Income Tax Bill: Transitional Provisions

by CA. Sandeep Choudhary

63662 57036

sandeepchoudharyfca@gmail.com

This article summarises the Transitional Provisions in the Income Tax Bill, 2025. An earlier article discussed some key features on the proposed law.

1. Proceedings already started under the 1961 Act will continue to be governed by that Act. Any notice or proceeding relating to period before 1st April 2026 will be carried out under the old law. Thus, if assessments of older periods are re-opened, they will be governed by the 1961 Act.

2. If you opted for Old Regime instead of the default New Regime, your choice shall continue to be applicable in the 2025 Bill. 

3. Interest provisions will be governed by 1961 Act till 31st March 2025 and by the new Bill thereafter. This means, that while the demand notice or refund order will be under the 1961 Act, part of the interest computation will be under the new Bill. 

4. If you have claimed any deduction in 1961 Act and its conditions are later violated, the corresponding amount will be added back to your income under the new law in the year of violation. For example, if you have received Capital Gains exemption in PY 2024-25 on account of investing in new capital asset and such asset is sold in TY 2026-27, the exemption granted earlier will become chargeable as Capital Gain in TY 2026-27. 

5. There is no specific provision which tells us what happens if the reverse happens. If some expenses are disallowed u/s 43B on grounds of non-payment, they are normally allowable under the year of payment. Similarly, if expense is disallowed on the grounds that TDS was not deducted, the expense is allowed in the year of payment. The Bill is silent where expense was disallowed under the 1961 Act and conditions for allowing expense after the new law comes into effect. It only covers the situations where an income is to be added in later years. 

6. Recognition to approved Charitable Trusts, etc (referred to as Registered Non-Profit Organisations in the new Bill) shall continue to be valid. 

7. MAT Credit under 1961 Act will continue to be available under the new law. Similarly, brought-forward losses and unabsorbed depreciation from 1961 Act will be allowable. The time limits for set-off of losses will remain unchanged. 

There is one important change here. For capital losses brought forward from 1961 Act, the distinction between Long-Term and Short-Term has been eliminated. Thus, in 1961 Act, Long-Term capital losses can be set-off against Long-Term Gains only. The same is the case for Long-Term loss under the new law. However, the Long-Term loss brought forward from 1961 Act will be available for set-off against both Long-Term and Short-Term Capital Gains under the new law. 

8. For search cases, the transition may result in a tricky situations.  Block assessment may be under one law, tax under normal provisions may be under another law. Determining the quantum of undisclosed income will require simultaneously juggling the provisions of both the laws. 

a. Where search is initiated prior to 1.4.2026, the 1961 Act will apply as if the new law had not been enacted. Thus, if search is initiated in March 2026, and the last Panchnama is drawn April 2026, the income of April 2026 till the date of signing will be taxed under the 1961 Act and not the new law. 

b. For searches initiated 1.4.2026 onwards, the entire Block Assessment will be governed by the new law. This will be so even though the income of a part of the Block Period was otherwise taxable under the 1961 Act. Since preceding 6 Tax Years are covered under Block Period, the old law will remain relevant till TY 2031-32 for search cases. 

9. Section 536(2)(a) and (b) are clumsily worded. These are important clauses in Transitional Provisions that provide finality to operations, orders, rights and obligations under 1961 Act. These clauses need to be properly worded.

10. Existing Instructions and Notifications will remain valid unless they are inconsistent with the new Act. The law is silent on the fate of existing Circulars.

11. Across laws, there is a large body of judgements confirming that old judicial precedents remain valid if the language and context is consistent. In the last decade, case laws have flowed smoothly in Company law from the 1956 Act to the 2013 Act and in Indirect Taxes from Service Tax to GST. 

Thus, case laws evolved over decades will remain applicable. However, minor changes in language will unnecessarily force fresh litigation, as discussed in preceding article.

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Income Tax Bill, 2025: Second Set of Observations

by CA. Sandeep Choudhary

63662 57036

sandeepchoudharyfca@gmail.com

This is my second post on the new Income Tax Bill, 2025. An earlier post captured my preliminary observations. 

1. Tax Holiday for 1 Year to all? 

The first section of the Bill says that the new law will call info effect from 1st April 2026. The last section says that the Income Tax Act, 1961 is hereby repealed. Since no separate date is given here, it means that the 1961 Act shall stand repealed from 1st April 2026. This creates a problem. 

Under section 4 of the 1961 Act, income tax is charged on Assessment Year (AY) basis for income in the previous year (PY). If the law stands repealed from 1st April 2026, there will be no AY 2026-27 in which tax on income of PY 2025-26 can be computed. And the 2025 Bill does not envisage taxing income for Tax Year 2025-26. A literal reading of the first and last sections of the 2025 Bill imply that there will be no Income Tax for the year 2025-26 for any person.  

Obviously, this is not how the situation will unfold. Section 535 of the Bill empowers the Central Government to issue 'Removal of Difficulties Order'. In 2017, similar powers in GST law were used to address obvious lacuna and implementation issues. We will see a repeat of issue of such orders in 2026-27. 

So, no, Nirmala Ji is not giving a tax break to all. However, since the Removal of Difficulties Order will be issued after the new law comes into effect, it creates some ambiguity for income for the PY 2025-26. 

2. Petty Changes?

As noted in the earlier post, Explanations and Proviso have either been converted into separate clauses or clubbed with the underlying provision using the word 'where'. Similarly, the word 'notwithstanding' has been replaced by 'irrespective of'. In a law where every word, punctuation mark and nuance gets heavily litigated, this can be problematic. 'Proviso' are a well-understood concept, they limit, modify or explain the main part. That is to say, it is restricted in scope to the underlying provision in which it is carving out a change.  Converting a Proviso into a separate clause can expand the scope of its text, which may not be the intention here. 

Other minor changes may have more impact. Replacing 'reasonably attributable' with 'attributable', 'wholly or substantially the whole' with 'wholly or substantially' change the scope of the provisions. 

Currently, the law permits taxpayers to apply for lower of NIL rate of TDS. In practice, even where NIL rate is ought, tax authorities impose a small rate of say, 0.5%. The new Bill converts this de facto position into de jure: the Bill provides only for application for lower rate and not NIL rate. It could be argued that NIL is indeed a lower rate, but it is likely that when the utility is updated, the option to fill the requested rate will not permit zero figure.  

3. Unpaid Taxes

U/s 43B of the 1961 Act, unpaid taxes are disallowed even if the amount was not payable in the PY under the relevant law. Thus, GST of March 2024 payable in April 2024 but not paid by due date of filing return would be disallowed in the computation of income for PY 23-24.  No such provision has been provided under the corresponding section 37 of the 2025 Bill. A taxpayer could therefore make the argument that the GST liability for March 2027 is not a sum payable in the TY 26-27 and hence need not be added back even if it remains unpaid on the due date of filing return. 

4. Indexation for Real Estate

In the Budget for 2024, the benefit of indexation u/s 48 was proposed to be removed. Correspondingly, a lower rate of 12.5% was mooted. After much brouhaha, a further amendment was introduced stating that old provisions will apply if they result in lower tax for land/ building. Thus, indexation continues to be applicable for land/ building in many cases. The new section 72 of the 2025 Bill simply states that indexation will be applicable in 'prescribed cases'. This is a case of excessive delegation of legislative power to tax department.  

5. No Refund if Return not Filed within Due Date?

Filing of Income Tax Return (ITR) is covered u/s 263 of the new Bill. Section 263(1)(ix) states that a person intending to make a claim of refund shall file return on or before due date. It appears that a person filing belated return may not be eligible for refund. No such restriction exists under the 1961 Act. Even the refund provisions in the new Bill do not refer to any such condition. The condition is flowing from the section on filing of returns. 

6. No addition by CPC on the basis of TDS info

Currently, when ITR is processed by CPC, it has the power to make additions based on information in Form 26AS, Form 16A and Form 16. This power has not been given to the CPC in the new Bill. This appears contrary to the general trend of speedy automation. 

7. Drafting Anomalies  

a. For presumptive taxation, eligible assessee is defined under section 58(10). The conditions here should have been cumulative. However, in the current draft, each condition ends with the word 'or' instead of 'and'. This would imply that the taxpayer can claim various deductions currently not available under presumptive taxation, and is probably not whatthe Govt intends to do.  

b. Now that the New Regime is the default option, the charging section in the Bill could have directly referred to it. However, section 4 of the new Bill continues to refer to Finance Acts for charge of Income Tax. Surprisingly, the clause 'subject to the provisions of this Act' has been removed. Thus, the charging section does not refer to the New Regime or any of the special rates (such as for Capital Gains). 

c. In Royalty payable by Non-Resident, the 1961 Act refers to income from any source in India. The new Bill refers to income from any source outside India. This is an obvious error. 

c. Section 78(3) of the new Bill defines the word 'assessable' for the purposes of the section. However, the word in not used in the section. 

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New Income Tax Bill: Preliminary Observations

by CA. Sandeep Choudhary

63662 57036

sandeepchoudharyfca@gmail.com

Draft of the new Income Tax law is out now. My preliminary observations:

1. The new Income Tax Bill, 2025 is expected to come into effect from 1st April 2026. Unlike the earlier effort of 'Direct Tax Code' 15 years ago, this is essentially a re-writing and re-arranging of the existing provisions of the Income Tax Act, 1961. 

There is no new levy, heads of income are the same, the due dates, computation and details are the same. 

The re-writing is welcome. The law had become very clumsy over time, as it is amended at least once every year. 

It is also a missed opportunity, a lot of language could have been simplified.

2. The useless terminology of 'assessment year' and 'previous year' is being junked in favour of 'tax year'. This is a welcome change, there was never a good reason for having these two terms.

3. Filing of ITR to be mandatory for business with TURNOVER above 5 Lakhs under the new Income Tax Bill. So, no tax upto income of 12 Lakhs. But if your sales exceeds 5 Lakhs (income of Rs. 40k annually using the presumptive income rule), you must file ITR.

4. For salaries, the tax provisions in the 1961 Act are scattered all over the place: some provisions are given under the head 'Salaries', some under section 10 (Exemptions) while others are given under separately issued Income Tax Rules, 1962. Now, everything has been put together in one table.

5. Some long-winding provisions, such as Cost of Acquisition, TDS, Advance Tax have been put in a tabular form. This is better than the existing arrangement, though the tables are still clumsy. There are small changes in unexpected places. A thorough clause-by-clause word-by-word comparision is required even if it is an exercise in re-writing and re-arranging sections.

6. The 1961 Act will not be completely dead. One of the goals of the Govt was to reduce the number of words in the new Bill. So, in many places, they say that this thing will be governed by 1961 Act. Completely reduces the number of words here, but now you need to refer to 2 laws.

a. The Bill defines income to include, inter alia, income referred to under section 2(24) of Income Tax Act, 1961. This is just lazy. What stops the draftsmen from copy-pasting the whole definition? 

b. For tax breaks to industrial undertakings engaged in infrastructure, the Income Tax Bill says that deduction as per old section 80-IA will continue to be available, "as if the said Act had not been repealed". If that is how you want to proceed, then why repeal in the first place.

c. Similarly, sections 80-IA, 80-IAB, 80-IB, 80-IBA, 10AA of the 1961 Act will remain undead "as if the said Act had not been repealed".

d. Many provisions simply give reference to 1961 Act: list of approved institutions for deduction of interest on educational loan, definition of hotels and convention centres, UTI administrator, reconstituted plot in Andhra Pradesh Capital City. These are NOT transitional provisions. The draftsmen had a target for number words and just said, 'yeh cheej purana wala mein padh lo'.

7. You may have heard that Explanations and Provisos have been eliminated. All that has happened is one of the two things:

a. They have been converted into clauses. 

b. The words 'Explanation' and 'Provided that' have been replaced by the word 'where'. This does not simplify the language. It merely makes the sentences longer and clumsier.

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