Key Supreme Court rulings and ITAT Judgments Impacting Income Tax Practices

Introduction

The Income Tax Appellate Tribunal (ITAT) and the Supreme Court of India have recently delivered several judgments that have significant implications for taxpayers and tax practitioners. This article provides a detailed analysis of these rulings, highlighting their impact on reassessment procedures, international taxation, amalgamation assessments, capital reduction, and the applicability of surcharge and education cess under Double Taxation Avoidance Agreements (DTAAs).​

1. Reassessment Proceedings and Approval under Section 151

Case: Jagbir Singh vs. The Income Tax Officer

In this case, the ITAT Delhi quashed the reassessment order under Section 147 of the Income-tax Act, 1961, citing non-application of mind in the approval process under Section 151. The tribunal noted that the approval memo lacked the identity of the sanctioning authority, rendering the approval invalid. This judgment underscores the necessity for proper authorization and due process in reassessment proceedings, emphasizing that powers under Section 147 must be exercised with due diligence and statutory compliance.​

2. Dividend Distribution Tax (DDT) and DTAA Provisions

Case: Tweezerman India Pvt. Ltd. vs. The Assistant Commissioner of Income Tax

The ITAT Chennai upheld the rejection of the assessee’s claim for a refund of excess DDT paid at 15% under Section 115-O, instead of the 10% rate stipulated under Article 10 of the India-Germany DTAA. The tribunal referenced the Mumbai ITAT Special Bench decision in Total Oil India, affirming that DDT is an additional income tax levied on the distributing company, not on shareholders. This ruling clarifies that the DTAA rate does not override the domestic DDT rate, and the abolition of DDT effective from April 1, 2020, does not apply retrospectively.​

3. Taxability of Salary Income for Non-Resident Individuals

Case: Mridula Jha Jena vs. International Tax

The ITAT Mumbai addressed the tax residency status of an individual who left India during the previous year for employment abroad and stayed in India for less than 182 days. The Assessing Officer had treated the assessee as a resident and taxed the global income. The tribunal held that only the salary income earned for services rendered in India is taxable in India. Salary received for services rendered outside India, even if received in India, is not taxable under Section 9(1)(ii). This decision highlights the importance of determining tax residency and the source of income for taxation purposes.​

4. Assessment in Case of Amalgamation

Case: The Deputy Commissioner of Income Tax vs. Union Bank of India

The ITAT Mumbai quashed an assessment order passed without issuing a notice under Section 143(2) to the amalgamated company. Despite being informed about the scheme of amalgamation, the notice was issued in the name of the erstwhile entity. The tribunal rejected the Revenue’s argument regarding the assessee’s participation in the proceedings, stating that the absence of proper notice cannot be cured by invoking Section 292BB. This ruling emphasizes the necessity for tax authorities to recognize corporate restructuring and issue notices accordingly.​

5. Capital Reduction and Capital Gains Tax

Case: The Principal Commissioner of Income Tax vs. Jupiter Capital Pvt. Ltd.

The Supreme Court held that capital reduction falls within the ambit of “sale, exchange, or relinquishment of the asset” under Section 2(47) of the Income-tax Act. Consequently, any resulting long-term capital loss can be claimed by the assessee. The Court rejected the Revenue’s argument that there was no extinguishment of rights since the shareholding pattern remained unchanged. This judgment broadens the interpretation of “transfer” under capital gains tax provisions, allowing taxpayers to claim capital loss in cases of capital reduction.​

6. Applicability of Surcharge and Education Cess under DTAA

Case: Shri Sankaranarayanan Ramasubramanian vs. The Assistant Commissioner of Income Tax

The ITAT Chennai ruled that surcharge and education cess are not leviable on the tax rates prescribed under DTAAs. In this case, the Centralized Processing Center (CPC) computed education cess on the entire tax liability, whereas the assessee computed it only on income arising in India. The tribunal noted that Article 2 of the DTAA includes surcharge in income tax, and the prescribed DTAA rates shall be deemed to include cess as well. This decision clarifies that when DTAAs specify tax rates, they encompass all additional charges, including surcharge and cess.​

Conclusion

These recent judgments provide critical insights into various aspects of direct taxation, including reassessment procedures, international tax treaties, corporate restructuring, and the computation of tax liabilities. Taxpayers and professionals must stay abreast of these developments to ensure compliance and optimize tax positions. Engaging with experienced tax advisors is recommended to navigate the complexities highlighted by these rulings effectively.