ITAT Special Bench allows deduction for provisioning made by banks on standard assets

 This Tax Alert summarizes a Special Bench ruling of the Chandigarh Income-tax Appellate Tribunal (ITAT) in the case of Malwa Gramin Bank^[1] on the allowability of deduction under Section 36(1)(viia) of the Income-tax Act, 1961 (Act) in respect of provisions created on “standard assets”. The ruling assumes significance in light of divergent judicial precedents on the issue.

The Special Bench has ruled in favor of the assessee, holding that provision on standard assets, made in accordance with RBI norms qualifies for deduction under Section 36(1)(viia) of the Act, subject to the overall ceiling limit as prescribed therein.

The key observations of the Special Bench are:

ITAT Mumbai Rules in Favour of Category III AIF: Gains from Securities Held as Capital Assets, Unit Premium Not Taxable

 The Mumbai Income-tax Appellate Tribunal (ITAT) in the case of 360 One has delivered a significant ruling in favour of a SEBI-registered Category III Alternative Investment Fund (AIF), holding that income from securities transactions must be treated as capital gains (not business income) when consistently reported as such. The Tribunal further ruled that unit premium arising from NAV-based issuances does not constitute taxable income, provided the valuation methodology is duly substantiated.

India’s Economic Model and Tax Treaty Policy: A Strategic Contrast with the OECD

 India's economic story is one of striking contrasts. On one hand, the country stands out as a global growth leader, with the OECD consistently ranking it at the top among G20 nations. On the other, significant structural challenges—particularly in fiscal capacity and social infrastructure—remain deeply embedded.

Understanding the Reverse Charge Mechanism (RCM)

 In a typical transaction, the supplier of goods or services is responsible for collecting and paying the tax to the government, known as the forward charge mechanism. However, under specific circumstances outlined in the GST law, this responsibility is reversed. For services, RCM is applicable to imports, certain transport services by road, legal services provided to business entities, and a range of services provided by government bodies, among others.

Madras High Court Clarifies Taxability of Capital Gains Under Unimplemented Joint Development Agreements

 In a recent judgment of Vijaya Productions, the Madras High Court has offered crucial guidance on when capital gains tax becomes applicable under a Joint Development Agreement (JDA), specifically addressing the concept of "transfer" under income tax law.

Supreme Court Allows Interest Deduction on Funds Advanced to Sister Concern – Reaffirms ‘Commercial Expediency’ Test

 Summary

The Supreme Court (SC) has recently ruled in the case of L. K. Trust v. CIT on the deductibility of interest expenditure incurred on borrowed funds that were advanced to a sister concern. The key issue was whether such interest qualifies as a deduction under Section 36(1)(iii) of the Income Tax Act, 1961 (ITA 1961) – specifically, when the borrowed funds are used by the sister concern to acquire shares in another company.

ITAT Chennai Reaffirms Tax Neutrality for Genuine Intra-Group Restructurings

 In cross-border group restructurings, multinational corporations frequently undertake internal share transfers and mergers to streamline operations and simplify holding structures. In a significant ruling on the scope of tax neutrality, the Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has reaffirmed that legitimate tax planning and commercially driven intra-group reorganisations cannot be disregarded solely because they result in a tax advantage.

CIT(A) cannot direct reopening of years not under appea

 Recently, the Hon’ble Income-tax Appellate Tribunal, Chennai (‘ITAT’) in the case of Mr. Chandanmal Nagaraj v. Assistant Commissioner of Income-tax held that the appellate authority cannot issue directions for reopening assessments relating to years which are not the subject matter of appeal before it. The ITAT observed that while allowing the assessee’s appeal in relation to addition made on account of alleged unexplained expenditure, the Learned Commissioner of Income Tax (Appeals) [Ld. CIT(A)] had directed the Assessing Officer (A.O) to reopen assessment for earlier years for verification of the genuineness of transaction. The Tribunal held that the jurisdiction of the appellate authority is confined to the year under consideration and that it cannot travel beyond the scope of the appeal to issue directions concerning other years. Accordingly, the ITAT expunged the directions issued by the Ld. CIT(A) for reopening the earlier years.

ITAT: Property Received on Family Trust Dissolution Qualifies as ‘Devolution’, Long-Term Capital Gains Tax Applies

Under income tax law, when a capital asset is acquired by way of succession, inheritance or devolution, the cost of acquisition is deemed to be the cost incurred by the previous owner. Additionally, the previous owner’s holding period is included when determining whether the asset is long-term or short-term.

No GST on Corporate Guarantees to Group Companies? Bombay High Court Says Yes, but Ruling Faces Criticism

Facts of the Case

The petitioner issued Corporate Guarantees (CGs) to banks to secure loans obtained by its group companies. The guarantee deeds explicitly stated that no consideration would be received from the group companies for providing these guarantees. The GST authorities, however, demanded tax on the CGs. In response, the petitioner challenged both the levy of GST and the constitutional validity of an amendment to Rule 28(2) of the CGST Rules, which prescribes the valuation methodology for such guarantees.

Mere execution of JDA with developer does not trigger capital gains tax in real estate transactions

 Recently Bangalore ITAT recently delivered an important ruling clarifying that merely executing a Joint Development Agreement (JDA) does not automatically constitute a "transfer" for capital gains tax purposes. The Tribunal held that for transfer provisions to apply, there must be a conclusive transfer of possession meeting all requirements of the Transfer of Property Act (‘TOPA’) - not merely contractual arrangements that remain contingent.

The assessee and his family jointly owned ancestral land in Bangalore. In September and December 2012, they entered into JDAs with a developer for construction of residential projects. The family also executed an irrevocable General Power of Attorney (GPoA) granting the developer extensive powers and received substantial advances through banking channels. The Assessing Officer computed LTCG, treating the JDA execution coupled with the GPoA and advance payments as a "transfer" under Income Tax Act read with the provisions of the TOPA. The CIT(A) upheld this addition, holding that the family had effectively transferred possession and control of the land to the developer.
The Tribunal deleted the entire addition, making several crucial technical observations - Section 53A of TOPA requirements not satisfied as for transfer provisions to apply, possession must be transferred "in part performance of a contract" under Section 53A. This requires: (a) transferee put in actual possession, (b) contract capable of specific performance, and (c) transferor debarred from denying the contract. These conditions were not conclusively met. The Tribunal also observed that the ownership rights of the land remained disputed as following the JDA execution, family disputes arose and a partition suit was filed. The Civil Court's decree in 2018 allotted substantial portions of the property to other family members, not the assessee. This proved that underlying ownership was never settled when the JDA was executed. If possession had truly been transferred under Section 53A, family members would have been legally debarred from filing partition suits - yet they successfully did so.
A completely new JDA was executed in August 2023 between the developer and the assessee's brother (excluding the assessee). This wasn't a renewal but a fresh arrangement between different parties, proving conclusively that the 2012 JDA never achieved completion. If the 2012 JDA had resulted in effective transfer under Section 53A, no fresh agreement would have been necessary.

Delhi ITAT allows write-off of obsolete inventory under AS-2

 The Delhi ITAT held that write-off of slow-moving and non-moving inventory is allowable as deduction where the inventory had lost utility or become obsolete and the write-off was undertaken in accordance with Accounting Standard-2 (‘AS-2’) supported by technical evaluation and documentary evidence. The Tribunal observed that such write-off reflects the true and correct value of inventory.