Domestic and Direct Tax Updates

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Direct Tax – Domestic Tax Updates

Notifications and circulars

Central Board of Direct Taxes (‘CBDT’) launches NUDGE initiative for foreign asset / foreign income disclosures

On 27 November 2025, the CBDT launched second NUDGE initiative (Non-intrusive Usage of Data to Guide and Enable) to encourage taxpayers to voluntarily report their foreign assets and foreign income correctly. Using information from international sources like the Automatic Exchange of Information (‘AEOI’) under the Common Reporting Standards (‘CRS’) and the Foreign Account Tax Compliance Act (‘FATCA’) from the United States, CBDT has identified taxpayers who may have foreign assets not reported in their Income Tax Returns (‘ITRs’) for Assessment Year (‘AY’) 2025-26. From 28 November 2025, such taxpayers received Short Message Service (‘SMS’) and email alerts asking them to check and update their ITRs by 31 December 2025. The initiative focused on accurate reporting in Schedule FA (Foreign Assets) and Schedule FSI (Foreign Source Income) of the ITRs, helping taxpayers follow the Income-tax Act, 1961 (‘ITA’) and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (‘BMA’). The first NUDGE campaign in 2024 led over 24,000 taxpayers to revise their ITRs, disclosing foreign assets worth INR 292,080 Million, showing CBDT’s aim to improve compliance in a simple and non-intrusive way.

Domestic Tax Rulings

Supreme Court Rules in favor of Revenue on Applicability of Section 44C to Head Office Expenses

In the present case, the non-resident taxpayer, American Express Bank Ltd., claimed deduction of certain overseas administrative expenses under Section 37(1) of the ITA, without applying the ceiling prescribed under Section 44C of the ITA, in respect of its Indian branch. Upon query by the Assessing Officer, the taxpayer contended that the impugned expenses could not be characterized as “head office expenditure”, as Section 44C presupposes that a part of such expenditure is attributable to business operations outside India. Since, according to the taxpayer, the entire expenditure was incurred exclusively for its Indian business, the provisions of Section 44C were stated to be inapplicable.

The Assessing Officer rejected the taxpayer’s contention and restricted the deduction by applying Section 44C, limiting the allowable expenditure to 5% of the adjusted total income. On appeal, the Commissioner of Income-tax (Appeals) upheld the assessment order. However, the Income Tax Appellate Tribunal ruled in favor of the taxpayer, which order was subsequently affirmed by the Bombay High Court, resulting in dismissal of the Revenue’s appeal.

Aggrieved by the High Court’s decision, the Revenue preferred an appeal before the Supreme Court. Upon hearing both parties, the Supreme Court rendered its findings as under:

• The Supreme Court held that Section 44C applies where (i) the assessee is a non-resident, and (ii) the expenditure qualifies as “head office expenditure”. Once these conditions are satisfied, Section 44C, being a non-obstante provision, overrides Sections 28 to 43A and governs the quantum of allowable deduction. Accordingly, even if such expenditure is otherwise deductible under Section 37(1), the deduction cannot exceed the statutory ceiling prescribed under Section 44C.
• The Supreme Court held that Section 44C applies to all head office expenditure, whether common or exclusively incurred for the Indian branch, so long as it satisfies the statutory definition.
• The Court clarified that “attributable to” is a wider concept, of which “exclusive” expenditure is merely a species; hence, exclusive expenses are also covered under Section 44C.
• The Supreme Court observed that the decision of the Bombay High Court in Emirates Commercial Bank offers no cogent reasoning to support its conclusion that Section 44C applies only to common head office expenditure incurred for multiple branches, and rejected such a restrictive interpretation of the provision.
• The Supreme Court held that the legislative history, including the Explanatory Memorandum and CBDT Circulars, does not indicate that Section 44C was enacted only to restrict common expenditure. Rather, the provision was introduced to address the mischief of inflation of head office expenses by foreign entities and the practical difficulty faced by the Revenue in verifying such claims. Accordingly, the Court held that the plain and unambiguous meaning of Section 44C must be given full effect to remedy the mischief sought to be addressed by the legislature.
• The Court rejected reliance on Article 7 of the India- USA Double Taxation Avoidance Agreement (DTAA), holding that treaty-based deductions are expressly subject to domestic tax law, including Section 44C.

However, on facts, the Court noted that lower authorities had not properly examined whether the expenses actually qualified as “head office expenditure” under the Explanation to Section 44C and therefore remanded the matter to the ITAT for limited factual verification.

Gujarat High Court (‘HC’) holds the notices issued by Jurisdictional Assessing Officer under Section 148 of ITA after 01 April 2022 valid

In the instant batch of writs, the issue challenged by the petitioners was whether the jurisdictional Assessing Officer (‘JAO’) can assume the jurisdiction to issue notices under Section 148 of the ITA, in view of the amendments to Section 151A of the ITA and the E-Assessment of Income Escaping Assessment Scheme, 2022 (‘Scheme 2022’). It was the contention of the petitioners that only the Faceless Assessing Officer (‘FAO’) is empowered to issue notice under Section 148 in a faceless automated manner and the notices issued by JAO were without jurisdiction and void.

The HC observed that the Scheme 2022 provides for e-assessment of income escaping assessment in exercise of the powers conferred in sub-sections (1) and (2) of section 151A of the ITA. As per Paragraph 3 of Scheme 2022, the scope of the Scheme 2022 is sub-divided into two parts – Clause (a) refers to assessment, reassessment and re-computation under section 147 as section 147 refers to the assessment of income escaping assessment, whereas, clause (b) refers to the issuance of notice under section 148 which is prior to the stage of reassessment as to whether the reassessment is to be initiated or not as provided under section 148.

Further, the HC observed that Paragraph 3 of the Scheme, 2022 refers to the issuance of the notice through automated allocation in accordance with the Risk Management Strategy formulated by the Board only. The contention on behalf of the petitioners that the issuance of notice also should be in a faceless manner is also required to be considered from the subsequent prefix after the words “and in faceless manner” which is further qualified by the words “to the extent provided in section 144B with reference to making assessment or reassessment of total income or loss of assessee”. The procedure prescribed under section 144B of the ITA only refers to the faceless assessment and it nowhere provides for the notice to be issued under section 148 in a faceless manner. On perusal of section 148, it is clear that the same is subject to the provisions of section 148A except for certain eventualities enumerated therein.

If the contention of the petitioners is accepted, the HC held that it would lead to the provisions of
section 148A, which provides for inquiry by the Assessing Officer and passing of order by the Assessing Officer to come to a prima-facie conclusion that whether it is a fit case to reopen, which is not available in the Scheme, 2022. If the Scheme is also applied to the procedure prescribed under section 148A, the same shall be altered by adding the procedure of discarding a case which is not a fit case to reopen, which is not intended by the legislature.

The HC, therefore, held that on reading of the provisions of the ITA and Scheme 2022, the legislative intent appears to be to operate the two aspects separately, one by issuance of notice under Section 148 of the Act by automated allocation and other by conducting assessment or reassessment proceedings under Section 147 of the Act in a faceless manner to the extent as provided under Section 144B of the Act. This is supported by the Office Memorandum of CBDT dated 20 February 2023, relied by the Revenue, which provided that the procedure for issuance of notice under Section 148 of the ITA as well as the consequent assessment proceedings is followed as per the Scheme notified under Section 151A of the ITA as the Jurisdictional Assessing Officer is empowered to issue notice under Section 148 of the Act as the Scheme, 2022 only. Accordingly, in view of the foregoing discussion, then HC held the notices issued by the JAO under section 148 of the ITA after 01 April 2022 to be valid and legal.

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