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Domestic and Direct Tax Updates

published on 30 January 2025 I reading time approx. 7 minutes

Notifications and Circulars

1. Central Board of Direct Taxes (‘CBDT’) issues circular authorizing income tax authorities to admit an application for refund claims or carry forward of losses which are filed after due date

Taxpayers are required to generally submit their various types of income tax claims (income tax refunds, set-off/carry forward of losses, exemptions/deductions etc.) by way of filing of income tax returns within the prescribed statutory time limits. However, there are instances when the taxpayer is unable to file such genuine claims within the prescribed statutory time limits and the time limit thus gets lapsed. In such situations, there are domestic income tax provisions which allow taxpayers to submit the claims even beyond the prescribed statutory time limits. Such powers have been bestowed upon the CBDT vide section 119(2)(b) of the Income Tax Act 1961 (‘ITA’). The said section empowers CBDT to direct income tax authorities to allow any claim for exemption, deduction, refund and any other relief under the ITA, even after the expiry of the statutory time limit to make such claim.

CBDT vide Circular No. 11/2024 dated 1 October 2024 has specified guidelines for condoning delays in filing income tax refund claims or carrying forward/set-off of losses under section 119(2)(b) of the ITA. The Circular supersedes all prior instructions/circulars/guidelines issued by CBDT in this context. Key highlights of the Circular are:

Claims up to INR 10 Million per assessment year to be handled by the Principal Commissioner/Commissioner of Income-tax (‘Pr. CIT/CIT’), claims between INR 10 Million and INR 30 Million per assessment year by the Chief Commissioner of Income-tax (‘CCIT’), and claims exceeding INR 30 Million by the Principal Chief Commissioner of Income-tax (‘Pr. CCIT’).
No applications to be accepted for delays exceeding five years from the end of the relevant assessment year. This five-year time limit applies to claims filed on or after 1 October 2024.
Applications to be processed within six months from the date of receipt, where possible.
When reviewing the application, tax authorities to ensure that the delay was due to reasonable cause and that applicant is facing genuine hardship.

2. CBDT condones delay in filing Form No. 10-IC, Form No. 10-ID for the Assessment Years (‘AYs’) 2020-21, 2021-22 and 2022-23

In order to avail lower Corporate tax rates available under section 115BAA (22 per cent) and 115BAB (15 per cent) of the ITA, as a matter of procedure, taxpayers are required to file Form No. 10-IC and Form No. 10-ID respectively. The said Forms are required to be filed along with filing of the annual income tax returns for the respective year. With a view to reduce genuine hardship in the case of taxpayers who have missed filing of the said Forms within the prescribed statutory time limits, the CBDT has issued Circular No. 17/2024 dated 18 November 2024. The Circular grants authority to Pr. CCIT, CCIT and Director General of Income Tax (‘DGIT’), to accept applications for condoning delays in filing of the said Forms for AYs 2020-21, 2021-22 and 2022-23 for delays exceeding 365 days. While Pr. CIT and CIT can accept applications for delays of up to 365 days. No applications for delay condonation would be considered, if the same are submitted more than three years after the end of the relevant assessment year.

3. CBDT revises guidelines for compounding of offences; Simplifies procedure, reduces charges

As a step towards simplifying and rationalizing the procedure for compounding of offences under the ITA, the CBDT has issued revised guidelines effective from 17 October 2024. Some of the salient features of the revised guidelines are:

The new guidelines replace all previous guidelines and apply to both pending and new compounding applications.
The guidelines remove the categorization of offences and the limit on the number of applications a taxpayer can file. Applications can now be filed if defects are cured, which was not allowed under prior guidelines.
The time limit for filing an application has been removed (previously, there was a 36-month limit from the filing of a complaint).
Interest on delayed payments has been abolished, and the rates for offences such as withholding tax (‘TDS’) defaults have been reduced.

Domestic Tax Rulings

1.Interest on income tax refund under section 244A of ITA payable till the date of payment i.e. release of refund instead of date of refund order

In the instant case, the taxpayer filed a petition before the Delhi High Court (‘HC’) seeking a writ of mandamus to direct the revenue to release the income tax refund along with applicable interest under section 244A of ITA for the assessment year 2017-18. Although the refund had been released, the taxpayer disputed the interest calculation. Revenue calculated the interest up to the date of refund order issued, but the taxpayer claimed that it should be calculated up to the date the refund was credited to their bank account.

HC emphasized that "refund granted" refers to the release of funds, not just the order for the refund. The court rejected the Revenue's argument that interest should stop after the refund order, even if the funds are withheld, and directed the Assessing Officer to recalculate and release the interest within four weeks.

2. Hyderabad Income Tax Appellate Tribunal (‘ITAT’) rules that benefit of lower corporate tax rate under section 115BAB of ITA is available in the following AY upon demonstrating the commencement of manufacturing activities

In the instant case, taxpayer was a company set up on 16 January 2023. Taxpayer filed its income tax return for Financial Year (‘FY’) 2022-23 i.e. AY 2023-24, along with Form 10-ID, as required for the exercise of lower corporate tax rate option available under section 115BAB of the ITA. Centralised Processing Centre Income tax department (‘CPC’) processed the income tax return for FY 2022-23 and denied claim of taxpayer under section 115BAB of ITA, since the taxpayer had not commenced its manufacturing activities.

ITAT ruled that although the taxpayer did not meet the requirements of section 115BAB of the ITA for the relevant assessment year, i.e. commencement of manufacturing activities, the Revenue should have considered the commencement of manufacturing activities for the subsequent assessment year rather than relying solely on the Form 10-ID filed for the subject (earlier) assessment year. ITAT emphasized the need for a harmonious interpretation of the law, acknowledging that while manufacturing activities had not started for the assessment year in question, the Revenue must account for the commencement of manufacturing once it occurs. If the taxpayer can demonstrate that manufacturing activities began before 31 March 2024, it would be sufficient to comply with the provisions of section 115BAB of ITA, and the Revenue should consider the subsequent commencement date, even if it occurs after the filing of the income tax return and Form 10-ID accordingly.

3. Kolkata ITAT: Denying Foreign Tax Credit (‘FTC’) claim due to belated filing of requisite Form-67 ‘not justified’

As per requisite provisions of ITA, taxpayers have to file Form-67 for FTC claim paid on income earned from outside India. The Form has to be filed on or before filing of the income tax return. In the present case, the taxpayer filed Form-67 which was after the income tax return was filed. An intimation was issued to the taxpayer under section 143(1) of ITA. The taxpayer filed rectification application against the intimation order, which was rejected by the CPC. Pursuant to this, the taxpayer filed appeal before the CIT(A) which was dismissed.

Kolkata ITAT while ruling in favour of the taxpayer held that the relevant Income Tax Rule does not preclude the taxpayer from claiming credit for FTC in case of delay in filing the required Form-67, as the credit for FTC is a vested right of the taxpayer, and since Form-67 was filed (although belatedly) there was no justification for not allowing the credit for FTC. ITAT further relied on its earlier ruling in the case of Sukhdev Sen (ITA No. 78/Kol/2014, dated 26 March 2024), wherein it was held that filing of FTC in terms of relevant Income Tax Rule is only directory in nature and that FTC shall not be disallowed for non-compliance with any procedural requirement.

4.No taxable ‘benefit’ on receipt of free import of assets for testing purposes

The receipt of free of cost assets has been matter of contention with the tax authorities who often consider the value of such assets as ‘benefit’ and make an addition under section 28(iv) of the ITA, resulting in a long-drawn litigation for the recipient.

In the present case, the taxpayer received certain free of cost assets such as testing board, cameras, accessories and testing equipment from the non-resident Associated Enterprises outside India, to whom it was providing software development services. The Assessing officer inter-alia made an addition under section 28(iv) of the ITA towards the value of equipment received free of cost.

Bangalore ITAT observed that the arm's length pricing of the software development services was already tested by the Transfer Pricing Officer (‘TPO’) and the dispute on the pricing was resolved through Mutual Agreement Procedure (‘MAP’) with the competent authorities of India and Korea, wherein the cost of indirect benefits received by the taxpayer should have been embedded while arriving at the margin. Therefore, it was held that no ‘benefit’ was received by the taxpayer on receipt of such free of cost assets as the price charged towards the services was already accepted by the TPO to be at arm’s length.

Vide Finance Act, 2022 section 194R was introduced in the ITA, which casts an obligation on the provider of the ‘benefit’ or ‘perquisite’ to deduct withholding tax at a rate of 10 per cent for values exceeding INR 0.02 Million. No specific relief has been provided to the non-residents from the compliance of section 194R. Therefore, the debate on what constitutes ‘benefit’ or ‘perquisite’ is expected to be further boiled down wherein the provider has to assess the applicability of TDS under section 194R of ITA. Further, in context of non-resident provider, one will have to evaluate whether TDS compliance under section 194R would be applicable to such non-residents also.

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