Old Tax Regime vs. New Tax Regime: A Comprehensive Guide to Choosing the Best Option for FY 2025-26

With the revised income tax slabs set to take effect from April 1, 2025, taxpayers are now presented with a critical choice: stick with the old tax regime or switch to the new tax regime. The Union Budget 2025 introduced significant changes, especially aimed at middle-income earners, including tax exemptions and reduced tax rates for income up to ₹24 lakh. However, choosing the right regime depends on a variety of factors, including deductions, exemptions, and individual financial circumstances. In this blog, we’ll break down both regimes and help you make an informed decision.

Key Features of the New Tax Regime (2025-26)

The new tax regime offers simplified taxation by reducing the number of tax slabs and removing deductions, allowing taxpayers to benefit from lower tax rates. The notable highlights of the new tax regime include:

• No Tax Up to ₹12 Lakh: The most striking change is that individuals earning up to ₹12 lakh are not required to pay any tax, which offers substantial relief to those in the middle-income group.

• Lower Slab Rates: The tax rates have been significantly reduced for income up to ₹24 lakh, making the new regime potentially more attractive for individuals with lower to middle incomes.

• Standard Deduction: A ₹75,000 standard deduction is applicable to salary income, making the new regime more straightforward.

• Simplified Filing: The new regime eliminates the need for tracking various deductions and exemptions, providing a hassle-free filing experience for taxpayers.

Deductions and Exemptions Under the Old Tax Regime

In contrast to the new regime, the old tax regime allows taxpayers to claim various deductions and exemptions, which can significantly lower their taxable income. Some of the most important deductions include:

• Section 80C: Taxpayers can claim up to ₹1.5 lakh in deductions for EPF, PPF, life insurance premiums, and other approved investments.

• House Rent Allowance (HRA): Individuals living in rented accommodations can claim HRA exemptions, which can reduce taxable income, especially for those in high-rent cities.

• Leave Travel Allowance (LTA): Taxpayers can claim LTA exemptions for travel expenses, which can further reduce tax liability.

• National Pension Scheme (NPS): Contributions to NPS are eligible for deductions, with an additional ₹50,000 under Section 80CCD(1b), apart from the 10% of salary available under Section 80CCD(2) for employer contributions.

• Health Insurance Premiums (Section 80D): Premiums paid for health insurance can be deducted under Section 80D for the taxpayer, family, and parents.

• Interest from Savings Accounts (Section 80TTA): Taxpayers can claim up to ₹10,000 in deductions on interest earned from savings accounts.

These deductions make the old tax regime more attractive for individuals who have substantial investments or eligible expenses to claim.

Deductions in the New Tax Regime

The new tax regime, while offering lower tax rates, significantly limits the ability to claim deductions. Key available deductions include:

• Standard Deduction: A ₹75,000 standard deduction for salary income.

• NPS Contributions: Employer contributions to the National Pension Scheme (NPS) are deductible under Section 80CCD(2), but there is no provision for individual contributions under the new regime.

• Telephone and Conveyance Reimbursements: These remain exempt from tax under both regimes.

Beyond these, the new regime does not allow for most other deductions such as HRA, LTA, or investments under Section 80C. This makes it a simpler but less flexible option.

Choosing the Best Tax Regime: Factors to Consider

The decision between the old and new tax regime depends on multiple factors. Here’s a breakdown of what to consider:

1. Deductions and Exemptions

• If you are someone who regularly claims deductions for NPS, HRA, LTA, or health insurance premiums, the old tax regime may be better suited for you as it offers a range of deductions that can significantly reduce your taxable income.

2. Tax Simplicity

• If you prefer a hassle-free filing experience and don’t have substantial deductions to claim, the new tax regime might be more beneficial. It simplifies the filing process, making it ideal for individuals who don’t want to keep track of receipts and documents.

3. Taxable Income and Tax Savings

• For individuals earning up to ₹12 lakh, the new tax regime offers a tax exemption, which makes it a clear choice.

• For those earning higher incomes or those with significant deductions, the old tax regime could still be more beneficial.

4. NPS Contributions

• The old tax regime allows for greater flexibility in NPS deductions (up to 10% of basic salary for employee contributions), compared to the 14% allowed under the new tax regime. This is important for employees contributing significantly to NPS.

Consider Switching to the New Tax Regime

The new tax regime should be considered if you:

• Have minimal deductions and prefer a simplified filing process.

• Have income up to ₹12 lakh, as it offers tax exemption.

• Want to avoid the hassle of maintaining proofs for claiming deductions.

Stick with the Old Tax Regime

The old tax regime remains a better choice if you:

• Have substantial deductions available (e.g., HRA, NPS, health insurance premiums).

• Prefer a customized tax-saving strategy to maximize savings.

• Have a higher income and want to reduce your taxable income significantly using deductions and exemptions.

Make the Right Tax Choice for 2025-26

Choosing between the old and new tax regimes requires a careful evaluation of your income and the deductions you can claim. If your goal is simplicity and you do not have significant deductions, the new tax regime will likely offer better tax savings with less paperwork. However, if you have substantial deductions (such as for NPS or HRA), the old tax regime could result in greater tax relief.

Actionable Tip: Utilize online tax calculators to compare both regimes and see how they affect your overall tax liability. This will help you make an informed decision based on your financial situation and tax-saving needs for FY 2025-26.

Finance Act 2025: ITR-U Filing Window Extended to 48 Months – Strategic Relief for Taxpayers

The Finance Act, 2025 has brought about a pivotal amendment to the Income-tax framework by extending the time limit for filing Updated Returns (ITR-U) from 24 months to 48 months from the end of the relevant Assessment Year. This expansion marks a major legislative shift towards enabling voluntary tax disclosures, reducing litigation, and promoting tax certainty.

A notification on the Income Tax e-filing portal confirms:

“Facility for filing updated returns for the AYs 2021–22 and 2022–23 as per Finance Act, 2025 will be provided shortly.”

This article provides a legal and practical analysis of the amendment, its rationale, impact, and the compliance roadmap for taxpayers.

Section 139(8A) – Updated Return

Introduced via Finance Act, 2022, section 139(8A) of the Income-tax Act, 1961 empowers any taxpayer — whether return-filer or not — to furnish an Updated Return (ITR-U) within a prescribed time limit if they discover any error, omission, or income that was not previously reported.

Pre-Amendment Rule (up to AY 2024–25):

• Time limit: Up to 24 months from the end of the relevant AY.

• Additional tax: 25% or 50% on tax + interest depending on delay.

Post-Amendment Rule (from AY 2025–26 onwards):

As per the amended Section 139(8A), read with clause (iv) of the proviso introduced by Finance Act 2025:

• The ITR-U may now be filed within 48 months from the end of the relevant AY.

• Additional tax slabs have been expanded to include higher rates for extended delays.

Revised Time Limits & Additional Tax

Time from End of AY	Permissibility	Additional Tax	Legal Status
0–12 months	Allowed	25%	Section 139(8A)(a)
12–24 months	Allowed	50%	Section 139(8A)(b)
24–36 months	- Newly Allowed	60%	Finance Act, 2025
36–48 months	-  Newly Allowed	70%	Finance Act, 2025

Note: Additional tax is levied on the aggregate of tax and interest payable on the additional income disclosed.

Application of Additional Tax

Consider a taxpayer identifying unreported income for AY 2021–22, where tax plus interest payable totals ₹1,00,000.

Filing Timeline	Total Liability (with Additional Tax)
Within 12 months	₹1,25,000 (25% of ₹1,00,000)
12–24 months	₹1,50,000 (50%)
24–36 months	₹1,60,000 (60%)
36–48 months	₹1,70,000 (70%)

Important Exclusion - Section 148A Proceedings

To prevent misuse, Section 139(8A) includes a caveat — if a taxpayer has been served a notice under Section 148A (pertaining to reassessment), the ability to file ITR-U beyond 36 months is prohibited.

However, an important exception applies:

If an order under Section 148A(3) explicitly states that reassessment under Section 148 is not warranted, the taxpayer may still file an ITR-U up to 48 months.

Effective Date and Transitional Relief

These amendments are prospectively effective from 1st April 2025 and shall apply to ITR-U filings for:

• Assessment Year 2021–22

• Assessment Year 2022–23, and onwards.

The Income Tax portal will shortly enable functionalities to facilitate such updated return filings as per the extended time window.

Government’s Shift Toward Compliance-Driven Ecosystem

This legislative development aligns with the government’s intent to:

• Encourage self-disclosure and rectification of defaults,

• Improve revenue mobilization without coercive measures, and

• Reduce long-drawn litigation by providing a structured pathway for compliance.

By allowing an extended compliance window, the government is clearly incentivizing transparency, while balancing it with deterrence through higher additional taxes for delayed disclosures.

Strategic Considerations for Taxpayers & Advisors

File proactively: Don’t wait for scrutiny. The earlier you file, the lower the additional tax burden.

Assess eligibility carefully: Ensure there are no ongoing Section 148A proceedings that may restrict eligibility.

Document disclosures: Maintain robust documentation to justify the accuracy of additional income declared.

Evaluate impact on GST & TDS: Ensure updated income reported is reconciled with indirect tax and withholding tax positions, if applicable.

Conclusion

The extension of the ITR-U time limit from 24 to 48 months under the Finance Act, 2025 is a progressive compliance measure that opens a second window for taxpayers to voluntarily regularize past defaults. While this is a welcome relief, taxpayers must exercise diligence and timeliness, as delayed disclosures will attract steep additional tax costs.

Taxpayers and professionals must now view ITR-U not merely as a remedial tool, but as a strategic lever for mitigating risk and ensuring compliance in a rapidly digitizing tax administration regime.

Guidance Note on Filing of Form DPT-3 for FY 2024–25

Under the Companies (Acceptance of Deposits) Rules, 2014
[As per Section 73 & Rule 16 of Companies Act, 2013]

1. Legal Framework

Under Section 73 of the Companies Act, 2013 read with Rule 16 of the Companies (Acceptance of Deposits) Rules, 2014, every company (excluding Government companies) is required to file Form DPT-3 annually with the Registrar of Companies (ROC), disclosing:

Deposits accepted and outstanding, and
Amounts not treated as deposits under Rule 2(1)(c) but outstanding as on the financial year-end.

2. Due Date and Period of Reporting

Particulars	Details
Period Covered	01 April 2024 to 31 March 2025
Cut-off for Outstanding	31 March 2025
Due Date for Filing	30 June 2025
Form	DPT-3
Filing Authority	Registrar of Companies (ROC)

3. What Needs to be Reported?

A. Deposits (DPT-3 – Part I) 

Amounts received that are not exempt under Rule 2(1)(c) — typically rare for private companies.

Statutory Auditor certification is mandatory for these.

B. Non-deposit Transactions under Rule 2(1)(c) (DPT-3 – Part II) 

These amounts are not classified as deposits but must be reported if outstanding as on 31 March 2025.

Self-certified by the Director — no auditor certification required.

4. Inclusions vs. Exclusions — Illustrative Classification Table

S. No.	Nature of Transaction	Reportable in DPT-3?	Rule / Reasoning	Comments & Grey Area Clarification
1	Loan from Director (own funds)	✅ Yes	Rule 2(1)(c)(viii)	Declaration required; otherwise treated as deposit
2	Loan from Director (borrowed funds)	❌ Deposit	Not exempt	If funds are not from own resources, report in Part I
3	Loan from Shareholder (not a Director)	❌ Deposit	Not exempt	Treated as deposit unless exemption under Rule applies
4	Loan from Relative (Private Co. only)	✅ Yes	Rule 2(1)(c)(viii)	Permitted for private companies only
5	Loan from NBFC / Bank / FI	✅ Yes	Rule 2(1)(c)(ii)/(iii)	Exempt from "deposit", but must be reported
6	Inter-Corporate Loan (from Company)	✅ Yes	Rule 2(1)(c)(vi)	Allowed; report if outstanding as on 31-Mar-25
7	Unsecured Loan from LLP / Firm	✅ Yes	Rule 2(1)(c)(ix)	Reportable if outstanding
8	Customer Advances for Services/Goods	✅ Yes (if unadjusted)	Rule 2(1)(c)(xviii)	Must be adjusted within 365 days
9	Advance for Property Sale/Rent	✅ Yes	Rule 2(1)(c)(xiv)/(xii)	Report if not adjusted within 12 months
10	Share Application Money pending > 60 days	✅ Yes	Rule 2(1)(c)(xvii)	If not allotted within 60 days, becomes reportable
11	Trade Payables / Credit from Suppliers	✅ Yes	Rule 2(1)(c)(xvii)	If in ordinary course and terms not excessive
12	Security Deposits (Employees/Vendors)	✅ Yes	Rule 2(1)(c)(xii)/(xiii)	Must be for performance or employment contract
13	Cancelled Order - Customer Advance Unadjusted	✅ Yes	Not adjusted	Still reportable if not refunded within 365 days
14	ESOP / Bonus / Gratuity Fund Advances	✅ Yes	Rule 2(1)(c)(xi)	Deferred employee benefits – reportable
15	Advance Received from Foreign Holding Co.	✅ Yes (if outstanding)	FEMA + Rule 2(1)(c)(ix)	Not a deposit but must be reported
16	GST Refund or Statutory Receivable	❌ No	Not in the nature of deposit	Not a liability, hence not reportable
17	Advance from customer settled within 365 days	❌ No	Rule 2(1)(c)(xviii)	Exempt if within time limit
18	Security Deposit fully refunded before 31-Mar-25	❌ No	Not outstanding	No need to report
19	Government Grant/Subsidy	❌ No	Not loan or deposit	Not in scope of DPT-3
20	Share Capital, Premium, Bonus Shares	❌ No	Equity transaction	Not a financial liability

5. Certification Requirements

Transaction Type	Report in DPT-3	Auditor Certification?
Deposits	Part I	✅ Yes
Exempt Receipts	Part II	❌ No
NIL Return	NIL	❌ No

6. Action Steps

Step	Description
1️⃣	Review books of accounts and trial balance as of 31-Mar-2025.
2️⃣	Refer to enclosed Excel Template for classification (Rule 2(1)(c) wise).
3️⃣	Fill details like Name of lender, Amount, Date, Nature, Clause, Outstanding balance.
4️⃣	Identify and separate actual deposits, if any.
5️⃣	Coordinate with Statutory Auditor for certification if deposits are included.
6️⃣	If there are no such transactions, intimate for NIL return preparation.

7. Consequences of Non-Compliance

Failure to file DPT-3 can lead to severe penalties under Section 76A, including:

• Fine up to ₹1 crore or twice the amount of deposit, whichever is lower

• Daily penalties for continued default

• Liability on directors/officers in default

Final Note

Even if your company has no deposits, if you have any outstanding receipts exempt under Rule 2(1)(c), you must file DPT-3 – Part II.

For assistance with classification or filling the Excel template, feel free to reach out. It is advised to complete internal checks well in advance of 30 June 2025 to avoid last-minute delays.

NRI Residential Status and Black Money Laws: An In-Depth Analysis of FEMA vs. Income Tax Act for AY 2025-26

Understanding the residential status of an individual is critical for determining tax liabilities, compliance requirements, and reporting obligations under Indian law. For Non-Resident Indians (NRIs) and residents alike, the criteria for residential status under the Income Tax Act (ITA) and FEMA (Foreign Exchange Management Act) play a pivotal role in shaping their tax responsibilities. With the increasing emphasis on combating black money and improving transparency, the Indian government has implemented stringent rules governing the disclosure of foreign assets, income, and financial interests. These laws directly impact NRIs, making it essential to stay informed about the regulations and ensure compliance.

1. Residential Status under the Income Tax Act (ITA) and FEMA

Income Tax Act – Criteria for Residential Status

Under Section 6(1) of the Income Tax Act (ITA) 1961, the residential status of an individual is determined based on their physical presence in India during a financial year. This is a crucial factor in determining whether the income earned by an individual will be taxed in India or not.

• Resident: An individual is considered a Resident if they have been in India for 182 days or more during the financial year or for 60 days or more in the current year, with an aggregate of 365 days or more during the previous four years.

• Non-Resident (NR): If the individual fails to meet the above criteria, they are considered a Non-Resident (NR).

• Resident but Not Ordinarily Resident (RNOR): This status applies to individuals who qualify as residents but fail to meet specific conditions regarding their stay in India over the past years. These conditions are typically met by NRIs who have been in India for less than 2 years in the last 10 years or for fewer than 729 days in the last 7 years.

FEMA – Residential Status

The Foreign Exchange Management Act (FEMA), 1999, is another critical statute that governs foreign exchange and investments in India. It provides guidelines for determining whether an individual is a resident or non-resident under Indian law for the purpose of holding foreign assets or making foreign investments.

• Resident under FEMA: An individual is considered a resident under FEMA if they have been in India for more than 182 days during the preceding financial year, excluding certain cases such as employment or business assignments abroad.

• Non-Resident under FEMA: If the individual does not meet the FEMA residency criteria, they are deemed a non-resident for the purposes of holding foreign assets and investments.

2. Black Money and Disclosure Requirements for NRIs

The Indian government has taken significant steps to curtail the movement of black money and to prevent the concealment of foreign assets. Black money refers to illicit wealth or income that has been hidden or not declared to tax authorities, often acquired through illegal means. NRIs are required to comply with disclosure requirements related to foreign assets and foreign income under various provisions of Indian law.

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

To address the issue of black money, the Indian government enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. This law specifically focuses on individuals who have hidden foreign income or assets and failed to disclose them to Indian authorities.

• Section 3: Requires Indian residents and NRIs to disclose their foreign assets and income. Any undisclosed foreign income or asset is liable to be taxed.

• Section 4: The undisclosed foreign income or assets are taxed at a rate of 30% of the total value. A penalty of up to 90% of the tax due can be levied on those who fail to report their foreign assets.

• Section 5: Allows for the mandatory disclosure of foreign bank accounts, investments, and properties in the annual income tax return.

Income Tax Act – Disclosure of Foreign Assets

Under Section 139 of the Income Tax Act, taxpayers are required to disclose their foreign income and assets while filing their tax returns. This includes reporting foreign bank accounts, investments, and properties. The requirement is critical for both residents and NRIs, especially as India has signed agreements with multiple countries for the automatic exchange of tax information under the Common Reporting Standard (CRS).

• Form ITR-2: NRIs are required to fill out this form to disclose foreign income, assets, and bank accounts. Any non-disclosure or misreporting can attract heavy fines and penalties under the Income Tax Act.

• Penalties for Non-Disclosure: Failure to report foreign assets can lead to penalties under Section 271(1)(c) and Section 270A of the Income Tax Act. Penalties range from 100% to 300% of the tax sought to be evaded.

3. Case Law on NRI Residential Status and Black Money Laws

Case Reference: Union of India vs. Raghubir Saran (1974) 97 ITR 572 (SC)

In the Union of India vs. Raghubir Saran case, the Supreme Court deliberated on the issue of residential status under the Income Tax Act. The case is crucial because it emphasized the importance of determining physical presence and the intention of staying in India to determine tax liability.

Key Points from the Case:

• The Supreme Court ruled that an individual’s physical presence in India and their intention to reside in India or abroad is a determining factor in establishing residential status for tax purposes.

• The case reinforced the need for genuine disclosure of foreign income and assets, warning against attempts to evade tax on foreign income by concealing assets abroad.

Citation:

Union of India vs. Raghubir Saran (1974) 97 ITR 572 (SC)

This case serves as a guiding reference for interpreting residential status under the Income Tax Act and clarifies the role of intentions and stay duration in determining tax liabilities. For NRIs, it underscores the importance of accurately declaring their foreign income and assets to avoid complications under Indian tax laws.

4. Compliance Requirements and Strategic Considerations for NRIs

• Filing of Tax Returns: NRIs must file their tax returns every year, regardless of whether they earn income in India. Non-disclosure of foreign income or assets can lead to severe penalties under the Income Tax Act and Black Money Act.

• Tax Liabilities for RNOR: RNOR individuals are exempt from tax on foreign income that is earned abroad, provided it is not brought to India. However, they must still disclose foreign bank accounts and foreign investments.

• Penalties for Non-Disclosure: Non-disclosure of foreign assets or income can lead to hefty fines under the Black Money Act and Income Tax Act. NRIs must ensure that they comply with these regulations to avoid being penalized for evasion.

• Tax Transparency: India has entered into automatic exchange of information agreements with several countries to combat tax evasion. As such, NRIs must proactively disclose their foreign income and assets to avoid the risks of black money.

Conclusion

For Assessment Year 2025-26, NRIs must remain vigilant about their residential status under both the Income Tax Act and FEMA. In addition to these regulations, the Black Money Act imposes stringent disclosure requirements regarding foreign assets and income. Non-compliance with these laws could lead to substantial fines and legal repercussions. By ensuring proper disclosure, adhering to tax compliance, and understanding the case law surrounding residential status, NRIs can navigate the tax landscape successfully and avoid costly penalties.

Citation References:

• Union of India vs. Raghubir Saran (1974) 97 ITR 572 (SC)

This case provides key insights into determining residential status and underlines the importance of genuine disclosures of foreign income and assets for NRIs.

Understanding Penalties under the Black Money Act: An Analysis of the Sanjay Bhupatrai Shah Case

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA) aims to tackle the issue of undisclosed foreign assets held by Indian residents. A key provision under this law concerns the imposition of penalties for failing to disclose foreign assets in the income tax returns. This article analyzes a significant case involving penalty provisions under Section 43 of the Black Money Act. The case of Sanjay Bhupatrai Shah v. Dy. Director of Income-tax offers a critical judicial interpretation, clarifying when a penalty can be imposed and the role of beneficial ownership in the application of the Act.

Sanjay Bhupatrai Shah v. Dy. Director of Income-tax, [2025] 173 taxmann.com 316 (Mumbai)
Judgment by: Income Tax Appellate Tribunal, Mumbai

Case Background

The case, Sanjay Bhupatrai Shah v. Dy. Director of Income-tax ([2025] 173 taxmann.com 316, Mumbai), revolves around the non-disclosure of a foreign asset in the income tax return for the assessment years 2019-20, 2020-21, and 2021-22. The assessee, Sanjay Bhupatrai Shah, was listed as a joint holder of an investment in the ASK Global Strategies Fund (Mauritius), alongside his son. The Assessing Officer (AO) discovered that Shah had not disclosed this foreign asset in the required schedule of his income tax returns.

As a result of this omission, the AO initiated penalty proceedings under Section 43 of the Black Money Act, which imposes a penalty for failing to disclose foreign assets. The AO imposed a penalty of Rs. 10 lakhs for each year. However, Shah contested the penalty, arguing that he was not the beneficial owner of the asset, but only a joint holder for administrative purposes, with his son being the actual beneficial owner. Shah’s son had already disclosed the foreign asset in his return.

Legal Issues in the Case

The primary issue in this case was whether a taxpayer who is a joint holder of a foreign asset, but not the beneficial owner, is required to disclose that asset under Section 43 of the Black Money Act. The legal issues addressed included:

1. Beneficial Ownership vs. Joint Ownership: Does being a joint holder of a foreign asset impose an obligation to disclose the asset if the taxpayer is not the beneficial owner?

2. Bona Fide Belief: Can the taxpayer’s genuine belief that he was not required to disclose the asset serve as a valid defense for non-disclosure?

3. Judicial Discretion in Imposing Penalties: Should penalties be imposed automatically, or should the AO exercise discretion based on the circumstances?

Tribunal’s Analysis and Key Findings

1. Ownership and Disclosure Obligations: The Tribunal clarified that joint ownership alone does not automatically create a requirement for disclosure if the taxpayer is not the beneficial owner. In this case, Shah was not the beneficial owner of the asset but was merely a joint holder for administrative convenience. Since Shah did not derive any benefit from the asset, the Tribunal ruled that he was not obligated to disclose it.

2. Bona Fide Belief as a Valid Defense: The Tribunal accepted Shah's argument that he acted under a bona fide belief that he was not required to disclose the asset. This defense was considered reasonable, especially as his son, the actual beneficial owner, had disclosed the foreign asset in his return. The Tribunal acknowledged that taxpayers acting in good faith and making reasonable disclosures should not be penalized.

3. Discretion in Imposing Penalties: The Tribunal emphasized that penalties under Section 43 are not automatic. The AO has discretion in applying penalties, which must be based on a careful assessment of the facts and circumstances. Given the reasonable belief held by Shah, the Tribunal ruled that the penalty was unjustified.

4. Scope of the Black Money Act: The Tribunal also ruled that the Black Money Act applies to undisclosed foreign assets. Domestic financial transactions, such as loans between family members, are not covered by this Act, reinforcing the Act’s focus on foreign assets.

Tribunal’s Ruling

The Income Tax Appellate Tribunal (ITAT) in Mumbai ruled in favor of the assessee, Sanjay Bhupatrai Shah. The Tribunal deleted the penalty of Rs. 10 lakhs for each of the assessment years 2019-20, 2020-21, and 2021-22, holding that the failure to disclose the foreign asset was due to Shah’s bona fide belief that he was not the beneficial owner and was not required to disclose the asset.

The Tribunal’s decision highlighted that penalties under the Black Money Act should be imposed only when there is a clear willful failure to disclose, and in cases where the taxpayer acted in good faith, the penalty should be waived.

Legal Principles Established in the Case

1. Judicial Discretion in Penalty Imposition: Penalties under the Black Money Act are not automatic; the AO must assess the facts carefully before imposing penalties.

2. Joint Ownership Does Not Impose Disclosure Obligations: Mere joint ownership does not necessitate disclosure if the taxpayer is not the beneficial owner of the asset.

3. Bona Fide Belief as a Valid Defense: A genuine belief that the taxpayer is not required to disclose an asset can serve as a valid defense against penalty imposition.

4. Black Money Act’s Scope: The Act applies specifically to undisclosed foreign assets and does not extend to domestic transactions like loans between family members.

Conclusion and Implications:

The case of Sanjay Bhupatrai Shah v. Dy. Director of Income-tax offers an important clarification regarding the penalty provisions under the Black Money Act. It underscores that penalties are not automatically imposed and that taxpayers acting in good faith and in the belief that they are not in violation of the law should not be penalized. This case also reinforces the distinction between joint ownership and beneficial ownership, stressing that joint ownership alone does not trigger disclosure requirements under the Act.

For taxpayers, the case serves as a reminder to make accurate and transparent disclosures of foreign assets while ensuring that they are fully aware of their obligations. It also emphasizes the importance of consulting with tax professionals when in doubt about ownership status and disclosure requirements.

This legal opinion examines the eligibility of Input Tax Credit (ITC) on construction-related goods and services, specifically focusing on air conditioners as a case study. The analysis is conducted in the light of Section 17(5)(d) of the CGST Act, 2017, and incorporates the amendments made to the section from 01st October 2023.

The examination of air conditioners will take into account various possible scenarios, such as their use in commercial buildings, factories, and residential premises, to determine their eligibility for ITC based on the end-use, functionality, and taxable supply tests.

Additionally, this opinion includes relevant judicial precedents and interpretations that inform the understanding of ITC eligibility for construction-related goods under the current GST framework.

2. Statutory Framework: Section 17(5)(d) of the CGST Act

2.1 Pre-Amendment Position (before 01.10.2023)

Prior to October 1, 2023, under Section 17(5) of the CGST Act, ITC was disallowed on goods and services received for the construction of immovable property (other than plant and machinery) intended for self-use or own account.

The relevant provision stated:

"Input tax credit shall not be available in respect of goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account, even when used in the course or furtherance of business."

This created ambiguity in relation to the eligibility of ITC for construction materials, such as cement, bricks, steel, and air conditioners.

2.2 Post-Amendment Position (from 01.10.2023)

With the amendment to Section 17(5)(d) effective from October 1, 2023, ITC is now available for construction of immovable property when it is undertaken for the purpose of making taxable outward supplies. The amended provision reads:

Proviso: ITC is allowed for construction of immovable property when the property is constructed for making taxable supplies such as leasing or renting, provided the construction is part of a business activity.

This amendment allows businesses that intend to lease or rent out property to claim ITC on goods and services used in the construction of such property, as long as the end-use is for taxable activities.

3. Judicial Interpretation and Key Cases

3.1 Safari Retreats Pvt. Ltd. v. Chief Commissioner of CGST (2023)

In the Safari Retreats case, the issue was whether ITC could be claimed on construction materials for a commercial building that was eventually leased out. The Supreme Court ruled that:

• The construction of the building was primarily for own account (for the company’s leasing business), and the property was not being directly used for taxable outward supply at the time of construction.

• The Court disallowed ITC on materials used for constructing the immovable property as it was for self-use and did not qualify under the definition of taxable supply.

Rationale: The "own account" test was a key factor in denying ITC. Even though the final use of the property was for leasing (a taxable supply), the building was constructed for internal use initially, which did not qualify for ITC.

3.2 Larsen & Toubro Ltd. v. State of Karnataka (2013)

In this case, the Supreme Court allowed ITC on works contract materials used in construction, recognizing that the construction was part of a taxable business activity.

• L&T constructed a property as part of a works contract to sell or lease, and ITC was allowed on materials like cement and steel, as the project was intended for commercial purposes, which qualified as taxable supply.

Rationale: This case demonstrated that construction for business purposes (such as for sale or lease) could allow ITC on goods like cement and steel used in construction, as they were tied to taxable supplies.

3.3 KEI Industries Ltd. (2022, AAR Gujarat)

In the KEI Industries case, the company sought ITC on various construction materials, including air conditioners and transformers used for setting up a factory.

• The AAR Gujarat ruled that:

  • Air Conditioners were part of the immovable property and were used for comfort purposes, and therefore, ITC was denied.

  • Transformers, however, were plant and machinery essential for the operation of the factory, and ITC was allowed.

Rationale: The functionality test was crucial here. Air conditioners were considered as part of the building’s comfort infrastructure, making them ineligible for ITC. In contrast, transformers were considered essential machinery that enabled business operations, making them eligible for ITC.

4. Analysis of ITC Eligibility on Air Conditioners in Different Scenarios

4.1 Scenario 1: Air Conditioners in Commercial Buildings (Leasing)

• Use: Air conditioners are installed in a commercial building intended for leasing to tenants, with the rental income being subject to GST.

• Analysis: Air conditioners in this case would be used in the course of making taxable outward supplies (rental income subject to GST). Therefore, ITC would be eligible under the amended provisions of Section 17(5)(d).

  Test Application:

  • End-use: The property (including air conditioners) is used for taxable supply (rental income).

  • Functionality: The air conditioners are used for comfort but do not impede the functioning of the business (the property is rented out for tenants’ use).

  • Taxable supply: The renting of commercial property is subject to GST.

  Conclusion: Eligible for ITC.

4.2 Scenario 2: Air Conditioners in Residential Property (For Personal Use)

• Use: Air conditioners are installed in a residential property for personal comfort.

• Analysis: In this case, the air conditioners are part of an immovable property used for personal use. As per the GST law, ITC on goods used for personal purposes is not allowed.

  Test Application:

  • End-use: The air conditioners are used for personal purposes, which is not a taxable supply.

  • Functionality: Air conditioners are part of the immovable property, intended for comfort rather than business operations.

  • Taxable supply: The use is non-taxable (no business activity).

  Conclusion: Ineligible for ITC.

4.3 Scenario 3: Air Conditioners in Factory (Used for Production)

• Use: Air conditioners are installed in a factory to maintain optimal working conditions for machinery or employees involved in the production process.

• Analysis: In this case, the air conditioners are essential for the operation of the business, enabling the functioning of machinery and ensuring that employees work efficiently. Since the air conditioners are used in the course of business, ITC may be eligible.

  Test Application:

  • End-use: The air conditioners are used in the business process to support production.

  • Functionality: The air conditioners support the functioning of the factory and are not merely part of the building’s comfort infrastructure.

  • Taxable supply: If the factory’s products are sold or the output is used for taxable supplies, the air conditioners qualify as essential business equipment.

  Conclusion: Eligible for ITC as they are used for business operations.

5. Tests for ITC Eligibility: Recap

5.1 End-Use Test

This test examines the purpose for which the goods (e.g., air conditioners) are used. If the goods are used for taxable business purposes (such as leasing or production), ITC is eligible. If they are used for personal purposes or in a non-taxable manner, ITC is denied.

5.2 Functionality Test

The functionality test looks at whether the goods form part of the plant and machinery or are essential for the operation of the business. Goods such as air conditioners that serve as comfort items (not part of the production process) may be ineligible for ITC unless used directly in business operations.

5.3 Taxable Supply Test

This test assesses whether the goods contribute to a taxable supply. If the goods are used to produce or facilitate taxable output (such as rent or goods sold), ITC is eligible. If they are part of a non-taxable activity, ITC is denied.

6. Conclusion

6.1 Pre-01.10.2023 Position: Under the old law, ITC was generally not allowed for construction materials used in immovable property, especially when the property was constructed for self-use.

6.2 Post-01.10.2023 Amendment: The amended Section 17(5)(d) now allows ITC on construction-related goods used for buildings that are intended for taxable supply (e.g., leasing or renting). The end-use, functionality, and taxable supply tests should be applied rigorously to determine ITC eligibility.

6.3 Air Conditioners: ITC on air conditioners is eligible when they are used in the course of taxable supplies (e.g., commercial leasing or factory production). However, ITC is denied when used for personal comfort or in non-taxable residential premises.