribe any adjudicatory machinery for
property as void under deciding any question which may arise under section 281.
section 281? In order to declare a transfer as fraudulent under section
281, an appropriate proceeding in accordance with law was
required to be taken under section 53 of the Transfer of
Property Act, 1882. The Assessing Officer is required to file
a suit for declaration to the effect that the transaction of
transfer was void under section 281 of the Income-tax Act;
but he himself cannot assume jurisdiction suo moto to
declare the sale deed as void.
5. CIT v. Laxman Das Khandelwal (2019) 417 ITR 325 (SC)
Issue Analysis & Decision
Is the omission to issue Without the statutory notice u/s 143(2), the Assessing
notice u/s 143(2) a Officer could not assume jurisdiction.
defect not curable in
spite of section 292BB, According to section 292BB, if the assessee had
inspite of participation participated in the proceedings, by way of legal fiction,
by the assessee in notice issued would be deemed to be valid even if there be
assessment infractions as detailed in the said section. The scope of the
proceedings? provision is to make service of notice having certain
infirmities to be proper and valid if there was requisite
participation on the part of the assessee. It is, however, to
be noted that the section does not save complete absence

© The Institute of Chartered Accountants of India

 18.44 DIRECT TAX LAWS

of issue of notice. For section 292BB to apply, the notice

must have emanated from the Department. It is only the
infirmities in the manner of service of notice that the
section seeks to cure. The section is not intended to cure
complete absence of notice itself.
Non-issuance of notice u/s 143(2) is not a curable defect u/s
292BB inspite of participation by the assessee in
assessment proceedings.
6. Principal CIT v. Maruti Suzuki India Ltd. (2019) 416 ITR 613 (SC)
Issue Analysis & Decision
Is notice issued u/s The consequence of the scheme of amalgamation approved
143(2) and 142(1) to the u/s 394 of the Companies Act, 1956 (section 232 of the
amalgamating company, Companies Act, 2013) was that the amalgamating company
after approval of the ceased to exist. It could not thereafter be regarded as a
Scheme of person u/s 2(31) against which assessment proceedings
amalgamation by the could be initiated or an order of assessment made. Notice
High Court and u/s 143(2) was issued to the amalgamating company. Prior
intimation of the same to to the date on which the jurisdictional notice u/s 143(2) was
the A.O., a defect not issued, the scheme of amalgamation had been approved by
curable u/s 292BB? the High Court.
Since the notice u/s 143(2) was issued in the name of the
amalgamating company in spite of the fact that the
amalgamated company had, prior to that date, addressed a
communication to the Assessing Officer intimating the fact
of amalgamation, the initiation of assessment
proceedings against an entity which had ceased to exist
was void ab initio. Further, participation in the proceedings
by the amalgamated company would not cure this illegality.

© The Institute of Chartered Accountants of India

 MISCELLANEOUS PROVISIONS 18.45

TEST YOUR KNOWLEDGE

Questions
1. Fearless General Finance & Investment Limited, a residuary non-banking company, accepts
public deposits, issues deposit certificate and repays the same after some period of time
alongwith interest, under different schemes run by it. Following transactions were noted from
their books of account:

(i) Mr. A, an individual, has deposited ` 15,000 on 1 st May, 2022 for 48 months by bearer
cheque and another ` 15,000 on 30 th June, 2025 in cash to purchase a new certificate
of 48 months tenure.
(ii) Mr. A has applied for premature withdrawal against both the certificates and the
company has paid him ` 16,500, by a bearer cheque, against principal and interest on
23rd March, 2026, due against his first certificate (purchased in 2022) and ` 15,500 in
cash on 25th March, 2026, against the second certificate.
Discuss the violation of income tax provision, if any, and consequential penalty for each
transaction. Will it make any difference if the certificates were held by Mr. A with his wife Mrs.
A, jointly, while repaying back in cash or bearer cheque?
2. The proceedings before the Income-tax Authorities either can be attended by the assessee
in person or through an authorized representative. Who can be treated as an authorized
representative of the assessee? Mention any five persons who can be treated as an
authorized representative of the assessee.
3. An order for A.Y. 2024-25 was passed by the Assessing Officer as per section 143(3), but
the typist wrongly typed in the order, the assessment year as A.Y.2023-24 and the relevant
previous year as ending on 31.3.2023. The assessee claimed in appeal that the same is an
invalid order which was not accepted by the CIT (Appeals) on the ground of the error being
of clerical nature. Discuss the correctness of the order of the CIT(Appeals).
4. “Proceedings cannot be initiated under the Act, unless a proper notice to this effect has been
served upon.” In this context answer:

(i) What are the prescribed modes of service of such notice?

(ii) On whom should the notice be addressed and served upon in the cases where the
assessee is a dissolved firm, a deceased person and a partitioned HUF.

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 18.46 DIRECT TAX LAWS

5. Explain the circumstances under which the Assessing Officer can resort to provisional
attachment of the property of the assessee. Also, state the period of time for which such
attachment can take place.
When can the Assessing Officer revoke provisional assessment of property? Discuss.
6. Mr. Biswas, a stock broker, has defaulted with regard to his income -tax payments and the
Assessing Officer has attached his membership card of Stock Exchange under section 281B
of the Income-tax Act, 1961. Mr. Biswas contends that the membership card is not
transferable and is not his personal asset. Discuss the validity of attachment of the card by
the Assessing Officer in the context of Section 281B.
7. An assessee had credited a sum of ` 50,000 in cash in the account of Madan, said to
represent a loan obtained from him. The Assessing Officer, having gone into the genuineness
of the transaction, disbelieved the story of loan and treated the sum of ` 50,000 as the income
of the assessee from undisclosed sources. He also started proceedings under section 271D
and levied a penalty of ` 60,000 on the assessee for having accepted the loan in
contravention of section 269SS. Examine the correctness of the levy.

Answers
1. (i) There is no violation of section 269SS at the time of acceptance of the first deposit of
` 15,000 by bearer cheque on 1.5.2022, since it is not in excess of the threshold limit
of ` 20,000. However, violation under section 269SS is attracted at the time of
acceptance of the second deposit in cash on 30 th June, 2025, since as on that date,
there is already an outstanding deposit of ` 15,000 and another cash deposit of
` 15,000 would take the aggregate to ` 30,000, which exceeds the threshold limit of
` 20,000. Therefore, penalty under section 271D of a sum equal to the amount of
deposit taken from Mr. A is attracted for failure to comply with the provisions of section
269SS.

(ii) In this case, there is a violation of the provisions of section 269T at the time of first
repayment by bearer cheque on 23 rd March, 2026, since on that date, the aggregate
amount of deposits held by Mr. A with the non-banking company (together with interest
payable on such deposits) is more than ` 20,000. Therefore, penalty under section
271E equal to the amount of deposit so repaid will be attracted for failure to comply
with the provisions of section 269T.

© The Institute of Chartered Accountants of India

 MISCELLANEOUS PROVISIONS 18.47

However, the second repayment of ` 15,500 on 25 th March, 2026 in cash cannot be

considered as a violation of section 269T, since neither the amount of deposit with
interest thereon nor the aggregate amount of deposits held by Mr. A on that date
together with interest exceeds the threshold limit of ` 20,000.

The provisions of section 269T will be attracted at the time of first repayment of bearer
cheque even if the certificate is being held by Mr. A in joint name with his wife.
2. As per section 288, the proceedings before the income-tax authorities can be attended by an
assessee in person or through an authorised representative, i.e., a person authorized by the
assessee in writing to appear on his behalf, being -
(i) a person who is a relative or a regular employee of the assessee; or

(ii) any officer of a Scheduled Bank in which the assessee maintains a current account or
has other regular dealings; or
(iii) a legal practitioner who is entitled to practise in any civil court in India; or

(iv) a chartered accountant within the meaning of the Chartered Accountants Act, 1949
who hold a valid certificate of practice
(v) any person who has passed any accountancy examination recognized in this behalf
by the CBDT for this purpose; or
3. Section 292B provides that no return of income, assessment, notice or summons furnished
or made or issued or taken in pursuance of any of the provisions of the Income -tax Act, 1961
shall be invalid or deemed to be invalid merely by reason of any mistake, defect or omission
in such return of income, assessment or notice etc., if such return of income, assessment,
notice, summons etc. is in substance and effect in conformity with or according to the intent
and purpose of the Act. Therefore, a clerical mistake cannot invalidate an otherwise
valid assessment. Thus, the typographical error in the assessment order as to assessment
year and previous year does not make the same invalid unless established otherwise.
Accordingly, the action of the CIT(Appeals) in not accepting the claim of the assessee is valid.
4. (i) As per section 282(1), the service of notice or summon or requisition or order or any
other communication under this Act may be made by delivering or transmitting a copy
thereof to the person named therein -
(1) by post or such courier services as approved by the CBDT; or

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 18.48 DIRECT TAX LAWS

(2) in such manner as provided in the Code of Civil Procedure, 1908 for the
purposes of service of summons; or
(3) in the form of any electronic record as provided in Chapter IV of the Information
Technology Act, 2000; or
(4) by any other means of transmission of documents as may be provided by rules
made by the CBDT in this behalf.
The CBDT is empowered to make rules providing for the addresses (including the
address for electronic mail or electronic mail message) to which such communication
may be delivered or transmitted to the person named therein.
(ii) The service of notice in the given cases should be on the persons mentioned
hereunder:-
Person Notice to be addressed and served on
A dissolved firm Any person who was a partner (not being a minor)
immediately before dissolution.
A deceased person The legal heirs of the deceased.
A partitioned HUF Last Manager of the HUF, or, if he is dead, then, all adult
members of the erstwhile HUF.

5. As per the provisions of section 281B, there can be provisional attachment to protect the
interest of Revenue in certain cases i.e.-

(i) The proceeding for the assessment of any income or for the assessment or
reassessment of any income which has escaped assessment or for imposition of
penalty under section 271AAD (penalty leviable for false entry etc. in books of
accounts) where the amount or aggregate of amounts of penalty likely to be imposed
under the said section exceeds ` 2 crores should be pending.
(ii) Such attachment should be necessary for the purpose of protecting the interest of
Revenue in the opinion of the Assessing Officer.
(iii) The previous approval of the Principal Chief Commissioner or Chief Commissioner,
Principal Commissioner or Commissioner, Principal Director General or Director
General or Principal Director or Director has been obtained by the Assessing Officer.
(iv) The Assessing Officer, may, by an order in writing attach provisionally any property
belonging to the assessee in the manner provided in the Second Schedule.

© The Institute of Chartered Accountants of India

 MISCELLANEOUS PROVISIONS 18.49

(v) Such provisional attachment shall cease to have effect after the expiry of a period of
six months from the date of order made under section 281B(1). However, the period
can be extended by the Principal Chief Commissioner or Chief Commissioner,
Principal Commissioner or Commissioner, Principal Director General or Director
General or Principal Director or Director, as the case may be, for the reasons to be
recorded in writing for a further period or periods as he thinks fit. The total period of
extension in any case cannot exceed 2 years or 60 days after the date of order of
assessment or reassessment, whichever is later.
The Assessing Officer shall, by order in writing, revoke provisional attachment of a property
made under section 281B(1) in a case where the assessee furnishes a guarantee from a
scheduled bank, for an amount not less than the fair market value of such provisionally
attached property or for an amount which is sufficient to protect the interests of the revenue.
6. The right of membership is not a private asset and it is merely a personal privilege granted
to the member. It is non-transferable and incapable of alienation by the member or his legal
representative except to the limited extent provided in the rules and regulations of the stock
exchange and subject to the fulfillment of conditions prescribed by the stock exchange. The
nomination, even if permitted, is subject to the rules and is not automatic. The right of nomination
is vested in the stock exchange absolutely in the case of death of or default of a member. Thus,
the membership card is not the property of the assessee and therefore cannot be attached under
section 281B. It has been so held by the Apex Court in the case of Stock Exchange Ahmedabad
vs. ACIT (2001) 248 ITR 209.
7. Penalty leviable under section 271D cannot exceed the sum equal to the loan taken. Hence,
the maximum penalty leviable would be ` 50,000. Further, the Assessing Officer cannot, on
the one hand, treat the loan as undisclosed income of the assessee and on the other, treat it
as a loan for the purpose of section 269SS read with section 271D. Such a treatment will be
self-contradictory. The moment the amount of ` 50,000 is treated as undisclosed income, it
ceases to bear the character of loan and therefore, the foundation for the levy of penalty
under section 271D disappears. [Diwan Enterprises v. CIT and Others (2000) 246 ITR 571].

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India
CHAPTER 19

PROVISIONS TO COUNTERACT
UNETHICAL TAX
PRACTICES

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ identify and examine the cases where penalty is leviable and determine the
quantum of penalty for defaults under various provisions of the Income-tax Act,
1961;
❑ list the conditions to be fulfilled by an assessee for making an application for
grant of immunity from penalty and prosecution and the time limit for making
such application;
❑ appreciate the powers of the Commissioner to waive penalty in certain cases
or grant immunity from penalty in certain cases;
❑ comprehend the procedure to be complied with for imposing penalty under the
Act;
❑ recall the limitation period, beyond which penalty cannot be imposed;
❑ appreciate the provisions of Income-tax law relating to offences and
prosecution;
❑ integrate, analyse and apply the relevant provisions of the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 and
related Rules to address relevant issues and make computations.
 19.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Offences and
Penal provisions Prosecution
[Sections 270A to Black Money Law
275] [Sections 275A to
280]

19.1 INTRODUCTION
As per Taxpayers’ Charter, a taxpayer is expected to be honest, disclose full information, keep
accurate records as required under laws, pay timely tax and comply with other requirements of
the tax laws. However, where a taxpayer fails in complying with such requirements or indulges in
in unlawful activities, the Income-tax Act, 1961 provides for imposition of penalty. The Income-tax
Act, 1961 also contains prosecution provisions, which are used as a tool for effective enforcement of
tax laws and deterring tax avoidance and tax evasion.
While penalties may be imposed by the income-tax authorities, the imposition of a fine or the
launching of prosecution for any offence under the Act can be made only by the Magistrate of a
Court under sections 275A to 280. In respect of the same default of an assessee, penalty may be
imposed, and a prosecution also may be launched
against him.

In addition to the provisions contained under the

Income-tax Act to counteract unlawful tax practices,
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 contains
provisions to tax undisclosed foreign income and assets.

The provisions to counteract ethical failures include the penal and prosecution provisions
contained under the Income-tax Act, 1961 and the Black Money (Undisclosed Foreign Income and
Assets) and Imposition of Tax Act, 2015.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.3

19.2 PENAL PROVISIONS UNDER THE INCOME TAX ACT

Penalty is levied over and above the amount of any tax or interest payable by the assessee and
thus, penalty is distinct and different from the tax payable. Penalty proceedings, however, are a part
of the assessment proceedings. The authority concerned is entitled to levy penalty only if he is
satisfied in the course of any proceedings under the Act that a person has been found guilty of any
default in complying with the provisions of the Act. If the order of the penalty is set aside in appeal
on the ground that the assessee was not given a reasonable opportunity of being heard, the
Assessing Officer would be entitled to levy a penalty again after rectifying the mistakes in
proceedings. The penalty to be levied on an assessee is to be based upon the law as it sto od at the
time the default was committed and not the law as it stands in the financial year for which the
assessment is made.
The various sections prescribe the minimum and the maximum penalty that can be levied in certain
cases though the Principal Commissioner or the Commissioner is empowered to waive or reduce
the penalty in some cases. The authority concerned has been given the discretion to levy or not to
levy a penalty. However, penalty levied cannot be less than the prescribed minimum nor can it
exceed the maximum amount prescribed by the Act. The quantum of penalty levied by a lower
authority can be modified by a higher authority on appeal, reference or revision. The various defaults
in respect of which penalty can be levied under the Act are discussed as follows:

19.2.1 PENALTY LEVIABLE FOR UNDER REPORTING OF INCOME

[SECTION 270A]
Upto A.Y. 2016-17, section 271(1)(c) provided for penalty on account of concealment of particulars
of income or furnishing inaccurate particulars of income.

For the purpose of ensuring objectivity, certainty and clarity in the penalty provisions, section 270A
provides for levy of penalty in cases of under
reporting and misreporting of income with effect
from A.Y.2017-18. Consequently, the penal
provisions under section 271 shall not apply in
relation to A.Y.2017-18 and onwards.
(1) Authorities empowered to levy penalty: Section 270A(1) empowers the Assessing
Officer, the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the Principal
Commissioner or the Commissioner to direct levy of penalty, during the course of proceedings
under the Income-tax Act, 1961, if a person has under reported his income. Such penalty
 19.4 DIRECT TAX LAWS

shall be imposed by an order in writing by such authority.

(2) Cases of under-reporting of income [Section 270A(2)]: A person shall be considered to
have under reported his income if, A>B in the cases given hereunder–

is greater than

Case (A) (B)

(i) Return of income has Income assessed Income determined in the
been filed return processed u/s
143(1)(a);
(ii) No return of income Income assessed Basic exemption limit
has been filed or where
return is furnished for
the first time u/s 148
(iii) Reassessment Income reassessed Income assessed or
reassessed immediately
before such re-assessment
(iv) Return of income has The amount of deemed The deemed total income
been filed and total income assessed or determined in the return
assessment/ reassess- reassessed as per the processed u/s 143(1)(a)
ment is made on the provisions of section
basis of MAT/AMT 115JB or 115JC
provisions
(v) No return of income is the amount of deemed The basic exemption limit, in
filed or where return total income assessed as case of an assessee being an
has been furnished for per the provisions of individual, HUF, AOP, BOI, in
the first time u/s 148 section 115JB or 115JC respect of whom the
and assessment/ provisions of AMT are
reassessment is made applicable.
on the basis of MAT/
AMT provisions
(vi) Reassessment as per The amount of deemed The deemed total income
the provisions of total income reassessed assessed or reassessed
sections 115JB or as per the provisions of immediately before such
115JC sections 115JB or 115JC reassessment.
Further, a person would be considered to have under-reported his income if the income
assessed or reassessed has the effect of reducing the loss or converting such loss into
income.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.5

(3) Calculation of under-reported income in different scenarios [Section 270A(3)]:

Case Manner of computation of under-reported income
(i) Where return is furnished Assessed income
and assessment is made for (-)
the first time.
Income determined under section 143(1)(a)
[in case of all persons]
(ii) Where no return has been
furnished or where return Person Under-reported
has been furnished for the income
first time u/s 148 and the Company, firm or local Assessed income
assessment is made for the authority
first time Other persons Assessed income
(-)
Basic exemption limit
(iii) Where income is not Income reassessed or recomputed
assessed for the first time (-)
Income assessed or reassessed or recomputed in the
order immediately preceding the order during the course
of which penalty u/s 270A(1) has been initiated.

(iv) Where under reported (A - B) + (C - D)

income arises out of where,
determination of deemed
total income in accordance A = Total income assessed as per the general
with the provisions of provisions i.e., provisions other than the provisions
section 115JB or section contained in section 115JB or section 115JC;
115JC B = The total income that would have been chargeable
had the total income assessed as per the general
provisions been reduced by the amount of under
reported income;
C = The total income assessed as per the provisions
contained in section 115JB or section 115JC;
D = The total income that would have been chargeable
had the total income assessed as per the
provisions contained in section 115JB or section
115JC been reduced by the amount of under
reported income.
However, where the amount of under reported income
on any issue is considered both under the provisions
 19.6 DIRECT TAX LAWS

contained in section 115JB or section 115JC and under

general provisions, such amount shall not be reduced
from total income assessed while determining the
amount under item D.
(v) Where an assessment or The loss claimed
reassessment has the effect (-)
of reducing the loss declared
in the return or converting The income or loss, as the case may be, assessed or
that loss into income reassessed.

(4) Meaning of Under-reported income in a case where the source of any receipt, deposit
or investment is linked to an earlier year [Section 270A(4) & (5)]:

In a case where the source of any receipt, deposit or investment appearing in the current
assessment year is claimed to be an amount added to income or deducted while computing
loss, as the case may be, in the assessment of such person in any earlier assessment year
and no penalty was levied for such preceding year, under-reported income shall include such
amount as is sufficient to cover such receipt, deposit or investment.
Note – Such amount shall be deemed to be the amount of income under-reported for the
preceding year in the following order –
(i) The preceding year immediately before the year in which the receipt, deposit or
investment appears, being the first preceding year; and
(ii) Where the amount added or deducted in the first preceding year is not sufficient to
cover the receipt, deposit or investment, the year immediately preceding the first
preceding year and so on.

(5) Cases not included within the scope of under-reported income under section 270A
[Section 270A(6)]:
Case Condition
(i) The amount of income in The Assessing Officer/CIT/PC/ the Joint
respect of which the assessee Commissioner (Appeals) /the Commissioner
offers an explanation (Appeals) is satisfied that the explanation is
bona fide and all the material facts have been
disclosed to substantiate the explanation.
(ii) The amount of under-reported If the accounts are correct and complete to the
income determined on the basis satisfaction of the income-tax authority but the
of an estimate method employed is such that the income
cannot properly be deduced therefrom
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.7

(iii) The amount of under-reported If the assessee has, on his own, estimated a
income determined on the basis lower amount of addition or disallowance on the
of an estimate same issue and has included such amount in the
computation of his income and disclosed all the
facts material to the addition or disallowance
(iv) The amount of under-reported Where the assessee had maintained information
income represented by any and documents as prescribed under section
addition made in conformity with 92D, declared the international transaction
the arm’s length price under Chapter X and disclosed all the material
determined by the Transfer facts relating to the transaction
Pricing Officer
(v) The amount of undisclosed Where penalty is leviable under section 271AAB1
income on account of a search in respect of such undisclosed income.
operation

(6) Cases of misreporting of income [Section 270A(9)]:

(i) misrepresentation or suppression of facts;
(ii) failure to record investments in the books of account;
(iii) claim of expenditure not
substantiated by any evidence;
(iv) recording of any false entry in the
books of account;
(v) failure to record any receipt in the books of account having a bearing on total income; and
(vi) failure to report any international transaction or deemed international transaction or
specified domestic transaction under Chapter X.
(7) Quantum of penalty leviable:
Section Case Penalty
(i) 270A(7) Under reporting of income 50% of tax payable on under-
reported income
(ii) 270A(8) Where under reporting of income 200% of tax payable on such
results from misreporting of income by under-reported income
any person.

1 On account of introduction of ‘Block Assessment’ (Chapter XIV-B) vide Finance Act, 2024, where search is
initiated under section 132 on or after the 1.9.2024, penalty under section 271AAB would not be levie d after
the said date.
 19.8 DIRECT TAX LAWS

(8) Manner of computation of tax payable on under-reported income [Section 270A(10)]:

Case Manner of computation of tax payable on
under-reported income
(i) Where no return of income has been The tax payable on under-reported income
furnished or where return has been shall be the amount of tax calculated on the
furnished for the first time u/s 148 under-reported income as increased by the
and the income has been assessed basic exemption limit as if it were the total
for the first time income.
(ii) Where the total income determined The tax payable in respect of the under-
u/s 143(1)(a) or assessed or reported income shall be the amount of tax
reassessed or recomputed in a calculated on the under-reported income as if
preceding order is a loss it were the total income.
(iii) In any other case The amount of tax calculated on the under-
reported income as increased by the total
income determined under section 143(1)(a)
or total income assessed, reassessed or
recomputed in a preceding order as if it were
the total income
Minus
The amount of tax calculated on the total
income determined under section 143(1)(a)
or total income assessed, reassessed or
recomputed in a preceding order.

(9) No addition or disallowance of an amount shall form the basis for imposition of penalty, if
such addition or disallowance has formed the basis of imposition of penalty in the case of the
person for the same or any other assessment year [Section 270A(11)].
(10) Consequential amendments in other provisions:

Consequential amendments have been made in sections 119, 253, 271A, 271AA, 271AAB 2,
273A, 276C and 279 to provide reference to section 270A.

Section Provision Amendment

(i) 119(2)(a) Power of CBDT to relax certain The CBDT has been empowered
provisions, by way of a general or to relax the provisions for levy of
special order, for the purpose of penalty u/s 270A also.

2 On account of introduction of ‘Block Assessment’ (Chapter XIV-B) vide Finance (No. 2) Act, 2024, where
search is initiated under section 132 on or after the 1.9.2024, penalty under section 271AAB would not be
levied after the said date.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.9

proper and efficient management of

the work of assessment and
collection of revenue.
(ii) 253(1) Enlists the orders appealable to the The order passed by the Joint
Appellate Tribunal. Commissioner (Appeals) or the
Commissioner (Appeals), the
Principal Commissioner or the
Commissioner u/s 270A would
also be appealable to the
Appellate Tribunal.
(iii) 271A Levy of penalty of ` 25,000 for The penalty under this section
failure to keep, maintain or retain would be without prejudice to the
books of account as required under provisions of section 270A.
section 44AA.
(iv) 271AA Levy of penalty of 2% of value of The penalty under this section
international transaction or would be without prejudice to the
specified domestic transaction, provisions of section 270A.
where the person fails to maintain
information and documents
required u/s 92D or report such
transaction or maintains or
furnishes an incorrect information
or document.
(v) 271AAB3 Levy of penalty where search is No penalty under section 270A
initiated under section 132 on or would be imposable in respect of
after 15.12.2016 but before undisclosed income on which
01.09.2024. penalty has been levied under
section 271AAB(1A).
Such penalty may be levied either
by the Assessing Officer or
Commissioner (Appeals)
(vi) 273A(1) Power of the Principal Reduction or waiver of penalty
Commissioner or the imposable on a person u/s 270A,
Commissioner to reduce or waive if prior to detection by the
penalty in certain cases. Assessing Officer, the person has
voluntarily and in good faith made
full and true disclosure of
particulars of income i.e., where

3 On account of introduction of ‘Block Assessment’ (Chapter XIV-B) vide Finance (No. 2) Act, 2024, where
search is initiated under section 132 on or after the 1.9.2024, penalty under section 271AAB would not be
levied after the said date.
 19.10 DIRECT TAX LAWS

the excess of income assessed

over the income returned is of
such a nature as not to attract the
penal provisions u/s 270A.
(vii) 273A(2) Order reducing or waiving penalty Previous approval of higher
under section 273A(1) to be made authorities also required if, in a
by the PC/CIT only with the case falling u/s 270A, the amount
previous approval of the PCC/CC/ of income in respect of which the
PDG/DG, as the case may be. penalty is imposed or imposable
for the relevant A.Y., or where
such disclosure relates to more
than one A.Y., the aggregate
amount of such income for those
years exceed ` 5 lakh.
(viii) 276C Prosecution to be instituted if a Prosecution to also be instituted if
person willfully attempts in any a person under-reports his income
manner to evade any tax, penalty under the Income-tax Act, 1961
or interest chargeable or imposable
under the Income-tax Act, 1961.
Rigorous imprisonment for a period Rigorous imprisonment for a
of 6 months to 7 years and fine period of 6 months to 7 years and
would be attracted in a case where fine would also be attracted in a
the amount sought to be evaded case where the tax on under-
exceeds ` 25 lakhs. reported income exceeds ` 25
lakhs.
(ix) 279(1A) Prosecution not to be instituted Prosecution not to be instituted
against a person u/s 276C or 277 in against a person u/s 276C or 277
relation to the assessment for an in relation to the assessment for
assessment year in respect of an AY in respect of which penalty
which penalty imposed or imposed or imposable u/s 270A or
imposable u/s 271(1)(iii) has been u/s 271(1)(iii) has been reduced or
reduced or waived by an order u/s waived by an order u/s 273A.
273A.

19.2.2 REDUCTION OR WAIVER OF PENALTY [SECTION 273A]

(1) Power to reduce/ waive penalty under section 270A

(a) Exercise of power to reduce/waive penalty under section 270A - Section 273A(1)
authorises the Principal Commissioner or the Commissioner of Income-tax to reduce
or waive the amount of penalty imposed or imposable on a person under section 270A.
The exercise of this power by the Principal Commissioner or the Commissioner is
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.11

purely at his discretion and may be done either on his own motion or otherwise, that
is on receipt of an application from the assessee.
(b) Conditions to be satisfied -The Principal Commissioner or the Commissioner can
reduce or waive the penalty payable by any person only if the following conditions are
satisfied:
(i) Full and true disclosure -The reduction or waiver by the Principal Commissioner
or the Commissioner would be permissible only if, prior to the detection by the
Assessing Officer of the concealment of income or the inaccuracy of particulars
furnished in respect of such income, the assessee has made a full and true
disclosure of all the particulars in respect of his income and, that, too voluntarily
and in good faith.
For this purpose, a person would be deemed to have made a full and true disclosure
of his income or of all the particulars relating thereto, in any case where the excess
of income assessed over the income returned is of such a nature as not to attract
the imposition of any penalty under section 270A.
(ii) Co-operation in enquiry - It is essential that the assessee must have co-operated
with the department in any enquiry relating to the assessment of his income.
(iii) Payment of tax or interest - He must also have either paid or made satisfactory
arrangements for the payment of any tax or interest, which may become payable
in consequence of any order passed under the Income-tax Act, 1961 in respect of
the assessment year.
(c) Prior approval of higher authorities required in certain cases - If, in a case falling
under section 270A, the amount of income in respect of which the penalty is imposed
or imposable for the relevant assessment year
or where such disclosure relates to more than
one assessment year, the aggregate amount
of such income for those years exceeds
` 5,00,000, the Principal Commissioner or the
Commissioner of Income-tax can exercise his
power to reduce or waive penalty, only after
getting the previous approval of the Principal
Chief Commissioner or the Chief Commissioner or the Principal Director General or
the Director General.
 19.12 DIRECT TAX LAWS

(d) Relief available only once in life time - Where an order has been made under section
273A(1) in favour of any person, whether such order relates to one or more
assessment years, he shall not be entitled to any relief under this section in relation to
any other assessment year at any time after the making of such order.
(2) Power to reduce/ waive penalty payable under the Act
(a) Exercise of power to reduce/waive any penalty - Section 273A(4) authorises the
Principal Commissioner or the Commissioner of Income-tax, without prejudice to the
powers conferred on him by any other provision of the Act, to reduce or waive the
amount of any penalty payable by the assessee under this Act. The Principal
Commissioner or the Commissioner may exercise this power on an application made
by the assessee, after recording his reason in writing for so doing. He is also
empowered to stay or compound any proceedings for the recovery of any penalty in
cases where he is satisfied that:
(i) to do otherwise would cause genuine hardship to the assessee having due regard
to all the facts and circumstances of the case; and

(ii) the assessee has co-operated in any enquiry relating to the assessment or any
proceeding for the recovery of any amount due from him.
Such order accepting or rejecting application of an assessee in full or part has to be
passed within a period of 12 months from the end of the month in which such
application is received by the PC or CIT.

However, order rejecting the application of the

assessee shall not be passed unless the
assessee has been an opportunity of being
heard.

(b) Prior approval of higher authorities required in

certain cases - In case the quantum of penalty
payable under this Act exceeds ` 1 lakh or the
application relates to more than one penalty and the aggregate amount of such
penalties exceeds ` 1 lakh, the PC or the CIT grant relief only with the previous
approval of the PCC or the CC or the PDG or the DG, as the case may be.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.13

(3) Finality of order

The Principal Commissioner or the

Commissioner’s order under section 273A for
reduction or waiver of penalty is final and cannot
be challenged in any court or before any
authority.

ILLUSTRATION 1
M/s. XYZ is a firm liable to tax@30%. The following are the particulars furnished by the firm for
A.Y.2026-27:
Particulars of total income `
(1) As per the return of income furnished u/s 139(1) 50,00,000
(2) Determined under section 143(1)(a) 60,00,000
(3) Assessed under section 143(3) 75,00,000
(4) Reassessed under section 147 95,00,000

Can penalty be levied u/s 270A on M/s. XYZ? If the answer is in the affirmative, compute the penalty
leviable u/s 270A.

SOLUTION
M/s. XYZ is deemed to have under-reported its income since:
(1) its income assessed u/s 143(3) exceeds its income determined in a return processed u/s
143(1)(a); and
(2) the income reassessed under section 147 exceeds the income assessed u/s 143(3).
Therefore, penalty is leviable under section 270A for under-reporting of income.

Computation of penalty leviable under section 270A

Particulars ` `
Assessment under section 143(3) Under-reported income:
Total income assessed under section 143(3) 75,00,000
(-) Total income determined u/s 143(1)(a) 60,00,000
15,00,000
Tax payable on under-reported income:
Tax on under-reported income of ` 15 lakhs plus tax on total
 19.14 DIRECT TAX LAWS

income of ` 60 lakhs determined u/s 143(1)(a) [30% of ` 75 lakh

+ HEC@4%] 23,40,000
Less: Tax on total income determined u/s 143(1)(a) [30% of
` 60 lakh +HEC@4%] 18,72,000
4,68,000
Penalty leviable@50% of tax payable 2,34,000
Reassessment under section 147 Under-reported income:
Total income reassessed under section 147 95,00,000
(-) Total income assessed under section 143(3) 75,00,000
20,00,000
Tax payable on under-reported income:
Tax on under-reported income of ` 20 lakhs plus tax on total
income of ` 75 lakhs assessed u/s 143(3) [30% of ` 95 lakh +
HEC@4%] 29,64,000
Less: Tax on total income assessed u/s 143(3) [30%of ` 75 lakh +
HEC@4%] 23,40,000
6,24,000
Penalty leviable@50% of tax payable 3,12,000

Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or reassessment qualifies under
section 270A(6); and
(2) The under-reported income is not on account of misreporting.
ILLUSTRATION 2

Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of income for
A.Y.2026-27. However, the total income assessed in respect of such year under section 144 is
` 14 lakh. Is penalty u/s 270A attracted in this case, and if so, what is the quantum of penalty leviable?
SOLUTION
Mr. Ram is deemed to have under-reported his income since he has not filed his return of income
and his tax liability would be computed applying the provisions of section 115BAC, since w.e.f. A.Y.
2026-27 he has to specifically exercise the option to shift to normal provisions along with the return
of income. Hence, penalty under section 270A is leviable in his case in the following manner.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.15

Computation of penalty leviable under section 270A

Particulars ` `
Assessment under section 144
Under-reported income:
Total income assessed under section 144 12,00,000
Tax payable on under-reported income as per section 115BAC
Upto ` 4,00,000 Nil
` 4,00,001 – ` 8,00,000 @ 5% 20,000
`8,00,001 – ` 12,00,000 @10% 40,000
` 12,00,001 – ` 14,00,000 @15% 30,000 90,000
Add: HEC@4% 3,600
93,600
Penalty leviable@50% of tax payable 46,800
Note – It is assumed that the under-reported income is not on account of misreporting.
ILLUSTRATION 3
ABC Ltd. is a domestic company liable to tax @25%. The following are the particulars furnished by
the company for A.Y.2026-27:
Particulars of total income `
(1) As per the return of income furnished u/s 139(1) (15,00,000)
(2) Determined under section 143(1)(a) (8,00,000)
(3) Assessed under section 143(3) (5,00,000)
(4) Reassessed under section 147 4,00,000

Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum of penalty?
SOLUTION
ABC Ltd. is deemed to have under-reported its income since:
(1) the assessment u/s 143(3) has the effect of reducing the loss determined in a return
processed u/s 143(1)(a); and
(2) the reassessment u/s 147 has the effect of converting the loss assessed u/s 143(3) into
income.
Therefore, penalty is leviable under section 270A for under-reporting of income.
 19.16 DIRECT TAX LAWS

Computation of penalty leviable under section 270A

Particulars ` `
Assessment under section 143(3) Under-reported income:
Loss assessed u/s 143(3) (5,00,000)
(-) Loss determined under section 143(1)(a) (8,00,000)
3,00,000
Tax payable on under-reported income@25% 75,000
Add: HEC@4% 3,000
78,000
Penalty leviable@50% of tax payable 39,000
Reassessment under section 147 Under-reported income:
Total income reassessed under section 147 4,00,000
(-) Loss assessed under section 143(3) (5,00,000)
9,00,000
Tax payable on under-reported income@25% 2,25,000
Add: HEC@4% 9,000
2,34,000
Penalty leviable@50% of tax payable 1,17,000

Notes – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or reassessment qualifies u/s
270A(6); and
(2) The under-reported income is not on account of misreporting.

19.2.3 OTHER PENAL PROVISIONS UNDER THE INCOME TAX ACT

Chapter XXI of the Income-tax Act, 1961 contains various penal provisions which are attracted for
failure to comply with the requirements of the provisions contained in other chapters of the Act. To
provide easy correlation certain penal provisions are discussed along with related provisions in the
respective chapters of the Study Material. To give a bird’s eye view of the penal provisions discussed
in other chapters, the following table summarizes these penal provisions:
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.17

Section Nature of Default Penalty Leviable Remarks

271A Failure to keep or ` 25,000 Penalty may be levied by
maintain or retain books the Assessing Officer or
of account, document etc. the Joint Commissioner
as required u/s 44AA or (Appeals) or the
rules made thereunder. Commissioner (Appeals).
Penalty is leviable without
prejudice to section 270A.
271AA(1) Failure to keep and maintain 2% of the value of Penalty may be levied by
any information and each international the Assessing Officer or
document as required u/s transaction or Commissioner (Appeals).
92D(1)/(2); specified domestic
Penalty is leviable without
transaction entered
Failure to report such prejudice to section 270A
into by such person
transaction which he is or section 271BA.
required to do so;
Maintaining or furnishing an
incorrect information or
document.
271AA(2) Fails to furnish the ` 5,000 Prescribed Income-tax
information and Authority
documents as required
under section 92D(4)
271AAD Penalty for false entry Sum equal to the Penalty may be levied by
etc. in books of account aggregate amount of the Assessing Officer or
or omission of any entry false entry or omitted Joint Commissioner
which is relevant for entry (Appeals) or Commissioner
computation of total (Appeals).
income of such person, to
Such penalty is leviable on
evade tax liability.
• the person who makes
False entry includes use or
such false entry or
intention to use –
omits an entry to
• Forged or falsified evade tax liability; and
documents such as a
• any other person, who
false invoice or, in
caused the person in
general, a false piece
any manner to make a
of documentary
false entry or omit any
evidence; or
entry to evade tax
• Invoice in respect of liability.
supply or receipt of
goods or services or
 19.18 DIRECT TAX LAWS

both issued by the

person or any other
person without actual
supply or receipt of
such goods or
services or both; or
• Invoice in respect of
supply or receipt of
goods or services or
both to or from a
person who does not
exist
271AAE If during any proceeding Sum equal to - Penalty may be levied by
under this Act, it is found the Assessing Officer
(i) 100% of the
that any person, being
aggregate
any fund or institution or
amount of
trust referred under
income so
section 10(23C)(iv)/(v)/
applied, where
(vi)/(via) or any trust or
the violation is
institution referred to in
noticed for the
section 11 applied income
first time during
of the trust or institution,
any previous
directly or indirectly, for
year; and
the benefit of any person
referred to in section (ii) 200% of the
13(3) aggregate
amount of
income so
applied, where
violation is
noticed again in
any subsequent
previous year.
271B Failure to get accounts ½% of total sales, Penalty may be levied by
audited or obtain audit turnover or gross the Assessing Officer
report u/s 44AB or to receipts of business/
furnish the report of such gross receipts of
auditor with return of profession or
income. ` 1,50,000, which-
ever is less.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.19

271BA Failure to furnish audit ` 1,00,000 Penalty may be levied by

report as required under the Assessing Officer
section 92E
271C Failure to deduct tax at A sum equal to the Penalty imposable by the
source as per chapter amount of tax which Joint Commissioner.
XVII-B or to pay or ensure he failed to deduct or
However, w.e.f.
payment of the whole or pay or ensure
01.04.2025 penalty shall
any part of the tax as payment of said tax
be imposed by the
required by - at source.
Assessing Officer.
- the proviso to section
194B [winnings from
lottery or crossword
puzzle] or
- the first proviso to
section 194R(1) [on
benefits and perquisites
in respect of business
or profession] or
- the proviso to section
194S(1) [consideration
on transfer of virtual
digital assets] or
- section 194BA(2)
[winnings from online
games].
Note – In all the four
situations mentioned
above, the winnings/
benefit/ perquisite/
consideration for transfer,
as the case may be, is
wholly in kind or partly in
cash and partly in kind and
the part in cash is not
sufficient to meet the TDS
liability.
271CA Failure to collect the whole A sum equal to the Penalty imposable by the
or any part of the tax as amount of tax which Joint Commissioner.
required by or under the he failed to collect.
However, w.e.f.
provisions of Chapter XVII-
01.04.2025 penalty shall
BB
be imposed by the
Assessing Officer.
 19.20 DIRECT TAX LAWS

271D Failure to comply with the Penalty of a fixed Penalty imposable by the
provisions of section sum equal to amount Joint Commissioner.
269SS. of loan or deposit or
However, w.e.f.
specified sum taken
01.04.2025 penalty shall
or accepted
be imposed by the
otherwise than by
Assessing Officer.
way of account payee
cheque/ bank draft or
use of ECS through a
bank A/c.
271DA Failure to comply with the Penalty of sum Penalty imposable by the
provisions of section received in Joint Commissioner.
269ST contravention of the
However, w.e.f.
provisions of section
01.04.2025 penalty shall
269ST i.e., sum of
be imposed by the
` 2 lakh or more
Assessing Officer.
received in aggregate
from a person in a
day or in respect of a
single transaction or
in respect of
transactions relating
to one event or
occasion from a
person, otherwise
than by an account
payee cheque/ bank
draft or use of ECS
through a bank A/c.
271DB Failure to comply with the Penalty of ` 5,000 Penalty imposable by the
provisions of section per day of continuing Joint Commissioner.
269SU default, if the person
However, w.e.f.
who is required to
01.04.2025 penalty shall
provide facility for
be imposed by the
accepting payment
Assessing Officer.
through the
prescribed electronic No penalty imposable if the
modes of payment person proves that there
referred to in section were good and sufficient
269SU, fails to reasons for such failure
provide such facility
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.21

271E Failure to comply with the A sum equal to the Penalty imposable by the
provisions of section amount of loan or Joint Commissioner.
269T deposit or specified
However, w.e.f.
advance repaid
01.04.2025 penalty shall
otherwise than by an
be imposed by the
account payee
Assessing Officer.
cheque/bank draft or
use of ECS through a
bank A/c.
271FA Failure to furnish A sum of ` 500 for Penalty leviable by Income
Statement of financial every day during Tax Authority prescribed
transaction or reportable which failure u/s 285BA
account within the time continues.
prescribed u/s 285BA(2),
i.e., on or before 31 st May,
immediately following the
F.Y. in which the
transaction is registered
or recorded.
Failure to furnish A sum of ` 1,000 for
Statement of Financial every day during
Transaction or Reportable which failure
Account within the time continues, beginning
prescribed u/s 285BA(5). from the day
immediately following
the day on which the
time specified in such
notice for furnishing
the statement expires.
271FAA(1) Furnishing of inaccurate ` 50,000 Leviable by the income-tax
information in the authority prescribed under
statement of financial section 285BA
transaction or reportable
account or failure to
furnish correct
information within the
period specified or fails to
comply with due diligence
271FAA(2) Furnishing inaccurate ` 5,000 for every
statement of financial reportable account, in
transaction or reportable addition to the penalty
account by reporting of ` 50,000 levied
 19.22 DIRECT TAX LAWS

financial institution, under section

where the inaccuracy is 271FAA(1) above.
due to false/inaccurate The reportable
information furnished by financial institution is
the holder(s) of the entitled to recover the
relevant reportable sum so paid on behalf
account(s). of such reportable
account holder or to
retain out of any
money that may be in
its possession or may
come to it from every
such reportable
account holder, an
amount equal to the
sum so paid.
271FAB Failure to furnish within the ` 5,00,000 Leviable by the income-tax
prescribed time, a authority prescribed under
statement or any section 9A(5)
information or document as
required u/s 9A(5) by an
eligible investment fund
271G Failure to furnish 2% of the value of the Competent Authority to
information or document international levy penalty:
under section 92D(3) transaction or
The Assessing Officer/ the
specified transaction
Transfer Pricing Officer/ the
for each such failure
Commissioner (Appeals).
271GA Failure to furnish 2% of the value of the Penalty imposable by an
information or document transaction in respect income-tax authority
by an Indian concern of which such failure prescribed under section
under section 285A has taken place, if 285A.
such transaction has
the effect of directly
or indirectly
transferring the right
of management or
control in relation to
the Indian concern.
In any other case;
` 5,00,000.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.23

271GB Non-furnishing of the For details, refer section

report by any reporting 286 discussed in Chapter
entity which is obligated to 24 on Transfer Pricing
furnish Country-by-
Country report as required
under section 286
Period of delay/default Penalty
Not more than a month ` 5,000 per day
Beyond one month ` 15,000 per day for
the period exceeding
one month
Continuing default even ` 50,000 per day of
after service of order continuing failure
levying penalty beginning from the
date of service of
order
Failure to produce
information and
documents within
prescribed time
Failure to produce ` 5,000 per day of
information before continuing failure,
prescribed authority from the day
within the period allowed immediately following
u/s 286(6) the day on which the
period for furnishing
the information and
document expires.
Continuing default even ` 50,000 per day for
after service of penalty the period of default
order beyond the date of
service of penalty
order.
Penalty for submission of ` 5,00,000 Penalty would be leviable
inaccurate information in on the reporting entity, if,-
the CBC report
(a) the entity has
knowledge of the
inaccuracy at the time
of furnishing the
report but does not
 19.24 DIRECT TAX LAWS

inform the prescribed

authority; or
(b) the entity discovers
the inaccuracy after
the report is furnished
and fails to inform the
prescribed authority
and furnish correct
report within a period
of fifteen days of such
discovery; or
(c) the entity furnishes
inaccurate information
or document in
response to notice of
the prescribed
authority under
section 286(6).
271GC Failure to furnish ` 1000 per day for Penalty leviable by
statement under section the period of default, Assessing Officer
285 if the period of default
does not exceed 3
months or ` 1,00,000
in any other case.
271H Penalty leviable by
Assessing Officer

(a) Failure to furnish ` 10,000 to No penalty would be leviable

TDS/TCS statements ` 1,00,000 if the person proves that after
within the prescribed paying tax deducted or
time. collected along with the fee
under section 234E and
interest, if any, to the credit
of the Central Government,
he had delivered or caused
to be delivered the TDS/TCS
statements before the expiry
of one month from the time
prescribed for delivering or
causing to be delivered such
statements.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.25

(b) Furnishing incorrect `10,000 to

information in the said ` 1,00,000
statements in respect of tax
deducted or collected
271-I Failure to furnish ` 1,00,000 Penalty leviable by
information or furnishing Assessing Officer
inaccurate information by
a person who is required
to furnish information
under section 195(6)
271J Furnishing of incorrect ` 10,000 for each Penalty leviable by the
information in reports or such report or Assessing Officer or the Joint
certificates furnished by certificate Commissioner (Appeals) or
an accountant, merchant the Commissioner (Appeals)
banker or a registered who, in the course of
valuer proceedings under the Act,
finds that the accountant,
merchant banker or
registered valuer has
furnished incorrect
information in reports or
certificates
271K Where a research
association, university,
college or other institution
referred to 35(1)(ii)/(iii) or
the company referred to
in section 35(1)(iia) fails
to deliver or cause to be
delivered a statement
within the time prescribed
under 35(1)(i), or furnish ` 10,000 to 1,00,000 Penalty leviable by the
a certificate prescribed Assessing Officer
under 35(1A)(ii).
Where an institution or a
fund, fails to deliver or
cause to be delivered a
statement within the time
prescribed under section
80G(5)(viii) or furnish a
certificate prescribed
under section 80G(5)(ix).
 19.26 DIRECT TAX LAWS

272A(1) (a) Refusal to answer ` 10,000 for each Penalty imposable by Joint
questions put by such default or failure director or Joint
income tax authority Commissioner.
(b) Refusal to sign However, where the
statements made in contravention, failure
the course of income default occurs in the
tax proceedings. course of any proceeding
before income-tax
(c) Non-compliance
authority not lower in rank
with summons
than a Joint director or
issued u/s 131(1) to
Joint Commissioner,
give evidence or
penalty is imposable by
produce books of
such income-tax authority.
accounts.
(d) Failure to comply Penalty imposable by the
with a notice issued income-tax authority who
u/s 142(1) or section had issued the notice or
143(2) or failure to direction after giving the
comply with a person an opportunity of
direction issued u/s being heard in the matter.
142(2A)
272A(2) Failure: ` 500 for every day Section 272A(3) specifies
during which default that for the default
− To comply with
continues. committed u/s 272(A)(1)
notice u/s 94(6)
and (2), where the
However, the amount
− To give notice of contravention occurs in the
of penalty for failure in
discontinuance of course of any proceeding
relation to a
business/ profession before an income-tax
declaration u/s 197A,
u/s 176(3) authority not lower in rank
a certificate u/s 203
than a Joint Director or a
− To furnish in due and a returns u/s 206
Joint Commissioner,
time returns and 206C and
penalty can be imposed by
statements statements u/s
such income-tax authority.
mentioned in 200(2A)/(3) or proviso
sections 133, 206, to section In any other case, by the
206C or 285B. 206C(3)/(3A) shall not Joint Director or the Joint
exceed the amount of Commissioner.
− To allow inspection tax deductible or
of register referred in In either case, the penalty
collectible.
section 134 order can be passed only
after the person concerned
− To furnish returns of is given an opportunity of
income u/s being heard in the matter.
139(4A)/(4C)
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.27

− To furnish a
certificate as
required in section
203 or 206C
− To deduct and pay
tax u/s 226(2)
− To furnish a
statement as
required by section
192(2C)
− To deliver or cause
to be delivered in due
time a copy of the
declaration referred
to in section
206C(1A)
− To deliver or cause
to be delivered the
statements within the
time specified in
section206A(1)/200
(2A)/ 206C(3A)
− To deliver or cause Penalty is imposable by the
to be delivered copy PCC/CC/PC or the
of the declaration u/s Commissioner of Income-
197A tax after giving the person
an opportunity of being
heard in the matter.
272AA Failure to comply with the Any amount upto Penalty imposable by the
provision of section 133B ` 1,000 Joint Commissioner/Asst.
Director/ Dy.
Director/Assessing Officer
after giving the person an
opportunity of being heard
in the matter.
272B Failure to comply with the ` 10,000
provisions of section 139A
Failure to quote/intimate ` 10,000 for each
PAN/Aadhaar No. in any such default
document referred to in
 19.28 DIRECT TAX LAWS

section 139(5)(c) or to
intimate such no. as
required u/s 139A(5A) or
139A(5C) or Penalty imposable by
quoting/intimating false Assessing Officer
PAN/Aadhaar No.
Failure to quote ` 10,000 for each
PAN/Aadhaar No. in such default
documents referred to in No penalty imposable
section 139A(6A) unless the person on
Failure to authenticate ` 10,000 for each whom penalty is to be
PAN/Aadhaar No. in such default imposed is given an
accordance with section opportunity of being
139A(6A) heard in the matter.

Failure to ensure that ` 10,000 for each

PAN/Aadhaar No. has such default
been -
- duly quoted in
documents relating to
transactions referred
to in section
139A(5)(c) or
139A(6A); or
- duly authenticated in
respect of transactions
referred to u/s
139A(6A).
272BB(1) Failure to comply with the Penalty imposable by
provisions of section 203A Assessing Officer
No penalty imposable
272BB(1A) Quoting false TAN willfully ` 10,000
unless the person on whom
in challans/ certificates/ penalty is to be imposed is
statements/other given an opportunity of
documents referred to in being heard in the matter.
section 203A(2)

19.2.4 TAXATION OF UNDISCLOSED SOURCES OF INCOME

There are many occasions when the Assessing Officer detects cash credits, unexplained
investments, unexplained expenditure etc., the source for which is not satisfactorily explained by the
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.29

assessee to the Assessing Officer. The Act contains a series of provisions to provide for these
contingencies:

(1) Cash Credits [Section 68]

Where any sum is found credited in the books of an assessee maintained for any previous
year and the assessee offers no explanation about the nature and source or the explanation
offered is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be
charged as income of the assessee of that previous year.
Unexplained loan or borrowing - Where the sum so credited consists of loan or borrowing
or any such amount, by whatever name called, any explanation offered by the assessee in
whose books such sum is credited would not be deemed to be satisfactory, unless
- the person in whose name such credit is recorded in the books of such assessee also
offers an explanation about the nature and source of
such sum so credited and
- in the opinion of the Assessing Officer, such
explanation has been found to be satisfactory.
Unexplained Share Capital/ Premium - Any explanation offered by a closely held company
in respect of any sum credited as share application money, share capital, share premium or
any such amount, by whatever name called, in the accounts of such company would not be
deemed to be satisfactory, unless
 19.30 DIRECT TAX LAWS

- the person, being a resident, in whose name such credit is recorded in the books of
such company also explains about the nature and the source of such sum so credited
and
- in the opinion of the Assessing Officer, such explanation has been found to be
satisfactory.
Non-applicability to Venture Capital Fund or Venture Capital Company – The above-
mentioned additional conditions would not apply if the person, in whose name the sum is
recorded, is a Venture Capital Fund or Venture Capital Company registered with SEBI. 4.
(2) Unexplained Investments [Section 69]

Where in the financial year immediately preceding the assessment year, the assessee has
made investments which are not recorded in the books of account and the assessee offers
no explanation about the nature and the source of investments or the explanatio n offered is
not satisfactory in the opinion of the Assessing Officer,
the value of the investments are taxed as deemed
income of the assessee of such financial year.
(3) Unexplained money etc. [Section 69A]
Where in any financial year the assessee is found to
be the owner of any money, bullion, jewellery or other valuable article and the same is not
recorded in the books of account and the assessee offers no explanation about the nature
and source of acquisition of such money, bullion etc. or the explanation offered is not
satisfactory in the opinion of the Assessing Officer, the money and the value of bullion etc.
may be deemed to be the income of the assessee for such financial year. Ownership is
important and mere possession is not enough.
(4) Amount of investments etc., not fully disclosed in the books of account [Section 69B]
Where in any financial year the assessee has made investments or is found to be the owner of
any bullion, jewellery or other valuable article and the Assessing Officer finds that the amount
spent on making such investments or in acquiring such articles exceeds the amount recorded
in the books of account maintained by the assessee and he offers no explanation for the
difference or the explanation offered is unsatisfactory in the opinion of the Assessing Officer,
such excess may be deemed to be the income of the assessee for such financial year.

4 defined under section 10(23FB)

 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.31

(5) Unexplained expenditure [Section 69C]

Where in any financial year an assessee has incurred any expenditure and he offers no
explanation about the source of such expenditure
or the explanation is unsatisfactory in the opinion
of the Assessing Officer, Assessing Officer can
treat such unexplained expenditure as the income
of the assessee for such financial year. Such unexplained expenditure which is deemed to
be the income of the assessee shall not be allowed as deduction under any head of income.
(6) Amount borrowed or repaid on hundi [Section 69D]
Where any amount is borrowed on a hundi or any amount due thereon is repaid other than
through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall
be deemed to be the income of the person borrowing or repaying for the previous year in
which the amount was borrowed or repaid, as the case may be.
However, where any amount borrowed on a hundi has been deemed to be the income of any
person, he will not be again liable to be assessed in respect of such amount on repayment of
such amount. The amount repaid shall include interest paid on the amount borrowed.
Unexplained money, investments etc. to attract tax @60% [Section 115BBE]
(1) In order to control laundering of unaccounted money by
availing the benefit of basic exemption limit, the
unexplained money, investment, expenditure, etc.
deemed as income under section 68 or section 69 or section 69A or section 69B or section
69C or section 69D would be taxed at the rate of 60% plus surcharge @25% of tax. Thus,
the effective rate of tax (including surcharge@25% of tax and cess@4% of tax) is 78%.
(2) No basic exemption or allowance or expenditure shall be allowed to the assessee under any
provision of the Income-tax Act, 1961 in computing such deemed income.
(3) Further, no set off of any loss shall be allowable against income brought to tax under sections
68 or section 69 or section 69A or section 69B or section 69C or section 69D.
Penalty in respect of undisclosed income in the form of unexplained money, investments etc.
under section 271AAC:
In a case where income determined includes any income referred to in sections 68, 69, 69A to 69D
for any previous year, in addition to the tax
payable under section 115BBE, penalty@10%
of tax payable under section 115BBE would
be attracted.
 19.32 DIRECT TAX LAWS

Penalty may be levied by the Assessing Officer or the Joint Commissioner (Appeals) or the Commissioner
(Appeals). However, no such penalty would be levied on such income to the extent the same has
been included by the assessee in return of income furnished u/s 139 and tax in accordance with
section 115BBE has been paid on or before the end of the relevant previous yea r.
The provisions of section 271AAC are notwithstanding anything contained in the Income -tax Act,
1961, other than the provisions for levy of penalty under section 271AAB 5 on undisclosed income
detected in search cases.
No penalty under section 270A for under-reporting of income is leviable in respect of income on
which penalty is leviable under this section.

19.2.5 PENALTY NOT LEVIABLE IN CERTAIN CASES [SECTION 273B]

No penalty is leviable under sections 271A, 271AA, 271B, 271BA, 271C, 271CA, 271D, 271E,
271FA, 271FAA 271FAB, 271G, 271GA, 271GB, 271GC, 271H, 271-I, 271J, 272A(1)(c) or
272(A)(1)(d), 272A(2), 272AA(1), 272B, 272BB(1)/(1A), if the assessee proves that there was
reasonable cause for the said failure.

19.2.6 PROCEDURE FOR ASSESSMENT OF PENALTIES [SECTION 274]

(1) Section 274(1) provides that no penalty under Chapter XXI can be imposed unless the
assessee has been heard or has been given a reasonable opportunity of being heard.
(2) Section 274(2) stipulates obtaining prior approval of the Joint Commissioner by the income -
tax authorities mentioned in column (2) where the quantum of penalty exceeds the amount
specified in column (3).

S. Income-tax authority passing the penalty order Quantum of

No. penalty

(i) The Income-tax Officer > ` 10,000

(ii) The Assistant Commissioner or the Deputy Commissioner > ` 20,000

5 On account of introduction of ‘Block Assessment’ (Chapter XIV-B) vide Finance (No. 2) Act, 2024, where
search is initiated under section 132 on or after the 1.9.2024, penalty under section 271AAB would not be
levied after the said date.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.33

(3) Section 274(2A) empowers the Central Government to formulate a scheme 6, by notification
in the Official Gazette

(4) In order to give effect to the scheme so formulated, section 274(2B) empowers the Central
Government to direct, by notification in the Official Gazette, that any of the provisions of the
Income-tax Act, 1961 relating to jurisdiction and procedure for imposing penalty would not
apply or would apply with such exceptions, modifications and adaptations as may be
mentioned in the notification. Though such direction cannot be issued after 31.3.2022,
however, the Central Government may amend such direction by issuing notification.

(5) Every notification issued under section 274(2A)/(2B) has to be laid before each House of
Parliament as soon as may be after the notification is issued.

(6) An income-tax authority making an order imposing penalty under Chapter XXI has to send a
copy of such order to the Assessing Officer, unless he himself is the Assessing Officer.

6 Accordingly, the Central Government has notified Faceless Penalty Scheme,2021 which is available at
[Link]
 19.34 DIRECT TAX LAWS

19.2.7 TIME LIMIT FOR IMPOSITION OF PENALTY [SECTION 275]

1) No order imposing a penalty shall be passed after the expiry of six months from the end
of the quarter in which-
Time limit for passing penalty order Circumstances
(1) (2)
Proceedings, in the course of which Where the relevant assessment or other
action for the imposition of penalty has order is not the subject matter of an appeal
been initiated, are completed. under section 246 or 264A or 253., the
proceeding in which imposition of penalty has
been completed
Order of revision under section 263 or Where the relevant assessment or other
264 is passed. order is the subject matter of revision under
section 263 or 264.
Order of an appeal under section 246 or Where the relevant assessment or other
246A is received by the jurisdictional order is the subject matter of an appeal under
Principal Commissioner or section 246 or 246A and no further appeal
Commissioner. has been filed under section 253.
Order of an appeal under section 253 is Where the relevant assessment or other
received by the jurisdictional Principal order is the subject matter of an appeal under
Commissioner or Commissioner. section 253.
Notice for imposition of penalty is issued. Any other case

2) Where the relevant assessment or other order is the subject matter of an appeal under
section 246 or 246A or 253 or 260A or 261 or revision under section 263 or 264, the order
imposing or enhancing or reducing or cancelling penalty or dropping the proceedi ngs for the
imposition of penalty may be revised on the basis of assessment as revised by giving effect
to order passed under the said sections [Section 275(2)].
3) No order imposing or enhancing or reducing or cancelling penalty or dropping the
proceedings for the imposition of penalty shall be passed:
a) unless the assessee has been heard or has been given a reasonable opportunity of
being heard;
b) after the expiry of six months from end of the quarter in which the order passed
under section 246 or 246A or 253 or 260A or 261 is received by the jurisdictional
Principal Commissioner or Commissioner or the order of revision under section 263 or
264 is passed.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.35

4) The provisions of 274(2) shall apply to the order imposing or enhancing or reducing penalty
under section 275(2).
Note: Section 274(2) provides that for passing an order imposing penalty exceeding ` 10,000,
the Income-tax officer has to take the prior approval of the Joint Commissioner. Also, for
passing an order imposing penalty exceeding ` 20,000, the Assistant Commissioner or the
Deputy Commissioner should take the prior approval of the Joint Commissioner.
5) Following period shall be excluded from computing the period of limitation:
a) time taken in giving an opportunity to the assessee to be reheard under the proviso to
section 129;
b) period commencing on the date on which stay on proceeding for levy of penalty was
granted by an order or injunction of any court and ending on the date on which certified
copy of the order vacating the stay was received by the jurisdictional Principal
Commissioner or Commissioner.

19.3 OFFENCES AND PROSECUTION UNDER THE INCOME

TAX ACT
The punishable offences as well as the prosecution for such offences under the Income -tax Act,
1961 are discussed under Chapter XXII. The prosecution provisions are discussed hereinbelow-
Section Nature of default Rigorous Quantum of Fine
imprisonment
275A Contravention of order made under the Upto 2 Years (+) No limit specified
second proviso to sub-section (1) or fine
sub-section (3) of section 132
regarding search and seizure
275B Failure to afford the authorized officer Upto 2 years (+) No limit specified
the necessary facility to inspect the fine
books of account or other documents
as required under section 132(1)(iib)
276 Removal, concealment, transfer or Upto 2 years (+) No limit specified
delivery of property to thwart tax fine
recovery
276B Failure to pay to the credit of the 3 months to 7 years No limit specified
Central Government, tax deducted at (+) fine
source by a person as required by or
under the provisions of Chapter XVII-B.
 19.36 DIRECT TAX LAWS

If the payment, however, has been

made to the credit of the Central
Government on or before the time
prescribed for filing the statement
under section 200(3), no prosecution
would be attracted.
Failure to pay tax or ensure payment of
tax to the credit of the Central
Government as required by or under
- the proviso to section 194B
[winnings from lottery or
crossword puzzle] or
- the first proviso to section 194R(1)
[on benefits and perquisites in
respect of business or profession]
or
- the proviso to section 194S(1) [on
transfer of virtual digital assets] or
- section 194BA(2) [Winnings from
online games ].
Note – In all the four situations
mentioned above, the winnings/
benefit/ perquisite/ consideration for
transfer, as the case may be, is wholly
in kind or partly in cash and partly in
kind but the part in cash is not sufficient
to meet the TDS liability.
276BB Failure to pay to the Central 3 months to 7 years No limit specified
Government tax collected under (+) fine
section 206C.
However, the above provision may
not apply if the payment of tax
collected at source has been made
to the credit of the Central
Government on or before the time
prescribed for filing the statement
under section 206C(3).
276C(1) Wilful attempt to evade tax, penalty or Evaded No limit specified
interest chargeable or imposable or amount/Tax on
under reports his income under reported
income exceeding
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.37

₹ 25 lakh: 6 months
to 7 years (+) fine
Other cases: 3
months to 2 years
(+) fine
276C(2) Wilful attempt to evade payment of tax, 3 months to 2 years No limit specified
penalty or interest. (+) fine, at the
discretion of the
court.
276CC Wilful failure to furnish in due time a Evaded tax No limit specified
return of income u/s 139(1) or u/s exceeding ₹ 25
142(1)(i) or u/s 148. lakh : 6 months to 7
Note: If return of income u/s 139(1) is years (+) fine
furnished before expiry of the Other cases: 3
assessment year or an updated return months to 2 years
is furnished within the time specified (+) fine
under section 139(8A) or the tax
payable by a person, not being a
company, on the total income
determined on regular assessment, as
reduced by advance tax or self-
assessment tax, if any, paid before the
expiry of the assessment year, and any
TDS/TCS does not exceed
₹ 10,000 - No prosecution.
276CCC Wilful failure to furnish in due time a 3 months to 3 years No limit specified
return of income in search cases u/s (+) fine.
158BC(1)(a).
276D Wilful failure to produce accounts and Up to one year (+) No limit specified
documents under section 142(1)/ fine
142(2A)
277 False statements in verification. Evaded tax No limit specified
exceeding ` 25
lakh: 6 months to 7
years (+) fine
In other cases: 3
months to 2 years
(+) fine
 19.38 DIRECT TAX LAWS

277A Falsification of books or documents, Imprisonment of 3 No limit specified

etc. to induce or abet any person to months to 2 years
evade any tax, penalty or interest (+) fine
chargeable or imposable under the Act.
It is not necessary to prove that the
other person has actually evaded any
tax, penalty or interest chargeable or
imposable under the Act for the
purpose of establishing the charge
under this section.
278 Abetment of false return etc. (relating to Evaded tax No limit specified
any income chargeable to tax) exceeding ₹ 25
lakh: 6 months to 7
years (+) fine
In other cases: 3
months to 2 years
(+) fine
278A Second and subsequent offences 6 months to 7 years No limit specified
under section 276B, 276BB, 276C(1), for every
276CC, 277, 278. subsequent offence
(+) fine
280(1) Disclosure of particulars by public Up to 6 months (+) No limit specified
servants in contravention of section fine
138(2). Prosecution after previous
sanction of Central Government under
section 280(2).

Section 278AA provides that where a reasonable cause for the failure is proved, punishment shall
not be imposed for offences specified in sections 276B or 276BB.
For the purposes of offences and prosecutions, the following individuals will be deemed to be guilty
of the offence committed by the respective person:
Person Section Individual
Company 278B Every person in charge of affairs; Director, Manager,
Secretary and every officer who is guilty of offence
Firm 278B Partner
AOP/BOI 278B Members controlling the affairs
HUF 278C Karta or member either by acquiescence or negligence.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.39

Section 278B(3) provides that if an offence under the Act has been committed by a person being a
company, it shall be punished with fine. Every other person who was in charge of and was
responsible for the conduct of business of the company, or any director, manager, secretary or other
officer of the company (with whose consent or connivance or due to whose neglect the offence was
committed) would be liable for punishment of imprisonment and fine wherever so provided.

19.3.1 PRESUMPTION AS TO CULPABLE MENTAL STATE

[SECTION 278E]
(1) Onus of proof on accused - In any prosecution for any offence under this Act which requires
a culpable mental state on the part of the accused, the court shall presume the existence of
such mental state but it shall be a defence for the accused to prove the fact that he had no
such mental state with respect to the act charged as an offence in that prosecution.
It may be noted that penalty proceedings being quasi-
criminal in nature, it has been judicially held in the context
of various penalty and prosecution proceedings, that the
burden is on the department to establish that the assessee
concealed the particulars of his income or deliberately furnished inaccurate particulars
thereof and it is not enough for the revenue merely to show that a certain amount was
received by the assessee. Section 278E has clearly overruled this view and has sp ecifically
placed the burden of proof on the assessee.
It specifically provided that where any prosecution requires a culpable mental state (mens
rea) the court shall presume the existence of such mental state but the assessee is entitled
to prove that he had no such mental state with respect to the act charged with. Thus, the
burden to prove the non-existence of mens rea has been effectively placed on the assessee
in prosecution cases.
(2) Meaning of ‘Culpable mental state’ - Culpable mental state includes intention, motive or
knowledge of a fact or belief in, or reason to believe, a fact.
(3) Proof of fact - For the purposes of this section a fact is said to be proved only when the court
believes it to exist beyond reasonable doubt and not merely when its existence is established
by a preponderance of probability.
 19.40 DIRECT TAX LAWS

19.3.2 PROSECUTION TO BE MADE AT THE INSTANCE OF THE

PRINCIPAL CHIEF COMMISSIONER OR CHIEF COMMISSIONER OR
PRINCIPAL COMMISSIONER OR COMMISSIONER [SECTIONS 279
AND 279A]
(1) Prior sanction of higher authorities - Section 279(1) provides that the proceedings to punish
a person for an offence under sections 275A, 275B, 276, 276B, 276BB, 276C, 276CC, 276D,
277, 277A and 278 can be initiated only after previous sanction of the Principal Commissioner
or Commissioner or the Joint Commissioner (Appeals) or the Commissioner (Appeals) or the
appropriate authority. However, the Principal Chief Commissioner or the Chief Commissioner
or the Principal Director General or Director General may issue such instructions or directions
to the said authorities for institution of proceedings under section 279(1).
(2) Cases where prosecution cannot be initiated - Section 279(1A) provides that the
proceedings to punish a person for an offence under section 276C or 277 cannot be initiated
in relation to the assessment of an assessment year in respect of which the penalty imposed
or imposable on him under section 270A has been waived or reduced under section 273A.

(3) Compounding of offences - An offence may, either before or after the institution of
prosecution proceedings be compounded by the concerned authorities under section 279(2).
In order to provide better understanding with respect to the revised guidelines, the CBDT has
issued clarifications, vide [[Link]. 285/08/2014-IT(lnv.V/t63 dated 17.10.2024 and Circular
No. 4/2025 dated 17.3.2025, in the form of FAQs which are discussed below:
Revised Guidelines for Compounding of Offences along with FAQs
Before moving to these Guidelines, lets first understand what is compounding of offence as
included in the FAQs.

Q. What is compounding of offence?

Ans Compounding of an offence is a mechanism whereby the defaulter is reprieved of major legal
consequences by affording him an opportunity to pay certain sum of money to escape prosecution.
The specified offences can be compounded by the competent authority either before or after the
initiation of proceedings.

Q. Are there any offence(s) under Income-tax Act, 1961 which are not compoundable?
Ans All offence under the Income-tax Act, 1961 is compoundable in these revised guidelines.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.41

1. Scope of the Guidelines to prosecutions under Income-tax Act, 1961

These guidelines shall come into effect from the date of issuance i.e.,17 th October 2024 and applies
to all compounding applications filed after this date as well as to applications which have already
filed earlier but not yet disposed of.

Q. Whether revised guidelines are applicable on pending compounding applications? If yes,

whether applicants have to file a fresh application?
Ans: Yes, revised guidelines are applicable on the applications, pending before issuance of these
guidelines. The applicants whose applications were pending on 17.10.2024 are not required to file
a fresh application or pay any fresh application fees.

In case applications under earlier guidelines were rejected solely on account of curable defects,
fresh applications may also be filed again.
Curable defects are such as non-payment of outstanding tax, interest, penalty, or any other sum
related to the offence, filing of application in incorrect proforma, mention of incorrect assessment
year/financial year or section under which offence has been committed, non-payment or short
payment of compounding charges, non-submission of undertaking regarding withdrawal of appeals,
etc.
Applications rejected in the past on merits by the Competent Authority shall not be reconsidered
under these revised guidelines.

Q. Whether the applicant whose application was rejected in earlier guidelines on the ground
of being convicted is eligible to re-apply for compounding as per revised guidelines?
Ans: Yes, in case the rejection was solely on account of conviction, without examination of merits,
as per any of the earlier guidelines, such applicant can reapply in terms of revised guidelines.

2. Conditions for consideration of Compounding Application

Offences may be considered for compounding provided all the following conditions are satisfied:
(i) Compounding Application
An application for compounding is made to the Jurisdictional Principal Chief Commissioner/ Chief
Commissioner/ Principal Director General/ Director General of Income-tax, being the Competent
Authority, for compounding of the offence(s).
The compounding application may be filed for offence(s) pertaining to one financial year (in case of
taxpayers) or quarter (in case of tax deductors) or for multiple years/quarters. The compounding
 19.42 DIRECT TAX LAWS

application filed for multiple years/ quarters are referred to as “Consolidated Compounding
Application”.
If there are more than one rejected application under the previous Guidelines, one Consolidated
Compounding Application may be filed for all such previous applications.

Q. Whether applicant can withdraw a compounding application and file a new application?
Ans: The applicant can file a new single application or consolidated application after withdrawal of
earlier application(s). However, such new application shall be treated as a subsequent application
and higher compounding rate shall be applicable which is discussed later on.
Q. Whether applicant is required to file compounding application for all the offences together,
for which prosecution proceedings has been initiated?
Ans: No, the applicant may apply for one or multiple offences in an application. His application
cannot be rejected on the ground that he has not applied for particular offence for which notice for
prosecution has been issued and proceedings are under progress.
Q. Is there any limitation as to the number of times compounding applications can be filed by
a person?
Ans: No, there is no limitation on the number of times a person can file compounding application.
However, the Competent Authority may reject an application filed by a person on the ground of him
being a “habitual offender”.

(ii) Time limit for filing application

The compounding application or Consolidated Compounding Application may be filed suo -moto at
any time after the offence(s) is committed, irrespective of whether it comes to the notice of the
Department or not. The Compounding Application or the Consolidated Compounding Application
may also be filed after the launch of prosecution proceedings.

Q. Is there any time limit for filing of an application for compounding?

Ans: No, an application for compounding can be filed at any time after committing the offence,
regardless of whether the same has come to the notice of the department or prosecution proceedings
have been launched.

(iii) Compounding Application Fee

For Compounding Applications or the Consolidated Compounding Applications, filed on or after
17.10.2024, the applicant has to deposit non-refundable Compounding Application Fee of ` 25,000
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.43

for a single Compounding application (per application) and ` 50,000 for a consolidated
Compounding application (per such application).
The said fee is a non-refundable fee, but adjustable against applicable total compounding charges
decided by the Competent Authority, if any.

Q. Whether compounding application fee is adjustable against compounding charge payable?

Ans: Yes, compounding fee is adjustable but only against compounding charges payable for the
offence(s) sought to be compounded in the particular application. Cross application adjustment is
not allowed. However, if compounding application is rejected for any reasons, the application fees
shall neither be refundable nor adjustable against any subsequent application.
Q. Whether compounding is allowed if the application for such an offence was previously
rejected? If so, whether separate applications need to be filed for more than one application
rejected under the previous guidelines? How will the compounding application fees be
charged?

Ans: Yes, an applicant may apply for compounding of offence(s) through a single consolidated
application, if one or more applications had been rejected under previous guidelines.
However, the fresh application can only be filed if such rejection(s) were on account of curable
defects and no application is allowed to be filed for any of the rejection(s), made by the Competent
Authority, on merits with those particulars i.e. offence and relevant financial year.
Compounding application fees chargeable for a “consolidated compounding application” would be
charged in this case.

(iv) Payment of all taxes, interest & other sums relating to offence for which compounding
sought
All outstanding tax, interest (including interest u/s 220), penalty and any other sum due, relating to
the offence(s) for all relevant year(s) and/or quarter(s) for which compounding has been sought is
to be paid before making the Compounding Application or the Consolidated Compounding
Application, as the case may be.
However, if on verification by the Department, any related demand is found outstanding or is
considered payable, the same, on being intimated to the applicant, has to be paid (including interest
u/s 220) within 30 days of the intimation by the Department or such period (not exceeding three
months) allowed by the Competent Authority. The compounding application or the consolidated
compounding application, as the case may be, shall be considered valid only consequent to the
payment of all the demand pertaining to the offence(s) for respective years/quarters.
 19.44 DIRECT TAX LAWS

(v) Undertaking by the applicant

The applicant has to undertake to pay the Compounding charges within the stipulated timeframe.
(vi) Withdrawal of appeals
The person/applicant has to undertake to withdraw appeals filed by him, if any, related to the
offence(s) sought to be compounded. In case such an appeal has mixed grounds, one or more of
which may not be related to the offence(s) under consideration, an undertaking has to be given for
withdrawal of such grounds as are related to the offence to be compounded.

Q. Whether an applicant is required to withdraw appeal related to offence sought to be

compounded before filing a compounding application?
Ans: No such withdrawal is required. However, applicants shall undertake to withdraw appeals
including Writ petitions, if any, related to offences being compounded and in case where appeal has
mixed grounds, grounds of appeal related to the offence to be compounded.

(vii) Consolidation of offences

Any application for compounding of offence u/s 276B/276BB by an applicant for any period for a
particular TAN should cover all defaults constituting offence u/s 276B/276BB in respect of that TAN
for such period.
The total default on account of non-payment of TDS/TCS for a quarter shall be considered by
combining the defaults in all the statements filed by the TDS deductor, in respect of the relevant
quarter.
3. Revival of a defective application
Applications which do not fulfil any of the specified conditions or are not acceptable due to curable
defects such as
• Non-payment of outstanding tax, interest, penalty, or any other sum related to the offence;
• Application not filed in correct proforma;

• Applications filed for incorrect financial year or assessment year or under incorrect section,
etc.;
shall be treated as 'defective' under these guidelines and shall not be proceeded with.

However, such applications can be revived without additional payment of Compounding Application
Fee, provided the defects are cured within a period of one month from the date of intimation of the
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.45

defect(s). In case, the defect is not cured within time allowed, defective application will be returned
back to the applicant.
Any further application filed for the same purpose, will be considered as subsequent compounding
application and charges will be applicable.
4. Offences compoundable with the approval of higher authority
The Competent Authority, in the following cases, may compound only with the approval of Chairman,
CBDT.
(a) In case of an offence for which the applicant has been convicted with imprisonment for 2
years or more, with or without fine, by a court of law;
(b) In case of an offence which is related to another offence under any other law for which he
has been convicted with imprisonment for 2 years or more, with or without fine, by a court of
law;
(c) If the applicant, as per information available on the basis of an investigation conducted by
any Central or State Agency, has been found to be involved, in any manner, in anti -national
or terrorist activity. In such cases, the Competent Authority shall consult with relevant Agency
and seek inputs regarding the said activity and its implications, for the purpose of deciding it
as a deserving case and incorporate them while seeking approval;
(d) In the case of an applicant, being a person other than the main accused, where it is proved
that the applicant facilitated tax evasion through mechanisms such as use of entities for
laundering of money, generation of bogus invoices of sale/purchase without actual business,
by providing accommodation entries or in any other manner, as prescribed in section 277A;
(e) If the offence is directly related to an offence under the following Acts:
- the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015; or
- Prohibition of Benami Property Transactions Act,1988;
(f) In case of an offence under section 275A and/or 275B.

Q. Whether offence can be compounded where applicant has been convicted for
imprisonment for two years or more?
Ans: Yes, even if applicant has been convicted with imprisonment of two years or more for any
offence under Income-tax Act, 1961 or for an offence under any other law, which is related to offence
under the Income-tax Act, 1961, may apply for compounding. Such offence shall, however, be
compoundable only with the approval of Chairman, CBDT.
 19.46 DIRECT TAX LAWS

Q. Whether cases involving other agencies such as ED /CBI can be compounded?

Ans: Yes, such offence(s) may be compounded by the competent authority if applicant is not found
to be involved in anti-national or terrorist activity. However, if the applicant is found to be involved
in such activity, the offence shall be compounded only with the approval of Chairman, CBDT.

5. Authority Competent to Compound an Offence

The jurisdictional Principal Chief Commissioner/ Chief Commissioner/ Principal Director General/
Director General of Income-tax is the Competent Authority for compounding of offences.
If a person has committed an offence u/s 276B/276BB for non-payment of TDS/TCS in respect of
both resident and non-resident payees/ collectees then the jurisdiction over such person normally
lies with more than one jurisdictional charge. In such case, the Principal Chief Commissioner/ Chief
Commissioner/ Principal Director General/ Director General of Income-tax in whose jurisdiction
compounding application has been filed will be the Competent Authority. However, in case the
applicant files applications in more than one jurisdictional charge, the Competent Authority will be
the jurisdictional authority where the quantum of TDS default is higher. All other applications shall
be transferred to such Competent Authority.
In case an applicant files Compounding application for offences committed u/s 276B/276BB, in
respect of two or more TANs falling in two or more jurisdictions, the jurisdictional authority where
the quantum of TDS default is higher shall be the Competent Authority. All other applications shall
be transferred to such Competent Authority.
6. Compounding Procedure
Report from Assessing Officer/Assistant or Deputy Director - On receipt of the Compounding
application, the Competent Authority has to obtain a report from the Assessing Officer/Assistant or Deputy
Director concerned who has to submit it promptly to the Competent Authority, through proper channel.
Time to pass application order if application is not acceptable - In cases where, the
compounding application is not found to be acceptable, then the Competent Authority shall dispose
of such application through a speaking order. Such order may be passed within two months from
the end of the month of receipt of the application as far as possible.
Time to pass application order if application is acceptable - In cases where, the compounding
application is found to be acceptable, then the Competent Authority has to intimate the applicant
accordingly, along with the compounding charges payable and other pending liabilities, if any. Such
intimation may be issued within 2 months from the end of the month of receipt of the application as
far as possible.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.47

Time limit for payment for compounding charges - The Competent Authority shall, while
intimating the amount of compounding charges to the applicant, require him to pay the same within
1 month from the end of the month of receipt of such intimation.
Extension of time limit for payment of compounding charges - On written request of the
applicant for further extension of time period for payment of compounding charges, the Competent
Authority, under exceptional circumstances, may extend this period up to six months. Extension
beyond 6 months and upto 12 months shall not be permissible except with the prior approval in
writing of the Principal Chief Commissioner of Income Tax of the Region concerned. Extension
beyond 12 months and upto 24 months from the end of month shall not be permissible except with
the prior approval of Chairman, CBDT or a Member, CBDT authorized by the Chairman, CBDT on a
proposal of the Competent Authority concerned. No extension shall be allowed after 24 months from
the end of the month of receipt of such intimation of compounding charges.
Rejection of application on non payment of compounding charges - Where compounding
charge is not paid within the time allowed/extended, the application will be rejected and prosecution
proceedings shall be initiated, if not already done so.
The complainant shall serve a copy of the prosecution complaint to each accused within 15 days of
filing complaint to allow prompt filing of compounding application.
In all cases where prosecution proceedings have been instituted, the order of acceptance/rejection
of application of compounding has to be brought to the notice of the Court immediately through
prosecution counsel, where the said prosecution proceedings are pending before the Court.

Time to pass compounding order - Where the payment of compounding charges is made within
time allowed/extended, the Competent Authority shall pass the compounding order within 1 month
from the end of the month of payment of total compounding charges .
In case proceedings to impose penalty related to the offence sought to be compounded are pending
at the time of filing of the compounding application, such proceedings should be concluded
expeditiously and the demand related to penalty, if any, recovered b efore issuing the compounding
order.
Taxpayers, particularly NRIs, avoid opting for compounding due to a misconception that it constitutes
an admission of offences, which could affect their reporting obligations at various statutory and
international forums. To address this misconception and encourage taxpayers to seek compounding,
it is directed that the Competent Authority has to include the following paragraph in the compounding
order issued under section 279(2):
 19.48 DIRECT TAX LAWS

"This compounding order is intended to resolve the offence under section 279(2) of the Act
and should not be construed as an admission of the offence(s) by the applicant."
The timelines for processing the compounding applications by the Competent Authority prescribed
in these Guidelines, are administrative and do not prescribe a limitation period for disposal of the
compounding application.

Q. Whether time for payment of compounding charges may be extended beyond 24 months?
Ans: No, beyond 24 months extension is not allowable and the application shall be rejected followed
by initiation of prosecution proceedings, if not already initiated. However, the applicant can file new
application for the same particulars which shall be treated as a subsequent application for the
purpose of determination of compounding charges.
Q. As per the revised guidelines, the payment period for compounding charges may be
extended up to 24 months only from the end of the month in which the compounding charges
were intimated. For pending applications where the payment initiation was made befo re the
issuance of the revised guidelines but not fully paid, how will the period of 24 months be
calculated? Additionally, will such applications require approval for extension?
Ans: For applications pending as on 17.10.2024, wherein compounding charges were not fully paid
within time allowed as per earlier Guidelines or wherein time allowed had not elapsed, the period of
24 months will commence from the end of the month of issuance of these guidelines i.e., October
2024. The extension of timelines will require approval as prescribed in the Guidelines.
Q. Are extension for payment of compounding charges subject to interest or additional
charges?
Ans: No, interest or additional charges are not applicable on extension allowable under the
guidelines. Further, for cases pending as on date of issuance of revised guidelines, additional
compounding charge (chargeable under previous guidelines) shall not be applicable and
compounding charge shall be determined as per these revised guidelines.

7. Compounding Charges
For the purpose of computation of the compounding charges, the word "tax" means tax including
surcharge and any cess, by whatever name called, as applicable. However, interest shall not be
included in 'tax' to be considered for computation of Compounding Charge.
The compounding charges for the 'first' compounding application or consolidated compounding
application by a person has to be computed, for each offence disclosed in the application.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.49

Further, any application filed subsequent to the first application, shall be counted as second, third
and fourth compounding application or consolidated compounding application and so on.
Furthermore, if a person applied for compounding of an offence(s), the type of which was applied
for earlier, then compounding charges for subsequent offence(s) shall be 1.2 times, 1.4 times, 1.6
times, and so on of the compounding charges for the second, third, fourth, etc. time of such offence.
If a subsequent application(s) includes any offence(s), the type of which had not been disclosed in
any of the earlier applications, the compounding charges for the said offence(s) shall be computed
only as per the charges given in these Guidelines.

Where the compounding application(s) had been filed in accordance with prior guidelines and are
either pending or were rejected or have been compounded, all such applications, filed prior to
issuance of these guidelines, shall together be considered as 'first' compounding application.
If the application is made beyond 12 months from the end of the month in which the prosecution
complaint is filed, the compounding charges shall be increased by 50% of the amount calculated
above.

Q. What will be the date of applications in case of carried forwarded applications - original
date of application or date of issue of revised guidelines?

Ans: The application pending as on 17.10.2024 shall be governed under these revised guidelines.
However, date of such pending application shall be the original date of application for any purpose.
Q. How shall the compounding charges be calculated for applications pending before
issuance of these guidelines?
Ans: The compounding charges for pending application are subject to redetermination as per the
revised guidelines. All pending applications, whether for single or multiple years/quarters, shall be
treated as first compounding application and compounding charge shall be re-computed for each
offence disclosed in the application.
Q. If a new consolidated application includes a year for which application was filed earlier
and then withdrawn, whether partial compounding charges paid for such year for which
application is withdrawn can be adjusted against total compounding charges tow ards
consolidated application?
Ans: No. Partial compounding charges paid for the year for which application is withdrawn can be
adjusted in new consolidated application only towards the offence and particular year for which
payment was made.
 19.50 DIRECT TAX LAWS

Q. An applicant has filed compounding applications under earlier guidelines, two of which
were rejected on account of curable defects, two were compounded and three are pending as
on issuance of this guideline. How should the applicant file a compounding a pplication after
issuance of these guidelines and how shall the new application be treated?
Ans: No action is pending for the applications which have been compounded. A consolidated
application may be filed for all applications which were rejected (on account of curable defects) and
no fresh application is required to be filed for pending applications.
All pending applications, whether for single or multiple years/quarters, shall be treated as first
compounding application and compounding charge shall be re-computed for each offence disclosed
in the application. The fresh consolidated application for rejected applications will be considered as
second application. Accordingly, the application filed after issuance of these guidelines shall be
treated as subsequent application (2 nd application) and compounding charge shall be re-computed
for each offence disclosed in the application.
Q. How the rate of compounding charges will be determined in subsequent application(s)?
Ans: The rate of compounding charge is based on sequence of application as well as offence applied
for. If a subsequent application includes an offence which has also been included in earlier
application(s), it shall be liable for higher rate i.e. 1.2 times, 1.4 times, 1.6 times and so on;
irrespective of the fact that the offence and year of the offence are same in subsequent application
and earlier application was rejected or pending or even compounded.
However, if subsequent application includes offence(s) which were not included in any compounding
application filed earlier (rejected or compounded or pending) and the offence has been applied for
first time, the compounding charge for such offence(s) shall be computed at normal rate.

Illustration - An applicant has filed different applications on different dates to compound different
offences which will be considered as below:
Scenario Clarification
Application Status Offence (FY) Sequence of Offence included Rate
Date Application in Earlier
Application?
15/01/2021 Compounded 276B NA NA NA
(2012-13)
17/10/2022 Compounded 276C(1) (2018-19) NA NA NA
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.51

18/08/2023 Rejected 276B NA NA NA

(2013-14)
17/09/2024 Pending 276D First (No fresh NA Normal rate
(2019-20) application
required)
01/11/2025 Single 276B Second Yes, in application 1.2 times of
application (for (2013-14) dated 15/01/2021 normal rate
earlier and 18/8/2023
application (Considered as
rejected) 2 time)*
nd

18/12/2025 Consolidated 276B Third Yes, in application 1.4 times of

application (2017-18) dated 15/01/2021, normal rate
18/08/2023 and
01/11/2025
(3rd time)#

276C(1) (2019-20) Yes, in application 1.2 times of

dated 17/10/2022 normal rate
(2nd time)
275A No, first time Normal rate
(2023-24) applied for
(1st time)
* The applicant has opted for compounding for section 276B offence for the third time in third application
and accordingly compounding charges at 1.4 times of normal rate should apply. However, since both
applications were filed under previous guidelines, all such applications will be cumulatively considered
as “first” application. Thus, offence under first two applications will be considered as clubbed together
for calculation of compounding charges.
# The applicant has opted for compounding for section 276B offence for the fourth time in fourth
application and accordingly compounding charges at 1.6 times of normal rate should apply. However,
since first two applications were filed under previous guidelines, both these applications will be
cumulatively considered as “first” application. Application filed on 01.11.202 5 will be considered as
“second” and this application will be considered as “third”. Thus, offence under first two applications
will be considered as clubbed together for calculation of compounding charges.
 19.52 DIRECT TAX LAWS

Q. Whether compounding application may be filed after launch of the prosecution? If yes,
how the compounding charge will be determined?
Ans: Yes. If application is filed within 12 months from end of the month in which prosecution
complaint is filed, the compounding charge will be determined as per the guidelines as illustrated in
above question. For applications filed after 12 months, the compounding charge so calculated shall
be increased by 50% as per the guidelines.

Illustration: Assessee had made TDS default of ` 10,00,000 for 3 months during F.Y. 2019-20.
The prosecution has been launched on 01/04/2022 u/s 276B of the Act. Normal compounding
charges in this case, suppose is ` 45,000.
Scenario Case Date of Time Rate Compounding
Application Elapsed charges
Case-1 12/10/2022 Less than 12 Normal ` 45,000
(Pending as on months compounding
Scenario 1 17/10/2024) charges
(No earlier
application Case-2 31/10/2025 More than Increase by ` 67,500
rejected) 12 months 50% of normal (1.5 x ` 45,000)
compounding
charges
12/10/2022 Less than 12 NA (Application NA
Scenario 2 (Rejected) months rejected)
(First
application 31/10/2025 More than 1.2 times of ` 81,000
rejected, Cace-3 12 months normal [1.5 x (1.2 x
revised compounding ` 45,000)]
application charges
filed) increased by
50%

8. Co-accused and Abettor- Section 278B (Offences by companies) and Section 278C
(Offences by Hindu undivided families)
Where an offence under this Act has been committed by a Company or HUF as defined in section
278B or 278C, an application for compounding may be filed separately or conjointly by the main
accused i.e., Company, or HUF and/or any of the person(s) deemed to be guilty of the offence under
section 278B or 278C (Co-accused) which are referred as “Co-accused” for the purpose of
compounding.
In cases of offences by a company or HUF, the main accused or co-accused may apply separately
or conjointly. On payment of compounding charges for the offence, by any one of them separately
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.53

or jointly, the Competent Authority shall compound the offences of the main accused as well as all
the co-accused, vide an order u/s 279(2).
In case liability of a company for an offence committed prior to the commencement of the corporate
insolvency resolution process ceases due to the provisions of section 32A of the Insolvency
Bankruptcy Code (IBC), the prosecution proceedings against the co -accused can still continue. In
such a case, the compounding application and payment of compounding charges can be made by
the co-accused and/or the main accused company.

Q. Whether co-accused can file compounding application under revised guideline?

Ans: Yes, co-accused may apply for compounding of offence separately or conjointly.
Q. Where the compounding application of the co-accused was rejected earlier on the ground
that the main accused has not filed for compounding, whether such applicants will be eligible
for filing again? If yes, whether such application shall be a subsequent application?
Ans: Yes, other than the case where application was rejected in past on merit, any of the co -accused
applicant is eligible to file compounding application again separately or conjointly. Such application
shall be treated as a subsequent application for the purpose of determination of compounding
charges.

Q. Similarly, where the compounding application of the main accused was rejected earlier on
the ground that the co-accused has not filed for compounding or given undertaking, whether
such applicants will be eligible for filing again? If yes, whether such a pplication shall be a
subsequent application?
Ans: Yes, other than the case where application was rejected in past on merit, the main accused
applicant is eligible to file compounding application again separately or conjointly with the co -
accused. Such application shall be a subsequent application for the purpose of determination of
compounding charges.
Q. If any application filed by co-accused or accused under previous guidelines is pending,
whether they are required to file a fresh application under revised guidelines?
Ans: No. All such pending applications will be clubbed together and none of the applicants (main
accused and/or co-accused) are required to file a fresh application under revised guidelines. This
consolidated application shall be considered as first application for the purpose of determination of
compounding charges.
 19.54 DIRECT TAX LAWS

Q. If application is filed by main accused or co-accused or by both of them co-jointly, whether

separate compounding fee shall be applicable for co-accused or not?
Ans: No separate compounding fee for co-accused shall be payable, irrespective of the fact that
application has been filed by main accused or co-accused or by both of them co-jointly. Only
compounding charge(s) for the concerned offence(s) shall be payable. Once such payment is made
by the applicant being main accused or co-accused or both of them conjointly, the Competent
Authority shall compound concerned offences for main accused as well as all the co -accused.
Q. Whether any person other than mam accused or co-accused can file compounding
application for compounding of an offence of company or HUF?

Ans: No, person other than main accused or co-accused cannot file compounding application. The
applicant is required to disclose his status as main accused or co-accused in the compounding
application.

Q. Can co-accused furnish an undertaking for withdrawal of appeals as required in of the

guidelines, on behalf of the main accused?
Ans: No, co-accused cannot furnish undertaking for withdrawal of appeal on behalf of the main
accused. Such undertaking shall be furnished by the main accused only which must be attached
with the application if application has been filed by the co-accused, since offences of both main
accused and co-accused are being compounded.
Q. If application has been filed by only main accused or co-accused, in such case against
whom name the compounding order shall be passed?
Ans: The compounding order u/s 279(2) shall be passed in the name of person(s) who have applied
for compounding. If co-accused has applied, then order shall include the name of main accused
also. Further, in a case where main accused has applied and co-accused has been identified, the
order shall be passed in the name of main accused and co-accused.

(4) Admissibility of statement made or books of account produced as evidence - If a person

is proceeded against under section 279(1), then a statement made or account or documents
produced before any authority under Act shall not be inadmissible as evidence for purpose
of the prosecution proceedings merely on the ground that such account or document was
produced or statement was made in the belief that the penalty imposed or imposable under
section 270A would be reduced or waived under section 273A or that the offence would be
compounded.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.55

(5) Scheme to be formulated by Central Government - The Central Government is empowered

to make a scheme, by notification in the Official Gazette, for the purposes of granting sanction
under section 279(1) or compounding under section 279(2), so as to impart greater efficiency,
transparency and accountability by—
(a) eliminating the interface between the income-tax authority and the assessee or any
other person to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional
specialisation;

(c) introducing a team-based sanction to proceed against, or for compounding of, an

offence, with dynamic jurisdiction.
In order to give effect to such scheme, the Central Government may, by notification in the
Official Gazette, direct that any of the provisions of the Income-tax Act, 1961 shall not apply
or shall apply with such exceptions, modifications and adaptations as may be specified in the
notification. However, no such direction can be issued after 31st March, 2022. Further, every
such notification issued has to be laid before each House of Parliament, as soon as may be
after the notification is issued.
(6) Non-cognizable offences - Section 279A provides that offences punishable under sections
276B, 276C, 276CC, 277 and 278 shall be deemed to be non-cognizable offences.

19.3.3 IMMUNITY FROM IMPOSITION OF PENALTY AND PROSECUTION

[SECTION 270AA]
(1) Application to be made by the assessee to the Assessing Officer for grant of immunity from
penalty and prosecution [Section 270AA(1)]
An assessee may make an application to the Assessing
Officer for grant of immunity from imposition of penalty
under section 270A and initiation of proceedings under
section 276C or section 276CC, if he -
(i) pays the tax and interest payable as per the order of assessment under section
143(3) or reassessment under section 147, within the period specified in such notice
of demand; and
(ii) does not prefer an appeal against such assessment/reassessment order.
 19.56 DIRECT TAX LAWS

(2) Time limit for making application [Section 270AA(2)]

The assessee can make such application in the prescribed form and verified in the prescribed
manner within one month from the end of the month in which the order of assessment or
reassessment is received
(3) Circumstances in which the Assessing Officer cannot grant immunity from penalty and
prosecution [Section 270AA(3)]
The Assessing Officer shall grant immunity from initiation of penalty under section 270A and
prosecution under section 276C or section 276CC, on fulfilment of the conditions specified in
(1) above, and after the expiry of period of filing appeal as specifi ed in section 249(2)(b).

However, immunity shall be granted by the Assessing Officer only if the penalty proceedings
u/s 270A have not been initiated on account of the following, namely:—
(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of

account;
(c) claim of expenditure not substantiated by any
evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in the books of account having a bearing on total income; or
(f) failure to report any international transaction or any transaction deemed to be an
international transaction or any specified domestic transaction to which the provisions
of Chapter X apply.
(4) Time limit for passing order accepting or rejecting application for immunity from
penalty and prosecution [Section 270AA(4)]
The Assessing Officer shall pass an order accepting or
rejecting the application for immunity from penalty under
section 270A or prosecution under section 276C or
section 276CC within a period of three months from
the end of the month in which such application is
received. However, in the interest of natural justice, no order rejecting the application shall
be passed by the Assessing Officer unless the assessee has been given an opportunity
of being heard.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.57

(5) Finality of order passed by the Assessing Officer under section 270AA(4) [Section
270AA(5)]
The order of the Assessing Officer passed under section 270AA(4) accepting or rejecting the
application made by the assessee for immunity from penalty under section 270A or
prosecution under section 276C or section 276CC shall be final.
(6) Order of assessment/reassessment, in respect of which application for immunity is
accepted, is neither appealable before the Commissioner (Appeals) nor can the same
be admitted by the Commissioner for revision under section 264 [Section 270AA(6)]
No appeal under section 246 or section 246A or an application for revision under section 264
shall be admissible against the order of assessment or reassessment referred to in section
270AA(1)(a), in a case where an order under section 270AA(4) has been made accepting the
application.
(7) Exclusion of period when application for immunity is pending before Assessing Officer
from the time limit for filing of appeal before the Commissioner (Appeals), in a case
where such application is rejected [Second Proviso to section 249(2)(b)]
As per section 249(2)(b), an appeal before the Commissioner (Appeals) is to be made within
30 days of the receipt of the notice of demand relating to an assessment or penalty, where
the appeal relates to such assessment or penalty.

In a case where the assessee makes an application under section 270AA seeking immunity
from penalty, then, the following period has to be excluded for calculation of the aforesaid 30
days period –
Exclusion of period
beginning from ending with
the date on which application under section the date on which the order rejecting the
270AA for immunity from penalty under application is served on the assessee.
section 270A is made

19.4 OVERVIEW OF THE BLACK MONEY & IMPOSITION OF TAX LAW

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, passed
on 26.5.2015, provides for stringent taxation of any undisclosed income in relation to foreign income
and assets. This new law has been formulated to act as a strong deterrent and curb the menace of
black money stashed away abroad by Indians. This law is effective from A.Y.2016-17, unless
otherwise provided in any section of this Act and extends to the whole of India.
 19.58 DIRECT TAX LAWS

19.4.1 BASIS OF CHARGE [CHAPTER II – SECTIONS 3 TO 5]

(i) Charge of tax [Section 3]
(A) Rate of tax [Section 3(1)] - Every assessee would be liable to tax@30% in respect of
his undisclosed foreign income and asset of the previous year.

However, an undisclosed asset located outside

India shall be charged to tax on its value in the
previous year in which such asset comes to the notice
of the Assessing Officer.
Meaning of certain terms:
Term Section Meaning
Undisclosed 2(12) The total amount of undisclosed income of an
foreign assessee from a source located outside India and the
income and value of an undisclosed asset located outside India,
asset referred to in section 4, and computed in the manner
laid down in section 5
Undisclosed 2(11) An asset (including financial interest in an entity)
asset located located outside India,
outside India
- held by the assessee in his name or
- in respect of which he is a beneficial owner, and
- he has no explanation about the source of
investment in such asset or the explanation
given by him is in the opinion of the Assessing
Officer unsatisfactory.
Assessee 2(2) A person,—
(a) being a resident in India within the meaning of
section 6 of the Income-tax Act, 1961 in the
previous year; or
(b) being a non-resident or not ordinarily resident
in India within the meaning of section 6(6) of the
Income-tax Act, 1961 in the previous year, who
was resident in India either in the previous year
to which the income referred to in section 4
relates; or in the previous year in which the
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.59

undisclosed asset located outside India was

acquired:
However, the previous year, in case of acquisition of
undisclosed asset outside India, shall be determined
without giving effect to the provisions of section
72(c) which states that where any asset has been
acquired or made prior to commencement of this Act,
and no declaration in respect of such asset is made
under Chapter VI (Tax Compliance for Undisclosed
Foreign Income and Assets), such asset shall be
deemed to have been acquired or made in the year in
which a notice under section 10 is issued by the
Assessing Officer and the provisions of this Act would
apply accordingly
In effect, it has been clarified that a person would be
an assessee, if he is resident in the previous year in
which the undisclosed asset located outside India was
actually acquired by him and not the year in which
notice under section 10 is issued by the Assessing
Officer.
Previous year 2(9) Circumstance Period
Beginning Ending with
with
a In case of a The date of The date of closure
newly set up setting up of business or 31st
business of a March following the
business date of setting up
of business,
whichever is
earlier.
b Where a new The date The date of closure
source of on which of business or
income comes the new 31st March
into existence source following the date
comes into on which such new
existence source comes into
existence,
whichever is
earlier.
c In case of 1st day of The date of
discontinuance the FY discontinuance of
 19.60 DIRECT TAX LAWS

of business or business [other

dissolution/ than business
liquidation referred to in (b)
above] or
dissolution of an
unincorporated
body or liquidation
of a company, as
the case may be.
d In any other 1st April of 31st March
case the following. (i.e., a
relevant period of 12
year months
commencing from
1st April and
ending on
31st March)

(B) Relevant previous year of chargeability to tax

[Proviso to section 3(1)] - Undisclosed asset
located outside India to be charged to tax on its value
in the previous year in which the asset comes to the
notice of the Assessing Officer.
(C) Value of an undisclosed asset [Section 3(2)] - The fair market value of an asset
(including financial interest in any entity) determined in the prescribed manner as laid down
in Rule 3 of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax
Rules, 2015, would be the value of an undisclosed asset. The following table gives the
manner of determination of fair market value of different assets -
Asset Fair market value as per Rule 3(1)
(a) Bullion, Higher of –
jewellery or
(i) its cost of acquisition; and
precious stone
(ii) the price that the bullion, jewellery or precious
stone shall ordinarily fetch if sold in the open
market on the valuation date.
For this purpose, the assessee may obtain a
report from a valuer recognised by the
Government of a country or specified territory
outside India or any of its agencies for the purpose
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.61

of valuation of bullion, jewellery or precious stone

under any regulation or law.
(b) Archaeological Higher of -
collections,
(i) Cost of acquisition; and
drawings,
paintings, (ii) the price that the artistic work shall ordinarily fetch
sculptures or if sold in the open market on the valuation date for
any work of art which the assessee may obtain a report from a
(artistic work) valuer recognised by the Government of a country
or specified territory outside India or any of its
agencies for the purpose of valuation of artistic
work under any regulation or law;
(c)(I) Quoted Higher of –
Shares and
(i) cost of acquisition; and
securities
(ii) the price as determined in the following manner,
namely:
(A) the average of the lowest and highest price
of such shares and securities quoted on any
established securities market on the
valuation date; or
(B) where on the valuation date there is no
trading in such shares and securities on any
established securities market, average of the
lowest and highest price of such shares and
securities on any established securities
market on a date immediately preceding the
valuation date when such shares and
securities were traded on such securities
market;
(c)(II) Unquoted Higher of –
shares and
(i) Cost of acquisition; and
securities
(ii) The value, on the valuation date, of such equity
shares as determined in the following manner,
namely:—
the fair market value of unquoted equity shares =
( A + B − L )  PV
PE
19.62 DIRECT TAX LAWS

Where,
A book value of all the assets (other than bullion,
jewellery, precious stone, artistic work, shares,
securities and immovable property)
minus
(i) any amount of income-tax paid, if any, less
the amount of income-tax refund claimed,
if any, and
(ii) any amount shown as asset including the
unamortised amount of deferred
expenditure which does not represent the
value of any asset;
B fair market value of bullion, jewellery, precious
stone, artistic work, shares, securities and
immovable property as determined in the
manner provided in this rule
L book value of liabilities, but not including the
following amounts, namely:
(i) the paid-up capital in respect of equity
shares;
(ii) the amount set apart for payment of
dividends on preference shares and
equity shares;
(iii) reserves and surplus, by whatever name
called, even if the resulting figure is
negative, other than those set apart
towards depreciation
(iv) any amount representing provision for
taxation, other than amount of income-
tax paid, if any, less the amount of
income-tax claimed as refund, if any, to
the extent of the excess over the tax
payable with reference to the book profits
in accordance with the law applicable
thereto;
(v) any amount representing provisions
made for meeting liabilities, other than
ascertained liabilities;
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.63

(vi) any amount representing contingent

liabilities other than arrears of dividends
payable in respect of cumulative
preference shares;
PE total amount of paid-up equity share capital as
shown in the balance sheet;
PV the paid-up value of such equity shares
(c)(III) Unquoted Higher of,—
share and
(i) its cost of acquisition; and
security other
than equity (ii) the price that the share or security shall ordinarily
share in a fetch if sold in the open market on the valuation
company date for which the assessee may obtain a report
from a valuer recognised by the Government of a
country or specified territory outside India or any
of its agencies for the purpose of valuation of
share and security under any regulation or law
(d) Immovable Higher of,—
property
(i) its cost of acquisition; and
(ii) the price that the property shall ordinarily fetch if
sold in the open market on the valuation date for
which the assessee may obtain a valuation report
from a valuer recognised by the Government of a
country or specified territory outside India in which
the property is located or any of its agencies for
the purpose of valuation of immovable property
under any regulation or law
(e) An account (I) the sum of all the deposits made in the account
with a bank with the bank since the date of opening of the
account; or
(II) where a declaration of such account has been
made under Chapter VI and the value of the
account as computed under sub-clause (I) has
been charged to tax and penalty under that
Chapter, the sum of all the deposits made in the
account with the bank since the date of such
declaration.
However, where any deposit is made from the
proceeds of any withdrawal from the account,
 19.64 DIRECT TAX LAWS

such deposit shall not be taken into consideration

while computing the value of the account
(f) & value of an The net asset of the firm, AOP or LLP on the valuation
(g) interest of a date shall first be determined.
person in a
Thereafter, the portion of the net wealth of the firm,
partnership
AOP or LLP as is equal to the amount of its capital shall
firm or in an
be allocated among its partners or members in the
AOP or a LLP
proportion in which capital has been contributed by
of which he is
them.
a member
The residue of the net asset shall be allocated among
the partners or members in the following manner:
Circumstance Manner of allocation
In the event of In accordance with the
dissolution of the agreement of partnership or
firm or AOP association for distribution of
assets
In the absence of in the proportion in which the
such agreement for partners or members are
distribution of assets entitled to share profits
on dissolution
The sum total of the amount so allocated to a partner
or member shall be treated as the value of the interest
of that partner or member in the partnership or
association.
Net asset of the firm, AOP or LLP shall be (A + B - L),
determined in the manner specified in C(II) above.
(h) Any other Higher of –
asset
(I) its cost of acquisition or the amount invested; and
(II) the price that the asset would fetch if sold in the
open market on the valuation date in an arm's-
length transaction.

FMV of an asset (other than bank account) transferred before the valuation date [Rule 3(2)]:
Where an asset (other than a bank account) was transferred before the valuation date, the
FMV of such asset shall be higher of its cost of acquisition and the sale price. This is
notwithstanding the valuation rules given in Rule 3(1),
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.65

However, where such asset was transferred without consideration or for inadequate
consideration before the valuation date, the FMV of the asset shall be higher of its cost of
acquisition and the FMV on the date of transfer.
FMV, in a case where a new asset is acquired out of consideration received on account
of transfer of an old asset or withdrawal from a bank account [Rule 3(3)]:
In such a case, the fair market value of the old asset or the bank account, as the case may
be, determined in accordance with Rule 3(1) and Rule 3(2), shall be reduced by the amount
of the consideration invested in the new asset.

Example
House A located in a country outside India was bought in 1995 for ` 15 lakh. It was sold in
2000 for ` 22 lakh. This amount was deposited in a bank account in that country. In the year
2001 another House B was purchased for ` 35 lakh. The investment in House B was made
through withdrawal from the bank account in the foreign country. House B has not been
transferred before the valuation date and its value on the valuation date is ` 48 lakhs.
Assuming that the value of foreign bank account as computed under Rule 3(1)(e) is ` 60
lakhs, the fair market value (FMV) of the assets would be computed in the following manner:
FMV of House A = ` 22 lakh (being higher of ` 15 lakh and ` 22 lakh) - ` 22 lakh (invested
in foreign bank account) = Nil
FMV of Foreign Bank account = ` 60 lakh - ` 35 lakh (invested in House B) = ` 25 lakh
FMV of House B = Higher of ` 35 lakh and ` 48 lakh = ` 48 lakh

Rate of conversion of currency used to determine FMV of an asset [Rule 3(4) & 3(5)] :
The fair market value of an asset determined in a currency which is one of the permitted
currencies designated by the RBI under the Foreign Exchange Management Regulations, has
to be converted into Indian currency as per the reference rate of the RBI on the date of
valuation.
Where the FMV of an asset is determined in a
currency other than one of the permitted currencies
designated by the RBI, then, such value shall be
converted into United States Dollar on the date of valuation as per the rate specified by the
Central Bank of the country or jurisdiction in which the asset is located. Such value in United
States Dollar shall be converted into Indian currency as per the reference rate of the RBI on
the date of valuation:
 19.66 DIRECT TAX LAWS

However, where the Central Bank of the country or jurisdiction in which the asset is located
does not specify the rate of conversion from its local currency to United States Dollar, then,
such rate shall be the one as specified by any other bank regulated under the laws of that
country or jurisdiction.
Meaning of certain terms [Explanation 1 to Rule 3]
Term Meaning
(a) Established securities An exchange that is officially recognised and
market supervised by a Governmental entity in which the
market is located and that has a meaningful annual
value of shares traded on the exchange
(b) Meaningful annual value With respect to an exchange, it means it has an annual
of shares traded on the value of shares traded on the exchange (or a
exchange predecessor exchange) exceeding one billion United
States Dollar during each of the three calendar years
immediately preceding the calendar year in which the
determination is being made.
(c) Meaningful volume of With respect to each class of shares, it means,-
trading on an on-going (i) trades in each such class are effected, other than
basis in de minimis quantities, on one or more
established securities markets on at least 60
business days during the prior calendar year; and
(ii) the aggregate number of shares in each such
class that are traded on such market or markets
during the prior year are at least 10% of the
average number of shares outstanding in that
class during the prior calendar year
(d) Quoted share or security The share or security which has a meaningful volume
of trading on an ongoing basis on an established
securities market and is regularly quoted by dealers
where they actively do offer to, and in fact do, purchase
the share from, and sell the share to, customers who
are not related to the dealer in the ordinary course of a
business.
(e) Unquoted share and In relation to share or security, means share or security
security which is not a quoted share or security.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.67

Relevant Date for determination of market value and conversion of currency

[Explanation 2 to Rule 3]
For the purpose of determining the market value as on
valuation date referred to in Rule 3(1), and for the purpose of
conversion into Indian currency or conversion of foreign
currency into United States Dollar and thereafter into Indian currency, the date would be —
Case Date
(a) in respect of asset declared under section 59 of the 1st July, 2015
Act
(b) in any other case 1st April of the previous year

(ii) Scope of total undisclosed foreign income and asset [Section 4]

(a) Total undisclosed foreign income and asset of any previous year would be -
(1) the income from a source located outside India which has not been disclosed
in the return of income filed under the Income-tax Act, 1961 on or before the
due u/s 139(1) or in the belated return of income u/s 139(4) or in the revised
return of income u/s 139(5).
(2) the income from a source located outside India in respect of which a return is
required to be filed under section 139 of the Income-tax Act, 1961, but no
return, belated return or revised return has been filed under section
139(1)/(4)/(5) of that Act.
(3) the value of any undisclosed asset located outside India.
(b) Any variation made in the income from a source outside India in the assessment or
reassessment of the total income of any previous year, of the assessee under the
Income-tax Act, 1961 in accordance with the following provisions of the Income -tax
Act, 1961 is not includible in the total undisclosed foreign income:
Section Provision
29 Manner of computation of income under the head “Profits and gains of
business or profession”
43C Special provision for computation of cost of acquisition of an asset
which becomes the property of an amalgamated company under a
scheme of amalgamation and is sold by the amalgamated company as
stock-in-trade of the business carried on by it.
 19.68 DIRECT TAX LAWS

57 Manner of computation of income chargeable under the head “Income

from other sources”
59 Profits (Deemed income) chargeable to tax
92C Computation of arm’s length price
(c) Non-inclusion of income included in undisclosed foreign income and asset in
the total income under the Income-tax Act, 1961 - The income included in the total
undisclosed foreign income and asset under this enactment would not form part of
total income under the Income-tax Act, 1961.
(iii) Computation of total undisclosed foreign income and asset [Section 5]

(a) Disallowance of expenditure and set-off of loss - No

deduction in respect of any expenditure or allowance or
set off of any loss would be allowed in computing the
total undisclosed foreign income and asset of any previous year of an assessee,
irrespective of whether the same is allowable under the Income-tax Act, 1961.
(b) Permissible deduction from value of undisclosed asset located outside India -
From the value of undisclosed asset located outside India, any income which has so
far been assessed to tax for any assessment year under the Income-tax Act, 1961
prior to the assessment year to which the Act applies and any income which is
assessable or has been assessed to tax for any assessment year under this Act,
will be reduced.
However, the assessee has to furnish evidence to the satisfaction of the Assessing
Officer that the asset has been acquired from the income which has been assessed or
assessable to tax.
(c) Permissible deduction from value of immovable property - If the deduction
referred to in (b) above in respect of income which is assessable or has been assessed
to tax is in relation to an immovable property, the quantum of deduction would be the
amount which bears to the value of the asset as on the first day of the financial year
in which it comes to the notice of the Assessing Officer, the same proportion as the
assessable or assessed foreign income bears to the total cost of the asset.
Example
A house property located in a country outside India was acquired by Mr. A, an assessee in
the previous year 2012-13 for ` 60 lakh. Out of the investment of ` 60 lakh, ` 35 lakh was
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.69

assessed to tax in the total income of the previous year 2012-13 and earlier years. Such
undisclosed asset comes to the notice of the Assessing Officer in the year 2025-26. If the
value of the house property in the year 2025-26 is ` 120 lakh, the amount chargeable to tax
shall be X-Y=Z where,
X = ` 120 lakh,
Y = ` 120 lakh x 35/60 = ` 70 lakh,
Z = ` 120 lakh – ` 70 lakh = ` 50 lakh.

19.4.2 PENALTIES [CHAPTER IV – SECTIONS 40 TO 47]

(i) Penalty in relation to undisclosed foreign income and asset [Section 41] - In case, where
tax has been computed in respect of undisclosed foreign income and asset, the Assessing
Officer may direct the assessee to pay by way of penalty, in addition to tax, if any, payable
by him, a sum equal to three times the tax so computed.

(ii) Penalty for failure to furnish return in relation to foreign

income and asset [Section 42] - Failure to furnish return of
income as required under section 139(1) before the end of
the relevant assessment year by a person, being a resident other than not ordinarily resident
in India, holding any asset (including financial interest in any entity) located outside India as
a beneficial owner or otherwise or being a beneficiary of any asset (including financial interest
in any entity) located outside India or having any income from a source located outside India,
would attract penalty of ` 10 lakh.

(iii) Penalty for failure to furnish information in the return of income or for furnishing
inaccurate particulars about an asset located outside India [Section 43] - If such failure
is in relation to an asset (including financial interest in any entity) held by a person, being a
resident other than not ordinarily resident in India, as a beneficial owner or otherwise, or in
respect of which such person was a beneficiary, or if such failure is in relation to any income
from a source located outside India, at any time during such previous year, the Assessing
Officer may direct such person to pay, by way of penalty, a sum of ` 10 lakh.
 19.70 DIRECT TAX LAWS

(iv) Non-applicability of penalty under sections 42 & 43 in certain cases [Proviso to

sections 42 & 43] -
Penalty under sections 42 and 43 would, however, not apply in respect of an asset or assets
(other than immovable property), where the aggregate value of such asset or assets does not
exceed ` 20 Lakh.
(v) Determination of the value equivalent in rupees of the balance in an account
maintained in foreign currency [Explanation to sections 42 & 43] – For determining the
value equivalent in rupees of the balance in an account maintained in foreign currency, the
rate of exchange for calculation of the value in rupees shall be the telegraphic transfer buying
rate of such currency as on the date for which the value is to be determined as adopted by
the State Bank of India constituted under the SBI Act, 1955.
(vi) Penalty for default in payment of tax arrear [Section 44] – Penalty equal to the amount of
tax arrears is leviable in case of an assessee in default or an assessee deemed to be in
default in making payment of tax and in case of continuing default by such assessee. An
assessee shall not cease to be liable to any penalty merely by reason of the fact that before
levy of such penalty, tax has been paid by him.

(vii) Penalty for other defaults [Section 45] – Penalty of a sum not less than `50,000 but
extending upto ` 2 lakh would be attracted in case a person liable to penalty has, without
reasonable cause, failed to -
(a) answer any question put to him by a tax authority in exercise of his powers under the Act
(b) sign any statement made by him in the course of any proceedings under the Act which
a tax authority may legally require him to sign
(c) attend or produce books of account or documents at the place or time, if he is required
to attend or to give evidence or produce books of account or other documents at
certain place and time in response to summons issued under section 8.
(viii) Prior approval of Joint Commissioner or Joint Director - An order imposing a penalty
under this Chapter shall be made with the approval of the Joint Commissioner or Joint
Director, if –

(1) the penalty exceeds `1 lakh and the tax authority levying the penalty is in the rank of
Income-tax Officer; or
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.71

(2) the penalty exceeds ` 5 lakhs and the tax authority levying the penalty is in the rank
of Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy
Director

Prior approval of Joint Commissioner/Joint Director

[Section 46(4)]

Penalty > `1 lakh Penalty > ` 5 lakhs

Tax authority levying penalty is in the

Tax authority levying penalty
rank of Assistant Commissioner or
is in the rank of Income-tax
Deputy Commissioner or Assistant
Officer
Director or Deputy Director

Summary of Penal Provisions contained in Chapter IV

Section Failure/Default Quantum of penalty
41 Where tax has been computed in relation to In addition to tax, a sum
undisclosed foreign income and asset equal to three times the tax
so computed.
42 Failure to furnish return in relation to foreign ` 10 lakh
income and asset
43 Failure to furnish information in the return of ` 10 lakh
income or for furnishing inaccurate particulars
about an asset located outside India
44 Default in payment of tax arrear Amount equal to the
amount of tax arrears
45 Failure, without reasonable cause, to answer ` 50,000 to ` 2 lakh
any question put to him by a tax authority or to
sign any statement made by him in the course
of any proceedings under the Act or to attend
or produce books of account or documents at
the place or time in response to summons
issued under section 8
 19.72 DIRECT TAX LAWS

19.4.4 OFFENCES AND PROSECUTION [CHAPTER V]

(i) Provisions of Chapter V not in derogation of any other law or any other provision of
the Act [Section 48] – The provisions relating to offences and prosecution contained in
Chapter V are in addition to, and not in derogation of, the provisions of any other law providing
for prosecution for offences thereunder. Further, the provisions of Chapter V to be
independent of any order under this Act that may be made, or has not been made, on any
person. Also, it shall not be a defence that the order has not been made on account of time
limitation or for any other reason.
(ii) Punishment for failure to furnish return in relation to foreign income and asset
[Section 49] – Willful failure to furnish return required to be furnished under section 139(1)
of the Income-tax Act, 1961 in due time, by a person, being a resident other than not ordinarily
resident in India, who at any time during the previous year, held any asset (including financial
interest in any entity) located outside India as a beneficial
owner or otherwise, or was a beneficiary of such asset or
had income from a source outside India, would be
punishable with rigorous imprisonment for a term which would not be less than six months
but which may extend to seven years and with fine. However, prosecution would not
be attracted if he furnishes such return before the expiry of the assessment year.
(iii) Punishment for failure to furnish information about an asset located outside India in
the return of income [Section 50] - If such failure in relation to an asset (including financial
interest in any entity) held by a person, being a resident other than not ordinarily resident in
India, as a beneficial owner or otherwise, or in respect of which he was a beneficiary, or if
such failure in relation to any income from a source located outside India, at any time during
such previous year, is willful, the punishment would be rigorous imprisonment for a term which
would not be less than six months but which may extend to seven years and with fine.
(iv) Punishment for willful attempt to evade tax [Section 51] – Willful attempt to evade any
tax, penalty or interest under this Act by a person, being a resident other than not ordinarily
resident in India, is punishable with rigorous imprisonment for a term not less than three
years but extending to ten years and with fine.
Willful attempt to evade payment of any tax, penalty or interest under the Act, is punishable
with rigorous imprisonment for a term not less than three months but extending upto three
years and also a fine, in the discretion of the Court.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.73

Meaning of willful attempt to evade tax, penalty or interest

A willful attempt to evade any tax, penalty or interest chargeable or imposable under this Act
or the payment thereof includes a case where any person—
(1) has in his possession or control any books of account or other documents (being books
of account or other documents relevant to any proceeding under this Act) containing
a false entry or statement; or
(2) makes or causes to be made any false entry or statement in such books of account or
other documents; or
(3) willfully omits or causes to be omitted any relevant entry or statement in such books
of account or other documents; or
(4) causes any other circumstance to exist which will have the effect of enabling such
person to evade any tax, penalty or interest chargeable or imposable under this Act or
the payment thereof.
(v) Punishment for false statement in verification [Section 52] – If a person, makes a
statement in any verification under this Act or under any rule made thereunder, or delivers an
account or statement which is false, and which he either knows or believes to be false, or
does not believe to be true, he shall be punishable with rigorous imprisonment for a term not
less than six months but extending to seven years and with fine.
(vi) Punishment for abetment [Section 53] – Rigorous imprisonment for a term not less than
six months but extending to seven years and fine would be attracted for abetment to
make and deliver an account or statement or declaration relating to tax payable under this
Act which is false or to commit an offence under section 51(1).
(vii) Presumption as to culpable mental state [Section 54] – In any prosecution for any offence
under this Act which requires a culpable mental state on the part of the accused, the court
shall presume the existence of such mental state. However, it shall be a defence for the
accused to prove the fact that he had no such mental state with respect to the act charged
as an offence in that prosecution. “Culpable mental state” includes intention, motive or
knowledge of a fact or belief in, or reason to believe, a fact. For this purpose, a fact is said to
be proved only when the court believes it to exist beyond reasonable doubt and not merely
when its existence is established by a preponderance of probability.
(viii) Prosecution to be at instance of Principal Chief Commissioner or Principal Director
General or Chief Commissioner or Director General or Principal Commissioner or
Commissioner. [Section 55] - A person shall not be proceeded against for an offence under
section 49 to section 53 except with the sanction of the Principal Commissioner or
 19.74 DIRECT TAX LAWS

Commissioner or the Commissioner (Appeals), as the case may be. The Principal Chief
Commissioner or the Chief Commissioner or the Principal Director General or the Director
General may issue such instructions, or directions, to the tax authorities as he may think fit
for the institution of proceedings under this section.
(ix) Offences by companies [Section 56] -
(a) Persons in charge at the time when offence was committed deemed guilty of
offence - Where an offence under this Act has been committed by a company, every
person who, at the time the offence was committed, was in charge of, and was
responsible to, the company for the conduct of the business of the company as well as
the company would be deemed to be guilty of the offence and would be liable to be
proceeded against and punished accordingly. If, however, such person proves that the
offence was committed without his knowledge or that he had exercised all due diligence
to prevent the commission of such offence, he would not be deemed guilty of the offence.
(b) Director/manager/secretary/officer of company deemed guilty of offence
committed with their consent or connivance - Where an offence under this Act has
been committed by a company and it is proved that the offence has been committed
with the consent or connivance of, or is attributable to any neglect on the part of, any
director, manager, secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of that offence and shall be
liable to be proceeded against and punished accordingly.
(c) Fine and imprisonment - Where an offence under this Act has been committed by a
person, being a company, and the punishment for such offence is imprisonment and
fine, then, such company shall be punished with fine. Further, every person, referred
to in (a), or the director, manager, secretary or other officer of the company referred
to in (b), would be proceeded against and punished in accordance with the provisions
of this Act.
(d) Meaning of certain terms for this section
Term Meaning
(1) Company Means a body corporate.
Includes —
(i) an unincorporated body (i.e., a firm, AOP or BOI);
(ii) a Hindu undivided family.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.75

(2) Director In relation to Meaning of Director

(i) A firm A partner in the firm
(ii) An AOP/BOI A member of the AOP/BOI
(iii) A HUF An adult member of the family
(iv) A company A whole-time director
(v) A company not having Any other director or manager
a whole-time director or officer, who is in charge of
the affairs of the company

(x) Proof of entries in records or documents [Section 57]

The entries in the records, or other documents, in the custody of a tax authority are admissible
in evidence in any proceeding for the prosecution of any person for an offence under Chapter
V of this Act. These entries may be proved by the production of –
(a) the records or other documents (containing such entries) in the custody of the tax
authority; or
(b) a copy of the entries certified by that authority under its signature, as true copy of the
original entries contained in the records or other documents in its custody.
(xi) Punishment for second and subsequent offences [Section 58]
If any person convicted of an offence under section 49 to section 53 is again convicted of an
offence under any of the aforesaid provisions, he shall be punishable for the second and
every subsequent offence with rigorous imprisonment for a term of three to ten years and
with fine ranging from ` 5 lakh to ` 1 crore.
(xii) Summary of Prosecution Provisions in Chapter V
Section Offence Punishment
49 Willful failure to furnish return in relation to Rigorous Imprisonment:
foreign income and asset (including financial
6 months to 7 years
interest in any entity) before the expiry of the
assessment year by a person, being a resident (+)
other than not ordinarily resident in India Fine
50 Willful failure to furnish in the return of income, Rigorous Imprisonment:
any information about an asset (including
6 months to 7 years
financial interest in any entity) located outside
India by a person, being a resident other than (+)
not ordinarily resident in India Fine
 19.76 DIRECT TAX LAWS

51(1) Willful attempt to evade any tax, penalty or Rigorous Imprisonment:

interest chargeable or imposable under the Act
3 to 10 years
by a person, being a resident other than not
ordinarily resident in India (+)
Fine
51(2) Willful attempt to evade payment of any tax, Rigorous Imprisonment:
penalty or interest under the Act by any person
3 months to 3 years
(+)
Fine, at the discretion of
the court.
52 Making false statement in verification or Rigorous Imprisonment:
delivering an account of statement which is
6 months to 7 years
false knowingly
(+)
Fine
53 Abetting or inducing a person to make or Rigorous Imprisonment:
deliver a false statement, account or
6 months to 7 years
declaration knowingly or to commit an offence
u/s 51(1) (+)
Fine
58 Second and subsequent offence Rigorous Imprisonment:
3 to 10 years
(+)
Fine: ` 5 lakh to `1 crore.
Note: Students are advised to read the Black Money (Undisclosed Foreign Income and
Assets) and Imposition of Tax Act, 2015 and the Black Money (Undisclosed Foreign Income
and Assets) and Imposition of Tax Rules, 2015 available at the website of the Income -tax
Department, Government of India, [Link]
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.77

SIGNIFICANT SELECT CASES

S. Case Law
No.
1. CIT v Jindal Tractebel Power Co. Ltd. (2025) 474 ITR 77 (Karn.)
Issue Facts, Analysis and Decision
Whether reliance on Facts of the Case: The assessee-company did not effect TDS
professional advice can from the monies payable to a foreign entity under the contract
be treated as a relating to supply and services of off-shore equipment. This it
reasonable cause for not did on the professional advice that no tax was required to be
deducting tax at source, deducted by way of TDS in as much as no income was deemed
and consequently, to accrue or arise in India pursuant to off-shore contract. The
whether penalty u/s 271C foreign entity had also applied for advance ruling seeking a final
is leviable for failure to opinion in this regard which was not processed. The competent
deduct tax? authority-initiated penalty proceedings under section 271C for
failure to deduct tax and disregarded the explanation offered by
the assessee that the non-deduction of tax was due to the bona
fide belief formed on the basis of the professional advice.
The Commissioner of Income-tax agreed with the explanation
offered by the assessee and granted relief to it observing that
the non-deduction of tax was not tainted with mala fide; there
was reasonable cause for not deducting. The Tribunal rejected
revenue’s appeal.
Analysis and Decision: The Hon’ble High Court noted that, the
assessee in its reply specifically stated that the non-deduction
of tax for the subject period was due to the bona fide belief
formed on the basis of the legal opinion obtained from a Law
firm of repute; and the opinion of a Chartered Accountant’s firm.
This apart, the foreign entity had also sought advance ruling and
the Chairman of the Advance Ruling Authority (now Board of
Ruling Authority) did not process the same for personal reasons.
Added what benefit the assessee could derive by not deducting
the tax at source is also a factor. All these certainly constitute a
reasonable cause for not effecting TDS and, therefore, the
impugned order being consistent with the same is not vulnerable
for challenge, as rightly contended by the assessee.
Accordingly, it was held that non-deduction of TDS was not
tainted with mala fide and reasonable cause was shown for not
deducting TDS, therefore, penalty under section 271C was not
leviable.
 19.78 DIRECT TAX LAWS

2. US Technologies International Pvt. Ltd. v. CIT [2023] 453 ITR 644 (SC)
Issue Analysis and Decision
Can penalty under section Section 271C(1)(a) is applicable in a case of failure on the part
271C be levied for non- of the assessee to “deduct” the whole or any part of the tax as
payment or belated required by or under the provisions of Chapter XVII-B of the Act.
remittance of the tax The words “fails to deduct” used in section 271C(1)(a) are clear;
deducted at source under and it does not speak about belated remittance of the tax
Chapter XVII-B to the deducted at source.
credit of the Central
Government? On a plain reading of section 271C(1)(a), no penalty would be
leviable on belated remittance of TDS after it is deducted by the
assessee. The scope of section 271C(1)(a) and the extent of its
application are discernible from the provision itself, in unambiguous
terms.
Wherever Parliament intended consequences for non-payment
or belated remittance of the tax deducted at source, Parliament
has provided for it, such as in section 201(1A) and section 276B
of the Act. Section 201(1A) provides that in case a tax has been
deducted at source but is subsequently remitted belatedly, such
a person is liable to pay interest as provided under section
201(1A). The consequences of non-payment or belated
remittance/payment of the tax deducted at source are
specifically provided under section 201(1A). Similarly, section
276B speaks about prosecution for failure to pay the tax
deducted at source to the credit of the Central Government
within the prescribed time.
The words “fails to deduct” in section 271C(1)(a) cannot be read
as “failure to deposit/pay the tax deducted”. Therefore, on
correct interpretation of section 271C, no penalty would be
leviable under section 271C on delay in remittance of the tax
deducted at source after deducting it on time.
Note: Section 271C provides that if any person fails to
(a) deduct the whole or any part of the tax as required by or
under the provisions of Chapter XVII-B; or
(b) pay or ensure payment of the whole or any part of the tax as
required by or under
- the second proviso to section 194B,
- the first proviso to section 194R(1);
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.79

- the proviso to section 194S(1)

- section 194BA(2)
then, such person shall be liable to pay, by way of penalty, a sum
equal to the amount of tax which such person failed to deduct or
pay or ensure payment of, as aforesaid.
Penalty under clause (a) above is attracted where a person fails
to deduct tax wholly or partly. However, under clause (b) penalty
is attracted for failure to pay tax or to ensure payment of such tax.
These are specific cases where winnings/ benefits/ perquisites/
consideration for transfer, as the case may be, are wholly in kind
or partly in cash or partly in kind, but the cash portion is not
sufficient to meet the TDS liability.
Therefore, the above Apex court ruling is applicable only with
respect to clause (a) of section 271C(1). In respect of clause (b),
both penalty u/s 271C and prosecution u/s 276B would be
attracted.
3. ACIT v. AT-Dev Prabha (JV) and others (2023) 454 ITR 59 (SC)
Issue Analysis & Decision
Can prosecution Relevant provision of law:
proceedings under
section 276B be launched As per section 276B, if a person fails to pay to the credit of the
for delay in depositing tax Central Government, the tax deducted at source by him as
to the credit of Central required under Chapter XVII-B, he shall be punishable with
Government, where the rigorous imprisonment for not less than 3 months but which may
period of delay and the extend to 7 years.
amount of TDS were not No prosecution would be attracted if TDS is paid to the
substantial and the credit of the Central Government on or before the time
amount of TDS has been prescribed for filing the statement u/s 200(3) (i.e., Quarterly
subsequently deposited Statement under Rule 31A).
with some delay along
with interest? Analysis and Decision:
In the present case, the High Court, considering the CBDT
Circular (wherein it is mentioned that prosecution under section
276B shall not normally be proposed when the amount involved,
or the period of default was not substantial and the amount in
default had been deposited in the meantime to the credit of the
Central Government) quashed the criminal proceedings and
orders passed by the Special Economic Offences court against
the assessee holding that the tax deducted at source in all the
 19.80 DIRECT TAX LAWS

cases had been deposited with interest, though there was some
delay in depositing the tax. Moreover, apart from one or two
cases, the deducted amounts were not more than ` 50,000.
The Apex Court upheld the High Court decision and accordingly,
dismissed the special leave petition.
Note - The CBDT has, vide Circular No. 24/2019 dated
9.9.2019, in exercise of the powers under section 119, listed out
the offences covered under Chapter XXII of the Income-tax Act,
1961 in respect of which prosecution proceedings shall be
launched by Approving Authority being the Sanctioning
Authority where the quantum of offences exceed the prescribed
monetary threshold. Accordingly, in case of failure to pay TDS
under section 276B or failure to pay TCS u/s 276BB, no
prosecution will be processed if the TDS/TCS amount does not
exceed ` 25 lakhs and delay in deposit is less than 60 days.
However, for these offences, in exceptional cases like habitual
defaulters, based on particular facts and circumstances of each
case, prosecution may be initiated only with the previous
administrative approval of the Collegium of two CCIT/DGIT rank
officers though the amount involved does not exceed the
threshold limit of ` 25 lakhs.
Students may read the detailed circular available at the following
link–
[Link]
[Link]
4. Union of India v. Bhavecha Machinery and Others (2010) 320 ITR 263 (MP)
Issue Analysis & Decision
Would prosecution The provisions of section 276CC to get attracted, there should be
proceedings under a willful delay in filing return and not merely a failure to file return
section 276CC be in time. There should be clear, cogent and reliable evidence that
attracted where the the failure to file return in time was ‘willful’ and there should be
failure to furnish return no possible doubt of its being ‘wilful’. The failure must be
in time was not willful? intentional, deliberate, calculated and conscious with complete
knowledge of legal consequences flowing from them.
In this case, it was observed that there were sufficient grounds
for delay in filing the return of income and such delay was not
willful. Therefore, prosecution proceedings under section 276CC
are not attracted in such a case.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.81

5. Income-tax department v. D. K. Shivakumar [2021] 434 ITR 367 (Kar)

Issue Analysis & Decision
Can prosecution be The gist of the offence under section 276C(1) is the wilful attempt
launched in every case to evade any tax, penalty or interest chargeable or imposable on
where unaccounted income. What is made punishable is “attempt to evade tax,
transactions (like penalty or interest”. In legal parlance, an “attempt” is understood
unaccounted loan) are to mean “an act or movement towards commission of an intended
unearthed during crime”. It is doing “something in the direction of commission of
search, irrespective of offence”.
whether there is a
liability to pay tax, A positive act on the part of the accused is required to be
penalty or interest established to bring home the charge against the accused for the
under the Act in respect offence under section 276C(2). There is no presumption under
thereof? law that every unaccounted transaction (uncounted loan, in the
present case) would lead to imposition of tax, penalty or interest.
Therefore, until and unless it is determined that the unaccounted
transactions unearthed during search were liable for payment of
tax, penalty or interest, no prosecution could be launched on the
ground of attempt to evade such tax, penalty or interest.
 19.82 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Questions
1. What is the quantum of penalty that could be levied in each of the following cases -
(i) Failure to get books of accounts audited as required under section 44AB within the
time prescribed under the Act.
(ii) Failure to comply with a direction issued under section 142(2A).
(iii) Failure to furnish report from an accountant as required under section 92E.
2. X, an individual whose total sales in the business of food grains for the year ending 31.3. 2026
was ` 205 lakhs, did not maintain books of account for P.Y.2025-26, even though his turnover
was ` 28 lakhs in the P.Y.2024-25. During the previous year 2025-26, majority of payment
were made either in cash or by bearer cheque by Mr. X. The Assessing Officer levied penalty
of ` 25,000 under section 271A for non-maintenance of books of account and penalty of
` 1,02,500 under section 271B for not getting the books audited as required by section 44AB.
Is the Assessing Officer justified in levying penalty under section 271B?

3. State the conditions, if any, to be satisfied by an assessee in order to get relief under section
273A(4) regarding the waiver of penalty. Can the Principal Commissioner or the
Commissioner refuse to grant relief, when the conditions laid down in the section was
complied with, by the assessee?
4. Examine the following cases and state whether the same are liable for penalty as per the
provisions of the Income-tax Act, 1961.

(i) Raman & Associates had made payment in excess of the limits prescribed to the
contractors for carrying out labour job work at various sites, but had not deducted tax
at source as per section 194C.

(ii) Hotels and Hotels were asked by Income-tax Officer (CIB) to furnish details of all such
tourists who stayed in their hotels and had paid bill amount in excess of ` 10,000.
They have not furnished the requisite information in spite of various reminders.

5. Fox Limited failed to furnish information and documents sought by the Transfer Pricing Officer
(TPO). Can TPO levy penalty for such failure? How much would be the quantum of penalty
imposable for the said failure?
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.83

6. What would be the penalty leviable under section 270A in case of the following assessees, if
none of the additions or disallowances made in the assessment or reassessment qualify
under section 270A(6) and the under-reported income is not on account of misreporting?
M/s. Alpha, Beta Ltd.,
Particulars of total income of A.Y.2026-27 a resident an Indian
firm company
(` ) (` )
(1) As per the return of income furnished u/s 139(1) 35,00,000 (12,00,000)
(2) Determined under section 143(1)(a) 45,00,000 (6,00,000)
(3) Assessed under section 143(3) 62,00,000 (2,00,000)
(4) Reassessed under section 147 81,00,000 6,00,000

Note – Beta Ltd. is a trading company. The total turnover of Beta Ltd. for the P.Y.2023-24
was ` 401 crore and the company has not exercised option under section 115BAA.
7. Can prosecution be launched for each of the following actions or defaults committed? If
yes, then explain the relevant provisions of the Act and the quantum of prescribed
punishment.
(i) The assessee had restrained and not allowed the officer authorized as per section
132(1)(iib) of the Act to inspect the documents maintained in the form of electronic
record and the books of accounts.
(ii) The assessee deliberately has failed to comply with the requirement of section
142(1) and/or 142(2A).
(iii) The assessee deliberately has failed to make the payment of the tax collected under
section 206C.
8. The Assessing Officer lodged a complaint against M/s. KLM, a firm, under section 276CC
of the Income-tax Act, 1961 for failure to furnish its return of income for the A.Y.20 24-25
within the due date under section 139(1). The tax payable on the assessed income, as
reduced by the advance tax paid and tax deducted at source, was ₹ 60,000. The appeal
filed by the firm against the order of assessment was allowed by the Commissioner
(Appeals). The Assessing Officer passed an order giving effect to the order of the
Commissioner (Appeals). The tax payable by the firm as per the said order of the Assessing
Officer was ₹ 8,900. The Assessing Officer has accepted the order of the Commissioner
(Appeals) and has not preferred an appeal against it to the Income Tax Appellate Tribunal.
The firm desires to know of the maintainability of the prosecution proceedings in the facts
and circumstances of the case.
 19.84 DIRECT TAX LAWS

Would your answer change if the person against whom complaint was lodged was KLM
Ltd., a company, instead of a firm?
9. Explain section 278C applicable in respect of offences committed by Hindu undivided
families.
10. Can the Department launch prosecution in a case where they have accepted the revised
return filed by the assessee, rectifying a mistake in the original return of income?
11. Ravinder, an Indian citizen, left India and settled in United Kingdom from 10.4.2016. He
had never left India previously since April, 2008. He acquired a property worth ` 200 lakhs
in his name in the financial year 2013-14 at Malaysia. The Assessing Officer came to know
of this in March, 2026 based on the investigation made by Enforcement Directorate in some
other person’s case.
The Assessing Officer, having recorded some concrete evidences against Ravinder, issued
a notice under section 10 of the Black Money and Imposition of Tax Act, 2015 on 27.3.2026.
Mr. Ravinder’s counsel contended that since Mr. Ravinder is not a resident in the financial
year 2025-26, a notice under section 10 could not be issued to him.
Is the issue of notice on Ravinder under section 10 of the Black Money Act, 2015 tenable
in law? Examine.
12. Mr. Harshit stayed in India only for 48 days during P.Y.2025-26. He had acquired a house
property located in Country A in September 2013 for ` 80 lakh. Out of the investment of
` 80 lakh, ` 55 lakh was assessed to tax in the total income of the P.Y.2013-14 and
P.Y.2012-13, when he was resident in India. The remaining income has not been assessed
to tax in any year. This asset comes to the notice of the Assessing Officer in March 2026.
The value of the house property on 1.4.2025 was ` 120 lakh.
What is the value of undisclosed asset (house property located in Country A) in the hands
of Mr. Harshit for the purpose of Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015 and in which year would the same be chargeable to tax?
13. An apartment located in Country X was bought in 1988 for ` 10 lakh. It was sold in the year
2003 for ` 30 lakh. This amount was deposited in a bank account in Country X. In the year
2004, another apartment was purchased for ` 45 lakh. The investment in the new apartment
was made through withdrawal from the bank account in Country X. The new apartment has
not been transferred before the valuation date and its value on the valuation date is ` 55 lakh.
Assuming that the value of foreign bank account in Country X as computed under Rule 3(1)(e)
is ` 70 lakh, what would be the fair market value of the new apartment as per Rule 3 of Black
Money (Undisclosed Foreign Income and Assets) Imposition of Tax Rules, 2015?
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.85

14. Mr. Piloo (age 72) was the managing director of Ashok (P) Ltd. at Surat. He retired in June,
2009 and left India permanently in January, 2012. It came to the notice of the Joint Director
of Income-tax (Investigation) in June, 2025 that Mr. Piloo had accumulated assets during
the previous year 2008-09 exceeding ` 500 lakhs outside India (consisting of residential
apartments and deposits in banks) which were not disclosed for income -tax purposes up to
the assessment year 2012-13 for which the return of income was filed in India. Mr. Piloo
was served with a notice under the Black Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act, 2015 in August, 2025.
Mr. Piloo is of the opinion that since 10 years have elapsed from the last assessment year
in which he was assessed in India, no proceedings could be initiated against him under the
Income-tax Act, 1961 and the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015. Mr. Piloo is a non-resident for the assessment year 2026-27.
Discuss the liability of Mr. Piloo under the Black Money law and state the procedure and
methodology for determination of the value of undisclosed asset outside after evaluating
the validity of the contentions raised by him.
15. Deepak, aged 45 (an Indian citizen) has settled in California, USA since 2015. Prior to that,
he has always been in India. He had acquired a residential property in California on 25 -06-
2009 for USD 20,000. He kept bank deposit of USD 10,000 in a bank account in New Yo rk
since 15-04-2010.
Notice under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax
Act, 2015 was issued on 20-10-2025. The fair market value of residential property as on
01-04-2025 was USD 25,000; on 01-04-2026 USD 32,000 and 20-10-2025 USD 30,000.
The bank deposit with accrued interest thereon was USD 12,500 on 01 -04-2025; USD
12,800 on 01-04-2026 and USD 12,700 on 20-10-2025.
Note: USD = United States Dollar
The exchange rate of Indian currency per 1 USD as per the reference rate of the RBI on
the various dates are:
01-04-2025 = ` 71
20-10-2025 = ` 72
01-04-2026 = ` 73
Compute the value of undisclosed foreign asset chargeable to tax in the hands of Deepak
as per Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act,
2015.
 19.86 DIRECT TAX LAWS

Answers
1. The penalty that could be levied in each case is:

(i) Failure to get books of accounts audited as required under section 44AB of the
Income-tax Act, 1961 - a sum equal to ½% of the total sales, turnover or gross
receipts, as the case may be, in business, or of the gross receipts in profession, in
such previous year or years, or a sum of ` 1,50,000, whichever is less [Section 271B].
(ii) Failure to comply with a direction issued under section 142(2A) – a sum of
` 10,000 [Section 272A(1)(d)].

(iii) Failure to furnish report from an accountant as required by section 92E - a sum
of ` 1,00,000 [Section 271BA].
2. X is required to maintain books of account as per section 44AA for the P.Y.2025-26 since his
turnover exceeded ` 25 lakhs in the P.Y.2024-25. He also has to get them audited under
section 44AB, since his gross sales in the P.Y.2025-26 exceeds ` 1 crore. He is liable to pay
penalty under section 271A for not maintaining his books of account as per section 44AA.
Accordingly, the action of the Assessing Officer in levying penalty of ` 25,000 under section
271A is correct. However, where books of account have not been maintained, there cannot
be a question of getting them audited. Audit of books of account presupposes maintenance
of books of account. When admittedly X has not maintained books, he cannot obviously get
the audit done.
In Surajmal Parsuram Todi v. CIT (1996) 222 ITR 691, the Guwahati High Court has held that
when a person commits an offence by not maintaining books of accounts as contemplated by
section 44AA, the offence is complete and after that there can be no possibility of any offence
as contemplated by section 44AB and, therefore, the imposition of penalty under section 271B
is erroneous.
Therefore, in this case, the Assessing Officer is not justified in levying penalty under
section 271B.

3. There are two conditions to be satisfied by an assessee in order to get relief in the form of a
waiver or reduction of penalty by the Principal Commissioner or the Commissioner of Income-
tax under section 273A(4) of the Act. These conditions are:

(i) The payment of penalty would cause "genuine hardship" to the assessee and the
Commissioner is satisfied about the existence of genuine hardship having regard to
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.87

the circumstances of the case. The existence of genuine hardship would entitle the
assessee to relief. The CBDT in its Circular No 784 dated 22-11-1999 has clarified
that “genuine hardship” referred to in the provisions of section 273A(4) should exist
both at the time at which the application under section 273A(4) is made by the
assessee before the Principal Commissioner or the Commissioner and at the time of
passing of order under section 273A(4) by the Principal Commissioner or the
Commissioner.
(ii) The assessee has co-operated in any enquiry relating to the assessment or any
proceeding for the recovery of any amount due from him.
As per the decision of Andhra Pradesh High Court in K.S.N. Murthy v. Chairman, CBDT
(2001) 252 ITR 269, if the above conditions laid down for exercise of the discretion are
satisfied, the Principal Commissioner or the Commissioner cannot refuse to exercise the
discretion. Though the power given to the Commissioner under section 273A is discretionary,
the exercise of discretion cannot be either arbitrary or capricious and has to be judicious and
objective, once the conditions required for exercise of discretion in any judicial or quasi -
judicial proceedings are satisfied. Such discretion must be exercised taking into consideration
all relevant facts. The satisfaction for exercise of discretionary power under section must be
based on objective consideration and not on subjective satisfaction.
Also, as per the proviso to section 273A(4), in case the quantum of penalty exceeds ` 1 lakh,
the Principal Commissioner or the Commissioner can grant relief only with the previous
approval of the Principal Chief Commissioner or the Chief Commissioner or the Principal
Director General or the Director General, as the case may be.
Note - The Principal Commissioner or the Commissioner has to pass an order under section
273A(4), either accepting or rejecting the application in full or in part, within a period of 12
months from the end of the month in which the application is received. Further, no order
rejecting the application, either in full or in part, shall be passed unless the assessee has
been given an opportunity of being heard.
4. (i) Penalty under section 271C is attracted for failure to deduct tax at source. The penalty
would be a sum equal to the amount of tax which such person has failed to deduct.
Such penalty can be imposed only by the Assessing Officer. Therefore, Raman &
Associates shall be liable for penalty under section 271C equal to the amount of tax
which they have failed to deduct under section 194C from the payments made to the
contractors. The penalty would be in addition to the disallowance of 30% of
expenditure/payment under section 40(a)(ia).
 19.88 DIRECT TAX LAWS

(ii) Section 133(6) empowers the Income-tax authority to require any person to furnish
information in relation to such points or matters which will be useful for or relevant to
any enquiry or proceeding under the Act. Failure on the part of an assessee to furn ish
the information in relation to such points or matters as required makes him liable for
penalty under section 272A(2) of ` 500 for every day during which the failure
continues.
Note – An income-tax authority below the rank of the Principal Director or Director or
Principal Commissioner or Commissioner can exercise this power in respect of an enquiry
in a case where no proceeding is pending, only with the prior approval of the Princip al
Director or Director or Principal Commissioner or Commissioner. Such power can, however,
be exercised by the Joint Director, Deputy Director and Assistant Director, without the prior
approval of the Principal Director/Director/Principal Commissioner/Commissioner. In this
case, it is presumed that the Income-tax authority has obtained the approval of the Principal
Director/Director or Principal Commissioner/ Commissioner before exercising this power.
5. Under section 271G, if any person who has entered into an international transaction or
specified domestic transaction fails to furnish any such information or document as required
by section 92D(3) sought for by the Transfer Pricing Officer, then, such per son shall be
liable to a penalty which may be levied by the Assessing Officer or the Transfer Pricing
Officer or the Commissioner (Appeals). Thus, the Transfer Pricing Officer is a competent
authority to levy penalty.
Penalty would be a sum equal to 2% of the value of international transaction or specified
domestic transaction for each such failure.
6. Penalty leviable under section 270A in case of M/s. Alpha, a resident firm
M/s. Alpha is deemed to have under-reported its income since:
(1) its income assessed under 143(3) exceeds its income determined in a return
processed under section 143(1)(a); and
(2) the income reassessed under section 147 exceeds the income assessed under
section 143(3).
Therefore, penalty is leviable under section 270A for under-reporting of income.
PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.89

Computation of penalty leviable under section 270A

Particulars ` `
Assessment under section 143(3)
Under-reported income:
Total income assessed under section 143(3) 62,00,000
(-) Total income determined u/s 143(1)(a) 45,00,000
17,00,000
Tax payable on under-reported income:
Tax on under-reported income of ` 17 lakhs plus total income
of ` 45 lakhs determined u/s 143(1)(a) [30% of ` 62 lakh +
HEC@4%] 19,34,400
Less: Tax on total income determined u/s 143(1)(a) [30% of
` 45 lakh + HEC@4%] 14,04,000
5,30,400
Penalty leviable@50% of tax payable 2,65,200
Reassessment under section 147
Under-reported income:
Total income reassessed under section 147 81,00,000
(-) Total income assessed under section 143(3) 62,00,000
19,00,000
Tax payable on under-reported income
Tax on under-reported income of ` 19 lakhs plus total income
of ` 62 lakhs assessed u/s 143(3) [30% of ` 81 lakh + 25,27,200
HEC@4%]
Less: Tax on total income assessed u/s 143(3) [30% of ` 62
lakh + HEC@4%] 19,34,400
5,92,800
Penalty leviable@50% of tax payable 2,96,400

Penalty leviable under section 270A in the case of Beta Ltd., an Indian company
Beta Ltd. is deemed to have under-reported its income since:
(1) the assessment under 143(3) has the effect of reducing the loss determined in a return
processed under section 143(1)(a); and
(2) the reassessment under section 147 has the effect of converting the loss assessed
under section 143(3) into income.
Therefore, penalty is leviable under section 270A for under-reporting of income.
 19.90 DIRECT TAX LAWS

Computation of penalty leviable under section 270A

Particulars ` `
Assessment under section 143(3)
Under-reported income:
Loss assessed u/s 143(3) (2,00,000)
(-) Loss determined under section 143(1)(a) (6,00,000)
4,00,000
Tax payable on under-reported income@30% 1,20,000
Add: HEC@4% 4,800
1,24,800
Penalty leviable@50% of tax payable 62,400
Reassessment under section 147
Under-reported income:
Total income reassessed under section 147 6,00,000
(-) Loss assessed under section 143(3) (2,00,000)
8,00,000
Tax payable on under-reported income@30% 2,40,000
Add: HEC@4% 9,600
2,49,600
Penalty leviable@50% of tax payable 1,24,800

Note – The applicable rate of tax for Beta Ltd., a trading company, for A.Y.2026-27 is 30%,
since its turnover for the P.Y.2023-24 exceeded ` 400 crores.
7. (i) Failure to afford facility to the officer authorized as per section 132(1)(iib) is a case for
which prosecution can be launched under section 275B and such person shall be
punishable with rigorous imprisonment for a term which may extend to two years
and shall also be liable to fine.
(ii) Willful failure to produce books of account and documents as required under section
142(1) or willful failure to comply with a direction to get the accounts audited under
section 142(2A) is a case for which prosecution can be launched under section
276D and such person shall be punishable with rigorous imprisonment for a term
which may extend to one year and with fine.
(iii) Deliberate failure to deposit the tax collected under section 206C to the credit of the
Central Government is a case for which prosecution can be launched under section
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.91

276BB and such person shall be punishable with rigorous imprisonment for a term
which shall not be less than three months but which may extend to seven years
and with fine.
8. (i) Section 276CC provides for prosecution for wilful failure to furnish a return of income
within the prescribed time, in a case where tax would have been evaded had the failure
not been discovered. Since the amount of tax which would have been evaded do es
not exceed ₹ 25 lakh, the imprisonment would be for a term of 3 months to 2 years.
In addition, fine would also be attracted.
However, in a case where the return of income is not filed within the due date,
prosecution proceedings will not be attracted if the tax payable by a person, other than
a company, on the total income determined on regular assessment, as reduced by the
advance tax or self assessment tax, if any, paid and any tax deducted at source, does
not exceed ₹ 10,000.
In this case, even though the tax liability of the firm as per the original order of
assessment exceeded ₹ 10,000, however, as a result of the order of the Commissioner
(Appeals), it got reduced to ₹ 8,900, which is less than ₹ 10,000. Therefore, since the
tax liability of the firm on final assessment was determined at ₹ 8,900, the prosecution
proceedings are not maintainable.
In Guru Nanak Enterprises v. ITO (2005) 279 ITR 30, where the facts were similar, the
Supreme Court held that prosecution was unwarranted.
(ii) Yes, in case of a company, the answer would be different and prosecution proceedings
would be maintainable.

9. As per section 278C(1) of the Income-tax Act, 1961, where an offence under the Income-tax
Act, 1961 has been committed by a Hindu undivided family (HUF), the karta shall be deemed
to be guilty of the offence and shall be liable to be proceeded against and punished
accordingly. However, the karta shall not be liable to any punishment if he proves that the
offence was committed without his knowledge or that he had exercised all due diligence to
prevent the commission of such offence.

As per section 278C(2), where an offence under the Income-tax Act, 1961 has been
committed by a HUF and it is proved that the offence has been committed with the consent
or connivance of, or is attributable to any neglect on the part of any member of the HUF, such
member shall also be deemed to be guilty of that offence and shall be liable to be proceeded
against and punished accordingly.
 19.92 DIRECT TAX LAWS

10. This question came up before the Karnataka High Court in K.E. Sunil Babu, Asst. CIT v. Steel
Processors (2006) 286 ITR 315. The High Court observed that since the Department had
accepted the revised returns filed under section 139(5), it was clear that there was a bona fide
mistake in the original return and there was no element of mens rea. Therefore, the High Court
held that the Department cannot launch prosecution under sections 276C, 277 and 278.
11. Every assessee would be liable to tax@30% in respect of his undisclosed foreign income and
asset of the previous year. Undisclosed foreign asset would be liable to tax in the previous
year in which such asset comes to the notice of the Assessing Officer.
The term “assessee” defined under section 2(2) of the Black Money Act includes a person
being a resident in India within the meaning of section 6 of the Income -tax Act, 1961 in the
relevant previous year; or being a non-resident or not ordinarily resident in India within the
meaning of section 6(6) of the Income-tax Act, 1961 in the relevant previous year, who was
resident in India in the previous year in which the undisclosed asset located outside India
was acquired.
Since Mr. Ravinder left India and settled in United Kingdom from 10.4.2016 and has not
visited India at any time thereafter, he would be non-resident in India in the previous
year 2025-26 in which notice is issued. However, he was resident and ordinarily resident
in India in the financial year 2013-14 when he acquired the property at Malaysia.
Accordingly, the issue of notice on Mr. Ravinder under section 10 of the Black Money Act,
2015, is tenable in law.
12. Although Mr. Harshit is a non-resident in A.Y.2026-27 (since he stayed in India only for 48
days in the P.Y.2025-26), he is a resident in the P.Y. 2013-14 in which the undisclosed asset
located in Country A was acquired. Hence, he is an assessee under the Black Money
(Undisclosed Foreign Income and Assets) Imposition of Tax Act, 2015.
If the value of the house property in the year 2025-26 is ` 120 lakh, the amount chargeable
to tax shall be X-Y=Z where,
X = ` 120 lakh,
Y = ` 120 lakh x 55/80 = ` 82.50 lakh,
Z = ` 120 lakh – ` 82.50 lakh = ` 37.50 lakh.
` 37.50 lakh chargeable to tax in the hands of Mr. Harshit in the A.Y. 2026-27.
13. FMV of the new apartment = ` 55 lakh, being higher of cost of acquisition i.e., ` 45 lakh and
price which the property would ordinarily fetch if sold in the open market on the valuation date
as per the valuation report i.e., ` 55 lakh.
 PROVISIONS TO COUNTERACT UNETHICAL TAX PRACTICES 19.93

14. The contention of the assessee that the proceedings under the Black Money law are barred
by limitation is not tenable in law. The time limitation given in the Income-tax Act, 1961, will
not apply for the purpose of Black Money law. There is no time limit for initiation of
proceedings under the Black Money Law, therefore, proceedings can be initiated against
Piloo, even though 10 years have elapsed from the last assessment year in which he was
assessed in India.
Every assessee would be liable to tax @ 30% in respect of his undisclosed foreign income
and asset of the previous year. Undisclosed foreign asset would be liable to tax in the
previous year in which such asset comes to the notice of the Assessing Officer.
Since Mr. Piloo left India permanently in January, 2012, he is a non-resident in India for the
previous year 2025-26, the year in which the notice under the Black Money Act was served
on him. However, he was resident in India during the previous year 2008-09, being the year
in which he accumulated assets outside India which were not disclosed by him in the return
of income.
The term “assessee” defined under section 2(2) of the Black Money Act, inter alia includes a
person being a non-resident or not ordinarily resident in India within the meaning of section
6(6) of the Income-tax Act, 1961 in the relevant previous year, but who was resident in India
in the previous year in which the undisclosed asset located outside India was acquired.
Accordingly, Piloo who was resident in India in the P.Y.2008-09 would be an assessee under
the Black Money Act, even though he is a non-resident for P.Y.2025-26.
Accordingly, Piloo is liable to pay tax @30% in respect of undisclosed foreign asset during
the previous year 2025-26, the year in which such assets came to the notice of the
Assessing Officer.
The relevant date for determination of the value of undisclosed assets would be the first day
of April of the previous year in which the undisclosed asset located outside India comes to
the notice of the Assessing Officer. The notice under the Black Money law was served in
August, 2025 and the question states that it came to the notice of Joint Director of Income -
tax (Investigation) in June, 2025. Accordingly, the fair market value of the asset as on
01.04.2025 would be adopted.
He is also liable to pay penalty, in addition to tax, if any, payable by him, of a sum equal to
three times the tax so computed.
The value of the undisclosed asset would be the fair market value of an asset (including
financial interest in any entity) determined in the prescribed manner as laid down in Rule 3 of
Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Rules, 2015.
The value of residential apartments would be the higher of -
 19.94 DIRECT TAX LAWS

(i) its cost of acquisition; and

(ii) the price that the property shall ordinarily fetch if sold in the open market on the
valuation date
The value of bank deposits would be the sum of all the deposits made in the account with the
bank since the date of opening of the account. However, where any deposit is made from the
proceeds of any withdrawal from the account, such deposit shall not be t aken into
consideration while computing the value of the account.
15. The definition of “assessee” under the Black Money Law, inter alia, includes a person who,
being a non-resident in the previous year when the undisclosed income came to the notice of
the Assessing Officer, was resident in India in the previous year in which the undisclosed
asset located outside India was acquired. Therefore, Deepak is an assessee under the Black
Money Law since he was resident in India in the P.Y.2009-10, when the property was
acquired, even though he is a non-resident in the P.Y.2025-26, when notice under Black
Money Law was issued. Accordingly, the value of undisclosed asset located outside India of
Deepak would be chargeable to be tax under the Black Money Law in the previous year in
which such asset comes to the notice of the Assessing Officer i.e., P.Y 2025-26, even though
he is a non-resident in India for that previous year.
Computation of value of undisclosed foreign asset

Particulars USD `
Value of residential property in California acquired on 25,000
25.6.2009
Value of residential property would be the fair market value,
being the higher of -
- Cost of acquisition USD 20,000
- Price that the property shall ordinarily fetch if sold in the USD 25,000
open market on the valuation date, i.e., 1.4.2025
Converted into Indian currency taking the rate as on 1.4.2025 ` 71/USD 17,75,000
Bank Deposits in a bank A/c in New York as on 1 st April 10,000
2025 [The sum of all the deposits made in the account with
the bank since the date of opening of the account would be
the value of the bank deposits]
Converted into Indian currency taking the rate as on 1.4.2025 ` 71/USD 7,10,000
Total value of undisclosed foreign asset 24,85,000
CHAPTER a
20
7
TAX AUDIT AND ETHICAL
COMPLIANCES

LEARNING OUTCOMES

After studying this chapter, you would be able to -

❑ appreciate the provisions relating to tax audit and other audit reports
and certificates under the Income-tax Act, 1961;
❑ examine the cases where the assessee is mandatorily required to get
the books of accounts audited;
❑ comprehend and apply the provisions of section 44AD read with Rule
6G to identify Form No. under which tax audit report is to be furnished;
❑ comprehend the clause-by-clause reporting requirements in Form 3CD;
❑ analyse the ethical implications in case of failure to comply with the
reporting requirements.
 20.2 DIRECT TAX LAWS

CHAPTER OVERVIEW

Reports and Certificates

Tax Audit report u/s 44AB Other Reports and Certificates

Form 3CA Form 3CB

Examples

Form 3CD [to be Form 3CD [to be

furnished along with Form furnished along with Report in
Form Certificate in
3CA] Form 3CB] Audit report in Form 15CB
Form 10CCB for 10DA
certifying for
deductions u/s remittances
80-IA to 80-IE deduction
u/s abroad
80JJAA

20.1 INTRODUCTION
The provisions relating to tax audit were inserted by the
Finance Act, 1984 applicable w.e.f. 01.04.1985, marking a
milestone in the history of chartered accountancy profession
in the realm of professional opportunity in direct taxes.
Since tax audit was introduced to ensure the accuracy of
books of accounts maintained, which forms the basis of
computation of income, this significant responsibility was
entrusted by the Government to chartered accountants.
Time and again changes were made in the reporting requirements of tax audit report widening the
scope of tax audit. Considering the significant responsibility entrusted by the Government to
 TAX AUDIT AND ETHICAL COMPLIANCES 20.3
a

chartered accountants, the ICAI has issued Guidance Note on Tax Audit u/s 44AB of the Income -
tax Act, 1961” offering guidance to members for conduct of tax audit, making of report and related
matters.
Audit Reports & Reports and Certificates under the provisions of the Income -tax Act, 1961
In addition to section 44AB, there are other provisions in the Income -tax Act, 1961 which require
furnishing of report by a chartered accountant. Section 12A(1)(b) requires audit of accounts of a
trust or institution and furnishing of audit report in Form 10B/10BB before the specified date for
claiming the benefit of exemption under section 11 or section 12. Also, the provisions permitting
deductions in respect of certain incomes under sections 80-IA to 80-IE of Chapter VI-A of the
Income-tax Act, 1961 require audit of accounts and furnishing of audit report in Form 10CCB
before the specified date, declaring that the undertaking or enterprise has satisfied the conditions
stipulated under the respective sections for claim of deduction and the amount of deduction
claimed is as per the provisions of the Income-tax Act, 1961.
For claiming deduction under section 80JJAA, report of a chartered accountant in Form 10DA has
to be furnished before the specified date certifying the deduction to be claimed. Further, every
company to which the provisions of minimum alternate tax under section 115JB applies has to
furnish a report in Form 29B from a chartered accountant certifying the correctness of computation
of book profit. There is a similar requirement for every person to whom the provisions of alternate
minimum tax under section 115JC are applicable. The report, in this case, would be in Form 29C
certifying that the adjusted total income and alternate minimum tax have been computed in
accordance with the provisions of the Act. In case of slump sale under section 50B, the assessee
has to furnish in Form 3CEA, a report of a chartered accountant certifying the correctness
computation of the net worth of the undertaking or division.
Also, there are certain provisions under the Income-tax Act, 1961 which require certification by a
chartered accountant. For instance, certificate from a chartered accountant in Form 15CB is
required in case of remittances to non-residents where the remittance or aggregate of such
remittances exceed ` 5 lakh during the financial year and the remittances are chargeable under
the provisions of the Income-tax Act, 1961.
Government’s trust on competence and integrity of Chartered Accountants
The requirement of audit of accounts and furnishing of report of chartered accountant certifying the
correctness of computations under different provisions of the Income -tax Act, 1961 indicate the
trust reposed by the Government on a chartered accountant. Also, Revenue Authorities rely upon
the integrity of the chartered accountant to assist tax authorities. The decision rendered by the
 20.4 DIRECT TAX LAWS

Delhi High Court in the case of Additional CIT v. Jay Engineering Works Ltd. (1978) 113 ITR 389
indicates the extent to which the income-tax authorities place reliance on the audit reports -
“It is quite competent for the income-tax authorities not only to accept the auditor’s report but also
to draw proper inference from the same. The income-tax authorities can, therefore, come to the
conclusion that, since the auditors were required by the statute to find out if the deductions
claimed by the assessees were supported by the relevant entries in their account books, the
auditors must have done so and must have found that the account books supported the claims for
deductions.
Where the original account books of the assessee had been destroyed in a fire, it was held that the
Appellate Tribunal, in allowing a deduction, could rely upon other material mainly consisting of the
auditor’s reports from which it could be inferred that the deductions were properly supported by the
relevant entries in the account books”.
This clearly demonstrates the faith which the Government and the Revenue Authorities have in the
competency and integrity of a chartered accountant due to which various statutory duties and
responsibilities have been cast upon them under the provisions of the Act. It is in this context that
the conduct of the chartered accountant has to be appreciated. Chartered accountants cannot be
oblivious to their professional duties and sign audit reports and certificates in a mechanical
manner.
Paras 13.3 and 13.4 of the Guidance Note on Tax Audit under section 44AB read as follows -
“The audit report given under section 44AB is to assist the income-tax department to assess the
correct income of the assessee. The tax auditor should keep necessary working papers about the
evidence on which he has relied upon while conducting the audit and also maintain all the
necessary working papers. Such working papers should include the auditor’s notes on the
following, amongst other matters:
(a) work done while conducting the audit and by whom;
(b) explanations and information given to him during the course of the audit and by whom;
(c) decision on the various points taken;
(d) the judicial pronouncements relied upon by him while making the audit report; and
(e) certificates issued by the assessee/management letters

The requirements of documentation are applicable in respect of tax audit conducted by chartered
accountants. For this purpose, attention is also invited to SA 230, Audit Documentation, which
 TAX AUDIT AND ETHICAL COMPLIANCES 20.5
a

provides that the tax auditor should prepare documentation that provides a sufficient and
appropriate record of the basis for the auditor’s report and evidence that the audit was planned
and performed in accordance with SA’s and applicable legal and regulatory requirements.”
A chartered accountant in practice would be deemed to be guilty of professional misconduct under
clauses (7) of Part I of the Second Schedule to the Chartered Accountant Act, 1949, if he does not
exercise due diligence, or is grossly negligent in the conduct of his professional duties. Further, as
per clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, a
chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he fails
to obtain sufficient information which is necessary for expression of an opinion or its exceptions
are sufficiently material to negate the expression of an opinion.
In this chapter, we would be first discussing the reporting requirements under different clauses of
Form 3CD. Thereafter, with the aid of case studies, the ethical aspects to be considered by a
chartered accountant while undertaking tax audit and issuing reports and certificates under the
different provisions of the Income-tax Act, 1961 and the Rules made thereunder have been
explained.
It may be noted that in certain clauses the tax auditor, in addition to the reporting requirements
under the said clauses, has to qualify his report in para 3 of Form 3CA or para 5 of Form 3B, as
the case may be.
It may also be noted that penalty under section 271J would be attracted in the hands of, inter alia,
an accountant for furnishing incorrect information in any report or certificate furnished under any
provision of the Income-tax Act, 1961 or Income-tax Rules, 1962. The quantum of penalty is
` 10,000 for each such report or certificate.

20.2 TAX AUDIT UNDER SECTION 44AB

Under section 44AB, it is obligatory in the following cases for a person carrying on business or
profession to get his accounts audited before the “specified date” by a Chartered Accountant:
(i) if the total sales, turnover or gross receipts in business exceeds ` 1 crore in any previous
year.
However, tax audit is not required in case of such person carrying on business whose total
sales, turnover or gross receipts in business ≤ ` 10 crore in the relevant previous year
(P.Y.), if:-
 20.6 DIRECT TAX LAWS

- aggregate cash receipts including amount received for sales, turnover, gross
receipts in the relevant previous year ≤ 5% of such receipts; and
- aggregate cash payments including amount incurred for expenditure in the relevant
P.Y. ≤ 5% of such payments.
Payment or receipt by a cheque or by a bank draft which is not account payee, would be
deemed to be made in cash.
The twin conditions of paragraph with respect to cash receipts and cash payments is to be
satisfied together. Further, if the sales, turnover or gross receipts is > 10 crores, the person
is required to get his accounts audited even if these conditions are fulfilled.

(ii) if the gross receipts in profession exceed ` 50 lakhs in any previous year.
(iii) where the assessee is covered under section 44AE, 44BB or 44BBB and claims that the
profits and gains from business are lower than the profits and gains computed on a
presumptive basis in any previous year.
(iv) where the assessee is carrying on a notified profession under section 44AA, and he claims
that the profits and gains from such profession are lower than the profits and gains
computed on a presumptive basis under section 44ADA and his income exceeds the basic
exemption limit in any previous year.

(v) where the assessee is covered under section 44AD(4) and his income exceeds the basic
exemption limit in any previous year.
The persons mentioned above has to get his accounts audited by an accountant before one
month prior to the due date of filing return of income specified under section 139(1) and
furnish by that date, the report of such audit in the prescribed form duly signed and verified
by such accountant and setting forth such particulars as may be prescribed.
Section 44AB is not applicable in case of a person who declares profits or gains for the
previous year in accordance with the provisions of section 44AD(1) or 44ADA(1). This
section shall also not apply to an assessee, being a non-resident who derives income of the
nature referred to in section 44B i.e., from operation of ships or section 44BBA i.e., from
operation of aircraft.
For this purpose, the CBDT has prescribed under Rule 6G, Forms 3CA/3CB/3CD containing
forms of audit report and particulars to be furnished therewith. In the case of a person who
carries on business or profession and who is required by or under any other law to get his
accounts audited, Form 3CA has to be furnished. In the case of a person who carries on
 TAX AUDIT AND ETHICAL COMPLIANCES 20.7
a

business or profession whose accounts are not required to be audited under any other law ,
Form 3CB has to be furnished. The particulars required to be furnished under section 44AB
is to be furnished in Form 3CD. In a case where the accounts of a person are required to
be audited by or under any other law before the specified date, it will be sufficient
compliance if the person gets his accounts audited under such other law before the
specified date and also furnishes by the said date, the report of audit required under such
other law and a further report by an accountant in Form 3CA.
Sales, Turnover and Gross Receipts
The provisions relating to tax audit under section 44AB apply to every person carrying on
business, if his total sales, turnover or gross receipts in business exceed the prescribed limit
(` 1 crore or, in certain specified cases, ` 10 crore) and to a person carrying on a profession, if his
gross receipts from profession exceed the prescribed limit (` 50 lakhs) in the previous year
2025-26. However, the terms "sales", "turnover" or "gross receipts" are not defined in the Act, and
therefore, the meaning of the aforesaid terms has to be considered for the applicability of the
section.
The words "Sales", "Turnover" and "Gross receipts" are commercial terms, they should be
construed in accordance with the method of accounting regularly employed by the assessee.
Section 145(1) provides that income chargeable under the head "Profits and gains of business or
profession" or "Income from other sources" should be computed in accordance with either cash or
mercantile system of accounting regularly employed by the assessee. The method of accounting
followed by the assessee is also relevant for the determination of sales, turnover or gross receipts.
Applying the above generally accepted accounting principles, a few typical cases may be
considered:
(i) Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can
be deducted from the turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of
a financing charge and is not related to turnover. The same should not be deducted from
the figure of turnover.
(iii) Turnover discount is normally allowed to a customer if the sales made to him exceed a
particular quantity. This being dependent on the turnover, as per trade practice, it is in the
nature of trade discount and should be deducted from the figure of turnover even if the
same is allowed at periodical intervals by separate credit notes.
 20.8 DIRECT TAX LAWS

(iv) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount. If it is in the nature of commission on sales, the same cannot be deducted
from the figure of turnover.
(v) Price of goods returned should be deducted from the figure of turnover even if the returns
are from the sales made in the earlier year/s.
(vi) Sale proceeds of fixed assets would not form part of turnover since these are not held for
resale.
(vii) Sale proceeds of property held as investment property will not form part of turnover.

(viii) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form
part of turnover. However, if the shares, securities, debentures etc., are held as stock -in-
trade, the sale proceeds thereof will form part of turnover.

The term "gross receipts" is also not defined in the Act. It will include all receipts as per books of
account whether in cash or in kind arising from carrying of the business or profession which will
normally be assessable under the head “Profit and gains of business and profession”. Broadly
speaking, the following items of income and/or receipts would be covered by the term "gross
receipts in business":
(i) Cash assistance (by whatever name called) received or receivable by any person against
exports under any scheme of the Government of India;
(ii) Any indirect tax re-paid or repayable as drawback to any person against exports under the
Customs and Central Excise Duties and Service Tax Drawback Rules, 1995;
(iii) The aggregate of gross income by way of interest received by the money lender;
(iv) Commission, brokerage, service and other incidental charges received in the business of
chit funds;
(v) Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, travelling
etc.) and if the same is credited to a separate account in the books, only the net surplus on
this account should be added to the turnover for the purposes of section 44AB;
(vi) The net exchange rate difference on export sales during the year on the basis of the
principle explained in (v) above will have to be added;
(vii) Hire charges of cold storage;
(viii) Liquidated damages;
(ix) Insurance claims - except for fixed assets;
 TAX AUDIT AND ETHICAL COMPLIANCES 20.9
a

(x) Sale proceeds of scrap, wastage etc. unless treated as part of sale or turnover, whether or
not credited to miscellaneous income account;
(xi) Gross receipts including lease rent in the business of operating lease;
(xii) Finance income to reimburse and reward the lessor for his investment and services;
(xiii) Hire charges and instalments received in the course of hire purchase;
(xiv) Advance received and forfeited from customers;
(xv) The value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession.
Note - Where the assessee carries on more than one business activity, the results of all business
activities should be clubbed together. In other words, the aggregate sales, turnover and/or gross
receipts of all businesses carried on by an assessee would be taken into consideration in
determining whether the prescribed limit (i.e., ` 1 crore & ` 10 crore for certain specified cases) as
laid down in section 44AB has been exceeded or not.

However, where the business is covered by section 44B or 44BBA, turnover of such business shall
be excluded. Similarly, where the business or profession is covered by section 44AD or 44ADA or
44AE or 44BB or 44BBB and the assessee opts to be assessed under the respective sections on
presumptive basis, the turnover thereof shall be excluded.

Example 1. DB Pvt. Ltd. has a total turnover of ` 10.25 crore for the F.Y. 2025-26. Its receipts and
payment during the P.Y. 2025-26 are made otherwise than by way of cash.
DB Pvt. Ltd has to mandatorily get its books of account audited under section 44AB, since its
turnovers for the P.Y. 2025-26 exceed ` 10 crores, irrespective of the fact that its entire receipts
and payments are in a mode other than cash.
Example 2. DB Ltd. has a total turnover of ` 9 crores for the F.Y.2025-26. Out of this, only ` 7
crores is received during the previous year 2025-26. These amounts are received through account
payee cheque/bank draft and other permissible electronic modes. Apart from this, it also received
advance of ` 4 crores for the future supply of goods. Out of such advance, it received ` 46 lakhs
in cash. Assume that all payments are made otherwise than by way of cash. Is DB Pvt. Ltd.
mandatorily required to get its accounts audited?
For the purpose of computing the threshold limit of cash receipts, total receipts including the
amount received for turnover need to be considered. Since in the present case, ` 46 lakhs does
not exceed ` 55 lakhs i.e., 5% of total receipts of ` 11 crores (` 7 crores plus ` 4 crores), DB Pvt.
Ltd. is not required to mandatorily get its accounts audited.
 20.10 DIRECT TAX LAWS

20.3 FORM 3CA & FORM 3CB

Form 3CA Form 3CB
Applicability Tax audit report is to be furnished Tax audit report is to be furnished in
in Form No. 3CA, in a case where Form No. 3CB, in case of a person who
the accounts of the business or carries on business or profession but
profession of a person have been who is not required by or under any
audited under any other law like other law to get his accounts audited.
the Companies Act, 2013 or the In the case of companies having their
Limited Liability Partnership Act, accounting year which is different from
2008. the financial year, accounts of the
financial year are required to be
prepared and audited. The audit report
shall be in Form No. 3CB. This has
been clarified vide Circular No. 561
dated 22.5.1990.
Requirement In this case, it is not required for In this case, the tax auditor is required
the tax auditor appointed under to give his opinion as to whether or not
section 44AB to give his opinion, the accounts audited by him give a true
as to whether or not the accounts and fair view:
give a true and fair view. It would (i) in the case of the balance sheet, of
only be necessary for him to the state of affairs as at the last
annex a copy of the audited date of the accounting year.
accounts as well as a copy of the (ii) in the case of the profit and loss
audit report given by the statutory account, of the profit or loss of the
auditor along with his (tax assessee for the relevant
auditor’s) report in Form No. 3CA accounting year.
with statement of particulars
The second part of the report states that
required to be furnished under
the statement of particulars required to
section 44AB is annexed in Form
be furnished under section 44AB is
No. 3CD.
annexed to the audit report in Form No.
The tax auditor is required to give 3CD. The tax auditor is required to give
his opinion whether the prescribed his opinion whether the prescribed
particulars furnished in Form 3CD particulars furnished by the assessee
by the assessee are true and are true and correct, subject to
correct, subject to observations observations and qualifications, if any
and qualifications, if any.
The tax auditor may have a difference
of opinion with regard to the particulars
furnished by the assessee These
differences are to be reported in Para 5
of Form 3CB. [Para 18.6 of the
Guidance Note on Tax Audit]
 TAX AUDIT AND ETHICAL COMPLIANCES 20.11
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Revision of As per Rule 6G(3), the report of audit furnished in Form 3CA/3CB along with
Tax audit particulars in Form 3CD may be revised by the person by getting revised
report report of audit from an accountant, duly signed and verified by such
accountant, if there is payment by such person after furnishing of such report
which necessitates recalculation of disallowance under section 40 or section
43B. The revised report of audit has to be furnished before the end of the
relevant assessment year for which the report pertains.
Thus, a scenario may arise where, after issuing the audit report, but before
the due date for filing the return u/s 139(1), the assessee may make payment
of sums referred to in section 40 and 43B, deduction of which is allowed only
on actual payment basis, which may require revision of Tax Audit Report.
As per the law, there is no restriction for the number of times for revision of
tax audit reports. The same can be revised a number of times, but revision
should be done only to meet some technical requirements or amendments in
law. It should be ensured that the revised report should carry the reference of
old reports and should be signed in the current date. It is recommended that
all the revisions required should be done at a time. However, there may
reasons, like, a court ruling subsequent to the signing and uploading of the
revised tax audit report which may necessitate further revision of tax audit
report. In such cases, the auditor may, if he deems fit, amend the tax audit
report.
The tax auditor must ensure that the latest amended report must contain the
reference to the earlier report(s) and he must sign the same on the present
date and generate a new UDIN. The tax auditor should also ensure that
Guidance Notes and SA-560 as well as the guidelines and the rules specified
for revision for tax audit report by the CBDT are being followed.
The tax auditor is required to mention in the revised books of account and in
the Revised Tax Audit Report that the report is the Revised Tax Audit Report
giving the reference of the previous report. The tax auditor is also required to
mention the reason for revision both in the revised books of account as well
as in the Revised Tax Audit Report.
The e-filing portal permits uploading the revised audit reports via CA login id.
Further, the e-filing utility permits insertion of comments under the heading
OTHERS in the tab, and uploading it on the e-filing portal. The tax auditor
should insert the comments or observations in Form No. 3CA/Form 3CB in
the space given in the e-form.
Revision of tax audit has to be done by the same tax auditor who has done
the original tax audit and not by another tax auditor. It is to be noted that a
new UDIN is required to be generated for the Revised Tax Audit Report and
the same has to be generated each time. The UDIN so generated should also
be updated on the online Income-tax Portal.
 20.12 DIRECT TAX LAWS

20.4 FORM 3CD – STATEMENT OF PARTICULARS

REQUIRED TO BE FURNISHED UNDER SECTION
44AB
This form prescribes the statement of particulars required to be furnished under section 44AB of
the Income-tax Act, 1961 in case of both corporate and non-corporate assessees carrying on
business or profession as Annexure to the audit report in Form 3CA or Form 3CB. This form has
been designed to facilitate the determination of assessee’s income from business or profession.
As per Para 19.3 of the Guidance Note on Tax Audit, while verifying the particulars in Form
No. 3CD, it would be advisable for the tax auditor to consider the following:
(a) Where in respect of any particular aspect, reporting is required at more than one clause, in
that case, the tax auditor may ensure that information may be furnished at any one of the
clauses and reference may be given in the other clause.
(b) If there is any difference in the opinion of the tax auditor and that of the assessee in respect
of any information furnished in Form No. 3CD by the assessee, the tax auditor may
consider stating both the view points and also the relevant information related to matter in
his report in order to enable the tax authority to take a decision in the matter.
(c) In computing the allowance or disallowance, he should keep in view the law applicable in
the relevant year, even though the form of audit report may not have been amended to
bring it in conformity with the amended law.

(d) In case the assessee has furnished prescribed particulars in part or piecemeal or relevant
form is incomplete or the assessee does not give the information against all or any of the
clauses, the auditor should not withhold the audit report. In such a case, he should qualify
his report in para 3 of Form 3CA or para 5 of Form 3CB as applicable on matters in respect
of which information is not furnished or if furnished, are inadequate/insufficient.
(e) The information in Form No. 3CD should be based on the books of accounts, records,
documents, information and explanations made available to the tax auditor for his
examination. In case it is not in accordance with the books and documents, he has to
mention the same in his observations.

(f) In case the auditor relies on a judicial pronouncement, he may mention the fact as his
observations in para 3 of Form No. 3CA or para 5 provided in Form No. 3CB, as the case
may be.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.13
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Clause by clause analysis of Form 3CD

Clause Particulars Reporting requirements in relation to the relevant
clause
PART A
1. Name of the (i) The name of the assessee whose accounts are
assessee being audited under section 44AB should be given
as specified in PAN.
(ii) In case there is a different trade name, the same
should be reported.
(iii) If the tax audit is in respect of a branch, name of
such branch should be mentioned along with the
name of the assessee.
(iv) In case of change in the name of the assessee, if the
change has taken place during the financial year,
name at the end of the financial year should be
stated. However, if the change in name has taken
place after the close of the financial year but before
signing of tax audit report, name as at the year
ending date should be mentioned. In either case,
fact of name change should be suitably clarified by
the tax auditor as an observation in audit report.
2. Address (i) The address to be mentioned should be the same as
has been communicated by the assessee to the
Income-tax Department as on the date of signing of
the audit report.
(ii) If the tax audit is in respect of a branch or a unit, the
address of the branch or the unit should be given.
(iii) In the case of a company, the address of the
registered office should be stated.
(iv) In the case of new assessee, the address of the
principal place of business should be stated.
The tax auditor should verify the relevant
details of the assessee from the available
income tax records or from the profile of the
assessee on Income-tax portal. In case of
difference, the same should be given as an observation in
the audit report.
3. Permanent Account (i) The permanent account number (PAN) allotted to
Number or Aadhaar the assessee should be indicated.
Number (ii) Clause further asks to mention Aadhaar number (in
case of Individuals) as an alternative.
 20.14 DIRECT TAX LAWS

(iii) It may be noted that in the e-filing format, PAN is a

mandatory field and Aadhaar is an optional field.
4. Whether the The auditor is required to examine from the appropriate
assessee is liable to evidence, the registration number or any other
pay indirect tax like identification number, if any.
excise duty, service For any indirect tax, if multiple registration numbers are
tax, sales tax, goods available, all registration numbers should be ensured by
and services tax, the tax auditor are duly reported.
customs duty, etc. If The auditor should obtain from the
yes, please furnish assessee the list of indirect taxes
the registration applicable on him if the different types of
number, GST indirect taxes are leviable on him and that too in multiple
number or any other states.
identification number
allotted for the same It is recommended that the tax auditor should obtain from
the assessee:
- list of indirect taxes applicable on him
- copy of registration certificates issued by the various
authorities clearly mentioning the registration
number under that relevant law.
Where indirect tax law does not require any registration,
appropriate identification number may be reported in this
clause. For example, in Customs Act, 1962, since there is
no registration number, a copy of Importer Exporter Code
(IEC) may be obtained, and information be accordingly
furnished.
5. Status The status of the assessee is to be mentioned as included
in the definition of person in section 2(31) namely,
individual, Hindu Undivided Family, company, firm, an
association of persons or a body of individuals, whether
incorporated or not, a local authority or artificial juridical
person.
It should not be confused with the residential status. In
case of proprietorship concern, the status shall be quoted
as individual.
6 Previous year The relevant previous year should be mentioned i.e.,
starting from 1st April to 31 st March.
In case of amalgamations, demergers, reconstitution, new
business, closure of existing business etc., the date of
beginning and ending of the previous year may be
different, accordingly, the relevant date of beginning and
ending of the previous year may be mentioned.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.15
a

7. Assessment Year The assessment year relevant to the previous year for which
the accounts are to be audited should be mentioned.
8. Indicate the relevant The relevant clause of section 44AB under which the audit
clause of section has been conducted has to be mentioned.
44AB under which In case the assessee is carrying on business and his total
the audit has been sales, turnover or gross receipts as the case may be,
conducted exceeds ` 1 crore in the relevant previous year, the
auditor is required to mention clause (a) of section 44AB.
If the assessee is carrying on profession and his gross
receipts exceed ` 50 lakhs in the relevant previous year,
the auditor is required to mention clause (b) of section
44AB. Likewise, if the audit under section 44AB is being
conducted by virtue of provisions of section 44AE, 44BB
and 44BBB, the auditor is required to mention clause (c).
For audit being conducted by virtue of provisions of section
44ADA, clause (d) is to be mentioned. For audit being
conducted by virtue of provisions of section 44AD(4),
clause (e) is to be mentioned. Where a person is required
by or under any other law to get his accounts audited, say a
company, a society etc. then audit under section 44AB is
conducted under the third proviso to section 44AB and not
under clause (a) or (b) of that section.
8a Whether the Assessee is required to pay income-tax at the rates
assessee has opted specified in the annual Finance Act. However, sections
for taxation u/s 115BA, 115BAA, 115BAB, 115BAD and 115BAE provide
115BA/ 115BAA/ option to the assessee to pay tax at special rates and
115BAB/ 115BAC1/ forego certain deductions, exemptions etc. The assessee
115BAD/ 115BAE? can opt to pay tax under the rates prescribed in the
Finance Act or the one made available by any of the
aforesaid sections.
The tax auditor has to mention whether the assessee has
opted for taxation under any of the aforesaid sections and
in case answer is Yes, then, he has to select the
appropriate section. With effect from A.Y. 2024-25, tax
shall be payable as per section 115BAC, unless the
assessee being an individual, HUF, AOP (other than co-
operative society) or BoI or an artificial Juridical person
exercises the option to shift out of the default scheme and
pay tax under the optional tax regime as per the normal
provisions of the Act.

1 With effect from A.Y. 2024-25, tax shall be payable as per section 115BAC unless the assessee being an individual, HUF,
AOPs (other than co-operative society) or BoIs or an artificial Juridical person exercises the option to shift out of the default
scheme and pay tax as per the normal provisions of the Act.
 20.16 DIRECT TAX LAWS

Companies can pay tax as per the normal provisions of

the Income-tax Act, 1961 or opt to pay tax as per section
115BAA, subject to fulfillment of conditions stipulated
thereunder and forgoing certain exemptions/deductions.
Likewise, Co-operative Societies can pay tax as per the
normal provisions of the Income-tax Act, 1961 or opt to
pay tax as per section 115BAD, subject to fulfillment of
conditions stipulated thereunder and forgoing certain
exemptions/deductions. Companies or co-operative
societies that have already opted for section 115BAB or
115BAE can continue to pay tax under that section.
The tax auditor has to examine the income tax return of
the previous year to verify the option which has been
exercised by the assessee.
For the purpose of reporting under clause
8a, the tax auditor should verify whether –
❑ The application for exercise of
option in the prescribed form being 10-IB, 10-IC,
10-ID, 10-IF and 10-IFA has been furnished
electronically under section 115BA, 115BAA, 115BAB,
115BAD and 115BAE.
❑ In case of opt out of default tax regime under section
115BAC, the auditor should verify whether the
assessee has furnished in Form 10-IEA the option to
shift out of the default tax scheme under section
115BAC and pay tax under the optional tax regime
as per the normal provisions of the Act.
❑ In case, the assessee has not filed the relevant form,
written representation from the assessee should be
obtained whether he will be availing the concessional
regime or otherwise and based on written
representation, the reporting under this clause
should be made.
❑ Where reporting is made solely on the basis of
assessee’s representation, the fact should be stated
in paragraph (3) of Form 3CA or paragraph (5) of
Form 3CB.
PART B
9. (a) If firm or association Where the assessee is a firm or association of persons
of persons, indicate (AOP) or body of individuals, the names of partners of the
name of partners/ firm or members of the AOPs or BOIs and their profit
members and their sharing ratios (%) have to be stated.
profit sharing ratios.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.17
a

In case where the partner of a firm or the member of AOP/

BOI acts in a representative capacity, the name of the
beneficial partner/member should be stated.
Thus, the details of partners or members during the entire
previous year will have to be furnished.
❑ The particulars in this clause
should be verified from the instrument or
agreement or any other document evidencing
partnership or AOPs including any supplementary
documents or other documents effecting such
changes.
❑ The tax auditor should obtain certified copies of the
deeds, documents, understanding, notice of changes
etc. including certified copies of the
acknowledgment, if any, evidencing filing of
documents with the concerned authorities, if
registered.
❑ In case of certain AOPs/BOIs, where shares are not
precisely ascertainable during the previous year
resulting in a situation wherein the shares of
members are indeterminate or unknown, the relevant
fact should be stated.
(b) If there is any If there is any change in the partners of the firm or
change in the members of the AOPs/ BOIs or their profit or loss sharing
partners or members ratio since the last date of the preceding year, the
or in their profit particulars of such change must be stated. All the
sharing ratio since changes occurring during the entire previous year must be
the last date of the stated.
preceding year, the
particulars of such
change.
10. (a) Nature of business The principal line of each business is to be reported. If the
or profession (if assessee is in more than one business, the information
more than one has to be furnished in respect of all business. i.e., the
business or sector in which the business or profession falls such as
profession is carried manufacturing, trading, commission agent, builder,
on during the contractor, professionals, service sector, financial service
previous year, sector or entertainment industry. In case a person belongs
nature of every to service sector, the nature of each type of service
business or should be broadly stated. Thereafter it is required to
profession). mention the sub-sector pertaining to the sector selected
has to be mentioned.
 20.18 DIRECT TAX LAWS

Information has to be furnished in respect of each

business profession carried on during the previous year
based on review of profit and loss account.
The code is to be mentioned against the nature of
business pertains to the main area of business activity.
(b) If there is any Any material change in the business should be precisely
change in the nature set out. The change will include change from
of business or manufacturer to trader as well as change in principal line
profession, the of business. Likewise, any addition to or other than
particulars of such temporary discontinuance of, a particular line of business
change. may also amount to change requiring reporting. However,
temporary suspension of the business may not amount to
change and therefore need not be reported.
A review of business report or the minutes
of meetings would enable the tax auditor to
note the changes, if any. He may make
necessary enquiries on this basis and seek information to
determine whether any change has occurred or not. If
need be, the tax auditor should get a declaration from the
assessee regarding change in the nature of business.
In case of a business reorganization/reconstruction, if
there is a similar line of activity, no reference needs to be
made. However, if a new line of activity emerges, the
same may be stated. If any line of activity is being hived
off in case of restructuring, the same may be reported.
11. (a) Whether books of As per section 2(12A), books or books of account includes
account are ledgers, daybooks, cash books, account-books and other
prescribed under books, whether kept in the written form or in electronic
section 44AA, if yes, form or in digital form or as print-outs of data stored in
list of books so such electronic form or in digital form or in a floppy, disc,
prescribed. tape or any other form of electro-magnetic data storage
device.
Under section 44AA read with Rule 6F, the books of
account have been prescribed only in respect of persons
carrying on specified profession. No books of account
have been prescribed for the persons carrying on
business or non-specified profession. This may be
considered while verifying the reporting under clause
23(a).
Rule 6F has prescribed the books of account and other
documents to be kept and maintained by a person
carrying on certain professions specified in section
44AA(1). Section 44AA(2) provides that persons carrying
on business or profession, other than those specified in
 TAX AUDIT AND ETHICAL COMPLIANCES 20.19
a

section 44AA(1), shall keep and maintain such books of

account and other documents as may enable the
Assessing Officer to compute his total income in
accordance with the provisions of the Income-tax Act, if
his income from business or profession exceeds the
monetary limits prescribed under section 44AA(2) or his
total sales, turnover or gross receipts in business or
profession exceed the monetary limits prescribed under
section 44AA(2) in any one of the three years immediately
preceding the previous year.
(b) Lists of books of The address at which the books so maintained are kept is
account maintained also required to be mentioned under this clause. In case
and the address at the books of accounts are kept at more than one location
which the books of then the details of address of each such location along
account are kept. with the detail of books of account maintained thereof is
(In case books of required to be mentioned.
account are In case, where books of account are maintained and
maintained in a generated through computer system, the details of
computer system, address of the place where the server is located or the
mention the books of principal place of business/Head office or registered office
account generated by whatever name called is to be mentioned under this
by such computer clause.
system. If the books Where the books of account are stored on cloud or online,
of account are not IP address (unique) of the same may be reported. It is
kept at one location, required by the auditor to verify the specification to which
please furnish the books of account have been maintained in computer
addresses of system and which of the records have been maintained in
locations along with hard copy form.
the details of books The tax auditor should obtain from the
of account assessee a complete list of books of
maintained at each account and other documents maintained
location). by him (both financial and non-financial records) and
make appropriate marks of identification to ensure the
identification of the books and records produced before
him for audit. The list of books of account maintained by
the assessee should be given under this clause.
(c) List of books of Books of accounts examined would constitute the books
account and nature of original entry and the other books of account. In
of relevant addition to the list of books of accounts examined, the
documents extent of examination is also to be reported.
examined. Whereas sub-clause (b) requires furnishing list of books
of account maintained by the assessee and address of
the place where books of account are kept, sub-clause (c)
requires the tax auditor to state a list of books of account
 20.20 DIRECT TAX LAWS

and the nature of relevant documents that he has

examined.
The list of books of account prescribed,
maintained and examined has to be stated
under this clause. There may be difference
between the three lists. For example, books of account
may have been prescribed but all the prescribed books
might not have been maintained or the entire books of
accounts maintained might not have been produced for
examination. The tax auditor should exercise his
professional judgment in order to arrive at the conclusion
whether such a situation warrants any disclosure or
qualifications while forming his opinion on the matters
covered by reporting requirements in Form No. 3CB.
12. Whether the profit or If the profit and loss account includes any profits and
loss account includes gains assessable on presumptive basis, then, the tax
any profits and gains auditor has to verify the amount so included in the profit
assessable on and loss account. It may be noted that what is required to
presumptive basis, if be stated is the amount of profits and gains of the
yes, indicate the business or profession covered by presumptive taxation
amount and the included in the profit and loss account and not the amount
relevant section assessable on presumptive basis.
[44AD, 44ADA, The tax auditor will have to verify if the assessee is
44AE, 44AF, 44B, covered by the provisions of any of the sections specified
44BB, 44BBA, in clause 12 and the assessee will be offering to tax
44BBB, 44BBC profits under presumptive taxation, where applicable.
Chapter XII-G If the profit and loss account does not include profit
(provisions relating to assessable on presumptive basis, then, there is no
shipping business), requirement to furnish the particulars under this clause.
First Schedule
The amount to be mentioned in this clause means amount
(Insurance business)
included in the profit and loss account. The tax auditor is
or any other relevant
not required mentioning whether such amount
section].
corresponds to the amount assessable under the relevant
section relating to presumptive taxation. As such, the
report requirement gets satisfied, if the amount as per
profit and loss account is reported.
Even where the assessee opts for
presumptive taxation, the tax auditor
should consider to impress upon the
assessee that it would be advisable to maintain some
basic records to support the turnover/gross receipts
declared for presumptive taxation.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.21
a

13. (a) Method of Section 145 provides that the income chargeable under
accounting the head “Profits and gains of business or profession” or
employed in the “Income from other sources” must be computed in
previous year. accordance with either cash or mercantile system of
accounting regularly employed by the assessee.
The hybrid system of accounting, viz. a mixture of cash
and mercantile, is not permitted. However, the assessee
may adopt a cash system of accounting for one business
and mercantile system of accounting for other business.
Once the choice of method of accounting is decided, the
assessee must follow consistently the method of
accounting employed.
(b) Whether there had If there is any change in the method of accounting, that is
been any change in to be reported and the effect thereof i.e., increase or
the method of decrease in profits has to be stated under this clause.
accounting The tax auditor should apply reasonable
employed vis-à-vis checks to the earlier year’s accounts to
the method ascertain whether there is any change in
employed in the the method of accounting as compared to that of the year
immediately under audit, after obtaining a written confirmation from the
preceding previous assessee as to the method of accounting followed.
year. It may be noted that in view of section 128 of the
Companies Act, 2013, every company is required to keep
books of account on accrual basis.
Note - A change in an accounting policy does not amount
to change in method of accounting. A change in the
method of valuation of stock will be a change in
accounting policy and hence, such change need not be
mentioned in clause 13(b).
(c) If answer to (b) above In case there is any change in the method of accounting,
is in affirmative, give employed vis-à-vis the method employed in the
details of such immediately preceding previous year, auditor has to verify
change, and the whether the details of the same, along with impact on the
effect thereof on the profit for the year are mentioned.
profit or loss with As regards the impact on profit the concept of materiality
increase/ decrease in is the basic governing factor. If it is not possible to
profits. quantify the effect of the change in the method of
accounting, appropriate disclosure should be made under
this clause.
(d) Whether any In exercise of the powers conferred by section 145(2), the
adjustment is Central Government notified the ICDSs to be followed by
required to be made all assessees (who are required to get their books of
to the profits or loss account audited) following the mercantile system of
 20.22 DIRECT TAX LAWS

for complying with accounting, for the purposes of computation of income

the provisions of chargeable to income-tax under the head “Profits and
income computation gains of business or profession” or “Income from other
and disclosure sources”.
standards notified This clause requires the auditor to state whether any
under section adjustment is required to be made to profit and loss for
145(2)? complying with the provisions of income computation and
disclosure standards (ICDS). Such adjustment is required
to be stated separately.
The increase/decrease in profit and net effect should be
reported in the absolute terms. The tax auditor should
obtain draft computation of the total income and
disclosures required under ICDS.
For the purpose of verifying clause 13(d),
the tax auditor should obtain draft
computation of total income and
disclosures required under ICDS. Based on information
and books of account, the tax auditor should consider
whether any adjustment is required to be made to the
profit or loss and accordingly, if the answer is in
affirmative, whether ‘yes’ has been stated; or if otherwise
‘no’ has been stated.
While verifying the reporting, the auditor has to consider
the draft of income computation provided by the
assessee. This fact should be mentioned in the audit
report in paragraph 3 of Form No. 3CA and paragraph 5
of Form No. 3CB.
(e) If answer to (d) If answer to ‘d’ above is in affirmative, the amount of
above is in the adjustment against each ICDS is required to be quantified
affirmative, give in clause 13(e).
details of such
Tax auditor may refer to the technical
adjustments
guide on ICDS issued by the ICAI in July,
ICDS wise with 2017. In the working paper file of ICDS,
increase or decrease checklist should be prepared and maintained alongwith
in profit and net computation working for any increase/decrease in income
effect. as per ICDS. Also, last year’s tax audit report should be
reviewed to ascertain any effect in the current year.
(f) Disclosure as per This clause requires disclosure of significant income
ICDS (to be given computation and disclosure policies adopted by a person
ICDS wise) for computation of income chargeable under the head
“Profits and gains from business or profession” or “Income
from other sources”.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.23
a

In this clause, if information furnished is

based on income computation furnished by
the assessee, appropriate disclosure of
this fact should be mentioned in Form No. 3CA or 3CB as
the case may be.
14. (a) Method of Ascertain the method of valuation of closing stock
valuation of employed during the year. Where there is change in the
closing stock basis of determining cost, market value or net realizable
employed in the value even though there is no change in the method of
previous year. valuation. The auditor should study the procedure
(b) In case of followed by the assessee in taking the inventory of closing
deviation from the stock at the end of the year and valuation thereof.
method of The tax auditor should –
valuation ❑ obtain the inventory of closing
prescribed under stock, indicating the basis of valuation
section 145A, thereof for verifying the reporting on the method of
and the effect valuation of closing stock.
thereof on the ❑ review the methods of valuation adopted for
profit and loss valuation of closing stock and compare the same
with the method prescribed under section 145A.
❑ obtain from the assessee, the inventory valuation
sheet of the stock in trade giving quantitative details,
method of valuation, rate and total value of each
item.
❑ ascertain whether the method of valuation is such
that the value of closing stock includes the amount of
any tax, duty or cess actually paid or incurred by the
assessee to bring the goods to the place of its
location and conditions as on the date of valuation.
15. Give the following For furnishing the particulars required under this clause,
particulars of the capital the provisions of section 2(47) [meaning of transfer],
asset converted into stock- section 45(2) [conversion of capital asset into stock-in
in-trade: trade deemed to be transfer of the previous year in which
(a) Description of capital conversion took place], proviso below to section 47(iv) &
asset; (v) [transfer of capital asset by a holding company to its
subsidiary or vice versa not considered as transfer by
(b) Date of acquisition; virtue of clause (iv) or (v) of section 47 if condition
(c) Cost of acquisition; specified thereunder are satisfied. However, such benefit
Amount at which the would not be available where capital asset is transferred
(d)
asset is converted by a subsidiary company to its holding company or vice
into stock-in-trade. versa as stock-in trade] and section 47A [Where transfer
of capital asset by a holding company to its subsidiary or
vice versa not considered as transfer by virtue of clause
 20.24 DIRECT TAX LAWS

(iv) or (v) of section 47 but such capital asset is converted

into stock-in trade within eight years from the date of
transfer, such capital gain would be deemed to be capital
gains of the previous year in which such transfer took
place] have to be kept in mind.
The particulars to be stated under this clause should be
furnished with respect to the previous year in which the
capital asset have been converted into stock in trade. The
clause does not require the details regarding the taxability
of capital gains or business income arising from deemed
transfer. The description of the capital assets is required
to be mentioned, for example, shares, securities, land,
building, plant, machinery etc.
For ascertaining the correct date, the tax
auditor will have to refer the accounts of
the financial year in which such capital
assets is acquired. The date is important to determine
whether assets is long term capital asset or short term
capital asset.
In this clause, the cost of acquisition as per books of
accounts is to be mentioned. In case of depreciable
assets, the carrying cost appearing in the books will be
written down value. But the value to be reported should be
the original cost of acquisition. The amount recorded in
the books at which the asset is converted into stock in
trade should be stated. Such an amount may not be fair
market value as on the date of conversion.
The valuation of stock-in-trade is to be examined with
reference to AS-2: Valuation of Inventories or Ind AS-2:
Inventories, as applicable.
16. Amounts not credited to the
profit and loss account,
being –
(a) The items falling Under this clause various amounts falling within the scope
within the scope of of section 28 which are not credited to the profit and loss
section 28; account are to be stated.
Example. A Ltd., a manufacturing company sponsored
the Dubai trip of Mr. B, seller of construction material,
along with his spouse, upon achieving of sales target set
by the company. Neither any money received in the
books, nor any expenses incurred through the books.
The same is chargeable to tax as benefit or perquisite
arising from business or profession by virtue of section
 TAX AUDIT AND ETHICAL COMPLIANCES 20.25
a

28(iv). Thus, the same is required to be reported though it

is not credited in the profit and loss account.
(b) The proforma For this clause, the tax auditor should examine all
credits, drawbacks, relevant correspondence, records, assessee’s particulars
refund of duty of on portal of the department and evidence in order to
customs or excise or determine whether any particular refund/claim has been
service tax, or admitted as due and accepted during the relevant
refund of sales tax financial year. The words ‘admitted by the concerned
or value added tax authorities’ would mean ‘admitted by the authorities within
where such credits, the relevant previous year'.
drawbacks or If the assessee is following cash basis of accounting, it
refunds are admitted should be clearly reported by the auditor that acceptance
as due by the of claim during the relevant year without actual receipt
authorities has no significance.
concerned; Where such amounts have not been credited in the profit
and loss account but netted against the relevant
expenditure/income heads, such fact should be clearly
brought out.
(c) Escalation claims The escalation claim accepted during the previous year
accepted during the but not credited to the profit and loss account has to be
previous year; stated here.
Escalation claims would normally arise pursuant to a
contract (including contracts entered into in earlier years),
if so permitted by the contract. Only those claims to which
the other party has signified unconditional acceptance
could constitute accepted claims. Mere making of claims
by the assessee or claims under negotiations or claims
which are sub-judice [CIT v. Hindustan Housing & Land
Development Trust Ltd. [1986] 161 ITR 524 (SC)] cannot
constitute claims accepted.
(d) Any other item of Any other item which is considers as an income based on
income; his verification of records and other documents and
information gathered, but which has not been credited to
the profit and loss account.
If employees contribution to any provident fund or
superannuation fund or any other fund is not paid on or
before the due date under the respective Act, then it
becomes income of the assessee. Such information is to
be stated in this clause. Similar information is also
furnished in clause 20(b) of Form 3CD, therefore, cross
referencing may be required.
Note - In giving the details under sub-clauses (c) and (d),
due regard should be given to AS-9: Revenue
 20.26 DIRECT TAX LAWS

Recognition/Ind AS 115: Revenue from Contracts with

Customers, as applicable.
(e) Capital receipt, if The tax auditor should use his professional expertise and
any. judgement in determining whether a receipt is capital or
revenue. The capital receipts are not generally credited
to the profit and loss account, hence, the auditor should
take enough care to check out any transaction generating
receipts of capital nature.
Note – The information under sub-clauses (a), (d) and (e)
of clause (16) is to be given with reference to the entries
in the books of account and records made available to the
tax auditor for the purpose of tax audit under section
44AB. The auditor should check thoroughly the bank
account of the assessee and also the cash book to find
out any credits regarding any income earned but not
credited to the profit and loss account of the assessee.
The tax auditor may obtain a management representation
in writing from the assessee in respect of all items falling
under this clause.
The tax auditor may use his professional
expertise and judgement in determining
whether the receipt is taxable or not for the
purpose of verifying the reporting under sub-clauses (a) to
(d) of clause 16 and may report in the observation para of
audit report, disclosing the basis of the same.
17. Where any land or Where any land or building or both is transferred during
building or both is the previous year for a consideration less than the value
transferred during adopted or assessed or assessable by any authority of a
the previous year for State Government referred to in section 43CA or 50C, the
a consideration less auditor is required to verify the following details:
than value adopted (a) Details of property
or assessed or (b) Consideration received or accrued
assessable by any
(c) Value adopted or assessed or assessable.
authority of the State
Government referred The details about the nature of property i.e., whether the
to in section 43CA or property transferred during the year is land or building
50C, please furnish along with the address of such property have to be
details of property, furnished. The tax auditor should obtain the list of all
consideration properties transferred by the assessee during the
received or accrued previous year.
and value adopted The tax auditor has to furnish the amount of consideration
or assessed or received or accrued, during the relevant previous year of
assessable. audit, in respect of land/building transferred during the
year as disclosed in the books of account of the
 TAX AUDIT AND ETHICAL COMPLIANCES 20.27
a

assessee. For verifying the value adopted or assessed or

assessable, the tax auditor should obtain from the
assessee relevant information with regard to sale of Land
or Building or both during the previous [Link] case the
property is not registered, the auditor may verify relevant
documents from relevant authorities or obtain third party
expert like lawyer, solicitor representation to satisfy the
compliance of section 43CA/ section 50C. In exceptional
cases where the auditor is not able to obtain relevant
documents, he may state the same through an
observation in his report in Form 3CA/CB.
18. Particulars of With respect to this clause, the tax auditor is required to
depreciation examine the following:
allowable as per the (a) Classification of the asset
Income-tax Act, (b) Classification thereof to a block
1961 in respect of
(c) actual cost or written down value
each asset or block
of asset, as the case (d) The date of acquisition and the date on which it is
may be, in the put to use
following form:- (e) The applicable rate of depreciation
(f) The additions / deductions and dates thereof
(g) Adjustments required – specified as well as on
account of sale, etc.
(a) Depreciation of For the purpose of determining the rate of depreciation,
asset/block of assets the tax auditor has to examine the classification of the
assets into various blocks. The tax auditor should ensure
that the classification as made by the assessee is in
consonance with legal principles.
In this connection, he should traverse through judicial
pronouncements as well as through the past assessment
history of the assessee, and upon an analysis thereof, if
he comes to the conclusion that the matter is not free
from doubt or controversy, he has to indicate the fact in
his report by way of suitable qualification. It may also be
necessary to rely upon technical data for determining the
proper classification of the block. Since the tax auditor is
not a technical expert, he has to obtain suitable certificate
from concerned experts.
(b) Rate of depreciation Once the classification has been ascertained and checked
properly, the rates applicable as per the Income-tax
Rules, 1962 follow as a natural corollary. The tax auditor
must have due regard to the Income-tax Rules, 1962,
relevant clarifications from the Department and judicial
decisions.
 20.28 DIRECT TAX LAWS

Under sub-clauses (a) to (b), information in

respect of description of assets, block of
assets under which the concerned asset is
classifiable and the rate of depreciation are to be stated.
This will include information about the existing assets. In
respect of the existing assets, the computation of
depreciation would involve stating the opening written
down value of the block of assets which should be taken
from the relevant income-tax records. The tax auditor
should ensure the opening block of assets matches with
the income-tax return filed for the immediately preceding
previous year.
(c) Actual cost or written For the purpose of determination of actual cost, the tax
down value, as the auditor has to be guided by the relevant legal provisions.
case may be. Since determination of actual cost has got accounting
implications, he can rely on the relevant Accounting
Standards and Guidance Notes. Depreciation is also
allowable on intangible assets like know-how, patents,
copyrights, trademarks, licenses, franchises or any other
business or commercial rights of similar nature. There
may be intangible assets like know-how, patents,
copyrights, trade marks, licences, franchises or any other
business or commercial rights of similar nature for which
the assessee might have incurred costs. From
01.04.2021, intangible asset being goodwill does not
qualify for depreciation. The tax auditor should examine
this and the basis on which the cost of such intangible
assets has been arrived at.
(d) Additions/deductions In case an asset is purchased in foreign currency on
during the year with deferred payment basis, the auditor should verify the
dates; in the case of actual cost on the basis of section 43A. Addition or
any addition of an reduction will be limited to the exchange difference
asset, date put to actually paid during the previous year. The tax auditor is
use; including required to verify that the adjustments in the cost of fixed
adjustment on assets on account of changes in the rate of exchange of
account of: currency in the schedule of fixed assets prepared for
(i) Central Value computation of depreciation as per Income-tax Rules are
Added Tax credits in accordance with the provisions of section 43A and
claimed and allowed information about such adjustment is provided under sub-
under the Central clause (ii) of clause 18(d) of Form 3CD.
Excise Rules, 1944, The provisions of Section 36(1)(iii) and Explanation 8 to
in respect of assets section 43(1) i.e., interest related to the period after asset
acquired on or after first put to use should not form part of actual cost of such
1st March 1994, asset, should be kept in mind for capitalization of interest
 TAX AUDIT AND ETHICAL COMPLIANCES 20.29
a

(ii) change in rate of to the cost of assets. Explanation 10 to section 43(1)

currency, and (iii) provides that where a portion of the cost of an asset
subsidy or grant or acquired by the assessee has been met directly or
reimbursement, by indirectly by the Central Government or a State
whatever name Government or any authority established under any law or
called. by any other person, in the form of a subsidy or grant or
reimbursement (by whatever name called), then, so much
of the cost as is relatable to such subsidy or grant or
reimbursement shall not be included in the actual cost of
the asset to the assessee. Subsidy in respect of asset
acquired in any earlier year(s) and received during the
year has to be deducted from the written down value of
such assets in the year of receipt.
Any expenditure for acquisition of any asset etc.
exceeding ` 10,000 otherwise than account payee
cheque/draft drawn on a bank or use of electronic clearing
system, then such expenditure shall be ignored for
determining actual cost. The tax auditor should also verify
that the amount of GST input credit deducted from cost of
capital goods tallies with the credit availed on this
account.
The additions/deductions during the year have to be
reported, with dates. Where any addition was made, the
date on which the asset was put to use is to be reported.
In respect of deductions, the sale value of the assets
disposed of along with dates should be mentioned.
To ascertain when the asset has been put
to use, the tax auditor could call for basic
records like production records/installation
details/excise records/service tax records/ goods and
service tax records/records relating to power connection
for operating the machine, title deeds or building
completion certificate etc. in case of immovable assets
and any other relevant evidence. In the absence of any
specific documentation with regard to the effective date
from which the asset is put to use, he could get a
representation letter from the management, in respect of
the assets acquired.
(e) Depreciation The amount of depreciation and written down value of the
allowable. block at the year-end is calculated correctly by taking the
(f) Written down value relevant figure at the beginning of the year and adjusted
at the end of the in respect of the additions/deductions during the year.
year. The tax auditor shall verify the WDV at the beginning of
the year in respect of each block of assets.
 20.30 DIRECT TAX LAWS

Wherever a claim for depreciation involves

any reliance on any judgement or opinion or
other contentions (as to its classification, rate
applicable, cost, date on which put to use etc.), it may be
advisable for tax auditor to disclose full particulars thereof
and the basis on which the depreciation allowable has
been determined and vouched by him.
19. Amounts admissible In case the assessee has obtained a separate audit report
under sections: for claiming deductions under any of these sections, he
33AB, 33ABA, must make a reference to that report while giving the
35(1)(i), 35(1)(ii), details under this clause.
35(1)(iia), 35(1)(iii), The Tax Auditor should verify the amount debited to the
35(1)(iv), 35(2AA), Profit & Loss Account and the amount actually admissible
35(2AB), 35ABA, in accordance with the applicable provisions of law.
35ABB, 35AD, The amount not debited to the Profit & Loss Account but
35CCA, 35CCC, admissible under any of the sections mentioned in the clause
35CCD, 35D, 35DD, has also to be stated. For example, sections 33AB and
35DDA, 35E2 and 33ABA allow deduction in respect of the amount deposited in
any other relevant designated account for specified purposes which as per the
section accounting principles are not debited to the Profit and loss
A/c. In this connection, on the basis of the conditions
prescribed in the concerned section, the amount admissible
there under has to be worked out and reported.
An assessee may be eligible for deduction under one or
more sub sections of section 35. In such a case, the
deduction allowable under each sub-section should be
stated separately under the applicable part, i.e. the
amount deductible in respect of the amount debited in
Profit & Loss Account and the amount not debited to the
Profit & Loss Account.
The tax auditor should also examine the eligibility of the
expenditure/payment for deduction and compliance of the
conditions prescribed in the sub-section including
approval from the relevant/prescribed authority,
notification issued by the Central Government, any other
guideline circular etc. issued in this behalf. Tax auditor
should also refer Rule 6 of Income-tax Rules, 1962.
In case the auditor relies on a judicial
pronouncement, he may mention the fact in
his observations para provided in Form No.
3CA or Form No. 3CB, as the case may be.

2Reference to section 32AC, 32AD, 35AC and 35CCB is not given, since no deduction under these sections is
available for the current assessment year.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.31
a

20. (a) Any sum paid to an Section 36(1)(ii) provides for deduction of any sum paid to
employee as bonus an employee as bonus or commission for services
or commission for rendered where such sum would not have been payable
services rendered, to him as profit or dividend, if it had not been paid as
where such sum was bonus or commission.
otherwise payable to The tax auditor should obtain the list of
him as profits or employees eligible for bonus or commission
dividend for services rendered with amounts and
check the basis of calculation of bonus or commission.
(b) Details of Section 2(24)(x) includes within the scope of income any
contributions sum received by the assessee from his employees as
received from contributions to any provident fund or superannuation
employees for fund or ESI fund or any other fund for employees welfare.
various funds as Section 36(1)(va) permits deduction of any sum received
referred to in section by the assessee from any of his employees to which the
36(1)(va) namely, provisions of section 2(24)(x) are applicable, if it is
nature of fund, sum credited by the assessee to the account of the employees
received from in the relevant statutory fund on or before the due date.
employees, due date In respect of such sum, if any extension is granted by
for payment, actual respective authorities, it shall be considered. This can be
amount paid and the taken into consideration for determining the due date of
actual date of payment.
payment to the
Under this clause, details regarding the nature of fund,
concerned
details of the amount deducted, due date for payment,
authorities.
actual amount paid and actual date of payment to the
concerned authorities in respect of provident fund, ESI
fund or other staff welfare fund have to be stated.
Under this clause, the requirement is only in
respect of the disclosure of the amount and
the tax auditor is not expected to express his
opinion about its allowability or otherwise. The tax auditor
should verify the employment/ contract details of the
employees so as to ascertain the nature of payments.
The tax auditor should get a list of various contributions
recovered from the employees which come within the
scope of this clause and the date on which it is deposited.
He should also verify the documents relating to provident
funds and other welfare funds. He should verify the
agreement under which employees have to make
contributions to provident fund and other welfare funds.
The ledger account of contributions from employees
should be reviewed; the due dates of payments and the
actual dates of payment should be verified with the
 20.32 DIRECT TAX LAWS

evidence available. In view of the voluminous nature of

the information, the tax auditor can apply test checks and
compliance tests to satisfy himself that the system of
recovery and remittance is proper.
21. (a) Please furnish the - Capital expenditure is not allowable in computing
details of amounts business income unless specifically provided in any
debited to profit and sections of the Act. The details of capital
loss account, being expenditure, if any, debited to the profit and loss
in the nature of account should be maintained in a classified manner
capital, personal, stating the amounts under various heads separately.
advertisement The total amount of capital expenditure debited to
expenditure in any the profit and loss account is to be reported under
souvenir, brochure, this clause in the e-filing portal.
tract, pamphlet or - Personal expenses debited to the profit and loss
the like published by account are to be specified under this sub-clause as
a political party, they are not deductible in the computation of total
expenditure incurred income under section 37.
at clubs, expenditure Note - Section 143(1)(e) of the Companies Act 2013
for any purpose specifically requires the auditor to inquire whether
which is an offence personal expenses have been charged to revenue
or is prohibited by account. In the case of a person whose accounts of
law or expenditure the business or profession have been audited under
by way of penalty or any other law, the tax auditor will have to report in
fine for violation of respect of personal expenses debited in the profit
any law (enacted in and loss account. In the case of a person who
India or outside carries on business or profession but who is not
India), expenditure required by or under any other law to get his
by way of other accounts audited, the tax auditor will have to verify
penalty or fine not the personal expenses. if debited in the expenses
covered above, account while conducting the audit and verify the
expenditure incurred amount of expenses mentioned under this clause.
to compound an - Section 37(2B) provides that no allowance shall be
offence under any made in respect of expenditure incurred by an
law for the time assessee on advertisement in any souvenir,
being in force, in brochure, tract, pamphlet or the like published by a
India or outside political party. Therefore, the expenditure of this
India, expenditure nature should be segregated and reported under this
incurred to provide clause. The auditor may also keep in mind the
any benefit or provisions of section 80GGB and 80GGC which
perquisite, in allow deduction in respect of contribution made by
whatever form, to a corporate and non-corporate assessees respectively
person, whether or to political parties and electoral trust, as required to
not carrying on a be reported by him in clause 33 of Form no. 3CD.
business or
 TAX AUDIT AND ETHICAL COMPLIANCES 20.33
a

exercising a - The amount of payments made to clubs by the

profession, and assessee during the year being cost for club services
acceptance of such and facilities used should be indicated under this
benefit or perquisite clause. The fact whether such expenses are incurred
by such person is in in the course of business or whether they are of
violation of any law personal nature should be ascertained. If they are
or rule or regulation personal in nature, they are to be shown separately
or guideline, as the under Clause 21(a) referred to earlier.
case may be, for the - This clause requires separate reporting of any
time being in force, expenditure incurred by an assessee for any
governing the purpose which is an offence or which is prohibited
conduct of such by law is to be reported. It also requires reporting of
person, expenditure expenditure by way of penalty or fine for violation of
incurred to settle any law (enacted in India or outside India).
proceedings The tax auditor should obtain in writing from the
initiated in relation assessee, the details of all payments by way of
to contravention penalty or fine for violation of any laws have been
under such law as made and paid or incurred during the relevant
notified by the previous year and how such amounts have been
Central dealt with in the books of accounts produced for
Government in the audit.
Official Gazette in
This clause covers only penalty or fine for violation
this behalf.
of law and not the payment for contractual breach or
liquidator damages. The tax auditor should keep in
mind the difference between the amount prohibited
by law and the amount paid which is compensatory
in nature under the relevant statue. Supreme Court
in Mahalakshmi Sugar Mills Co. Ltd. vs CIT 123 ITR
429 and CIT vs Hyderabad Allwyn Metal Works Ltd
172 ITR 113 (SC) wherein it was held that when an
amount paid by assessee could be regarded as
compensatory in character then it would be allowable
u/s 37(1) and if it were penal in nature it was not
allowable.
Tax auditor is not required to express any opinion as
to the allowability or otherwise of the amount of
penalty or fine for violation of law. He is only
required to give the details of such items as have
been charged in the books of accounts.
- In this clause, the tax auditor has to verify and report
any expenditure incurred by the assessee during the
year to compound an offence under any law for the
time being in force, in India or outside India.
 20.34 DIRECT TAX LAWS

- This clause requires specifically to report any benefit

or perquisite, in whatever form, to a person, whether
or not carrying on a business or exercising a
profession, where acceptance of such benefit or
perquisite by such person is in violation of any law
or rule or regulation or guideline, as the case may
be, for the time being in force, governing the
conduct of such person.
The tax auditor should obtain the list of beneficiaries
in respect of whom tax has been deducted at source
under section 194R to form an opinion as to whether
any benefits and perquisites are inadmissible and
require reporting under this clause.
In case the tax auditor is of the opinion that any
amount debited to the profit and loss account is to be
disallowed as per section 37 and hence, has to be
reported under this clause, then, reporting need not be
done under clause 21(b) on amounts inadmissible
under section 40(a)(ia) for non-deduction of tax at
source. Appropriate disclosure should be made in the
audit report in respect of such transactions in the
observation in Para 3 of Form No. 3CA or Para 5 of
Form No. 3CB, as may be applicable.
(b) Amounts Section 40(a) specifies certain amounts which shall not be
inadmissible under deducted in computing the income chargeable under the
section 40(a)(i)/(ia) head “Profits and gains of business or profession”. Under
with details of section 40(a)(i), 100% disallowance attracted with respect
payment on which to sum paid or payable to a non-resident and under
tax has not deducted section 40(a)(i)/(ia) 30% disallowance attracted with
or after deduction, respect to sum paid or payable to a resident payee on tax
tax has not been is deductible at source and such tax has not been
paid on or before the deducted or after deduction has not been paid on or
due specified under before the due date of furnishing return of income under
section 139(1) and section 139(1).
the amount Under this clause, the tax auditor is required to report the
inadmissible under details of payment on which tax is not deducted at source
section 40(a)(iib), and also the details of payment on which tax has been
40(a)(iii), 40(a)(iv), deducted but not paid during the previous year or before
40(a)(v)3 due date of filing return of income specified under section
139(1). The tax auditor is advised to give details under
this clause for each individual payee.

3 Sub-clause (ic) of section 40(a) relates to fringe benefit tax and sub-clause (iia) thereof relates to wealth-
tax. Reference to these sub-clauses are not given since these taxes have been abolished.
TAX AUDIT AND ETHICAL COMPLIANCES 20.35
a

Sub clause 40(a)(iib) provides that (a) any amount paid by

way of a royalty, license fees, service fees, privilege fees,
service charge or any other fees or charge by whatever
name called, which is levied exclusively on; or (b) which is
appropriated, directly or indirectly from, a State
Government undertaking by the State Government is
inadmissible expenditure. The Tax auditor should verify
any such payment made by State Government
undertaking to the State Government and should report
under clause.
The amount of salary which is paid outside India or to a
non-resident in respect of which tax has not been
deducted but which is required to be deducted under the
applicable provisions of the Income-tax Act,1961 or tax
has not been paid after deductione is not allowed as a
deduction u/s. 40(a)(iii) and the same is required to be
reported under this sub-clause. This information is
required to be given for each individual payee. The tax
auditor should also furnish the date of payment along with
the name and address of the payee.
40(a)(iv) provides that any payment to a provident or
other fund established for the benefit of employees of the
assessee shall be disallowed, unless the assessee has
made effective arrangements to secure that tax shall be
deducted at source from any payments made from the
fund which are chargeable to tax under the head
“Salaries”. The tax auditor is also required to report the
same under this sub-clause.
Any tax paid by an employer on non-monetary perquisites
is exempt in the hands of the employee as per section
10(10CC). Further, as per section 40(a)(v) the tax paid by
the employer on non-monetary perquisites provided to
employees shall not be deductible in computing profits
and gains from business or profession. The tax auditor is
required to report the amount of such tax paid by the
employer, in case it is debited to the profit and loss
account under this sub-clause.
For this purpose the tax auditor may examine
the books of accounts and tax deduction
returns.
In case where the assessee submits that any sum debited
to profit and loss account is not inadmissible under the
provisions of section 40(a), the tax auditor may exercise
his judgement in the light of the applicable laws and report
 20.36 DIRECT TAX LAWS

accordingly about the compliance of this provision. The

tax auditor may rely upon the judicial pronouncements
while taking any particular view. In case of difference of
opinion between the tax auditor and the assessee, the tax
auditor should state both the view points. In case of
voluminous nature of the information, the tax auditor can
apply materiality principles, tests checks and compliance
tests for verifying the information required to be provided
under this clause.
Note: Case Studies on the ethical aspects in relation to
tax audit under section 44AB and other Audit Reports are
presented at the end of this Chapter.
Case Study 1 pertains to reporting under Clause 21(b)
(c) Amounts debited to Under Clause 21(c) of Form No. 3CD, the amounts
profit and loss debited to profit and loss account being, interest, salary,
account being, bonus, commission or remuneration inadmissible under
interest, salary, section 40(b)/40(ba) and computation thereof have to be
bonus, commission reported. Section 40(b) deals with expenditure not
or remuneration allowable in case of a firm/LLP whereas section 40(ba)
inadmissible under deals with expenses not allowable in case of an AOP or
section 40(b)/40(ba) BOI.
and computation The inadmissible remuneration, salary, bonus or
thereof; commission under section 40(b) has to be determined on
the basis of the provisions of sub-clause (v) of section
40(b) read with the limits laid down therein. Such limits
are laid down as a percentage of book profits.
It is advisable for the auditor to obtain from the assessee a
detailed working of the inadmissible remuneration, salary,
bonus or commission under section 40(b). He has to verify
the computation from the instrument or agreement or any
other document evidencing partnership including any
supplementary documents or other documents effecting
changes which would affect the computation of the
inadmissible amounts under section 40(b).
Under section 40(b)(iv), any payment of interest to any
partner which is authorised by, and is in accordance with,
the terms of the partnership deed and relates to any
period falling after the date of such partnership deed in so
far as such amount exceeds the amount calculated at the
rate specified under the Income-tax Act from time to time
will not be admissible as a deduction.
Section 40(ba) lays down that any interest or
remuneration paid by an AOP to its member shall not be
allowed as a deduction to the AOP.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.37
a

In order to determine the amount inadmissible

under section 40(b), the tax auditor should
obtain the computation of total income from
the assessee.
(d) Disallowance under Disallowance would be made if the payment or aggregate
section 40A(3) / of payments, exceeding ` 10,000 (` 35,000 in case of
deemed income plying, hiring or leasing of goods carriage) is made to a
under section person in a day otherwise than by an account payee
40A(3A) cheque drawn on a bank or account payee bank draft or
[On the basis of the use of electronic clearing system through a bank account
examination of books or through such other electronic mode as may be
of account and other prescribed. However, no disallowance would be attracted
relevant documents/ in respect of cases and circumstances prescribed under
evidence, whether Rule 6DD.
the expenditure The tax auditor should obtain a list of all cash
covered under payments in respect of expenditure exceeding
section 40A(3)/ the prescribed limit under section 40A(3A).
40A(3A) read with The list should be verified by the tax auditor with the
Rule 6DD were made books of accounts in order to ascertain whether the
by account payee conditions for specific exemption granted under Rule 6DD
cheque drawn on a are satisfied. Details of payments which do not satisfy the
bank or account above conditions should be stated under this clause. Audit
payee bank draft or tools are available to find out such payments
use of electronic expeditiously and accurately. These tools may be
clearing system employed in case data is voluminous.
through a bank Practically, it may not be possible to verify each payment,
account or through reflected in the bank statement, as to whether the
such other electronic payment has been made through account payee cheque,
mode as may be demand draft or use of electronic clearing system through
prescribed. If not, a bank account or through such other electronic mode as
please furnish the may be prescribed, it is, thus, desirable that the tax
details of date of auditor should obtain suitable certificate from the
payment, nature of assessee to the effect that the payments for expenditure
payment, amount referred to in section 40A(3) and section 40A(3A) were
and name and PAN made by account payee cheque drawn on a bank or
or Aadhaar number account payee bank draft or use of electronic clearing
of the payee, if system through a bank account or through such other
available]. electronic mode as may be prescribed, as the case may
be.
Where the tax auditor has relied on certificate of the
assessee, the fact has to be reported as an observation in
clause 3 of Form 3CA and clause 5 of Form 3CB, as the
case may be. The tax auditor, in his report, may comment
on such violation as under:-
 20.38 DIRECT TAX LAWS

“It is not possible for me/us to verify whether the

payments in excess of ` 10,000 have been made
otherwise than by account payee cheque or bank draft or
prescribed electronic modes, as the necessary evidence
is not in the possession of the assessee”.
Note: Case Studies on the ethical aspects in relation to
tax audit under section 44AB and other Audit Reports are
presented at the end of this Chapter. Case Study 2
pertains to reporting under Clause 21(d).
(e) Provision for As per section 40A(7), no deduction shall be allowed in
payment of gratuity respect of any provision made by the assessee for the
not allowable under payment of gratuity to his employees on their retirement
section 40A(7); or on termination of their employment for any reason.
The deduction, however, shall be allowed in relation to
any provision made by the assessee for the purpose of
payment of a sum by way of contribution towards an
approved gratuity fund or for the purpose of payment of
gratuity that has become payable during the previous
year.
The gratuity fund should be approved for the relevant
previous year by the Commissioner of Income-tax. If the
gratuity fund is not approved for the time being, the
assessee would not be able to avail of deduction for any
provision made for the payment of a sum by way of any
contribution towards that gratuity fund.
The tax auditor should call for the order of the
Principal Commissioner of Income-tax/
Commissioner of Income-tax granting approval
to the gratuity fund, verify the date from which it is
effective and also verify whether the provision has been
made as provided in the trust deed.
(f) Any sum paid by the Under section 40A(9), any payment made by an employer
assessee as an towards the setting up or formation of or as contribution to
employer not any fund, trust, company, association of person, body of
allowable under individuals, society registered under Societies Registration
section 40A(9); Act or other institutions is not allowable. The tax auditor
should examine the details of payments which are not
allowable under this section.
The tax auditor shall maintain detailed working
papers documenting the factual nature of such
expenses incurred and debited to the Profit
and Loss for the previous year under consideration which
are considered disallowable u/s 40A(9). The tax auditor
should get the relevant content in working papers
 TAX AUDIT AND ETHICAL COMPLIANCES 20.39
a

prepared for such disallowance duly confirmed by the

assessee as a necessary safeguard.
If any such contribution is made by the assessee in a
capacity other than that of an employer, then such
contribution is not to be considered as disallowable u/s
40A(9) of the Income-tax Act, 1961. Thus, the tax auditor
should carefully examine the capacity of assessee while
making such contribution before reaching any conclusions
for allowing or disallowing such contribution.
It may be noted that section 40A(9) allows deduction of
any contributions made as an employer towards
recognized provident fund or approved superannuation
fund or notified pension scheme or approved gratuity fund
or as required by or under any other law for the time being
in force. Thus, any contribution made to Employees’
Welfare Co-op Society will not be allowed as a deduction
in the case of the employer company under section
40A(9), unless such contribution is required by or under
any other law for the time being in force. Instruction: No.
1799, dated 3-10-1988.
(g) Particulars of any The assessee is required to furnish particulars of any
liability of a liability of a contingent nature debited to the profit and
contingent nature; loss account.
The tax auditor, for verifying the details of contingent
liability debited to the profit and loss account, may
conduct a detailed scrutiny of various account heads e.g.,
outstanding liabilities, provision etc., if required.
Accounting policy followed and disclosed would be helpful
in ascertaining and verifying details. The tax auditor may
also verify reporting under CARO and disclosure in the
Notes on accounts.
The tax auditor should verify that the
Contingent liability shown in Notes to
Accounts is not required to be reported, as the
amounts debited to Profit and Loss account are required
to be reported in this sub-clause.
(h) Amount of deduction The expenditure which is relatable to the income which
inadmissible in terms does not form part of total income is not allowed as
of section 14A in deduction in terms of Section 14A of the Act.
respect of the Rule 8D lays down the method for determining the amount
expenditure incurred of expenditure in relation to income not includable in total
in relation to income income.
 20.40 DIRECT TAX LAWS

which does not form An assessee may claim that no expenditure has been
part of total income; incurred by him in relation to income which does not form
part of total income, even in such case the provision of
section 14A will apply.
The tax auditor has to verify the amount of inadmissible
expenditure as estimated by the assessee with reference
to established principles of allocation of expenditure
based on logical parameters like proportion of exempt and
taxable income recorded, turnover, man hours spent to
earn the relevant income etc. For allocation of interest
between taxable and nontaxable income, the quantum of
investment, the period and the rate of interest are
generally the relevant factors to be considered.
It is primarily the responsibility of the assessee to furnish the
details of amount of deduction inadmissible in terms of
section 14A i.e., in respect of the expenditure incurred in
relation to income, which does not form part of the total
income. The tax auditor has to examine the details of amount
of inadmissible expenditure as furnished by the assessee.
While carrying out such examination the tax auditor is
entitled to rely on the management representation.
(i) Amount inadmissible The provisions of section 36(1)(iii) provide that the
under the proviso to amount of interest paid in respect of capital borrowed for
section 36(1)(iii) the purposes of business or profession would be allowed
as a deduction in computing the income referred to in
section 28. The proviso thereunder provides that any
amount of the interest paid, in respect of capital borrowed
for acquisition of an asset (whether
capitalized in the books or account or not) for
any period beginning from the date on which
the capital was borrowed for acquisition of the
asset till the date on which such asset was put to use,
shall not be allowed as a deduction.
The tax auditor, while determining the admissible/
inadmissible amount under section 36(1)(iii) should also
keep in mind the requirements of ICDS IX relating to
borrowing cost.
22. (i) Amount of interest The Micro, Small and Medium Enterprises Development
inadmissible under Act, 2006 (MSMED Act). MSMED is an Act to provide for
section 23 of the facilitating the promotion and development and enhancing
Micro, Small and the competitiveness of micro, small and medium
Medium Enterprises enterprises and for matters connected therewith or
Development Act, incidental thereto
2006; or
 TAX AUDIT AND ETHICAL COMPLIANCES 20.41
a

(ii) Total amount Notwithstanding anything contained in the Income-tax Act, 1961
required to be paid (43 of 1961), the amount of interest payable or paid by the
to a micro or small buyer, under or in accordance with the provisions of this Act,
enterprise, as shall not for the purposes of the computation of income under
referred to in the Income-tax Act,1961 be allowed as a deduction.
section 15 of the The inadmissible interest has to be determined on the
MSMED Act, during basis of the provisions of the MSMED Act. Section 16 of
the previous year; the MSMED Act provides for the date from which and the
(iii) Of amount referred rate at which the interest is payable. Accordingly, where a
to in (ii) above, buyer fails to make payment of the amount to the supplier,
amount – being micro and small enterprise, as required under
section 15, the buyer shall, notwithstanding anything
(a) paid up to time
given under contained in any agreement between the buyer and the
section 15 of the supplier or any law for the time being in force, be liable to
MSMED Act; pay compound interest with monthly rests to the supplier
on that amount from the appointed date or, as the case
(b) not paid up to may be, from the date immediately following the date
time given under agreed upon, at three times of the bank rate notified by
section 15 of the the Reserve Bank.
MSMED Act and
inadmissible for Section 24 of MSMED Act provides that sections 15 to 23
the previous year.” shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in
force. Sections 15 to 24 of the MSMED Act make a buyer
liable to pay interest but they, by themselves, do not
require the buyer to make payment to the supplier.
However, as payment of such interest is considered as
penal in nature, no deduction is allowed under section 37
of the Income Tax Act, 1961.
Clause 22 has two limbs – under the first limb, covering
sub-clause (i), the amount of interest inadmissible under
section 23 of the MSMED Act needs to be stated. Under
the second limb covering remaining two sub-clauses,
under sub-clause (ii) the total amount required to be paid
to a micro or small enterprise, as referred to in section 15
of the MSMED Act during the previous year needs to be
stated. In sub-clause (iii) under (a), the amount paid up to
the time given under section 15 of the MSMED Act, and
under (b) the amount not paid up to time given under
section 15 of the MSMED Act and inadmissible for the
previous year needs to be stated. Thus, the amount to be
reported under (b) is the payment which satisfies the dual
conditions, namely, paid beyond the time given under
section 15 of the MSMED Act and inadmissible for the
previous year.
20.42 DIRECT TAX LAWS

The tax auditor, while verifying the reporting in

respect of clause 22(i) should take the
following steps:
(a) obtain a full list of suppliers of the assessee
which fall within the purview of the definition of
“Supplier” under section 2(n) of the MSMED Act.
It is the responsibility of the auditee to correctly
classify and identify those suppliers who are
covered by this Act.
(b) In respect of payments made to such suppliers,
obtain a list of all instances where there was
delay in payment beyond the time limit specified
under Section 15 of the MSMED Act, the interest
payable for such delay and the interest actually
paid.
(c) Review the list so obtained and verify the
accuracy thereof on test check basis including
the calculation of interest. Also, cross check the
disclosure made in the financial statements in
terms of Section 22 of the MSMED Act with the
list so obtained. In case of company auditees,
reference may also be made to half-yearly Form
MSME-1, if any, furnished by such companies to
the ROC.
(d) Verify from the books of account and Financial
Statements whether any interest payable or paid
to the supplier(s) in terms of section 16 of the
MSMED Act has been provided for in the books
of account or has been debited to the Profit &
Loss Account.
(e) Verify that only interest paid or payable in terms
of Section 16 of the MSMED Act which has been
debited to the Profit & Loss account is reported
under clause 22(i). Such interest is not allowable
as deduction for the purposes of computation of
income under the Income-tax Act, 1961 in terms
of Section 23 of the MSMED Act.
Under clause 22, full disclosure is required to be made as
required in sub-clauses (ii) and (iii). Accordingly –
(a) Reporting under Clause 22(ii) should include the
amount required to be paid to Micro and Small
Enterprises during the previous year (including
amounts which are not claimed as a deduction in the
TAX AUDIT AND ETHICAL COMPLIANCES 20.43
a

Profit and Loss Account) irrespective of whether

they have been paid during the year and whether or
not they are outstanding on the Balance Sheet date.
Reporting under this sub-clause should also include
amounts which have accrued during the year but are
not due for payment as on 31st March.
Thus, under clause 22(ii) which requires reporting of
“total amount required to be paid to a micro or small
enterprise, as referred to in section 15 of the
MSMED Act, during the previous year”, the total
amount required to be paid during the year needs to
be stated even if the said amount has been actually
paid during the year.
(b) Under Clause 22(iii) –
• Under (a), all payments out of that included
under 22(ii), which have been settled within the
time limit laid down in Section 15 of MSMED
Act need to be stated.
• Under (b), only such amounts which will attract
disallowance under section 43B(h) should be
reported. This will include only amounts which–
(i) have been claimed as a deduction during
the year;
(ii) are outstanding on the last date of the
previous year; and
(iii) have not been paid within the time limit
specified in section 15 of the MSMED Act.
While verifying the amounts reported under this clause, the
tax auditor should note that the benefit available under the
first proviso to section 43B for payments made upto the due
date of filing the return is not available for payments covered
under clause (h). Hence, any payment beyond the time limit
specified u/s 15 of MSMED Act (and which has not been
paid during the previous year) will be inadmissible.
In order to promote timely payments to micro or small
enterprises, the Finance Act, 2023 includes payments
made to such enterprises within the ambit of section 43B
of the Income-tax Act. Accordingly, clause (h) in section
43B has been inserted w.e.f. A.Y. 2024-25 to provide that
any sum payable by the assessee to a micro or small
enterprise beyond the time limit specified in section 15 of
the MSMED Act shall be allowed as deduction only on
actual payment.
 20.44 DIRECT TAX LAWS

Note - Section 15 of the of the Micro, Small and Medium

Enterprises Development Act, 2006 mandates payment of
goods or services to supplier, being a micro or small
enterprises by the buyer on or before the date agreed
upon between them in writing i.e., as per the written
agreement, which cannot be more than 45 days. If there is
no such written agreement, the payment shall be made
before the appointed day i.e., within 15 days.
If the sum payable by the assessee to a micro or small
enterprise is paid as per written agreement (maximum within
45 days) or within 15 days in case of no agreement, the
deduction can be claimed on accrual basis if mercantile
method of accounting is followed by the assessee.
However, if the sum payable by the assessee to a micro or
small enterprise is not paid as per written agreement or
within 15 days in case of no agreement, the deduction would
be allowed in the previous year in which it is actually paid.
Note – Section 23 of MSMED Act specifically prohibits the
assessee from claiming the deduction in respect of
interest paid to MSME. Thus, no deduction would be
allowed in respect of such interest even if such sum is
actually paid by the assessee. However, any sum payable
(not being interest referred under section 23 of MSMED
Act, 2006) by the assessee to a micro or small enterprise
(being a supplier) beyond the time limit specified in
section 15 of MSMED Act, 2006 shall be allowed as
deduction only on actual payment.
23. Particulars of The section enjoins on the Assessing Officer, the power to
payments made to fix the quantum of disallowance. Under this clause, the
persons specified particulars of payments stated to be made to persons
under section covered under section 40A(2)(b) should be examined.
40A(2)(b) The tax auditor in this connection:
(a) Obtain full list of specified persons as contemplated in
this section.
(b) Obtain details of payments made to the specified
persons.
(c) Scrutinise all items of payments to the above persons.
(d) Call for all the contracts or agreements entered into by
the assessee and list out the contracts and
agreements entered into with the specified persons
and segregate the items of payments made to them
under these agreements.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.45
a

Where the transactions are voluminous or the list contains

several names, scrutiny to be made to the extent possible.
In that case, reliance may be made on the information
supplied by the client with adequate disclosure in the
report.
24. Amounts deemed to Section 33AB allowed deduction in respect of Tea
be profits and gains Development Account, Coffee Development Account and
under section 33AB Rubber Development Account. The auditor is required to
or 33ABA. verify the amount reported as deemed income chargeable
as profits and gains of business under the circumstances
specified in section 33AB(4)/(5)/(7) and (8).
Section 33ABA allowed deduction in respect of Site
Restoration Fund. The auditor is required to verify the
amount reported as the deemed income chargeable as
profits and gains of business under the circumstances
specified in section 33ABA(5)/(7) and (8).
Tax auditor has to verify the details regarding
the deposit account and site restoration
account. He also has to verify the accuracy of
details given by the assessee by scrutinizing the books of
accounts and other relevant documents and evidence.
He also has to verify whether the assets acquired through
deposit account is not sold or transferred before expiry of
eight years from the date of acquisition. Verify the manner
of utilization of amount withdrawn from the specified
reserve account.
25. Any amount of profit The tax auditor should obtain a list containing all the
chargeable to tax amounts chargeable under section 41 with the
under section 41 and accompanying evidence, correspondence etc. He should
computation thereof. examine the past records to satisfy himself about the
correctness of the information provided by the assessee.
The tax auditor has to examine whether the
profit chargeable to tax has been stated under
this section. This information has to be given
irrespective of the fact whether the relevant amount has
been credited to the profit and loss account or not. The
computation of the profit chargeable under this clause is
also to be stated.
The tax auditor should check whether amounts which have
been written back in respect of trading liability by way of
remission or cessation thereof or otherwise, is credited to
Profit & Loss account. If any such liability credited to profit
and loss account is already offered to tax in any prior
 20.46 DIRECT TAX LAWS

period, the same shall not, once again, be considered as

income in the year in which it is so credited.
In case the amount given in this clause regarding section
41 of the Act is not routed through profit and loss account
or income and expenditure account, the auditor may
include the said fact in the observation para of the audit
report.
26. In respect of any As per section 43B, deduction in respect of certain
sum referred to in expenditure is allowable only on the basis of actual
section 43B, the payment made within the time limits specified in section
liability for which:- 43B.
(A) Pre-existed on the Section 43B is applicable in respect of expenditure for
first day of the which a deduction is otherwise allowable under the Act.
previous year but Therefore, where any expenditure is reported under any
was not allowable in other clause indicating that deduction is otherwise not
the assessment of allowable, there is no need of reporting such expenditure
any preceding under this clause.
previous year and If the assessee is maintaining its books of accounts on
was the mercantile system, the tax auditor should verify the
(a) paid during the aforesaid particulars of section 43B from the books of
previous year; account for the year under audit as well as from the books
(b) not paid during of account, vouchers and documents of the immediately
the previous succeeding assessment year and the return of income for
year; the earlier assessment years to ensure that the
information about the aforesaid payments made in the
(B) Was incurred during subsequent year have been correctly reported.
the previous year
The liability incurred during the year in respect of all the
and (for clauses
specified sums should be clearly distinguished from the
other than clause liability that pre-existed on the first day of the relevant
(h) of section 43B) previous year.
was
The liability which pre-existed on the first day of the
(a) paid on or previous year is allowable as deduction if paid during the
before the due
previous year. This is required to be reported in clause
date for
26(A)(a). If such liability is not paid during the previous
furnishing the
year, then, the same has to be reported in clause
return of 26(A)(b). The liability which is incurred in the previous
income of the year (except under clause (h) of section 43B) is allowable
previous year to the extent it is paid on or before the due date for
under section
furnishing the return of the income under section 139(1).
139(1);
Such items are to be disclosed in clause 26(B)(a). If such
(b) not paid on or liability is not paid before the due date, the same is
before the reported in clause 26(B)(b).
aforesaid date
 TAX AUDIT AND ETHICAL COMPLIANCES 20.47
a

(State whether sales In respect of any sum referred to in clause (h) of section
tax, customs duty, 43B, reported under (A) of this clause as pre-existed on
excise duty, or any the first day of the previous year, the tax auditor should
other indirect tax, cross-check the amount so reported with the sum
levy, cess, impost, reported as inadmissible in clause 22 during the
etc., is passed immediately preceding previous year. If the same is paid
through the profit during the year it should be reported in (a) and if it is not
and loss account). paid during the year it should be reported in (b). In the
next year, tax auditor should cross check the amount
reported in Clause 26(A)(a) with the amount reported as
inadmissible in clause 22 (iii)(b) and the amount reported
in Clause 26A(b) during the immediately preceding
previous year. There is no reporting required under (B) in
respect of any sum referred to in clause (h) of section
43B.
In case of GST liability under reverse charge mechanism
(RCM), if liability is booked but not paid on or before the
due date of filing return under section 139(1), the amount
must be reported under this clause. Auditor must obtain
and verify the same with GST payable ledger or GSTR-3B
reconciliations.
27. (a) Amount of Central The amount of CENVAT/GST availed or utilized should be
Value Added Tax reported under this clause. In some cases, CENVAT/GST
credits availed of or availed may be lesser than the CENVAT/GST credit
utilised during the utilized during the year on account of opening balance in
previous year and its CENVAT/GST account or vice versa as such it would be
treatment in the advisable, in order to avoid any misleading conclusion
profit and loss and inferences to report the opening and closing balances
account and of CENVAT/GST.
treatment of Regarding the reporting of accounting treatment of
outstanding Central CENVAT/GST credit, the clause requires that its
Value Added Tax treatment in profit and loss account and the treatment of
credits in the outstanding CENVAT/GST credit in the account have to
accounts. be reported upon.
The tax auditor should verify that there is a proper
reconciliation between balance of CENVAT credit in the
accounts and relevant statutory records. .
(b) Particulars of income It may be noted that information under this clause would
or expenditure of be relevant only in those cases where the assessee
prior period credited follows mercantile system of accounting. Under cash
or debited to the system of accounting, expenses debited/ income credited
profit and loss to the profit and loss account would be current year’s
account. expenses/income even though they may relate to earlier
years.
 20.48 DIRECT TAX LAWS

The tax auditor should obtain the particulars of

expenditure or income of any earlier year debited or
credited to the profit and loss account of the relevant
previous year when mercantile system of accounting is
followed.
It may be noted that there is a difference between
expenditure of any earlier year debited to the profit and
loss account and the expenditure relating to any earlier
year, which has crystallised during the relevant year.
Material adjustments necessitated by circumstances
which though related to previous periods but determined
in the current period, will not be considered as prior
period items.
In such cases, though the expenditure may relate to the
earlier year, it can be considered as arising during the
year on the basis that the liability materialised or
crystallised during the year and such cases will not be
reported under this clause. Similar consideration will apply
in relation to income also.
29A (a) Whether any amount This clause requires disclosure of whether any amount is
is to be included in chargeable to tax under section 56(2)(ix), and if so, to
income chargeable furnish prescribed details of such income.
under the head Section 56(2)(ix) provides for taxability as Income from
‘income from other Other Sources of any sum of money received as an
sources’ as referred advance or otherwise in the course of negotiations for
to in clause (ix) of transfer of a capital asset, if such sum is forfeited and the
sub-section (2) of negotiations do not result in transfer of such capital asset.
section 56? (Yes/No) Any such forfeited amount if it is in respect of a personal
(b) If yes, please furnish capital asset is not required to be reported, where such
the following details: asset or the advance or the forfeiture is not recorded in
(i) Nature of income the books of account relating to the business or
(ii) Amount thereof profession.
If an advance has been received and has been
outstanding for a considerable period of time or has
become time barred, there is no requirement to report
such amount unless and until it is forfeited by an act of
the assessee.
Forfeiture of amounts received as advance towards transfer
of a capital asset would become income under sub-clause
(ix) of section 56(2) and is is required to be reported under
this clause. Any advances received and forfeited towards
sale of stock-in-trade would be taxable under section 28(i)
and would not be required to be reported since the amount
would be credited to profit & loss account.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.49
a

The tax auditor should obtain a representation

from the assessee regarding all such advances
received towards transfer of capital assets
which have forfeited during the year. He should examine
whether any amount of such advances has been written
back during the year and examine the basis of such write
back was on account of an act of forfeiture.
29B (a) Whether any amount This clause requires reporting as to whether any amount
is to be included as is to be included as income chargeable under the head
income chargeable ‘income from other sources’ as referred to in section
under the head 56(2)(x).
‘Income from other Section 56(2)(x) provides that where any person receives
sources’ as referred in any previous year, from any person or persons money,
to in clause (x) of immovable property, or other property and conditions
sub-section (2) of stated in the clause are satisfied, then, it is treated as
section 56? (Yes/No) income of the recipient.
(b) If yes, please furnish Receipt of assets, other than immovable property or
the following details: assets included within the purview of property under the
(i) Nature of said section, would not be covered by the provisions of
income: this section, and would, therefore not be required to be
(ii) Amount (in `) reported. For e.g., Stock-in-trade, not being a capital
thereof: asset, is not covered by this provision.
The tax auditor should obtain a representation
from the assessee regarding any such receipts
during the year, either received in his business or
profession or recorded in the books of account of such
business or profession. He should also scrutinise the books
of account to verify whether receipt of any such amount or
asset has been recorded therein. Based on such
verification, tax auditor has to consider whether the
question is to be answered in affirmative or otherwise.
In case answer to clause 29B(a) is yes, then the following
details have to be furnished, namely nature of income and
amount. In case of nature of income, it has to be stated
whether the income is by way of receipt of any sum of
money or from acquisition of any immovable property like
land, building etc. or other than immovable property like
shares and securities, jewellery, drawings, paintings etc.
30. Details of any Details of the amount borrowed on hundi (including
amount borrowed on interest on such amount borrowed) and details of
hundi or any amount repayment otherwise than by an account payee cheque,
due thereon are required to be indicated under this clause.
(including interest on The tax auditor should obtain a complete list of
the amount borrowings and repayments of hundi loans otherwise than
 20.50 DIRECT TAX LAWS

borrowed) repaid, by account payee cheques and verify the same

otherwise than with the books of account.
through an account The tax auditor should verify the
payee cheque borrowing/repayments with reference to such evidence
[Section 69D] which may be available and in the absence of conclusive
or satisfactory evidence, the auditor may obtain suitable
certificate/ management representation in this regard.
30A (a) Whether primary This clause requires reporting of primary
adjustment to adjustments and various other details, for the
transfer price, as purpose of making secondary adjustments
referred to in sub- under section 92CE.
section (1) of 92CE, The tax auditor should obtain a certificate from the
has been made assessee as to what transfer pricing adjustments has
during the previous been made during the previous year so that the primary
year? (Yes/No) onus should be with the management and then the same
should also be verified from the tax records to check
whether there is any such occurrence.
(b) If yes, please furnish Clause 30A requires reporting of whether primary
the following adjustment to transfer price, as referred to in section
details:- 92CE(1), has been made during the previous year. Thus
(i) Under which the tax auditor is required to verify whether any primary
clause of sub- adjustment is ‘made’ in terms of section 92CE(1) during
section (1) of the previous year under consideration. The primary
92CE primary adjustment made may not necessarily relate to previous
adjustment is year under consideration.
made? It is also necessary that the disclosure under Clause 30A
(ii) Amount (in `) may need to be done is respect of each and every type of
of primary primary adjustment made in the relevant financial year,
adjustment irrespective of the previous year to which this adjustment
(iii) Whether the pertains to. For instance, an assessment order in relation to
excess money say, F.Y. 2022-23 may be passed in during F.Y. 2024-25
available with wherein AO has made a primary adjustment and the same
the associated has been accepted by the taxpayer.
enterprise is to Such primary adjustment may need to be reported in the
be repatriated tax audit report of F.Y. 2024-25.
to India as per The relevant clause of section 92CE(1) under which the
the provisions relevant adjustment falls, and the amount of adjustment
of sub- section have to be reported.
(2) of section Under clause 30A(b)(iii), the requirement is to report
92CE? whether the excess money available with the associated
(Yes/No) enterprise is required to be repatriated to India as per the
(iv) If yes, provisions of section 92CE(2). In case any such primary
whether the adjustment has taken place, which requires repatriation of
 TAX AUDIT AND ETHICAL COMPLIANCES 20.51
a

excess the excess money or part thereof, the tax auditor should
money has verify whether the excess money has been received, and
been whether it has been received within the prescribed time..
repatriated In case the excess money or part thereof has not been
within the repatriated within the prescribed time and the assessee
prescribed has not opted to pay additional income-tax, the imputed
time interest income, which would be the secondary
(Yes/No) adjustment, needs to be computed. Since the reporting is
(v) If no, the for the previous year, it is advisable for the tax auditor to
amount (in ensure that the amount of interest imputed till the end of
`) of the previous year is furnished. In case the interest up to
imputed the date of furnishing of the tax audit report is given, it is
interest advisable to provide a break-up of the amount of interest
income on imputed till end of the relevant previous year and for the
such excess period post the end of the relevant previous year ending
money with the date of furnishing tax audit report. It is possible
which has that interest income may be imputed during the relevant
not been previous year in connection with primary adjustment made
repatriated during the earlier previous years. Such interest income
within the arising from primary adjustment made in earlier year is
prescribed also taxable during the previous year under consideration
time. and will be included in the return of income of the
concerned previous year. Thus, it may be advisable for
the taxpayer to furnish and tax auditor to verify and report
the information pertaining to such primary adjustments in
respect of interest income which is chargeable under
section 92CE(2).
The tax auditor should obtain a certificate from
the assessee, as to what transfer pricing
adjustments have been made in the return/(s) of
income filed during the previous year, whether any
advance pricing agreement was entered into during the
previous year, whether any transfer pricing adjustment
was made/confirmed in an assessment order/appellate
authority order passed during the previous year, or
whether any agreement has been arrived at under a
Mutual Agreement Procedure during the previous year.
The tax auditor should also verify tax records to check
whether there is any such occurrence. In this regard, the
auditor should also obtain a prior management
representation on the information obtained to be true and
accurate, on the basis which he should verify the amount
of adjustment reported. Hence, the primary onus should
be with the management.
 20.52 DIRECT TAX LAWS

30B (a) Whether the This clause requires reporting for the purposes of
assessee has examining allowability of expenditure by way of interest in
incurred expenditure respect of debt issued by a non-resident Associated
during the previous Enterprises under section 94B while computing income
year by way of under the head “Profits and gains from business and
interest or of similar profession”.
nature exceeding The excess interest is to be calculated as the lower of
one crore rupees as total interest paid or payable in excess of 30% of earning
referred to in sub- before interest, taxes, depreciation and amortization
section (1) of section (EBITDA) of the borrower in the previous year or interest
94B? (Yes/No) paid or payable to associated enterprises for that previous
year.
(b) If yes, please furnish The excess interest which is disallowed, is allowed to be
the following carried forward for a period of 8 assessment years
details:- following the year of disallowance, to be allowed as a
(i) Amount (in `) deduction against profit and gain of any business in
of expenditure subsequent years, to the extent of maximum allowable
by way of interest expenditure under this section.
interest or of In computing the limit of ` 1 crore, only interest and
similar nature expenditure of similar nature which is deductible while
incurred: computing income under the head “Profits and Gains of
(ii) Earnings before Business or Profession” should be considered, and not
interest, tax, interest deductible under any other head of income or
depreciation interest which is otherwise not deductible. Therefore, any
and interest disallowable under section 14A, under the proviso
amortization to section 36(1)(iii), under section 40(a)(i) or section
(EBITDA) 40A(2) should not be considered as interest for the
during the purposes of section 94B(1). Similarly, interest disallowed
previous year: on account of transfer pricing under section 92, should
also not be considered, since such interest is not
(iii) Amount (in `) of
allowable in computing income under the head “Profits
expenditure by
and Gains of Business or Profession”.
way of interest
or of similar In case such interest exceeds ` 1 crore, details in part (b)
nature as per (i) of the clause need to be given. In item (i) of sub-clause
above which (b), details of expenditure incurred by way of interest or of
exceeds 30% of similar nature need needs to be provided. The language
EBITDA as per in the clause creates a doubt whether details that need to
(ii) above: be given are of the total amount of interest and similar
expenditure claimed as a deduction and not just the
(iv) Details of
interest paid to non-resident AE(s). However, in view of
interest
the requirement of clause (a) where a specific question
expenditure
has been asked only with respect to section 94B(1) the
brought forward
subsequent clauses seem to be consequential and flowing
as per section
from clause (a). Section 94B(1) confines itself to interest
94B(4)
 TAX AUDIT AND ETHICAL COMPLIANCES 20.53
a

(v) Details of paid to Non-resident AE and section 94B(2) can be

interest regarded as controlled by section 94B(1) since Section
expenditure 94B(2) operates “for the purposes of sub-section (1)”. The
carried forward computation of “excess interest” as per section 94B(2)
as per section should be within the boundaries of interest referred to in
94B(4) section 94B(1), which is NR AE interest paid. The
language of para 46.3 of CBDT Circular No. 2 of 2018
containing Explanatory Notes to Provisions of Finance
Act, 2017 (dated 15 February 2018) is similar to the
format of reporting prescribed by CBDT in clause 30B of
Form No. 3CD. The better view is to disclose interest paid
only to non-resident AE(s).
Thus in item (i) of sub-clause (b),expenditure incurred by
way of interest or of similar nature paid to its non-resident
AE or to the lender to whom the AE has provided an
implicit or explicit guarantee or has deposited a matching
amount of funds, has to be reported, out of the total
interest and similar expenditure claimed as deduction. It
should be kept in mind that word ‘paid’ in terms of section
43(2) means actually paid or incurred according to the
method of accounting employed.
30C (a) Whether the This clause requires reporting of impermissible avoidance
assessee has arrangements as referred to in section 96 entered into by
entered into an the assessee during the previous year and to quantify the
impermissible tax benefit arising in the aggregate in the previous year to
avoidance all parties to such arrangement.
arrangement, as The auditor should examine if, in any earlier year, whether
referred to in section any reference has been made for declaring an
96, during the arrangement as an impermissible avoidance arrangement,
previous year? if such reference have been made, the auditor should
(Yes/No) report the fact in Form 3CA/3CB.
(b) If yes, please specify: In the light of the Chapter X-A, provisions of the Income-
(i) Nature of the tax Act relating to GAAR, the rules made thereunder and
impermissible CBDT Circular thereto, the tax auditor should examine the
avoidance following:
arrangement: (i) The tax auditor should examine whether the
(ii) Amount (in `) of Principal Commissioner or the Commissioner or the
tax benefit in the Approving Panel has, in any earlier previous year,
previous year declared any arrangement as IAA. In case, if any
arising, in arrangement has been declared to be an IAA in any
aggregate, to all earlier previous year, the tax auditor should further
the parties to examine if any transaction pertaining or in
the connection with such declared IAA has taken place
arrangement”; during the previous year under the audit.
 20.54 DIRECT TAX LAWS

(ii) The tax auditor should examine if, in any earlier

previous year, whether any reference has been
made for declaring an arrangement as an
impermissible avoidance arrangement, if such
references have been made, the auditor should
report the fact in Form 3CA or Form 3CB, as the
case may be.
In both the cases, the auditor should further examine if
any transaction pertaining or in connection with such
declared IAA or such arrangement in respect of which
reference has been made, has taken place during the
previous year under the audit. If any transaction
pertaining or in connection with such declared IAA or such
arrangement has taken place during the previous year
under the audit, this fact is expected to be reported along
with the tax benefit arising to all parties. If, however, he is
unable to ascertain the tax benefit in the previous year
arising, in aggregate, to all the parties to the
arrangement, he should indicate the same in Form 3CA or
Form 3CB, as the case may be.
In either case, where the assessee has given response to
any show cause notice or has preferred an appeal, along
with outcome thereof should be taken into consideration
while verifying.
31. (a) Particulars of each This clause seek certain particulars of each loan or deposit in
loan or deposit in an an amount exceeding the limit specified in section 269SS
amount exceeding taken or accepted during the previous year.
the limit specified in
Each individual transaction of receipt of loan or deposit
section 269SS taken
has to be reported separately by selecting the code from
or accepted during
the drop down, even if it is from the same person. Tax
the previous year -
auditor should obtain and verify the details of Code
(i) name, address against each transaction of receipt of loan or deposit.
and PAN or
Reporting is required only where each loan or deposit in
Aadhaar
an amount of ` 20,000 or more severally or in aggregate
Number (if
of the three sums, as specified in the section. This sub-
available with
clause requires six specific particulars in respect of each
the assessee) of
loan or deposit including the permanent account number
the lender or
or Aadhaar number of the lender or depositor, if available
depositor;
with assessee.
(ii) Amount of
The tax auditor should obtain the details from the
each loan or
assessee in respect of each reportable loan or deposit
deposit taken
and verify if the same amount reported as per the records
or accepted
and evidence available with the assessee.
and code of the
 TAX AUDIT AND ETHICAL COMPLIANCES 20.55
a

nature of such There will be practical difficulties while verifying the loan
amount; or deposit taken or accepted by the account payee
(iii) whether the loan cheque or an account payee bank draft. In such cases,
or deposit was the tax auditor should verify the transactions with
squared up reference to such evidence which may be available.
during the year;
In the absence of satisfactory evidence, for answering, as
(iv) maximum to whether bank cheque or bank draft was ‘account
amount payee’, the tax auditors should make a suggested
outstanding at comment in his report. The suggested comment is as
any time during follows:
the previous “It is not possible for me/us to verify whether loans or
year; deposits have been taken or accepted otherwise than by
(v) whether the an account payee cheque or account payee bank draft, as
loan or the necessary evidence is not in the possession of the
deposit was assessee”.
taken or
accepted by
cheque or
bank draft or
use of
electronic
clearing
system
through a
bank account;
(vi) in case the
loan or
deposit was
taken or
accepted by
cheque or
bank draft,
whether the
same was
taken or
accepted by
an account
payee cheque
or account
payee bank
draft.
 20.56 DIRECT TAX LAWS

(b) Particulars of each Under this clause, particulars of any specified sum taken
specified sum in an or accepted in relation to transfer of an immovable
amount exceeding property, whether or not the transfer takes place has been
the limits specified in dealt with. Such specified sum may be any sum of money
section 269SS taken receivable whether or not the transfer takes place.
or accepted during Transaction of specified sum has to be reported
the previous year: separately by selecting the code from the drop down,
(i) name, address even if it is from the same person. Tax auditor should
and PAN or obtain and verify the details of Code against each
Aadhaar transaction of specified sum.
number (if
The tax auditor should ascertain whether the
available with
assessee has any immovable property which
the assessee)
has been transferred or was proposed to be
of the person
transferred during the year and review the relevant
from whom
agreements, documents etc. in this regard. The auditor
specified sum
should satisfy himself that the proceeds arising from such
is received;
transfer, based on the review of documents has been duly
(ii) Amount of credited to the bank account by an account payee cheque
each loan or or account payee bank draft or use of electronic clearing
deposit taken system through a bank account or through such other
or accepted electronic mode as may be prescribed.
and code of
the nature of
such amount;
(iii) whether the
specified sum
was taken or
accepted by
cheque or bank
draft or use of
electronic
clearing system
through a bank
account;
(iv) in case the
specified sum
was taken or
accepted by
cheque or bank
draft, whether
the same was
taken or
accepted by an
account payee
 TAX AUDIT AND ETHICAL COMPLIANCES 20.57
a

cheque or
account payee
bank draft
(Particulars at (a)
and (b) need not be
given in the case of
a Government
company, a banking
company or a
corporation
established by the
Central, State or
Provincial Act)
(ba) Particulars of each The sub-clauses (ba), (bb), (bc) and (bd) of clause 31
receipt in an amount deal with reporting of transactions of receipts and
exceeding the limit payments in excess of the specified limit made otherwise
specified in section than by the modes specified in section 269ST. Section
269ST, in aggregate 269ST does not distinguish between receipt on capital
from a person in a account and revenue account. Accordingly, sub-clauses
day or in respect of (ba), (bb), (bc) and (bd) of clause 31 do not distinguish
a single transaction between receipts and payments on capital account and
or in respect of revenue account. Once the receipt or the payment, as the
transactions relating case may be, exceeds the limit specified in section
to one event or 269ST, the particulars of such transactions will have to be
occasion from a reported under these clauses. The tax auditor should bear
person, during the this in mind while examining the books of account and
previous year, where records of the assessee.
such receipt is Particulars are required to be given if receipts or
otherwise than by a payments, even though individually are lower than ` 2
cheque or bank draft lakh but in aggregate amount to ` 2 lakh or more if such
or use of electronic receipts or payments are to or from one person in a day
clearing system (whether related to a single transaction or otherwise) or
through a bank relate to a single transaction (even if the receipts or the
account - payments, as the case may be, are on different dates and
(i) Name, address, individual receipts or payments are less than ` 2 lakh) or
PAN or are in respect of more than one transaction but relate to a
Aadhaar single event or occasion (even if the receipts or the
Number (if payments, as the case may be, are on different dates and
available with individual receipts or payments are less than
the assessee) ` 2 lakh).
of the payer; Sub-clauses (ba) and (bb) of clause 31 requires
(ii) Nature of particulars to be furnished in respect of transactions
transaction; exceeding ` 2 lakh where assessee has received the
amount from a person, whereas sub-clauses (bc) and
 20.58 DIRECT TAX LAWS

(iii) Amount of (bd) of clause 31 requires information about the

receipt (in `) transactions exceeding ` 2 lakh where the payment has
(iv) Date of receipt; been made by the assessee to a person.
(bb) Particulars of each While it is comparatively simple to work out receipts or
receipt in an amount payments to or from a single person in a day, the tax
exceeding the limit auditor will have to exercise care and caution while
specified in section verifying the particulars of receipts or payments pertaining
269ST, in aggregate to a single transaction or relating to a single event or
from a person in a occasion. The tax auditor will need to link all receipts and
day or in respect of payments, as the case may be, otherwise than by the
a single transaction modes specified in this section received/ made in respect
or in respect of of single transaction and verify if the aggregate amount
transactions relating exceeds the limits specified in section 269ST. A single
to one event or invoice may relate to multiple transactions and vice-a-
occasions from a versa, multiple bills may relate to a single transaction. The
person, received by tax auditor will have to exercise his judgement to decide
a cheque or bank whether the receipts/payments is pertaining to a single
draft, not being an transaction.
account payee Similarly, the tax auditor will have to exercise judgement
cheque or an in deciding whether receipts/payments though pertaining
account payee bank to more than one transaction, pertain to a single event or
draft, during the occasion.
previous year:- For example, for a function organized by a person,
(i) Name, address assessee contractor may have been given catering
and Permanent contract as well as contract for flower decoration. In such
Account a case, while the transactions may be different, the
Number or occasion or event would be the same and provisions of
Aadhaar section 269ST will be attracted if the receipts exceeding
Number (if the limits specified under section 269ST are by mode
available with other than those specified in the section.
the assessee) It is possible that the assessee may have purchased
of the payer; goods or services while simultaneously he may have sold
(ii) Amount of goods or services to the same party, consideration for
receipt (in `) which exceeds ` 2 lakh. In such a case, if the amount of
consideration for purchase is set off against the amount
(bc) Particulars of each
receivable for the sale of goods or services, such set off is
payment made in an
not a receipt as contemplated under section 269ST. If the
amount exceeding
amount of such set off exceeds ` 2 lakh, the tax auditor
the limit specified in
may give appropriate note to the effect that such set-off
section 269ST, in
not being a receipt or payment has not been included in
aggregate to a
the particulars given and the relevant sub-clause.
person in a day or in
respect of a single If such receipts or payments are otherwise than by
transaction or in account payee cheque or an account payee draft or by
respect of use of electronic clearing system through a bank account,
 TAX AUDIT AND ETHICAL COMPLIANCES 20.59
a

transactions relating then, the tax auditor will have to verify the mode of the
to one event or receipt or payment, as the case may be. He will have to
occasions to a examine whether the receipt or the payment, as the case
person, otherwise may be, has been properly classified as under:
than by a cheque or (i) otherwise than by cheque or bank draft or use of
bank draft or use of electronic clearing system through a bank account,
electronic clearing into receipt or payment;
system through a (ii) by cheque or bank draft not being an account payee
bank account during cheque or an account payee bank draft.
the previous year :-
While section 269ST deals only with receipts exceeding
(i) Name, address ` 2 lakh or more otherwise than by the specified modes,
and PAN or sub-clauses (ba), (bb), (bc) and (bd) of clause 31 require
Aadhaar details to be furnished of both receipts and payments.
number (if
The particulars required under these sub-clauses need
available with
not be given in case of a receipt by a or payment to a
the assessee)
government company, banking company, a post office
of the payee;
saving bank, co-operative bank or in the case of
(ii) Nature of transactions referred to in section 269SS.
transaction;
(iii) Amount of
payment (in `);
(iv) Date of
payment;
(bd) Particulars of each
payment in an
amount exceeding
the limit specified in
section 269ST, in
aggregate to a person
in a day or in respect
of a single transaction
or in respect of
transactions relating
to one event or
occasions to a
person, made by a
cheque or bank draft,
not being an account
payee cheque or an
account payee bank
draft, during the
previous year:
(i) Name, address
and PAN or
 20.60 DIRECT TAX LAWS

Aadhaar
number (if
available with
the assessee) of
the payee;
(ii) Amount of
payment (in `)
(Particulars at (ba),
(bb), (bc) and (bd)
need not be given in
the case of receipt by
or payment to a
Government
company, a banking
Company, a post
office savings bank, a
cooperative bank or
in the case of
transactions referred
to in section 269SS or
in the case of
persons referred to
in Notification No.
S.O. 2065(E) dated
I3rd July, 2017)
(c) Particulars of each This sub-clause requires particulars of each repayment of
repayment of loan or loan or deposit in an amount exceeding the limit specified
deposit or any in section 269T made during the previous year.
specified advance in Section 269T is attracted where repayment of the loan or
an amount deposit is made to a person, where the aggregate amount
exceeding the limit of loan or deposits held by such person either in his own
specified in section name or jointly with any other person on the date of such
269T made during repayment together with interest, if any, payable on such
the previous year: deposit is ` 20,000 or more.
(i) Name, address, In the case of company assessee, loan or deposit is
PAN or defined to mean deposit repayable after notice or loan or
Aadhaar deposit repayable after a period. Therefore, in case of a
number (if company, loan or deposit repayable on demand will not
available with be considered for the purpose of this section as loan or
the assessee) deposit. However, in the case of non-company assessee,
of payee; loan or deposit is defined to mean loan or deposit of any
(ii) amount of nature. This distinction will have to be kept in mind while
each giving information under this sub-clause.
repayment of Loan or deposits discharged by means of transfer entries
loan or
 TAX AUDIT AND ETHICAL COMPLIANCES 20.61
a

deposit or any or journal entries in the books of account constitute

specified repayment of loan or deposits otherwise than by account
advance and payee cheque or account payee bank draft. Hence, such
code of the entries have to be reported under this clause.
nature of such Each individual transaction of loan or deposit or
amount; specified advance repaid has to be reported
(iii) maximum separately by selecting the code from the drop down,
amount even if it is from the same person. Tax auditor should
outstanding at obtain and verify the details of Code against each
any time during transaction of repayment of loan or deposit or
the previous specified advance, as the case may be.
year; The monetary limit of ` 20,000 or more is applicable in
(iv) whether the respect of a banking company or a co-operative bank with
repayment was reference to each branch and in all other cases, assessee
made by as a whole.
cheque or bank
draft or use of
electronic
clearing system
through a bank
account;
(v) in case
repayment was
made by
cheque or bank
draft, whether
the same was
repaid by an
account payee
cheque or an
account payee
bank draft.
(d) Particulars of Under this clause the details of repayment received by the
repayment of loan or assessee from a person in respect of loan or deposit or
deposit or any specified advances exceeding the limit specified in
specified advance in section 269ST received otherwise than by a cheque or
an amount exceeding bank draft or use of electronic clearing system through a
the limit specified in bank account during the previous year based on the
section 269T received examination of books of accounts or other relevant
otherwise than by a documents have to be provided.
cheque or bank draft In case the repayments are voluminous, it may not
or use of ECS possible to verify each repayment, reflected in the bank
through a bank statement, as to whether the acceptance of deposits or
account during the loans or specified advances has been through cheque,
previous year: bank draft or not.
 20.62 DIRECT TAX LAWS

(i) Name, address, Tax auditor can obtain a certificate form the
PAN or assessee as to the repayment received ahd
Aadhaar the mode of such repayment. Where tax
number (if auditor has verified on the basis of the certificate of the
available with assessee, the same shall be reported as an observation
the assessee) in para 3 of Form No. 3CA or para 5 of Form No. 3CB, as
of the payer, the case may be.
(ii) amount of
repayment of
loan or deposit
or any specified
advance
received
otherwise than
by a cheque or
bank draft or
use of ECS
through a bank
account during
the previous
year.
(e) Particulars of Under this sub-clause, the tax auditor has to verify details
repayment of loan or of repayment received by the assessee from a person in
deposit or any respect of loan or deposit or specified advance exceeding
specified advance in the limit specified in section 269T received by cheque or
amount exceeding bank draft which is not an account payee cheque or
the limit specified in account payee bank draft during the previous year based
section 269T received on the examination of books of accounts and other
by a cheque or bank relevant documents.
draft which is not an It may not be possible to verify each repayment, received,
account payee reflected in bank statement, as to whether the same has
cheque or account been made through cheque, bank draft which is not an
payee bank draft account payee cheque or account payee bank draft.
during the previous Therefore, certificate may be obtained from the assessee
year: and where the reporting has been done on the basis of
(i) Name, address, the certificate of the assessee, the same shall be reported
PAN or Aadhar as an observation in clause (3) of Form No. 3CA or clause
Number (if (5) of Form No. 3CB.
available with
the assessee),
of the payer,
(ii) amount of
repayment of
loan or deposit
 TAX AUDIT AND ETHICAL COMPLIANCES 20.63
a

or any specified
advance
received by a
cheque or a
bank draft which
is not an
account payee
bank cheque or
account payee
bank draft
during the
previous year.
(Particulars at (c),
(d) and (e) need not
be given in the case
of a repayment of
any loan or deposit
or any specified
advance taken or
accepted from the
Government,
Government
company, banking
company or a
corporation
established by the
Central, State or
Provincial Act)
32. (a) Details of brought The amount of brought forward loss or depreciation
forward loss or allowance is required to be quantified as per return and
depreciation assessment orders or appellate orders, if any.
allowance to the Depreciation on goodwill will not be available from
extent available A.Y. 2021-22.
containing Brought forward losses may relate to different heads of
information relating income such as property income, profits and gains of
to assessment year, business or profession, speculation business or capital
nature of gains.
loss/allowance (in Different provisions are contained in sections 32 and 70 to
`), amount as 79A of the Income-tax Act, 1961, with regard to loss/
returned (in `)* all depreciation under different heads. In the remarks
losses/allowances column, information about the pending assessment or
not allowed under appellate proceedings or about delay in filing loss returns
section 115BAA/ should be given. For giving the above information, the
115BAC/ 115BAD, auditors should study the assessment records i.e., the
 20.64 DIRECT TAX LAWS

115BAE amount as income-tax returns filed, assessment orders, appellate

assessed (give orders, orders giving effect to appellate order and
reference to relevant rectification/revisional orders for the earlier years and
order) and remarks. ascertain if the figures given in the above clause are
* If the assessed correct. The tax auditor should keep in mind the
depreciation is less provisions of section 71B regarding carry forward and set-
and no appeal off of loss from house property, section 73A regarding
pending then take carry forward and set-off of losses by specified business
assessed. and also section 78 regarding carry forward and set-off of
losses in case of change in constitution of firm or on
succession.
The tax auditor should also verify whether any revised
or updated return has been filed under Section 139(5)
or 139(8A) respectively, and its impact on the claim of
carry forward of losses.
The tax auditor should examine if there is any
pending assessment or appellate proceedings, or any
delay in filing the return of income, impacting the
carry forward of losses.
The tax auditor should obtain all the assessment orders or
appellate orders completed and pending during the audit.
If the consequential order for any revision / appellate
order is yet to be passed, the same can be disclosed
along with the impact thereof, if material.
It means in case of any undisclosed income determined in
case of an assessee during any proceedings of search,
requisition or survey, then no adjustment or set off shall
be allowed against such undisclosed income. The set off
shall not be available in case of both brought forward
losses as well as the unabsorbed depreciation.
From the Assessment Year beginning from 2022-23
onwards, the tax auditor has to confirm and verify whether
any search or survey has been taken place or undergoing
based on the records of assessment proceedings of the
assessee and accordingly shall check if any undisclosed
income has been determined in case of assessee.
The eligibility of brought forward losses and unabsorbed
depreciation against such undisclosed income as
computed by the assessee should be checked and based
on that, the necessary adjustments should be made to
losses to be carried forward by the assessee.
(b) Whether a change in The tax auditor should obtain the details of changes in
the shareholding of voting power pattern year-on-year and verify the reasons
the company has for any such changes before determining the allowability
 TAX AUDIT AND ETHICAL COMPLIANCES 20.65
a

taken place during of losses eligible to be carried forward.

the previous year The tax auditor should obtain necessary representation to
due to which the this effect wherever it is not feasible to verify or cross-
losses incurred prior check the shareholding pattern and changes therein.
to the previous year The comparison of the composition of the shareholding is
cannot be allowed to to be done with reference to the last day of the current
be carried forward in previous year and the last day of every previous year in
terms of section 79. which the loss was incurred. The carry forward of the loss
incurred in respect of different previous years is to be
determined with respect to the individual previous years.
Such comparison of the shareholding can be done by
referring to the Register of Memberss and other requisite
forms and documents filed with MCA and other statutory
authorities.
The comparison must be carried out for each year of
loss separately, and the allowability must be evaluated
year-by-year, rather than in aggregate.
(c) Whether the Having regard to the definition of “speculative business”,
assessee has the tax auditor has to verify from the books of account and
incurred any other relevant documents as to whether the assessee is
speculation loss carrying on any speculation business. On verification if
referred to in section the auditor is of the opinion that the auditee is carrying on
73 during the speculation business, under this clause, the tax auditor
previous year. If yes, has to furnish the details regarding speculation loss
please furnish referred to in section 73, if any incurred by the assessee
details of the same. during the previous year. It may be noted that it is not
necessary that same speculation business needs to be
continued to set off its loss of earlier year(s) against profit
of same speculation business. It can be ‘any’ speculation
business i.e., a different speculation business.
(d) Whether the Under clause 32(d), the tax auditor has to verify from the
assessee has books of accounts and other relevant documents as to
incurred any loss whether the assessee is carrying on specified business as
referred to in section referred to under section 35AD. In case the auditor is of
73A in respect of the opinion that the assessee is carrying on such
any specified specified business, he has to furnish the details of the
business during the loss incurred, if any, in respect of any specified business
previous year, if yes, during the previous year. In case the assessee carries on
please furnish more than one specified businesses and losses have
details of the same. been incurred in both the business, the details of the loss
incurred with respect of each business is to be specified
separately.
(e) In case of a The Explanation to Section 73 provides that where part of
company, please the business of a company (other than a company whose
 20.66 DIRECT TAX LAWS

state that whether gross total income consists mainly of income which is
the company is chargeable under the heads income from securities,
deemed to be income from house property, capital gain and income from
carrying on a other sources or a company the principal business of
speculation business which is the business of trading in shares or banking or
as referred in granting of loans and advances consist in the purchase or
Explanation to sale of shares of the other companies shall be deemed to
section 73, if yes, be carrying on a speculation business to the extent to
provide details of which business consists of purchase and sale of such
speculation loss if shares.
any incurred during The tax auditor has to furnish the details regarding the
the previous year. speculation losses incurred, if any, as referred to in
Explanation to section 73.
33. Section-wise details The tax auditor has to ensure that the assessee fulfils all
of deductions, if any, the conditions specified in the sections under which
admissible under deduction is claimed. For ascertaining this, the tax auditor
Chapter VIA or has to obtain all necessary evidence which would enable
Chapter III (Section him to express the opinion regarding the admissibility of
10AA) specifying the deductions. In order to ascertain the fulfillment of this
section under which condition, the tax auditor may have to check all
deduction is claimed documentary evidence. There may be cases where there
and the amounts is difference between the amount claimed by the
admissible as per assessee and the amount computed by the tax auditor. In
the provision of the such cases, it is quite possible that the assessee's claim
Income-tax Act, is based on some judicial pronouncement on the subject.
1961 and fulfils the In such cases, it may be advisable to report the amount
conditions, if any, admissible. The amount claimed and the background behind
specified under the and the basis of the claim of the assessee may form part of
relevant provisions the working papers. If the claim of the assessee is well-
of Income-tax Act, founded and settled by judicial pronouncement, the tax
1961 or Income-tax auditor may accept the claim, but he has to record in his
Rules,1962 or any working papers that admissible amount has been reported
other guidelines, on the basis of such judicial pronouncement. In appropriate
circular, etc., issued circumstances, such judicial pronouncements etc. should be
in this behalf. mentioned in the report.
It may be noted that separate audit report or certificate is
required to be obtained under section 10AA and certain
sections like 80-IA, 80-IB, 80-IC, 80-JJAA under Chapter
VI-A. While giving information with regard to the deduction
allowable under these sections, the tax auditor should
refer to separate audit reports/ certificates obtained by the
assessee.
These audit reports/ certificates may have been given by
the tax auditor or by any other auditor. The figures given
 TAX AUDIT AND ETHICAL COMPLIANCES 20.67
a

in such separate audit reports/certificates should be taken

into consideration while giving information with regard to
income covered by these sections.
Note: Case Study 3 and Case Study 4 deal with the
ethical aspects which have to be considered while issuing
audit report in Form 10CCB.
Some sections in Chapter VIA such as section 80G
(donations), Section 80GGB/80GGC (contributions to
political parties), section 80JJAA (wages of new workmen)
etc. relate to the expenditure incurred by an assessee.
There are other sections such as section 80-P (income of
cooperative societies), etc. which relate to income of the
assessee. In respect of all these sections, the tax auditor
should ascertain whether there is any expenditure or
income covered by the above sections recorded in the
books of accounts audited by him.
Section 115BAA, 115BAB, 115BAC, 115BAD and 115BAE
provide that no deductions under Chapter VI-A or Chapter
III can be claimed by the assessee opting for taxation
under any of these sections except deductions mentioned
under section 80M and 80JJAA, reply to clause 8a shall
be considered and accordingly admissibility of deductions
should be examined.
34. (a) Whether the While answering the issue of applicability of the provisions
assessee is required of Chapter XVII-B and/or XVII-BB, a number of debatable
to deduct or collect issues may arise before the assessee as well as the tax
tax as per the auditor. The auditor may have a difference of opinion with
provisions of regard to the applicability of the provisions of TDS/TCS on
Chapter XVII-B or a particular payment. In such a case, the tax auditor has
Chapter XVII-BB, if to report the difference of opinion appropriately as an
yes, please furnish observation in the para 3 of Form No. 3CA or para 5 of
details of Form No. 3CB as the case may be.
(1) Tax deduction It is essential to note that it is the primary responsibility of
and collection the assessee to prepare the information in such a manner
Account that the tax auditor can verify the compliance as required
Number (TAN) in the clause. The tax auditor is required to verify that no
(2) Section No. items have been omitted in the information furnished to
(3) Nature of him and reasonable test checks would reveal whether or
payment not the information furnished is correct. The extent of
check undertaken would have to be indicated by the tax
(4) Total amount of
auditor in his working papers and audit notes. The tax
payment or
auditor would be well advised to so design his tax audit
receipt
programme as would reveal the extent of checking and to
ensure adequate documentation in support of the
 20.68 DIRECT TAX LAWS

(5) Total amount information being certified.

on which tax It may be noted that while determining the amount to be
was required to reported in this clause, the tax auditor has to check and
be deducted or verify the payments made by the assessee and should not
collected only restrict to verification of expenses debited to Profit &
(6) Total amount Loss or the TDS/TCS returns filed and provided by the
on which tax assessee e.g., an advance payment made to any
was deducted contractor may also be liable for deduction of tax. In the
or collected at case of payment to non-residents, the applicable rate of
specified rate tax deduction at source is to be read along with the
(7) Amount of tax Double Taxation Avoidance Agreement.
deducted or This clause also requires furnishing of the total amount
collected out of the amount deductible or collectible, at which the
(8) Total amount tax was deducted or collected at the rate less than the
on which tax specified rate. The lesser deduction is required to be
was deducted reported in this clause. This will include deduction at a
or collected at lower rate than what is prescribed, application of wrong
less than section for deduction of tax at source, etc.
specified rate For example, section 194C requires deduction @2% in
or Amount of case payment is made to a person other than individual or
tax deducted or HUF, but the deductor deducts only 1%, the same has to
collected at be reported under this clause.
less than The tax auditor should also consider applicability of higher
specified rate rate of TDS/TCS. The tax auditor should verify the cases
and amount of where the tax has been deducted at source but not paid to
tax deducted or the credit of the Central Government till the date of the
collected not audit. It may be seen that tax deducted but deposited late
deposited to will not be –required to be reported.
the credit of Tax auditor should obtain a copy of TDS/TCS
Central returns filed by the assessee and reconcile the
Government. same with the books of accounts, which shall
form the basis of reporting under this clause. The tax
auditor should take into consideration the relevant
sections, rules, notifications, circulars and various judicial
pronouncements in relation to transactions of relevant
payment or collections. If the tax auditor has not agreed
with the interpretation/ views taken by the assessee, he
should report the same in Form 3CA/3CB.
(b) Whether the This clause deals with the information pertaining to
assessee is required statement of tax deducted and collected at source.
to furnish the The tax auditor has to ascertain whether the assessee is
statement of tax required to furnish the statement of tax deducted or tax
deducted, or tax collected at source, and if so, whether he has furnished
collected. If yes, the same within the prescribed time. The tax auditor has
 TAX AUDIT AND ETHICAL COMPLIANCES 20.69
a

please furnish the to verify the details given in the table contained in Clause
details of TAN, type 34(b) only with regard to the statement required to be
of form, due date for furnished by the assessee.
furnishing, date of The information given in clause 34(a) and (b) should be
furnishing, if reconciled with the disallowances reported under section 40(a)
furnished, whether in clause 21(b) to the extent applicable for cross checking
the statement of tax appropriateness of reporting under both the clauses.
deducted or Depending upon transactions that require tax deduction or
collected contains collection, the tax auditor should ascertain which
information about all statements, the assessee was required to furnish for the
transactions which financial year under audit. He should check which
are required to be statements have been furnished by the assessee for tax
reported. If not, deducted as well as collected. The reporting requirement
please furnish list of is notwithstanding the fact that the assessee has
details/transactions furnished the statements of tax deducted at source and
which are not tax collected at source.
reported.
The tax auditor should keep in mind laws
relating to tax deductions/collections at source
and various case laws so as to detect any
case of contravention or default in the provisions of
Chapter XVII -B / chapter XVII-BB.
If the information is voluminous, then the tax auditor
should consider reporting significant deficiencies with
appropriate remarks in paragraph (3) of Form 3CA or
paragraph (5) of Form 3CB.
(c) Whether the Under this clause, detailed information has to be
assessee is liable to furnished in case the assessee is liable to pay interest
pay interest under under section 201(1A) or section 206C(7) of the Act.
section 201(1A) or Where the assessee is liable to pay interest u/s 201(1A)
section 206C(7). If or u/s 206C(7), the tax auditor should verify such amount
yes, please furnish from the books of account as on 31 st March of the relevant
details of Tax previous year and also from PART G of the statement
deduction and generated by the Department in Form No.26AS. In case
collection Account the assessee had disputed the levy or calculation of
Number (TAN), interest under TRACES, in Form No.26AS/AIS/TIS of the
amount of interest assessee, the auditor may re-calculate the amount of
under section interest under section 201(1A) or section 206C(7) up to
201(1A)/ 206C(7) is the date of audit report for reporting under this clause and
payable and also mention the fact in his observations paragraph
amount of interest provided in Form No.3CA or Form No.3CB, as the case
paid along with date may be.
of payment.
 20.70 DIRECT TAX LAWS

35. (a) In the case of a The tax auditor should examine whether the enterprise is
trading concern, give a trading concern or not. If yes, the tax auditor should
quantitative details obtain certificates from the assessee in respect of the
of principal items of principal items of goods traded, the balance of the
goods traded: opening stock, purchases, sales and closing stock
(i) Opening Stock; (alongwith its measurement unit) and the extent of
(ii) purchases shortage/excess/damage and the reasons thereof.
during the The entire quantitative information should be examined by
previous year; the auditor from the records.
(iii) sales during
the previous
year;
(iv) closing stock;
(v) shortage /
excess, if any
(b) In the case of a The tax auditor should ascertain whether the enterprise is
manufacturing a manufacturing concern and it is accordingly reported in
concern, give clause 10(a). If yes, this sub-clause is applicable. The tax
quantitative details auditor should obtain certificate from assessee in respect
of the principal items of principal items of raw materials, finished goods and by-
of raw materials, products (alongwith its measurement unit) and
finished products quantitative information required to be reported in this
and by-products: sub-clause.
A. Raw Materials: Note - This clause requires that quantitative details of
(i) opening stock; “principal items” of raw materials and finished goods
(ii) purchases should be given. Therefore, information about petty items
during the need not be given. What would constitute principal items
previous year; will depend on the facts of each case. Normally, items
which constitute more than 10% of the aggregate value of
(iii) consumption
purchases, consumption or turnover as the case may be,
during the
may be classified as principal items.
previous year;
(iv) sales during
the previous
year;
(v) closing stock;
(vi) yield of finished
products;
(vii) percentage of
yield;
(viii) shortage /
excess, if any.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.71
a

B. Finished
products/by-
products:
(i) opening stock
(ii) purchases
during the
previous year;
(iii) quantity
manufactured
during the
previous year;
(iv) sales during
the previous
year;
(v) closing stock;
(vi) shortage/
excess, if
any.
36A (a) Whether the The tax auditor should obtain from the assesseea
assessee has certificate containing a list of closely held companies in
received any which he is a beneficial owner of shares carrying not less
amount in the than 10% of the voting power and list of concerns in which
nature of he has a substantial interest.
dividend as The dividend taxable under section 2(22)(e) is restricted
referred to in to accumulated profits on the date of payment. Thus, the
sub- clause (e) accumulated profits have to be determined as on the date
of clause (22) of the payment. Further, if at any time earlier any amount
of section 2? has been considered as income under any of the clauses
(Yes/No) of section 2(22), the accumulated profits will have to be
(b) If yes, please reduced by such an amount.
furnish the The tax auditor may not be able to determine the
following accumulated profits such as on the date of payment of the
details:- closely held company making the payment for various
(i) Amount reasons. The tax auditor in such a case may arrive at the
received accumulated profits by appropriating the profit for the year
(in `): on a time basis. In such a case, the auditor should include
(ii) Date of appropriate remarks in para 3 of Form No. 3CA or para 5
receipt of Form No. 3CB, as the case may be, about the
methodology adopted by him.
For attracting section 2(22)(e), it is necessary that the
assessee receiving a loan or advance should be a
shareholder. Wherever the beneficial shareholder is not
the registered shareholder and the closely held company
 20.72 DIRECT TAX LAWS

has given loan or advance to the beneficial shareholder or

to a concern, the tax auditor should make appropriate
remark in Form No. 3CA or Form 3CB, as the case may
be.
The tax auditor should also obtain a certificate
from the taxpayer giving particulars of any loan
or advances received by any concern in which
he has substantial interest from any closely held company
in which he is a beneficial owner of shares carrying not
less than 10% of the voting power. These certificates are
necessary since the tax auditor may not be able to verify
the above from the books of account of the assessee.
The tax auditor should verify Form 26AS in the case of the
taxpayer to know if the closely held company has
deducted tax at source from any payment made to it to
the taxpayer or the concern under section 194.
36B. (a) Whether the Sub-clause (f) was inserted in section 2(22) of the
assessee has Income-tax Act, 1961 with effect from 01-10-2024 in order
received any to further broaden the meaning of the term “dividend” so
amount for that it can include any payment by a company on
buyback of purchase of its own shares from a shareholder in
shares as accordance with the provisions of section 68 of the
referred to in Companies Act, 2013.
sub-clause (f) While verifying the contents of the reporting under item (i)
of clause (22) of sub-clause (b) of clause 36B, it should be verified that
of section 2? only such amount of received in respect of buyback
(Yes/No). completed on or after 1st October, 2024 is reported and
(b) If yes, please no amount which has been received in respect of buyback
furnish the completed before such date should be mentioned here.
following Further, the tax auditor should take into consideration
details: whether the amount that has been received as a buyback
(i) Amount is forming part of the accounts that is subject to Tax Audit
received or not. In case of any individual/HUF, there could be a
(in ` ) case where there are two separate sets of financials
(ii) Cost of maintained i.e. one set of financials containing the
acquisiti business accounts and the other one which only has
on of personal accounts.
shares Hence, if the share and securities forms part of the
bought personal accounts, then, ideally no reporting is required to
back be made in this clause as it is not subjected to tax audit.
However, if the business accounts has the shares and
securities reported under it, then, a reporting shall be
required to be made, even if the assessee claims that the
amount has been earned out of tradable stock i.e. the
 TAX AUDIT AND ETHICAL COMPLIANCES 20.73
a

assessee is in the business of trading into shares and

securities.
The said amount of buyback can be cross verified by the
Tax Auditor by referring to the TIS/AIS, wherein certain
companies would have reported the transactions that are
in the nature of buyback of shares.
The actual cost incurred to purchase such shares which
has been bought back by the company should be
mentioned in item (ii) of subclause (b) of clause 36B.
37. Whether any cost The tax auditor should ascertain from the management
audit was carried whether a cost audit was carried out and if yes, a copy of the
out, if yes, give the same should be obtained from the assessee. Even though
details, if any, of the tax auditor is not required to make any detailed study of
disqualification or such a report, he has to take note of the details of
disagreement on any disqualification or disagreement on any matter/ item/
matter/item/value/ value/ quantity as may be reported/ identified by the cost
quantity as may be auditor. The information is required to be given in respect of
reported/identified by cost audit report which is received upto the date of tax audit
the cost auditor. report.
The tax auditor should examine the time
period for which the cost audit, if any, has
been required to be carried out. Information is
required to be given only in respect of such cost audit
report, the time period of which falls within the relevant
previous year. In effect, the information is required to be
given in respect of that cost audit report which is received
upto the date of tax audit report.
38. Whether any audit The tax auditor should ascertain from the management
was conducted whether any audit was conducted under the Central Excise
under the Central Act, 1944 and if such an audit was carried out, obtain a
Excise Act, 1944, if copy of the report. Even though the tax auditor is not
yes, give the details, required to make any detailed study of such report, he has
if any, of to take note of the details if any, of disqualification or
disqualification or disagreement on any matter/ item/ value/ quantity as may
disagreement on any be reported/ identified by the auditor. The tax auditor need
matter/item/value/qu not express any opinion in a case where such audit has
antity as may be been ordered but the same has not been carried out. The
reported/identified by information is required to be given in respect of excise audit
the auditor. report which is received upto the date of tax audit report.
The tax auditor should examine the time
period for which the excise audit, if any, has
been required to be carried out. Information is
required to be given only in respect of such excise audit
report the time period of which falls within the relevant
 20.74 DIRECT TAX LAWS

previous year. In effect, the information is required to be

given in respect of that excise audit report which is
received upto the date of tax audit report.
40. Details regarding These ratios have to be calculated only for assessee who
turnover, gross are engaged in manufacturing or trading activities. While
profit, etc. for the calculating these ratios, meaning has to be assigned to
previous year and the terms used in the above ratios having due regard to
preceding previous the generally accepted accounting principles. All the ratios
year: mentioned in this clause are to be calculated in terms of
1. Total turnover value only.
of the assessee For the purpose of calculating the ratio mentioned in (4),
2. Gross profit/ only closing stock is to be considered. The term ` stock-in-
turnover trade' used therein does not include stores and spare parts
3. Net profit/ or loose tools. The term “stock-in-trade” would include only
turnover finished goods and would not include the stock of raw
material and work-in-progress since the objective here is to
4. Stock-in-trade/
compute the stock-turnover ratio.
turnover
Material consumed would, apart from raw material
5. Material
consumed, include stores, spare parts and loose tools.
consumed/
finished goods Under this clause, calculation of the ratios is also to be
produced stated. As such, computation of various components based
upon which these ratios have been worked out is required
(The details required
to be stated under this clause. There should be consistency
to be furnished for
between the numerator and the denominator while
principal items of
calculating the above ratios. Any significant deviation
goods traded or
thereof should be pointed out in Form 3CA or Form 3CB,
manufactured or
as the case may be. The relevant previous year figures are
services rendered)
to be taken from last previous year audit report or the
reinstated figures, to make the ratios comparable with
current year. In case the preceding previous year is not
subject to audit, nothing should be mentioned in the
relevant column and the same should be disclosed in the
observation para of Form No.3CA/Form No.3CB.
The ratios has to be given for the business as a whole
and need not be given product wise.
41. Please furnish The assessee may be assessed under various tax laws
details of demand other than Income-tax Act, 1961 resulting into a demand
raised or refund order or refund order. The tax auditor should obtain copy
issued during the of all the demand/refund orders issued by the government
previous year under authorities during the previous year under any tax law
any tax laws other other than Income-tax Act, 1961.
than Income-tax Act,
 TAX AUDIT AND ETHICAL COMPLIANCES 20.75
a

1961 and Wealth The auditor should exercise his professional judgement in
Tax Act, 19574 determining the applicability to relevant tax laws for
alongwith details of reporting under this clause.
relevant It may be noted that even though the
proceedings. demand/refund order is issued during the
previous year, it may pertain to a period other
than the relevant previous year. In such cases also,
reporting has to be done under this clause. The tax
auditor should verify the books of account and the orders
passed by the respective Department for ascertaining
whether any such demand has been raised or refund
order has been issued under any other tax law and
accordingly report the same. It is advisable to cross verify
the demands from online portal of the respective
Department. If there is any adjustment of refund against
any demand, the same should be reported under this
clause. Management representation should be obtained
from the assessee. In case of corporate assessee, the
auditor should check the said details with the disclosures
of contingent liabilities in the audited financials,
disclosures in statutory auditor’s report pursuant to
CARO, if applicable.
42. (a) Whether the This clause has been introduced where the tax payer is
assessee is required required to furnish a statement in Form 61/61A/61B.
to furnish statement As per Rule 114D(1), every person referred to in clauses
in Form No. 61 or (a) to (k) of Rule 114C(1) and Rule 114(2) and who is
Form No. 61A or required to get his accounts audited under section 44AB
Form No. 61B? who has received any declaration in Form 60 (this form is
(Yes/No) used by an individual or a person other than a company or
(b) If yes, please furnish a firm who does not have PAN and who enter into any of
Income-tax the transactions specified in rule 114B) is required to
Department furnish statement in Form No. 61 containing particulars of
Reporting Entity such declaration.
Identification The Annual Information Return or Statement of financial
Number, Type of transaction required to be furnished under section
form, Due date for 285BA(1) is to be furnished in Form No. 61A. Statement
furnishing, Date of of Reportable Account under section 285BA(1)(k) is to be
furnishing (if furnished by a reporting financial institution in respect of
furnished), Whether each account which has been identified pursuant to due
the form contains diligence procedure as a reportable account.
information about all The tax auditor should verify that whether the
details/ transactions assessee is liable to report the transaction in the

4 abolished with effect from the 1st April, 2016

 20.76 DIRECT TAX LAWS

which are required to prescribed form or not, if yes, whether the assessee has
be reported. If not, filed the same and he has furnished all the particulars
please furnish list of required in the Form.
the details/ The tax auditor is further required to verify whether the Form
transactions which contains information about all details or furnished
are not reported. transactions which are required to be reported. He may rely
on management representation in this regard.
Form No. 61, 61A and 61B uploaded on the income tax
portal should be examined by the tax auditor for purpose
of verifying the reporting under this clause. If the forms
have been revised, then, the auditor must verify whether
all the particulars required to be reported have been
reported in the revised form.
43. (a) Whether the This clause seeks information about applicability to
assessee or its furnish the report as referred to in section 286(2). Section
parent entity or 286(2) casts an obligation on the parent entity or the
alternate reporting alternate reporting entity, if it is resident in India to furnish
entity is liable to report, in respect of the international group of which it is a
furnish the report as constituent, for every accounting year, within a period of
referred to in sub- 12 months from the end of the said reporting accounting
section (2) of section year to the prescribed authority.
286 (Yes/No) The reporting requirement under section 286 shall not
apply in respect of an international group for an
accounting year, if the total consolidated group revenue,
as reflected in the consolidated financial statement for the
accounting year preceding such accounting year does not
exceed ` 6,400 crores (Rule 10DB).
The obligation to furnish the report referred to in section
286(2) arises under following situations requiring reply in
affirmative to clause 43(a):
(i) If the assessee itself is the parent entity of the
international group and is resident in India, it will
have the obligation to furnish the report under
section 286(2);
(ii) If the assessee is resident in India and has been
designated as the alternate reporting entity of the
international group;
(iii) If the assessee is a constituent of the international
group with its parent entity resident in India and the
group has not designated any other resident
constituent entity as the alternate reporting entity,
the parent entity will have the obligation to file the
report under section 286(2).
 TAX AUDIT AND ETHICAL COMPLIANCES 20.77
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(iv) If the assessee is neither the parent entity nor has it

been designated as the alternate reporting entity, but
other constituent entity resident in India of the
international group has been designated as the
alternate reporting entity by the group, such other
constituent entity resident in India will have
obligation to file the report under section 286(2).
The tax auditor should verify in the case of the assessee if
any of the above four situations exist. The tax auditor
should verify if the assessee whose parent is a non-
resident has filed Form No. [Link] No.3CEC will
indicate if the assessee or another constituent entity
resident in India has been designated as the reporting
entity for the international group. The tax auditor may
obtain necessary certificate from the assessee in respect
of constitution of the international group, entities that are
resident in India and not resident in India and entity if
appointed as the alternate reporting entity.
If none of the above four situations described above
exists, the reply to clause 43(a) will be negative.
(b) If yes, please furnish If the assessee is liable to file Form 3CEAC, the tax
the following details: auditor has to verify whether the necessary compliance as
prescribed in section 286 has been done and the requisite
(i) Whether report
information has been furnished by the assessee.
has been
furnished by If the assessee has filed a report, the tax auditor should
the assessee or verify acknowledgement for furnishing the same. If the
its parent entity report has been filed either by the parent of the assessee
or an alternate or another constituent entity of the international group, the
reporting entity tax auditor should ask for a copy of the report and
acknowledgement for filing the report.
(ii) Name of parent
entity The term parent entity is defined in section 286(9)(h). The
tax auditor should examine which is the parent entity and
(iii) Name of
verify whether the same has been reported. The term
alternate
‘alternate reporting entity’ is defined in section 286(9)(c).
reporting entity
The tax auditor should examine whether any such
(if applicable)
alternate reporting entity exists and if yes, name of the
(iv) Date of alternate reporting entity should be stated.
furnishing of
From acknowledgement for furnishing report as referred
report
to in section 286(2), date for furnishing of the said report
should be stated. The tax auditor may obtain necessary
certificate from the assessee in respect of the constituent
entity.
 20.78 DIRECT TAX LAWS

44. Break-up of total This clause requires to provide details of the expenditure
expenditure of in respect of entities registered under GST, which is
entities registered or further sub-classified into four categories as follows:
not registered under (a) Expenditure relating to goods or services exempt from
the GST. Specifying GST - Here, the value of all inward supply of goods or
total amount of services which are exempt from GST is to be given.
expenditure incurred (b) Expenditure relating to entities falling under
during the year, composition scheme - Value of all inward supplies
expenditure in from composition dealers is to be mentioned here.
respect of entities
(c) Expenditure relating to other registered entities -
registered under
Value of all inward supplies from registered dealers,
GST relating to
other than supplies from composition dealers and
goods or services
exempt supply from registered dealers, are to be
exempt from GST,
mentioned here.
relating to entities
falling under (d) Total payment to registered entities - The word
composition ‘payment’ should harmoniously be interpreted as
scheme, relating to ‘expenditure’, as the combined heading is
other entities and ‘Expenditure in respect of entities registered under
total payment to GST’. Hence, the total expenditure in respect of
registered entities. registered entities i.e., sum total of values reported
Expenditure relating in (a), (b) and (c) should be reported in (d) above.
to entities not Under this clause, expenditure relating to entities not
registered under registered under GST is also to be given. The value of
GST also need to be inward supply of goods and/or services received from
specified. unregistered persons should be reported here.
It is important to differentiate the ‘current status’ of
supplier’s registration from their status as it was at the
time of supply. There are several instances where
registration may be cancelled with effect from an earlier
date which may be prior to the date of supply to assessee.
Events occurring after balance sheet date that alter the
data relating to year under audit does not alter the nature
of the expenditure, that it is from registered suppliers.
Auditors may elect to extend their review up to a certain
cut-off date or not at all. In either case, disclosure of
notes of the position with regard to (i) known cancellations
and (ii) treatment in the disclosure considering possibility
of such cancellations would go a long way in making the
report meaningful and unambiguous.
Under clause 44, the language used is “expenditure in
respect of”. Since, the word used is ‘expenditure’, it is
necessary that the capital expenditure should also be
reported in the format prescribed. Separate reporting of
capital expenditure will provide ease in reconciliation.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.79
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In case of multiple GST registrations of an entity, there is

likelihood of inter-branch supply, which is eliminated at
the consolidated financials. Proper reconciliation for such
type of transactions may be kept on record. This report
may be prepared for an entity as a whole or for a branch
thereof, as may be audited and accordingly the
information in these columns may have to be filled up
consolidating the expenditure incurred under various GST
registrations.
Note - It may be noted that any expenditure that is
incurred, wholly and exclusively for business or profession
of the assessee qualifies for the deduction under the Act.
Registration or otherwise of the payee under the GST Act
has no relevance in considering allowability of
expenditure.

20.5 SUMMARY OF PROVISIONS IN RESPECT OF WHICH

INFORMATION TO BE FURNISHED IN FORM 3CD
The following table will give you a bird’s eye view of certain provisions for which the information is
to be given in Form 3CD
Section of the Income-tax Clause No. Details to be furnished
Act, 1961 of the
Guidance
Note
44AB 8 Indicate the relevant clause of section 44AB
under which the audit has been conducted
115BA,115BAA, 115BAB, 8a Mention whether the individual/HUF/AOP/BOI
115BAC, 115BAD, 115BAE has opted to shift out of the default regime u/s
115BAC.
In case of companies/co-operative societies,
mention whether they have opted for
concessional rates of taxation under the special
regimes under section 115BAA/115BAB or
115BAD/115BAE, as the case may be.
44AA 11(a) Mention whether books of account are prescribed
under section 44AA, if yes, list of books so
prescribed.
 20.80 DIRECT TAX LAWS

44AD,44ADA, 44AE, 44AF, 12 Mention whether the profit or loss account

44B, 44BB, 44BBA, 44BBB, includes any profits and gains assessable on
44BBC Chapter XII-G presumptive basis, if yes, indicate the amount
(provisions relating to and the relevant section.
shipping business)
145(2) 13(d) Mention whether any adjustment is required to be
made to the profits or loss for complying with the
provisions of income computation and disclosure
standards.
145A 14(b) Review the metho ds of valuation adopted for
valuation of closing stock and compare the same
with the method prescribed under section 145A.
45(2) 15 Mention the details of capital asset converted
into stock- in-trade
28 16 Indicate the amounts falling within the scope of
section 28 which are not credited to the profit
and loss account
43CA or 50C 17 Where any land or building or both is transferred
during the previous year for a consideration less
than value adopted or assessed or assessable
by any authority of a State Government referred
to in section 43CA or 50C, furnish the following
details:
(a) Details of property
(b) Consideration received or accrued
(c) Value adopted or assessed or assessable
32 18 Mention the particulars of depreciation allowable as
per the Income-tax Act, 1961 in respect of each
asset or block of asset in the mentioned format.
Section 43(1) and Explanations thereunder and
section 36(1)(iii) also to be kept in mind.
33AB, 33ABA, 35(1)(i), 19 State the amounts admissible under these
35(1)(ii), 35(1)(iia), 35(1)(iii), sections
35(1) (iv), 35(2AA), 35ABA,
35(2AB), 35ABB, 35AD,
35CCA, 35CCC, 35CCD,
35D, 35DD, 35DDA, 35E
36(1)(ii) 20(a) Indicate the sums paid to an employee as bonus
or commission for services rendered, where such
sum was otherwise payable to him as profits or
dividend
 TAX AUDIT AND ETHICAL COMPLIANCES 20.81
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36(1)(va) read with 20(b) Mention the details of contributions received from
2(24)(x) employees for various funds as referred to in
section 36(1)(va)
37 21(a) Mention the details of amounts debited to profit
and loss account, being in the nature of capital,
personal, advertisement expenditure,
expenditure incurred at clubs, expenditure for
any purpose which is an offence or is prohibited
by law or expenditure by way of penalty or fine
for violation of any law (enacted in India or
outside India), expenditure by way of other
penalty or fine not covered above, expenditure
incurred to compound an offence under any law
for the time being in force, in India or outside
India, expenditure incurred to provide any benefit
or perquisite, in whatever form, to a person,
whether or not carrying on a business or
exercising a profession, and acceptance of such
benefit or perquisite by such person is in
violation of any law or rule or regulation or
guideline, as the case may be, for the time being
in force, governing the conduct of such person
40(a)(i)/(ia)/(iib)/ 21(b) Indicate the amounts inadmissible under section
(iii)(iv)/(v) 40(a)(i)/(ia) with details of payment on which tax
has not deducted or after deduction, tax has not
been paid on or before the due specified under
section 139(1) and the amount inadmissible
under section 40(a)(iib), 40(a)(iii), 40(a) (iv),
40(a)(v)
40(b)/40(ba) 21(c) State the amounts debited to profit and loss
account being, interest, salary, bonus,
commission or remuneration inadmissible under
section 40(b)/40(ba) and computation thereof
40A(3)/ 40A(3A) 21(d) State the amount of disallowance under section
40A(3)/ deemed income under section 40A(3A)
40A(7) 21(e) Indicate the provision for payment of gratuity not
allowable under section 40A(7)
40A(9) 21(f) State the amount of payment made to an
employer towards the setting up or formation of
or as contribution to any fund, trust, company,
association of person, body of individuals,
society registered under society registration act
or other institutions which is not allowable
 20.82 DIRECT TAX LAWS

ICDS X 21(g) Examine the particulars of any liability of a

contingent nature debited to the profit and loss
account.
14A 21(h) Verify and state the amount of expenditure
relatable to the income which does not form part
of total income which is not allowed as deduction
in terms of section 14A
36(1)(iii) 21(i) Indicate the amount inadmissible under the
proviso to section 36(1)(iii)
Section 23 of MSMED Act, 22 Indicate the amount of interest inadmissible
2006 under section 23 of the MSMED Act, 2006.
40A(2)(b) 23 Mention the particulars of payments made to
persons specified under section 40A(2)(b)
33AB or 33ABA 24 Report the deemed income chargeable as profits
and gains of business under the circumstances
specified in section 33AB(4)/(5)/(7)/(8) or in
section 33ABA(5)/(7)/(8)
41 25 Indicate the amount of profit chargeable to tax
under section 41 and computation thereof
43B(a)/(b)/(c)/(d)/ 26 Indicate the amount of expenditure not allowable
(e)/ (f)/ (g)/ (h) as per section 43B.
- 27(a) Indicate the amount of Central Value Added Tax
credits availed of or utilised during the previous
year and its treatment in the profit and loss
account and treatment of outstanding Central
Value Added Tax credits in the accounts.
- 27(b) Mention the particulars of income or expenditure
of prior period credited or debited to the profit
and loss account.
56(2)(ix) 29A(a)/(b) Indicate the sum of money received as an
advance or otherwise in the course of
negotiations for transfer of a capital asset, if such
sum is forfeited and the negotiations do not
result in transfer of such capital asset.
56(2)(x) 29B(a)/(b) Mention the amount which is treated as income
in the hands of a person who received in any
previous year, from any person or persons
money, immovable property, or other property
and conditions stated in the clause are satisfied.
69D 30 Details of the amount borrowed on hundi (including
interest on such amount borrowed) and details of
 TAX AUDIT AND ETHICAL COMPLIANCES 20.83
a

repayment otherwise than by an account payee

cheque, are required to be indicated
92CE 30A(a)/(b) Mention the details of primary adjustment to
transfer price and details of excess money
available with the AE.
94B 30B(a)/(b) Mention the details of expenditure incurred
during the previous year by way of interest or of
similar nature respect of debt issued by a non-
resident Associated Enterprises under section
94B.
96 30C(a)/(b) Mention the details of impermissible avoidance
arrangements as referred to in section 96
entered into by the assessee during the previous
year and to quantify the tax benefit arising in the
aggregate in the previous year to all parties to
such arrangement.
269SS 31(a)/(b) Furnish the particulars of each loan or deposit or
specified sum in an amount exceeding the limit
specified in section 269SS taken or accepted
during the previous year.
269ST 31(ba)/ Furnish the particulars of each receipt in an
(bb)/ (bc)/ amount exceeding the limit specified in section
(bd) 269ST.
269T 31(c)/(d)/(e) Furnish the particulars of each repayment of loan
or deposit or any specified advance in an amount
exceeding the limit specified in section 269T
made during the previous year.
32(a) Furnish the details of brought forward loss or
depreciation allowance to the extent available.
79 32(b) Furnish the details of change in the shareholding
of the company taken place during the previous
year due to which the losses incurred prior to the
previous year cannot be allowed to be carried
forward in terms of section 79.
73 32(c) Furnish the details of speculation loss incurred
by the assessee during the previous year.
73A 32(d) Furnish the details of loss incurred in respect of
specified business during the previous year.
Explanation to section 73 32(e) Mention whether the company is deemed to be
carrying on a speculation business as referred in
Explanation to section 73.
 20.84 DIRECT TAX LAWS

Chapter VI-A or section 33 Provide section-wise details of deductions, if any,

10AA admissible under Chapter VIA or Chapter III.
- 34(a)/(b) Mention whether the assessee is required to
deduct or collect tax as per the provisions of
Chapter XVII-B or Chapter XVII-BB.
201(1A)/206C(7) 34(c) Mention the details of the amount of interest
under section 201(1A) or section 206C(7).
- 35(a)/(b) Provide quantitative details of principal items of
goods, in case of a trading or manufacturing
concern.
2(22)(e) 36A Mention whether the assessee has received any
amount in the nature of dividend as referred to in
section 2(22)(e)
2(22)(f) 36B Mention whether the assessee has received any
amount for buyback of shares as referred to in
section 2(22)(f)
- 37 Mention the details of disqualification or
disagreement on any matter/item/value/quantity
as may be reported/identified by the cost auditor.
- 38 Mention the details of disqualification or
disagreement on any matter/item/value/quantity
as may be reported/identified under audit was
conducted under the Central Excise Act, 1944.
- 40 Provide the details regarding turnover, gross
profit, etc. for the previous year and preceding
previous year.
- 41 Provide the details of demand raised or refund
issued during the previous year under any tax
laws other than Income-tax Act, 1961.
- 42(a)/(b) Mention whether the assessee is required to
furnish statement in Form No. 61 or Form No.
61A or Form No. 61B.
286(2) 43 Mention whether the assessee or its parent entity
or alternate reporting entity is liable to furnish the
report as referred to in section 286(2).
- 44 Provide the break-up of total expenditure of
entities registered or not registered under the
GST.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.85
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20.6 PENALTY FOR FAILURE TO FURNISH TAX AUDIT

REPORT [SECTION 271B]
If any person fails to get his accounts audited in respect of any previous year furnish a tax audit
report as required under section 44AB, the Assessing Officer may direct that such person shall
pay, by way of penalty, a sum equal to

- ½ % of the total sales, turnover or gross receipts, as the case may be, in business, or of the
gross receipts in profession, in such previous year or years or

- ` 1,50,000,

whichever is less.

However, according to section 273B, no penalty shall be imposed if reasonable cause for such
failure is proved.

Example: DB Ltd.’s turnover for the F.Y. 2025-26 is ` 15 crore from textile business and ` 3 crore
from petrol pump business. All transactions are through banking channels. DB Ltd. prepared its
financial statements for textile business and got its accounts audited and furnished the same to the
Income Tax department within the prescribed time. The company was of the view that since the
turnover from the petrol pump business is ` 3 crore and all transactions were through banking
channels, the accounts of petrol pump business were not required to be audited. Section 44AB is
attracted where the total turnover from business exceeds the threshold of ` 10 crore i.e., total
turnover indicates that the turnover from all businesses are to be aggregated.

Taking the facts from Example, the Assessing Officer wants to invoke penalty on ` 18 crore i.e.,
` 15 crore plus ` 3 crore, considering ½% of the total turnover. Since the assessee has already
furnished the report for ` 15 crore, the penalty u/s 271B shall be invoked only on turnover of ` 3
crore and not on turnover of ` 18 crore.
 20.86 DIRECT TAX LAWS

CASE STUDIES
Case Studies have been included to underline the ethical aspects which have to be considered by
a chartered accountant while issuing tax audit report under section 44AB as well as audit reports
and certificates under the other provisions of the Income-tax Act, 1961. These case studies are
based on the orders passed by the Disciplinary Committee of ICAI and/or the final orders passed
by the Appellate Authority constituted by the Central Government under the Chartered
Accountants Act, 1949.
Every Case Study begins with “A Word about the Case Study” which, as the phrase suggests,
gives an overview as to what the case study is about. Thereafter, each case Study is presented in
the following manner, highlighting the -
I. Relevant provisions of income-tax law
II. Relevant clauses of Part I of the Second Schedule to the Chartered Accountants Act, 1949
III. Facts of the case
IV. Contentions/Submissions of the chartered accountant
V. Bases for Conclusion
VI. Key Takeaways
Additional categories have also been included in a Case Study, if found necessary.

CASE STUDY 1
A Word about the Case Study
This Case Study highlights the ethical aspects which have to be considered by a chartered
accountant while issuing tax audit report. The issue involved in this Case Study relates to the
responsibility of the chartered accountant in relation to reporting in Clause 34(a) and clause
21(b) of Form 3CD for non-deduction of tax at source and consequent disallowance under
section 40(a)(ia).
I Relevant provisions of income-tax law
(1) Section 194J
Section 194J requires tax deduction at source@10% on, inter alia, fees for
professional services, at the time of credit of such sum to the account of the
payee or at the time of payment, whichever is earlier.
As per clause (a) of the Explanation to section 194J, “Professional services”
means services rendered by a person in the course of carrying on, inter alia,
medical profession.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.87
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(2) Section 40(a)(ia)

Section 40(a)(ia) provides for disallowance of 30% of the sum payable to a
resident, on which tax is deductible at source under Chapter XVII-B of the
Income-tax Act, 1961 and such tax has not been deducted or after deduction, has
not been paid on or before the due date for filing return of income u/s 139(1).
(3) Reporting requirement in Clause 21(b) of Form 3CD (Relevant Extract)
Amounts inadmissible under section 40(a)
(ii) as payment referred to in sub-clause (ia)
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(4) Reporting requirement in Clause 34(a) of Form 3CD (Relevant Extract)
Whether the assessee is required to deduct or collect tax as per the provisions of
Chapter XVII-B or Chapter XVII-BB, if yes, please furnish –

(10)
(1)

(2)

(3)

(4)

(5)

(6)

(8)

(9)
(7)
Total amt on which tax was deducted or

Total amt on which tax was deducted or

Total amt on which tax was required to be

Amt of TDS or TCS not deposited to the credit

Total amt of payment or receipt of the nature

collected at less than specified rate out of (7)

Amt of tax deducted or collected out of (6)

Amt of tax deducted or collected on (8)

collected at specified rate out of (5)

of the Central Govt. out of (6) & (8)

deducted or collected out of (4)
specified in column (3)
Nature of payment
Section
TAN

II Relevant clause of Part I of the Second Schedule to the Chartered Accountants Act,
1949
As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act,
1949, a chartered accountant in practice shall be deemed to be guilty of professional
misconduct, if he does not exercise due diligence, or is grossly negligent in the conduct
of his professional duties.
 20.88 DIRECT TAX LAWS

III Facts of the case

A survey was conducted on the premises of a hospital consequent to which it was found
that the hospital had made payments of consultancy charges to doctors, without
deducting tax under section 194J, even though the payments to each doctor exceeded
the threshold of ` 30,000 (` 50,000 w.e.f 1.4.2025).
In the tax audit report, the amount inadmissible under section 40(a)(ia) was mentioned
as NIL in clause 21(b) of Form 3CD. Also, there was no mention of or reporting of TDS
section 194J in clause 34(a).
IV Contentions of the Chartered Accountant
The Chartered Accountant contended that since the doctors did not provide any
professional service to the hospital, the provisions of section 194J would not be
attracted. He explained his contention that sometimes, due to unavoidable
reasons/circumstances, the hospital collected the consultation fees on behalf of the
doctors and the same is then paid/remitted to the doctors. Such payments were not
expenses of the hospital and hence, the question of TDS does not arise.
He also contended that as per the decision passed by the Special Bench of the Tribunal
(Vishakapatnam) in case of Merilyn Shipping and Transports v. ACIT, section 40(a)(ia)
is applicable only in respect of the amounts of expenditure which are payable as on 31 st
March of every year and it cannot be invoked to disallow the amounts which have been
actually paid during the previous year, without deduction of tax at source. In this case,
all payments were made to the respective doctors before 31 st March.
Therefore, according to him, the payment made to doctors by way of reimbursement of
the fees collected from patients does not fall under the ambit of TDS and even if it does,
the same would not be disallowed under section 40(a)(ia) due to the above decision.
Note – It may be noted that the Supreme Court, in Palam Gas Service v. CIT (2017)
394 ITR 300, observed that when the entire scheme of obligation to deduct the tax at
source and paying it over to the Central Government is read holistically, it cannot be
held that the word “payable” occurring in section 40(a)(ia) refers only to those cases
where the amount is yet to be paid and does not cover the cases where the amount is
actually paid. Once the section mandates a person to deduct tax at source not only on
the amounts payable but also when the sums are actually paid to the contractor, any
person who does not adhere to this statutory obligation has to suffer the consequences
which are stipulated in the Act itself.
Also, the CBDT has, vide Circular No.10/2013 dated 16.12.2013 that the provisions of
section 40(a)(ia) are amply clear that the term “payable” would include the “amounts
which are paid during the year”.
The case in question relates to a period prior issuance of the Circular and the
pronouncement of the Supreme Court ruling.
V Basis for Conclusion
(1) As per the Guidance Note on Tax Audit issued by ICAI, the tax auditor is required to
report as to whether tax is deductible under any section of Chapter XVII-B and any
amount is inadmissible u/s 40(a)(ia) under clauses 34(a) and 21(b), respectively.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.89
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(2) If tax has not been deducted on the basis of Court judgement in a particular
case, then, the tax auditor is required to disclose the same in his report so
as to enable the Income-tax department to know the reason as to why tax
was not deducted by the assessee.
(3) On perusal of the profit and loss account of the hospital vis-à-vis the working
papers of the CA, it has been noted that consultancy charges were shown as
expenses in the Profit and Loss account of the hospital. Thus, the contention that
the hospital collected fees on behalf of doctors and payment of such fees is not
expenditure for attracting TDS u/s 194J is not correct, since such expenditure
has been debited to the profit and loss account
In this case, the CA had ignored the reporting requirements in Form 3CD and had not
exercised due diligence in carrying out his professional duties. Hence, he was held
guilty of professional misconduct falling within the meaning of clause (7) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949.
VI Key Takeaway
The tax auditor should exercise due diligence while reporting under various clauses of
Form 3CD. In case he has taken a view that tax is not deductible by virtue of a Court
judgement, like in this case, he should disclose the same in his report.

CASE STUDY 2
A Word about the Case Study
This Case Study highlights the ethical aspects which have to be considered by a chartered
accountant while issuing tax audit report. The issue involved in this Case Study relates to the
responsibility of the chartered accountant in relation to reporting in clause 21(d) of Form 3CD of
expenditure exceeding ` 10,000, for which payment is made otherwise than by way of account
payee cheque/bank draft, ECS or other prescribed electronic modes. Such expenditure would
attract disallowance under section 40A(3) of the Income-tax Act, 1961.
I Relevant provisions of income-tax law
(1) Section 40A(3)
Where the assessee incurs any expenditure, in respect of which payment or aggregate
of payments made to a person in a day otherwise than by an account payee cheque
drawn on a bank or by an account payee bank draft or use of electronic system through
bank account or through such other prescribed electronic modes exceeds ` 10,000, such
expenditure shall not be allowed as a deduction.
The prescribed electronic modes are credit card, debit card, net banking, IMPS
(Immediate payment Service), UPI (Unified Payment Interface), RTGS (Real Time
Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat
Interface for Money) Aadhar Pay.
The provision applies to all categories of expenditure involving payments for goods or
services which are deductible in computing the taxable income.
 20.90 DIRECT TAX LAWS

(2) Reporting requirement in Clause 21(d) of Form 3CD

(A) On the basis of the examination of books of account and other relevant
documents/evidence, whether the expenditure covered under section 40A(3) read
with rule 6DD were made by account payee cheque drawn on a bank or account
payee bank draft. If not, please furnish the details -
Serial Date of Nature Amount Name and
No. payment of PAN/Aadhar No. of the
payment payee, if available

II Relevant clauses of Part I of the Second Schedule to the Chartered Accountants Act,
1949
As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949,
a chartered accountant in practice shall be deemed to be guilty of professional misconduct,
if he does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties.
As per clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949,
a chartered accountant in practice shall be deemed to be guilty of professional misconduct,
fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion.
III Facts of the case
A search was conducted u/s 132 of the Income-tax Act, 1961 in the case of PQR Jewellers,
a leading gold jewellery retail chain, on 30.1.2026. As part of the post search enquiries, data
from the billing software was analysed. On analysis of this data, it was found that the
concern was involved in violation of section 40A(3) in a major way to the tune of ` 30 crores
in the purchase of old gold.
The tax audit report of the concern for the P.Y. 2024-25 was issued by a chartered
accountant u/s 44AB of the Income-tax Act, 1961. The audit report has a specific clause,
namely, clause 21(d), concerning compliance of section 40A(3). However, the chartered
accountant had not properly filled up this clause and had failed to highlight the extensive
violation of section 40A(3).
IV Contentions of the Chartered Accountant
The chartered accountant submitted that he had done test checks and he did not come
across any payment which warrants disclosure in Form 3CD. He also submitted that
standing instructions were given by the management of the entity to the employees to make
payments above ` 10,000 only through account payee cheques and/or bank drafts or other
permissible electronic modes. Copy of these instructions were verified by him. He had also
taken a representation from the Management that net payment in cash to any person in a
day did not exceed ` 10,000.
Therefore, the tax auditor submitted that he had taken reasonable professional care and on
the basis of test checks, nothing came to his attention to warrant a reporting of violation of
section 40A(3).
 TAX AUDIT AND ETHICAL COMPLIANCES 20.91
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V Contentions of the Director of Income-tax (Investigation)

The DIT (Investigation) made the following contentions -
(1) As part of the post search enquiries, data from the billing software was analysed and
violations u/s 40A(3) to the tune of ` 30 crores were noticed. In order to verify the
findings culled from digital data, some of the customers whose whereabouts were
available from computer records were contacted and their statements were recorded
under oath. These customers admitted under oath that they had sold old gold and
received the amounts (all exceeding ` 10,000) in cash. The fact which emerges from
the enquiries is that PQR Jewellers purchase old gold and make payments for these
purchases in cash, even if they exceed ` 10,000.
(2) Though the audit report has a specific clause, namely, clause 21(d) concerning
compliance of section 40A(3), it was not properly filled up and the auditor failed to
highlight the extensive violation of section 40A(3).
He drew reference to the Guidance Note on Tax Audit issued by ICAI which states that
there may be practical difficulties in verifying whether each payment is made through
account payee cheque or bank draft or ECS or other prescribed electronic modes.
Where the reporting has been done on the basis of the certificate of the assessee, the
fact has to be reported as an observation in para 3 of Form 3CA and para 5 of Form
3CB, as the case may be. The tax auditor, in his report, may comment on such
violation as under:-
“It is not possible for me/us to verify whether the payments in excess of ` 10,000 have
been made otherwise than by account payee cheque or bank draft or prescribed
electronic modes, as the necessary evidence is not in the possession of the
assessee”.
However, in this case, the tax auditor had mentioned “Yes” in response to the
statement in sub-clause (A) of Clause 21(d) on whether the expenditure covered under
section 40A(3) read with Rule 6DD were made by account payee cheque drawn on a
bank or account payee bank draft.
(3) As per the Guidance Note, for the purpose of furnishing the required particulars, the
tax auditor should have obtained a list of all cash payments in respect of expenditure
exceeding ` 10,000/- made by the assessee during the relevant year which should
include the list of payments exempted in terms of Rule 6DD with reasons. This list
should have been verified by the tax auditor with the books of accounts in order to
ascertain whether the conditions for specific exemption granted under Rule 6DD are
satisfied. Details of payments, which do not satisfy the above conditions, should have
been stated under this clause. He should have made use of the audit tools which are
available to find out such payments expeditiously and accurately where the data is
voluminous.
(4) Reference was drawn to the CBDT Circular No. 387, dated 06.07.1984, which clarifies
the purpose of tax audit. The relevant extract of the circular is given below: -
“A proper audit is for tax purposes would ensure that the books of accounts and other
 20.92 DIRECT TAX LAWS

records are properly maintained, that they faithfully reflect the income of the tax payer
and he correctly makes claims for deduction. Such audit would also help in preventing
fraudulent practices. It can also facilitate the administration of tax laws by a proper
presentation of the accounts before the tax authorities and considerably saving the
time of the Assessing Officers in carrying out routine verifications like checking
correctness of totals and verifying whether purchases and sales are properly vouc hed
or not. The time of the Assessing Officers thus saved could be utilised for attending to
more investigational aspects of the case”.
(5) In this case, given the massive scale of violation of section 40A(3), the chartered
accountant has not exercised reasonable diligence before offering the remarks; and
the audit in this case was not carried out as per the Guidance Note of the ICAI and the
CBDT Circular.
VI Basis for Conclusion
(1) In Form 3CD, particulars in respect of cash payments made in violation of Section 40A(3)
are required to be reported, as such payments are inadmissible as deduction.
(2) The contention of the chartered accountant that the test checks conducted by him did
not reveal the aforesaid violation was not tenable. Considering the nature of business
of the assessee, namely, jewellery business, the onus was on the chartered
accountant to verify the same before reporting in Form 3CD. Stating the fact that no
such transaction was identified during test check is not acceptable because such
payments can be identified independent of bank transaction provided the chartered
accountant had extended the verification to cover the same. Mere reliance on
certificate issued by the management is not acceptable.
(3) The chartered accountant was, thus, required to point out in tax audit report, the
violation of the provisions of section 40A(3) thereof involving expenditure to a person
in a day exceeding ` 10,000 otherwise than by way of account payee cheque/bank
draft, ECS and other prescribed electronic modes. However, the chartered accountant
has certified that there were no such instance, though such instances aggregate to a
large quantum of ` 30 crores.
Thus, in this case, the chartered accountant was held guilty of professional misconduct
falling within the meaning of clauses (7) and (8) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949.
VII Key Takeaway
The chartered accountant should consider the nature of business of the assessee and
accordingly undertake necessary checks to verify whether there are violations in the
provisions of the Act, like cash payments in violation of section 40A(3) made, as in this
case, by the assessee engaged in jewellery business. He should make use of the audit tools
which are available to find out such payments expeditiously and accurately where the data
is voluminous.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.93
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CASE STUDY 3
A Word about the Case Study
This Case Study highlights the ethical aspects which have to be considered by a chartered
accountant while issuing Form 10CCB. While issuing Form 10CCB, the chartered accountant
has to ensure compliance with the conditions stipulated under the relevant section (in this
case, section 80-IA) for claim of deduction. Since the profit-linked deductions are available for
a specified period, ten years in case of deduction u/s 80-IA, the chartered accountant has to
ensure that the ten year period has not already elapsed. In case he notices the error after
issuing Form 10CCB, he should withdraw the report timely and inform the same to the
assessee immediately.
I Relevant provisions of income-tax law
(1) Section 80-IA
Section 80-IA provides for deduction of 100% of the profits and gains derived
from the business of, inter alia, developing or operating and maintaining or
developing, operating and maintaining any infrastructure facility for 10
consecutive assessment years.
Section 80-IA(7) requires audit of accounts and furnishing of audit report in the
prescribed form on or before the specified date i.e., 30 th September of the
assessment year for claim of such deduction.
(2) Rule 18BBB and Form 10CCB
Rule 18BBB requires the audit report under section 80-IA(7) to be furnished in
Form 10CCB along with the copy of the agreement of the enterprise with the
Central Government or State Government or the local authority for carrying on
the business of developing or operating and maintaining or developing, operating
and maintaining the infrastructure facility.
In Form 10CCB, the chartered accountant gives a declaration that in his opinion
the enterprise satisfies the conditions stipulated in section 80-IA and the amount
of deduction claimed thereunder is as per the provisions of the Income -tax Act,
1961 and meets the required conditions.
II Relevant clause of Part I of the Second Schedule to the Chartered Accountants
Act, 1949
As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act,
1949, a chartered accountant in practice shall be deemed to be guilty of professional
misconduct, if he does not exercise due diligence, or is grossly negligent in the conduct
of his professional duties
III Facts of the case
M/s. XYZ & Co. is a firm engaged in developing, operating and maintaining a highway
project filed its return of income for A.Y.2016-17 on 30 th September, 2016 claiming
deduction under section 80-IA, on the basis of Form 10CCB issued by the chartered
accountant. However, in August, 2017, it came to the notice of the chartered accountant
that the ten year period for which the company had been eligible to claim deduction and
 20.94 DIRECT TAX LAWS

had, in fact, claimed deduction had expired in A.Y.2015-16. The chartered accountant
withdrew the audit report in Form 10CCB and advised the firm to file a revised return u/s
139(5). At that point of time, the time limit for filing a revised return was one year from
the end of the relevant assessment year i.e., upto 31.3.2018. Accordingly, the firm filed
a revised return u/s 139(5) for A.Y.2016-17 on September, 2017. The Assessing Officer
completed the assessment on the basis of the revised return and issu ed the assessment
order on 1.3.2019.
IV Contentions of the Chartered Accountant
The Chartered Accountant contended that as soon as he came to know about the error,
he withdrew his report in Form 10CCB and informed the assessee accordingly. The
assessee, accordingly, filed a revised return withdrawing the claim under section 80 -IA.
He informed the Commissioner of Income-tax about the same in March 2019 at the first
available opportunity since he was neither the tax auditor of the company nor was he
representing the assessee before the tax authorities. He added that the Assessing
Officer had completed the assessment on the basis of the revised return. Further,
according to him, his report in Form 10CCB was neither the subject matter at the time of
assessment nor at the time of penalty proceedings.
V Basis for Conclusion
(1) The claim for deduction under section 80-IA was made by the assessee in the
original return, supported by Form 10CCB issued by the chartered accountant.
However, as soon as the chartered accountant came to know of the error, he
withdrew his report and informed the assessee, who also filed a revised return
withdrawing the claim under section 80-IA.
(2) Therefore, the chartered accountant had withdrawn his audit report in Form
10CCB and informed the assessee, who also had filed a revised return
immediately withdrawing the claim for deduction under section 80-IA.
Accordingly, the chartered accountant was held “not guilty” of professional misconduct
under clause (7) of Part I of the Second Schedule to the Chartered Accountants Act,
1949.
VI Key Takeaway
The chartered accountant should exercise due care while issuing audit reports and
ensure that all the conditions stipulated under the relevant provisions of the Income -tax
Act, 1961, including the time period for claim of deduction, are satisfied. In case he
notices an error subsequently, he should immediately withdraw his report, and
communicate the same to the assessee immediately.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.95
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CASE STUDY 4
A Word about the Case Study
This Case Study highlights the ethical aspects which have to be considered by a chartered
accountant while issuing audit report in Form 10CCB and conducting tax audit. The issue involved
in this Case Study relates to the responsibility of the chartered accountant to ensure compliance
with the stipulated conditions for claim of profit-linked deduction under Chapter VI-A while issuing
audit report. He has to ascertain whether a certain activity carried out by the assessee would
constitute “manufacture” for claim of deduction under section 80-IE and whether the conditions for
claim of deduction have been satisfied in a case where the assessee is a company which had
taken over a sole proprietary concern.
The actual case on the basis of which this Case Study is developed was in relation to section 80 -
IB for the A.Y.2002-03 to A.Y.2008-09, prior to the insertion of definition of “manufacture” in the
Income-tax Act, 1961 w.e.f. 1.4.2009. The Case was decided in the year 2014 and reference was
invited to the definition of “manufacture” under the Income-tax Act, 1961 by the Assistant
Commissioner of Income-tax (ACIT). However, in the final decision, the meaning assigned to
“manufacture” under different laws were resorted to considering that there was no definition in the
Act during the relevant period (i.e., A.Y.2002-03 to A.Y.2008-09).
In this Case Study, the dates have, therefore, been modified to a period post insertion of the
definition and reference has been given to section 80-IE, since section 80-IB is no longer relevant
for manufacture or production of article or thing.
I Relevant provisions of income-tax law
(1) Section 80-IE
Section 80-IE applies to an undertaking which has begun to manufacture or produce
any eligible article or thing on or before 1.4.2017. Deduction of 100% of profits and
gains from such business would be available for ten consecutive assessment years from
the year in which it begins to manufacture or produce eligible article or thing.
The conditions to be satisfied for claim of deduction are that the undertaking should not
be formed by -
(i) splitting up or the reconstruction of a business already in existence and
(ii) the transfer to a new business, of machinery or plant previously used for any
purpose.
(2) Section 2(29BA)
“Manufacture” with its grammatical variations, means a change in a non-living physical
object or article or thing –
(a) resulting in transformation of the object or article or thing into a new and distinct
object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a
different chemical composition or integral structure.
 20.96 DIRECT TAX LAWS

(3) Form 10CCB

This is the form for audit report, inter alia, u/s 80-IE. It requires a chartered accountant
to give a declaration that the undertaking satisfies the conditions stipulated under
section 80-IE and the amount of deduction claimed is as per the provisions of the
Income-tax Act and meets the required conditions.
II Relevant clause of Part I of the Second Schedule to the Chartered Accountants Act,
1949
As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, a
chartered accountant in practice shall be deemed to be guilty of professional misconduct, if
he does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties.
III Facts of the case
Alpha Packaging Services Ltd. located in Guwahati has been claiming deduction under
section 80-IE of the Income-tax Act, 1961 since P.Y.2016-17 on the ground that it was
engaged in manufacture or production of an eligible article or thing. A survey conducted on
the company followed by a scrutiny of the case showed that the company was merely
involved in packaging washing powder of a leading brand, Turf, obtained from Unilever Ltd.
and giving the same back to them. The tax audit report as well as the report in Form 10CCB
for claiming deduction under section 80-IE was issued by the same chartered accountant.
A show cause notice was issued by the ACIT to the chartered accountant stating the
company got undue relief under section 80-IE for the last seven years on the basis of his
report in Form 10CCB to the effect that the concern was involved in manufacturing/production
of an eligible article or thing.
IV Contentions of the ACIT
The ACIT contended that the report in Form 10CCB issued by the chartered accountant is
not correct since –
- The company is not in any way involved in manufacturing or production of any article or
thing. The company is merely involved in packaging of washing powder that was given
by LMN Ltd. It was not involved in manufacturing of any pouch or cover or sachet which
was independently saleable as a product in the market.
- The company is not a new undertaking because it had taken over a proprietary concern
and hired the plant and machinery of the said proprietary concern. Hence, it did not
satisfy the condition for claim of deduction u/s 80-IE.
V Submissions of the Chartered Accountant and the ACIT’s counter contentions
CA’s Submission ACIT’s Contention
1. The report in Form 10CCB This contention is not acceptable as Form 10CCB
was only a declaration not a is a declaration by the chartered accountant that
certificate the undertaking satisfies the stipulated conditions
 TAX AUDIT AND ETHICAL COMPLIANCES 20.97
a

for claim of deduction and the amount claimed is

as per the provisions of the Income-tax Act, 1961
and meets the required conditions.
2. Reliance on the Certificate of The activity(s) which amount to manufacture or
Directorate of Industry, Assam production is different under each Act. The
chartered accountant issuing Form 10CCB has to
ensure that the same amounts to “manufacture”
as per the definition given in section 2(29BA) of
the Income-tax Act, 1961.
3. Reference to Supreme Court Even according to the Supreme Court ruling, the
ruling in ITO v. Arihant tiles condition to be fulfilled is that there should be
and Marbles Pvt. Ltd. wherein emergence of a new and distinct commodity. In
it was held that only when the the case of the assessee, the washing powder
marble blocks are cut into remains a washing powder. The original product
slabs and there is an activity and the end product remained the same. No new
of polishing and ultimate and distinct commodity emerges as a result of
conversion of block into packaging.
polished tiles, such slabs and Further, the end product is patented by Unilever
tiles ultimately produced are and it cannot undergo change in any manner.
held to be manufacturing
activity because a new
product has emerged.
4. The proprietary business was The assessee did not own plant and machinery,
taken over by the company and such assets hired by the assessee amounted
with all assets and liabilities to transfer and thus, the company was not
except plant and machinery entitled to deduction u/s 80-IE.
pertaining to the old units.
The plant and machinery was
not transferred to the
company but given on hire to
it and for using the machines,
payment of hire charges was
made and shown in the
statement of profit and loss.
Hence, the company has not
violated any condition.
VI Basis for Conclusion in the original case
(1) The definition of manufacture was inserted with effect from 1.4.2009. Since the case in
question actually related to a period prior to insertion of definition of “manufacture” in the
Income-tax Act, 1961, it was decided that though packaging or repackaging of a
product is not manufacturing activity, the further activity of removing dust, grinding can
be treated as manufacturing activity because the said activity changes the quality of the
product and makes the product commercially marketable in different form. This
 20.98 DIRECT TAX LAWS

conclusion emerged on the basis of Court ruling in relation to Excise law and other case
laws holding that provisions of a taxing statute granting incentive for promoting growth
should be construed liberally.
(2) Certain Tribunal and High Court rulings have held that in order to constitute an industrial
undertaking (which was a requirement under section 80-IB), the industrial unit need not
necessarily own its plant and machinery and hiring of plant and machinery would not inhibit
the ability of industrial unit or company to claim deduction.
(3) Considering the rationale emerging from the Court decisions as regards whether the
activity of packaging constituted manufacture/production and whether hiring of plant and
machinery from the sole proprietary concern which was taken over by the company
would be in violation of the stipulated condition, the benefit of doubt was extended to the
chartered accountant and he was held “not guilty of professional misconduct”.
VII Key Takeaways in the context of the current provisions of Income-tax law
(1) In the current context, however, the definition of “manufacture” as per section 2(29BA) of the
Income-tax Act, 1961 would be relevant. Therefore, the chartered accountant giving a
declaration in Form 10CCB has to ensure that the activity carried on by the assessee
amounts to “manufacture” as per the said definition. He may rely on judicial rulings based
on the definition of manufacture u/s 2(29BA) or a similar definition under any other law for
this purpose. It may be noted that “making the product commercially marketable”, which was
one of the bases for conclusion in the actual case is not included in the definition of
manufacture under section 2(29BA).
(2) With the introduction of several anti-avoidance provisions in the Income-tax Act, 1961,
in the last decade, the action of taking over all assets and liabilities of the sole
proprietary concern except plant and machinery and subsequently hiring the plant and
machinery from the said concern itself in order to claim deduction under section 80 -IE
may be viewed as a tax avoidance measure. This may be viewed as an arrangement
entered into solely or primarily for the purpose of obtaining a tax advantage and even
GAAR provisions may be attracted if the tax benefit is more than ` 3 crores.
Therefore, the chartered accountant must ensure satisfaction of conditions for claiming
deduction under section 80-IE before issuing the audit report under Form 10CCB.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.99
a

CASE STUDY 5
A Word about the Case Study

This Case Study highlights the ethical aspects which have to be considered by a chartered
accountant while issuing certificate in Form 15CB. The issue involved in this Case Study relates
to the responsibility of the chartered accountant to examine the agreement between the remitter
and the beneficiary as well as the relevant documents and books of account to ascertain the
nature of remittance and determine the rate of deduction of tax at source.

I Relevant provision of income-tax law

Section 195(6) and Rule 37BB

The person responsible for paying to a non-corporate non-resident or a foreign company,
any sum, whether or not chargeable under the provisions of the Income -tax Act, 1961, has
to furnish information relating to payment of such sum in the prescribed form and manner.
Rule 37BB(1) provides that the person responsible for paying to a non -corporate non-
resident or a foreign company, any sum chargeable under the provisions of the Income -tax
Act, 1961, has to furnish the information in Part C of Form No.15CA, if the amount of
payment or the aggregate of such payments, as the case may be, during the financial year
exceeds ` 5 lakh, after obtaining a certificate in Form No.15CB from a chartered
accountant.

II Relevant clauses of Part I of the Second Schedule to the Chartered Accountants Act,
1949

As per clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949,
a chartered accountant in practice shall be deemed to be guilty of professional misconduct,
if he does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties.
As per clause (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949,
a chartered accountant in practice shall be deemed to be guilty of professional misconduct,
fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion.

III Facts of the case

The Income-tax department collected documents from X Bank which revealed that M/s. Y
Travels and Consultancy Services (Y Travels) had remitted substantial amounts abroad.
The documents collected include Form 15CB issued by the chartered accountant, list of
passengers, copy of their passports, date of travel and invoice raised by the foreign party.
On enquiring from the passengers and verifying their passports, it is found that they did not
travel abroad during the dates mentioned in the documents. Further, the passengers denied
 20.100 DIRECT TAX LAWS

any sort of transactions with Y Travels. The department, therefore, concluded that the
amounts were remitted abroad on the basis of false invoices and for wrong reasons, leading
to FEMA violations and that the Form 15CB issued by the chartered accountant facilitated
such violations. During the six-month period in question, the chartered accountant had
issued 80 certificates in Form 15CB approximately involving remittances of ` 25 crores in
favour of Y Travels.

IV Submissions of the Chartered Accountant

The chartered accountant submitted that he had issued Form 15CB based on invoices
produced by the company and verifying the KYC documents of the signatory to the invoices.
He submitted that since he was not the statutory auditor of the company, he did not examine
the books of account before issue of Form 15CB or conduct due diligence of its business
activities. He had charged ` 2,000 per certificate. Mostly, the fees was collected in cash.
Some part of the fee was credited to his bank account.

V Basis for Conclusion

(1) Form 3CB is a certificate of an accountant wherein he certifies that he has examined
the agreement between the remitter and the beneficiary requiring such remittance as
well as the relevant documents and books of account required for ascertaining the
nature of remittance and for determining the rate of deduction of tax at source.

(2) The CA certifying the form undertakes to have verified the agreement between the
remitter and the beneficiary as well as the relevant documents and books of account to
ascertain the nature of remittance and determine the rate of TDS.

(3) In this case, however, the CA mentioned that he had only verified KYC of signatory to
invoice and the invoices thereof. He had not only failed to justify as to how verification
of invoices was considered as sufficient compliance for certifying the forms but also
failed to bring on record the said invoices. Thus, he failed to provide any basis on
which he relied for issuing Form 15CB certificates to the company.

(4) The CA issuing certificate in Form 15CB is, therefore, required to examine the
agreement between the remitter and the beneficiary along with the relevant documents
as well as books of account of the company –
(i) for arriving at a conclusion as to the nature of remittance and rate of TDS; and
(ii) for ensuring that the particulars mentioned in the certificate were true and correct.

In this case, since he has failed to do so, he is held guilty of professional misconduct as per
clauses (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
for failure to obtain sufficient information and failure to exercise due diligence in discharging
his professional responsibilities.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.101
a

VI Key takeaway

As elucidated in the Guidance Note, while issuing certificates, absolute level of assurance is
expected to be provided by the practitioner on the subject matter. Therefore, a CA has to
exercise due diligence and discharge the duties expected of him as a professional while
issuance of such certificates. Accordingly, in this case, before issuing certificate in Form
15CB, the CA should verify the agreement between the remitter and the beneficiary, along
with the relevant documents and books of account of the company for arriving at a
conclusion as to the nature of remittance and rate of TDS. Only after ensuring that the
particulars mentioned in the certificate were true and correct, should he issue such
certificate. In case after issuing the certificate in Form 15CB, he comes to know that the
remittance was not genuine, he has to withdraw the same within 7 days.
 20.102 DIRECT TAX LAWS

TEST YOUR KNOWLEDGE

Questions
1. Sunlight & Co., a partnership firm engaged in trading of electronic goods, has a turnover of
` 265 lakhs for the F.Y. 2025-26. Examine whether Sunlight & Co. is required to get its
books of account audited mandatorily as per section 44AB from the information given
below–

Particulars `
(i) Total turnover of F.Y.2025-26 2,65,00,000
(ii) Aggregate of all receipts during the year (including amount 3,25,00,000
received for turnover mentioned in (i) above)
(iii) Cash receipts out of (i) above 14,00,000
(iv) Cash receipts out of (ii) above (This is inclusive of the figure 16,00,000
mentioned in (iii) above)
(v) Aggregate of all payments during the year 1,35,00,000
(vi) Cash payments out of (v) above 6,95,000
Would your answer change if the cash receipts indicated in (iii) is ` 13 lakh instead of ` 14
lakh?

2. Mr. Abhinav Ahuja runs a travel agency business since the year 2010. His total commission
receipts for the F.Y. 2025-26 is ` 287 lakhs. The details of receipts and payments made by
him during the year 2025-26 are as follows:
Particulars Amount (`) Mode of receipt/ payment
Date of Receipt
15.4.2025 15,65,000 BHIM UPI
27.4.2025 13,80,000 A/c payee cheque
7.5.2025 13,35,000 Bearer cheque
6.6.2025 18,21,000 A/c payee cheque
15.8.2025 15,25,000 NEFT
19.9.2025 16,72,000 NEFT
18.10.2025 15,35,600 UPI
15.2.2026 16,25,350 UPI
17.3.2026 18,19,450 NEFT
 TAX AUDIT AND ETHICAL COMPLIANCES 20.103
a

Other aggregate receipts not 1,44,21,600 A/c payee cheques, NEFT

exceeding ` 2,000 per person on and UPI
certain occasions from various
customers. Out of this, receipts of
` 52,500 are received in cash.
Payments
Aggregate all payments made during 2,58,00,000
the P.Y. 2025-26
Amount incurred for expenditure in 20,58,000
cash (not exceeding ` 10,000 per
person in each case)

Mr. Abhinav contended that he is not required to get his accounts audited since his turnover
does not exceed ` 3 crores and he is eligible to declare his income as per presumptive
provisions of section 44AD. Examine the contention of Mr. Abhinav Ahuja.

3. X Ltd., an Indian company, paid interest of ` 95 lakhs to X Inc., a non-resident associated

enterprise in the P.Y.2025-26 on loan borrowed from it. X Ltd. also obtained loan of ` 5
crore@10% p.a. on 1.4.2025 from Y Inc., a foreign company in which it holds 20% voting
power. X Inc. deposits ` 2 crore with Y Inc. X Ltd. contends that the provisions of section
94B are not attracted in its case, since the interest paid to non-resident associated
enterprise does not exceed ` 1 crore in the P.Y.2025-26. The tax auditor is, however, of the
opinion that the interest of ` 20 lakh (i.e., 10% of ` 2 crore) also has to be considered for
the purpose of section 94B. X Ltd. contends that X Inc. has not deposited a corresponding
and matching amount of ` 5 crore with Y Inc, and hence, the provisions of section 94B will
not be attracted in this case. Examine the reporting requirement, if any, of the tax auditor in
this case.

4. ABC Ltd. is engaged in transportation of building material and transportation of goods to

contractors. It made payment for hiring dumpers for this purpose. The company has not
deducted tax at source on the ground that since the payment was for transportation of
goods and not renting out machinery and equipment, such payments could not be termed
as rent paid for use of machinery under section 194-I and hence, no tax was deductible at
source.

The tax auditor is, however, of the view that the transactions being in the nature of
contracts for shifting of goods from one place to another would be covered under works
contracts, thereby attracting the provisions of section 194C. He relied upon the Gujarat High
Court ruling in CIT (TDS) v. Shree Mahalaxmi Transport Co. (2011) 339 ITR 484.
 20.104 DIRECT TAX LAWS

What is the reporting responsibility of the tax auditor in such a case and the consequent
ethical implications? Examine.

5. A search was conducted u/s 132 of the Income-tax Act, 1961 in the case of LMN Jewellers
(P) Ltd., a gold jewellery retail chain, on 28.2.2025. As part of the post search enquiries,
data from the billing software was analysed. On analysis of this data, it was found that the
company was involved in violation of section 40A(3) in a major way to the tune of ` 20
crores in the purchase of old gold.

In order to verify the findings culled from digital data, some of the customers whose
whereabouts were available from computer records were contacted and their statements
were recorded under oath. These customers admitted under oath that they had sold old
gold and received the amounts (all exceeding ` 10,000) in cash. The fact which emerged
from the enquiries is that LMN Jewellers (P) Ltd. purchase old gold and make payments for
these purchases in cash, even if they exceed ` 10,000.

However, the tax auditor had mentioned “Yes” in response to the statement in sub -clause
(A) of Clause 21(d) on whether the expenditure covered under section 40A(3) read with
Rule 6DD were made by account payee cheque drawn on a bank or account payee bank
draft. The tax auditor submitted that standing instructions were given by the management
of the entity to the employees to make payments above ` 10,000 only through account
payee cheques and/or bank drafts or other permissible electronic modes; and copy of these
instructions were verified by him. He further submitted that he had also taken a
representation from the Management that net payment in cash to any person in a day did
not exceed ` 10,000. Also, he mentioned that the test checks conducted by him did not
reveal any violation.

Examine the ethical implications in this case and the consequences thereof.

6. XYZ & Co, a firm engaged in interior decoration business, employed 20 new employees on
1.4.2025 on a monthly salary of ` 25,000 to be paid by account payee cheque. In addition,
each employee was entitled to 10% employer contribution to recognised provident fund .
The employees were also entitled to transport allowance of ` 3,000 p.m. paid in cash. The
gross total income of XYZ & Co. included profits and gains from business of ` 62 lakhs.

The firm claimed deduction under section 80JJAA of ` 18 lakh, being 30% of 60 lakh (20
new employees x ` 25,000 p.m. x 12) on the basis of the report of the chartered accountant
 TAX AUDIT AND ETHICAL COMPLIANCES 20.105
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issued in Form 10DA. The same chartered accountant was also the tax auditor of the firm.
The chartered accountant contended that “emoluments” do not include employer
contribution to PF. Also, cash payments were not to be considered as “additional employee
cost” for the purpose of section 80JJAA. Hence, only ` 25,000 p.m. per employee paid by
account payee cheque has to be treated as additional employee cost. Since the same does
not exceed the limit of ` 25,000 p.m. and the employees have been employed for more than
240 days in the P.Y.2025-26, the employees would qualify as “additional employees” for the
purpose of deduction under section 80JJAA for A.Y.2026-27.

Is his contention correct? Examine the ethical implications in this case.

7. The Income-tax department collected documents from ABC Bank which revealed that M/s.
Alpha Travels and Consultancy Services (Alpha Travels) had remitted substantial amounts
abroad. The documents collected include Form 15CB issued by the chartered accountant,
list of passengers, copy of their passports, date of travel and invoice raised by the foreign
party. On enquiring from the passengers and verifying their passports, it is found that they
did not travel abroad during the dates mentioned in the documents. Further, the passengers
denied any sort of transactions with Alpha Travels. The department, therefore, concluded
that the amounts were remitted abroad on the basis of false invoices and for wrong
reasons, leading to FEMA violations and that the Form 15CB issued by the chartered
accountant facilitated such violations. During the nine-month period in question, the
chartered accountant had issued 120 certificates in Form 15CB approximately involving
remittances of ` 30 crores in favour of Alpha Travels.

The chartered accountant submitted that he had issued Form 15CB based on invoices
produced by the company and verifying the KYC documents of the signatory to the invoices.
He however, failed to bring on record the invoices. He further submitted that since he was
not the statutory auditor of the company, he did not examine the books of account before
issue of Form 15CB or conduct due diligence of its business activities. He had charged
` 3,000 per certificate. Mostly, the fees was collected in cash. Some part of the fee was
credited to his bank account.

Examine the ethical implications in this case.

 20.106 DIRECT TAX LAWS

Answers
1. As per section 44AB, every person carrying on business or profession is required to get his
accounts audited before the “specified date” by a Chartered Accountant, if the total sales,
turnover or gross receipts in business exceeds ` 1 crore in any previous year.

However, tax audit is not required in case of such person carrying on business whose
total sales, turnover or gross receipts in business ≤ ` 10 crore in the relevant previous
year (P.Y.), if:-

- aggregate cash receipts including amount received for sales, turnover, gross
receipts in the relevant previous year ≤ 5% of such receipts; and
- aggregate cash payments including amount incurred for expenditure in the relevant
P.Y. ≤ 5% of such payments or
In this case, the turnover of Sunlight & Co. exceeds ` 1 crore but does not exceed ` 10
crore. Accordingly, it has to be seen whether cash receipts exceed 5% of aggregate
receipts and cash payments exceed 5% of aggregate payments, to determine whether tax
audit is compulsory.
In this case, the percentage of cash receipts of ` 16 lakhs to aggregate receipts of ` 325
lakhs is 4.92% and the percentage of cash payments to aggregate payments is 5.14 8%.
Since the cash payments made during the year exceed 5% of aggregate payments, the firm
is required to get its accounts audited under section 44AB and furnish audit report before
the specified date, irrespective of the fact that its turnover does not exceed ` 10 crores and
its cash receipts do not exceed 5% of total receipts.
It may be noted that, in this case, Sunshine & Co. cannot declare profits as per the
presumptive provisions of section 44AD, since the percentage of turnover receipts in cash
of ` 14 lakhs to the total turnover of ` 265 lakhs is 5.28%.
If the cash receipts indicated in (iii) is ` 13 lakhs instead of ` 14 lakhs, the percentage of
turnover receipts in cash of ` 13 lakhs to the total turnover of ` 265 lakhs would be 4.91%.
In such a case, Sunshine & Co. can declare profits as per the presumptive provisions of
section 44AD, in which case, it need not get its books of account audited under section
44AB.
2. As per section 44AB, every person inter alia carrying on business or profession is required
to get his accounts audited before the “specified date” by an accountant, if total sales,
turnover or gross receipts in business exceeds ` 1 crore in any previous year.
 TAX AUDIT AND ETHICAL COMPLIANCES 20.107
a

However, tax audit is not required in case of such person carrying on business whose total
sales, turnover or gross receipts in business ≤ ` 10 crore in the relevant previous year
(P.Y.), if -
- aggregate cash receipts including amount received for sales, turnover, gross
receipts in the relevant previous year ≤ 5% of such receipts; and
- aggregate cash payments including amount incurred for expenditure in the relevant
P.Y. ≤ 5% of such payments or
As per section 44AD, a resident individual, HUF or Partnership firm (but not LLP) engaged
in eligible business and who has not claimed deduction under section 10AA or Chapter VIA
under “C – deductions in respect of certain incomes” whose total turnover/ gross receipts in
the P.Y. ≤ ` 200 lakhs (where cash receipts do not exceed 5% of total turnover, higher
threshold limit of ` 300 lakhs applicable) can declare 8%/6%, as the case may be, of total
turnover/ sales/gross receipts or a sum higher than the aforesaid sum claimed to have been
earned by the assessee. However, a person inter alia carrying on any agency business are
not eligible for presumptive provisions of section 44AD.
In the present case, since Mr. Abhinav Ahuja is carrying on travel agency business, he is
not eligible for presumptive provisions of section 44AD, though his turnover does not
exceed ` 3 crores.
In this case, the turnover of Mr. Abhinav Ahuja exceeds ` 1 crore but does not exceed ` 10
crore. Accordingly, it has to be seen whether cash receipts exceed 5% of aggregate
receipts and cash payments exceed 5% of aggregate payments, to determine whether tax
audit is compulsory. During the P.Y. 2025-26, his cash receipts are ` 13,35,000 plus
` 52,500 totalling to ` 13,87,500, which is 4.83% of total receipts of ` 2,87,00,000. Cash
payments made during the P.Y. 2025-26 are ` 20,58,000 which is 7.98% of aggregate
payments of ` 2,58,00,000. Since his cash payments during the P.Y. 2025-26, exceed 5%
of aggregate payments made during the year, he is required to get the accounts audited
under section 44AB and furnish tax audit report on or before the specified date i.e., one
month prior to the due date of filing return of income under section 139(1).
3. Relevant provision of law - Section 94B provides that where the debt is issued by a lender
which is not associated but an associated enterprise either provides an implicit or explicit
guarantee to such lender or deposits a corresponding and matching amount of funds with
the lender, such debt shall be deemed to have been issued by an associated enterprise.
 20.108 DIRECT TAX LAWS

In this case, the debt issued by Y Inc. is ` 5 crore and the deposit made by the associated
enterprise, X Inc. with Y Inc. is ` 2 crore. Since the deposit is not of a matching amount,
the X Ltd. contends that provisions of section 94B will not be attracted in respect of interest
payable by it to Y Inc. The tax auditor is of the opinion that interest on ` 2 crore amounting
to ` 20 lakhs will have to be considered for the purpose of section 94B. Accordingly, the
interest payable/paid by X Ltd. to non-resident associated enterprises during the year would
be ` 115 lakhs and hence, the provisions of section 94B would be attracted, since the same
exceeds the threshold of ` 1 crore. This appears to be the legislative intent, since
otherwise it is possible to escape the application of this provision by even by depositing a
marginally lower amount than the loan taken.
Relevant clause of Form 3CD - Clause 30B(a) of Form 3CD requires the tax auditor to
state whether the assessee has incurred expenditure during the previous year by way of
interest or of similar nature exceeding one crore rupees as referred to in sub -section (1) of
section 94B.

Relevant paras of the Guidance Note on Tax Audit - As per para 18.6 of the Guidance
Note on Tax Audit, the tax auditor may have a difference of opinion with regard to the
particulars furnished by the assessee. These differences are to be reported in para 3 of
Form No. 3CA or para 5 of Form 3CB. As per para 19.3, if there is any difference in the
opinion of the tax auditor and that of the assessee in respect of any information furnished in
Form No. 3CD by the assessee, the tax auditor may consider stating both the view points
and also the relevant information related to matter in order to enable the tax authority to
take a decision in the matter.
Therefore, the tax auditor has to report the difference of opinion appropriately as an
observation in para 3 of Form No. 3CA or para 5 of Form No. 3CB as the case may be.
Accordingly, in this case, the tax auditor may state both the view points in Clause
30B as well as report the difference of opinion appropriately as an observation in
para 3 of Form 3CA to enable the tax authority to take a decision in the matter.
4. In clause 34(a) of Form 3CD, the tax auditor is required to report whether the assessee is
required to deduct or collect tax as per the provisions of Chapter XVII -B or Chapter XVII-
BB, and if yes, to furnish the details mentioned thereunder. While answering the issue of
applicability of the provisions of Chapter XVII-B and/or XVII-BB, a number of debatable
issues may arise before the assessee as well as the tax auditor. The tax auditor may have
a difference of opinion with regard to the applicability of the provisions of TDS/TCS on a
particular payment. In such a case, the tax auditor has to report the difference of opinion
 TAX AUDIT AND ETHICAL COMPLIANCES 20.109
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appropriately as an observation in para 3 of Form 3CA. This requirement is contained in the

Guidance Note on Tax Audit.
Also, in clause 21(b)(ii) of Form 3CD, the amount inadmissible under section 40(a)(ia) has
to be mentioned.
In case the tax auditor does not comply with the reporting requirements under these
clauses and fails to mention the difference of opinion appropriately as an observation in
para 3 of Form 3CA, clause (7) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949 for not exercising due diligence may be invoked.

5. As per section 40A(3), where the assessee incurs any expenditure, in respect of which
payment or aggregate of payments made to a person in a day otherwise than by an account
payee cheque drawn on a bank or by an account payee bank draft or use of electronic
system through bank account or through such other prescribed electronic modes exceeds
` 10,000, such expenditure shall not be allowed as a deduction.
Clause 21(d) of Form 3CD requires the tax auditor to report, on the basis of the examination
of books of account and other relevant documents/evidence, whether the expenditure
covered under section 40A(3) read with rule 6DD were made by account payee cheque
drawn on a bank or account payee bank draft; and if not, to furnish details mentioned
thereunder, namely, date of payment, nature of payment, amount etc.
The Guidance Note on Tax Audit issued by ICAI states that there may be practical
difficulties in verifying whether each payment is made through account payee cheque or
bank draft or ECS or other prescribed electronic modes. Where the reporting has been
done on the basis of the certificate of the assessee, the fact has to be reported as an
observation in para 3 of Form 3CA.
The tax auditor is required to point out in tax audit report, the violation of the provisions of
section 40A(3) thereof involving expenditure to a person in a day exceeding ` 10,000
otherwise than by way of account payee cheque/bank draft, ECS and other prescribed
electronic modes. However, in this case, the tax auditor has certified that there was no such
instance, though such instances aggregate to a large quantum of ` 20 crores.
The tax auditor should have considered the nature of business i.e., jewellery business of
the assessee and accordingly undertaken necessary checks to verify whether there are
cash payments in violation of section 40A(3). He should have made use of the audit tools
which are available to find out such payments expeditiously and accurately where the data
is voluminous.
 20.110 DIRECT TAX LAWS

In this case, considering the nature of business of the assessee, namely, jewellery
business, the onus was on the tax auditor to verify the same before reporting in Form 3CD.
Mere reliance on certificate issued by the management is not acceptable in such a case.
Also, even in a case where the reporting has been done on the basis of the certificate of the
assessee, the fact has to be reported as an observation in para 3 of Form 3CA, which he
had failed to do.
Thus, in the case, the tax auditor had failed to exercise due diligence in the conduct of his
professional duties. He had also failed to obtain sufficient information which is necessary for
expression of opinion. On account of such failure, clauses (7) and (8) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949 may be invoked.
6. Deduction under section 80JJAA is allowable to an assessee to whom section 44AB applies
and whose gross total income includes any profits and gains derived from business, in
respect of employment of new employees. The amount of deduction is 30% of additional
employee cost incurred in the course of such business in the previous year, for three
assessment years including the assessment year relevant to the previous year in which
such employment is provided.
“Additional employee cost” means the total emoluments paid or payable to additional
employees employed during the previous year. However, in the case of an existing
business, the additional employee cost shall be nil, if emoluments are paid otherwise than
by an account payee cheque or account payee bank draft or use of ECS through bank
account or other prescribed electronic mode.
“Emoluments” means any sum paid or payable to an employee in lieu of his employment by
whatever name called but does not include, inter alia, contribution by employer to provident
fund.
“Additional employee” means an employee who has been employed during the previous
year and whose employment has the effect of increasing the total number of employees
employed by the employer as on the last day of the preceding year, but does not include,
inter alia, an employee whose total emoluments are more than ` 25,000 p.m.
In this case, the contention of the chartered accountant that the emoluments do not include
employer contribution to PF is correct. However, emoluments include ` 3,000 paid in cash
by way of transport allowance to the employee. Hence, the total emoluments per employee
is ` 28,000 p.m. Due to this reason, the 20 employees employed on 1.4.2025 will not
qualify as “additional employees” for the purpose of deduction under section 80JJAA, since
 TAX AUDIT AND ETHICAL COMPLIANCES 20.111
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their total emoluments are more than ` 25,000 p.m. Hence, XYZ & Co. is not eligible for
any deduction under section 80JJAA due to failure to fulfil the condition for being treated as
an “additional employee”. In this case, the chartered accountant has failed to ensure
compliance with the condition stipulated for claim of deduction under section 80JJAA and
has wrongly issued the report in Form 10DA certifying the deduction claimed by the
assessee under section 80JJAA.
Also, clause 33 of Form 3CD requires section-wise details of deductions, if any, admissible
under Chapter VIA. Here again, the tax auditor has to ensure that the assessee fulfils all
the conditions specified in the section under which the deduction is claimed. However, in
this case, the tax auditor has failed to do so.
On account of such failure, clause (7) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949 may be invoked.
7. Form 15CB is a certificate of an accountant wherein he certifies that he has examined the
agreement between the remitter and the beneficiary requiring such remittance as well as
the relevant documents and books of account required for ascertaining the nature of
remittance and for determining the rate of deduction of tax at source. The chartered
accountant certifying the form undertakes to have verified the agreement between the
remitter and the beneficiary as well as the relevant documents and books of account to
ascertain the nature of remittance and determine the rate of TDS. In this case, however, the
chartered accountant mentioned that he had only verified KYC of signatory to invoice and
the invoices thereof. He had not only failed to justify as to how verification of invoices was
considered as sufficient compliance for certifying the forms but also failed to bring on record
the said invoices. Thus, he failed to provide any basis on which he relied for issuing Form
15CB certificates to the company.
On account of such failure, clauses (7) and (8) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949 for failure to exercise due diligence in discharging his
professional responsibilities and failure to obtain sufficient information may be invoked.
 QUESTIONS BASED ON SIGNIFICANT SELECT CASES

You are required to answer the following questions on the basis of decided case laws, bringing out
the following -
(a) Issue involved

(b) Relevant provisions of law

(c) Analysis and Conclusion
1. ABC Construction Pvt. Ltd. is engaged in the construction of bridges and flyovers. During the
previous year 2025-26, it made payment to various parties and deducted tax amounting to
` 22 lakhs. However, the company failed to deposit the said amount with the income-tax
department within the time prescribed under the Act. The company submitted that it is facing
financial hardship since a large sum of money has been stuck-up with its debtors and also
with the income-tax department in the form of tax refunds. It is further submitted that inspite
of financial crisis, the company has suo-moto deposited the TDS amount along with interest
u/s 201(1A), before receiving any notice from the income-tax department in this regard.
However, prosecution proceedings were initiated under section 276B against the company
and its directors. The company has approached you to advise in the matter.

2. XYZ Limited entered into a contract for purchase of patented process with M/s. Delta Inc, a
non-resident company based in Country X. It filed an application u/s 195(2) before the
Assessing Officer to make payment to the non-resident company for purchase of patented
process without deducting tax at source.
The assessee, XYZ Limited, contended that said non-resident company had no Permanent
Establishment in India and in terms of the DTAA between India and Country X, no tax was to
be deducted in India on same. The Assessing Officer rejected the assessee's application on
grounds that consideration for patented process constituted royalty u/s 9(1)(vi) and was liable
to be taxed in India and, accordingly, assessee was directed to deduct tax at source at rate
of 10% on said royalty payment.
On Appeal, the Commissioner (Appeals) passed an order in favour of the assessee. On
further appeal, the Tribunal upheld the order passed by the Assessing Officer on grounds
that payments made for purchase of patented processes were in the nature of royalty and tax
at source to be deducted on such payment.
 2 DIRECT TAX LAWS

The assessee company filed a miscellaneous application for rectification under section 254(2)
before the Tribunal. The assessee had also filed an appeal before the High Court.
The Tribunal allowed said application in exercise of his powers under section 254(2) and
reheard entire appeal on merits and recalled its original order and passed an order in favour
the assessee. Thereafter, the writ petition filed by the assessee with High C ourt was also
withdrawn. Is Tribunal justified in recalling its original order?
3. The assessee, being an Indian branch of US Company, LMN Inc, was engaged in contract
research activities and cultivation of parent seeds in India. It had been claiming exemption by
treating its entire income as agricultural income.
On scrutiny assessment for the period from year 2018 to 2022, the Assessing Officer treated
entire income of the assessee as business income and attributed deemed income from
research activity holding the assessee to the Permanent Establishment (PE) of LMN Inc.
However, the assessee company disputed the matter for resolution under Mutual Agreement
Procedure (MAP) under the DTAA agreement between India and USA. The MAP was
culminated in the year 2024. The assessment was finalized and taxes alongwith interest were
paid by the assessee u/s 220(2).
However, the assessee disputed the amount of interest u/s 220(2) for the period from 2022
to 2024.
Thereafter, the assessee filed an application before Jurisdictional Commissioner of Income-
tax under section 220(2A) for waiver of interest levied u/s 220(2). The Commissioner
dismissed application of the assessee.
The assessee is a part of LMN Inc, a global conglomerate which had in 2022 ` 86,000 crores
in net sales and ` 15,000 crores as operating profit. The amount paid by it towards interest
u/s 220(2) of the Act was ` 1.75 crores.
Discuss whether the Commissioner of Income-tax is justified in rejecting the claim of
assessee or not.
4. During the scrutiny assessment of Refresh Me Ltd., a company engaged in manufacture and
distribution of packaged juices, the Assessing Officer increased the income passed an order
of demand. Aggrieved by the order, the assessee filed an appeal to CIT(A), who confirmed
the order of Assessing Officer. The assessee further appealed to Appellate Tribunal
requesting for the stay of collection of tax, which the Tribunal provided initially for 180 days
on deposit of 20% of the amount of tax by Refresh Me Ltd. Thereafter, the Bench was
functioning intermittently and therefore, the disputed matter could not be disposed off. The
 Q & A – SIGNIFICANT SELECT CASES 3
a

company applied for extension of stay and was granted extension upto 365 days . The
Appellate Tribunal did not dispose off the appeal before the time extended for collection of
tax. The revenue served an order of demand citing the reason that the order of stay
automatically gets vacated post the expiry of 365 days. The assessee seeks your opinion as
to whether the contention of the revenue is justified.
5. On 31.07.2025, a search under section 132 was conducted in the business and residential
premises of Mr. Y and some gold bars were seized from the locker. Mr. Y voluntarily disclosed
` 12.50 crores of income during the course of search. Later on, he filed an application for
sale of the gold bars weighing 5 kgs for adjustment towards the tax liability, even before the
completion of the assessment by the Assessing Officer. However, the Assessing Officer
rejected the application and observed that such action can be taken only after the assessment
is completed and a demand has been quantified. Is the Assessing Officer justified in rejecting
the application? Examine.
6. Mr. X filed his return of income for A.Y. 2025-26 by declaring a total income of ` 10 lakhs.
His case was selected for scrutiny assessment and an addition of ` 4 lakhs was made by the
Assessing Officer on account of disallowances of certain expenses. During the course of the
assessment proceedings, Mr. X found that he erroneously failed to claim the set-off of brought
forward losses under section 72 amounting to ` 3 lakhs, which he was otherwise entitled to.
By the time the error was discovered by Mr. X, the time-limit for filling revised return had also
expired. Hence, during the course of the proceedings, Mr. X approached the Assessing
Officer to allow the set-off of the brought forward losses which was erroneously not claimed
in the return of income filed under section 139(1). Whether the Assessing Officer is bound to
accept the request of Mr. X? Examine.
7. M/s LMN Travels is a Travel Agent engaged in sale of air tickets of AirGo and AirJet Airlines.
It earns standard commission @ 5% as well as supplementary commission. AirGo and AirJet
have deducted tax at source under section 194H on the standard commission, which is a
fixed percentage designated by the International Air Transport Association (IATA). However,
they have not deducted tax on the supplementary commission, which is the additional amount
LMN Travels charges over and above the net fare quoted by AirGo and AirJet and retained
by LMN Travels as its own income.
The details of the amounts at which the tickets were sold are transmitted by LMN Travels to
an organization known as the Billing and Settlement Plan ("BSP") which functions under the
aegis of the IATA. This auxiliary amount charged on top of the net fare was portrayed on the
BSP as a "supplementary commission" in the hands of LMN Travels. The contract between
 4 DIRECT TAX LAWS

LMN Travels and the airlines stated that “all monies” received by LMN Travels were held as
the property of the air carrier until they were recorded on the billing and settlement plan and
properly gauged.
AirGo and AirJet contended that tax is not deductible on supplementary commission which
LMN Travels retains out of the sale proceeds of the air tickets, since there is no agency
relationship between the airlines and LMN Travels and that the supplementary c ommission
is not within the control of the airlines. Discuss the correctness of the above contention.
8. “The arm’s length price (ALP) determined by the Tribunal, which is the final fact -finding
authority, is final and cannot be the subject matter of scrutiny by the High Court as it does
not give rise to a substantial question of law; accordingly, in an appea l u/s 260A, the High
Court is precluded from examining the correctness of determination of the ALP” – Examine
the correctness of this statement with reference to a recent Supreme Court ruling.
9. In the case of M/s HKHR Ltd., the Income-tax Appellate Tribunal decided against the
assessee and issued order under section 254. The assessee filed an appeal to the
jurisdictional High Court by framing the substantial question of law under section 260A(2)( c).
The High Court, without framing the substantial question of law u/s 260A(3) at the time of
admission of appeal, issued notices, heard both the parties and decided the appeal affirming
the order of the Tribunal on the questions raised by the assessee appellant. Discuss whether
the High Court was justified in not formulating the substantial question of law as required
under section 260A(3) and adjudicating merely on the questions put forth by the appellant
under section 260A(2)(c).
10. The assessment of Mr. Arora was completed u/s 143(3) of the Income-tax Act 1961 with an
addition of income of ` 9 lakh to the returned income. Mr. Arora contends that the order of
assessment is bad in law as no notice was issued u/s 143(2) even though he had participated
in the assessment proceedings. The Assessing Officer, relying on section 292BB, contends
that since Mr. Arora has participated in assessment proceedings, he cannot raise such
objection.
Examine the validity of the contentions of both Mr. Arora as well as the Assessing Officer.
 Q & A – SIGNIFICANT SELECT CASES 5
a

ANSWERS – SIGNIFICANT SELECT CASES

1. Issue Involved: The issue under consideration is whether prosecution proceedings can be
initiated where tax deducted has been deposited by the assessee suo moto, after the time
prescribed under the Act but before receiving notice from the income-tax department, along
with interest under section 201(1A) and the assessee has shown reasonable cause for such
delay.

Relevant provisions of law: Prosecution proceedings are attracted under section 276B, if a
person fails to pay to the credit of the Central Government, the tax deducted at source by him
as required under the provisions of the Act. The punishment is rigorous imprisonment for not
less than 3 months but which may extend to 7 years and with fine.
Section 278AA, however, provides that no person would be punishable for such failure if he
proves that there was reasonable cause for the same.
Analysis & Conclusion: The CBDT has, vide Circular No. 24/2019 dated 9.9.2019, in
exercise of the powers under section 119, listed out the offences covered under Chapter XXII
of the Income-tax Act, 1961 in respect of which prosecution proceedings shall be launched
by Approving Authority being the Sanctioning Authority where the quantum of offences
exceeds the prescribed monetary threshold. Accordingly, in case of failure to pay TDS under
section 276B or failure to pay TCS u/s 276BB, no prosecution will be processed if the
TDS/TCS amount does not exceed ` 25 lakhs and delay in deposit is less than 60 days.
In this case, the company has reasonable and sufficient cause since it was facing financial
hardship on account of large sum of money stuck up with the debtors and also with the
income-tax department on account of refunds. Inspite of the financial crisis, the company has
suo moto deposited the TDS along with interest under section 201(1A) of the Act, before
receiving any notice from the income-tax department in this regard.

Since it has deposited the TDS along with interest suo moto before receiving any notice from
the department and it has also shown reasonable cause for such delay in deposit, the
company cannot be punishable for the delay in deposit of TDS. The initiation of prosecution
proceedings under section 276B against the company and the directors is, therefore, not
correct.
Note - The facts given in the question are similar to the facts in ACIT v. AT-Dev Prabha (JV)
and others (2023) 454 ITR 59, wherein the above issue came up before the Supreme Court.
 6 DIRECT TAX LAWS

The above answer is based on the rationale of the Supreme Court in the said case read along
with the CBDT Circular.
2. Issue Involved: The issue under consideration is whether the powers under section 254(2)
can be exercised by the Tribunal to recall an order and rehear the entire appeal on merits.
Relevant provision of law: Section 254(1) empowers the Appellate Tribunal to pass such
order thereon as it thinks fit, after giving both the parties to the appeal an opportunity of being
heard.
Under section 254(2), the Appellate Tribunal, may amend an order passed by it u/s 254(1)
with a view to rectifying any mistake apparent from the record.
Analysis & Conclusion: The power u/s 254(2) is limited to rectification of a mistake apparent
on record and therefore, the Tribunal must restrict itself within those parameters.

A detailed order was passed by the Tribunal upholding the order passed by the Assessing
Officer. While allowing the application u/s 254(2) and recalling its earlier order, the Tribunal
had reheard the entire appeal on the merits as if the Tribunal was deciding the appeal against
the order passed by the Commissioner (Appeals). The subsequent order passed by the
Tribunal recalling its earlier order was beyond the scope and ambit of the powers u/s 254(2)
and is not tenable in law.

Note – The facts given in the question are similar to the facts in Reliance Telecom
Ltd./Reliance Communications Ltd. (2022) 440 ITR 1 wherein the issue came up before the
Supreme Court. The above answer is based on the rationale of the Supreme Court in the said
case.
3. Issue Involved: The issue under consideration is whether pendency of dispute resolution
under MAP is a valid ground for waiver of interest under section 220(2A).
Relevant provision of law: Section 220(2) provides for levy of simple interest for delay in
paying the sum specified in the notice of demand within the period specified thereunder.
Section 220(2A) provides for reduction or waiver of interest payable under section 220(2) if,
inter alia, the Commissioner is satisfied that payment of such amount has caused or would
cause genuine hardship to the assessee.
Analysis & Conclusion: Merely raising the dispute before any authority cannot be a ground
for waiver of interest under section 220(2A). Otherwise, each and every assessee may raise
a dispute and thereafter, may contend that since the litigation was bona fide, no interest is
leviable.
 Q & A – SIGNIFICANT SELECT CASES 7
a

Further, in this case, the assessee is a part of a global conglomerate which had in the 202 2
` 86,000 crores in net sales and ` 15,000 crores as operating profit. In comparison to the
profitability over the years, the amount paid by it towards interest under section 220(2) was
merely ` 1.75 crores. This fact is relevant in concluding that no ‘genuine hardship’ can be
said to have been caused to the assessee on account of payment of interest.
The Commissioner of Income-tax is, therefore, justified in rejecting the claim of assessee.
Note – The facts given in the question are similar to the facts in Pioneer Overseas
Corporation USA (India Branch) v. CIT (International Taxation) (2022) 449 ITR 186 , wherein
the issue came up before the Supreme Court. The above answer is based on the rationale of
the Supreme Court in the said case.
4. Issue Involved: The issue under consideration is whether the stay order can be
automatically vacated upon expiry of extended period of stay of 365 days, where the delay in
disposing of the appeal is not attributable to the assessee.
Relevant provision of law: The third proviso to section 254(2A) provides that where the
appeal filed before the Appellate Tribunal is not disposed of within the period of stay or
extended period of stay granted by the Tribunal, the order of stay shall stand vacated after
the expiry of 365 days, even if the delay in disposing of the appeal is not attributable to the
assessee.
Analysis & Conclusion: This provision would result in the automatic vacation of a stay upon
the expiry of 365 days, even if the Appellate Tribunal could not take up the appeal in time for
no fault of the assessee. Thus, the vacation of stay in favour of the Department would en sue
even if the Department is itself responsible for the delay in hearing the appeal. This will cause
undue hardship to the assessee, even where he is not at fault. In this sense, the provision is
arbitrary and disproportionate so far as the assessee is concerned.
The contention of the revenue is not justified. Any order of stay shall stand vacated after the
expiry of the period or periods mentioned in the section, only if the delay in disposing of the
appeal is attributable to the assessee.
Note – The facts given in the question are similar to the facts in DCIT v. Pepsi Foods Ltd
(2021) 433 ITR 295, wherein the above issue came up before the Supreme Court. The above
answer is based on the rationale of the Supreme Court ruling in that case.
5. Issue Involved: The issue involved in this case is whether Mr. Y’s application, for adjustment
of tax liability on income surrendered during search by sale of seized gold bars, can be
entertained where assessment has not been completed.
 8 DIRECT TAX LAWS

Relevant provision of law: The provision contained in section 132B(1) lays down the
manner in which the assets seized under section 132 may be dealt with. An assessee is
entitled to make an application to the Assessing Officer for adjustment of seized assets
towards existing tax liability.
Analysis & Conclusion: Here, the application by the assessee is not for adjustment of any
existing liability, but towards the tax liability. In the said provision, the expression used is “the
amount of the liability determined”. “A liability is determined” only on completion of the
assessment. Until the assessment is complete, it cannot be postulated that a liability has
been crystallized.
Accordingly, the action of the Assessing Officer rejecting the application on the ground that
such action can be taken only after the assessment is completed and a demand has been
quantified, is justified.
Note - The facts given in the question are similar to the facts in Hemant Kumar Sindhi &
Another v. CIT (2014) 364 ITR 555 wherein the issue came up before the Allahabad High
Court. The above answer is based on the rationale of the Allahabad High Court in the said
case.
6. Issue Involved: The issue under consideration is whether the Assessing Officer is bound to
allow the set-off of brought forward losses under section 72 even if the assessee, Mr. X, in
this case, has not claimed the same in the return filed by him and the time limit for filing
revised return has expired.
Relevant provision of law: Under section 72, business losses shall be carried forward and
shall be set-off against the profits and gains of any business in the next assessment year. It
is assumed that the assessee has filed the return of income within the time stipulated u/s
139(1) and hence is eligible for set off of the unabsorbed loss in the subsequent year.
The wording used in section 72 is “shall”, indicating that the provisions relating to set off of
brought forward business loss are mandatory provided the loss was determined in pursuance
of a return filed under section 139(3) in any earlier previous year.
Analysis & Conclusion: As per CBDT Circular No.14 (XL-35) of 1955 dated 11.04.1955, it
is the duty of the Assessing Officer to assist a taxpayer in every reasonable way, particularly
in the matter of claiming and securing reliefs and in this regard, they should take the initiative
in guiding a taxpayer where proceedings or other particulars before them indicate that some
refund or relief is due to him.
 Q & A – SIGNIFICANT SELECT CASES 9
a

Thus, it is the duty of the Assessing Officer to apply the relevant provisions of the Act for the
purpose of determining the true figure of Mr. X’s total income and consequential tax liability.
Merely because Mr. X has not claimed the set-off of brought forward losses of ` 3 lakh in the
original return filed and the time limit for filing revised return has expired, it cannot relieve the
Assessing Officer of his duty to apply section 72 in the appropriate case.
The Assessing Officer is bound to accept the request of Mr. X and allow the set-off of brought
forward losses of ` 3 lakh under section 72, even if Mr. X has not claimed the same in the
return filed, and the time limit for filing the revised return has expired.
Note – The facts given in the question are similar to the facts in CIT v. Mahalakshmi Sugar
Mills Co. Ltd. (1986) 160 ITR 920, wherein the above issue came up before the Supreme
Court. The above answer is based on the rationale of the Supreme Court ruling in that c ase,
taking note of the CBDT Circular No.14 (XL-35) of 1955 dated 11.04.1955.
7. Issue Involved: The issue under consideration in this case is whether TDS under section
194H is attracted in respect of both standard and supplementary commission paid by AirGo
and AirJet Airlines to LMN Travels.
Relevant provision of law: TDS is attracted on income by way of commission or brokerage
payable to a resident, where the amount or aggregate amount credited or paid to a person
during the financial year exceeds ` 20,000.
Analysis & Conclusion: Section 194H does not distinguish between direct and indirect
payments. Both standard commission and supplementary commission fall within the meaning
of “commission” under clause (i) of the Explanation thereto.
Section 194H is to be read with section 182 of the Contract Act, 1872. If a relationship
between two parties as culled out from their intentions as manifested in the terms of the
contract between them indicates the existence of a principal-agent relationship as defined
under section 182 of the Contract Act, the definition of “commission” under section 194H
stands attracted and the requirement to deduct tax at source arises.
There was no transfer in terms of the title in the tickets and they remained the property of the
airline company throughout the transaction. Every action taken by the travel agents is on
behalf of the air carriers and the services they provide is with express prior authorization.
Accordingly, the contract is one of agency that does not distinguish in terms of stages of the
transaction involved in selling flight tickets. The accretion of the supplementary commission
to the travel agents was an accessory to the actual principal-agent relationship.
Notwithstanding the lack of control over the actual fare, the contract definitively stated that
 10 DIRECT TAX LAWS

“all monies” received by the agent were held as the property of the air carrier until they were
recorded on the billing and settlement plan and properly gauged. The billing and settlement
plan also demarcated “supplementary commission” under a separate heading.
Hence, once the IATA made the payment of the accumulated amounts shown on the billing
and settlement plan, it would be feasible for the assessees, being the airlines to deduct tax
at source on this additional income earned by the agent.
The contention of AirGo and AirJet is not correct and they are required to deduct tax at source
under section 194H on both the standard commission and supplementary commission paid
to LMN Travels.
Note – The facts given in the question are similar to the facts in Singapore Airlines Ltd / KLM
Royal Dutch Airlines v. CIT / British Airways Plc v. CIT (TDS) (2022) 49 ITR 203, wherein the
above issue came up before the Supreme Court. The above answer is based on the rationale
of the Supreme Court ruling in that case.
8. Issue Involved: The issue under consideration is whether the arm’s length price (ALP)
determined by the Tribunal, which is the final fact-finding authority, is final and cannot be the
subject matter of scrutiny by the High Court as it does not give rise to a substantial question
of law.

Relevant provision of law: As per section 260A(1), an appeal shall lie to the High Court
from every order passed in appeal by the Appellate Tribunal, if the High Court is satisfied that
the case involves a substantial question of law.
Analysis & Conclusion: The Apex Court, in SAP Labs India Pvt. Ltd. v. ITO [2023] 454 ITR
121, laid down the following with respect to the powers of High Court to consider the
substantial question of law involving determination of arm’s length price (ALP):
- While determining the ALP, the Tribunal has to follow the guidelines stipulated under
Chapter X of the Income-tax Act, 1961, namely, sections 92 to 92F of the Act and
Rules 10A to 10E of the Income-tax Rules, 1962. Any determination of the ALP under
Chapter X not in accordance with the relevant provisions of the Income-tax Act, 1961
and Rules can be considered as perverse and it may be considered as a substantial
question of law as perversity itself can be said to be a substantial question of law.
Therefore, there cannot be any absolute proposition of law that in all cases where the
Tribunal has determined the ALP, the same is final and cannot be the subject matter
of scrutiny by the High Court in an appeal under section 260A.
 Q & A – SIGNIFICANT SELECT CASES 11
a

When the determination of the ALP is challenged before the High Court, it is always
open for the High Court to consider and examine whether the ALP has been
determined while taking into consideration the relevant guidelines under the Act and
the Rules.
- The High Court can examine the question of comparability of two companies or
selection of filters and examine whether the same is done judiciously and on the basis
of the relevant material/evidence on record. The High Court can also examine whether
the comparable transactions have been taken into consideration properly or not, i.e.,
to the extent as to whether non-comparable transactions are considered as
comparable transactions or not.
Therefore, in an appeal challenging the determination of the arm's length price, it is always
open for the High Court to examine in each case, within the parameters of section 260A,
whether while determining the ALP, the guidelines laid down under the Inco me-tax Act, 1961
and the Income-tax Rules, 1962 are followed or not and whether the determination of the
ALP and the findings recorded by the Tribunal while determining the ALP are perverse or not.
The statement is, therefore, not correct.
9. Issue Involved: The issue under consideration is whether the High Court is justified in not
framing any substantial question of law itself and adjudicating merely on the questions put
forth by the appellant.
Relevant provision of law: Section 260A(1) provides that an appeal shall lie to the High
Court from every order passed in appeal by the Appellate Tribunal, if the High Court is
satisfied that the case involves a substantial question of law. As per section 260A(3) and
260A(4), if the High Court is so satisfied, it shall formulate that question and the appeal shall
be heard only on the question so formulated.
Analysis & Conclusion: There lies a distinction between the questions proposed by the
appellant for admission of the appeal to the High Court and the questions framed by the High
Court. The questions, which are proposed by the appellant, fall under section 260A(2)(c)
whereas the questions framed by the High Court fall under section 260A(3). Section 260A(4)
provides that the appeal is to be heard on merits only on the questions formulated by the
High Court under section 260A(3) and not on the questions proposed by the appellant.
In case the High Court is of the view that the appeal did not involve any substantial question
of law, it should have recorded a categorical finding to that effect that the questions proposed
by the appellant either do not arise in the case or/and are not substantial questions of law so
 12 DIRECT TAX LAWS

as to attract the rigour of section 260A for its admission and accordingly, should have
dismissed the appeal at the preliminary stage itself. However, this was not done in this case.
Instead, the appeal was heard only on the questions urged by the appellant u/s 260A(2)(c).
The High Court was, therefore, not justified since it did not decide the appeal in conformity
with the mandatory procedure prescribed in section 260A.
Note – The facts given in the question are similar to the facts in CIT v. A.A. Estate Pvt. Ltd.
[2019] 413 ITR 438, wherein the issue came up before the Supreme Court. The above answer
is based on the rationale of the Supreme Court in the said case.

10. Issue Involved: The issue under consideration is whether the participation by the assessee
in assessment proceedings would make the omission to issue notice under section 143(2) a
curable defect on account of the deeming provision under section 292BB.

Relevant provision of law: As per section 292BB, any notice which is required to be served
upon an assessee shall be deemed to have been duly served and the assessee would be
precluded from taking any objection that the notice was -

(a) not served upon him; or

(b) not served upon him in time; or
(c) served upon him in an improper manner,

if he had appeared in any proceedings or co-operated in any enquiry relating to assessment

or re-assessment.
Analysis & Conclusion: Issue of notice under section 143(2) is mandatory for making a
regular assessment under section 143(3). Section 292BB is a deeming provision that seeks
to cure defects in any notice issued under any provision of the Income-tax Act, 1961, if the
assessee has participated in the proceedings.
For section 292BB to apply, the notice must have emanated from the Department. It is only
the infirmities in the manner of service of notice that the section seeks to cure. The section is
not intended to cure the complete absence of notice itself.

Accordingly, non-issuance of notice under section 143(2) is not a curable defect under section
292BB inspite of participation by the assessee in assessment proceedings.
In the present case, since the assessment of Mr. Arora was completed u/s 143(3) without
issuing notice u/s 143(2), the assessment is bad in law and not a curable defect u/s 292BB.
 Q & A – SIGNIFICANT SELECT CASES 13
a

Therefore, the contention of Mr. Arora is valid and the contention of the Assessing Officer is
invalid in spite of the fact that Mr. Arora participated in the assessment proceedings.
Note – The facts given in the question are similar to the facts in CIT v. Laxman Das
Khandelwal (2019) 417 ITR 325, wherein the issue came up before the Supreme Court. The
above answer is based on the rationale of the Supreme Court in the said case.