Domestic and Direct Tax Updates

Annual Information Statement (‘AIS’) is an online facility of the Income tax department which provides details of a large number of financial transactions of the taxpayer which may have tax implications basis the financial information available from multiple sources. It is available to all registered Income Taxpayers through the compliance portal, accessible through the e-filing website (www.incometax.gov.in)​

CBDT has introduced new functionality in AIS to furnish response to every transaction which is displayed therein. This enables the taxpayer to comment upon the accuracy of information provided by source of such information. This feedback is automatically sent to the sources of the information, such as Tax Deductors/Collectors and Reporting Entities. The update allows taxpayers to track the status of their feedback, showing whether it has been shared with the source for confirmation, along with dates of communication and responses received. If corrections are needed based on taxpayer feedback, sources are required to submit a correction statement. Key attributes which are visible to taxpayer are as below:

a. Whether feedback is shared for confirmation – Indicates if feedback is shared with source or not.

b. Feedback shared on – Shows date on which feedback is shared.

c. Source responded on – Displays date on which sources responded.

d. Source response – Details of the responses provided by source.​

This initiative aims to empower income taxpayers by providing clearer visibility into the verification process of financial data, thereby improving overall taxpayer services.

For quite some time, the CBDT has been following up with individual Income Taxpayers to link their PAN with Aadhaar. Some categories of Individuals were exempted from this requirement. For example: non-resident individuals holding a PAN in India but not an Aadhaar as they are not Indian nationals eligible to obtain an Aadhaar as such. The Governments motive behind this move was to ensure efficient tax filing and stop people from using several PAN cards to avoid paying taxes.

In line with the above, provisions were also introduced in the domestic income tax regulations and the CBDT had issued Circular No. 3 of 2023 dated 28 March 2023, As per this Circular, one of the consequences specified as a result of the PAN of the deductee/collectee becoming inoperative, the tax is deductible/collectible in case of such person at higher rate. This was effective from 1 July 2023 and continued till the PAN became operative. Several deductors/collectors of withholding tax (‘TDS’) / tax collection at source (‘TCS’) therefore received notices for short deduction/collection of TDS/TCS respectively while carrying out transactions where PAN of deductees/collectees became inoperative.

With the view of redressing the grievances for the above issue faced by the deductors/collectors, CBDT issued a modified Circular No. 6 of 2024 dated 23 April 2024, wherein it specified that for the transactions entered up to 31 March 2024 and in case PAN became operative as a result of intimation of Aadhar on or before 31 May 2024, then there shall be no liability on the deductor/collector to deduct/collect tax at the higher rate for such transactions. As a result, many deductors/collectors have now received notices of short deduction/collection in case the PAN of the deductee/collectee remained inoperative even after 31 May 2024. The said situation needs to be carefully evaluated in light of the CBDT action of issuing demand notices to deductors/collectors.

The Calcutta HC recently had an occasion to deal with a situation wherein the investments in shares of an Indian company by the investors were held as undisclosed cash credit in the hands of the Indian company, as the genuineness of the transaction could not be established.

In the instant case, the Indian company issued shares having face value of INR 10 each at a premium of INR 40 each to 5 companies. During scrutiny assessment proceedings, Assessing Officer held that the Indian company entered into a share transaction with the investors to introduce the unaccounted income in form of share application/allotment; they did not have any regular business transaction or regular acquaintance with the investors; the investors had no reason to invest such huge amount in the business of the Indian company. And accordingly, added back entire share application money in total income as undisclosed cash credit under section 68 of the ITA.

Calcutta HC while deciding the matter in favour of the Assessing Officer, made following observations:

Accordingly, HC held that the Indian company had failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investors and hence decided the matter against the Indian company. This judgement is important since Income tax department usually seeks clarifications from the Indian company (recipient of investment) on the genuineness and creditworthiness of its investors, whether they are not merely shell companies being used for round-tripping of funds in respect of unaccounted money.

In the instant case, taxpayer subscribed to shares of a private company and subsequently received bonus shares in the ratio of 5:1 and resultantly the value per share was reduced to 1/6th of the original value of the shares. Thereafter (within 15 days), the taxpayer sold the original shares at a capital loss of INR 4,620 Million. Such capital loss was set-off by the taxpayer with his other long term capital gains in his income tax return.

In the scrutiny assessment proceedings, tax authorities issued a show cause notice contending to invoke GAAR provisions to treat the above transaction as an “impermissible avoidance agreement”. However, the tax payer challenged the applicability of GAAR and filed a writ petition before the Telangana HC. 

The taxpayer contended that transaction is covered by the provisions of bonus stripping under the Specific Anti Avoidance Rules (‘SAAR’) in the domestic tax law and thus GAAR provisions cannot be applied. Taxpayer argued that SAAR provisions covered bonus stripping only in case of mutual funds and not shares, therefore, what has been specifically excluded from the SAAR provisions cannot be indirectly included by applying GAAR provisions.

Whereas, the tax authorities alleged that the aforesaid transaction was undertaken with the sole purpose of tax evasion and pointed out series of pre-decided steps undertaken in sequence (private placement of shares to the taxpayer, issue of bonus shares and sale of shares at a significantly discounted price) which resulted in capital loss to the taxpayer. 

HC dismissed the writ petition of the taxpayer and held that the GAAR provisions will apply to the facts of the case. It was highlighted that usually general provision cannot be invoked wherein a specific provision has been subsequently enacted. However, in the given case, since GAAR provisions were introduced after the SAAR provisions for bonus stripping, the general rule cannot be applied here. Also, GAAR provisions begin with the non-obstante clause and has an overriding effect. Accordingly, the HC held that the tax authorities had persuasive and convincing evidence to conclude that these transactions are impermissible under the domestic tax laws.