Category Income Tax

The Supreme Court’s decision in GKN Driveshafts (India) Ltd. v. Income Tax Officer and Others [2002 INSC 494] clarified how reassessment under the Income-tax Act must be handled to protect taxpayer rights. The Court insisted that reopening an assessment cannot be an ambiguous exercise and set out a required procedural order for dealing with notices under Section 148. That judgement balanced the revenue’s investigation powers with safeguards that let taxpayers know and respond to the basis for reopening. The principles from the case shaped reassessment practice for many years and impacted later statutory amendments.

The notices and initial response

Tax authorities had issued notices under Section 148 after forming a belief that income had escaped assessment. The taxpayer filed a writ petition seeking to quash those notices as lacking any valid basis. The High Court declined to interfere at that stage, observing that statutory remedies existed and should be exhausted first. The matter reached the Supreme Court, which confirmed that a premature writ is generally inappropriate where a workable statutory route exists, but it also set out the administrative steps that must be respected before a fresh assessment proceeds.

Why premature writs are channelled to procedure

The Court explained that a Section 148 notice is not automatically arbitrary if issued after the Assessing Officer forms a genuine reason to believe. The correct course is to follow the procedure under the Act so that the officer’s reasons are put on record and the taxpayer gets an opportunity to object. A writ petition can remain available in exceptional cases where mala fide action or lack of jurisdiction is shown, but it is not a substitute for the statutory process in ordinary cases.

The procedure mandated by the Court (pre-2021 law)

GKN Driveshafts laid down a clear sequence that became standard practice:

1. Respond to the Section 148 notice by filing the return called for.
2. Request, in writing, the reasons recorded by the assessing officer for issuing the notice.
3. File considered and specific objections to those recorded reasons.
4. The Assessing Officer must pass a speaking, reasoned order disposing of those objections before proceeding to make any reassessment.

Only after a reasoned order addressing the objections is passed can the department proceed with reopening and assessment. This procedure ensured that taxpayers receive an intelligible record on which to base appeals.

The importance of this ruling

GKN Driveline brought transparency and accountability to reassessment proceedings. Requiring recorded reasons and a speaking order protected taxpayers from blind or fishing expeditions and gave appellate authorities a proper factual and legal record. By channelling disputes into administrative objections and appeals, the judgement promoted quicker, better-reasoned outcomes and limited premature judicial intervention.

Legislative reform and current impact

The Finance Act, 2021, introduced a new, statutory framework for reassessment by inserting Section 148A into the Income-tax Act. Section 148A requires the Assessing Officer to carry out a formal inquiry, serve a show-cause notice and provide the taxpayer an opportunity to be heard before issuing a Section 148 notice. This statutory procedure took effect from 1 April 2021 and, for reopenings initiated after that date, governs the process, thereby codifying many of the safeguards that GKN had created judicially. At the same time, Section 148A contains specific exceptions; for example, where assessments arise from searches or seizures, the prior 148A inquiry may be dispensed with. Thus, while GKN remains a cardinal authority for pre-2021 reopenings and for interpreting principles of fairness, reassessments after 1 April 2021 proceed under the statutory 148A regime.

Conclusion

GKN Driveshafts changed the practice of reassessment from an ambiguous power into a procedure that necessitates transparency and well-reasoned decisions. While guaranteeing taxpayers a fair hearing and an understandable record for appeal, the Supreme Court upheld the revenue’s authority to look into undisclosed income. Although these protective principles have now been integrated into the Act itself by the 2021 statutory amendments, court interpretation and the handling of pre-2021 reopenings remain affected by the procedural legacy of GKN. When taken as a whole, they highlight an essential principle: the use of power to investigate must be accompanied by written reasons and an appropriate opportunity to be heard.

A common problem for taxpayers in an era of growing international trade, investment, and cross-border employment is that they are taxed twice on the same income: once in the country where the money is earned (the source country) and once in the country where they reside (the residence country). India and a number of other nations have Double Taxation Avoidance Agreements (DTAAs) that exist to avoid this overlap of tax jurisdictions.

Meaning and Purpose of DTAA

A bilateral agreement between two nations that establishes the taxation of income earned inside their respective jurisdictions is known as a DTAA. In order to promote international trade and investment, its main goal is to prevent the same income from being taxed twice.

The primary goals of DTAA are:

• to equitably divide up taxing rights between the countries of origin and the countries of residence.
• to encourage global economic cooperation by offering tax stability.
• to stop tax evasion and double taxation of income.
• to set up systems that allow tax administrations to collaborate.

Payroll, business profits, dividends, interest, royalties, capital gains, fees for technical services, and income from shipping or air travel are just a few of the revenue categories that are normally covered by DTAAs.

India’s International Tax Treaty Network

India has DTAAs with several major economies, including the United States, the United Kingdom, Singapore, the UAE, France, Germany, Japan, Mauritius, and Australia. In recent years, India has amended older tax treaties to align them with international standards under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.

A significant recent update was the India-Oman Protocol, which was signed on January 29, 2025, and entered into force on May 28, 2025. The amendments, which are effective in India from the fiscal year 2026–27, modernise the existing treaty to strengthen anti-abuse clauses, reduce withholding tax rates (e.g., on royalties and fees for technical services from 15% to 10%), and enhance information-sharing to prevent tax evasion.

Methods to Prevent Double Taxation

In order to provide relief from double taxation under its DTAAs, India uses two common international methods:

1. Exemption Method: Only one country—either the country of residency or the country of source—taxes income. Income generated outside is fully exempt from taxation in India if it is subject to taxation there.
2. Tax Credit Method: In order to cover the tax due in India, the taxpayer may claim a Foreign Tax Credit (FTC) for taxes paid overseas. According to Rule 128 of the Income Tax Rules of 1962, this credit is given. In order to be eligible for this benefit, taxpayers need to submit Form 67 with their income tax return.

Key Provisions and Scope

A DTAA specifies:

• Persons Covered: Tax residents of one or both contracting countries.
• Taxes Covered: Typically applies only to income taxes; it does not apply to penalties or indirect taxes such as GST.
• Permanent Establishment (PE): Determines when a foreign company’s business presence in India creates a taxable base.
• Withholding Tax Rates: DTAAs often set reduced rates for dividends, interest, or royalty payments. For example, under the India-USA DTAA, dividends are taxed at 15%, royalties and fees for technical services at 10%, and interest income also benefits from concessional rates.
• Non-Discrimination Clause: Ensures equal tax treatment for foreign and domestic taxpayers.
• Exchange of Information: Enables authorities of both countries to share taxpayer data to prevent tax evasion.

Conclusion

The foundation of India’s foreign tax strategy is the Double Taxation Avoidance Agreements (DTAA), which guarantee equitable taxation, prevent tax evasion, and encourage investment. These agreements give tax duties stability and predictability in a globalised economy. DTAAs will continue to be important in promoting economic cooperation and preserving taxpayer confidence as India modernises its direct tax systems with the recently passed Income-Tax Act, 2025 (which is set to take effect on April 1, 2026), and conforms to international BEPS standards.

The Supreme Court’s verdict in the landmark case of State of Kerala v. Asianet Satellite Communications Ltd in 2025 addressed a major constitutional and financial issue: whether both the Central and State governments can tax distinct aspects of the same transaction. This case revolves around the state’s entertainment tax on broadcasting and the centre’s service tax on transmission. The aspect theory doctrine, which supports the implementation of two taxes on the same transaction, was upheld by the court.

Background and Issues

Asianet Satellite Communications Ltd. was subjected to two different taxes on the same broadcasting activity: the Centre’s service tax on transmission services and the Kerala State’s entertainment tax on the entertainment component. The main issue was whether this dual taxation violated the constitutional division of taxing powers, possibly amounting to a double tax on the same transaction.

The petitioner argued that they should not be subject to additional state entertainment tax, as they paid service tax for transmission. However, the State justified its tax by claiming that entertainment is a separate element permitted by Entry 62 of List II (State List) of the Constitution.

This legal conflict reflected continuing problems in regulating digital services, where traditional tax categorisations fail to capture new consumption modes like IPTV, DTH, and OTT platforms.

The Aspect Theory Explained

Central to the Court’s reasoning was the “aspect theory”. This doctrine recognises that a single transaction may possess multiple legal aspects, each falling under a different constitutional authority. Unlike the “pith and substance” doctrine, which resolves conflicts based on the dominant nature of legislation, aspect theory permits the coexistence of laws and taxes if they address separate facets.

Applying this, the Court highlighted:

• The Centre’s taxation of the service of transmission and broadcast;
• The state’s taxation of the entertainment enjoyed by viewers.

This dual view respects federalism by allowing both levels of government to exercise their taxing powers without encroachment.

Key Observations of the Court

The Court redefined “entertainment” beyond public shows and cinema halls to include digital consumption in private spaces, such as watching Netflix or cable TV at home or in vehicles. It acknowledged that the medium and location of entertainment have evolved and that the State’s power extends accordingly.

Moreover, the Court emphasised that the taxes are not duplicate but complementary. The service tax concerns facilitating the transmission infrastructure and signals, whereas the entertainment tax targets the content consumption aspect.

The ruling reaffirmed that incidental overlaps in jurisdiction do not invalidate legislative competence if their dominant objectives lie within constitutional entries. Thus, the service and entertainment taxes operate in harmony under their respective legislative domains.

Conclusion

The Asianet judgement firmly upheld the constitutionality of dual taxation under the aspect theory, affirming both Centre and States can tax different facets of the digital service transaction. However, the ruling foregrounds significant economic and policy challenges. While legally justified, its practical outcomes emphasise the urgency for coordinated legislative clarity and fiscal harmonisation, ensuring India’s digital entertainment sector thrives without punitive tax complexities. The Court’s decision highlights a crucial juncture where constitutional doctrine, digital transformation, and economic policy intersect, mandating proactive governance solutions aligned with evolving market realities.

In Union of India v. Azadi Bachao Andolan [(2003) 263 ITR 706 (SC)], the Supreme Court delivered a significant ruling in 2003 that addressed disputes pertaining to India’s Double Taxation Avoidance Agreement (DTAA) with Mauritius. CBDT Circular No. 789, which permitted foreign investors with Mauritian Tax Residency Certificates (TRCs) to claim capital gains exemptions under Article 13 of the DTAA, was challenged by the PIL. The problem emerged during a time when a lot of foreign investment went through Mauritius, and tax authorities claimed that shell companies were abusing the system. The Supreme Court looked at the validity of CBDT’s administrative circulars, whether treaty shopping is illegal, and if DTAAs supersede domestic law. The decision is still a fundamental precedent that has influenced India’s international tax system for many years.

The Mauritius DTAA and Investment Surge

India and Mauritius signed their DTAA in 1983 to encourage investment and prevent double taxation. Under Article 13(4), capital gains from alienation of shares by a Mauritius resident were taxable only in Mauritius. Article 4 determined residency based on tax liability and domicile.

Circular No. 682 (1994) confirmed that Mauritius-based FIIs were exempt from Indian capital gains tax. Foreign investment surged, but tax officers issued notices in 2000 to suspected shell companies. To restore certainty, CBDT issued Circular No. 789 (2000), stating that a Mauritius TRC was sufficient proof of residence for claiming DTAA benefits. Capital gains thus remained non-taxable in India, while dividends attracted limited withholding.

A PIL filed by Azadi Bachao Andolan challenged the circular, alleging that it enabled tax avoidance and impaired assessing officers’ powers. The Delhi High Court struck down the circular, prompting an appeal.

Key Issues Before the Court

The Supreme Court considered several questions:

• Whether Section 90 of the Income Tax Act permits DTAAs to override domestic provisions
• Whether Circular 789 was valid under Section 119.
• Whether a TRC is sufficient evidence of residence for treaty entitlement.
• Whether treaty shopping violates Indian public policy.
• Whether “liable to taxation” requires actual tax payment in Mauritius.

Petitioners relied on McDowell & Co. v. CTO (1985), arguing that routing investments through Mauritius was a colourable device.

Supreme Court’s Reasoning and Holdings

• A bench led by Justice R.C. Lahoti upheld the government’s position and restored Circular 789.
• First, the Court held that Section 90 authorises the Central Government to enter DTAAs for double-taxation relief and prevention of fiscal evasion. Where treaty provisions are more beneficial, they prevail over domestic law. Sections 4 and 5 operate subject to Section 90.
• Second, Circular 789 was held valid as an administrative instruction under Section 119. Its omission of specific statutory reference did not affect its legitimacy since its authority was traceable to the Act.
• Third, a TRC was held to be conclusive evidence of residence for DTAA entitlement, but it did not preclude assessment in cases of fraud or sham entities. Officers retained full power to investigate abuse.
• On treaty shopping, the Court observed that while it may be undesirable or open to misuse, it is not illegal unless expressly prohibited. Courts cannot rewrite treaties; policy changes are for Parliament or negotiators.
• On “liable to taxation”, the Court endorsed the principle that potential or theoretical tax liability satisfies the test. Actual payment of capital gains tax in Mauritius was not necessary.
• The Court clarified McDowell by noting that Justice Chinnappa Reddy’s broader observations were obiter dicta. Legitimate tax planning within the law remained permissible.

Impact on FDI and Tax Certainty

Prior to the 2016–17 DTAA amendments, Mauritius was India’s biggest source of foreign direct investment (FDI), but the ruling restored confidence among foreign investors and stabilised cash flows through the country. It reaffirmed the idea that cross-border investment requires certainty and that treaty benefits cannot be withheld without statutory authority.

The decision had an impact on subsequent decisions, such as Vodafone International Holdings (2012), in which the court maintained interpretive principles based on treaties. Legislative action rather than judicial expansion was used to address concerns about treaty abuse in later reforms, such as BEPS/MLI measures, GAAR (effective 2017), and modifications to the Mauritius DTAA that introduced source-based taxation.

Recent rulings, like those looking at beneficial ownership and substance, show a post-GAAR situation where anti-abuse regulations are in effect but Azadi Bachao Andolan’s fundamental position is intact.

Conclusion

Union of India v. Azadi Bachao Andolan upheld the validity of tax planning within legal limitations and the supremacy of DTAAs by striking a compromise between tax certainty and anti-abuse measures. The Court underlined that structural policy issues must be resolved by legislation and negotiation rather than judicial action by upholding CBDT Circular 789 and rejecting a general ban on treaty shopping. The ruling continues to be a fundamental precedent that affirms that foreign tax arrangements must be read consistently with the legislative purpose while ensuring that substance prevails over abuse, even as India implements GAAR, MLI, and revised treaty provisions twenty years later.

As globalization expands, more Indian taxpayers—especially Non-Resident Indians (NRIs) and residents with global interests—earn income or hold assets abroad. Understanding how to disclose such income, claim deductions, and avoid double taxation is vital under India’s evolving tax regime. As of now, the Income Tax Act, 1961, governs these matters, while the upcoming Income Tax Bill, 2025 (effective from April 2026), introduces clearer provisions and modernized compliance standards for foreign income and assets.

Deductions and Exemptions Available

1. Section 115F – Capital Gains Exemption for NRIs

NRIs who realize long-term capital gains from selling a Foreign Exchange Asset (FEA) can claim exemption by reinvesting the entire or part of the sale proceeds in specified Indian assets within six months.

• FEAs include shares, debentures, deposits, and government securities acquired using convertible foreign exchange (e.g., NRE or FCNR funds).
• The exemption is proportionate to the reinvested amount.

Exempt Gain = Total Capital Gain × (Amount Reinvested ÷ Net Sale Value)

• The reinvested asset must be held for at least three years; otherwise, the exemption is revoked and becomes taxable in the year of sale.

2. Section 80C – Investment-Based Deductions

NRIs can claim deductions up to ₹1.5 lakh per financial year under Section 80C against eligible Indian income.

Permissible investments include:

• Life insurance premiums
• ELSS mutual funds and ULIPs
• Principal repayment of home loans (for Indian property)
• 5-year NRO fixed deposits with scheduled banks

Clarification on PPF:

NRIs cannot open new Public Provident Fund (PPF) accounts. Pre-existing accounts may continue until maturity, but no fresh contributions are allowed, and such contributions cannot be claimed as deductions.

3. Double Taxation Avoidance Agreement (DTAA) & Foreign Tax Credit (FTC)

To avoid the burden of double taxation, India has entered into DTAA treaties with over 95 countries. Relief methods under Sections 90, 90A, and 91 include:

• Exemption method: Income taxed abroad is exempt in India.
• Credit method: Taxes paid abroad are credited against Indian tax liability.

Residents earning foreign income can claim Foreign Tax Credit (FTC) under Rule 128 of the Income Tax Rules:

• FTC equals the lower of the tax payable in India on that income or the tax actually paid abroad.
• To avail of FTC, taxpayers must file Form 67, preferably before or along with their Income Tax Return (ITR).

Foreign Asset Disclosure Rules

Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, disclosure compliance has been tightened.

Mandatory Disclosure (Schedule FA)

• All Resident and Ordinarily Resident (ROR) taxpayers must declare foreign assets, accounts, investments, and income in Schedule FA of their ITR (Form ITR-2 or ITR-3).
• Disclosure is mandatory even for dormant accounts or nil-balance holdings.

Assets to be Disclosed:

• Foreign bank accounts
• Shares/securities in foreign entities
• Real estate abroad
• Beneficial interests in overseas trusts or entities

Penalties for Non-Compliance:

• A flat penalty of ₹10 lakh per undisclosed asset;
• Possible prosecution with imprisonment (up to 7 years under the Black Money Act).

Expected Update (Income Tax Bill, 2025)

While Schedule FA is already mandatory for all RORs, the new bill formalizes stricter reporting norms for high-net-worth residents (HNWIs) with large global asset holdings. These rules will integrate FATCA/CRS-based reporting more directly into Indian tax returns.

Conclusion

India’s tax system now offers strong clarification on foreign asset reporting and foreign income taxation. The guidelines are simple for both Indian citizens and foreign workers:

• Accurately ascertain residency, adhere to all Schedule FA declarations, and utilize the FTC, DTAA, and Section 115F provisions to get allowable relief.
• Understanding Section 80C’s restricted investment eligibility and reinvestment exemptions guarantees NRIs can optimize their taxes legally and without unintentional violations.

Even if national income limits have become more uncertain due to the global economy, the Indian tax system is still developing towards legal certainty and transparency. The best ways to safeguard one’s reputation and worldwide income are still to stay in compliance, keep records, and seek advice from professionals.

The Income-Tax (No. 2) Bill, 2025, the most significant reform of India’s tax system in over 60 years, was enacted by the Lok Sabha on August 11, 2025. A simpler, more useful framework has taken the place of the outdated Income Tax Act, 1961, which had developed into complicated legislation with more than 800 sections and countless revisions.

One of the most notable of the many changes made is the substitution of the considerably simpler “Tax Year” concept for the long-standing “Assessment Year and Previous Year” structure. This change aims to simplify tax compliance, clear up any confusion, and bring the law into accordance with international standards.

Understanding the Old Framework: Assessment Year and Previous Year

Under the 1961 Income Tax Act, income taxation revolved around two separate terms:

1. Previous Year – This referred to the financial year in which a person actually earned income. For example, income earned between 1st April 2024 and 31st March 2025 would be the “previous year 2024-25″.
2. Assessment Year – This was the following year in which that income was assessed and taxed. So, income earned in the previous year, 2024-25, would be taxed in the “assessment year 2025-26″.

While this system worked for decades, it often created confusion for ordinary taxpayers. Many found it difficult to understand why their income was taxed in a different year than when they earned it. Professionals and students alike had to repeatedly clarify the difference between these two terms, leading to unnecessary complexity.

The New Concept: Tax Year

The Income-Tax (No. 2) Act, 2025, introduces the “tax year” to replace both “previous year” and “assessment year”.

• A tax year is simply the financial year in which income is earned and reported.
• For example, if income is earned between 1st April 2025 and 31st March 2026, it will now be referred to as Tax Year 2025-26.

This means income and its taxation will be identified within the same year, avoiding the two-step process that confused many taxpayers earlier.

Why This Change Matters?

1. Simplification of Language

By using just one clear term—Tax Year—the law becomes easier for individuals and small businesses to understand. A student filing their first return or a small shop owner trying to meet deadlines no longer has to remember separate terms.

2. Better Alignment with Digital Filing

India’s tax system is moving rapidly toward digital-first administration. In an era of online filing, faceless assessments, and instant refunds, the dual-year system felt outdated. The tax year integrates neatly with digital reporting formats, reducing the chance of mistakes.

3. Global Consistency

Many countries, including the United States and the UK, follow simpler terminology like “tax year” or “fiscal year”. India’s shift not only modernises domestic law but also makes cross-border compliance easier for global businesses and professionals.

4. Reduced Litigation and Errors

The old law saw frequent disputes over the timing of income recognition, especially in cases of carry-forward losses, deductions, and set-offs. With the tax year concept, the timeline is clearer, minimising interpretational gaps.

Comparison Table: Old vs New System

Aspect	Income Tax Act, 1961	Income-Tax Act, 2025	Implication
Concept	Previous Year & Assessment Year	Tax Year	Single term simplifies understanding and reporting
Tax Timeline	Income earned in Previous Year is taxed in next year (Assessment Year)	Income earned is taxed in the same Tax Year	Reduces confusion and aligns reporting with earning
Filing Returns	Taxpayer must calculate based on Assessment Year	Taxpayer calculates based on Tax Year	Simplified process for salaried individuals and businesses
Refunds	Strict deadlines; missing ITR may forfeit refund	Refunds allowed post-deadline without penalty	Reduces financial loss due to procedural delays
Digital Filing	Partial faceless processes	Fully faceless and digital-first	transparency and reduced face-to-face interaction with authorities

Conclusion

The substitution of “Tax Year” for “Assessment Year” and “Previous Year” is more than just a visual adjustment; it is a genuine attempt to simplify India’s tax structure. The rule eliminates misunderstandings, minimises compliance errors, and improves the transparency of tax reporting by matching income with the same year of taxes.

The Income Tax (No. 2) Act, 2025, along with its digital-first procedures, simplified sections, and enhanced taxpayer rights, lays the foundation for a contemporary, technologically advanced tax system. To put it briefly, the tax year is a sign that India’s tax system is finally keeping up with the demands of rapid growth and a digital economy.

The Supreme Court’s decision in CIT v. B.C. Srinivasa Setty [1981 AIR 972] addressed a common issue in capital gains law: whether goodwill created by a business from its own efforts can attract capital gains tax when it is transferred. The Court answered in the opposite where the goodwill is self-generated and there is no ascertainable cost of acquisition. The ruling remains a foundational authority on how the capital gains charge operates when intangible assets arise without an identifiable purchase price.

The Facts and the Dispute

B.C. Srinivasa Setty carried on an agarbatti manufacturing business that began in the mid-1950s. The partnership deed did not fix any value for goodwill and specifically deferred valuation until dissolution. On dissolution in 1965, goodwill was valued at Rs 1.5 lakh and transferred to a successor concern carrying on the business. The income-tax authorities sought to treat this receipt as capital gains in the assessment year following dissolution. The case moved through the tax tribunal and the High Court before reaching the Supreme Court.

The Core Legal Issues

Three central issues arose. First, is self-generated goodwill a “capital asset” within the statutory definition? Second, if it is a capital asset, can Section 45 operate so as to tax the full value of its transfer where there is no cost of acquisition? Third, can other provisions in the code supply a notional or deemed cost so as to permit a meaningful computation of capital gain?

Supreme Court’s Reasoning

The Court accepted that goodwill is, in general, an intangible capital asset. However, the crucial point was statutory mechanics. Section 45 charges income arising from the transfer of a capital asset, but the actual taxable gain must be computed under the scheme of Sections 45 through 55. That computation requires the value of acquisition and allowable deductions so that tax falls only on “gain” and not on capital itself.

In the case of self-generated goodwill, there is no acquisition cost recorded in the books, no purchase transaction to fix a cost, and no reliable basis for imputing a historic cost. The Court held that treating the entire receipt as taxable gain would amount to taxing capital itself and would circumvent the integrated computation mandated by the statute. Consequently, a transfer of self-generated goodwill cannot be made subject to capital gains tax where the statutory code offers no workable mode of computation.

Key Takeaways

The ruling establishes an important practical rule: a charge under the capital gains provisions cannot be invoked unless the statutory machinery permits a genuine computation of gain. Self-generated intangibles that lack an ascertainable acquisition cost therefore fall outside the charge in ordinary circumstances. This protects taxpayers from a demand that treats gross proceeds as profit rather than as return of capital.

Subsequent Developments and Practical Impact

While Setty’s principle remains a touchstone, law and practice have evolved. Over time, Parliament and tax authorities have introduced specific valuation or deeming rules for particular classes of intangibles in limited contexts, and anti-avoidance measures have grown stronger. General anti-avoidance rules and detailed valuation standards now affect how transfers of intangible value are examined. Tax practitioners therefore plan transfers and document cost bases carefully, and courts examine substance and statutory text closely.

Conclusion

CIT v. B.C. Srinivasa Setty clarified that mere valuation of self-generated goodwill on dissolution does not automatically create a taxable capital gain in the absence of statutory means to determine acquisition cost. The decision enshrined a simple but powerful rule: the charge to capital gains requires a workable calculation. While later legislative and administrative developments have adjusted how some intangibles are treated or valued, Setty’s basic doctrine, that tax law cannot be used to convert capital into taxable income without statute-based calculation remains a fundamental principle in Indian tax jurisprudence.

In Law, Cost of acquisition of Self-generated goodwill is mentioned as NIL to avoid any more conflict.

Charitable and religious trusts must register under Section 12AB of the Income Tax Act in order to be eligible for income tax exemptions. Registrations were first granted with a limited validity, typically five years, when this option was first implemented.

In order to continue receiving tax benefits, many trusts must renew their registration before their current period comes to a completion. One significant change brought about by the Finance Act 2025 is that qualifying entities can now receive 10-year validity rather than 5-year.

Also read here

Section 12AB Registration – Meaning, Importance, and Latest Changes (2025 Update)

Eligibility and Documents Required for Section 12AB Renewal in 2025

Why Renewal is Mandatory

Prior to the expiration date, each trust or institution that has acquired Section 12AB registration must submit an application for renewal. This is a must. The trust will lose its tax exemption benefits under Sections 11 and 12 if the renewal is not completed within the allotted period.

According to the law, the application for renewal must be submitted at least six months before the expiration date. The renewal must be submitted by September 30, 2025, for registrations that expire on March 31, 2026.

Eligibility for 10-Year Validity

In substitution of the previous 5-year cycle, the Finance Act 2025 added a provision that permits some trusts to be renewed for ten years. To be eligible,

• The total revenue of the trust, as determined without the use of Sections 11 and 12, cannot be more than ₹5 crore in each of the two years before the application year.
• Not gross receipts, but total income is subject to this cap.

For instance, you can renew your trust for a 10-year period if its total revenue (before exemptions) was ₹4.5 crore in FY 2023–2024 and FY 2024–2025.

Step-by-Step Process for Renewal

Form 10AB must be filed on the Income Tax e-filing portal as part of the entirely online renewal process. The steps are as follows:

Step 1: Log in to the Portal

Go to the Income Tax e-filing portal and log in using the trust’s credentials.

Step 2: Select Form 10AB

Navigate to ‘e-File’ > ‘Income Tax Forms’ > ‘File Income Tax Forms’ and choose Form 10AB under the relevant section.

Step 3: Choose Correct Category

In the form, select the correct sub-clause under Section 12A(1)(ac) for renewal (usually sub-clause (ii) for standard renewal).

Step 4: Attach Documents

Upload the following documents:

• Audited financial statements for the last two financial years
• Computation of income showing compliance with the ₹5 crore limit
• Trust deed and registration certificate
• Activity report and compliance certificates

Step 5: Submit and Verify

Submit the form online and verify it using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).

Timelines and Processing

The application will be processed by the Commissioner of Income Tax (Exemptions) or the Principal Commissioner after it is submitted. The order must be issued within six months of the end of the quarter in which the application is filed, according to the statute. The registration will be renewed upon verification of authentic activity and completion of all necessary documentation.

Consequences of Non-Renewal

Sections 11 and 12 exemptions will be lost if the registration is not renewed by the deadline. A significant tax burden could arise from the trust’s revenue becoming taxable. Penalties for non-compliance are another possibility.

Tips for Preventing Penalties

• Apply as soon as possible: don’t hold off until the last minute. Apply seven to eight months prior to expiration.
• Verify that the documents are complete: Missing paperwork may cause permission to be delayed.
• Monitor the status of your application: Check the portal frequently for updates.

Conclusion

In order to continue receiving tax benefits, charity and religious organisations are required by law to renew their Section 12AB registration. If qualifying trusts meet the ₹5 crore income criterion, they can achieve long-term compliance with the new 10-year validity requirement. The secret to avoiding fines and preserving exemption benefits is the timely filing of Form 10AB with correct documentation.

Charitable trusts and non-profit institutions in India enjoy income tax exemptions under the Income Tax Act, provided they are registered under Section 12AB. These registrations were initially granted for a limited period, mostly up to March 31, 2026, which means renewal is now mandatory to continue availing benefits. The Finance Act, 2025 has introduced a 10-year validity for eligible trusts, replacing the earlier 5-year cycle.

Also read here

Section 12AB Registration – Meaning, Importance, and Latest Changes (2025 Update)

Who Needs to Renew Section 12AB Registration?

Every trust or institution registered under Section 12AB must apply for renewal at least six months before the expiry date of the current registration. For registrations expiring on March 31, 2026, the last date to apply is September 30, 2025.

Renewal is not optional; it is a legal requirement under Section 12A(1)(ac)(ii). Failure to renew may lead to cancellation of the registration and loss of tax benefits under Sections 11 and 12.

Eligibility for Renewal with 10-Year Validity

The Finance Act, 2025 has brought a major change in validity. If a trust meets certain conditions, the renewed registration will be valid for 10 years instead of 5. The key eligibility requirement is:

Income Threshold Test:

The trust’s total income, calculated without claiming exemptions under Sections 11 and 12, should not exceed ₹5 crore in each of the two previous years before the year of application.

This means, when applying for renewal in 2025, the income for FY 2023-24 and FY 2024-25 will be checked. If the income exceeds ₹5 crore in any of these two years, the trust will get a 5-year validity instead of 10.

Points to Remember:

• Total income is not the same as gross receipts.
• It must be computed as per the Income Tax Act, excluding the benefits under Sections 11 and 12.

Who Cannot Get 10-Year Validity?

• Trusts with income above ₹5 crore in either of the two preceding years.
• Provisional registrations under sub-clause (vi) of Section 12A(1)(ac) (they still get 3-year validity).
• Such trusts can apply again after the provisional period ends, but they will not automatically qualify for the 10-year period.

Documents Required for Section 12AB Renewal

To apply for renewal, trusts must submit an application in Form 10AB through the Income Tax portal. Along with the form, the following documents are generally required:

1. Trust Deed or Registration Certificate – A copy of the original trust deed or instrument of establishment.
2. Audited Financial Statements – For the two years immediately preceding the year of application (e.g., FY 2023-24 and FY 2024-25).
3. Income Computation – Showing total income without exemptions under Sections 11 and 12, proving the ₹5 crore threshold compliance.
4. PAN of the Trust/Institution – Mandatory for filing.
5. Details of Trustees/Office Bearers – Names, PAN, and addresses of all key persons.
6. Activity Report – A brief report of activities carried out during the preceding years.
7. Registration under Other Laws – Copies of registrations under laws like the Societies Registration Act or Companies Act (if applicable).
8. Compliance Certificates – Declarations confirming adherence to conditions under Section 12AB.

Practical Tips for Smooth Renewal

• Apply early: Do not wait for the last date. File at least six months before expiry.
• Keep accounts updated: Ensure audits for FY 2023-24 and FY 2024-25 are completed well before filing.
• Attach all required proofs: Missing documents can delay or reject the application.
• Check income calculations carefully: The ₹5 crore limit applies to total income, not receipts.

Conclusion

Renewal of Section 12AB registration is mandatory for all trusts and institutions to retain their tax exemptions. For those meeting the income threshold of ₹5 crore or less in each of the two preceding years, the Finance Act, 2025 offers a 10-year validity, providing long-term stability. Timely application through Form 10AB, supported by complete and accurate documentation, is crucial to avoid penalties and ensure uninterrupted benefits.

Section 12AB of the Income Tax Act plays a crucial role for charitable trusts and non-profit organisations in India. It ensures that such entities continue to enjoy income tax exemption on their income, provided they meet the prescribed conditions. With the introduction of the Finance Act, 2025, significant updates have been made to the registration framework, making it important for organisations to understand the meaning, importance, and latest changes under Section 12AB.

What is Section 12AB Registration?

Section 12AB registration is a legal requirement for charitable and religious trusts, NGOs, and similar institutions to claim tax exemption on income applied for charitable purposes under Sections 11 and 12 of the Income Tax Act. Without this registration, organisations will not be eligible for these benefits.

Earlier, registrations were granted under Section 12A or 12AA. However, the government introduced Section 12AB to streamline the process and increase transparency. Initially, the registration granted was valid for five years. But the Finance Act 2025 has introduced a new framework offering an extended validity period under certain conditions.

Why is Section 12AB Registration Important?

The importance of Section 12AB registration cannot be overstated for charitable entities. Here are a few reasons why:

1. Tax Exemption on Income: A valid registration under Section 12AB ensures that income applied for charitable or religious purposes is exempt from income tax, subject to compliance with the Act.
2. Eligibility for Donations under Section 80G: Many donors prefer contributing to institutions that are registered, as their donations qualify for tax deductions under Section 80G.
3. Legal Recognition and Credibility: Registration provides legal recognition to the trust or NGO, enhancing its credibility in the eyes of donors, government bodies, and stakeholders.
4. Compliance with Law: It is mandatory for all trusts and institutions to hold valid registration to continue availing benefits. Failure to renew or maintain registration may lead to denial of exemptions and penalties.

Latest Changes Introduced by the Finance Act, 2025

The Finance Act, 2025, has brought a major change in the validity period of registration. Here are the key updates:

1. 10-Year Validity for Eligible Entities

Earlier, registrations were valid for five years. Now, trusts and institutions meeting specific conditions can obtain registration for 10 years. This is a significant relief for organisations, as it reduces the frequency of renewals.

2. Conditions for 10-Year Validity

To qualify for the extended 10-year validity:

• The total income of the trust or institution, computed without giving effect to Sections 11 and 12, should not exceed ₹5 crore in each of the two financial years immediately preceding the application year.
• This calculation excludes exemptions under Sections 11 and 12, meaning organisations must calculate income before applying these benefits.

3. Application Timeline

Trusts with registration expiring on 31 March 2026 must apply for renewal by 30 September 2025. Applications should be filed through Form 10AB on the income tax portal.

Procedure and Compliance

The renewal process requires:

• Filing of Form 10AB under the appropriate sub-clause.
• Submission of supporting documents, including audited financial statements for the last two years, trust deed, activity reports, and income computation to prove eligibility.
• Processing by the Principal Commissioner or Commissioner of Income Tax (Exemptions).
• If the application meets all conditions, the registration order will be issued in Form 10AD with a 10-year validity.

Conclusion

Section 12AB registration remains an essential compliance requirement for charitable and religious institutions in India. The introduction of the 10-year validity framework under the Finance Act, 2025, is a welcome move, reducing administrative burden for genuine organisations. However, eligibility depends on meeting the ₹5 crore income threshold and ensuring timely application before the deadline. Charitable entities should maintain proper documentation and track compliance timelines to secure long-term benefits under this updated regime.