Author: inavatiq

Ashish Chadha – [2026] 186 taxmann.com 44 (Article)

1. Introduction

The concept of a permanent establishment (‘PE’), as embodied in Article 5 of most tax treaties, was developed in an economic context dominated by traditional, asset-heavy business models. These provisions were framed at a time when commercial presence was largely synonymous with physical presence i.e., premises, personnel and tangible infrastructure.

The rapid evolution of the digital economy has far outpaced corresponding developments in international tax frameworks. In response to this structural lag, Indian tax authorities have sought to expand the scope of taxation of foreign enterprises operating in digital and technology-enabled business models. One such attempt has been the invocation of the relatively novel and controversial concept of a “virtual permanent establishment”.

This article reviews key judicial developments relating to the concept of virtual PE, with specific reference to India, where the tax authorities have consistently sought to test the limits of Article 5 through expansive interpretation.

2. Virtual PE as a BEPS – Era Construct

The Organisation for Economic Co-operation and Development (‘OECD’), in its Base Erosion and Profit Shifting (‘BEPS’) Action Plan, specifically Action Plan 1 addressing the tax challenges of the digital economy, has acknowledged the conceptual underpinnings of a “virtual PE”. However, the OECD has been clear in its position that the introduction of such a concept would require explicit tax treaty amendments.

To date, notwithstanding the Multilateral Instrument (‘MLI’) and ongoing Pillar One discussions, meaningful treaty-level adoption of a virtual PE framework remains limited. Consequently, in the absence of express treaty language, the legal sustainability of unilateral interpretations by tax authorities of a jurisdiction remains open to challenge.

3. Judicial Evolution of the Virtual PE Debate in India

The Indian tax authorities began exploring expansive interpretations of PE concepts well before the BEPS initiative. In an early ruling, the Income Tax Appellate Tribunal (‘ITAT’) held that computers installed at the premises of Indian travel agents constituted a fixed place PE of a foreign enterprise providing a computerized reservation system (CRS).

However, this approach did not find consistent judicial support. In a subsequent decision, the ITAT clarified that a website, by itself, does not constitute a fixed place PE, marking an early judicial recognition of the distinction between physical infrastructure and digital interfaces.

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Case Details: Jigar Sevantilal Shah vs. Income-tax Officer - [2026] 185 taxmann.com 818 (Mumbai-Trib.)

Judiciary and Counsel Details

• Saktijit Dey, Vice President & Makarand Vasant Mahadeokar, Accountant Member
• Rajesh Shah for the Appellant.
• Nayanjoti Nath, Sr. AR for the Respondent.

Facts of the Case

The assessee, an individual, acquired tenancy rights in respect of a flat in 2015. In December 2017, the landlord entered into a redevelopment arrangement with a developer, and the assessee, as a confirming party, executed a tripartite agreement to receive specified permanent alternate accommodation instead of surrendering tenancy rights. Under the terms of this agreement, until the tenant was offered possession of the new premises with amenities, he was to remain a tenant and was not deemed to have surrendered the tenancy. The alternate permanent accommodation was handed over in April 2019.

During the assessment, the Assessing Officer (AO) noted that, for stamp duty purposes, the Stamp Valuation Authority had determined the value at about Rs. 1.49 crores. The AO called upon the assessee to explain why this value should not be taxed as Short Term Capital Gain by invoking section 56(2) read with section 50D. Assessee contended that, under the agreement, surrender would occur only upon taking possession of the alternate accommodation in April 2019; therefore, any capital gain would be long-term and assessable in AY 2020-21. Unsatisfied with the reply, AO computed STCG and added it to the assessee’s income.

On appeal, the CIT(A) sustained the addition. The aggrieved assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that the reading of the relevant clauses of the agreement made it amply clear that the tenancy rights of the assessee in the existing (old premises) would come to an end only upon the assessee receiving possession of pre-identified alternative permanent accommodation in the new building. It was a fact that possession of alternative permanent accommodation in the new building was handed over to the assessee in April 2019.

Therefore, the taxable event of capital gain arising from the surrender of the tenancy rights could occur only in the financial year 2019-20, and not in the impugned assessment year. When the tripartite agreement between the assessee, the developer, and the landlord specifically provides that the tenancy rights will continue with the assessee until the handing over of possession of alternative permanent accommodation in the newly developed building, the Departmental Authorities cannot interpret the terms of the agreement differently.

Thus, the AO was directed to delete the addition made on account of surrender of tenancy rights in the impugned assessment year, and capital gain, if any, was to be assessed in the year of surrender of tenancy rights.

The post Capital Gain on Tenancy Surrender Taxable on Possession | ITAT appeared first on Taxmann Blog.

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Editorial Team – [2026] 186 taxmann.com 43 (Article)

Taxmann presents Practical Insights on Ind AS and SAs, a weekly series exclusively for Accounts and Audit Module subscribers of Taxmann.com, focusing on the practical application of Indian Accounting Standards and Standards on Auditing through structured, issue-based analysis.

Each week features a focused topic with real-world relevance. This edition moves beyond the conceptual discussion of recognition and measurement and explores how entities actually transition to Ind AS under Ind AS 101, highlighting real-world challenges and reporting practices observed among listed companies.

1. Introduction

Financial reporting under Ind AS is built on robust principles of recognition and measurement. However, a fundamental question arises when an entity transitions from its previous GAAP to Ind AS:

“How should existing balances and past transactions be aligned with Ind AS without distorting financial performance?”

Transitioning to Ind AS is not merely a technical adjustment exercise. It requires entities to revisit historical accounting decisions, reassess measurement bases, and ensure that financial statements reflect economic reality in a consistent and comparable manner.

Ind AS 101 addresses this challenge by prescribing a structured framework for first-time adoption. It ensures that the first Ind AS financial statements provide a reliable starting point while maintaining transparency and comparability for users.

2. Ind AS for First-Time Adoption

Ind AS 101 lays down the procedures that an entity must follow when adopting Ind AS for the first time. Accordingly, it applies to the first set of annual financial statements in which an entity transitions to Ind AS.

As per Appendix A of Ind AS 101, “First Ind AS financial statements” are defined as the first annual financial statements in which an entity adopts Ind AS, accompanied by an explicit and unreserved statement of compliance with Ind AS.

This definition highlights an important point i.e. first-time adoption is not established merely by applying Ind AS principles, but by formally declaring full compliance with Ind AS.

The requirement of an explicit and unreserved statement of compliance creates two important practical scenarios:

• Substance Without Form – An entity may comply with all recognition, measurement, and disclosure requirements of Ind AS. However, if it does not include an explicit statement of compliance, the financial statements cannot be regarded as first Ind AS financial statements, and Ind AS 101 does not apply.
• Form Without Substance – Conversely, if an entity includes the statement of compliance but fails to meet Ind AS requirements fully, the financial statements are still treated as first Ind AS financial statements. In such cases:

1. 1. The auditor is required to issue a modified opinion, and
   2. Any corrections are addressed in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors

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Editorial Team – [2026] 186 taxmann.com 49 (Article)

World Labour Law News provides a weekly snapshot of labour law developments from around the globe. Here’s a glimpse of the key labour law update this week.

1. Labour Law

1.1 US Department of Labour Launches Website to Build Artificial Intelligence Skills, Expand AI-Focused Registered Apprenticeship Programs

On April 29, 2026, the U.S. Department of Labour announced the launch of its AI in Registered Apprenticeship Innovation Portal, a one-stop resource for organisations looking to build artificial intelligence literacy and develop AI-focused Registered Apprenticeship programs.

Announced during the National Apprenticeship Week event, “Building the AI-Ready Workforce through Registered Apprenticeship,” the website provides practical tools and actionable guidance to help organisations integrate artificial intelligence skills into Registered Apprenticeship programs through skill-building resources, industry-specific training, and flexible program pathways. The initiative builds on the objectives outlined in the department’s AI Literacy Framework, released earlier this year.

“The department is committed to ensuring that every American has the opportunity to thrive in our nation’s workforce, especially in a world that is rapidly being reshaped by artificial intelligence.”

said Acting Secretary of Labour Keith Sonderling.

“Today, we are unveiling a new AI in the Registered Apprenticeship Innovation Portal that provides practical tools and resources to promote the integration of artificial intelligence skills into Registered Apprenticeship programs, marking a major step forward in preparing the American workforce for the jobs of the future.”

The online portal showcases how understanding, using and evaluating AI tools responsibly is essential for improving productivity, work quality and adaptability in today’s economy.

The site’s resources are organised around three key areas:

(a) AI Skills and Literacy in Registered Apprenticeship – Learn what AI literacy is, access general AI training resources, and discover how Registered Apprenticeship can help build AI competency across your organisation.

(b) AI Skills Building by Industry – Explore AI skill-building training modules tailored to specific occupations and industries, including education, finance, healthcare, advanced manufacturing, and more.

(c) Three Options to Integrate AI in Registered Apprenticeship Programs – Join an existing National Registered Apprenticeship program, create a new program for AI-focused roles, or update an existing program to include AI skills.

“The launch reflects this Administration’s commitment to ensuring American workers and businesses are equipped to lead in an AI-driven economy,”

said Assistant Secretary for Employment and Training Henry Mack.

“By providing employers with the resources to develop AI-ready Registered Apprenticeship programs and workers with the skills to thrive in them, the Department is taking concrete action to build the workforce of the future.

Source – Press Release

Click Here To Read The Full Article

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1. Facts

A listed company engaged in manufacturing operations is experiencing significant financial stress during the current financial year. The following conditions exist as of the reporting date:

• The company has incurred negative operating cash flows during the year and in the immediately preceding year.
• The entity is in a net current liability position, with current liabilities exceeding current assets.
• There are significant loan repayments falling due within the next 12 months, including term loans and working capital borrowings.
• The company has defaulted in repayment of certain borrowings, resulting in lenders initiating recovery discussions.
• Access to fresh external financing is restricted, and negotiations with lenders for restructuring are still at a preliminary stage.

Despite the above conditions, management has prepared the financial statements on a going concern basis, primarily relying on the following:

• Letters of financial support from promoters, stating their intention to provide funding as and when required.
• Proposed restructuring plans, including cost rationalisation and disposal of non-core assets.
• Projected improvement in operations, based on expected recovery in demand.

Suggest, whether in the given circumstances, the use of the going concern basis appropriate, and what should be the auditor’s reporting implication?

2. Relevant Provisions under SA 570, Going Concern

Para 6. The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern. These responsibilities exist even if the financial reporting framework used in the preparation of the financial statements does not include an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern.

Para 10. When performing risk assessment procedures as required by SA 315, the auditor shall consider whether events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern. In so doing, the auditor shall determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern, and:

(a) If such an assessment has been performed, the auditor shall discuss the assessment with management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern and, if so, management’s plans to address them; or

(b) If such an assessment has not yet been performed, the auditor shall discuss with management the basis for the intended use of the going concern basis of accounting, and inquire of management whether events or conditions exist that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.

Para 12. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern.

Para 16. If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern (hereinafter referred to as “material uncertainty”) through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (Ref: Para. A16)

(a) Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment.

(b) Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances. (Ref: Para. A17)

(c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future actions: (Ref: Para. A18–A19)

(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and

(ii) Determining whether there is adequate support for the assumptions underlying the forecast.

(d) Considering whether any additional facts or information have become available since the date on which management made its assessment.

(e) Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future actions and the feasibility of these plans. (Ref: Para. A20)

Para 22. If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going Concern” to: (Ref: Para. A28–A31, A34)

(a) Draw attention to the note in the financial statements that discloses the matters set out in paragraph 19; and

(b) State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the matter.

Para 21. If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion.

Para 23. If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor shall: (Ref: Para. A32–A34)

(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised)4; and

(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.

Para A3. The following are examples of events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. This listing is not all-inclusive nor does the existence of one or more of the items always signify that a material uncertainty exists.

Financial

• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets.
• Indications of withdrawal of financial support by creditors.
• Negative operating cash flows indicated by historical or prospective financial statements.
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
• Arrears or discontinuance of dividends.
• Inability to pay creditors on due dates.
• Inability to comply with the terms of loan agreements.
• Change from credit to cash-on-delivery transactions with suppliers.
• Inability to obtain financing for essential new product development or other essential investments.

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Case Details: King Enterprises vs. Commissioner of Commercial Taxes - [2026] 185 taxmann.com 560 (Karnataka)

Judiciary and Counsel Details

• Ms Jyoti M, J.
• R.M. Javed, Adv. for the Petitioner.
• Smt. Nandini B. Somapur, AGA for the Respondent.

Facts of the Case

The petitioner challenged the cancellation of its GST registration by the jurisdictional officer under CGST based on a show cause notice (SCN) issued in FORM GST REG-17, alleging violation under Section 29(2)(e) of the CGST Act and the Karnataka GST Act on the ground that registration had been obtained by fraud. It contended that the SCN was vague, defective in format, and contained only a bald allegation of fraud without furnishing any material particulars or adequate reasons, thereby disabling an effective response. It was further submitted that despite such deficiencies, the registration was cancelled and the appellate authority affirmed the cancellation without addressing the absence of specific allegations. The matter was accordingly placed before the High Court.

High Court Held

The High Court held that the SCN issued in FORM GST REG-17 was not in conformity with the statutory requirements prescribed under Section 29 of the CGST Act and the Karnataka GST Act read with Rule 22 of the CGST Rules and the Karnataka GST Rules, as it contained only a bald allegation of fraud without disclosing any material particulars or reasons. It was observed that a valid notice under the aforesaid provisions must set out sufficient details to enable the assessee to effectively respond, and absence of such particulars renders the notice vague and legally unsustainable. Orders passed pursuant to such a defective notice, including the cancellation of registration and its affirmation by the appellate authority, cannot be sustained in law. The Court concluded that the impugned actions were untenable. Accordingly, a writ was issued quashing the cancellation order and the appellate order, and directing the restoration of the GST registration.

The post GST Cancellation Quashed Due to Vague Fraud SCN | HC appeared first on Taxmann Blog.

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Case Details: Big Peat Company vs. State Tax Officer - [2026] 185 taxmann.com 582 (Madras)

Judiciary and Counsel Details

• D. Bharatha Chakravarthy, J.
• S. Karunakar for the Petitioner.
• R. Suresh Kumar, Addl. Govt. Pleader for the Respondent.

Facts of the Case

The petitioner challenged the rejection of its application seeking a waiver under Section 128A of the CGST Act and the Tamil Nadu GST Act pursuant to the GST Amnesty Scheme, 2025. It was submitted that the assessment proceedings culminated in an adjudication order in which tax, interest, and penalty were quantified separately, and an appeal against such order remained pending. It was contended that upon the introduction of the scheme, it paid the tax dues and withdrew the appeal. The application was rejected on the ground that in the summary assessment the entire demand was treated as ‘penalty’ with nil tax and interest. The petitioner contended that this was an apparent clerical mistake, as the original order clearly included tax, interest, and penalty components, and hence the benefit under the scheme could not be denied. The matter was accordingly placed before the High Court.

High Court Held

The High Court held that the original adjudication order clearly quantified tax, interest, and a limited penalty, and mere misclassification of the entire demand as ‘penalty’ in the summary proceedings was an apparent clerical error. It held that such an error could not be perpetuated while considering an application under Section 128A of the CGST Act and the Tamil Nadu GST Act. The Court observed that the jurisdictional officer under CGST ought to have correctly appreciated the original order and treated the amounts under the appropriate heads while examining the claim. It was held that the denial of the benefit of the amnesty scheme solely on account of such a clerical mistake was unsustainable. Accordingly, the matter was remanded to the authority for fresh consideration.

The post GST Amnesty Benefit Can’t Be Denied for Clerical Error | HC appeared first on Taxmann Blog.

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Case Details: United Commercial Bank vs. Union of India - [2026] 185 taxmann.com 442 (HC-Jharkhand)

Judiciary and Counsel Details

• Anubha Rawat Choudhary, J.
• Nipun Bakshi, Shubham Sinha & Sushawan Bhowmik, Advs. for the Petitioner.
• S. K. Laik, Adv. for the Respondent.

Facts of the Case

In the instant case, On a reference under section 10(1)(d), Industrial Tribunal found that workman had completed more than 240 days of work in a calendar year and was not being paid proper wages prescribed for casual workmen – Tribunal held demand for regularisation was justified and directed that he would be entitled to regularisation on permanent basis as and when permanent vacancy arose in bank, and further directed payment of wages as prescribed for casual workmen – Whether merely because workman had completed 240 days of work in a calendar year, same would not automatically entitle him for regularisation on permanent basis in absence of any available vacancy to which he could be regularised.

High Court Held

Held, yes – Whether direction that workman would be entitled for regularisation on permanent basis as and when permanent vacancy arose was beyond terms of reference, perverse and unsustainable – Held, yes – Whether while exercising jurisdiction under articles 226/227 of Constitution, Court could not direct creation of any post – Held, yes – Whether, however, direction to treat workman as casual workman and to pay wages as prescribed for casual workmen did not call for interference – Held, yes – Whether where no such norms existed in bank, workman would at least be entitled to minimum wages under law.

List of Cases Reviewed

• Dharam Singh v. State of U.P. [2025] 177 taxmann.com 556 (SC)/2025 SCC OnLine SC 1735 (para 22) distinguished
• G.M. O.N.G.C., Shilchar v. O.N.G.C. Contractual Workers Union 2008 taxmann.com 11208 (SC)/2008 AIR SCW 3996 (para 25) followed

List of Cases Referred to

• M.P. State Agro Industries Development Corpn. Ltd. v. S.C. Pandey [2006] 2 SCC 716 (para 6)
• Gangadhar Pillai v. Siemens Ltd. [2007] 2006 taxmann.com 3098 (SC) (para 6)
• G.M. O.N.G.C., Shilchar v. O.N.G.C. Contractual Workers Union 2008 taxmann.com 11208 (SC (para 8)
• Dharam Singh v. State of U.P. [2025] 177 taxmann.com 556 (SC) (para 9).

The post 240 Days’ Work Doesn’t Guarantee Regularisation | HC appeared first on Taxmann Blog.

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Notification no. S.O. 2186(E); Dated: 02.05.2026

The Central Government has notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2026. An amendment has been made to Schedule I of the existing rules. As per the amended norms, the FDI limit in the insurance sector has been increased from 74% to 100% under the automatic route, thereby allowing full foreign ownership. This move is expected to increase foreign participation in India’s insurance industry.

Accordingly, foreign investment in Indian insurance companies and intermediaries will now be allowed up to 100% of the total paid-up equity capital, including investments by portfolio investors. However, the full ownership under the automatic route will be permitted only after approval and verification by the Insurance Regulatory and Development Authority of India (IRDAI), as may be required from time to time.

Whereas, Life Insurance Corporation of India (LIC) will continue to remain under a separate framework, with foreign investment capped at 20% under the automatic route. The foreign investment in LIC must be subject to compliance with the provisions of the Life Insurance Corporation Act, 1956 and such other provisions of the Insurance Act, 1938, as apply to LIC under section 43 of the Life Insurance Corporation Act, 1956.

The conditions applicable to Indian insurance companies and insurance intermediaries are as follows:

(a) Foreign investment in the insurance sector must be subject to compliance with provisions of the Insurance Act, 1938 and the condition that companies receiving FDI must obtain the necessary license or approval from the IRDAI for undertaking insurance and related activities.

(b) In an Indian Insurance Company having foreign investment, at least one among the Chairperson of its Board, its Managing Director and its Chief Executive Officer must be a resident Indian Citizen. Also, an Indian Insurance Company with foreign investment must comply with the provisions of the Indian Insurance Companies (Foreign Investment) Rules, 2015, and the applicable rules or regulations notified by the Department of Financial Services or IRDAI.

(c) Foreign portfolio investment in an Indian Insurance Company must be governed by the provisions contained in Chapter IV, Rule 10 and 11, read with Schedule II of FEM (Non-debt Instruments) Rules, 2019, and the provisions of SEBI (FPI) Regulations, 2019.

(d) Any increase in foreign investment in an Indian Insurance Company must be in accordance with the pricing guidelines specified under these rules.

(e) The foreign equity investment cap of 100% must apply on the same terms to insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third-party administrators, Surveyors and Loss Assessors, managing general agents, insurance repositories and such other entities as may be notified by the IRDAI from time to time.

Further, FDI proposals must be allowed under the automatic route, subject to verification by the authority, and the foreign investment in insurance intermediaries must be governed by the same terms as provided under rules 7 and 8 of the Indian Insurance Companies (Foreign Investment) Rules, 2015.

Click Here To Read The Full Notification

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Anil Chachra – [2026] 185 taxmann.com 952 (Article)

1. Introduction

The Income-tax Act, 2025 (“ITA, 25”) has replaced the Income-tax Act, 1961 (“ITA, 61”) and the same has been implemented from April 1, 2026. The stated objective was to comprehensive review of the ITA, 1961 to concise, lucid, easy to read and understand the law. Tax Year 2026-27 is the first year of ITA, 25. No major policy related changes have been made in ITA, 25. There are certain ‘Gaps’ which the government had not address in the ITA, 1961. While reviewing the ITA, 25 it appears that the existed gaps has not been addressed in the ITA, 2025 as well. In this write up the author will address, what are the gaps exist which are supposed to be incorporated in the new tax law keeping in view of the current economy requirement.

2. Analysis

2.1 Fast Track Merger/Demerger u/s 233 of the Companies Act, 2013

[Section 2(19AA) of ITA, 1961 to section 2(35) of ITA, 2025]

The definition of ‘demerger’ under the ITA, 1961 is in relation to companies means the transfer pursuant to a scheme of arrangement under section 391 to 394 of the Companies Act, 1956. Corresponding section under ITA, 2025 is 2(35), wherein the demerger in a scheme of arrangement u/s 230 to 232 of companies Act, 2013 meaning there by the tax neutral demerger will be confined to section 230 to 232 of the companies Act, 2013. A demerger u/s 233 of the companies Act applies to small companies, holding/wholly-owned subsidiaries, start-ups, and certain other prescribed classes [without NCLT approval and through Registrar and official liquidators] falls outside this definition. The consequence is that the demerged company, the resulting company, and the shareholders all shall lose tax neutrality. Further, any payout to shareholders as part of the arrangement will be characterised as deemed dividend under Section 2(22) of the 1961 Act at the applicable rate of tax which can be up to 30% [highest slab] depending on the effective tax bracket. In effect, the fast-track route, for all practical purposes, is taxable demerger.

The Gap which was there in ITA, 1961 is still there in ITA, 2025 by not including the demerger u/s 233 of the companies act under the definition of demerger. By not including the demerger under the fast-track route u/s 233 leading to demerger as taxable event.

2.2 Carry Forward of Loss and Depreciation – ‘Restricted Definition of Industrial Undertaking’ Not Expended in ITA, 2025

[Section 72A of ITA, 1961 vis a vis Section 116 of ITA, 2025]

Where there has been an amalgamation the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be loss or, allowance for unabsorbed depreciation of the amalgamated company u/s 72A of the ITA, 1961 and the other provisions of the Act relating to set off and carry forward of loss and other provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. The accumulated loss and unabsorbed depreciation are allowed to be carry forward by amalgamated company is applicable only to the company owning an industrial undertaking or a ship or a hotel with another company.

The rationale for carry forward loss and unabsorbed depreciation was to encourage loss making entity to get merge with profit making entity via Merger and Acquisition route. The section was introduced when the manufacturing and PSU segment was dominated in India. Now under the current economy, services sectors relating to NBFCs, financial sectors, technologies company, start- up companies which are contributing significantly in the India’s GDP are excluded from the sectors who cannot avail of the carry forward loss benefits u/s 72A.

The result for the excluded sectors is that M&A involving loss-making entities in these sectors is structurally less attractive, since the accumulated losses and depreciation which could otherwise have been allowed to be set off against future profits of the amalgamated entity, would get lapse due to Merger/amalgamation.

ITA 2025 is not the reshape of the old law. It has just change in the language in simple way and change in numbering and have not touched upon the ‘current need’ of the economy which is arising keeping in view of the current scenario by not included the service sectors as mentioned above which they are contributing in a significant way to the Indian economy. It has not expended the definition of the industrial undertaking or not included the other sectors, keeping the limit of carry forward of loss and depreciation in a restricted manner u/s 116 of ITA, 2025.

There is a considerable gap in the ITA 2025 as start – up companies/other service sector who are in to losses want to get merge with another entity; the losses and the depreciation cannot be carry forward by the amalgamated company due to exclusion u/s section 72A/116 of the Act.

2.3 Carry Forward and Set Off of Losses in Case of Certain Companies – Genuine Change in Ownership due to Group Restructuring Has Not Been Defined/Clarified

[Section 79 of IT Act vis a. vis 119 of ITA, 2025]

Section 79 of ITA,1961, [Corresponding to section 119 of ITA, 2025] restricts the carry-forward and set off losses if there is a change in voting power [beneficial ownership] exceeding 51%. The aim of the provision is to prevent the loss- making companies to get the undue advantage of carry forward and set off of losses. In the case of intra-group restructurings: mergers, demergers, and holding company reorganisations frequently result in changes to the shareholding pattern at the entity level, even though the ultimate beneficial ownership remains same. A person/promoter who holds 80% of Company X, which in turn holds 100% of Company Y, may restructure such that the promoter directly holds 100% of Company Y. The beneficial owner has not changed. The shareholding at the Company B level has. Under Section 79 of the 1961 Act, the losses of Company Y stand extinguished on a principal basis. No exception has been made for genuine group restructurings where the beneficial owner remains the same.

Even in ITA, 2025, no exception has been made for the genuine group restructurings from the beneficial ownership provisions.

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