Relief for Private Discretionary Trusts: Kolkata ITAT Rules that Surcharge is not automatic for income below ₹50 Lakh

 Recently, the Kolkata Bench of the ITAT has ruled that surcharge is not leviable on a private discretionary trust taxed at the maximum marginal rate (‘MMR’) where the total income is below ₹50 lakhs. The Tribunal held that the definition of “maximum marginal rate” under section 2(29C) of the Income-tax Act, 1962 requires reference to the Finance Act rates, and surcharge becomes applicable only when the prescribed income threshold is exceeded.

In the present case, the assessee, a private discretionary trust, filed its return declaring total income of ₹4,56,900 and computed tax without surcharge. Subsequently, while processing the return and rectification, the AO levied surcharge at 37%, raising additional demand. The Commissioner of Income Tax (Appeals) upheld the levy, holding that the maximum marginal rate includes surcharge. Aggrieved, the assessee preferred an appeal before the ITAT, contending that surcharge is leviable only when income crosses the statutory threshold specified under the Finance Act.

Upon hearing the matter, the ITAT observed that private discretionary trusts are generally taxed at the maximum marginal rate; however, such rate must be determined with reference to the Finance Act provisions. The Tribunal relied on the Special Bench ruling in Araadhya Jain Trust vs. ITO, wherein it was clarified that surcharge cannot be automatically applied at the highest rate and must instead be computed based on the applicable income slabs specified in the First Schedule to the Finance Act. Since the assessee’s income in all relevant years was below ₹50 lakhs, the statutory threshold for levy of surcharge was not met. The Tribunal further noted that interpreting MMR to always include surcharge at the highest rate would render the surcharge provisions redundant and lead to an absurd interpretation. Accordingly, the Tribunal directed that tax be computed at 30% plus applicable cess, without surcharge, and allowed the assessee’s appeal.

Write-off of loan to overseas WOS denied – treated as colourable device

 In the present case, the assessee, engaged in the business of manufacturing and trading garments, had set up a wholly owned subsidiary (WOS) in Jordan as a special purpose vehicle (SPV) to acquire another entity in the same line of business. The assessee advanced loans aggregating to approximately INR 83 crore over multiple years to the WOS. During the relevant year, following losses in the overseas business and eventual sale of the underlying investment, the assessee wrote off INR 53.24 crore of such loans and claimed it as a deduction.

New TDS Framework For International Payments

 There are certain changes in India's tax rules for TDS on payments made to non-residents. The Income Tax Act, 2025 ('ITA 2025') replaces the Income Tax Act, 1961, introducing new forms and enhanced compliance obligations for all cross-border remittances. We have prepared a detailed Note on the subject which is enclosed for your reference.

Kerala HC holds bank’s eligibility of 50% ITC cannot be denied where IT depreciation is claimed w.r.t balance ineligible ITC

 This Tax Alert summarizes a recent ruling of the Kerala High Court (HC) ^[1] on the eligibility of banking companies opting for Section 17(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) to avail 50% of input tax credit (ITC), where depreciation has been claimed under the Income tax Act, 1961 (IT Act) on the remaining portion corresponding to the foregone ITC.

ITAT Ruling in Oracle Case Clarifies Taxability of Cross-Border Software Revenue

 Introduction

In the world of cross-border taxation, the structure of a contract often matters more than the nature of the transaction itself. A recent ruling by the Income Tax Appellate Tribunal (ITAT) involving Oracle India serves as a powerful reminder of this principle. What began as a straightforward software support arrangement between an Indian subsidiary and its foreign parent escalated into a significant tax dispute, with the revenue authorities alleging royalty income and the existence of a Permanent Establishment (PE). The Tribunal’s decision provides crucial clarity on when revenue from software deals crosses the line into royalty taxation—and when it does not.

Interest on borrowings for overseas acquisition allowed as business expenditure as it expanded assessee’s steel business: Hon'ble Mumbai ITAT

 Introduction

In a landmark ruling that provides significant clarity on the tax treatment of borrowings for overseas acquisitions, the Mumbai Income Tax Appellate Tribunal (ITAT) has ruled in favour of Tata Steel. The Tribunal allowed a deduction of ₹518 Crore in interest paid on funds borrowed to acquire the UK-based steel giant, Corus. This decision reinforces the principle that borrowings for strategic global expansion—even if resulting in a controlling interest—are for "business purposes" and not merely for "investment purposes."

Payment of Corporate Guarantee Given to Subsidiary – Allowable as Business Expenditure u/s 37(1)

Introduction

In a significant ruling that provides comfort to parent companies supporting their overseas subsidiaries, the Income Tax Appellate Tribunal (ITAT) has held that payments made towards the invocation of a corporate guarantee are allowable as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The decision, arising from the case of Escorts Limited, reinforces the principle that expenditure incurred to protect global business interests and brand reputation, even if arising from a default by a step-down subsidiary, is guided by commercial expediency and is thus deductible.

Artificial Goodwill from Intra-Group Amalgamation ineligible for depreciation

 In a recent ruling, the Pune ITAT held that goodwill created pursuant to an internal restructuring, in the absence of genuine commercial benefits, constitutes a colourable device and cannot be treated as a genuine commercial asset eligible for depreciation.

Corpus Distribution from Offshore Discretionary Trusts Taxable

 Ahmedabad Tribunal Special Bench has ruled that corpus distributed on dissolution of an offshore discretionary trust to resident Indian beneficiaries constitutes taxable income under the gift tax provisions.

The Taxpayers were resident individuals and sole surviving beneficiaries of an offshore discretionary trust settled by a non-resident settlor and managed by non-resident trustees. On dissolution, the trustees distributed the accumulated corpus equally between the two Taxpayers. Notably, the trust income had never been distributed to the beneficiaries since its inception and undistributed income was instead added to the capital fund of the trust pursuant to its deed. The Taxpayers had no prior knowledge of the trust and no relationship with the settlor or trustees. The Indian tax authorities treated the receipt as taxable under gift tax provisions.

The Tribunal held the following, thereby confirming that the corpus distribution from an offshore trust is taxable under gift tax provisions:

Recent Judicial Developments in Income Tax: Key Rulings from Supreme Court, High Courts and ITAT

Recent judicial pronouncements across different forums have clarified several important aspects of Indian income tax law, particularly relating to permanent establishment, assessment procedures, and the taxation of financial instruments. A brief overview of notable rulings is provided below, beginning with the Supreme Court, followed by the High Court, and finally the Income Tax Appellate Tribunal (ITAT).

Delhi High Court Rejects "Virtual Service PE" Argument in Clifford Chance Case

In a significant ruling delivered today, the Hon’ble Delhi High Court rejected the Income Tax Department’s attempt to introduce the concept of a "Virtual Service Permanent Establishment (PE)" under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The judgment, delivered in the case of *Clifford Chance PTE Ltd*, reinforces the principle that treaty terms must be interpreted strictly and cannot be expanded through judicial fiction.

Are Interchange Fees and Payment Gateway Charges Subject to TDS?

Tax Deducted at Source (TDS) is generally not applicable to interchange fees, payment gateway charges, or the Merchant Discount Rate (MDR).** This stance has been clearly established by the Central Board of Direct Taxes (CBDT) through official notifications and has been consistently reinforced by judicial rulings.