Top 5 Income Tax Rulings of February 2025

This article highlights five notable income tax rulings from February 2025, providing key insights into legal interpretations of the Income Tax Act. In M/S Ashok Leyland vs ACIT, the Chennai ITAT ruled that capital R&D expenditure qualifies for deductions under Section 35(1)(iv), but denied weighted deductions under Section 35(2AB) due to non-compliance with DSIR approval. The Supreme Court ruling in CIT vs M/S International Healthcare clarified that mere registration under Section 12AA does not automatically entitle trusts to exemptions under Sections 10 and 11, leaving final determination to the AO. In M/S Zoho Corporation vs DCIT, ITAT disallowed foreign tax credit as a business expenditure under Section 37(1), adhering to the provisions of Section 40(a)(ii). The Karnataka High Court’s decision in DCIT vs Flipkart Internet Pvt. Ltd favored the assessee, ruling that reimbursement of salaries to seconded employees does not constitute Fee for Technical Services (FTS) and is not taxable in India under the DTAA. Lastly, in Reckitt Benckiser Healthcare vs DCIT, the ITAT held that a treasury undertaking’s demerger failed to qualify as tax-neutral under Section 2(19AA) due to incomplete transfer of assets and liabilities, leading to capital gains taxation. These rulings collectively offer valuable insights into evolving tax jurisprudence and compliance requirements.

1. M/s Ashok Leyland vs ACIT ( ITA no.554/Chn/2023) & Cross Appeal No. ITA no 561/Chn/2023

Whether in favour of assessee: Partly for Assessee & Partly for Revenue

Issue:

• Whether assessee can be eligible for capital expenditure deduction under 35(1)(iv).
• Whether assessee can claim weighted deduction under 35(2ab) for research development(‘’RD”)incurred at RD centre without Department of Scientific and Industrial Research (DSIR) approval(no form 3CL filed)

Provisions

• As per Section 35(2AB) if a company is engaged in business of manufacture or biotechnology not being expenditure in the nature of cost of land or building or in house development a sum equal to one half times of expenditure incurred shall be allowed as deduction. However expenditure on scientific research(not being expenditure in the nature of cost of land building) on inhouse research and development facility a sum equal to expenditure shall be allowed as deduction. However, compliances have to be made in form 3CL which has to be filed one month before due date of filing return of income.

Facts

• Assessee claimed deduction of Rs. 731 Cr being 200% of the expenditure under Section 35(2AB) incurred at in-house R&D facility.
• Assessee also claimed 100% deduction of capital RD expenditure of 100.21 crores under Section 35(1)(iv).

Conclusion

• Chennai ITAT denies weighted deduction under 35(2AB) in respect of RD expenditure incurred at RD facility without DSIR approval in form 3CL as the rule clearly envisaged that form 3CL has to be filed one month before due date.
• However, as against capital expenditure of 100.21 crores incurred for scientific research the same is eligible for deduction under 35(1)(vi) of the Act. The same is allowed in favour of the assessee.

2) CIT vs M/S International health care (Supreme Court -Special leave petition)

Whether in favour of assessee: Yes

Issue: Where mere registration under 12AA can be eligible for claiming Section 10 and Section 11.

Provisions: As per provision of the law, trust needs to be registered under 12AA and ensure that it carries out charitable activity to claim exemption under 10 and 11 of the Act.

Facts

• The Commissioner of Income tax(’CIT’) had denied registration on the grounds that trust did not involve in charitable activity.
• Rajasthan HC held ITAT’s observations that the Commissioner cannot comment about genuineness of the Trusts’ activities and that he has not pointed out any defect in the clauses or the trust deed and that the activity will be carried out only after the trust is registered.

Conclusion

• Mere registration under Section 12-AA automatically does not entitle any charitable trust to claim exemption under Sections 10 and 11 respectively of the Act, 1961.
• If a return is filed by the trust claiming exemption it is for the AO to look into material fact and satisfy whether the exemption has been claimed. If the AO is not convinced it is always open for him to decline grant of exemption.

3) M/S Zoho Corporation vs DCIT (ITA no 2957/Chny/2018)

Whether in favour of assessee: No

Issue: Whether the amount paid by assessee to oversees jurisdiction will qualify as allowable deduction under 37 of the Act.

Provisions: As per Section 37 any expenditure incurred wholly on business shall be allowable as business expenditure.

As per Section 40 the following amounts shall not be deductible  any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

Facts: Assessee had claimed foreign tax credit amounting to Rs.8,93,06,247/- within the meanings of 90 / 91 of the IT act. Assessee did not disallow the amount under 40(a)(ii) for expenditure incurred outside India.

Conclusion: No scope of assessee claiming foreign tax credit under 40(a)(ii) of the acts. Based on other juridical precedents Assessee is not entitled to claim taxes paid in an oversees jurisdiction as deduction under 37(1) of the Act.

4) DCIT/CIT/CBDT vs M/S Flipkart Internet Private Ltd (TS-115-HC-2025 (kar)

Whether in favour of assessee: Yes

Issue: Whether reimbursement of salary by Flipkart would amount to Fee for technical services (‘’FTS”) or TDS to be deducted by Assessee(‘’Flipkart Internet Private ltd’’)

Provisions: Let us understand the meaning of secondment. in general Secondment of employees means the employees who are registered with the foreign entity and are getting salary , allowances from the foreign entity but such employees are working under the control and supervision of Indian entity. In general, while determining taxability of secondment the following parameters are used Fee for technical services(‘’FTS’’) and business profit. In general, for reimbursement if a subsidiary company in India reimburses to parent company outside India for services rendered for foreign employees in India the same for which no TDS is to be deducted. Therefore, the taxpayer can make application under 195(2) for lower TDS deduction if the same for which no TDS is attracted.

Facts

• Walmart Inc had seconded certain employees (Seconded Employees) to the Assessee vide an Inter-company Master Services Agreement (Agreement).
• For administrative convenience, it was agreed that Walmart Inc would make payment of salaries to the Seconded Employees (Salaries) which in turn would be reimbursed to Walmart Inc by the Assessee.
• The Assessee wanted a NIL certificate, but authorities rejected on the grounds there was no employer employee relationship between assessee and seconded employees and services rendered by Seconded employees were in the nature of technical services under the act and DTAA and the same was to be taken as FTS. Assessee had preferred writ petition before HC on the contention withholding obligation under 195 was not triggered as salary were pure reimbursement and no income embedded therein. Reimbursement of salary could not be classified as FTS as make available clause not meet.

Conclusion: The HC decided the matter in favour of the Assessee by ruling that the reimbursement of Salaries by the Assessee to Walmart Inc will not be subject to Withholding tax (‘’WHT’’) as the same is not taxable in India on account of there being no income element embedded therein. The make available clause is not satisfied and assessee can apply NIL certificate under 195(2) of the acts.

5) Reckitt Benckiser Healthcare vs DCIT (I.T.A No.1184/Ahd /2018) and Cross Appeal No. I.T.A No.1225/Ahd/2018

Whether in favour of assessee: No

Issue: Whether transfer of treasury of asset and liability at NIL book value will qualify for 2(19AA)exemption.

Provisions: 2(19AA) of the act states for demerged of an undertaking to happen all asset liability properties of demerging entity becomes ownership of demerged entity and transfer of undertaking is on going concern basis.

Facts: The Taxpayer was engaged in the manufacturing and marketing of pharmaceutical and cosmetic products. During Financial Year (‘FY’) 2010-11, the Taxpayer transferred its treasury undertaking (‘Treasury Undertaking’) by way of a demerger to Sterling India Ltd. (‘Sterling’) pursuant to a scheme of demerger approved by the Gujarat High Court. In the contention of the taxpayer, the Treasury Undertaking had no liabilities and thus under the demerger, only assets of the undertaking were transferred to Sterling.

Conclusion: It was held by ITAT demerger of treasury undertaking is a non-qualifying demerger as it fails to comply with the provisions of Section 2(19AA)(11)(111). The tribunal held that demerger of treasury undertaking was not treated as tax neutral as it fails to transfer liabilities belonged to other segments whereas asset belonging to other assets. Thereby taxable under section 45 by virtue of capital gains.

Concluding Remarks: 

All 5 case laws are like panchmuruga Anjaneya for tax professionals/ CA pariwar. These case laws describe how a small interpretation is to be made in Section which in turn the judgment.