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Domestic and Direct Tax Updates

published on 30 October 2024 I reading time approx. 5 minutes

Notifications and Circulars

1. Central Board of Direct Taxes (‘CBDT’) specifies the effective date of Direct Tax Vivad se Vishwas Scheme, 2024 and prescribes the Rules and Forms thereto

Over the years, the pendency of income tax appeals filed by taxpayers and the Government has increased since the number of appeals that are filed is much higher than the number of appeals that are disposed of. To address this problem and to provide expeditious disposal of appeals by appellate authorities under its administrative control, the Direct Tax Vivad Se Vishwas Act, 2020 was launched for appeals pending as of

31 January 2020. Considering the success of this scheme in 2020 and the mounting pendency of appeals at the Commissioner of Income-Tax (Appeals) level [‘CIT(A)’], the Direct Tax Vivad se Vishwas Scheme, 2024 was introduced by the Finance (No. 2) Act, 2024.

Accordingly, CBDT vide Notification No. 103/2024 has specified 01 October 2024, as the date on which the Direct Tax Vivad Se Vishwas Scheme, 2024 shall come into force. Further, vide Notification No. 104/2024 CBDT has also prescribed new rules and forms related to the subject Scheme called as the "Direct Tax Vivad se Vishwas Rules, 2024. The rules provide the process of the scheme which will be initiated by filing of declaration of dispute by applicant in Form 1 and concluded by order of designated authority in Form 4.

2. CBDT seeks to assuage concerns over Income-tax Clearance Certificate, issues clarification

ection 230(1A) of Income Tax Act, 1961 (‘ITA’) relates to obtaining of Income tax clearance certificate (‘ITCC’), in certain circumstances, by person domiciled in India. Originally introduced as part of Finance Act, 2003, the provision has been updated under Finance No. 2 Act, 2024 to also include liabilities covered under Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (the ‘Black Money Act’) ensuring to cover liabilities covered under ITA in similar manner.

There has been some misinformation about amendment providing that all Indian citizens must obtain ITCC before leaving country. CBDT has clarified that the said position is factually incorrect and that the requirement to obtain ITCC will be applicable to certain persons, in respect of whom circumstances exist which make it necessary to obtain ITCC. The said circumstances would be:

Where the person is involved in serious financial irregularities and his presence is necessary in investigation of cases under the Income-tax Act or the Wealth-tax Act and it is likely that a tax demand will be raised against him; or
Where the person has direct tax arrears exceeding INR 1 Million outstanding that have not been stayed by any authority.

Further, ITCC can only be required after documenting the reasons and obtaining approval from the Principal Chief Commissioner or Chief Commissioner of Income Tax.

Domestic Tax Rulings

1. Taxpayer’s failure to discharge its onus to provide shareholders proof of identity, creditworthiness and genuineness of receipt of the share premium resulted in addition to the income

The taxpayer issued its shares at a premium to a Mauritius entity and a venture capital fund. For the share capital received, the tax authorities asked the taxpayer to prove the shareholders identity, creditworthiness and genuineness of the share capital and premium received by the taxpayer. In this regard, the taxpayer furnished the financial statements and registration certificate for the shareholders.

However, the tax officer did not find the documents sufficient and concluded that the taxpayer failed to discharge the onus of providing the proof of identity, creditworthiness and genuineness of the transaction. Accordingly, the tax officer made addition for the amount of share premium received, to the income of the tax payer.

The case reached before the Pune Income Tax Appellate Tribunal (‘ITAT’), wherein the ITAT upon relying on various judgements on the similar matters held that the principle that can be presumed is that mere production of incorporation details, Permanent Account Number (‘PAN’), receipt of money through banking channel etc. only prove the Identity and creditworthiness of investors but not the genuineness of the transaction. The genuineness of the transaction can be proved by various factors such as the manner and mode by which the parties approached each other, written agreement entered by the parties along with the terms and conditions to protect the rights of the investor, objects and purpose of the investment etc.

As the taxpayer did not provide sufficient evidences to discharge its onus to provide shareholders’ proof of identity, creditworthiness and genuineness of the transaction, thus, the Pune ITAT upheld the addition of the share premium to the income of the taxpayer.

2. Supreme Court (‘SC’) rules that technological impediment cannot be reason for harassing taxpayer year after year and directs the revenue to delete the excess surcharge levied on taxpayer

Arithmetical calculation issues and unnecessary adjustments to income in the official notices/communications, due to incorrectly programmed computer software of the Centralized Processing Centre Income tax department (‘CPC’), has been a prolonged matter forming the basis for disputes and resultantly appeals, preferred by taxpayers and Revenue authorities. One such issue is the levy of surcharge and education cess in addition to the base gross tax rate calculated on the income of non-resident taxpayers’ whose income is otherwise subject to tax on a gross tax basis under the relevant Double Taxation Avoidance Agreement (‘DTAA’) with India.

In a unique decision by SC, it has been noted that the excess surcharge is being levied by CPC and tax demand has been raised by CPC year after year on the taxpayer. Revenue authorities submitted that error is occurring as the CPC has not adopted the mechanism of deleting excess calculation as it is programmed to so calculate and raise a demand. SC, by stating in a stern manner that the technological impediment cannot be a reason for harassing a taxpayer year after year, directed the revenue to delete the excess surcharge being levied upon the taxpayer, within 6 weeks from the receipt of the SC order.

Further, the SC directed the Revenue authorities to take immediate steps to upgrade the software or take such other steps as may be necessary to ensure that such mistake does not occur in future. The SC also directed the CBDT to take necessary steps for rectifying the software as the issue may not be resolved by the Jurisdictional Assessing Officer.

3. Receipts from sale of MEIS scrips not to be considered as ‘income’, but non-taxable capital receipts

The Government grants several type of monetary benefits/incentives to taxpayers for enhancing exports from India. One such scheme is Merchandise Exports from India Scheme (‘MEIS’) scrips. Taxability of such receipts has been a contentious issue.

In the instant case, the taxpayer claimed receipts from sale of scrips from MEIS as exempt income. Revenue held that the income from sale of MEIS scrips were similar to Duty Entitlement Pass Book Scheme (‘DEPS’), duty drawback, etc. and thus revenue in nature. Hence, receipts from the MEIS scrips were to be assessable as income under relevant provisions of ITA, i.e. section 2(24)(xviii).

The Chennai ITAT held that taxpayer was an exporter falling under MEIS and after analysing Chapter 3 of the Foreign Trade Policy (‘FTP’), ITAT observed that the objective of the scheme is to provide rewards to exporters falling under MEIS of FTP to exporters. The ITAT observed that as per section 2(2)(24(xviii) of ITA, income included assistance in form of subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by Central Government or a State Government or any authority or body or agency in cash or kind to the taxpayer.

The ITAT, after analysing various terms involved in section 2(24)(xviii) of ITA, held that “subsidy” or “grant” or “cash incentives” or “duty drawback” or “waiver” or “concession” or “reimbursement” are not involved in the MEIS scrips. It was held that, since reward does not fall within the definition of section 2(24)(xviii) of ITA, thus, income from sale of MEIS scrips was not income under section 2(24)(xviii) of ITA, but rather non-taxable capital receipts.

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