Guide to Capital Goods under GST – Credit, Reversal, Sale, Loss, and Reporting

By CA Surekha S Ahuja

ITC, Reversal, Reverse Charge, Sale, Loss, Insurance and Annual Return Reporting

Why Capital Goods Need Special Attention under GST

Under GST, capital goods are not a one-time compliance event. They are tracked throughout their life cycle. The law allows full input tax credit upfront, but it also expects tax neutrality to be maintained till the asset is finally sold, scrapped, destroyed or removed from business use.

Most GST disputes relating to capital goods do not arise due to ambiguity in law, but due to missed reversals, incorrect valuation at the time of sale, or improper disclosure in annual returns and reconciliation statements.

What Qualifies as Capital Goods under GST

Capital goods are goods whose cost is capitalised in the books and which provide enduring benefit to the business. GST law follows the accounting character and economic substance, not merely invoice description.

Expenditure that merely restores an asset to its original condition remains repairs and maintenance and does not attract capital goods treatment or future reversals.

This distinction is critical because only capital goods are governed by deferred reversal and exit provisions under GST.

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Eligibility of Input Tax Credit on Capital Goods

Input tax credit on capital goods is allowed under Section 16 of the CGST Act when the goods are used or intended to be used in the course or furtherance of business and basic conditions relating to invoice, receipt, tax payment and return filing are fulfilled.

GST permits full ITC in the year of purchase itself. There is no concept of spreading credit over useful life.

However, the GST component must not be capitalised for income-tax depreciation. Claiming depreciation on GST amount leads to permanent denial of ITC.

When ITC on Capital Goods Is Blocked or Denied

ITC is blocked under Section 17(5) in specific cases, such as capital goods used for construction of immovable property on own account, goods used for personal consumption, and certain motor vehicles.

Where ITC is blocked at inception, no credit is available at any stage, even if the asset is later sold.

Capital Goods Used for Exempt or Mixed Supplies

When capital goods are used partly or wholly for exempt supplies, Section 17(2) applies and ITC must be reversed proportionately.

The manner of reversal is prescribed under Rule 43, which assumes a standard useful life of sixty months. Reversal is asset-wise and time-based.

Repairs and maintenance never fall under Rule 43.

Reverse Charge on Capital Goods

Reverse charge may apply on capital goods under Section 9(3) or 9(4) in notified cases. GST under reverse charge must be paid in cash and reported in GSTR-3B under reverse charge liability.

Once paid, ITC is available subject to Section 16 conditions. Subsequent sale or disposal of such capital goods follows the same rules applicable to forward-charge capital goods.

Sale or Disposal of Capital Goods – Core GST Treatment

Sale, disposal, scrapping or permanent removal of capital goods is always treated as a taxable supply under Section 7, irrespective of age, depreciation or book value.

When ITC was availed, Section 18(6) mandates payment of GST equal to the higher of:
the tax calculated on transaction value under Section 15, or
the ITC attributable to the remaining useful life.

The remaining ITC is computed by reducing the original ITC at the rate of five percent per quarter or part thereof, as prescribed under Rule 44(6).

This applies even if the asset is sold in the same financial year.

Sale at Loss, Below WDV or as Scrap

GST law does not recognise accounting loss or WDV. Sale at loss, below WDV or as scrap does not reduce GST liability.

If ITC was availed, Section 18(6) comparison must still be applied. Paying GST only on sale price without applying this rule is a common reason for short-payment demands.

Loss, Destruction, Theft or Write-off of Capital Goods

Where capital goods are destroyed, lost, stolen, written off or permanently removed from business use, ITC attributable to remaining useful life must be reversed under Section 18(6) read with Rule 44(6), even if there is no sale consideration.

This is one of the most frequently missed reversals during audit.

Insurance Claim on Capital Goods

Receipt of insurance compensation is not a supply and is not liable to GST.

However, if capital goods are destroyed or lost and insurance is received, the asset exits business use. Therefore, ITC attributable to remaining useful life must be reversed if ITC was originally availed.

No GST is payable on insurance receipt, but ITC reversal is mandatory.

GST Return Reporting – Table-wise Clarity

In GSTR-1, sale of capital goods is reported as taxable outward supply under B2B or B2C tables.

In GSTR-3B, output tax on sale is paid in Table 3.1, reverse charge liability (if any) is paid in Table 3.1(d), and ITC reversals under Rule 43 or Section 18(6) are reported in Table 4(B).

In GSTR-9, sale of capital goods forms part of taxable turnover, ITC on capital goods is disclosed, and reversals are reported separately.

In GSTR-9C, sale of capital goods should be shown as a reconciling item and not merged with revenue from operations.

Incorrect placement in GSTR-9C is a common trigger for scrutiny and audit.

Common Errors Leading to Interest and Penalties

Most penalties arise due to claiming depreciation on GST component, ignoring Rule 43 reversals, non-reversal on loss or insurance claim, paying GST only on sale price without Section 18(6) computation, or incorrect annual return disclosure.

These are treated as compliance failures and usually attract interest and penalty.

Professional Closing Insight

GST on capital goods is not punitive. It is lifecycle-based. The law allows full credit upfront but requires accountability when usage changes or ends. Businesses that track capital goods till exit and align accounting, GST returns and annual reconciliation rarely face disputes.

Numerical Illustration Sheet – Capital Goods under GST

Illustration 1: Sale of Capital Goods after 3 Years

Purchase price ₹10,00,000
GST @18% ₹1,80,000 (ITC availed)

Asset sold after 3 years (12 quarters) for ₹4,00,000

ITC attributable to remaining life:
Original ITC ₹1,80,000
Reduction: 12 quarters × 5% = 60%
Remaining ITC = 40% of ₹1,80,000 = ₹72,000

GST on sale value = 18% of ₹4,00,000 = ₹72,000

GST payable = higher of the two = ₹72,000

Illustration 2: Sale in Same Financial Year

Purchase GST ITC ₹1,80,000
Asset sold after 2 months (treated as one quarter)

Reduction: 1 quarter × 5% = 5%
Remaining ITC = 95% of ₹1,80,000 = ₹1,71,000

GST on sale value = ₹90,000

GST payable = ₹1,71,000

Illustration 3: Destruction with Insurance Claim

Original ITC ₹1,80,000
Asset destroyed after 2 years (8 quarters)

Reduction: 8 quarters × 5% = 40%
Remaining ITC = 60% of ₹1,80,000 = ₹1,08,000

ITC to be reversed = ₹1,08,000
No GST on insurance receipt

Illustration 4: Capital Goods Used for Exempt Supplies

Original ITC ₹1,20,000
Monthly reversal under Rule 43 = ₹2,000
Reversal continues till 60 months or till disposal

Can Form 26QB TDS Be Paid If the Buyer’s Login ID Is Not Known

By CA Surekha S Ahuja

In property transactions, buyers frequently encounter a practical hurdle: the buyer has a PAN but does not have, or does not remember, the Income-tax portal login credentials. This often leads to confusion about whether TDS under Form 26QB can be paid at all.

The short answer is yes.
The Income-tax law does not make portal login a pre-condition for depositing TDS on purchase of property.

This article explains the legal position, permitted payment mechanisms, and post-payment compliance, in a clear and structured manner.

Statutory Requirement Under Section 194-IA

Section 194-IA of the Income-tax Act, 1961 mandates that:

• Where the consideration for transfer of immovable property is ₹50 lakh or more

• The buyer is required to deduct TDS at 1%

• The deducted tax must be deposited through Form 26QB

Key statutory points:

• TAN is not required

• PAN of both buyer and seller is compulsory

• TDS must be deposited within 30 days from the end of the month in which deduction is made

Notably, neither the Act nor the Rules prescribe login to the Income-tax portal as a condition for making the payment.

Practical Issue: Absence of Buyer Login Credentials

In real-life transactions, it is common that:

• The buyer has never filed an income-tax return

• No income-tax portal account has been created

• Login credentials are forgotten or inaccessible

• Property registration timelines are tight

This leads to the misconception that TDS payment cannot proceed without login access, which is incorrect.

Permissible Methods to Pay Form 26QB Without Buyer Login

The Income-tax Department has provided pre-login and alternate payment facilities to ensure smooth compliance.

Method 1: Income-tax Portal – Pre-Login e-Pay Tax Facility

This is the most direct and recommended route.

Procedure:

1. Visit www.incometax.gov.in

2. Select e-Pay Tax

3. Choose Continue as Guest / Pre-Login Service

4. Select TDS on Sale of Property – Form 26QB

5. Enter:

   • Buyer PAN

   • Seller PAN

   • Property consideration

   • Date of payment or agreement

   • TDS amount (1%)

   • Property details

6. Complete payment using net banking, debit card, or other enabled modes

Upon successful payment:

• Form 26QB (challan-cum-statement) is generated

• An acknowledgement number is issued

At this point, the buyer’s statutory obligation to deposit TDS stands fulfilled.

Method 2: TIN-NSDL / Bank-Based Payment Route

This method remains useful where portal access is difficult or where bank-assisted payment is preferred.

Procedure:

1. Access the TIN-NSDL Form 26QB page

2. Fill in buyer and seller PAN, property details, and TDS amount

3. Generate challan

4. Make payment through online banking or authorised bank channels

This route also does not require login to the Income-tax portal.

Post-Payment Compliance: What Follows After 26QB Payment

Credit to Seller

• TDS reflects in the seller’s Form 26AS

• Seller becomes eligible to claim credit in the return of income

Issuance of Form 16B

• Buyer is required to download Form 16B (TDS certificate) from TRACES

• This can be done after creating or retrieving portal credentials

• Form 16B must be issued to the seller within the prescribed time

Importantly, Form 16B is not required at the time of TDS payment, but is a subsequent compliance.

Is Buyer Registration on Income-tax Portal Mandatory

• Not mandatory for depositing TDS

• However, advisable for post-payment compliances, including:

  • Downloading Form 16B

  • Responding to any future notices

  • Tracking TDS credits and filings

The buyer’s PAN itself acts as the user ID, and registration can be completed at any later stage.

Key Practical Precautions

• Ensure accurate PAN details of both parties

• Match consideration value with sale agreement

• Deduct TDS at the time of payment or credit, whichever is earlier

• Deposit TDS within the statutory timeline

• Retain challan and acknowledgement details

Errors in PAN or amounts may lead to credit mismatch and rectification delays.

Concluding Note

Form 26QB compliance is transaction-centric, not login-centric.
The absence of buyer login credentials does not restrict or invalidate TDS payment, provided the statutory requirements are otherwise met.

Pre-login and alternate payment mechanisms ensure that property transactions are not stalled due to technical or access-related issues, while maintaining full legal compliance.

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PAN Compliance for NRIs: Aadhaar Exemption and Strategic Year-End Guidance

 As the ITR-U filing deadline approaches, Non-Resident Indians (NRIs) have increasingly received notifications regarding PAN‑Aadhaar linking. While these notices may appear urgent, it is important to understand the legal requirements, implications, and structured compliance measures. This advisory outlines a comprehensive framework for NRIs to maintain compliance, safeguard refunds, and protect assets.

Legal Position: Aadhaar Exemption for NRIs

• Section 139AA of the Income Tax Act, 1961 requires PAN to be linked with Aadhaar only for Indian residents.

• NRIs, as defined under Section 6, are legally exempt from Aadhaar.

• PAN held by NRIs remains valid indefinitely for tax filings, property transactions, and banking purposes.

• Professional advisory: Responding to PAN-Aadhaar notifications may inadvertently flag the NRI as a resident, triggering automated scrutiny or administrative actions under Clause 422.

Automated Compliance Risks and NRI Considerations

Although Aadhaar is not applicable to NRIs, automated systems may flag notifications due to:

1. Residency mismatch alerts arising from PAN communications.

2. TDS discrepancies in rental, salary, or other income, as seen in Form 26AS or the Annual Information Statement (AIS).

3. Capital gains or property transaction inconsistencies, potentially triggering administrative holds or asset liens.

Key principle: Accurate documentation and timely corrective filings prevent automated escalations, including blocked refunds or asset freezes.

Structured Compliance Action Plan for NRIs

Step 1: Maintain Documentation

• Preserve proof of non-resident status: Passport, visa, and Tax Residency Certificate (TRC).

• Archive all PAN-Aadhaar messages as evidence of exemption.

Step 2: Verify TDS and Income Reporting

• Reconcile Form 26AS with AIS to identify and rectify discrepancies in rental, salary, or other income.

Step 3: File Corrective Returns if Necessary

• File ITR-U under Section 139(8A) to address any discrepancies flagged by automated processes.

• Ensure all exemptions and deductions are correctly claimed.

Step 4: Utilize DTAA Protections

• Submit TRC and Form 10F to claim treaty-based TDS rates (typically 15% vs 30%).

• Align rental and investment income with applicable treaties to avoid excess TDS.

Step 5: Professional Oversight

• Engage qualified advisors to review filings and correspondence with the IT Department.

• Address any communications formally and professionally to prevent misclassification or administrative errors.

Advisory Principles for NRIs

• Do not respond to PAN-Aadhaar notifications.

• Ensure all TDS and income reporting is accurate and reconciled.

• Maintain comprehensive proof of NRI status and documentation for all financial transactions in India.

• Consult professional advisors for any notices to mitigate automated penalties or asset restrictions.

Illustrative Risk Scenario

A Dubai-based NRI encountered a ₹18 lakh property lien due to a ₹2.5K TDS discrepancy on rental income. Responding to a PAN-Aadhaar message flagged residency, triggering automated escalation.

Professional takeaway: Strategic documentation, reconciliation, and timely corrective filing are essential to avoid such escalations.

Conclusion

NRIs are legally exempt from Aadhaar linking, and PAN remains fully valid. Effective compliance requires:

• Structured documentation of NRI status

• Accurate TDS and income reporting

• Timely corrective filings, including ITR-U where needed

• Utilization of DTAA protections (TRC + Form 10F)

• Professional oversight and documentation of all departmental communications

By following a methodical, evidence-based approach, NRIs can manage Indian tax obligations confidently, avoid unnecessary automated scrutiny, and protect refunds and assets.

Clause 422, Income-tax Bill 2025: Why NRIs Must Now Treat Tax Reconciliation as Asset Protection

 By CA Surekha S Ahuja

No panic. No noise. Just a quiet change in recovery law that every NRI with Indian assets should understand.

The proposed Income-tax Bill, 2025 introduces Clause 422, a provision that subtly but decisively reshapes the manner in which outstanding tax dues may be recovered. While the authority to recover taxes is not new, the speed and sequencing under the new framework marks a material shift, particularly for Non-Resident Indians (NRIs) who manage Indian assets and compliance remotely.

This note is intended as a professional advisory with an alert element — to help NRIs understand the change clearly, assess their exposure calmly, and take preventive steps where required.

Understanding Clause 422 — What Has Really Changed

Clause 422 consolidates and modernises the recovery provisions that earlier existed across multiple sections of the Income-tax Act, 1961. The most significant change is procedural compression.

Once a tax demand becomes legally enforceable, the tax authorities may initiate recovery actions such as attachment of bank accounts, fixed deposits, rental receivables, or immovable property, where recoverable dues exceed the prescribed threshold.

Importantly, this does not remove the taxpayer’s right to appeal, seek rectification, or obtain relief through due process. However, the practical time gap between demand crystallisation and recovery action has reduced.

Why This Matters More for NRIs

Most NRIs manage Indian tax matters in good faith, relying heavily on tax deducted at source and third-party reporting. While this model works in most cases, it also means that system-driven mismatches, rather than intentional defaults, are the primary source of exposure.

Typical areas where NRIs encounter issues include rental income where TDS under Section 195 is short or incorrectly deposited, property sales where TDS at 30 percent exceeds actual capital gains, refunds withheld due to automated verification or risk flags, and small interest or penalty demands that remain unnoticed on the e-filing portal.

Under Clause 422, unresolved mismatches — not intent — may lead to faster recovery actions.

How Risk Commonly Builds Up in Practice

Experience shows that recovery exposure rarely begins with large tax defaults. More often, it starts with a small difference, an untracked demand, or a pending clarification. In a fully digital environment, silence or delay is interpreted as non-response, allowing the system to move forward.

Clause 422 does not change the law’s intent; it changes the tempo.

Advisory Safeguards NRIs Should Implement

Periodic reconciliation of Form 26AS and AIS is now essential, not optional. This ensures that income, TDS credits, and system records are aligned and that no demand remains unnoticed.

Where income has been under-reported inadvertently or TDS credit has been missed, ITR-U provides a structured and lawful route to regularise matters. Used timely, it prevents minor gaps from maturing into recovery proceedings.

Equally important is maintaining complete DTAA documentation, including a valid Tax Residency Certificate and Form 10F. Proper treaty compliance often reduces excess TDS and avoids refund-driven mismatches that later convert into demands.

What Clause 422 Does Not Mean

Clause 422 does not permit arbitrary attachment of assets. It does not override appellate remedies or dilute taxpayer protections. Compliant taxpayers remain fully safeguarded.

The provision simply reflects an expectation of timely response and data accuracy in a technology-driven tax ecosystem.

Professional Perspective

Clause 422 reinforces a fundamental professional principle:

In a real-time tax system, timely reconciliation is the most effective form of asset protection.

For NRIs holding Indian real estate, rental portfolios, bank deposits, or repatriation-linked investments, compliance discipline is now a strategic necessity, not a procedural formality.

Conclusion

There is no cause for alarm.
There is, however, a clear reason for attentiveness.

Clause 422 does not introduce a new power; it reduces the cushion of time that taxpayers previously relied upon. NRIs who monitor, reconcile, and regularise their tax positions remain on solid ground. Those who delay may find that recovery mechanisms move faster than expected.

Calm compliance continues to be the strongest safeguard.

India’s Cash Transaction Rules — Reality, Myths, and Strategic Compliance FY 2025–26

 By CA Surekha S Ahuja

Cash is legal only when it’s limited, documented, and traceable — the rules haven’t changed, but AI and SFT make every transaction accountable.

Why Social Media “Halla-Gulla”?

Despite social media frenzy, the laws themselves are not new:

• Key provisions: Sections 269ST, 269SS/269T, 194N, 68, 69, 69A, 115BBE, and SFT reporting predate 2025.

• No legislative changes were introduced in FY 2025–26.

• Hype arises from AI-enabled enforcement, SFT-triggered notices, and high-visibility penalties, making existing rules appear stricter.

Insight: Understanding past, present, and forward-looking compliance strategy is essential to avoid risk.

Legacy Rules & Key Thresholds

Section / Rule	Limit / Trigger	Allowed / Disallowed	Effective Date	Notes
Sections 68 / 69 / 69A / 115BBE	Unexplained cash, unrecorded investments	Cash allowed if source documented; disallowed if unexplained	01-Apr-2017	Penalty up to 84% for unexplained deposits; AI/SFT triggers notices
Section 269ST	Cash receipt ≥ ₹2,00,000/day or transaction	Disallowed beyond limit; allowed if < ₹2L	01-Apr-2018	Applies per person per day / transaction / occasion; penalty equal to cash received
Sections 269SS / 269T	Cash loan / repayment ≥ ₹20,000	Disallowed above limit; allowed below	1984 / 1989	Requires formal agreement, PAN, repayment documentation
Section 194N	Cash withdrawal > ₹20,00,000 if ITR not filed 3 yrs	TDS triggers; allowed if ITR filed	01-Sep-2019	Filing ITR avoids TDS; auditors should verify compliance
SFT Reporting (285BA / Rule 114E)	Savings deposit > ₹10L, property > ₹30L, FDs > ₹10L	Mandatory reporting; non-reporting triggers notice	Progressive, FY 2022–23 onwards	AI matches PAN, triggers automatic notices

Allowed Cash Transactions — Permitted under the Act

Transaction Type	Limit	Conditions	Reference / Notes
Business expenses / supplier payments	≤ ₹10,000/person/day	Maintain invoices; allowed for deduction; above limit, deduction disallowed	Sec 40A(3)
Cash loans / repayments	≤ ₹20,000/transaction	PAN verification, agreement, repayment schedule required	Sec 269SS / 269T
Cash receipts from a person	< ₹2,00,000/day/transaction/occasion	Allowed if below threshold	Sec 269ST
Salary / wages	No explicit cash limit	Bank transfer preferred for traceability; above ₹20,000, maintain records	Sec 192
Rent payments	≤ ₹1,00,000/month cash	Exempt from TDS under 194-IB if within limit	Sec 194-IB
Medical reimbursements / professional fees / incidental expenses	≤ ₹10,000/person/day	Proper bills/invoices; maintain records	Sec 269ST / Rule 114E

Insight: Limits differ per purpose; documentation and digital transactions preferred to reduce risk of notices or penalties.

High-Risk & Trigger Points

• Savings account deposits > ₹10L/year → triggers SFT

• Daily cash receipts ≥ ₹2L → 269ST penalties

• Cash loans > ₹20,000 → Sections 269SS/269T penalties

• Property transactions > ₹20,000 in cash → SFT / 269ST triggers

• Non-filing of ITR → 194N TDS on withdrawals > ₹20L

• Unexplained cash detected by AI / SFT → 115BBE + penalty

Auditor Role: Verify all cash-intensive transactions, reconcile with ITR & SFT, validate sources, ensure documentation.

AI & SFT Enforcement — Reality vs Social Media Myths

• AI Monitoring: Detects unusual patterns across PAN, bank, property, FDs, mutual funds

• SFT Expansion: Routine high-value transactions flagged automatically

• Automatic Notices & Penalties: 115BBE / 269ST / 269SS / 269T triggers

• Social Media Myths vs Reality

Claim	Reality
“New rules in 2025”	No new law; enforcement visibility increased
“All cash deposits taxed 84%”	Only unexplained cash under Sections 68–69A / 115BBE
“ITD targets small taxpayers”	Primarily high-value transactions flagged by SFT / AI
“Social media tips suffice”	Professional guidance and documentation essential

Extended ITR Timeline — Strategic Importance

• Four-year scrutiny ensures multi-year verification of transactions

• Deterrence effect: discourages non-compliance

• Auditor Role: Reconcile 4 years of cash deposits, loans, and property, validate sources, and provide advisory for mitigation

Compliance & Strategic Action — FY 2025–26

1. Digitize transactions → NEFT, RTGS, UPI for amounts > ₹20k

2. Document loans & advances → Agreements, PAN, repayment schedule

3. Track SFT triggers → Maintain internal dashboards

4. Maintain multi-year records → Reconcile past 4 years for ITR/SFT alignment

5. Timely ITR filing → Avoid 194N TDS and AI/SFT notices

6. Audit verification → Review cash-intensive operations and high-risk transactions

7. Proactive advisory → Educate clients about AI, SFT, and cash handling limits

Key Takeaways

• Hype ≠ new law; enforcement visibility and penalties have increased

• Intent remains: transparency, compliance, black money prevention

• Auditor & CA roles critical: verification, documentation, advisory

• Strategic compliance: digitize, formalize, document, reconcile, and file ITR timely

• Board-level awareness: implement structured internal controls and compliance workflows

Bottom Line: FY 2025–26 is where long-standing cash rules intersect with AI-powered enforcement, making it essential to understand thresholds, allowed/disallowed transactions, trigger points, and strategic compliance steps to mitigate penalties and reputational risk.

Form 67 & ITR Revision: Strategic Timeline for Disclosure of Foreign Assets

By CA Surekha S Ahuja

In the globalized financial landscape, Indian taxpayers holding foreign assets must navigate mandatory disclosure obligations carefully. Foreign asset reporting in Schedule FA is non-negotiable, and claiming Foreign Tax Credit (FTC) requires Form 67.

While earlier, we highlighted the importance of foreign asset compliance in posts like “Your Last Legal Window to Correct Past Returns – AY 2025–26 and Earlier Years”, this post adopts a strategic, timeline-based approach. It helps taxpayers, boards, and HNWI advisors ensure risk-free compliance, maximize FTC benefits, and mitigate penalties under Sec 271/271B.

Step 1: Identify Your Foreign Assets

Begin with a complete inventory of all foreign holdings:

• Bank Accounts: Savings, current, term deposits abroad.

• Financial Interests: Shares, bonds, mutual funds, partnerships in foreign entities.

• Immovable Property: Land, buildings, commercial property abroad.

• Other Financial Instruments: Life insurance policies, crypto assets, trusts overseas.

Board-level insight: Maintain a centralized foreign asset ledger to enable accurate compliance, risk assessment, and proactive tax planning.

Step 2: Determine the Need for Form 67

Form 67 is mandatory only for claiming FTC under Sec 90/91 (DTAA or unilateral credit). Key considerations:

• FTC claim for taxes paid abroad.

• Attachment of proof of taxes paid abroad.

• Filing Form 67 along with revised or original ITR, not separately.

Strategic tip: Even without FTC, Schedule FA reporting is mandatory. Boards and HNWI advisors should verify full disclosure to avoid compliance gaps.

Step 3: Assess ITR Revision Requirement

If foreign assets or FTC were omitted in the original ITR, revision is mandatory under Sec 139(5):

• Deadline for AY 2025–26: 31.12.2025.

• ITR-U for the last 4 years: If FTC or foreign asset disclosure was missed, taxpayers can file Updated Returns (ITR-U) for prior Assessment Years.

Common scenarios requiring revision:

• FTC not claimed previously.

• Foreign bank accounts, dividends, or investments omitted.

• FX gains/losses missed in earlier filings.

Board-level advisory: Early detection and revision mitigate penalties, interest, and audit risk. Quarterly internal reviews are recommended for multi-entity setups.

Step 4: Filing Form 67

Ensure accurate completion:

• Include nature of asset, country, and taxes paid.

• Attach supporting proof: bank statements, tax certificates, investment statements.

• Cross-verify Form 67 vs revised ITR for consistency.

Pro Tip: Mismatches can trigger department scrutiny, delaying FTC claims.

Step 5: Filing Revised ITR / ITR-U

• Select “Revised Return” or ITR-U in the portal.

• Cross-check Form 67 vs Schedule FA disclosure.

• Claim FTC under Sec 90/91 as per DTAA provisions.

• Maintain documentation for audits and future assessments.

Step 6: Timeline for Strategic Compliance

Step	Applicable Years / Timeline	Key Advisory Insight
Identify foreign assets	Ongoing	Centralized ledger for HNWI / board-level review
Prepare Form 67	Before filing/revision	Verify taxes paid abroad, ensure proof
File ITR-U	Last 4 AYs (if disclosure missed)	Mitigate past non-compliance
Revise ITR	AY 2025–26 before 31.12.2025	Avoid penalties, ensure portal compliance
Maintain documents	Continuous	Audit-ready, support FX/FTC planning

Visual reminder: (Embed infographic showing last 4 years → ITR-U → AY 2025–26 revision → Form 67 → document trail)

Step 7: Strategic & Future-Facing Considerations

1. Full Disclosure First: Even without FTC, Schedule FA reporting is mandatory.

2. Document Trails: Maintain all proof for audits or voluntary disclosures.

3. FX & FTC Planning: Track foreign exchange gains/losses to optimize tax outcomes in subsequent years.

4. Board-Level Integration: Align foreign asset compliance with treasury, finance, and governance functions.

5. Penalty Mitigation: Proactive disclosure avoids Sec 271/271B penalties and reduces litigation risk.

Advisory Angle: Form 67 and ITR revisions are not just compliance exercises—they are strategic risk management tools for boards, executives, and HNWI clients.

Conclusion

Timely identification of foreign assets, accurate filing of Form 67, and revision of ITR under Sec 139(5) or ITR-U for past years is critical for compliance and strategic tax management. Integrating this process into a board-level compliance framework transforms it into a forward-looking risk management and tax optimization strategy.

For further guidance, see our earlier post: “Your Last Legal Window to Correct Past Returns – AY 2025–26 and Earlier Years”. 

Discontinuance Is Not Dissolution - Capital Gains on Firm Property: Law Settled, Strategy Rewritten

 BY CA Surekha S Ahuja

Tax outcomes do not follow business sentiment. They follow ownership, documentation, and timing.

The ITAT Visakhapatnam ruling in Vivek Industries v. ITO (December 2025) decisively settles a long-debated issue in partnership taxation:

Can a firm that has stopped business shift capital gains tax on its property to its partners?

The answer is now unequivocal—No.

This judgment is not merely about capital gains computation. It is a structural ruling that dismantles aggressive post-sale tax repositioning and reaffirms that legal ownership—not commercial intention—determines taxability.

For promoters, boards, and advisors dealing with immovable property exits, this ruling redraws the strategic map.

CORE CONTENT – WHAT THE LAW NOW ESTABLISHES

1. Discontinuance Does Not Change Ownership

The Tribunal clarified a critical distinction:

• Discontinuance of business is only stoppage of operations

• It does not dissolve the firm

• It does not vest firm assets in partners

Until there is:

• Formal dissolution, and

• Legal distribution of assets,

the firm continues to be the legal owner of its property.

Ownership does not fade away with inactivity—it transfers only through law.

2. Section 176(3): Procedural Compliance with Substantive Effect

Failure to intimate business discontinuance to the Assessing Officer under Section 176(3) proved fatal.

The Tribunal reinforced that:

• Discontinuance is a statutory event, not a factual claim

• Intimation to other authorities is irrelevant

• Without Section 176(3) compliance, claims of closure lack legal standing

Practical Reality:
If the tax department is not informed, the business is alive in law.

3. Capital Gains Taxable Only in Hands of the “Right Person”

Relying on ITO v. C.H. Atchaiah (SC), the Tribunal reaffirmed:

Income must be taxed only in the hands of the entity that legally earns it.

Accordingly:

• Capital gains on firm property cannot be assessed in partners’ hands

• Partner-level exemptions (Sections 54F / 54EC) are invalid

• Taxes wrongly paid by partners must be credited to the firm

This doctrine safeguards correct taxation—it does not validate flawed structuring.

4. Land vs Building: Documents Override Assumptions

The Assessing Officer attempted to:

• Split consideration between land and building

• Tax building as STCG under Section 50

The Tribunal rejected this approach because:

• The registered sale deed transferred only land

• No building was conveyed or valued

Law Affirmed:
What is not transferred under the deed cannot be taxed by estimation.

STRATEGIC VIEW – HOW FUTURE DECISIONS MUST BE MADE

Firm vs Partner Sale: The Only Valid Decision Framework

Step 1: Identify current legal ownership
→ Firm
→ Partners / Co-owners

If the Firm Is the Owner

• Firm sells → Firm pays capital gains tax

• Partner-level exemptions are not available

If partners desire individual exemptions:

Ownership must be transferred before sale, through:

• Formal dissolution

• Registered asset distribution

• Mutation of records

• Section 176(3) compliance

Post-2021 Strategic Reality (Critical Overlay)

Even after proper distribution:

• Section 9B taxes the firm on FMV of assets transferred

• Revised Section 45(4) taxes excess over partners’ capital balance

Distribution itself is now a taxable exit.

There is no longer any silent migration of assets from firm to partners.

Board-Level Questions That Must Be Answered Before Sale

1. Who should bear the tax—firm or individuals?

2. Is individual exemption worth firm-level exit tax?

3. Are we prepared for FMV exposure under Section 9B?

4. Is sale documentation aligned with tax intent?

5. Has every statutory compliance been completed before negotiations?

If these questions arise after signing the sale deed, the tax outcome is already sealed.

The Vivek Industries ruling delivers a clear, uncompromising message:

There is no tax arbitrage between a firm and its partners without first transferring ownership—and ownership transfer itself is taxable.

For promoters, boards, and advisors, the takeaway is strategic, not technical:

• Stoppage of business is not a tax exit

• Intention does not override title

• Planning after sale is not planning

Closing Thought

In tax law, exits are designed at the structuring stage—not at registration. Everything else is damage control.

 

 

When Silence Is Not an Asset: The Supreme Court’s Blueprint for Tax-Efficient Startup Exits

By CA Surekha S Ahuja 

When Silence Is Not an Asset

The Supreme Court’s Blueprint for Tax-Efficient Startup Exits

In every exit, the buyer pays for what exists and pays again to ensure nothing disrupts it. That second payment is not ownership. It is reassurance.

Startup exits are rarely about assets alone. They are about people, timing, credibility, and continuity. Founders carry institutional memory, market influence, and competitive capacity long after they exit the shareholding. For acquirers, the real risk is not what they buy, but what might follow after the exit.

The Supreme Court’s decision in Sharp Business System v. Commissioner of Income-tax (2025) recognises this commercial reality and aligns tax law with how modern businesses function. The judgment provides long-awaited clarity on the tax treatment of non-compete fees and, more importantly, offers a practical blueprint for exit structuring by startups.

What the Supreme Court Has Clarified

The Supreme Court has held that a non-compete fee paid to restrain competition, where no asset, intellectual property, or proprietary right is acquired, constitutes revenue expenditure allowable under Section 37(1) of the Income-tax Act, irrespective of the duration of the restraint.

In doing so, the Court has decisively rejected the notion that the mere presence of an enduring benefit automatically places an expenditure in the capital field. The focus, instead, is on the nature and function of the payment.

Why Silence Cannot Be Treated as Capital

A capital asset must be capable of ownership, transfer, or independent exploitation. A non-compete obligation satisfies none of these conditions.

Silence cannot be sold, licensed, or assigned. It does not exist independently of the individual who gives the undertaking. Once the restrictive period ends, nothing survives that can be characterised as an asset.

The Supreme Court correctly observed that a non-compete payment does not add to the profit-earning apparatus of the business. It merely protects the manner in which profits are earned. This distinction lies at the heart of the ruling.

The Commercial Function of Non-Compete Fees in Startup Exits

In the startup ecosystem, non-compete arrangements typically serve limited and specific purposes.

They provide a transition window for the buyer to stabilise operations.
They protect customer relationships and investor confidence.
They prevent immediate market disruption during a sensitive post-exit phase.

None of these outcomes involve the acquisition of new capabilities or expansion of business structure. They are defensive, not acquisitive. The Supreme Court’s reasoning acknowledges that such payments operate squarely in the revenue field.

Tax Planning Implications for Startup Exits

The judgment enables tax-efficient exit planning, provided transactions are structured with clarity and discipline.

Where a non-compete payment is genuinely made to ensure business continuity and is not linked to the transfer of intellectual property, brand value, technology, or customer rights, the expenditure should be treated as revenue in nature. This allows immediate deduction under Section 37(1) in the year of payment.

However, the benefit of this ruling is not automatic. It depends on whether the documentation and transaction structure reflect the true commercial intent.

Common Errors That Lead to Avoidable Disputes

Despite judicial clarity, disputes will arise where execution is flawed.

Problems typically occur when non-compete consideration is merged with acquisition price, when agreements use language suggestive of ownership or exclusivity, or when there is no contemporaneous explanation of the commercial necessity for the payment.

In such cases, it is not the law that fails, but the articulation of the transaction.

Guidance for Startup Boards and Founders

Boards should treat non-compete payments as transition and risk-mitigation costs rather than acquisition costs. This perspective aligns governance decisions with judicial reasoning and significantly reduces future tax exposure.

For founders, the judgment reinforces an important distinction. Agreeing not to compete is not the sale of what was built. It is a commitment regarding future conduct. Recognising this helps founders negotiate exits cleanly and helps buyers structure payments with confidence.

Conclusion

The Supreme Court’s decision in Sharp Business System is not merely a ruling on deductibility. It is a recognition of how businesses actually transition and how risk is managed in modern commercial arrangements.

Protecting a business from disruption is not the same as acquiring a business advantage. Silence is not property. Restraint is not ownership.

For startups, this judgment offers clarity, certainty, and a framework for cleaner exits, better tax planning, and reduced litigation. It rewards honest structuring and penalises artificial characterisation.

The most successful exits are not those that maximise valuation alone. They are the ones that leave behind certainty.

Non-Compete Fees After Sharp Business System (SC)

 By CA Surekha S Ahuja

The Definitive Decision-Making, Tax-Planning & Risk-Avoidance Framework

Sharp Business System v. Commissioner of Income-tax
[2025] 181 taxmann.com 657 (Supreme Court)

Why This Judgment Changes Tax Planning Forever

The Supreme Court has not merely allowed a deduction.
It has re-engineered the analytical framework for determining whether an expenditure is capital or revenue.

The Court has shifted the inquiry from
“How long does the benefit last?”
to
“What role does the payment play in the business?”

This distinction is critical for future planning, not just past litigation.

 What the Supreme Court Actually Decided (Substantive Ratio)

The Core Holding

A non-compete fee:

• Is paid to restrain competition

• Protects or facilitates the carrying on of business

• Does not create or add to the profit-earning apparatus

• Does not result in ownership or acquisition of any asset

Therefore:

Such payment is revenue expenditure allowable under Section 37(1),
irrespective of the duration of benefit.

The Supreme Court’s Master Test (Unwritten but Clear)

From the reasoning of the Court, the following master test emerges:

If an expenditure improves the conditions under which a business operates, without altering the structure of the business itself, it belongs to the revenue field.

Non-compete fees fall squarely within this test.

Strategic Judicial Tests for Future Decision-Making

These are the tests the Department will apply—and which you must pre-emptively satisfy.

Business Structure Test (Most Critical)

Ask:
Did the payment change the business itself or merely the business environment?

Impact	Tax Character
Change in assets, IP, ownership	Capital
Change in competitive landscape	Revenue

Non-compete fees only change the landscape, not the structure.

Asset Creation Test

Question:
Did the payment result in something that can be owned, transferred, or exploited independently?

If the answer to all is NO:

• Cannot be sold

• Cannot be transferred

• Cannot be licensed

• Cannot be monetised independently

→ No capital asset exists.

This demolishes capitalisation attempts.

3. Profit-Earning Apparatus vs Process Test

The Court draws a sharp line between:

• Apparatus → the machinery of earning profits (capital)

• Process → the manner of earning profits (revenue)

Non-compete fees operate entirely in the process zone.

Enduring Benefit Re-calibrated Test

Post-Sharp Rule:

Enduring benefit is relevant only if it lies in the capital field.

Thus:

• Enduring operational advantage → Revenue

• Enduring structural advantage → Capital

This is the single most powerful clarification of the judgment.

5. Substitution Test (Litigation-Proof)

Ask:
Does this payment substitute or replace an asset?

• Replacement of asset → Capital

• Prevention of competition → Revenue

Non-compete prevents rivalry; it does not substitute capital.

Scenario-Based Applicability (Decision Matrix)

Scenario 1: Stand-Alone Non-Compete Agreement

Tax Outcome: Revenue expenditure

Reason:
Pure commercial protection; no acquisition.

Scenario 2: Acquisition + Non-Compete (Promoter Level)

Key Question:
Is the non-compete:

• Integral to acquisition price? → Capital risk

• Independent restraint to ensure smooth operations? → Revenue

Best Practice:

• Separate valuation

• Separate agreements

• Clear allocation

Scenario 3: Non-Compete with IP or Brand Transfer

Correct Approach:

• Capitalise IP/brand

• Deduct non-compete

Risk if not split:
Entire payment may be disputed.

Scenario 4: Settlement or Exit-Based Non-Compete

Strongest revenue case.

Judicial Support:
Payments to buy peace or exit competition facilitate trade.

Scenario 5: Long-Term or Permanent Restraints

Key Insight from SC:
Duration is irrelevant if business structure remains untouched.

Still revenue.

How to Use This Judgment as a Tax-Planning Tool

1. Timing Advantage

• Claim 100% deduction in year of payment

• Avoid depreciation uncertainty

• Improve cash flows

2. Transaction Structuring

• Separate non-compete from acquisition price

• Avoid composite lump-sum consideration

• Support with commercial rationale

3. Documentation Strategy

Agreements should highlight:

• Business continuity

• Operational efficiency

• Risk mitigation

• Absence of asset transfer

Avoid:

• Language suggesting ownership or exclusivity

• Bundling with IP without allocation

Points for Consideration to Avoid Future Defaults & Disallowances

Documentation Red Flags to Avoid

• Calling non-compete a “right”

• Linking it to market dominance

• Treating it as transferable

• Absence of commercial justification

Accounting & Tax Alignment

• Expense in P&L (not capitalise)

• Disclose rationale in tax audit report if material

• Maintain valuation support where amounts are large

Assessment Defense Readiness

Keep ready:

• Business necessity note

• Board approval

• Competitive risk analysis

• Independent valuation (if high value)

If the payment makes the business safer to run but does not make it bigger to own, it is revenue expenditure.

This single rule captures the entire judgment.

Why Sharp Business System Will Shape Future Litigation

This ruling will now be cited for:

• Non-compete fees

• Settlement payments

• Market exit payments

• Restrictive covenants

• Capital vs revenue disputes

It restores coherence, predictability, and commercial logic to tax law.

Final Professional View

The Supreme Court has recognised a fundamental business truth:

Paying to reduce competition is not an investment—it is operational survival.

Used wisely, this judgment becomes:

• A planning instrument

• A litigation shield

• A structuring guide

Not merely a precedent.