Ethics in the Age of Intelligent Technology
Gabriela Figueiredo Dias
Chair, IESBA
Imagine a technology-based economy in which intelligent systems help to prepare accounts, interrogate entire populations of transactions and identify risks before they become losses
. Now imagine that the same systems can invent facts, conceal bias or act without a clear line of human responsibility . The technology opportunity is extraordinary . So is the obligation to use it ethically .
India’s leadership and a global public-interest imperative
India enters this moment in its technological leadership role in the world with an important ethical milestone
2026 is particularly noteworthy for another reason: re-centering ethics is the topic of Global Ethics Day
India’s scale, digital ambition and globally respected accountancy profession make it a vital proving ground on how the latest technology innovations, such as AI, can be made consistent with re-centering ethics and ultimately, worthy of supporting public trust in the accountancy profession
India’s opportunity and responsibility
Few countries illustrate the pace of technological change more vividly than India
Other technologies are moving through the same professional landscape
The Indian accountancy profession is not watching from the sidelines
Adoption, however, is not the same as competence
India therefore has both a leadership opportunity and a governance responsibility
IESBA's role is to help professional accountants in India and elsewhere act in the public interest through its Code of Ethics and associated guidance and close collaboration with local organizations and professionals
IESBA's durable ethical compass and the Three-Pillar Approach
The technology-related revisions to the IESBA Code², effective in India starting in April 2026, translate ethical principles into practical safeguards for working in an era of rapid and transformative digitalization
Under the Technology-related revisions, professional competence and due care now demand more than the ability to operate a technology-based tool
The revised confidentiality provisions extend across the full data lifecycle: collection, use, transfer, storage, dissemination, and lawful destruction
The Code and its technology-related revisions do not claim to answer every technology question
. They provide something more durable: a disciplined way to ask the right ethical questions before speed, convenience or commercial pressure narrows the field of view . This approach remains relevant to whether a professional accountant is selecting software, developing an AI model, using an external platform or assuring a technology-enabled process .
Keeping the principles-based Code fit for purpose regardless of the technology used is, in fact, the first of IESBA's three-pillar approach to Technology
The second pillar is continuous horizon scanning
The second pillar's focuses on upcoming technology risks includes how digital assets on a blockchain or digital ledgers test the profession's traditional boundaries, particularly where evidence is synthetic, model-driven, distributed across networks or difficult to trace
Distributed ledgers can provide tamper-evident transaction histories, but immutability does not establish the truth of information entered, the legitimacy of an off-chain event or the identity and authority of every participant
Larger concerns about financial crimes also inform the second pillar’s focus
The third pillar is practical support through carefully developed non-authoritative materials, outreach, and communication
IESBA’s July 2026 publication, Emerging Technologies: A Characteristics-Based Approach⁴, illustrates the method of the third pillar
IESBA’s AI-specific non-authoritative material to be published in the coming months will provide further support on dealing with the challenges professional accountants most commonly face
When intelligent systems reshape professional judgment: 5 Examples
The speed and breath of AI Adoption are creating opportunities and challenges everyday around the world
Hallucinations: Consider a plausible month-end close process
. An AI assistant drafts an explanation for an unusual variance, drawing on prior reports and external data . The narrative is fluent, but one cited event never occurred . A team member, pressed for time and reassured by the system’s confidence, approves it . Four of the five fundamental principles are challenged: first, Integrity is engaged because the explanation may mislead; second, professional competence and due care is at issue because the output was not adequately evaluated; third, objectivity must be considered because automation bias displaced challenge; and finally, professional behavior is called into question because unreliable information may reach decision-makers . Shadow AI: An employee uploads a client schedule to an unapproved public tool to save an hour
. Where is the data stored? Can it be used for training? What contractual rights exist, and can the information be retrieved or destroyed? A seemingly minor productivity choice can create a risk extending across jurisdictions, vendors, and the full data lifecycle . Pricing innovations: AI can compress the hours required for some professional services, increasing pressure to reduce fees or move toward outcome-based pricing
. Those models may create value, but they can intensify self-interest threats . A promised result, tight margin or accelerated deadline may encourage teams to reduce review, overstate a tool’s capability or rely on automation beyond what the evidence supports . Pricing innovation must not weaken the professional judgment on which the service depends . Partnerships: A firm may buy an AI tool from an audit client, sell technology to that client, jointly develop a platform, or form an alliance with a strategic provider for multiple services
. Even where no explicit prohibition is triggered under the Code, the arrangement may create commercial dependency, a close business relationship, confidentiality exposure, a self-review threat or the risk of assuming management responsibility . Agentic AI: Agentic AI raises the stakes further
. A system able to plan, call other tools and execute transactions may compress several human decisions into a sequence that is difficult to reconstruct, let alone ethically analyze concerns such as biased training data . Professional accountants must establish boundaries, escalation points, validation and meaningful human review before deployment . Human accountability cannot be delegated to a machine simply because its actions are autonomous .
Keeping humanity and trust at the center
India's 2026 Code milestone shows that ethical convergence and technological ambition can advance together
Furthering this goal of re-centering ethics today, especially in leading countries such as India, means placing at the forefront ethical considerations based on the Code
Re-centering ethics also means technological literacy should be taught alongside ethical reasoning, with realistic cases involving hallucinations, bias, confidentiality, agentic action, digital assets, and fraud
Common sense questions too are part of keeping trust at the center of any ethics-based decision involving technology: before accepting an output, ask where it came from, what it omits and how it could be wrong?
These risks are not reasons to reject AI or technology in general
It is wise to remember that in 2026, the profession's comparative advantage is not privileged access to intelligent tools
Ethics must move at the speed of innovation
Footnotes:[cite: 1, 3, 4]
¹ [https://www.icai.org/post/prc-icai-unveils-groundbreaking-ca-gpt-platform](https://www.icai.org/post/prc-icai-unveils-groundbreaking-ca-gpt-platform)
² [https://www.ethicsboard.org/publications/final-pronouncement-technology-related-revisions-code](https://www.ethicsboard.org/publications/final-pronouncement-technology-related-revisions-code)
³ [https://www.ethicsboard.org/news-events/2026-02/iesba-decoding-ethics-podcast](https://www.ethicsboard.org/news-events/2026-02/iesba-decoding-ethics-podcast)
⁴ [https://www.ethicsboard.org/publications/emerging-technologies-characteristics-based-approach-ethical-considerations-professional-accountants](https://www.ethicsboard.org/publications/emerging-technologies-characteristics-based-approach-ethical-considerations-professional-accountants)
Author may be reached at eboard@icai.in
Leading in Values: Ethics in the Corporate World
Ashwani Kumar
Assistant Vice President and Head of Group Ethics Office, Tata Sons
Picture a Tuesday evening the final, high-stakes day of the financial quarter. A sales team is one order short of its quarterly number that would lead to higher incentives. A key customer says he will sign today only if the invoice is back dated to the previous week. Nobody in that room is inherently dishonest. Everybody has a target and a seemingly valid business justification to say yes. It is settled in about ninety seconds, and it is precisely within these fleeting, quiet moments that the true reality of corporate ethics lives.
We usually picture ethics as something dramatic: a multi-crore fraud, a sudden regulatory raid, or a scandalous front-page corporate collapse. That picture is comforting, because it lets us decide ethics is somebody else's problem. However, the day-to-day reality is more granular and hopeful. Most people want to do the right thing, and most of the time they do. What decides the outcome is rarely a struggle between good and evil. Instead, it hinges on invoice date, the question that was courageously asked or left unasked.
As the Institute of Chartered Accountants of India (ICAI) commemorates Global Ethics Day on 21st October 2026, the theme of "Re-centering Ethics" invites us to bring ethics back to where it does its best work: the boardroom, the business plan and the everyday decision making.
Where Ethics Is Kept, and Where It Slips
Ethics is kept, or slips, in small decisions. A target that must be met by quarter-end. A supplier whose practices are easier not to examine. Each step looks reasonable on its own. Encouragingly, the reverse of this works too: small choices in the right direction, repeated over a period, build a resilient ethical culture that holds under pressure.
Consider a classic dilemma situation I often put to managers. A regional manager notices that a new distributor has been paid a "market development fee" twice in one month, instead of once. The quarter is critical, the distributor is delivering exceptional volume, the underlying facts are unclear. To avoid operational friction, he decides to "keep an eye on it". Three quarters later the additional fee is a routine line item, and an auditor asks a simple question nobody can answer. Asking early would have cost one awkward phone call; asking late cost an investigation. Speaking early is inexpensive that is the whole lesson.
"Speaking early is inexpensive. Speaking late is not."
None of this is peculiar to one manager. What made silence reasonable was circumstance, not character and circumstances can be designed differently.
Why We Choose Well and Why We Sometimes Miss the Choice
Start with an optimistic assumption, because it is true: most people, most of the time, will do the right thing if the work environment lets them. That last phrase carries two conditions.
People must believe the values are real and see themselves in them. An engineer repeatedly told that safety comes first, but measured and incentivized only on units produced, does not disbelieve the value; he simply cannot find it in his working day. Belief is built by watching values used in decisions that cost something — a defective shipment held back, a supplier changed for repeated compliance failure.
The barriers must be low enough. Even those who believe in values run into dilemma situations. Personal barriers include - fear of being seen as difficult, loyalty to a colleague, a home loan that depends on this job. Professional barriers include - an impossible target, a manager who does not want bad news, a rule nobody can explain. Ethics fails more often at these barriers than at the point of belief.
“Most people want to do the right thing — and will, if they believe in the values and the barriers to follow it are low enough.”
When people do miss the mark, it is rarely because they weighed right against wrong and chose wrong. It is because they never saw the decision as an ethical one. Three quiet features of human psychology do this:
Cognitive Bias: Just as our eyes are tricked by an optical illusion, so is our judgment is prone to self-serving distortions. We easily rationalise our own process bypasses as necessary “prudence” while branding a colleague’s identical action as deliberate “evasion”—and feel entirely fair while doing so.
Organisational Framing: The specific vocabulary (point of view) utilised to describe a problem dictates how it is solved. Ask whether a batch that misses an internal quality standard is a “production issue” or an “integrity question,” and the same person may answer differently on the same facts, purely because of the words used.
Ethical Fading: When a target is called non-negotiable. Attention narrows to the number. The ethical part of the decision does not lose the argument; it never enters the room. Ask the team afterwards and they will honestly say no ethical question came up — they were solving for the number, not weighing right against wrong.
Ethical Culture by Design
People rarely fail at the point of belief. They fail mostly at the barriers — the target that leaves no room, the manager who does not want bad news, the process that punishes the honest route. Removing those barriers is not a matter of asking people to try harder. It is a matter of design.
That design has two halves. Four institutional pillars give an organisation its frame, and six managerial levers put the frame to work in a team’s daily life.
The Four Institutional Pillars
Leadership Commitment: No policy or internal control will build an ethical culture without genuine commitment from the top and middle management. Leaders constantly signal what truly matters through their own conduct, the behaviour they reward or sanction, and where they put resources.
Compliance Structure: Stated commitment falls short without the governance structures, robust policies and controls to operationalise them. A well-designed compliance structure answers the practical questions: Who is responsible for the ethics programme? What authority they hold? How ethical considerations enter business processes? What controls prevent and detect misconduct?
Communication and training: Policies achieve little unless they are understood and people are equipped to apply them. Training has to move past awareness of what the rules are, to why they matter and how to use them — which means a buyer learns through a supplier scenario rather than a lecture, and guidance is available at the moment a real situation arises.
Measurement of effectiveness: Measurement moves ethics from stated aspiration to demonstrable accountability. It gives the board sight of how the programme is working, surfaces problems while they are still small, and shows where effort and resources need to be focused.
The frame is what an organisation builds; the levers are what a manager uses. Six do most of the work, and each is available on any ordinary workday.
The Six Managerial Levers
Big Picture: Connect daily tasks to purpose and to people. An internal audit employee checking invoices is not processing paper; he is protecting money that belongs to shareholders, customers and fellow employees.
Role Model: A team reads what its manager tolerates, not what the posters say. Approve one padded expense claim quietly and the policy has been rewritten for everybody, without a single email. Decline one, and that message travels just as far.
Practical Path: Ensure that the ethical route is designed to be the easiest route. If the proper purchase process takes four weeks and the workaround two days, the workaround wins most of the time. Fix the broken process, not the values poster.
Acknowledge Dilemmas: Say out loud that workplace dilemmas are normal. When a leader admits a decision was genuinely difficult — that turning down the order hurt and was still right — the team learns that doubt is not disloyalty.
Enable Reporting: Make raising a concern simple, accessible and safe rather than career-threatening. This requires a credible channel, protection for whoever comes forward, and word feedback loop for action taken. If speaking up needs absolute courage, only the bravest (read: none) will do it.
Reinforce the Values: Celebrate how results were achieved, not only the results. A team publicly acknowledged for rejecting an unethical manoeuvre, even at the cost of a major business opportunity, teaches an organisation more than a year of compliance training.
“A team reads what its manager tolerates, not what the posters say.”
| Ethical Culture By Design | Component | Focus / Action |
The Frame (What the organisation builds) | Leadership Commitment Compliance Structure Communication & Training Measurement of Effectiveness | Sets the governance framework, policies, leadership signals, and accountability mechanisms. |
The Levers (What a manager uses on any ordinary workday) | Big picture Acknowledge Role model Enable Practical path Reinforce | Connect the task to who it protects Say aloud that dilemmas are normal A team reads what its manager tolerates Raising a concern must be safe, not brave Make the ethical route the easy route Celebrate how results were achieved |
None of this needs a new rule, a new policy or a budget. It brings existing commitments into one clear picture of what good looks like — and asks only for the willingness to keep at it, week after week. Design and habit do most of the work. What they cannot do is settle the hard cases.
Where the Rulebook Runs Out
Most organisations that face ethical challenges are not short of policies. They are short of judgment at the point where the rulebook meets real world pressure. Two everyday scenes make the point.
First, the quality manager. A batch clears every legal limit but falls marginally below the company’s own standard. It is peak season and delay costs money. Operations offers the most reasonable line in business: “It is within the legal limit. We will tighten the next batch.” It sounds sensible, and that is what makes it risky. The law is the floor of responsibility, not the ceiling. And “next batch” is how an exception becomes normal, because next batch there will be another deadline. The company that holds the shipment loses a week’s revenue and keeps the confidence of its customer.
Second, the group chat that drifted. A sales manager is part of a friendly chat group with distributors. Over time it turns casual — greetings, jokes, market gossip, then an offhand line about a price revision not yet announced. A week later a screenshot appears elsewhere, and internal information is public. The boundary had gone long before the screenshot. The honest question is how many of us write things in a group chat that we would never put in an email.
Neither case is settled by looking up a rule. Both are settled by what the person already believes and enabled to act on it.
Values Are What You Do When It Costs You
The corporate world has never been short of values statements. A value that is only displayed does nothing; it becomes real the moment it decides something difficult — a highly profitable order turned down because it cannot be won cleanly, or a top performer facing the same consequence for misconduct that any junior would. The distance between what a company says and how it behaves is the only true measure of its ethical culture.
Standing of this kind is never built by branding. It is meticulously built in small moments: a supplier paid fairly for work the contract did not cover; a defect disclosed to a customer who would never have found it. Each of these actions inflicts costs on that day. Over years, such choices become the reason a company’s word is accepted without question — and no advertising can buy that.
Underneath every durable business is a simple belief: the trust of customers, employees, partners and communities is the most valuable asset a company owns, earned through conduct rather than communication. Values work as a compass, guiding behaviour where the rulebook runs out. Rules tell people what they must not do. Values tell them who they are — and so what they will not do, even when nobody is watching and they could easily get away with it.
Technology Changes; the Duty Does Not
Re-centering ethics would be simpler if the risks remained static. The traditional ones — bribery, conflicts of interest, harassment, third-party misconduct — remain, and artificial intelligence (AI) adds new ground. As decisions on credit worthiness, hiring, dynamic pricing and even audit samples are shaped by AI, we inherit profound questions no algorithm can answer for us. Is the model fair, or has it learned old prejudices at scale? Can its decision be explained to the person it affects? Who is accountable when it gets one wrong? Alongside sit the duty to protect data and the speed at which any lapse becomes public. The work of re-centering is to carry settled principles — honesty, independence, care, accountability — onto this new ground and not let “it is new” become a reason for a lower ethical standard.
The Profession That Holds the System Together
No profession sits closer to the centre of this than accountancy. The Chartered Accountant is a guardian of trust in the corporate world — the independent voice whose signature turns a company’s own account of itself into something the public can rely on. Investors, lenders, regulators and employees all act on the strength of that assurance.
Which is why the ethical aspects described earlier is familiar here. Independence, objectivity, and professional skepticism are not merely terms found in our code of ethics; they are the profession’s explicit answer to high-pressure moments. They are placed above commercial convenience precisely because convenience is the very force arguing on the other side.
Back to the Middle of the Table
None of this is a cost centre. Some still see ethics as a speed braker on the path of high performance; the evidence points the other way. The costs of ethical failure — reputational damage, regulatory action, penalties, lost market share — are neither small nor short-lived. Conversely, fair choices, made consistently, work like compound interest. They accumulate into an unassailable strategic asset that competitors cannot replicate, ensuring that top-tier talent and capital consistently flow toward organisations they respect.
Trust compounds the way it is built — one small decision at a time. That is all re-centering asks for: not a glorious programme, but the daily, disciplined habit of noticing and acting upon the right thing to do. The compass still works and the direction is known. The task is to keep ethics in the middle of the table, not as an afterthought once the numbers are settled, but as the frame within which they are made.
Which brings us back to that Tuesday evening, and the invoice nobody questioned. Every reader of this article will sit in a version of that room. You may not set the aggressive target or own the process. But you will be there, and you will notice. The whole of ethics, on most days, comes down to one person willing to say: before we decide — is there a question here we are not asking? To ask that question costs a temporary moment of awkwardness. Choosing not to ask costs considerably more, later, to an innocent stakeholder down the line.
“Ethics is not tested in big moments alone — it is shaped by everyday choices.”
If we hold to that — at every level, and especially where no one is watching — we will not merely have marked a day for ethics. We will have successfully re-centred it, where it was always meant to be.
Author may be reached at eboard@icai.in
Presumptive Taxation for Professional Partners: Analysing the Ranu Gupta Decision and the Unresolved Controversy Under Section 44ADA
CA. Raghav Mundra
Member of the Institute
The ITAT Delhi’s June 2, 2025 decision in Sh. Ranu Gupta (ITA No. 2224/Del/2025) reverses lower authorities and permits professional partners to claim presumptive taxation benefits under Section 44ADA on remuneration received from professional firms. This landmark ruling contradicts the Madras High Court’s A. Anand Kumar decision (2023), which held that partner remuneration cannot constitute “gross receipts” of a profession. The Ranu Gupta Tribunal’s reasoning contains a critical deficiency: it fails to substantively engage with or rebut the High Court’s foundational reasoning that partners do not independently carry on the profession. The decision creates significant jurisdictional variation - favorable to assessees in Delhi but contrary to settled law in South India - and its weakness invites High Court challenge.
Introduction
The taxation of professional partners has long presented a challenge for India’s income tax jurisprudence, particularly when presumptive taxation provisions are invoked. The ITAT Delhi’s recent decision in Sh. Ranu Gupta (ITA No. 2224/Del/2025, Assessment Year 2018-19, pronounced on June 2, 2025) reopens a contentious question: Can a Chartered Accountant who receives remuneration as a working partner in a professional firm claim the presumptive income scheme under Section 44ADA, or is such remuneration fundamentally excluded from the ambit of this provision?
The Statutory Framework: Understanding Section 44ADA
Introduction Of Section 44ADA
Section 44ADA was introduced by the Finance Act 2016, effective from Assessment Year 2016-17. It represents a shift from the general regime of detailed assessment by introducing a presumptive taxation scheme for small professionals. The language of Section 44ADA(1) provides that where the gross receipts of a resident assessee in a previous year on account of a profession do not exceed fifty lakh rupees (subsequently amended by the Finance Act 2023 to increase the threshold to ₹75 lakh), the assessee may declare income from the profession at a sum equal to 50% of the gross receipts, or at a higher amount claimed to have been earned by the assessee.
The statutory language “claimed to have been earned by the assessee” is critical: it may be argued that the income figure is determined by the assessee’s declaration, not by the Assessing Officer’s estimation. The Assessing Officer cannot subsequently deny this deeming provision by demanding that the assessee produce invoices, vouchers, or detailed records of actual expenses incurred. This deeming provision alters the nature of the assessment - it shifts from a detailed, expense-analysis model to a flat, receipt-based model.
The Eligibility Question: Who is an “Eligible Assessee”?
Section 44ADA(1) specifies that the scheme applies to resident individuals engaged in specified professions, partnership firms (excluding Limited Liability Partnerships) engaged in specified professions, and Hindu Undivided Families (HUFs) engaged in specified professions. The statute, notably, does not explicitly require that an assessee must be engaged in an individual capacity or in independent practice. This silence is the source of the controversy. The act recognizes partnership firms as eligible assessees, but it remains silent whether a partner within a firm can claim the benefit for income received from that firm, or whether only the firm itself can claim the benefit for its overall professional receipts.
The Concept of “Gross Receipts” in the Statutory Scheme
The term “gross receipts” is important but not defined in Section 44ADA itself. By implication, “gross receipts of a profession” refers to the total fees, remuneration, or income arising from the practice of the specified profession. The critical dispute revolves on whether remuneration received by a partner from a professional partnership firm constitutes “gross receipts of a profession” carried on by that partner individually, or whether it represents a derivative or secondary source of income that falls outside the ambit of the scheme. This difference is important since it goes to the heart of whether the scheme is designed for independent practitioners or is flexible to encompass secondary professional income earned.
The Core Controversy: Two Competing Interpretations
The controversy depends on different interpretations of what constitutes eligible “gross receipts” for Section 44ADA purposes. Two schools of thought have emerged, each with coherent statutory and jurisprudential support.
The Restrictive Interpretation: The Revenue’s Position
The tax authorities have adopted a restrictive stance grounded in several interconnected arguments. The first is regarding capacity and mode of engagement. Section 44ADA is meant for small practitioners engaged in solo or independent professional practice, as pointed out in CBDT Circular 3/2017, which describes Section 44ADA as a scheme for “small professional practices.” The Revenue views the partnership as the true professional entity, with the partner being a member-service provider rather than an independent practitioner.
The Revenue also argues what might be called the “derivative income theory.” Partner remuneration is not truly “professional income” of the partner but rather a derivative or secondary form of income arising from the firm’s professional practice. The primary income earner is the firm itself. By this logic, the partner is not independently carrying on the profession; rather, the partner is employed or engaged by the firm to contribute to its professional practice. The stance on whether the remuneration paid by the partnership firm to the partner tantamounts to professional income is ambiguous.
Finally, this interpretation reflects a substance-over-form philosophy, i.e. regardless of formal structure, the substance is that the partner is receiving a salary-like payment from an organization, not generating independent professional income.
The Expansive Interpretation: The Assessee’s Position (and ITAT Delhi’s Endorsement)
Conversely, assessee advocates and, the ITAT Delhi in Ranu Gupta argues that the statutory text does not support the Revenue’s restrictive interpretation. Section 44ADA does not, in its statutory text, mandate that a professional must practice in an individual capacity. If the Act intended such a restriction, it could and should have stated it explicitly. Under existing law, Section 28(v) of the Act explicitly characterizes remuneration received by a partner as “profits and gains from business or profession.” If it is professional income for standard taxation purposes, it should not be disqualified merely because it arises through a partnership. To do so would create an internal inconsistency: treating the same income as professional for general assessment purposes but non-professional for presumptive purposes. This inconsistency cannot be justified without explicit instructions in the Act distinguishing between the two contexts.
The Judicial Landscape: Conflicting Case Law
The “Presumptive Taxation Denies Partner” Line: A. Anand Kumar (Madras High Court)
Perhaps the most cited authority against allowing Section 44ADA (and similarly Section 44AD) benefits to partners is the decision of the ITAT Chennai in A. Anand Kumar (ITA No. 573/CHNY/2018), which was subsequently upheld by the Madras High Court on December 21, 2023 (MA No. 388 of 2019). In this case, A. Anand Kumar, an individual assessee, received remuneration and interest on capital from partnership firms during Assessment Year 2012-13. He sought to apply the presumptive rate of 8% under Section 44AD (a similar presumptive scheme for business).
The ITAT Chennai held that remuneration and interest received by a partner from a firm cannot be termed “turnover” or “gross receipts” of the partner himself. These amounts are not receipts from a business carried on by the assessee but rather receipts from a partnership in which the assessee is a partner. The presumptive scheme (Section 44AD) applies to persons carrying on an “eligible business,” and receipt from a partnership firm does not constitute an “eligible business” of the partner.
The Madras High Court upheld the Tribunal and went further and provided more detailed reasoning. The High Court held that the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. The remuneration and interest received by the assessee from the partnership firm cannot be termed to be a turnover as assessee.
This decision, being a High Court affirmation, carries significant precedential importance. It establishes that an individual partner is not “carrying on a business” or “engaged in a profession” independently; rather, the firm carries on the business, and the individual merely receives a share of its proceeds or remuneration.
The “Partner Can Opt” Supporting Line: Sagar Dutta (ITAT Kolkata)
In contrast, Sagar Dutta v. DCIT (ITAT Kolkata) ITA 692/Kol/2012, though not directly addressing Section 44ADA, is cited for the proposition that a partner can maintain books of account and be assessed on remuneration received from the firm as “gross receipts.” The Kolkata Tribunal held that remuneration and other receipts by a partner from a professional firm can be considered “gross receipts” for purposes of the statutory book-keeping requirement under Section 44AB. If amounts constitute gross receipts for audit purposes, the reasoning goes, they should similarly qualify under the presumptive scheme.
However, the Sagar Dutta decision involved a different statutory provision (Section 44AB audit requirements) and did not directly opine on Section 44ADA applicability. The decision is thus a supporting precedent by analogy but lacks the direct authority of A. Anand Kumar, as the distinction in “gross receipts” for audit compliance purpose and for presumptive taxation demands jurisdictional intervention.
The Foundational Partner Income Case: Ramnik Lal Kothari (Supreme Court)
The Supreme Court decision in Commissioner of Income Tax v. Ramnik Lal Kothari (1969) 74 ITR 57 (SC) is ancient decision but remains significant in the context of taxation of partner’s income. The Supreme Court established that a partner’s share in the firm’s profits is “profits and gains of business” within the meaning of the predecessor Income Tax Act, 1922. It held that a partner is entitled to claim deductions under Section 10(2) for expenditure incurred in earning the partner’s share of profits, even if such expenditure is not incurred by the firm itself.
This decision recognizes that partner’s income is taxed as business income and that partners have deduction rights of allowable business expenditure. A partner is not merely a passive recipient but an active participant in earning that income. However, this case predates the introduction of Section 44ADA and does not address whether partner income specifically qualifies for presumptive schemes.
The Auditing Framework Cases: Usha A. Narayanan and Amal Ganguly
Several tribunal decisions (such as Usha A. Narayanan v. DCIT, ITAT Kolkata, ITA 703/Kol/2012 and Amal Ganguly, ITA 2135/Kol/2008) have held that remuneration received by partners is subject to audit requirements under Section 44AB when it exceeds statutory thresholds. These decisions are often cited for the proposition that such amounts constitute “gross receipts” for audit purposes and therefore should be similarly treated under presumptive provisions.
Analysis of the Ranu Gupta Decision: The Delhi Bench's Significant Interpretation
Facts and Lower Authority Rejection
Sh. Ranu Gupta (the order spells the name both as "Ranu" and "Renu") was a Chartered Accountant. During Assessment Year 2018-19, the assessee received Rs. 27,00,000 as remuneration from the firm. He offered 50% of this amount to tax under the presumptive scheme of Section 44ADA.
The assessee relied on Sagar Dutta (ITAT Kolkata) for the proposition that partner remuneration qualifies as gross receipts, and Ramnik Lal Kothari (SC) for the principle that partner income is legitimate business income. The Assessing Officer rejected the claim on multiple grounds. First, the assessee was receiving remuneration as a working partner of the firm, not as an individual independently carrying on the profession. Second, the expenses incurred by the working partner for conducting the firm's affairs are the liability and responsibility of the firm and not of the individual partner, stating that the partner is not truly "carrying on" the profession. Third, under Section 28(v) and Section 40(b), remuneration from the firm cannot be considered gross receipts of a profession carried out by the assessee individually.
The AO also relied on CBDT Circular 3/2017, arguing that the scheme is for "small taxpayers" and "small professional practices." Additionally, the AO noted that the assessee had previously declared the same remuneration as general business income in Assessment Years 2016-17 and 2017-18.
The Commissioner of Income Tax (Appeals) upheld the AO's order. The appellate authority agreed that remuneration received by a partner is distinct and separate from the professional income of the partner as an independent practitioner. The decision in A. Anand Kumar case is taken to supports the AO's position. The CIT(A) essentially adopted the version of the Revenue's argument that if a partner cannot claim presumptive benefits for business under Section 44AD (per A. Anand Kumar), then certainly not for profession under Section 44ADA.
The Tribunal's Interpretation
The Delhi Bench of ITAT allowed the appeal. The Tribunal directed the Assessing Officer to reassess the assessee under Section 44ADA. This reversal contradicts both lower authorities and the precedent of A. Anand Kumar.
The Tribunal held that Section 44ADA does not impose any precondition that an assessee must first claim or substantiate actual expenditure to be eligible for the presumptive benefit. This reasoning rebuts the Revenue argument that because the assessee did not claim any expenses against the remuneration, the presumptive scheme should not apply. The Tribunal correctly recognized that the absence of claimed expenditure is irrelevant to eligibility. The deeming provision operates automatically once the assessee opts for the scheme.
The Tribunal emphasized that Section 44ADA does not mandate that professional activity must be carried on in an individual capacity or independently. Nowhere in the statutory text is it stipulated that a professional partner in a firm is not eligible for presumptive taxation merely because the activity is conducted through a partnership.
The Tribunal invoked the principle of strict interpretation of taxing statutes as established by the Supreme Court in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co. (2018) 9 SCC 1. This landmark decision, decided by a Constitutional Bench, reiterated that in construing taxation statutes, the Court has to apply strict rule of interpretation. The Tribunal applied the strict interpretation principle to reject the Revenue's implicit reading of conditions not found in the statutory text.
The Ranu Gupta Order's Critical Flaw: A. Anand Kumar Remains Unrebutted
A critical examination of the Hon'ble ITAT Delhi's order in Sh. Ranu Gupta (ITA No. 2224/Del/2025, June 2, 2025) reveals a fundamental defect. The Tribunal's actual reasoning occupies only paragraph 4 of the order and is very brief. The Tribunal talked about the main issues of the case in only one short paragraph in which the Tribunal summarily dismisses the Revenue's arguments without addressing the A. Anand Kumar precedent that formed the foundation of both the AO's and CIT(A)'s decisions.
This implies that the Tribunal did not engage with the A. Anand Kumar's precedent or attempt to rebut the High Court's holding that a partner "is not carrying on any business" and therefore remuneration "cannot be termed to be a turnover of the assessee." The Tribunal does not address why identical reasoning would not apply to Section 44ADA or why a partner “is carrying on a profession” when the High Court concluded the partner is not carrying on a business.
Instead, the Tribunal’s entire decision rests on a single point: Section 44ADA contains no explicit statutory language prohibiting partners from claiming the benefit, and therefore, textual silence must be interpreted in the assessee’s favor under the Dilip Kumar doctrine of strict interpretation. The Tribunal does not dispute the observations in A. Anand Kumar. The brevity of the Tribunal’s reasoning and its failure to rebut the High Court’s judgment create a conflicting arena that the Tribunal is not attempting to overturn A. Anand Kumar but rather is circumventing it through a procedural technicality, i.e. statutory silence.
This is problematic for several reasons. The doctrine of strict construction of tax statutes (Dilip Kumar, mentioned supra) does not automatically override High Court precedent. The Tribunal’s assertion that silence favors the assessee is a choice of interpretation. The Tribunal has not addressed whether the principle underlying A. Anand Kumar - that a partner does not independently carry on the business/profession but rather receives income from the entity that does - applies with equal force to Section 44ADA. If this principle has merit, then silence in Section 44ADA does not erase it.
This decision is therefore significantly weakened by the Tribunal’s failure to engage substantively with the precedent that opposed it. When the matter reaches a High Court on appeal, the court can point out that the Tribunal never addressed A. Anand Kumar’s core reasoning, merely stated that statutory silence favors the assessee, and failed to explain the basis for distinguishing the High Court’s holding. Consequently, the law on whether partners can claim Section 44ADA benefits remains unsettled, and the Revenue’s position holds considerable strength pending High Court resolution of the inter-bench conflict.
Relevance under the Income Tax Act 2025, applicable w.e.f. 01.04.2026
This issue remains highly relevant under the new Income Tax Act, 2025, because the core controversy continues almost unchanged even though the presumptive regime is now structurally consolidated into a single provision, i.e. Section 58 instead of the erstwhile Sections 44AD/44ADA of the 1961 Act. The new Act preserves a presumptive scheme for small resident taxpayers and professional assessees, but it does not comprehensively resolve the specific question of partner-level eligibility, meaning that the interpretational conflict between decisions like A. Anand Kumar and the favourable ITAT rulings of Ranu Gupta will still determine how Section 58 is argued and applied in practice. In effect, while section numbering and some eligibility mechanics have changed, the analytical framework and jurisprudence of ITAT Delhi in Ranu Gupta remain immediately useful under the Income Tax Act, 2025.
Conclusion: The Significance and Limitations of Ranu Gupta’s decision
The Ranu Gupta decision represents a significant victory for professional partners seeking to claim presumptive taxation benefits under Section 44ADA. By invoking strict interpretation principles and plain language reading, the Delhi Bench has held that Section 44ADA does not exclude partner remuneration from presumptive relief.
The decision offers hope, but not certainty. The Ranu Gupta decision is a landmark case that likely marks a turning point in the treatment of professional partners under presumptive taxation provisions. However, it is not yet the final word. Until a High Court affirms or reverses it, or until legislative clarification occurs, practitioners should regard the law as evolving. The law on this fundamental question remains unsettled, and the coming years will likely see further judicial pronouncements that may bring clarity.
Author may be reached at officeraghavm@gmail.com and eboard@icai.in
Deductions Available under the New Tax Regime (Section 202 of the Income Tax Act 2025): A Practical and Professional Analysis
CA. Deepak Rathore
Member of the Institute
Section 202 of the Income-tax Act, 2025, introduced a concessional tax regime for individuals and Hindu Undivided Families (HUFs), offering lower tax slab rates in exchange for the withdrawal of most exemptions and deductions. With effect from Financial Year 2025-26, the new tax regime has been notified as the default tax regime, though taxpayers may still opt for the old regime while filing their return of income. This article examines the scope of deductions and exemptions that continue to remain available under the new tax regime, dispels common misconceptions, and provides practical clarity for taxpayers and professionals.
Introduction
Every year, a significant number of taxpayers in India grapple with a fundamental question: "Which tax deductions am I eligible to claim?" For several decades, tax planning in India largely revolved around the Old Tax Regime, under which taxpayers could reduce their taxable income through various deductions and exemptions. Popular instruments such as Provident Fund (PF), Life Insurance (LIC), Equity Linked Savings Schemes (ELSS), health insurance premiums, and interest on home loans formed the backbone of tax-saving strategies. While this regime offered substantial deduction-based relief, it was also characterised by higher tax rates, extensive documentation, and complex compliance requirements.
With the objective of simplifying the income tax framework and reducing dependency on tax-driven investments, the Government of India introduced the New Tax Regime under Section 202 of the Income-tax Act, 2025. The new regime provides concessional tax slab rates in exchange for the withdrawal of most exemptions and deductions available under the old regime. A common misconception among taxpayers is that no deductions whatsoever are permitted under the new tax regime. This assumption is inaccurate. In reality, although the scope of deductions has been significantly narrowed, a limited yet meaningful set of deductions and exemptions continues to be available under the new tax regime. When understood and applied correctly, these provisions can still help taxpayers legally and efficiently reduce their tax liability, even without traditional tax-saving investments.
This article examines each deduction permitted under the New Tax Regime and explains those in clear and simple terms, supported by practical illustrations, to enable taxpayers and professionals alike to clearly understand what can and cannot be claimed while opting for taxation under Section 202.
Applicability of Section 202 of the Income-Tax Act, 2025
Section 202 applies to the following categories of taxpayers:
Individuals or Hindu Undivided Families (HUFs) or
An association of persons (other than a co-operative society); or
A body of individuals, whether incorporated or not; or
An artificial juridical person referred to in section 2(77)(g)
The provisions apply uniformly to:
Salaried employees
Pensioners
Self-employed individuals
Professionals
The availability of deductions, however, varies depending on the nature of income, particularly salary income.
Income Tax Slab Rates under the New Tax Regime
The Income-tax Act, 2025 introduces a significant simplification in India's tax framework by replacing the traditional concepts of "Previous Year" and "Assessment Year" with a single, unified term known as the Tax Year. Effective from 1 April 2026, the tax year represents a straightforward 12-month period from April to March, aligning the period of earning income with its taxation reference and eliminating the long-standing confusion between financial and assessment timelines.
TAX YEAR 2026-27: Slab Rates
The slab rates applicable under Section 202 are as follows:
| Total Income | Rate of Tax |
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
These slab rates apply irrespective of age and category of the taxpayer.
Standard Deduction under the New Tax Regime
Section 19 continues to provide relief to salaried taxpayers under the new tax regime.
Standard Deduction: ₹75,000
Eligible taxpayers: Salaried individuals and pensioners
This deduction is allowed automatically and does not require any documentary evidence.
Rebate under Section 156 of the Income-Tax Act, 2025
Resident individual taxpayers opting for the new tax regime are eligible for a rebate of tax up to ₹60,000 under Section 156.
Impact of Rebate:
Taxable income up to ₹12,00,000 results in nil tax liability.
Salaried individuals effectively enjoy tax-free income up to ₹12,75,000, considering the standard deduction.
This rebate significantly enhances the attractiveness of the new tax regime for middle-income taxpayers.
Deductions Allowed under Section 202 of the Income-Tax Act, 2025
Although most deductions under Chapter XV are withdrawn, the following deductions continue to be available.
Employer’s Contribution to National Pension System – Section 124(1) of the Income-tax Act, 2025
Deduction is allowed for contributions made by the employer to the employee’s NPS account.
Employees: Up to 14% of salary (Basic + DA)
There is no monetary ceiling on this deduction.
The table below compares the tax treatment of National Pension System (NPS) contributions under the New Tax Regime (Section 202) and the Old Tax Regime, highlighting the structural difference in deduction availability. The distinction primarily revolves around who contributes (employer vs employee) and whether deductions fall under Chapter XV limits.
| Particulars | New Tax Regime (Section 202) - Government Employer | New Tax Regime (Section 202) - Other Employers | Old Tax Regime - Government Employer | Old Tax Regime - Other Employers |
| Employer’s Contribution (124) | Deductible up to 14% of Salary (Basic + DA) | Deductible up to 14% of Salary (Basic + DA) | Deductible up to 14% of Salary (Basic + DA) | Deductible up to 10% of Salary (Basic + DA) |
| Employee’s Contribution (124) | Not allowed | Not allowed | Deductible up to 10% of Salary (Basic + DA) within overall Section 123 limit | Deductible up to 10% of Salary (Basic + DA) within overall Section 123 limit |
| Additional NPS Deduction (124(3)) | Not allowed | Not allowed | Deductible up to ₹50,000 extra over Section 123 limit | Deductible up to ₹50,000 extra over Section 123 limit |
| Deduction Under Section 123 (Total Limit ₹1.5 Lakh) | Not available | Not available | Available (includes employee NPS contribution) | Available (includes employee NPS contribution) |
Agniveer Corpus Fund: Deduction of Contributions under Section 125
Section 125 was introduced in the Income-tax Act, 2025 to provide tax relief to individuals enrolled under the Agnipath Scheme, with the objective of encouraging disciplined savings for Agniveers during their tenure of service. The section specifically grants deductions in respect of contributions made to the Agniveer Corpus Fund.
Unlike most deductions under Chapter XV, the benefit under Section 125 is expressly allowed even when the assessee opts for the New Tax Regime under Section 202.
Eligible Assessee
The deduction under Section 125 is available to:
Individuals enrolled as Agniveers under the Agnipath Scheme.
No other category of taxpayer is eligible for this deduction.
Nature of Contributions Covered
Section 125 allows deduction in respect of the following contributions made to the Agniveer Corpus Fund:
Employee’s (Agniveer’s) own contribution, and
Contribution made by the Central Government to the Agniveer Corpus Fund.
Both contributions are treated independently and are fully deductible.
Quantum of Deduction
100% of the amount contributed by the Agniveer to the Agniveer Corpus Fund is allowed as a deduction.
100% of the contribution made by the Central Government to the said fund is also allowed as a deduction.
There is no monetary ceiling prescribed under this section.
Availability under New and Old Tax Regimes
| Particulars | Old Tax Regime | New Tax Regime (Section 202) |
| Deduction for Agniveer’s contribution | Allowed | Allowed |
| Deduction for Government’s contribution | Allowed | Allowed |
| Covered under Section 123 limit | No | No |
Thus, the deduction under Section 125 operates independently of Section 123 and is not affected by the choice of tax regime.
Professional Observations
Section 125 is a regime-neutral deduction, unlike most Chapter XV deductions.
The deduction is over and above Section 123, with no upper monetary cap.
It ensures tax neutrality of mandatory savings under the Agnipath Scheme.
From a policy perspective, the provision aligns taxation with the unique employment structure of Agniveers.
Conclusion
Section 125 provides comprehensive tax relief in respect of contributions made to the Agniveer Corpus Fund by allowing full deduction of both employee and government contributions, irrespective of the tax regime chosen. This provision ensures that Agniveers are not disadvantaged from a tax perspective due to compulsory savings under the Agnipath Scheme and reinforces the Government’s intent to support long-term financial security for such personnel.
Deduction in respect of Family Pension – Section 93(1)d of the Income-tax Act, 2025
Meaning of Family Pension
Family pension refers to the pension received by the spouse or legal heir of a deceased employee, whether from the Government or from a private employer. For income-tax purposes, family pension is taxable under the head “Income from Other Sources” and not under the head “Salaries”.
Deduction Allowed
The provisions relating to family pension under the Income-tax Act, 2025 continue to provide a standard deduction to reduce the tax burden on recipients of such income. Family pension, being a regular monthly payment made by the employer to the family of a deceased employee, is taxable under the head “Income from Other Sources,” but with a concessional deduction. As per the new framework, where income-tax is computed under section 202(1), the deduction allowed is the lower of one-third of such income or ₹25,000; in all other cases, the deduction is restricted to the lower of one-third of such income or ₹15,000. This ensures a degree of relief to dependent family members while maintaining a simplified and consistent approach under the revised tax regime.
| Basis | New Tax Regime (Section 202(1)) | Old Tax Regime (Other Cases) |
| Nature of Income | Family Pension | Family Pension |
| Head of Income | Income from Other Sources | Income from Other Sources |
| Deduction Rule | Lower of 1/3 of pension or ₹25,000 | Lower of 1/3 of pension or ₹15,000 |
| Maximum Deduction Limit | ₹25,000 | ₹15,000 |
| Percentage Condition | 1/3 of total pension | 1/3 of total pension |
| Final Deduction Allowed | Whichever is lower (1/3 or ₹25,000) | Whichever is lower (1/3 or ₹15,000) |
This deduction is automatic and does not require any specific investment or expenditure.
Illustrative Example
| Particulars | Amount (₹) |
| Annual Family Pension received | 90,000 |
| One-third of pension | 30,000 |
| Deduction allowable under Section 93(1)d | 15,000 |
| Taxable Family Pension Income | 75,000 |
Note: The deduction of ₹15,000 is allowed irrespective of whether the assessee opts for the old or new tax regime.
Interest on Home Loan - Let-Out Property Only (Section 22 of the Income-tax Act, 2025)
Self-Occupied Property
Under the New Tax Regime (Section 202), no deduction is allowed in respect of interest on borrowed capital for a self-occupied house property.
Accordingly:
The deduction of interest up to ₹2,00,000 available under the old tax regime stands withdrawn.
No loss under the head "Income from House Property" can be claimed for a self-occupied property under the new tax regime.
Let-Out Property
In the case of a let-out property, the treatment under the new tax regime is as follows:
Deduction of interest on borrowed capital under Section 22 continues to be allowed.
However, any loss arising under the head "Income from House Property" cannot be set off against income under other heads, such as salary or business income.
Such loss may be carried forward and set off only against income from house property in subsequent assessment years, subject to statutory provisions.
Illustrative Example
| Particulars | Amount (₹) |
| Gross Rental Income | 2,40,000 |
| Less: Interest on Home Loan | (3,00,000) |
| Loss under the head "Income from House Property" | (60,000) |
Tax Treatment under New Tax Regime:
The loss of ₹60,000 cannot be adjusted against salary or other income in the same assessment year.
The loss may be carried forward and set off only against income from house property in future years.
Professional Note
The restriction on set-off of house property loss under the new tax regime significantly impacts taxpayers with housing loans. Taxpayers with substantial home loan interest, particularly in respect of self-occupied properties, should carefully evaluate the comparative tax impact before opting for Section 202.
Transport Allowance for Differently-Abled Employees: Rule 15(1), Income-tax Rules, 2026 (Effective from April 1, 2026)
Under the provisions of the Income-tax Rules, 2026, the government has proposed a substantial enhancement in the transport allowance deduction for employees with disabilities, including those who are blind, deaf, dumb, or orthopedically handicapped. The monthly deduction limit, which was earlier ₹3,200, is proposed to be increased to ₹8,000 for employees residing in non-metro areas and ₹15,000 for those in notified metro cities. This deduction will continue to be available under both the new and old tax regimes and is specifically aimed at addressing the higher commuting costs and mobility challenges faced by differently-abled individuals.
| Category | Earlier Limit | Revised Limit - Non-Metro Cities | Revised Limit - Metro Cities |
| Differently-Abled Employees | ₹3,200/month | ₹8,000/month | ₹15,000/month |
The above exemption is allowed irrespective of the tax regime opted.
Salary-Related Exemptions Allowed
Retirement and Terminal Benefits
The following exemptions continue to apply under the new tax regime as per existing limits:
Gratuity
Leave Encashment
Voluntary Retirement Compensation
These exemptions are unaffected by the choice of tax regime.
Allowances for Official Purposes
Certain allowances remain exempt when incurred wholly, necessarily, and exclusively for official duties, including:
Transport allowance for specially-abled employees
Conveyance allowance for official duties
Travel allowance for tour or transfer
Daily allowance for duty-related expenses away from the normal place of work
Perquisites for Official Use
Perquisites provided exclusively for official purposes continue to remain exempt, subject to prescribed conditions.
Deductions and Exemptions Not Available (Illustrative)
Under Section 202, the following commonly claimed benefits are not allowed:
Section 123 investments (PF, LIC, ELSS, PPF, etc.)
Medical insurance premium
Education loan interest
Donations
House Rent Allowance (HRA)
Leave Travel Allowance (LTA)
Home loan interest on self-occupied property
Employee’s own NPS contribution
Professional Evaluation of the New Tax Regime
The new tax regime is particularly beneficial for:
Taxpayers with minimal investments under Chapter XV
Salaried individuals without housing loans
Employees receiving employer contribution to NPS
Individuals preferring higher liquidity and simplified compliance
The regime may not be advantageous for taxpayers who heavily rely on deductions and exemptions under the old regime.
Conclusion
The introduction of Section 202 represents a structural transformation in India’s personal taxation framework, shifting the emphasis from exemption-oriented tax planning to a simplified, rate-based system. Although the new tax regime significantly restricts the availability of traditional deductions and exemptions, it does not eliminate tax relief in its entirety. Select provisions—such as the standard deduction, employer’s contribution to the National Pension System, deductions relating to the Agniveer Corpus Fund, interest on borrowed capital for let-out properties, and exemptions in respect of specified retirement benefits—continue to offer targeted relief under the new regime.
The analysis demonstrates that the effectiveness of the new tax regime is largely contingent upon the taxpayer’s income composition, employment structure, and availability of employer-driven benefits. For certain categories of taxpayers, particularly salaried individuals with limited reliance on Chapter XV deductions, the new regime may result in improved tax efficiency alongside reduced compliance complexity. Conversely, taxpayers with substantial deduction-based claims may find the old regime more advantageous.
Accordingly, the choice between the old and new tax regimes necessitates a reasoned, computation-based evaluation on an annual basis, rather than a presumption driven by the default applicability of Section 202. A nuanced understanding of the residual deductions and exemptions under the new tax regime is essential for ensuring legally compliant and optimal tax outcomes within the evolving income-tax framework.
Author may be reached at deepakrathore.8888@gmail.com and eboard@icai.in
Navigating Taxation in Inbound Overseas Secondments through the Labyrinth of Confusion
CA. Shreya Daga
Member of the Institute
Inbound secondments to India involve employees of a foreign company (F Co.) working temporarily for an Indian entity (I Co.), typically while remaining on F Co.’s payroll. Tax issues arise around tax on salary, withholding tax obligations, and Permanent Establishment (PE) risk. Courts assess the “real employer” through operational control, payroll, vested commercial interest of F Co. in operations of I Co., and business conduct, not just formal agreements. Landmark rulings such as Morgan Stanley, Centrica, Northern Operating, Formula One, and Hyatt have progressively refined Service and Fixed Place PE doctrines. Employee short-stay exemptions under Tax Treaties may apply, subject to the foreign employer being considered as the real employer. Strategic planning requires careful scrutiny of functions, assets, risks of I Co. qua F Co., and control thereon by the latter. Further, evolving jurisprudence demands that the facts and arguments are presented holistically and with structure before appellate forums to avoid adverse consequences.
Introduction
Inbound secondments to India usually refer to cases where employees of a foreign entity (parent, group company, or overseas client – hereinafter called F Co.) are temporarily deputed/seconded to work for an Indian entity (hereinafter called I Co.). Generally, F Co. sends skilled employees to I Co. to provide expertise, train local staff, or manage key projects. For global contracts, part of the work may need to be executed in India under the supervision of foreign personnel. The business rationale of secondment lies in I Co. getting direct access to experienced resources while allowing F Co. to maintain oversight and even call the shots. Generally, secondment is not a permanent transfer; the employee remains on the foreign payroll legally or reserves a lien on social security benefits, etc. with the home employer and works for the Indian company for a limited duration. The employee also receives salary from F Co. into his foreign bank account for administrative convenience. Even if the employee receives salary from I Co. directly in his Indian or overseas bank account, F Co. may continue paying social security benefits to overseas accounts of the employees to ensure continuity after termination of the Indian secondment term/agreement. Generally, the cost in respect of the seconded employee is cross-charged by F Co. to I Co. on a cost-to-cost basis.
A typical secondment arrangement would have three-fold documentation governing the roles, terms and responsibilities between:
F Co. and I Co. – inter-firm service agreement/secondment agreement
F Co. and employee – assignment agreement
I Co. and employee – local employment letter
The following tax controversies may potentially arise in India from this cross-border setup:
Taxability of service fees or reimbursement in the hands of F Co.
Withholding tax implications on reimbursement
Permanent establishment (PE) implications for F Co. through factors like prolonged stay of employee in India, or excessive control over Indian operations, thereby putting the Indian office at their virtual disposal
Short-stay exemption in the hands of the employee under the relevant Tax Treaty, if any, and incidental withholding tax implications in India on employee’s salary in the hands of I Co.
Issues 1 to 3
These issues rest on one fundamental question i.e., who the real employer is? If the question can be demonstrated in favour of I Co., then it is easy to justify that salary reimbursement to F Co. on a cost-to-cost basis is only for administrative convenience and that once it has carried out TDS on salary under Section 192 of the Income-tax Act 1961 ("the Act"), there is no need for I Co. to examine TDS implications again under Section 195 of the Act on reimbursement of such salary cost to F Co. It is also easy to conclude that if I Co. is the real employer and exercises substantive control on the seconded employee, the latter should not be seen as extended presence of F Co. in India to create a PE in India.
However, if the facts tilt in favour of F Co. as being the "real employer", authorities may contend that F Co. is receiving service/manpower supply fees in lieu of lending their employees to India which should be taxed in India as fees for technical services (subject to Tax Treaty benefit, if any) in the absence of a PE or business income in the case of constitution of PE in India. F Co., being seen as the real employer of the seconded employee, may symbolize the former having control over the Indian operation or disposal of I Co. premises, thereby posing PE risk to it.
"The assessment of parameters defining a master-servant or employer-employee relationship, including directions on 'what to do' versus 'how to do it too,' and the distinction between a 'contract of service' and a 'contract for service,' has become more critical than ever in determining the real employer and the degree of control exercised over the employee during and after secondment."
As this forms the focal point of dispute, it has generated a plethora of litigation over time—each case adding fresh perspectives and yielding varied conclusions on fact patterns that are similar yet not identical. The result is a labyrinth of complexity, with several principles already settled by the Apex Court. Yet new dimensions remain unexplored, with tax authorities and appellate forums adopting an evolving ambulatory approach, and judicial scrutiny often lifting the veil on contrived arrangements.
In the Morgan Stanley case¹, the Apex Court got an occasion to deliberate on the following aspects, where it coined the following principles of law:
PE in India: It was held that Morgan Stanley Advantage Services (MSAS), an Indian affiliate, constituted a Service PE of Morgan Stanley US under Article 5(2)(l) of the India-US DTAA.
Attribution of Profits: Once the Indian entity (MSAS) was remunerated at arm's length price (ALP) for the services rendered, no further profits could be attributed to the foreign company in respect of the PE. Thus, transfer pricing and PE profit attribution principles were harmonized.
Stewardship vs. Deputation: A line was drawn between stewardship function and deputation. Employees sent on "stewardship" functions (oversight, ensuring quality, protecting investor interests) do not create a PE; however, employees seconded and working under the control of I Co. could contribute to PE characterization.
Later, another landmark Delhi High Court judgement in the case of Centrica², dealt with Permanent Establishment (PE) issues in the context of secondment of employees. Centrica UK and other group entities seconded some employees to its Indian subsidiary, Centrica India Offshore Pvt. Ltd. (CIOP), for managerial and technical functions. It was held that if secondees remain employees of F Co. (contractually, payroll, repatriation rights) and render services in India “on behalf of F Co.”, F Co. may be considered to have a Service PE in India, even if I Co. reimburses costs.
In the Northern Operating Systems³ ruling, the Supreme Court observed that the secondment arrangement was essentially the foreign entity “lending” its employees to the Indian company. Reimbursements of salary cost were consideration for a taxable supply of manpower services under indirect tax law. This has triggered a spur of discussion of re-evaluating the fundamentals of the secondment arrangement in the corridors of the income tax office too.
In the Hyatt case⁴, the Supreme Court got the occasion to decide whether Hyatt International had a Fixed Place Permanent Establishment (PE) in India under Article 5(1) of the India-UAE DTAA, through its Strategic Oversight Services Agreement (SOSA) with Indian hotel companies, thereby making its income taxable in India.
The Supreme Court examined the case through a Fixed Place PE lens and affirmed the same, owing to many factors, some of which are:
Continuous and substantive operational control exercised by Hyatt over hotel operations.
Exclusive possession of premises is not essential, and stability, productivity and dependence tests form the principle of Disposal and Fixed Place PE test; following its coordinate bench ruling in the case of Formula One⁵.
Frequent visits coupled with intermittent return by Hyatt’s executives collectively established a continuous business presence.
Revenue-linked service fee arrangement seen as vested interest of F Co. in controlling the operations of I Co.
India PE, assessed as a separate taxable entity and merits profit attribution exercise, regardless of global losses of F Co.
Thus, from 2007 (Morgan Stanley) → 2014 (Centrica) → 2022 (Northern Operating) → 2025 (Hyatt), the controversy regarding taxation of employees sent on secondment has come a long way, showing how Indian courts have progressively refined the PE doctrine and applied strictness on secondments and foreign control in India, moving from examination of Service PE to even Fixed Place PE. Courts are consistently looking at real control, payroll, repatriation rights, and commercial nexus, not just contracts.
Issue 4
Taxability of salary in India (also linked with withholding tax thereon) is founded on the basic principle of where services are rendered or performed, regardless of where it is paid. While a resident as well as non-resident employee is hence taxable in respect of salary accrued during the exercise of employment in India, some benefit may be explored under Tax Treaties in respect of a non-resident employee.
Most Tax Treaties with India provide an 183-day or 90-day exemption rule under Article 15/16 dealing with Taxability of Dependent Personal Services. The same, popularly called ‘Short stay exemption,’ signifies that salary will not be taxed in India for an employee who is not a resident in India if all 3 conditions are met (taking the example of a typical tax treaty):
Stay in India ≤ 183 days in the relevant fiscal year or 12-month period, as the case may be;
Salary is paid by, or on behalf of, a non-resident employer; and
Salary cost is not borne by a PE or fixed base of such an employer in India.
If any of these conditions fail, salary remains taxable in India. However, if all three conditions are satisfied in a short-term secondment case, salary may come out of the contours of Indian taxability.
But if the I Co. bears the cost or controls the secondee, Indian tax authorities may treat I Co. as the “real employer,” making salary taxable in India even for short secondments.
Thus, the following potential scenarios typically emanate from an Indian non-resident secondee perspective:
Salary paid abroad by F Co., no recharge to I Co., stay < 183 days
→ Likely exempt under Tax Treaty.
Salary paid in India by I Co.
→ Taxable in India, regardless of stay period.
Salary split-pay (part abroad, part in India)
→ Entire salary relating to services in India taxable.
Non-resident employee may have to factor foreign tax credit admissibility in his country of residence in respect of taxes suffered in India on income, if any, taxed in both countries.
Thus, the real employer test can have a bearing on employee tax also. Interestingly, it runs contrary to the findings on Issues 1 to 3. In other words, if F Co. is determined to be the real employer, issues 1 to 3 are likely to result in adverse consequences for the assessee in terms of taxability and PE in the hands of F Co. and additional withholding tax obligations, if any, on I Co. qua F Co.
Conclusion
Overall, while standardised contracts may be in place, the operational reality, shaped by the actual conduct of business, the foreign company’s direct commercial interest in the profitability or revenue of the Indian entity, and insights from employee interviews during tax surveys on ‘who truly exercises control,’ now forms the centre-stage of judicial evaluation of case-specific facts. This means strategic tax advice based on ‘one size fits all’ will no longer suffice. Functions, assets and risks of I Co. qua F Co. will have to be closely scrutinised by applying different perspectives from different judgements. The need is to exercise caution at the representation as well as planning stage.
Representations in ongoing or past cases
Evolving jurisprudence demands that the facts and arguments are presented holistically and with structure before appellate forums. This is essential to prevent restrictive readings of findings, confusion from overlapping agreements, overlooked arguments, omission of relevant precedents, or leaving appellate forums with incomplete issues to adjudicate. Incomplete facts or partially addressed questions may prejudice not only the assessee’s case but also mislead future reliance on the decision as binding precedent.
Planning for the future
When designing cross-border arrangements, it’s important to ensure that F Co. exercises only the level of control over I Co. that is necessary for its role, whether as a service provider, franchisor, licensor, or the founder of a project office or capability center in India. Keeping the control limited in this way is essential for maintaining tax neutrality over time. Any level of control which crosses this line of control may be seen as extended arms of F Co. in India, long enough to be pulled to pay tax in India.
Further, if at the planning stage, F Co. is confident of satisfying the real employer test, I Co. can use the same to explore the benefit of short-stay exemption for the purpose of employee withholding tax under the Tax Treaty, if any. Where the burden of incremental tax in India qua the host country falls on I Co/F Co., this line of analysis may create potential tax savings for the taxpayer group, also saving the non-resident employee from the hassle of seeking foreign tax credit in his country of residence.
Footnotes / Citations:
¹ Director of Income Tax (International Taxation) v. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 (SC)
² Centrica India Offshore (P.) Ltd. v. CIT (2014) 364 ITR 336 (Del) - SLP dismissed later by the Supreme Court
³ C.C., C.E. & S.T. – Bangalore (Adj.) v. Northern Operating Systems Pvt. Ltd. (2022) 141 taxmann.com 289 (SC)
⁴ Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (2025) 176 Taxmann 783 (SC)
⁵ Formula One World Championship Ltd. v. Commissioner of Income Tax, International Taxation, Delhi (2017) 394 ITR 80 (SC)
Author may be reached at dagashreya1992@gmail.com and eboard@icai.in
GIST OF OPINIONS — THE CHARTERED ACCOUNTANT (October 2026)
1. Presentation of Unbilled Revenue under Trade Receivable or Other Current Financial Assets
A. Facts of the Case
A company is in the business of city gas distribution and has 22 lakh customers in the Domestic Piped Natural Gas (PNG) segment to whom billing is being done.
Accounting Treatment done by the Company
The Company follows bi-monthly meter reading and invoicing for its customers, and unbilled revenue is recognised for cases wherein readings were not taken at the end of the month as a part of the billing cycle of the Company.
The Company recognises unbilled revenue for such cases based on previous billed quantity (i.e., gas supplied) and not on actual readings at the month-end.
The actual sales are recognised when the meter readings are taken in the subsequent period and invoicing is done.
The querist has stated that since the amount of unbilled revenue is an estimate based on previous billed quantity and also the fact that actual invoicing to customer has not been made, mere recognition of unbilled revenue based on matching principle of accounting does not provide unconditional right to the Company to receive payment after a passage of time as the actual sales volume will differ from the provisional sale recognised at month end (which is the pre-condition to recognise trade receivable as per paragraph 108 of Ind AS 115). Accordingly, such unbilled revenue cannot be qualified as a trade receivable.
Auditor's observation
The head 'Other Current Financial Assets' includes an amount on account of unbilled revenue. However, the unbilled revenue is the part of trade receivable and should be disclosed with ageing of trade receivable as per Guidance Note on Division II Ind AS Schedule III to the Companies Act, 2013. Thus, trade receivable is understated and other current financial assets is overstated by equal amount.
B. Query
Whether such unbilled revenue forms part of 'Other Current Financial Assets' in terms of paragraphs 107 and 108 of Ind AS 115; or be included under the 'Trade Receivables'; or Any other presentation as EAC may consider appropriate in the case.
C. Points considered by the Committee and Opinion
At the outset, the Committee presumes that the Company in the extant case has an unconditional right to consideration for performance completed (viz., gas supplied) even on termination of the contract by customer before billing to the customer. In other words, if before billing, customer terminates the contract with the Company, the Company still has right to receive payment from the customer for the gas supplied.
The Committee notes from the requirements of paragraph 107 of Ind AS 115 that if an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable.
A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditional on something other than the passage of time (for example, the entity’s future performance), whereas a receivable is an entity’s right to consideration that is unconditional, i.e. only the passage of time is required before payment of that consideration is due.
Thus, when an entity satisfies a performance obligation but does not have an unconditional right to consideration, for example, because it first needs to satisfy another performance obligation in the contract, it should recognise a contract asset, whereas an entity would recognise a receivable if it has a present right to consideration.
The Committee further notes from BC325 of Basis for Conclusions (BC) to International Financial Reporting Standard (IFRS) 15, issued by IASB that the act of invoicing the customer for payment does not indicate whether the entity has an unconditional right to consideration and that the entity may have an unconditional right to consideration before it invoices (unbilled receivable) if only the passage of time is required before payment of that consideration is due.
To the extent that gas supply has already been made (and no further performance by the Company is to be made), the Committee is of the view that the Company has, in substance, satisfied its performance obligation and earned the right to consideration for the goods transferred to the customers.
Therefore, as per paragraph 108 of Ind AS 115 read with paragraph BC325 of IFRS 15, an unconditional right to consideration exists even before invoicing, and only the passage of time is required before payment becomes due.
Accordingly, in the extant case, even if the amount is unbilled at the reporting date, it will still qualify to be presented as a receivable (unbilled).
The Company has satisfied its performance obligation (supply of domestic gas), although the quantum of gas supplied has been estimated and not precisely determined.
Since the uncertainty relates merely to the determination of the amount (and not with regard to performance risk), it does not affect the underlying right to receive consideration for the supply already made. In other words, even though the exact amount that the Company shall receive will be known at a later date, it does not affect the Company’s right to consideration, as there is no uncertainty about the same.
With regard to presentation of receivable as trade receivables, the Committee is of the view that the unbilled receivables in the extant case shall be presented as ‘Trade Receivables’ under the head ‘financial assets’ under current or non-current assets, depending upon whether they meet the definition and criteria for classification as current or non-current assets.
Further, unbilled receivables should be disclosed separately as per the requirements of Schedule III to the Companies Act, 2013.
2. Accounting treatment of land and building components on purchase of Built-Up commercial space including undivided share in land, where future increase in Floor Area Ratio (FAR) or redevelopment rights are retained by Seller, under Ind AS framework
A. Facts of the Case
The Company acquired a built-up commercial office space in New Delhi from Ministry of Housing and Urban Affairs (MoHUA) pursuant to allotment letters issued by N Corporation allocating Units D-200, D-300 and D-400, Tower-D, along with Equivalent Car Parking Space (ECS).
The Company has incurred total cost of Rs. 39,512.38 lakhs towards acquisition and development of the said commercial office space.
As per the Allotment Letters, “Any future increase in floor area ratio (FAR) and redevelopment rights that may arise shall remain with the Government of India (GoI) and allottee (purchaser) has only rights of the purchased freehold specific Built-up area (BUA).”
As per Agreement To Sale (ATS) executed between the Company (Buyer) and Land and Development Office (L&DO)/MoUHA (Seller) for the said built-up commercial office floor, "The Total Price of the Unit includes recovery of price of proportionate share in the Said Land, construction of not only the Unit but also the Common Areas ...".
The querist has referred to the relevant clauses of Sale Deed, which guide that land is also part of commercial built-up space. Further, it clearly states, "seller is entitled to and has good right and full power to convey and transfer by way of sale, the said Commercial Space and the said Land is hereby conveyed or intended so to unto and to the use of the Buyer in the manner aforesaid".
It also establishes that for all taxes related to land from the date of allotment letter, buyer shall be responsible alongwith other statutory dues.
The querist has mentioned that since allocation of price between land and building was not determinable from the allotment letter, the Company obtained a valuation report from an IBBI registered valuer for allocation of price paid between building and land.
Accounting treatment adopted by the Company
The Company capitalised the total cost of Rs. 39,512.38 lakhs by allocating between land and building, based on a registered valuer's report assessing the relative fair values at the acquisition date. This has resulted in an overstatement of Gross Value of 'Freehold Land', and understatement of Gross Value of 'Freehold Building' by Rs. 36,646.55 lakhs, and also understatement of depreciation on the office building and overstatement of profit before tax by Rs. 127.24 lakhs.
Points submitted by the Committee in its reply submitted to the office of CAG:
The Company has obtained a valid ownership interest in the land attached to the allotted Built-up Area (BUA). The restriction on future Floor Area Ratio (FAR) or redevelopment rights held by the Government relates only to additional or incremental construction or development potential and does not affect the existing/present land interest already transferred with the Unit to the Company.
ATS explicitly includes 'recovery of price of proportionate share in Said Land' within total price.
The Company's cost allocation methodology is based on a registered valuer's relative fair value assessment which is robust and appropriately considers the FAR reservation while determining present land value.
Valuer while carrying out valuation also considered the value of building for comparable cross-check; it estimated the building component with reference to Central Public Works Department (CPWD) Plinth area rates with required adjustments.
The building component has been recognised as a depreciable asset, and depreciation has been charged on the same in accordance with the requirements of Indian Accounting Standard (Ind AS) 16.
The land Undivided Share (UDS) has been recognised as a non-depreciable asset, considering that land has an indefinite useful life.
Observation made by C&AG
Office of CAG did not agree to the accounting treatment carried out by the Company.
As per the terms of the Allotment letters, the allottee (purchaser) had only rights of the purchased freehold specific built-up area (BUA) while any future increase in FAR or redevelopment rights that may arise there shall remain with Government of India.
Despite these terms, out of above value of the commercial space, the Company capitalised an amount of Rs. 36,646.55 lakhs under 'Freehold Land' instead of capitalising the entire amount of Rs. 37,098.55 lakhs under the head 'Freehold Building'.
B. Query
In light of the ATS stating that the total price includes 'recovery of price of proportionate share in the said land', and recitals confirming MoHUA/L&DO's title to the land along with justification and explanations as given above, can the Company recognise a non-depreciable land component (UDS) appurtenant to the presently conveyed built-up area, notwithstanding the Allotment Letter's reservation of future FAR/redevelopment rights with Gol?
Where both (a) ATS demonstrates consideration includes a land UDS, and (b) an independent valuer has apportioned consideration based on relative fair values at the acquisition date (considering FAR restrictions), is such allocation compliant with Ind AS 16, paragraphs 58 and 43?
Are any additional disclosures recommended?
If accounting treatment followed by the Company is not appropriate, please suggest alternate treatment.
C. Points considered by the Committee and Opinion
The Committee notes that ATS explicitly states that the total consideration paid by the Company towards built-up area includes recovery of the price of the proportionate share in the said land. Further, the terms of the arrangement state that the buyer assumes obligations in respect of land-related outgoings, including taxes, ground rent, and other statutory levies.
The Committee notes that in the extant case, the Company has acquired the freehold rights in the unit/property (viz., a share in the building) together with proportionate undivided share or interest in the land.
The Committee is of the view that the right to undivided interest represents a share of the land that corresponds to the unit/property specified in the contract.
In the extant case, the Company has the present ability to use the unit/property (building as well as land) for the specified purpose as per terms agreed, such as for office or administrative use, and to obtain the economic benefits arising from such use (as per the terms of ATS).
Further, the Company also assumes liabilities and obligations relating to the property, including those pertaining to the underlying land, such as payment of vacant land tax and other statutory dues.
The Committee further notes from the clauses of Sale Deed that, upon purchase of the unit/property, the buyer has the right to sell the unit/property (including proportionate share in the land).
The Committee is of the view that although the Company can sell or pledge the undivided proportionate share in the land only along with the built-up area constructed on it, however, that does not preclude the Company from having future economic benefits arising therefrom, for example, realisation of benefits from increase in land value on sale or pledge.
Thus, the Company has the power or ability to obtain the future economic benefits flowing from the land although along with the built-up area, and it can also restrict or prevent the access of others to those benefits.
Accordingly, the Committee is of the view that in the extant case, the Company has the present ability to direct the use of the unit (viz., proportionate share in the building and land), and also to obtain all the economic benefits arising from their existing use. Also, it can restrict or prevent others from directing its use or their access to such benefits.
The Committee also wishes to mention that the retention of future increase in FAR or redevelopment rights by the seller pertains to a separate set of rights relating to potential future development in the complex where the unit/property exists and does not affect the Company’s existing control over its share of building and land.
Therefore, the building along with land, corresponding to the unit(s) owned by the Company meets the definition of an asset as per the Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS), issued by the ICAI.
Further, the Committee notes that the same also satisfies the recognition criteria of property, plant and equipment under Ind AS 16 and accordingly qualifies for recognition as property, plant and equipment.
The Committee notes that as per the requirements of Ind AS 16, each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately and consistent with this principle, an entity shall allocate the amount initially recognised in respect of an item of property, plant and equipment to its significant parts.
Further, as per paragraph 58 of Ind AS 16, land and buildings are separable assets and are accounted for separately, even when they are acquired together, to facilitate component accounting for depreciation as, generally, land has an unlimited useful life and therefore is not depreciated, whereas buildings have a limited useful life and are depreciable assets.
Considering these requirements, the Committee is of the view that since in the extant case, the value attributed to the proportionate share in the land (based on its fair value as determined by registered valuer) is significant in relation to the total cost of the unit/property and since the unit/property in the extant case is acquired for a composite consideration, the Company should allocate the amount initially recognised in respect of unit/property to land and building on a reasonable and appropriate basis, such as on the basis of their relative fair values at the date of acquisition (which shall also consider restrictions regarding FAR and redevelopment rights).
The Company should appropriately disclose the basis of allocation of consideration between land and building, the key assumptions used in such allocation and the existence of restrictions on the title of the unit (if any), etc. in accordance with the disclosure requirements of Ind AS 16 and other standards, such as Ind AS 1, 'Presentation of Financial Statements'.
Further, since the land (undivided) in the extant case has an unlimited useful life (as the proportionate land will continue to belong to or be owned by the Company), the same shall not be depreciated. However, impairment testing should be carried out in the extant case, in accordance with Ind AS 36, 'Impairment of Assets', especially considering any changes in restrictions on FAR or redevelopment rights.
3. Classification of certain standalone land parcels held to earn rentals as Right-of-Use Assets under Ind AS 116 vis-à-vis Investment Property under Ind AS 40
A. Facts of the Case
A Company, which is a joint venture of the Government of India (GoI) and the Government of National Capital Territory of Delhi (GNCTD), is entrusted with the construction, operation and maintenance of the rail-based Mass Rapid Transit System (MRTS)/metro for the Delhi/NCR region.
The Company has further been mandated by the Ministry of Housing and Urban Affairs (MoHUA) to undertake value capture from Property Development initiatives for sustainable revenue generation for the Company.
The land belonging to various Ministries/Departments as well as autonomous/statutory bodies/agencies of GoI/GNCTD, which is required for the project, including for Property Development purpose, is allotted to the Company on perpetual/99 years' lease basis.
Pursuant to the mandate of MoHUA, the Company undertakes leasing/licensing of certain land parcels for commercial purposes as part of its structured non-fare revenue stream.
Certain standalone land parcels i.e., parcels not forming part of station buildings and which are allotted to the Company under long-term/perpetual leases, have been allotted or licensed to third parties for commercial exploitation with the intention of earning rentals.
As per the querist, these arrangements fall within the scope of Ind AS 116, 'Leases', which requires the recognition of a Right-of-Use (ROU) asset for leased assets. Accordingly, the ROU assets for these land parcels are presented within Property, Plant and Equipment (PP&E).
Comptroller & Auditor General of India (C&AG) issued a provisional comment stating that 11 land parcels held by the Company for the purpose of earning rentals should have been classified as Investment Property in accordance with Ind AS 40, 'Investment Property'.
In response, the Company submitted that these land parcels form part of a mandated non-fare revenue framework, are operationally and economically integrated with the metro system, and are therefore, correctly accounted for as Right-of-Use assets under Ind AS 116.
The querist has stated that paragraph 7 of Ind AS 40 provides that an investment property generates cash flows largely independently of the other assets held by an entity. This distinguishes investment property from owner-occupied property.
The land parcels under consideration are located within the Metro Network Influence Zone, and their rental and commercial potential arise directly from metro commuter traffic, station connectivity, and the demand generated by the transport network.
Their development is structured to complement metro infrastructure, and they do not generate independent cash inflows. Thus, as per the querist, they do not satisfy the independence-of-cash-flows criterion required for classification as investment property.
The subject land parcels fall within the Transit-Oriented Development (TOD) zone in proposed modifications to Master Plan 2021 by Delhi Development Authority/Central Government, further evidencing their functional integration with the metro system rather than their existence as standalone investment assets.
As per the Detailed Project Report (DPR) of metro projects, development and commercial utilisation of land and air space along/close to this transport system and its facilities are considered essential to supplement financial resources for construction and operation of the system.
With construction of Metro corridor, demand of other consumer sectors is also expected to go up. Also, property development can be used for financing of the project. It is expected that 5% of the financing can be achieved through property development.
Therefore, as per the querist, while the land parcels are physically distinct or standalone, their classification should be viewed through the lens of their restricted use and integration into the metro assets and should be viewed constructively as forming part of the entire metro corridor.
Accordingly, given that these parcels cannot be independently sold or leased under a finance lease due to the conditions of allotment of land to the Company, classification of such land parcels as 'Investment Property' would be incorrect.
B. Query
Whether the current classification of aforesaid properties as 'Right-of-use assets' in the books of the Company is appropriate and compliant with applicable Ind AS requirements.
If not, what should be the correct and Ind AS-compliant treatment for such properties?
C. Points considered by the Committee and Opinion
At the outset, the Committee notes that 11 standalone land parcels allotted to the Company have been treated as assets held under lease. The Committee presumes that the Company has correctly identified the arrangement as lease in accordance with Ind AS 116, 'Leases'.
From the Facts of the Case, the Committee notes that the Company holds the aforesaid land parcels under lease and the purpose of holding such land parcels is to earn rentals by subleasing them on operating lease basis/licensing (since as the per facts supplied by the querist, these parcels cannot be independently sold or leased under a finance lease due to the conditions of allotment of land to the Company).
Thus, the standalone land parcels are the underlying assets in the 'head lease' as well as the sublease. The Company is a lessee in the head lease and the lessor in the sublease (i.e., the Company is an intermediate lessor).
The Committee is of the view that for accounting purposes, the Company should classify the sublease as operating lease or finance lease as the case may be in accordance with Ind AS 116 by reference to the ROU asset arising from the head lease and not by reference to the land parcels themselves.
In this regard, the Committee noting the requirements of paragraph B58 of Ind AS 116 and Basis for Conclusions paragraph BC179 of International Financial Reporting Standard (IFRS) 16, 'Leases', is of the view that if the sublease in the extant case is assessed as finance lease, then, the ROU asset should be derecognised and net investment in the sublease should be recognised in accordance with Ind AS 116, in which case, Ind AS 40, 'Investment Property' is not applicable at all. This may happen, for example, if the Company subleases the underlying asset for all or most of the remaining term of the head lease.
In this regard, the Committee also notes that as per paragraph 9(e) of Ind AS 40, property that is leased to another entity under a finance lease is not an investment property.
On the other hand, if the sublease is assessed as an operating lease, the Committee noting the requirements from Ind AS 40, 'Investment Property', Basis for Conclusions paragraphs B37 and B38 of International Accounting Standard (IAS) 40, 'Investment Property' and Basis for Conclusions paragraph BC179 of IFRS 16, is of the view that whether ROU asset should be classified as such or as investment property depends on whether it meets the definition of owner-occupied property or investment property.
Further, reading from the requirements of Ind AS 40 and BC paragraphs of IAS 40, the Committee is of the view that if an entity leases out a property (being land or a building or part of a building or both) on operating lease basis and also provides services to the lessee which are insignificant to the arrangement as a whole, the definition of investment property is met. However, there should be no intention of subsequently using the property as owner-occupied property.
If there is such an intention (viz., to subsequently use the property as owner-occupied property), it means that the property is held for an additional purpose other than to earn rentals or for capital appreciation or both in which case the definition of investment property is not met.
On the other hand, if the services provided are significant to the arrangement as a whole, the property does not meet the definition of investment property. The concept of significance involves judgement.
From the above, the Committee is of the view that in the extant case, if the sublease is assessed as operating lease, then, the Company should examine whether it provides any services to lessees/licensees in connection with the arrangement.
Thus, if the Company provides ancillary services to the lessees/licensees which are insignificant to the arrangement as a whole (or does not provide any services to the lessees/licensees), the ROU asset should be classified as investment property, provided the underlying asset is not held with the intention of subsequent use as owner-occupied property, such as, use for administrative purposes or for enhancement of the MRTS project. If there is any such intention, the ROU asset should be classified as such and not as investment property.
Further, if the services provided to lessees/licensees are significant to the arrangement as a whole, the ROU asset should be classified as such and not as investment property.
(For complete text of the Opinions, please refer the link:
Notes:
This gist provides only a summarised version of the Expert Advisory Committee's opinion for general informational purposes. While due care has been taken in preparing the summary, it does not purport to capture all facts, circumstances, assumptions, limitations, reasoning or contextual nuances forming part of the complete opinion. Users should refer, therefore, to the complete opinion for the authoritative text, detailed analysis, and contextual understanding. No reliance should be placed solely on this gist without reference to the full opinion.
The Opinion is only that of the Expert Advisory Committee and does not necessarily represent the Opinion of the Council of the Institute.
Each opinion is based on the specific facts and circumstances as presented by the querist and is finalised considering the applicable laws, statutes, and accounting and/or auditing principles prevailing as on the date of finalisation, which is duly mentioned with each opinion. The Opinion must, therefore, be read in the light of any amendments and/or other developments subsequent to the issuance of Opinion by the Committee.
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