Cost Records & Cost Audit Applicability – FY 2024‑25 & FY 2025‑26

By CA Surekha S ahuja

 References:

• Section 148(1), Companies Act, 2013

• Companies (Cost Records & Audit) Rules, 2014 (as amended, GSR 425(E))

• MSMED Act, 2006, Gazette Notification S.O. 1364(E) dated 21.03.2025

• MCA & ICMAI guidance

Legal Basis

Section 148(1), Companies Act, 2013:

“Every company which is required to maintain cost records under this section shall prepare such records in respect of the items of goods or services as may be prescribed in the manner specified in the Companies (Cost Records & Audit) Rules, 2014.”

Rule 3 (Cost Records – Applicability):

• Rule 3(1)(a): Applies to 37 regulated sectors (Table A)

• Rule 3(1)(b): Applies to 7 non-regulated sectors (Table B) if overall turnover ≥ ₹35 cr and company is not Micro or Small

Rule 4 (Cost Audit – Applicability):

• Rule 4(1) – Regulated sectors: Overall turnover ≥ ₹50 cr & product turnover ≥ ₹25 cr, not Micro/Small

• Rule 4(2) – Non-regulated sectors: Overall turnover ≥ ₹100 cr & product turnover ≥ ₹35 cr, not Micro/Small

Rule 4(3) – Exemptions:
Cost audit not required if:

1. Foreign exchange revenue >75% of total turnover

2. Operates exclusively from SEZ

3. Captive consumption of power

4. Micro/Small Enterprise under MSME classification

MSME Classification (Updated for FY 2025‑26)

MSME Type	Plant & Machinery/Equipment	Annual Turnover
Micro	≤ ₹2.5 cr	≤ ₹10 cr
Small	≤ ₹25 cr	≤ ₹100 cr
Medium	≤ ₹125 cr	≤ ₹500 cr

Old limits (FY 2024‑25):

• Micro ≤ ₹1 cr / ₹5 cr

• Small ≤ ₹10 cr / ₹50 cr

• Medium ≤ ₹50 cr / ₹250 cr

Key Interpretation:

• Micro & Small: fully exempt from cost records and cost audit.

• Medium: compliance required if thresholds met.

Sectoral Applicability – Industry-Specific

A. Regulated Sectors (Rule 3, Table A)

Industry	Key Notes
Petroleum Products & Refineries	Licenses regulated by Govt/IOCL
Electricity (Generation/Transmission/Distribution)	Includes public & captive generation
Drugs & Pharmaceuticals	CDSCO/FDA regulated
Fertilisers	Urea/NPK/DAP manufacturing
Sugar & Industrial Alcohol	Licensing regulated
Telecommunication	Licensed telecom operators
Railways	Freight & passenger operations

B. Non‑Regulated Sectors (Rule 3, Table B)

Industry	Key Notes
Cement, Steel, Glass, Ceramics	Manufacturing units
Textiles & Apparel	Excludes handloom Micro/Small units
Paper & Paper Products	Non-licensed domestic production
FMCG / Edible Oils / Food Processing	Non-regulated
Electrical & Electronic Machinery	Manufacturing
Rubber Products / Tyres & Tubes	Non-regulated
Paints & Varnishes	Non-regulated production

Interpretation: Even non-regulated companies must maintain cost records if turnover ≥ ₹35 cr and not Micro/Small.

Turnover Thresholds – Cost Records vs Audit

A. Cost Records (Rule 3)

FY	MSME Type	Turnover Threshold	Records Required?
2024‑25	Micro/Small	≤ ₹50 cr	❌ Exempt
2024‑25	Medium	> ₹50 cr & ≥ ₹35 cr	✅ Yes
2025‑26	Micro/Small	≤ ₹100 cr	❌ Exempt
2025‑26	Medium	> ₹100 cr & ≥ ₹35 cr	✅ Yes

Note: ₹35 cr threshold applies after MSME classification.

B. Cost Audit (Rule 4)

Sector	Overall Turnover	Product Turnover	Notes
Regulated	≥ ₹50 cr	≥ ₹25 cr	Mandatory if not Micro/Small
Non-Regulated	≥ ₹100 cr	≥ ₹35 cr	Mandatory if not Micro/Small

Exemptions – Rule 4(3)

Exemption	Condition
Exports	>75% foreign exchange revenue
SEZ Operations	Company operates exclusively from SEZ
Captive Power	Power generated is fully for internal consumption
MSME Exemption	Micro/Small as per revised MSMED Act

Interpretation: Exemptions override thresholds. Audit is not required even if turnover is high.

Year-Wise Applicability Snapshot

FY	Turnover	MSME Type	Records?	Audit?	Comments
2024‑25	≤ ₹50 cr	Micro/Small	❌ No	❌ No	Fully exempt
2024‑25	50–100 cr	Medium	✅ Yes (≥ ₹35 cr)	⚠️ Conditional	Check Rule 4 thresholds
2024‑25	≥100 cr	Medium	✅ Yes	✅ Yes	Rule 4 thresholds apply
2025‑26	≤ ₹100 cr	Micro/Small	❌ No	❌ No	Fully exempt
2025‑26	>100 cr	Medium	✅ Yes	⚠️ Conditional	Check Rule 4 thresholds & exemptions

Decision Tree – Step-by-Step Compliance

Step 1: MSME Status (Udyam Registration)

• Micro/Small → No records, no audit

• Medium → Go to Step 2

Step 2: Sector Classification

• Regulated → Rule 3(A)/4(1)

• Non-Regulated → Rule 3(B)/4(2)

Step 3: Turnover Thresholds

• Records: ≥ ₹35 cr

• Audit: Rule 4 thresholds (Regulated ≥50/25, Non-Regulated ≥100/35)

Step 4: Check Exemptions

• Exports >75% → Audit exempt

• SEZ → Audit exempt

• Captive Power → Audit exempt

Step 5: Documentation

• Cost Records CRA‑1

• Cost Auditor Appointment CRA‑2

• Filing CRA‑3 / CRA‑4

Step 6: Monitor FY Transitions

• FY 2024‑25 vs FY 2025‑26 → Revised MSME limits reduce compliance automatically

Practical Examples

1. Telecom Co FY 2024‑25, ₹60 cr turnover, 80% domestic

   • Records: Required

   • Audit: Required

2. Textile Co FY 2025‑26, ₹90 cr turnover

   • MSME Small → ✅ Fully exempt

3. Pharma Co FY 2025‑26, ₹450 cr turnover, 80% exports

   • Records: Required

   • Audit: Exempt (>75% export)

4. Infra Co FY 2025‑26, ₹110 cr turnover, non-regulated product ₹40 cr

   • Records: Required

   • Audit: Applies only if product turnover ≥ ₹35 cr

Key Takeaways

• MSME revision significantly reduces compliance burden for FY 2025‑26

• Medium enterprises are primary focus for cost records & audit

• Exports, SEZ, captive power offer statutory exemptions

• Always maintain cost records; audit may be exempt but records are evidence for statutory scrutiny

• 
  
  

  
  

Joint Development Agreement (JDA) Taxation in India: Capital Gains vs Business Income – Case Law, NRI Taxation & Guidance

By CA Surekha S Ahuja

“In Joint Development Agreements, taxability follows conduct — not contracts.”

Courts do not tax JDAs by their commercial appeal or revenue potential. They tax them by role, risk, and legal transfer.

Joint Development Agreements (JDAs) have become a preferred real-estate monetisation model in India, allowing landowners to unlock value without funding construction. However, JDAs also attract intense tax scrutiny, particularly on whether receipts should be taxed as capital gains or business income, and on when such income becomes taxable.

Mischaracterisation can result in denial of indexation, higher tax rates, GST exposure, interest, and prolonged litigation. For NRIs, the risk multiplies due to TDS under section 195, DTAA application, and FEMA repatriation rules.

This article provides a case-law–driven, SEO-aligned, and advisory-focused analysis of JDA taxation, explaining:

• capital gains vs business income,

• judicial differentiators,

• tax planning guardrails, and

• compliance obligations for resident and NRI landowners.

JDA Taxation: Capital Gains vs Business Income

Indian courts have consistently held that the nature of income under a JDA depends on the role of the landowner, not on the wording of the agreement or the form of consideration.

Judicially Accepted Determinants

Parameter	Capital Gains Treatment	Business Income Treatment
Role of landowner	Passive contribution of land	Active involvement in development
Nature of land	Capital asset	Stock-in-trade
Consideration	Revenue share / built-up area / cash on transfer	Income from development activity
Timing of tax	On legally effective transfer	On accrual / receipt
Key cases	Mathikere Ramaiah Seetharam (2025), V.S. Construction (2017)	CIT v. Hind Construction Ltd. (2019), Ashoka Buildcon Ltd. (2020)

Insight: Passive landowners under JDAs are normally taxed under capital gains, not business income.

Leading JDA Case Law Explained

DCIT v. Mathikere Ramaiah Seetharam (2025, ITAT Bangalore)

• Land contributed under JDA

• No role in construction or marketing

Held:
Income taxable as Long-Term Capital Gains (LTCG); advances are not business income.

Key Principle:
Revenue sharing alone does not convert capital gains into business income.

V.S. Construction Co. (2017)

• Revenue share agreement

• No development role of landowner

Held:
Capital gains treatment upheld; advances treated as capital receipts.

CIT v. Hind Construction Ltd. (2019)

• Landowner actively involved in execution

Held:
Income taxable as business income.

Differentiator:
Operational involvement and risk assumption.

Ashoka Buildcon Ltd. (2020, Bombay HC)

Held:

• Developer → business income

• Landowner → capital gains

Key Learning:
Different parties to the same JDA can have different tax treatments.

JDA Taxation for NRIs – Special Focus

Issue	NRI-Specific Compliance
TDS (Section 195)	Applicable only on sums chargeable to tax
DTAA relief	Can reduce withholding; PAN mandatory
FEMA compliance	Repatriation subject to RBI norms
Form 15CA/15CB	Mandatory for outward remittance
Timing of tax	Capital gains on transfer, not on advance
GST exposure	Only if income is business income

JDA tax for NRIs requires simultaneous compliance under Income-tax Act and FEMA.

Tax-Saving Strategies (Judicially Sustainable)

• Maintain a strictly passive role as landowner

• Avoid participation in construction, marketing, or financing

• Clearly document advances as adjustable capital receipts

• Time transfer deeds to optimise LTCG computation

• Avail indexation benefits for land held beyond 24 months

• Apply DTAA provisions to reduce TDS for NRIs

• Segregate roles clearly in joint ventures

These strategies are court-tested, not aggressive tax planning.

Common Mistakes Leading to Disallowances

• Treating land as stock-in-trade without formal conversion

• Recognising advances as taxable income prematurely

• Mixing passive and active roles without accounting clarity

• Incorrect or excess TDS deduction under section 195

• FEMA non-compliance during repatriation

• Weak documentation of JDA terms and possession clauses

Most JDA disputes arise from execution lapses, not legal uncertainty.

Practical Case Study (JDA + NRI)

Facts:
An NRI landowner contributes land under a JDA and receives 30% of constructed flats. He has no role in construction.

Tax Outcome:

• Income taxable as LTCG on transfer/sale

• Indexation benefit available

• TDS under section 195 applies only on sale

• DTAA may reduce tax

• Form 15CA/15CB required for repatriation

Contrast:
Active participation would shift taxation to business income, with possible GST exposure.

Conclusion

The taxation of Joint Development Agreements in India is well-settled in law but sensitive in execution.

• Passive landowners enjoy capital gains treatment and indexation benefits.

• Active participants face business income taxation and higher compliance burden.

• NRIs must manage TDS, DTAA relief, and FEMA rules with precision.

Final Takeaway:
Clear role definition, disciplined documentation, and alignment with judicial precedents are the most reliable tools for optimising tax outcomes and avoiding prolonged litigation under JDAs.

 

Where Wages Create More Value Than Profits

By CA Surekha S Ahuja 

Section 80JJAA vs Section 80-IAC — A Definitive Guide for HR, Manpower and Platform-Led Service Businesses

Tax incentives succeed only when they mirror economic reality. Where law chases optics, litigation follows.

The Real Question the Law Is Asking

Sections 80JJAA and 80-IAC are often discussed together, but they are not alternatives in the usual sense.
They are answers to two very different policy questions:

• How do we encourage formal employment?

• How do we encourage innovation-driven, scalable enterprises?

Human resource and manpower businesses sit at the intersection of this debate—sometimes mistakenly believing that startup status alone unlocks profit exemptions.

The law, however, looks past labels and examines how value is actually created.

The Economic Structure of HR and Manpower Businesses

Most HR, staffing and manpower supply enterprises share a common economic DNA:

• Revenue is generated by deploying people

• Costs are dominated by wages and statutory compliances

• Margins are stable but structurally capped

• Growth is linear with headcount

In practical terms, net profits rarely exceed 20–30% of total wage cost.

This single fact explains why employment-linked incentives frequently outperform profit-linked exemptions in this sector.

Section 80JJAA — Built for Employment-Driven Models

Section 80JJAA grants an additional deduction of 30% of “additional employee cost” for three consecutive assessment years, over and above the normal salary deduction.

Its architecture is intentional:

• It applies to any tax-audited business, irrespective of sector

• It rewards incremental, compliant hiring

• It aligns with labour-intensive models where wages dominate costs

Employees must satisfy conditions relating to emolument limits, minimum working days and PF coverage, while the employer must meet audit, filing and certification requirements.

Equally important is the legal boundary often overlooked in planning discussions:

The deduction is confined strictly to income chargeable under “Profits and Gains of Business or Profession.”

Capital gains, income from other sources and incidental receipts do not enter the equation.
This limitation ensures that Section 80JJAA remains an operational incentive, not a shelter.

Section 80-IAC — A Precision Tool for Innovation-Led Enterprises

Section 80-IAC offers a 100% deduction of eligible business profits for three selected years out of ten—but only to a narrowly defined class of startups.

Eligibility demands:

• Incorporation as a Pvt Ltd or LLP

• DPIIT recognition

• IMB approval

• A demonstrable innovation or scalable business model

• Turnover discipline and independence from reconstructed businesses

The deduction applies only to profits of the eligible business.
Capital gains, other sources and unrelated income remain fully taxable.

For conventional manpower and HR service providers, the innovation threshold is rarely satisfied. Operational efficiency or internal software use does not amount to innovation in the statutory sense.

Profit vs Wages — The Decisive Comparison

In a wage-heavy business, exempting profits often produces a smaller absolute tax benefit than enhancing the deductibility of wages.

A simple commercial truth emerges:

• Where profits are modest, profit exemptions underperform

• Where wages are substantial and growing, wage-linked deductions compound meaningfully

This is why, for most HR and manpower businesses, Section 80JJAA is not merely easier to claim—it is economically superior.

Urban Company and Platform-Led Models — Law Treats Them Differently

Urban Company exemplifies a platform-led, technology-first service model:

• Value is created through algorithms, standardisation and data

• Growth scales across cities without proportional payroll expansion

• Employment impact occurs at an ecosystem level rather than on payroll alone

Such models fit naturally within the language of Section 80-IAC—innovation, scalability and wealth creation.

A traditional manpower agency, by contrast, grows only by adding people to its own rolls. Its value lies in execution, compliance and workforce management, not in a proprietary platform.

The distinction is not cosmetic.
It is structural and intentional.

Comparative Perspective at a Glance

Aspect	Section 80JJAA	Section 80-IAC
Policy intent	Promote formal employment	Promote innovation-led startups
Basis of deduction	Additional employee cost	Eligible business profits
Typical HR use case	Staffing, manpower, payroll outsourcing	HR-tech / platform businesses
Dependence on innovation	None	Central requirement
Income covered	Business income only	Business income only
Practical acceptance	High, litigationally supported	Narrow, closely scrutinised
Economic fit for manpower	Strong	Generally weak

On Co-Existence of Both Deductions

The law does not expressly prohibit claiming both deductions, since one is wage-linked and the other profit-linked.

However, this is largely a theoretical construct.

In practice:

• Both deductions apply only to business income

• Both exclude capital gains and other sources

• The business models that meaningfully qualify for Section 80-IAC rarely resemble those that extract maximum value from Section 80JJAA

For most HR and manpower businesses, Section 80JJAA alone already captures the full incentive contemplated by the statute.

Looking Ahead — Up to AY 2026-27 and Beyond

Both provisions continue up to AY 2026-27 under the current framework. Any future Direct Tax Code is expected to preserve the same policy divide:

• Employment incentives for wage-driven enterprises

• Innovation incentives for scalable, platform-led enterprises

The mechanics may evolve, but the philosophy is unlikely to.

The Professional Conclusion

Tax planning works best when it respects economic substance.

Where value is created by people, payroll and compliance, Section 80JJAA is the most robust, sustainable and defensible deduction available under the law.

Where value is created by technology, platforms and scale, Section 80-IAC may apply—but only where innovation is real, provable and independently recognised.

Trying to force one model into the other’s incentive does not optimise tax.
It invites challenge.

CAM Charges, Section 194-I and Section 194-C

By CA Surekha S Ahuja

In TDS law, the most expensive mistakes are not made by non-compliance, but by misclassification. Common Area Maintenance (CAM) charges—an unavoidable feature of modern commercial leasing—have become a frequent trigger for TDS notices, primarily because they are mechanically equated with rent or contractual payments without examining their true legal character.

Recent judicial pronouncements, culminating in Dy. CIT v. Bird Automotive (P) Ltd. (ITAT Delhi, 2025), following the Delhi High Court in CIT (TDS) v. Liberty Retail Revolutions Ltd., have now settled the law. Yet disputes continue, largely because Sections 194-I and 194-C are applied without first satisfying their charging conditions.

This note undertakes a complete statutory and interpretative analysis of both sections, explains where CAM charges fit (and where they do not), and sets out a compliance framework that prevents mismatches, notices and assessee-in-default proceedings.

Section 194-I — Law, Scope and Interpretation

Statutory Language (Essence)

Section 194-I applies where a person responsible for paying to a resident any income by way of rent deducts tax at source at the prescribed rate.

“Rent” is defined as any payment, by whatever name called, for the use of land, building, land appurtenant thereto, machinery, plant or equipment.

Judicial Interpretation of “Rent”

Courts have consistently held that:

• Rent must be consideration for possession, occupation, or right to use immovable property.

• The expression “by whatever name called” does not enlarge the scope of rent beyond its essential character.

• Payments that do not grant or regulate the right of occupation cannot be treated as rent merely because they arise from a lease arrangement.

Why CAM Charges Fail the Section 194-I Test

CAM charges:

• Do not confer possession or right to occupy

• Do not enhance or regulate tenancy rights

• Do not create any interest in property

They represent proportionate sharing of common expenses incurred for:
cleanliness, electricity, water, security, HVAC, lifts, common repairs and upkeep.

In Bird Automotive (P) Ltd., the ITAT categorically held that such payments “cannot, by any stretch of imagination, be construed as payment of rent.”
Once a payment fails to qualify as rent, Section 194-I is excluded at the charging stage itself. Thresholds, rates, defaults and interest provisions become irrelevant.

Section 194-C — Law, Scope and Interpretation

Statutory Language (Essence)

Section 194-C applies where any person responsible for paying a resident any sum for carrying out any work (including supply of labour) in pursuance of a contract, deducts tax at source.

The section is triggered only when:

• There exists a contract, and

• The contract is for carrying out work.

Judicial Interpretation of “Work”

Courts have clarified that:

• “Work” implies execution of an obligation for another person.

• Mere reimbursement or cost sharing does not amount to carrying out work.

• The payer-payee relationship must be that of contractee and contractor, not owner and occupier.

Application of Section 194-C to CAM Charges

CAM charges do not automatically fall under Section 194-C.

Where CAM is:

• Recovered by the landlord as cost sharing for maintaining common areas, and

• The landlord is merely discharging ownership obligations or allocating expenses,

there is no contract for carrying out work for the tenant.
In such cases, Section 194-C does not apply.

Section 194-C becomes relevant only where:

• The tenant (or association of tenants) directly engages service providers, or

• The landlord separately undertakes service contracts as a contractor, not as an owner.

Thus, Section 194-C applies based on contractual substance, not payment labels.

The Crucial Distinction: Responsibility for Maintenance

Maintenance Responsibility with Landlord

Where the lease places responsibility for common area maintenance on the landlord:

• CAM is reimbursement / contribution

• Landlord is not a contractor

• CAM is neither rent (194-I) nor contractual payment (194-C)

• No TDS obligation arises

This is the strongest legally defensible position and is directly supported by judicial precedent.

Maintenance Responsibility with Tenant

Where tenants:

• Directly contract security, housekeeping, facility management, or

• Act through a tenants’ association,

payments may attract Section 194-C, subject to existence of a work contract.
Section 194-I has no application in this model, as payments are unrelated to occupation rights.

Hybrid Models

In mixed arrangements:

• Rent → tested only under Section 194-I

• CAM cost sharing → outside TDS

• Outsourced services → tested independently under Section 194-C

Segregation is mandatory. Aggregation is legally impermissible.

Why Thresholds Do Not Cure Wrong Classification

A recurring compliance fallacy is applying thresholds first. This is legally unsound.

Thresholds:

• Do not create taxability

• Operate only after a payment satisfies the charging description

CAM charges do not become rent because they are large, recurring or linked to lease tenure. Courts have repeatedly held that quantum cannot substitute legal character.

Why Notices and Section 201 Demands Commonly Arise

Most CAM-related demands arise because:

• Rent and CAM are clubbed in lease agreements

• Invoices lack descriptive break-ups

• TDS is deducted “to be safe” under wrong sections

• Authorities apply thresholds mechanically

Courts have consistently disapproved this approach.

Compliance Architecture That Survives Scrutiny

A litigation-proof framework requires:

• Clear lease clauses separating rent and CAM

• CAM defined as cost sharing / reimbursement

• Invoices reflecting actual expense heads

• Consistent accounting and TDS treatment

• Reliance on binding judicial precedents

In TDS matters, documentation determines destiny.

Final Conclusion

Sections 194-I and 194-C are charging provisions, not convenience tools. They apply only when their statutory conditions are met. Common Area Maintenance charges meet neither condition by default.

The law now stands settled:

CAM charges are operational contributions, not consideration for occupation and not automatically contractual payments.

Taxpayers who understand the distinction between rent, work contracts, and cost sharing, and who align their agreements and invoices accordingly, remain fully insulated from mismatches, notices and assessee-in-default exposure.

In TDS law, accuracy is not caution.

It is compliance.

Section 80JJAA Deduction: ITAT Clarifies Eligibility, Compliance, and Verification Requirements

By CA Surekha S Ahuja

Claiming a deduction is a right; sustaining it is a responsibility.

The Income Tax Act provides relief under Section 80JJAA to encourage employment, but the recent ITAT ruling in Innovative Cuisine (P.) Ltd. v. ACIT [2025] 181 Taxmann.com 14 makes it clear that deductions are fact-sensitive, evidence-driven, and employee-specific. Blanket disallowances are impermissible, but so is casual compliance.

Case Reference:

• Assessee: Innovative Cuisine (P.) Ltd.

• Bench: ITAT Ahmedabad – T.R. Senthil Kumar & Narendra Prasad Sinha

• Assessment Year: 2017-18

• Facts:

  • Assessee claimed Section 80JJAA deduction for 274 additional employees employed during the year.

  • AO disallowed the entire claim because most employees worked less than 240 days and statutory conditions were allegedly unverified.

  • Tribunal remanded the matter, directing AO to verify employee-wise eligibility.

Legal Framework of Section 80JJAA

1 Deduction:

• 30% of additional employee cost for three assessment years (year of employment + 2 subsequent years).

2 Eligibility Conditions (Section 80JJAA(2) & Explanation):

1. Employee’s monthly emoluments ≤ ₹25,000.

2. Participation in recognized Provident Fund and Pension Scheme.

3. Employee works not less than 240 days in the financial year.

4. Salary paid via account payee cheque/draft or electronic transfer (ECS/NEFT/RTGS).

3 Burden of Proof:

• Onus is squarely on the assessee to prove compliance with all conditions.

• Verification includes: payroll, attendance, bank records, PF/pension enrollment, and employment letters.

“Merely submitting sample employee details is insufficient; AO must verify employee-wise compliance.” [ITAT]

Key Observations of the Tribunal

1. Employee-Wise Verification Mandatory:

   • AO cannot disallow the entire deduction merely because some employees worked less than 240 days.

   • Deduction should be allowed only for employees satisfying all statutory conditions.

2. Payment Mode Verification:

   • Salary must be traceable via account payee instruments.

   • Even if offer letters are missing, bank statements and salary registers can substantiate compliance.

3. Sample Evidence is Insufficient:

   • Submission of 15 employees’ details out of 274 is inadequate.

   • AO must check all employees’ eligibility before disallowance.

4. Treatment of Part-Year Employees:

   • Employees working <240 days are ineligible.

   • Partial-year service cannot be aggregated unless statutory requirement is fulfilled.

5. PF / Pension Compliance:

   • Employees not enrolled in recognized schemes are ineligible.

   • Auditor certification strengthens the claim.

6. Monthly Emoluments Limit:

   • Only employees earning ≤ ₹25,000/month are eligible.

   • Include basic + allowances; exclude non-qualifying allowances.

Compliance Checklist – All “Ifs and Buts”

Requirement	Compliance Action	Caution / Points to Avoid Disallowance
Employee Eligibility	Maintain appointment letters, payroll, attendance	Avoid claiming for employees <240 days
Salary Limit	Verify monthly salary ≤ ₹25,000	Exclude bonuses/allowances beyond limit
Payment Mode	Salary via account payee instruments	Avoid cash or untraceable payments
PF / Pension Enrollment	Maintain proof of enrollment	Non-compliance invalidates deduction
Record Maintenance	Employee-wise summary linking salary, days worked, PF	Partial or sample evidence insufficient
Auditor Support	Certificate on employee cost and eligibility	Avoid unsupported claims
AO Queries	Respond with employee-wise computation and supporting documents	Delay or incomplete response can trigger disallowance

Tax Planning Insights

1. Staggered Recruitment:

   • Hire employees to ensure they complete ≥240 days within the financial year.

2. Payroll & HR Integration:

   • Maintain digital payroll linked with attendance and PF records for real-time verification.

3. Pre-Audit Verification:

   • Auditor to certify compliance for all eligible employees before filing.

4. Bank Transfer Compliance:

   • All emoluments to be routed through account payee / ECS to prevent disputes.

5. Documentation Readiness:

   • Maintain master sheet summarizing: employee name, joining date, PF details, monthly emoluments, salary payment proof, and days worked.

Judicial Support / Legal Precedents

• ITAT Ahmedabad (2025):

  AO cannot disallow full Section 80JJAA claim without verifying employee-wise compliance with 240-day and other statutory conditions.

• Principle: Deduction is evidence-driven, not discretionary.

• Other observations emphasize that:

  • Partial compliance or partial documentation does not justify blanket disallowance.

  • AO must provide opportunity for assessee to produce evidence.

Conclusion / Practitioner Takeaways

1. Section 80JJAA is highly fact-sensitive.

2. Employee-wise verification is mandatory; no blanket disallowances permitted.

3. Proper documentation, payroll integration, and auditor certification are essential to sustain deduction.

4. Tax planning: phased hiring, PF/pension compliance, salary limit adherence, bank-mode payment, and complete records ensure maximum deduction with minimal risk.

“Eligibility + Documentation + Verification = Sustainable Section 80JJAA Deduction.”

In essence, practitioners must ensure that every new employee satisfies all statutory conditions, maintain detailed evidence, and pre-empt AO queries to secure deduction under Section 80JJAA and prevent unnecessary litigation.

When Law Meets Life: Section 54, HUFs and the Reality of Buying the Family Home in the Wife’s Name

By CA Surekha S Ahuja

An authoritative, empathetic and litigation‑tested guide for Indian taxpayers and professionals

“Courts do not decide cases on intentions. They decide them on facts.”

That single sentence explains why so many honest families find themselves anxious during income‑tax scrutiny.

In real life, Indian families often purchase homes in the wife’s name — for loan eligibility, long‑term security, succession comfort, administrative convenience, or simply because that is how families have traditionally functioned. When a Hindu Undivided Family (HUF) sells its residential house and reinvests the proceeds in such a home, the decision is usually genuine and practical.

Yet, during assessment, a familiar objection is raised:

“The new house is not in the name of the HUF.”

This article explains — calmly, honestly and exhaustively — when Section 54 protects such reinvestments, when it does not, and what genuinely makes the difference. It is written to help taxpayers who acted in good faith, and professionals who want to guide without pushing aggressive or unsafe positions.

The statutory foundation — and where interpretation begins

Section 54 grants exemption where the assessee, being an Individual or a Hindu Undivided Family, transfers a long‑term residential house and:

“has, within the prescribed period, purchased or constructed a residential house.”

The provision is silent on one point that causes all the controversy: it does not expressly say that the new house must be registered exclusively in the assessee’s name.

The interpretational question therefore is simple, but decisive:

Does “purchased by the assessee” mean legal title alone, or does it include beneficial ownership supported by the assessee’s funds?

Indian courts have answered this question in two distinct ways — one liberal and substance‑oriented, the other strict and form‑driven.

The liberal judicial view — substance over form, especially for HUFs

Courts and Tribunals adopting the liberal view recognise that Section 54 is a beneficial provision and must be applied in a manner that protects genuine reinvestment of capital gains, rather than defeating it on technicalities.

In ITO v. Ramesh Kumar (HUF) (ITAT Bangalore), the HUF sold a residential property and claimed Section 54 exemption even though the new house was purchased in the name of an HUF member. The entire consideration flowed from HUF funds and the property was recorded as an HUF asset. The Tribunal held that exemption cannot be denied merely because the sale deed stood in a member’s name. What mattered was the source of funds and beneficial ownership.

This principle was reinforced at the High Court level in PCIT v. Vaidya Panalalmanilal (HUF) (Gujarat High Court), where the new residential house was purchased in the names of HUF members. The Court held that the rights of the HUF do not disappear merely because the conveyance deed carries the names of its members, so long as the investment belongs to the HUF and the property is treated as such.

These decisions are crucial because they recognise a doctrinal reality under Hindu law: HUF property can be held in the name of a member without losing its HUF character, provided substance supports that conclusion.

Applied to practical life, this means that where an HUF reinvests sale proceeds in a house registered in the karta’s wife’s name, and the wife is clearly acting as a member holding it for the family, Section 54 is not automatically lost.

Spouse‑name cases for individuals — and why they matter for HUFs

Even though these cases involve individual assessees, courts frequently rely on their reasoning when deciding HUF matters.

In CIT v. Kamal Wahal (Delhi High Court), the assessee invested capital gains in a house purchased in his wife’s name. The Court held that Section 54F does not require the house to be purchased exclusively in the assessee’s name and clearly distinguished earlier strict decisions involving sons or other relatives.

Similarly, in CIT v. Ravinder Kumar Arora (Delhi High Court), full exemption was allowed even though the property was jointly purchased with the wife, because the entire consideration was paid by the assessee.

Tribunals have followed the same reasoning even where houses were purchased jointly with close family members, emphasising that the spouse is not a stranger and funding is decisive.

The combined effect of these judgments is clear: where investment flows from the assessee and beneficial ownership is established, courts are willing to look beyond the name on the title deed.

The strict judicial view — and why some genuine cases still fail

The Revenue often relies on Prakash v. ITO (Bombay High Court), where exemption under Section 54F was denied because the new property was purchased entirely in the name of the assessee’s adopted son. The Court adopted a strict interpretation, holding that investment must be in the assessee’s own name.

What is important — and often overlooked — is why such cases fail. In strict‑view cases:

• the relative is treated as a distinct legal owner, not merely a conduit;
• funding and control are not clearly shown to vest with the assessee; and
• records, approvals and enjoyment point away from the assessee.

Courts themselves have distinguished spouse‑name cases from son or heir cases, and HUF cases add an additional layer of Hindu law that is absent in Prakash‑type situations.

Where assessments actually go wrong — real trigger points

In practice, Section 54 claims fail less because of law and more because of facts and documentation.

Common trigger points include:

• payments routed through the wife’s personal bank account;
• absence of capitalisation of the house as an HUF asset;
• housing loan or municipal approvals only in the wife’s name;
• rental income or self‑occupied benefit claimed in the wife’s return;
• Capital Gains Account Scheme deposits made in the wife’s name instead of the HUF’s.

Each of these weakens the argument of HUF ownership, even if the intention was genuine.

What genuinely strengthens a Section 54 claim in such cases

Strong cases consistently show discipline on three fronts.

Funding discipline — direct payment from the HUF bank account with a clear trail from sale proceeds.

Ownership discipline — HUF resolutions or declarations, capitalisation of the property as an HUF asset, and consistent reflection in accounts.

Usage discipline — expenses, control and income aligned with HUF ownership, not individual enjoyment.

Even simple drafting in the purchase deed — stating that the wife is acquiring the property for and on behalf of the HUF out of HUF funds — can materially strengthen the case.

Joint ownership of the old house — a frequent source of confusion

Where the old property is jointly held by the HUF and the wife, capital gains must be computed separately. The HUF can claim Section 54 only to the extent of its share and investment. The wife’s individual exemption, if any, must stand on her own footing.

Mixing these claims is a common and avoidable mistake.

What this is — and what it is not

This approach is not aggressive tax planning. It does not rely on artificial structures or paper ownership. It relies on alignment between family reality, accounting truth and judicial principles.

Courts have repeatedly shown that they will protect genuine reinvestments when records tell a consistent story — and withdraw protection when they do not.

Judicial support snapshot — how courts have actually decided

Case	Court / Tribunal	Section	In whose name was new house	Source of funds	Outcome	Core ratio relevant to HUF + wife cases
ITO v. Ramesh Kumar (HUF)	ITAT Bangalore	54	Name of HUF member	HUF funds	Exemption allowed	For HUF, purchase in member’s name does not defeat Section 54 when funds and beneficial ownership vest in HUF.
PCIT v. Vaidya Panalalmanilal (HUF)	Gujarat High Court	54F	Names of HUF members	HUF funds	Exemption allowed	HUF rights do not vanish merely because sale deed carries members’ names; substance prevails.
CIT v. Kamal Wahal	Delhi High Court	54F	Wife	Assessee	Exemption allowed	Section does not mandate exclusive ownership in assessee’s name; spouse is not a stranger.
CIT v. Ravinder Kumar Arora	Delhi High Court	54F	Joint with wife	Assessee	Full exemption allowed	Entire funding by assessee decisive; joint registration irrelevant.
Smt. Rachna Arora v. ITO	ITAT Chandigarh	54	Joint with daughter & son-in-law	Assessee	Exemption allowed	Close family members not strangers when assessee invests full capital gains.
Prakash v. ITO	Bombay High Court	54F	Adopted son	Assessee	Exemption denied	Strict interpretation; investment in son’s name treated as investment in another person.

Why this chart matters:

The cases allowing exemption consistently turn on three factual anchors — source of funds, beneficial ownership, and relationship category. The cases denying exemption usually fail on one or more of these anchors, especially where ownership appears to be consciously shifted away from the assessee.

Closing perspective

Section 54 was enacted to encourage reinvestment in residential housing, not to punish families for practical decisions. But the protection it offers depends entirely on facts, consistency and preparation.

When funds belong to the HUF, control rests with the HUF, and records speak with one voice, courts have repeatedly looked beyond the name on the deed — even when that name is the karta’s wife.

The difference between relief and litigation lies not in intention, but in execution.

Handled with clarity and discipline, Section 54 can — and does — protect genuine HUF reinvestments in the real world.