Weekly Round-up on Tax and Corporate Laws | 10th to 15th March 2025

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from March 10^th to 15^th 2025, namely:

1. Provisional b/s referring to position as on 30-09-2005 can’t be said to be incriminating material for AY 2004-05 & 2005-06;
2. ARC obligation to restore cell site towers to their original condition at end of lease period is allowable as business exp.: HC;
3. Mere hardship to accused in travelling from one place to another doesn’t justify transfer of cheque dishonour cases u/s 406 CrPC: SC;
4. Order to be set aside to the extent of ‘Security Wages’ as issue of ‘Security Wages’ was not in SCN and raised without hearing to assessee: HC;
5. Bail granted as arrest memo was attested by driver and not by any relative or person of locality from where arrest was made: HC; and
6. Improving audit oversight and compliance in deferred taxation through NFRA’s Auditor-Audit Committee Interaction series.

1. Provisional b/s referring to position as on 30-09-2005 can’t be said to be incriminating material for AY 2004-05 & 2005-06

The Delhi High Court recently ruled on a case concerning the validity of assessment proceedings initiated under Section 153C of the Income Tax Act, 1961. The case arose from a survey conducted on November 20, 2007, at the premises of Mr. Suresh Kumar Gupta, a chartered accountant.

The tax authorities alleged that Mr. Gupta was an “Entry Operator” who controlled multiple companies without any actual business operations and used them merely to issue accommodation entries. During the search, a provisional balance sheet dated September 30, 2005, relating to M/s Ridgeview Construction Pvt. Ltd. was found and seized.

Assessing Officer (AO) sought to initiate assessment proceedings against Ridgeview Construction for the Assessment Years (AYs) 2004-05 and 2005-06, arguing that the seized document provided grounds for reassessment under Section 153C.

The case was first heard by the Income Tax Appellate Tribunal (ITAT), which ruled in favor of Ridgeview Construction. The Tribunal held that the provisional balance sheet did not constitute incriminating material and did not pertain to the assessment years in question.

The matter reached before the Delhi High Court.

The Delhi High Court affirmed ITAT’s view that the provisional balance sheet neither contained incriminating material nor had any correlation with AYs 2004-05 and 2005-06. The court emphasised that the primary condition for initiating proceedings under Section 153C is that the seized material must pertain to undisclosed income relevant to the assessment years under question.

The court further observed that the procedural amendments introduced in 2015 did not change the fundamental requirement that Section 153C proceedings must be based on material that has a bearing on undisclosed income. Even under the unamended law, the AO of the non-searched entity was required to evaluate whether the seized material warranted reassessment. The High Court held that mechanically triggering reassessment under Section 153C without establishing a nexus between the seized document and the assessment years in question was impermissible.

The provisional balance sheet in question could not be considered incriminating material relevant to AYs 2004-05 and 2005-06, and therefore, reassessment was not justified. Accordingly, the tribunal was justified in annulling the assessment undertaken.

Read the Ruling

2. ARC obligation to restore cell site towers to their original condition at end of lease period is allowable as business exp.: HC

Assessee-Vodafone, a company engaged in providing telecommunication services, entered into a lease agreement with the owners of various office spaces for setting up cell site towers. The lease agreement obligated the assessee to restore the site to its original condition at the expiry of the lease period.

The assessee capitalized certain sums on account of the asset reconstruction cost (ARC) obligation, which represented the estimated cost likely to be incurred at the network sites and office premises to restore them to their original condition at the end of the lease period. The assessee claimed depreciation in this respect.

The Assessing Officer (AO) disallowed the said provision holding that it was not an ascertained liability. The Tribunal upheld the order of AO. Aggrieved-assessee filed the instant appeal before the High Court.

The High Court held that the issue pertaining to ‘actual cost’ as it appears in Section 32(1) need not be considered. Upon a holistic examination of the rival submissions, it is manifest that it is the alternate plea based on Section 37 that alone would merit further consideration.

Section 37 focuses on expenditure “laid out” or “expended” as opposed to the identification of an actual cost and which constitutes the heart of Section 32. The Madras High Court had an occasion to review a similar situation in Vedanta Limited vs. The Joint Commissioner of Income Tax [Tax Case (Appeals) Nos. 2117 to 2119 of 2008].

It was held that the words ‘laid out’ or ‘expended’ are not confined to an immediate expenditure but would also comprehend an expenditure that may arise in the future. All that Section 37(1) requires is that the expenditure should be “laid out” or “expended” for the purposes of business.

Thus, the provisioning for ARC qualified the prescriptions of AS 29, and the assessee was justified in accounting for the same. The ARC obligation clearly met the test of a positive obligation flowing from a past event, being a conceivable probability as well as being measurable.

Read the Ruling

3. Mere hardship to accused in travelling from one place to another doesn’t justify transfer of cheque dishonour cases u/s 406 CrPC: SC

The Supreme Court, in the matter of Sendhur Agro & Oil Industries v. Kotak Mahindra Bank Ltd. [2025] 172 taxmann.com 255 (SC), ruled that Section 142 of the Negotiable Instruments Act, 1881 provides a complainant with the right to file a complaint in a Court within whose jurisdiction, the branch of bank where the cheque is presented for collection is located. Thus, the complainant can file a complaint in the Court where the collection branch of the bank falls.

3.1 Brief facts of the case

In the instant case, the petitioner, a proprietary concern engaged in coconut oil production, availed an overdraft facility from the respondent bank, Kotak Mahindra Bank, at its Coimbatore branch. The loan was granted against an equitable mortgage on properties located in Coimbatore.

However, the petitioner defaulted on its EMI payments in 2018, which resulted in a demand notice under the SARFAESI Act for Rs. 2.74 crores. Consequential sale notices were issued, and the petitioner’s assets were sold in Coimbatore.

The petitioner challenged the SARFAESI proceedings before the Debt Recovery Tribunal (DRT) at Coimbatore. Meanwhile, the respondent bank/complainant presented the cheque at Chandigarh and subsequently filed a complaint under Section 138 of the Negotiable Instruments Act, 1881, in the Court of Judicial Magistrate, Chandigarh.

Thereafter, the petitioner filed a transfer petition seeking the transfer of the case from the Court of Judicial Magistrate, Chandigarh, to the Court of Metropolitan Magistrate, Coimbatore, Tamil Nadu. The petitioner argued that all financial transactions, including the sanction and disbursement of the loan, took place within Tamil Nadu and therefore, no cause of action arose for the bank to lodge the complaint for the offence punishable under section 138 of the Negotiable Instruments Act, 1881 in Chandigarh.

3.2 Supreme Court Observations

The Supreme Court observed the following key points:

• Section 142 of the Negotiable Instruments Act, 1881 provides that a complaint for dishonour of a cheque can be lodged in a Court within whose jurisdiction the bank branch where the cheque is presented for collection is situated. Thus, a complaint can be filed in the Court where the collection branch of the bank falls.
• Transfer of cases under Section 406 of CrPC is permitted only in situations where there is a reasonable apprehension, backed by evidence, that justice may not be done.
• Mere hardship or inconvenience to the accused in travelling from one place to another does not fall within the ambit of ‘expedient for ends of justice’ under Section 406 of CrPC for the transfer of proceedings.
• The accused can seek an exemption from personal appearance or request the Court to join proceedings online to mitigate any inconvenience.

3.3 Supreme Court Ruling

The Supreme Court held that since the respondent bank’s collection branch was in Chandigarh, the Court in Chandigarh had the territorial jurisdiction to entertain the complaint alleging the commission of an offence punishable under section 138 of the Act. Consequently, the transfer petition seeking to transfer the complaint pending in a Court of Judicial Magistrate, Chandigarh, to the Court of Metropolitan Magistrate, Coimbatore, Tamil Nadu, was to be dismissed.

Read the Ruling

4. Order to be set aside to the extent of ‘Security Wages’ as issue of ‘Security Wages’ was not in SCN and raised without hearing to assessee: HC

The Madras High Court held that a new issue cannot be introduced in an assessment order unless explicitly mentioned in the SCN, as doing so violates the principles of natural justice. The Court set aside the assessment order only to the extent of “Security Wages”, affirming the remainder. This ruling is given in the case Gem Granites vs. State Tax Officer.

Facts

The petitioner, a registered assessee under the Goods and Services Tax (GST) regime, filed a writ petition before the Madras High Court challenging the assessment order passed by the Assessing Authority (AA). The dispute arose when the AA issued a show cause notice (SCN) concerning Administration Expenses. However, in the final assessment order, the AA introduced a new issue of “Security Wages”, raising tax liabilities without prior notice or opportunity for the petitioner to respond. The petitioner contended that the demand on Security Wages was unsustainable as it was not part of the original SCN, thereby violating the principles of natural justice.

Held

The Hon’ble Madras High Court held that the Assessing Authority cannot introduce a new issue in the final assessment order that was not included in the show cause notice. The court observed that the issue of Security Wages was raised only upon the production of documents by the petitioner, and prior to this, no reference to it existed in the SCN or any other communication. As a result, the petitioner was deprived of an opportunity to present its case, constituting a violation of the principles of natural justice. Accordingly, the court set aside the assessment order only to the extent of the issue of Security Wages while upholding the remainder of the order.

Read the Ruling

5. Bail granted as arrest memo was attested by driver and not by any relative or person of locality from where arrest was made: HC

The Honourable Calcutta High Court held that failure to have an arrest memo attested by a family member or a respectable local violates legal instructions, rendering the arrest unlawful and entitling the petitioner to relief. This ruling is given in the case Vishal Kumar Arya vs. Union of India.

Facts

The petitioner was arrested under sections 69 and 132 of the Central Goods and Services Tax Act, 2017. The petitioner contended that the arrest was in violation of section 36 of the Bengal National Security Act, 1992 (BNSS) as the arrest memo was not attested by a member of the petitioner’s family or a respectable member of the locality where the arrest was made.

Held

The Calcutta High Court held that it was clear from the arrest memo that it was attested by a driver who was neither a member of the petitioner’s family nor a person from the locality of the arrest. The arrest was in violation of the instructions issued by the authorities. Since the arrest itself was bad in law, the petitioner deserved an order in his favour.

Read the Ruling

6. Improving audit oversight and compliance in deferred taxation through NFRA’s Auditor-Audit Committee Interaction series

Deferred tax accounting is a critical aspect of financial reporting, ensuring accurate reflection of tax obligations and benefits. Deferred Tax Assets (DTAs) and Deferred Tax Liabilities (DTLs) arise due to temporary differences between financial reporting and tax treatments. While DTAs provide future tax relief, their recognition depends on the certainty of future taxable income. Non- compliance of Ind AS 12, Income Taxes in recognition, measurement, or disclosure can lead to financial misstatements, regulatory penalties, and loss of investor confidence. To enhance transparency and compliance, the National Financial Reporting Authority (NFRA) has been actively guiding auditors and audit committees on this issue.

In its latest release, Part 2 of the Auditor-Audit Committee Interaction Series, NFRA focuses on challenges in auditing deferred taxes under Ind AS 12. A key concern is the risk of overstated DTAs, often due to unrealistic future profit assumptions. Companies must regularly reassess deferred tax estimates to align with economic changes and evolving tax laws. NFRA emphasizes that audit committees must critically evaluate management’s assumptions and ensure that tax estimates are realistic and well-documented. Furthermore, incorrect application of tax laws can lead to misstatements and tax disputes, making regulatory compliance a crucial aspect of deferred tax accounting.

Another major issue is Uncertain Tax Treatments (UTTs), where companies take tax positions that authorities may later challenge. NFRA highlights the need for transparent disclosures and professional skepticism from auditors in reviewing tax risks. Additionally, weak internal controls over tax calculations can lead to errors, inconsistencies, and regulatory scrutiny. Audit committees must ensure robust governance mechanisms to prevent such risks and uphold financial integrity.

With evolving tax regulations and business environments, NFRA urges auditors and audit committees to reassess deferred tax estimates continuously. Economic downturns, mergers, or restructuring can significantly alter a company’s taxable income trajectory, requiring updated assessments. By strengthening internal controls, ensuring transparent disclosures, and challenging assumptions, companies can enhance financial credibility and investor trust while mitigating regulatory risks.

Read the Story