Income-Tax Automated Emails on AIS Mismatch, Foreign Assets & High-Value Transactions

By CA Surekha S Ahuja

Legal Validity, Real Impact and the Correct Response before 31 December 2025

Data can alert, but only law can decide.

Over the last few weeks, a large number of taxpayers have received automated emails from the Income-tax Department flagging AIS mismatches, cash deposits, property transactions, and alleged non-disclosure of foreign assets or foreign income. The timing of these communications — just before 31 December 2025, the last date for filing a belated or revised return for Assessment Year 2025-26 — has led to widespread concern.

Although these emails are officially positioned as facilitative compliance nudges, their tone and presentation have prompted many taxpayers to treat them as enforcement-driven directives. As a result, even legally correct returns are being revised defensively, explanations are being replaced with artificial admissions, and fear is overtaking legal reasoning.

This post examines the real legal status of these emails, the systemic reasons behind AIS mismatches, the special sensitivity surrounding foreign asset alerts, and most importantly, the correct action plan a taxpayer should adopt before the 31-12-2025 deadline.

Core Content

AIS is an information tool, not a legal conclusion

The Annual Information Statement (AIS) is fundamentally a data aggregation system. It compiles transaction-level information reported by banks, employers, registrars, deductors, financial institutions, and overseas reporting mechanisms. Its purpose is to enhance visibility and transparency.

However, AIS does not apply the Income-tax Act. It does not determine the correct head of income, evaluate accrual versus receipt, test ownership or beneficial interest, apply DTAA provisions, or incorporate judicial interpretation. All these functions are discharged only through the Income-tax Return, which represents the taxpayer’s statutory act of self-assessment.

Legally, AIS is subordinate to the return. Treating AIS as the benchmark reverses the very architecture of the tax law.

Why AIS mismatches are common and often unavoidable

Most mismatches arise not from concealment, but from structural differences between data reporting and tax law.

TDS sections are frequently mistaken for charging provisions. Rent reported under section 194I does not automatically become “Income from House Property”. Commission-type receipts may not always be business income. Section 194Q deductions often relate to capital assets rather than trading activity. AIS follows deduction logic; the Act follows charging logic.

AIS also flags the movement or deployment of funds — cash deposits, fixed deposits, property purchases — even though tax law taxes income, not explained use of funds. A transaction being visible does not, by itself, make it taxable.

Timing differences further widen the gap. AIS captures payment or TDS deduction events, whereas taxability depends on accrual, transfer, or crystallisation under the Act. Chronology is system-driven; chargeability is law-driven.

Foreign asset and foreign income emails: high fear, low legal precision

Emails alleging non-disclosure of foreign assets or foreign income have the greatest psychological impact because they are implicitly associated with black money concerns. However, these alerts are often generated without applying essential legal filters such as residential status, ownership versus signatory authority, period of holding, or DTAA allocation of taxing rights.

As a result, assets held during non-resident years, employer-controlled ESOP or RSU holding accounts, overseas pensions governed by treaty provisions, or mere signatory authority on foreign accounts are mechanically flagged as “non-disclosure”.

Legally, every foreign asset is not reportable, and every reporting lapse is not an undisclosed foreign asset. Wilful intent is central to penal consequences — a nuance entirely absent from automated communications. In such cases, blind revision can create exposure that did not legally exist earlier.

Legal character and enforceability of these emails

These emails are system-generated administrative communications. They are not notices issued under sections 143, 147, 148 or 156 of the Income-tax Act. They do not initiate assessment, reassessment, penalty, or demand proceedings.

Accordingly, they do not create tax liability, do not reverse the burden of proof, and do not mandate revision of returns. A non-statutory email cannot achieve what the statute itself requires a formal legal process to accomplish.

The real impact: where analytics begin to overreach

Despite their limited legal force, these emails have had a disproportionate behavioural impact. Correct returns are being revised merely to “match AIS”. Income is being re-characterised without legal necessity. Explanations are being replaced by admissions.

In foreign asset cases especially, unnecessary revision can disturb DTAA positions, create artificial admissions, and expose taxpayers to risks under laws that were never applicable. Compliance is increasingly being driven by tone and fear, rather than legal correctness.

What the 31 December 2025 deadline actually means

The 31-12-2025 deadline closes the window for voluntary revision. It does not convert suspicion into default. It does not make a legally correct return incorrect. It merely limits opportunity — not legality.

The correct professional response framework

The decisive question is not what the email alleges, but whether the original return is incorrect in law.

If income has been correctly disclosed — even if classified differently from AIS — an explanation or AIS feedback is sufficient.
If a genuine factual omission or error is discovered by the taxpayer, revision before 31-12-2025 is prudent and protective.
If the return is legally correct, revision merely to align with system tags is unnecessary and may be harmful.

Correctness must precede conformity.

Closure

The Income-tax Department is justified in using analytics to improve compliance. What analytics cannot do is replace legal interpretation, contextual analysis, and adjudication.

AIS is a risk-identification tool, not a substitute for assessment. The Income-tax Act continues to rest on self-assessment guided by law, not automation driven by tone.

Correctness is compliance.
Explanation precedes correction.
Law overrides algorithms.

Until systems internalise legal nuance, taxpayers must respond with reasoned clarity — not reflexive revision.

Foreign Old-Age Benefits, Social Security, Carbon Credits & Family-Linked Foreign Receipts

 By CA Surekha S Ahuja

Complete Disclosure & Notice-Defence Guide -Indian Income-tax Law (AY 25-26)

Why Income-tax Notices Are Being Issued — and How to Respond Correctly Without Panic

In the CRS era, the Income-tax Department already knows about your foreign accounts, pensions and credits. Notices are not about intention — they are about disclosure.

Why This Issue Has Suddenly Become Critical for Indian Families

Thousands of Indian residents — especially senior citizens and parents whose children are settled abroad — are receiving Income-tax notices for:

• Foreign old-age pensions and social security

• Welfare and senior-citizen allowances

• Carbon credits and green incentives

• Foreign bank accounts held jointly with children

• Foreign properties where names appear only “for convenience”

Most recipients genuinely believed:

• “There was no TDS”

• “The money was spent abroad”

• “It was a welfare benefit”

• “It was my child’s account”

However, under CRS (Common Reporting Standard) and FATCA, foreign banks, governments and platforms automatically report this information to India.

Notices are issued because disclosure is missing — not because tax evasion is proven.

This guide explains what must be disclosed, what is taxable, what is not, and how to fix past omissions, in the simplest possible language.

THE GOLDEN RULE 

Residential Status Decides Everything

Status	What India Can Tax	What Must Be Disclosed
Resident & Ordinarily Resident (ROR)	Global income	All foreign assets & accounts
Resident but Not Ordinarily Resident (RNOR)	Limited	Generally no Schedule FA
Non-Resident (NR)	Indian source only	No foreign asset disclosure

🔴 CRS does not check residential status
🟢 Indian tax law applies it after data is received

COMPLETE LIST OF FOREIGN OLD-AGE & SOCIAL SECURITY RECEIPTS

Foreign Old-Age Pensions / State Pensions

Examples:

• Canada OAS

• UK State Pension

• EU government pensions

• Australia Age Pension

✔ Usually paid without TDS
✔ Still taxable in India if ROR
✔ Must be reported in Schedule FSI
✔ Foreign account must be disclosed in Schedule FA

Social Security / Contributory Pensions

Examples:

• Canada CPP

• US Social Security

• EU statutory schemes

✔ Covered under DTAA Article 18 (Pensions)
✔ India generally gets taxing right for residents
✔ FTC available only if tax actually paid abroad

Survivor, Spousal & Disability Benefits

Important clarification:

• These are not inheritances

• They are income replacements

✔ Periodic receipts taxable
✔ Lump-sum arrears taxable in year of receipt
✔ Disclosure mandatory as long as account exists

Guaranteed Income Supplements & Senior-Citizen Welfare Allowances

Often misunderstood as “non-income”.

✔ If cash is received, it is income
✔ No blanket exemption under Indian law
✔ Welfare label does not remove disclosure obligation

Medical, Care & Elder Support Payments

Type	Indian Treatment
Expense reimbursement	Not income
Fixed monthly allowance	Taxable
Home-care stipend	Taxable
Cash-value health plans	FA disclosure

⚠ Even if not taxable, account disclosure remains mandatory.

CARBON CREDITS, CARBON POINTS & GREEN INCENTIVES

(High-Notice-Risk Area)

Carbon Credits / Carbon Points

Examples:

• Carbon credits sold

• Carbon points converted to cash

• Climate incentive payments

Event	Tax Treatment
Credits generated	Asset
Credits sold / monetised	Capital gains
Incentive payments	Income
Wallet holding credits	FA disclosure

✔ Tax arises when monetised, not when earned
✔ CRS visibility starts at conversion or credit

Green Energy & Sustainability Incentives

Examples:

• Solar feed-in tariffs

• EV incentives

• Environmental bonuses

✔ Recurring cash → taxable income
✔ Capital subsidy → capital receipt (case-specific)
✔ Disclosure of receiving account mandatory

RECEIPTS LINKED TO CHILDREN SETTLED ABROAD

Gifts & Maintenance from Children

✔ Genuine gifts not taxable
❌ Still disclose foreign account if credited abroad
✔ Gift documentation strongly recommended

Joint Foreign Bank Accounts with Children

Most common reason for notices

✔ Income taxed only to real owner
✔ Schedule FA must be filed by every joint holder
✔ Full peak balance disclosed (not proportionate)

CRS tracks names, not family understanding.

Parents Named in Foreign Properties of Children

✔ Schedule FA (Table C) mandatory
✔ Ownership nature must be specified
✔ Rental income taxed only if legally belongs to parent

Foreign Credit Cards / Supplementary Cards

✔ Card itself is not income
✔ Linked bank / credit account may be reportable
✔ Spending is irrelevant — name linkage matters

WHAT IS NOT A VALID DEFENCE

The following do NOT remove disclosure or taxability:

❌ No TDS
❌ Below basic exemption limit
❌ Money spent abroad
❌ Not remitted to India
❌ Welfare / social security label
❌ Joint account
❌ Children sent the money

WHY NOTICES ARE BEING ISSUED NOW

Because:

• CRS reports balances, not explanations

• Matching is automated

• Schedule FA non-filing is a red flag

• Black Money Act focuses on non-disclosure

SIMPLE ACTION PLAN (NOTICE-READY)

1. Prepare a Global Asset & Receipt List

2. Check residential status every year

3. Disclose every foreign account where name appears

4. Tax income only in hands of real owner

5. File revised return by 31 December 2025 if required

6. Never ignore a notice — reconcile first

If your name appears anywhere abroad — bank, pension, property, credit or wallet — India already has the information.
Disclosure brings peace. Silence invites notices.

 

Export of Services vs Intermediary under GST: A Judicially Settled Guidance Framework for ITC Refund Eligibility

 By CA Surekha S Ahuja

In GST law, Input Tax Credit is not defeated by cross-border group structures; it is defeated only when the Indian entity abandons its role as a supplier and reduces itself to a facilitator.

Introduction: Why This Issue Needed a Guiding Framework

The classification of cross-border services rendered by Indian entities to overseas recipients has become one of the most contentious areas under GST. At stake is not merely taxability, but the very survival of accumulated Input Tax Credit (ITC).

If the service qualifies as an export of services, it is zero-rated under section 16 of the IGST Act, and refund of unutilised ITC becomes a statutory right.
If the same service is branded as an intermediary service, the place of supply shifts to India, GST becomes payable, and ITC refund is denied.

For years, tax authorities have attempted to stretch the intermediary definition—often relying on words such as assist, support, coordinate, or group entity. High Courts have now decisively intervened and drawn a clear, legally enforceable line.

This post distils that line into a guiding framework, anchored in statute, economics, and binding judicial precedent.

Statutory Architecture: Rule vs Exception

Export of Services — Section 2(6), IGST Act

Export of services is a complete code. Once its five conditions are satisfied, the supply:

• Qualifies as export

• Becomes zero-rated under section 16

• Triggers refund entitlement under section 54

Intermediary — Section 2(13), IGST Act

The definition is narrow and exclusionary. Critically, it excludes:

“a person who supplies such services on his own account”

Courts have repeatedly held that this exclusion governs the entire analysis. Intermediary is not the starting point; it is the exception that must be strictly proved.

Judicial Method: How Courts Actually Decide ITC Allowability

Across decisions such as Infodesk India (Gujarat HC), Genpact India (P&H HC), Ernst & Young (Delhi HC) and OHMI Industries (Delhi HC), courts apply a substance-driven test, not a semantic one.

They ask four fundamental questions:

1. Who supplies the service?

2. Who bears the operational and tax risk?

3. Who controls pricing and earns profit?

4. Is any third-party supply being arranged or facilitated?

The answers to these questions determine ITC entitlement.

When ITC Refund Is ALLOWABLE — The Judicially Accepted Conditions

 Services Are Supplied on Own Account

Guiding reasoning:
A person supplying services on own account supplies the main service itself, not a facilitation layer.

Courts have consistently held that once services are performed, owned, and delivered by the Indian entity, the exclusion in section 2(13) applies automatically.

Practical indicators:

• Defined scope of work

• Deliverables owned by the Indian entity

• Performance responsibility lies with the Indian entity

Judicial support:
Ernst & Young and Genpact clearly recognise that backend, professional, and operational services supplied directly are exports when rendered on own account.

Contract Is Principal-to-Principal

Guiding reasoning:
An intermediary relationship cannot exist without three distinct parties. A purely bipartite agreement legally undermines any intermediary allegation.

In Infodesk, the Gujarat High Court categorically held that in the absence of a third-party supply being arranged, intermediary classification is unsustainable.

Practical indicators:

• Agreement only between Indian entity and foreign recipient

• No authority to bind third parties

• No customer contracting on behalf of another

Consideration Includes a Profit Element

Guiding reasoning:
Profit is the economic signature of independence.
Agents earn commission. Principals earn margin.

A cost-plus model with mark-up demonstrates:

• Independent pricing logic

• Entrepreneurial character

• Absence of agency behaviour

Courts have treated profit element as strong economic evidence against intermediary classification.

Indian Entity Bears Operational and Tax Risks

Guiding reasoning:
Risk allocation distinguishes a supplier from a conduit.

Where the Indian entity bears:

• Manpower costs

• Compliance obligations

• Tax exposure

• Delivery risk

it functions as an independent service provider, not as a facilitator.

In Infodesk, contractual clauses placing all costs and taxes on the Indian subsidiary were decisive.

No Third-Party Supply Is Arranged or Facilitated

Guiding reasoning:
Intermediary status arises only when the supplier arranges or facilitates a supply between two others.

Courts have consistently rejected the notion that:

• Internal coordination

• Support functions

• Group-level assistance

amount to facilitation.

Key test:
If no third-party contract comes into existence because of the Indian entity’s role, intermediary classification fails.

Outcome (Authoritative Position)

✔ Supply qualifies as export of services
✔ Zero-rated under section 16
✔ Refund of unutilised ITC under section 54 is a matter of right

When ITC Refund Is NOT ALLOWABLE — The Judicially Recognised Triggers

Supplier Merely Arranges or Facilitates a Supply

Where the Indian entity:

• Brings buyer and seller together

• Enables execution of another’s supply

• Does not itself deliver the main service

courts have upheld intermediary classification.

Remuneration Is Commission-Based

Commission or transaction-linked consideration indicates:

• Lack of pricing autonomy

• Absence of entrepreneurial risk

• Agency character

Courts treat this as a classic intermediary marker.

Risk and Pricing Controlled by Foreign Principal

If the Indian entity:

• Has no pricing discretion

• Bears no performance risk

• Acts entirely on instructions

it lacks the economic substance of a principal supplier.

Indian Entity Acts Merely as a Conduit

Where services flow through the Indian entity without substantive value addition, ITC accumulation cannot be refunded, as the supply is not on own account.

Outcome

✖ Place of supply shifts to India
✖ Supply becomes taxable
✖ Refund of accumulated ITC is legally barred

Why This Distinction Is Substantive, Not Cosmetic

Courts have unequivocally rejected:

• Literal reading of agreement language

• Over-reliance on words like assist or support

• Presumption of intermediary merely due to group structure

Instead, they apply a combined legal–economic–functional test.
Once principal supply is established, ITC refund is not discretionary—it is statutory.

Closure: The Settled Legal Compass

The judicial position is now clear and consistent:

Intermediary is a narrow exception. Export of services is the governing rule.

Where an Indian entity supplies services independently, earns profit, bears risk, and does not arrange third-party supplies, denial of ITC refund is not merely incorrect—it is unsustainable in law.

This post is intended to serve as a guiding reference—for structuring contracts, defending refund claims, and ensuring GST positions are aligned with judicial reality.

In GST, substance decides ITC—and substance now has strong judicial protection.

GSTR-9 & GSTR-9C for FY 2024-25

By CA Surekha S Ahuja

Why Annual GST Returns Have Become Continuity Statements — and How CAPS Now Judges Your Compliance

In the CAPS era, GST annual returns are not checked for totals.
They are tested for consistency, continuity, and credibility across years.

 For many years, GSTR-9 and GSTR-9C were treated as summary compliance forms — annual compilations of what had already been reported in GSTR-1 and GSTR-3B.

That understanding is now outdated.

From FY 2024-25 onwards, the GST system processes annual returns through CAPS (Common Annual Processing System) — an internal GSTN framework that does behaviour-based reconciliation, not form-based validation.

The system no longer asks only:

“Is tax paid?”

It increasingly asks:

• When was ITC claimed?

• Why was it reversed or reclaimed?

• How does this year connect with the previous and next year?

As a result, most GST notices today arise not due to tax short-payment, but due to broken table-to-table and year-to-year linkages.

This article explains how to file GSTR-9 and GSTR-9C for FY 2024-25 in a manner that is:

• CAPS-aligned

• cross-referenced

• litigation-safe

The New Compliance Philosophy: Five Rules That Now Matter Most

Before diving into tables, it is important to internalise five governing principles that now shape annual GST scrutiny:

1. Every ITC must have a time identity
   Whether it belongs to the current year, a prior year, or the next year must be clearly disclosed.

2. Every ITC movement must have a reason
   Claim, reversal, reclaim, or permanent loss — silence is no longer acceptable.

3. Timing differences must be disclosed, not adjusted
   Annual returns reward transparency, not cosmetic netting-off.

4. Cross-year continuity matters more than year-wise symmetry
   A small difference is defensible if logically explained across years.

5. CAPS prefers explanation over perfection
   Unexplained alignment is riskier than explained difference.

GSTR-9 for FY 2024-25: Understanding the Return as a System Narrative

Tables 4 & 5 — Outward Supplies: Where the Story Begins

Tables 4 and 5 establish the nature and taxability of turnover — taxable, exempt, nil-rated, non-GST, exports, and reverse charge supplies.

Why this matters under CAPS:

• Table 4 & 5 must align with GSTR-1

• They must logically flow into Table 9 (Tax Payable)

• They must reconcile with GSTR-9C Table 5

Unexplained differences here often trigger turnover mismatch communications, even where tax is fully paid.

Table 6 — ITC Architecture (The Most Scrutinised Block)

Table 6A — ITC as per GSTR-3B (Auto-Populated)

This is the system’s starting point — the aggregate of ITC claimed through FY 2024-25 GSTR-3B returns.

Table 6A1 — Prior-Year ITC Claimed in FY 2024-25 (New from FY 24-25)

This table captures ITC relating to earlier financial years but claimed during FY 2024-25.

Why this table fundamentally changes ITC reporting:

• It segregates past-year credit from current-year behaviour

• It prevents inflation of FY 2024-25 ITC

• It allows CAPS to track delayed claims cleanly

Table 6A2 — Net ITC of FY 2024-25

Computed as:

Table 6A – Table 6A1

This figure represents the true ITC behaviour of FY 2024-25 and becomes the anchor for GSTR-9C ITC reconciliation.

Tables 6B to 6D — Current-Year ITC Claims

These tables report first-time ITC claims pertaining to FY 2024-25.

Under CAPS, they are cross-verified with:

• GSTR-2B (FY 2024-25)

• Table 8B

• GSTR-9C Table 12

Table 6H — ITC Reclaimed under Rule 37 / 37A

This is one of the highest-scrutiny tables in GSTR-9.

It reports restoration of ITC that was reversed earlier due to non-payment or similar rule-based conditions.

Critical clarity:

• Reclaimed ITC is not fresh ITC

• It must not be reported in Table 6B

• It must never be reported in Table 8C

Incorrect placement here is a common trigger for automated scrutiny.

Table 7 — ITC Reversals (Including New Tables 7A1 & 7A2)

Table 7 reports reversals under:

• Rule 37 / 37A

• Rule 42 / 43

• Section 17(5)

CAPS evaluates whether:

• reversals follow a logical lifecycle, and

• reclaims (if any) reappear in the correct year and table.

Permanent reversals (e.g., Section 17(5)) are treated very differently from temporary reversals.

Table 8 — ITC Reconciliation (CAPS Engine Room)

The system-computed formula is:

Table 8D = 8A – (8B + 8C)

Where:

• 8A is ITC as per GSTR-2B

• 8B is ITC claimed for FY 2024-25

• 8C is missed ITC of FY 2024-25 claimed in the next year

Important nuance (often misunderstood):

• A negative 8D is not illegal

• It is a risk indicator

• What matters is whether the difference is logically explained elsewhere

Reclaimed ITC must never enter Table 8C.

Tables 10–13 — Where Timing Differences Are Explained

These tables disclose when tax or ITC was actually discharged, not whether it was correct.

• Tables 10–11 → outward liability paid in FY 2025-26

• Table 12 → ITC reversed in FY 2025-26

• Table 13 → ITC availed in FY 2025-26

Golden rule:
Tables 12 and 13 are never netted off. They exist to preserve audit trail.

GSTR-9C: Reconciliation, Not Re-Audit

GSTR-9C remains a statutory reconciliation statement, not an audit certification.

Key anchors:

• Turnover reconciliation → GSTR-9 Tables 4 & 5

• Tax paid reconciliation → GSTR-9 Table 9

• ITC reconciliation → GSTR-9 Table 6A2

Differences are expected.
What is required is clear narration, not forced elimination.

Why CAPS Changes Everything

CAPS does not read one return in isolation.

It connects:

• previous year disclosures,

• current year behaviour, and

• next year claims.

From a system perspective, consistency tells a stronger compliance story than perfection.

Conclusion: The New Meaning of “Correct” in GST Annual Returns

For FY 2024-25, GSTR-9 and GSTR-9C are no longer about compiling numbers.
They are about telling a consistent, explainable story across years.

A return that shows:

• where ITC came from,

• why it moved, and

• when it was claimed

is defensible — even with differences.

A return that breaks continuity is vulnerable — even when tax is fully paid.

In the CAPS era of GST, cross-reference is compliance.

 

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

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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.