March 2025

In a landmark ruling on special audit provisions, the Supreme Court of India in Rajesh Kumar & Ors. vs. Deputy Commissioner of Income Tax & Ors. has reinforced the constitutional safeguards for taxpayers. The Court decisively held that the Assessing Officer’s power to direct special audit under section 142(2A) of the Income Tax Act, 1961, is not absolute but must be exercised judiciously with strict compliance to natural justice principles. The judgment establishes that: (1) An opportunity of hearing is mandatory before issuing special audit directions; (2) The Assessing Officer must form an objective opinion based on all three conjunctive statutory factors; (3) Such directions constitute judicial orders with civil consequences, not mere administrative actions. This ruling significantly curtails arbitrary use of special audit powers and aligns India’s tax administration with fundamental rights protection under Article 14 of the Constitution.

In this landmark penalty appeal, the Income Tax Appellate Tribunal, Delhi Bench, delivered a decisive verdict favoring the assessee, Abbott Cold Storages Pvt. Ltd., by quashing a penalty of Rs. 4,00,000 levied u/s 271(1)(c) for AY 2010-11. The Tribunal’s ruling pivots on two critical legal pillars: procedural invalidity and substantive bonafide. First, it annulled the penalty due to a defective notice—the AO’s failure to specify the exact charge (concealment vs. inaccurate particulars) violated mandatory procedural safeguards, as cemented by Supreme Court jurisprudence. Second, on merits, the Tribunal affirmed that disallowed claims (Rs. 10 lakhs for forfeited land advance and Rs. 1.44 lakhs for wealth-tax) stemmed from genuine, document-backed business decisions and inadvertent errors, not culpable intent. Relying on Price Waterhouse Coopers, it emphasized that bonafide beliefs or debatable claims cannot attract penalty, absent mens rea. This judgment reinforces the principle that penalty provisions demand strict procedural compliance and substantive proof of dishonesty, offering robust protection to taxpayers against mechanical penal actions.

In a landmark ruling favoring the non-resident assessee, the ITAT Kolkata Bench delved into the nuanced characterization of cross-border payments for designs/drawings and technical services. It emphatically rejected the Revenue’s attempt to tax receipts as royalty/FTS, instead classifying the sale of tailor-made designs/drawings as a transfer of a ‘copyrighted article’ constituting business income. Crucially, with no Permanent Establishment in India, such business profits remain outside India’s tax net under both domestic law and the DTAA. Further, leveraging the unique wording of Article 12(5) in the India-Finland Treaty, the Tribunal established that testing services rendered entirely in Finland are taxable exclusively in the state of performance, carving out a significant exception to the typical source-based taxation rule for FTS. This decision reinforces the principle of treaty override and provides critical guidance on distinguishing between sale of products and licensing of intangibles in international contracts.

In this landmark cross-appeal before the ITAT Indore, Som Distilleries & Breweries Ltd successfully contested an ad-hoc disallowance of expenses and a disallowance u/s 40(a)(ia) for non-deduction of TDS on royalty payments. The Tribunal, upholding principles of natural justice and statutory interpretation, deleted the ad-hoc disallowance due to lack of specific findings and affirmed the retrospective application of the second proviso to section 40(a)(ia), ensuring no disallowance when the payee has taxed the income. This judgment reinforces that disallowances must be evidence-based and aligns TDS provisions with their compensatory intent, offering clarity for businesses on expense claims and TDS compliance.

In this landmark ruling by the Agra Bench of the Income Tax Appellate Tribunal, the court decisively overturned the CIT(A)’s enhancements in the case of M/s Hindustan Construction. The Tribunal reinforced the principle that estimation of income post-book rejection must be grounded in the assessee’s historical performance, striking down the arbitrary 8% profit rate. It further clarified that section 41(1) additions require concrete evidence of liability cessation, not mere procedural lapses in creditor verification. This judgment underscores judicial scrutiny over arbitrary assessments and upholds taxpayer rights against unsubstantiated enhancements and penalties.

In this landmark judgment, the Allahabad High Court upheld the entitlement of charitable educational trusts to claim depreciation on capital assets, even when the cost of such assets has been allowed as an application of income under Section 11 of the Income Tax Act 1961. The Court decisively rejected the Revenue’s ‘double deduction’ argument, clarifying that Section 11 operates as an exemption mechanism, not a deduction, thereby permitting depreciation to accurately compute the income required to be applied for charitable purposes. The ruling reinforces the distinct fiscal treatment of charitable entities and aligns with a consistent line of High Court authorities. Additionally, the Court affirmed that scholarships for higher education constitute valid charitable expenditure, underscoring the broad interpretation of ‘advancement of education’. This decision provides critical clarity for trusts and institutions navigating pre-2015 tax assessments, emphasizing the prospective nature of the 2014 amendment to Section 11.

In this landmark ruling, the Mumbai ITAT clarified the tax treatment of payments for off-the-shelf software under international tax treaties. The Tribunal decisively held that such payments constitute business profits, not royalty, when only a copyrighted article is transferred without rights to the underlying copyright. This judgment reinforces the principle that DTAA provisions, if more beneficial, override domestic tax law under Section 90(2) of the Income Tax Act. Key implications include relief for non-resident software suppliers from royalty taxation in India, provided no PE exists, and protection from interest and penalty levies in TDS scenarios. The decision aligns with global trends in software taxation and offers strategic guidance for multinationals on treaty benefits.

In this landmark judgment, the Allahabad High Court clarified a critical aspect of taxation for charitable trusts in India. The Court ruled that charitable trusts registered under Section 12A of the Income Tax Act, 1961, are entitled to claim depreciation on capital assets, even if the entire cost of those assets has been treated as application of income under Section 11. The Court held that this does not constitute ‘double deduction’ because Section 11 operates as an exemption mechanism rather than a deduction provision. Depreciation is necessary to accurately determine the trust’s income available for charitable application. The Court also upheld the allowability of scholarship payments for higher education as valid charitable expenditure. This decision reinforces the distinct tax treatment of charitable entities and provides clarity on the computation of exempt income, aligning with the majority view across Indian High Courts prior to the 2015 amendment.