Supreme Court / High Courts
The Supreme Court has ruled that “Sharbat Rooh Afza” is classifiable as a “fruit drink” under Entry 103 of Schedule II, Part A of the UPVAT Act and is consequently liable to be taxed at the concessional rate of 4%. The ruling is based on the cumulative findings that the product derives its essential character from its fruit-based constituents, not its sugar base; and the common parlance test, supported by the product’s treatment in other states, indicates it is understood as a fruit-based beverage.
The Court took note that the same product was classified as a fruit-based beverage and taxed at a lower rate under similar VAT laws in several other states. While not binding, this consistent treatment across multiple jurisdictions serves as evidence of the product’s commercial understanding.
A Two-Judge Bench of Justice B V Nagarathna and Justice R Mahadevan observed that the regulatory laws like the Fruit Products Order, 1955 (FPO) or standards set by the Food Safety and Standards Authority of India (FSSAI) operate in the domain of quality control and licensing. Their classifications are not determinative for fiscal purposes unless a taxing statute expressly incorporates them. Therefore, the classification of “Rooh Afza” as a “non-fruit syrup” under the FPO does not automatically govern its classification under the UPVAT Act.
The Kerala High Court (Ernakulam Bench) has held that the employees of a Government department who are absorbed into a Public Sector Undertaking (PSU), and whose pensionary benefits are explicitly governed by Rule 37A of the Central Civil Services (Pension) Rules, 1972 (CCS Rules) that treat them on par with Central Government servants for the purpose of calculating such benefits, are entitled to the full tax exemption on leave encashment under Section 10(10AA)(i) of the Income Tax Act, as if they had retired from the Central Government.
The High Court explained that the legal fiction created by the service rules, which equates them with Central Government servants for pensionary purposes, must be given full effect and read harmoniously with the provisions of the Income Tax Act. Consequently, an executive instruction from the employer cannot override these statutory rights.
A Single Judge Bench of Justice Harisankar V. Menon conducted a detailed analysis of Rule 37A of the CCS Rules, which governs the pension of government servants absorbed into a PSU. While the respondents relied on sub-rule (4), which states that absorbed employees ‘cease to be Government servants’ and are ‘deemed to have retired’, the Bench found this provision could not be read in isolation.
The Calcutta High Court has held that payments calculated as a pre-determined percentage of turnover or sales, without a direct, item-by-item correlation to the actual expenses incurred by the service provider, do not qualify as “reimbursements” for the purposes of the Income Tax Act. Such payments are to be treated as contractual consideration for services rendered, which, if falling under the definition of ‘work’ as specified in Section 194C (including advertising, broadcasting, etc.), are subject to Tax Deducted at Source (TDS).
Consequently, the Court asserted that the payer has a statutory obligation to deduct TDS on such contractual payments. A failure to comply with this obligation justifies the disallowance of the corresponding expenditure in the hands of the payer under Section 40(a)(ia) of the Act. This obligation on the payer is independent of, and not absolved by, the fact that the recipient (payee) has included the payment in its taxable income and paid taxes thereon.
The Division Bench comprising Justice Rajarshi Bharadwaj and Justice Uday Kumar observed that the Tribunal’s reasoning for upholding the disallowance was well-founded and comprehensive. The Bench scrutinized the appellant’s claim that the payments were mere reimbursements and concurred with the Tribunal that they were, in fact, contractual payments for services like advertising, sales promotion, handling, and storage, which are covered under the provisions for contracted work in Section 194C of the Act.
The Special Court at Bombay has clarified that for the purpose of distribution of property under Section 11(2)(a) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (TORT Act), the phrase “taxes due” refers to taxes that are finally assessed, ascertained, and quantified. The Court ruled that a tax demand that is ‘protective’ in nature and is contingent upon the outcome of pending appeals, which have not been adjudicated for a prolonged period, does not constitute an ascertained and quantified liability.
Consequently, the Court held that the continued attachment of a notified party’s assets based solely on such an inchoate and unenforceable demand is not justified, and the estate is liable to be de-notified.
The Judge N. J. Jamadar has observed that the only claim against the estate of the late Jaideep Pathak is the income tax demand, as Standard Chartered Bank has confirmed a ‘Nil’ demand. The Judge noted that the income tax demand is admittedly a ‘protective demand’, contingent on the outcome of the substantive addition made in the assessment of Standard Chartered Bank.
The Delhi High Court has asserted that any authority is bound to provide copies of the documents it relies upon to the party against whom proceedings are being conducted. The failure of an authority, in this case the Transfer Pricing Officer (TPO), to supply copies of agreements that form the basis of its findings constitutes a violation of the principles of natural justice. This failure adversely impacts the taxpayer’s right to an effective defence, especially in complex matters like transfer pricing where comparability analysis is crucial.
The Division Bench comprising Justice Dinesh Mehta and Justice Vinod Kumar observed that the petitioner’s prayer for copies of the relied-upon documents was not unreasonable. The Bench noted that in transfer pricing matters, various factors such as the ‘nature of business’, ‘nature of transactions’, and the ‘goodwill involved’ of a contracting party are critical.
Since the core issue was whether the petitioner had paid excess royalty, the Bench opined that unless the agreements forming the basis of the TPO’s proceedings were provided, the petitioner’s right to defend its cause would be adversely impacted. The Bench, therefore, set aside the TPO’s order, deeming it to have been passed without affording a proper opportunity to the petitioner by not providing the relied-upon agreements.
The Amaravati Bench of Andhra Pradesh High Court has held that the power of tax officials at a check post under Sections 129 and 130 of the GST Act, 2017, is limited and does not extend to making determinations on the valuation of goods in transit. Such questions of potential undervaluation are to be adjudicated by the jurisdictional Assessing Authority only.
Further, the Court clarified that it is not a reasonable exercise of power for the authorities of a transit State to confiscate goods or impose penalties for potential tax evasion that may occur in the destination State. Based on these principles, the Court directed the release of the seized goods and vehicles.
The Division Bench comprising Justice R Raghunandan Rao and Justice T.C.D. Sekhar observed that the question of valuation cannot be undertaken during proceedings under Section 129 or Section 130 of the GST Act, and matters of valuation and the tax payable thereon must be referred to the appropriate Assessing Authority.
The Bench opined that the objective of Sections 129 and 130 of the GST Act is to prevent the loss of tax revenue to the state where the tax is legally payable. Consequently, the act of tax authorities of a transit state confiscating goods or levying penalties, on the suspicion of tax evasion in another state, does not appear to be a reasonable exercise of power.
The Gujarat High Court (Ahmedabad Bench) has clarified that where a product can be reasonably brought within a specific entry, recourse to a residuary entry is impermissible. Accordingly, the Court held that Mint Orange 2022 is rightly classifiable under Entry 226 of aromatic chemicals and compounds under Entry 42A of Schedule II to the Gujarat VAT Act & not under the residuary Entry 87.
The Division Bench comprising Justice A S Supehia and Justice Pranav Trivedi noted that the documentary evidence, including laboratory reports and certificates establishing that the product was custom-made for industrial use and seldom used for household purposes, had not been doubted by the Revenue Department.
Thus, relying on the decision of the Supreme Court in Mayuri Yeast India Pvt Ltd. v. State of Uttar Pradesh [(2008) 5 S.C.C. 680], the Bench reiterated the settled principle that where a product can be reasonably brought within a specific entry, recourse to a residuary entry is impermissible.
While dealing with the taxability of income from non-India Point of Sales (POS), the Delhi High Court has clarified that once 15% of revenue is attributed to the Indian Permanent Establishment (PE), the entire related expenditure must be deducted therefrom to compute taxable income. Since the expenditure, i.e., 68% commission was higher than the attributed revenue of 15%, no taxable income arose from these transactions.
As far as non-India POS income is concerned, the Court exercised judicial restraint as the matter was sub-judice before appellate bodies. However, to ensure justice, the Court adopted a proportional approach, linking the withholding tax rate to the quantum of disputed income. It determined that the non-India POS revenue constituted about 20% of the petitioner’s total revenue, i.e., Rs. 246.83 crore out of Rs. 1222.18 crore.
Therefore, the Court decided it expedient to apply a proportionate tax rate to this part of the income, rather than granting a complete NIL rate certificate which would ignore the ongoing dispute. Accordingly, the Court set aside the impugned order and the corresponding certificate, and directed the competent authority to issue a fresh tax withholding certificate within fifteen days, providing for a deduction of tax at the rate of 0.5%. This rate was calculated by taking the proportion of non-India POS revenue to total revenue and applying it to the original 1.6% rate determined by the authority, with the resulting 0.32% being rounded off to 0.5%.
The Division Bench comprising Justice Dinesh Mehta and Justice Vinod Kumar observed that the issue concerning the taxability of income from non-India POS transactions is yet to be conclusively decided by the appellate authorities, and given that the Assessing Officer’s view has been consistently against the petitioner for the last four years, the Bench would refrain from making any definitive finding on that matter.
The Madras High Court has held that where penalty proceedings under section 271AAB of the Income Tax Act were initiated in assessment order that became subject of appeal before Commissioner (Appeals) and Tribunal, limitation for passing penalty order would be governed by section 275(1)(a) and not residuary clause (c) of section 275(1)
The Court explained that Clause (c) of section 275 opens with the phrase ‘in any other case’. Taking into consideration the preambular phrase ‘in any other case’, it is beyond doubt that Parliament intended that clause (c) would apply only to cases wherein clauses (a) and (b) of section 275(1) of the Income Tax Act do not apply.
A Single Judge Bench of Justice Senthilkumar Ramamoorthy observed that many of the penalties for breach of other provisions of the Income Tax Act under Chapter XXI are subject to a reasonable cause defence under section 273B. The common thread running through the whole of the second category of penalties is that they are typically not strongly linked to assessment or other proceedings.
Tribunals (CESTAT/ ITAT/ AAR)
The New Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that resident of a Contracting State is not entitled to the benefits of the DTAA (Double Taxation Avoidance Agreement) if its affairs were arranged with the primary purpose of taking advantage of those benefits, as stipulated by the Limitation of Benefit (LOB) clause in Article 24A(1) of the India-Singapore DTAA.
The ITAT clarified that a company qualifies as a shell or conduit company, thereby losing treaty benefits under Article 24A(2), if it has negligible or nil business operations or no real and continuous business activities in the contracting state. The holding of a Tax Residency Certificate (TRC) is not conclusive proof of residency; and tax authorities are entitled to pierce the corporate veil and examine the surrounding facts and circumstances to determine if the control and management of the company are genuinely exercised in that state and to deny benefits in cases of impermissible tax avoidance arrangements.
Where a treaty benefit is denied on the grounds of such an arrangement, the income shall be taxed based on the source rule under the domestic tax law, i.e., the Income-tax Act, added the Tribunal, while holding that the capital gain arising on the sale of equity shares and CCDs of the Indian company is chargeable to tax in India under the provisions of the Income-tax Act, based on the source rule.
Since the taxpayer (appellant) was found to be a shell/conduit company interposed in Singapore to take undue tax advantage of the India-Singapore DTAA, with no real economic substance or commercial justification for its establishment in Singapore, the ITAT ruled that the petitioner is not eligible to avail the benefits of the India-Singapore DTAA.
The Division Bench comprising Raj Kumar Chauhan (Judicial Member) and Ramit Kochar (Accountant Member) observed that the appellant company was interposed in Singapore for routing investment into Renew Solar Energy (Karnataka) Limited, India, whereas, the ultimate parent company in China, a global leader in manufacturing solar PV modules, was concurrently supplying these modules to the same Indian entity for its 60MW solar power project.
The New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that the construction of public amenities like parking lots for a local authority, which is part of its statutory duties under the Constitution, does not constitute an activity for “commerce, industry, or any other business or profession” merely because a nominal fee is collected from the public for its maintenance and proper use. Such activities are not undertaken with a profit motive and are therefore eligible for service tax exemption under Entry 12A(a) of Notification No. 25/2012-ST.
Thus, the CESTAT clarified that a refund claim filed under a special legislative provision like Section 102 of the Finance Act, 2016, which grants a retrospective exemption and mandates the refund of tax collected during the interim period, is absolute and not governed by the procedural requirements or limitations applicable to general refund claims, such as the necessity to challenge the self-assessment.
The Division Bench comprising Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) observed that the central issue was whether the appellant’s services were eligible for exemption under Entry No. 12A of Notification No. 25/2012-ST, as retrospectively applied by Section 102 of the Finance Act, 2016. The Tribunal analysed the term ‘commercial’, and opined that an activity is commercial in nature only if it is carried on with a profit motive.
The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that where scrutiny assessment proceedings are conducted electronically through the ‘E-Proceeding’ facility as mandated by CBDT Instruction No. 1/2018, the resulting assessment order must be signed digitally by the Assessing Officer.
The ITAT emphasised that the failure to digitally sign the order and the issuance of a manually signed order is a direct violation of the binding procedure laid down by the CBDT. This procedural deviation is an incurable defect that renders the assessment order illegal and invalid, thereby justifying the quashing of the assessment itself.
The Division Bench comprising Mahavir Singh (Vice President) and M. Balaganesh (Accountant Member) observed that the CBDT Instruction No. 1/2018 mandates that assessment proceedings in scrutiny cases be conducted electronically. Specifically, Paragraph 4.2 of the instruction directs that all departmental orders and communications issued through the ‘e-Proceeding’ facility must be digitally signed by the Assessing Officer.
The New Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has clarified that for an importer to avail the benefit of customs duty exemption for an aircraft under Notification No. 21/2002-Cus for providing ‘non-scheduled (passenger) services’, the use of the aircraft must confirm to the definition of an “air transport service” under Rule 3(9) of the Aircraft Rules, 1937, which necessitates that the service is provided for remuneration.
The CESTAT therefore, held that use of the aircraft for private, non-commercial, or non-remunerative purposes constitutes a breach of the post-importation conditions of the exemption notification, thereby rendering the goods liable to confiscation and making the importer liable for the payment of the exempted duty based on the undertaking furnished at the time of import.
However, the Division Bench comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) asserted that the imposition of a penalty for abetment under Section 112(a) of the Customs Act, 1962, requires proof of mens rea or intentional aiding in the act or omission; mere facilitation or being a beneficiary of the use of the goods without knowledge of the violation is insufficient to attract such a penalty.
Since the appellant had violated Condition No. 104 of the Exemption Notification, the CESTAT upheld the confiscation of the helicopter and the demand for duty based on the undertaking. At the same time, the CESTAT held that penalties could not be imposed upon Baijayant Panda and Rajeev Lala under Section 112 of the Customs Act, as the element of abetment with knowledge was not proven.
ITAT Grants Relief to Mukul Rohatgi in ₹133 Crore Income Tax Revisional Assessment
While explaining the scope and limitations of the revisional power of the PCIT under Section 263 of the Income-tax Act, the New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that an assessment order cannot be deemed “erroneous” merely because the Principal Commissioner of Income Tax (PCIT) holds a different view from the Assessing Officer (AO). If the AO has considered the materials and explanations on record and has taken one of the possible views, the PCIT cannot invoke Section 263 to substitute their own view.
The ITAT emphasised that the PCIT’s conclusion that an order is erroneous and prejudicial to the interest of the Revenue must be based on materials available on the record. If there is no such material, the initiation of revision proceedings is illegal and without justification. The PCIT cannot set aside an assessment merely to conduct another investigation without a foundational basis.
While passing a revision order under Section 263, the PCIT must record reasons in support of the conclusion that the AO’s order is erroneous and how it is prejudicial to the interest of the Revenue, and an order that fails to indicate such reasons is not valid, clarified ITAT, while asserting that the PCIT does not have the jurisdiction under Section 263 to direct the AO to initiate penalty proceedings if the AO did not do so at the time of assessment. The satisfaction for initiating a penalty is that of the AO, not the PCIT in revision proceedings.
The Division Bench comprising Mahavir Singh (Vice President) and Manish Agarwal (Accountant Member) observed that the details filed by the appellant, including the ISIN codes for the funds (e.g., Axis Dynamic Equity Fund), clearly indicated that they were equity-oriented funds held for more than one year. The Bench noted that these details were filed before the AO during the original assessment, and the AO, after examining them, formed an opinion that they were equity-oriented funds. This was one of the possible opinions, and the PCIT had not provided any finding or observation as to how these funds were not equity-oriented.
CESTAT Delhi: Customs Act Can’t Be Invoked for FEMA Violations; Confiscation and Penalty Set Aside
The New Delhi, Principal Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that the jurisdiction of customs authorities to take action against contraventions of foreign exchange laws is not inherent in the Customs Act, 1962, but was historically derived from a ‘deeming provision’ present in the erstwhile FERA, 1947 and 1973. The CESTAT went on to clarify that the Foreign Exchange Management Act (FEMA), 1999, deliberately omitted this deeming provision, thereby rescinding the jurisdiction of customs authorities to initiate proceedings for confiscation and penalty under the Customs Act, 1962, for violations of FEMA regulations.
Consequently, any contravention of FEMA can only be addressed within the procedural and substantive framework of FEMA itself, and customs officers can only act if specifically delegated powers under FEMA, not by resorting to the provisions of the Customs Act, 1962, added the Tribunal.
The CESTAT held that the proceedings initiated against the appellants, which resulted in the confiscation of foreign currency and the imposition of penalties under Section 113(d) and Section 114 of the Customs Act, 1962, were conducted without valid legal authority. It asserted that invoking Section 113(d) of the Customs Act by ‘reading it with’ FEMA is impermissible because FEMA lacks a provision that deems its restrictions to be prohibitions under the Customs Act.
The Division Bench comprising Ajay Sharma (Judicial Member) and C J Mathew (Technical Member) traced the legislative history of foreign exchange regulation, noting that the erstwhile Foreign Exchange Regulation Act (FERA), 1973, and its predecessor, FERA, 1947, contained specific ‘deeming provisions’, which explicitly stated that restrictions under FERA were to be “deemed to have been imposed under Section 11 of the Customs Act”, thereby conferring jurisdiction on customs officers. The Bench observed that this deeming provision was the sole basis for the customs authorities’ power to adjudicate and penalize FERA violations.
The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that where respondent/ taxpayer has converted part of land from capital asset to stock-in-trade and Assessing Officer computed capital gains at fair market value at conversion under section 45(2) but did not use same value to calculate business profits on sale, such method resulted in a mistake, as same fair market value at conversion must be adopted for business profit computation
The Division Bench comprising Anubhav Sharma (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that the Assessing Officer has adopted a fair market value at the time of conversion of land as stock-in-trade and he proceeded to complete the assessment without giving the effect of adopting fair market value at the time of conversion while determining the profit under the head ‘income from business’.
This is so, when the Assessing Officer recalculated the fair market value at the time of conversion, the same market value had to be adopted while computing the profit under the head ‘income from business’ while determining the cost of acquisition by adopting the fair market value as determined at the time of conversion, added the Bench, while observing that there is mistake apparent on record in the method adopted by the Assessing Officer.
The New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that an incomplete or unfinished article, which possesses the essential character of the finished article, must be classified under the same tariff heading as the finished article. This principle is derived from Rule 2(a) of the General Rules for the Interpretation of the First Schedule to the Central Excise Tariff Act, 1985.
The CESTAT clarified that since a finished ‘Roti’ is a form of bread classifiable under CETH 1905 90 90, the appellant’s ‘Ready Roti’, being an unfinished product with the essential character of a roti, is also correctly classifiable under the same heading. Consequently, the demand for duty, interest, and penalty was set aside.
The Division Bench comprising Ajay Sharma (Judicial Member) and P.V. Subba Rao (Technical Member) observed that the central issue was the correct classification of ‘Ready Rotis’, whether as bread under CETH 1905 90 90 or as a miscellaneous edible preparation under CETH 2106 90 90. It noted that breads can be either leavened (like buns and pizza bases) or unleavened (like rotis and parotas), and that rotis are commonly referred to as ‘Indian unleavened flat breads’.
The New Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has pointed out that an exemption notification must be read holistically, and the scope of a broad description of goods is not to be restricted by a term placed in parenthesis unless there is clear legislative intent to do so. The CESTAT held that the presence of two different tariff headings corresponding to the description in the notification indicates that the parenthetical term ‘ventilator’ does not control the entire reach of the description.
Relying on the principle laid down in Zamil Steel Buildings India Pvt Ltd v. State of Maharashtra, the CESTAT affirmed that the specificity of a parenthetically enclosed expression does not override the generality of the main description. Therefore, any apparatus that conforms to the broader description ‘artificial respiration or other therapeutic respiration apparatus’, is entitled to the exemption. Accordingly, the Tribunal held that the impugned order erred in restricting the benefit of Notification No. 20/2020-Cus only to ‘ventilators’.
The Division Bench comprising Justice Dilip Gupta (President) and CJ Mathew (Technical Member) was surprised of the first appellate authority’s approach, noting that it was an unreasoned and unreasonable assessment. It observed that the appellate authority improperly relied on a subsequent notification (No. 28/2021-Cus) and a press release to interpret the earlier notification, which is not a credible method.
The Raipur Bench of the Income Tax Appellate Tribunal (ITAT) has held that deeming sale consideration as per the provisions of section 50C is not applicable for exemption under section 54F of the Income Tax Act. The rationale is that one cannot expect a person to perform impossible things. When the person receives a particular sum, he cannot be expected to invest any amount over and above the amount of consideration received for transfer of property.
Thus, if provisions of section 50C is applied in section 54F, then it is impossible for the appellant to fulfil the conditions for availing the full exemption in spite of investing the entire net consideration in a new residential house. Accordingly, the ITAT held that where the appellant claims exemption under section 54F, the net consideration when deployed in acquisition or construction of residential house, it should be eligible for exemption and the provisions of section 50C should not be imported for such computation.
The ITAT clarified that deeming fiction provided for computing full value of consideration is only for determining full value of consideration as defined in section 48 of the Income Tax Act and for the purpose of computing capital gains under deeming fiction provided in section 50C and this deeming fiction cannot be applied for exemption under section 54F.
The Tribunal explained that a deeming provision cannot be extended beyond the purpose for which it is enacted. Legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond their legitimate field.
The Division Bench comprising Partha Sarathi Chaudhury (Judicial Member) and Avdhesh Kumar Mishra (Accountant Member) referred to the provisions of Section 50C of the Income Tax Act to observe that where the full value of consideration shown to have been received or accruing on the transfer of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by stamp valuation authority, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be full value of consideration received or accruing as a result of such transfer. It is a deeming provision, and it covers land or building or both.