Tax Street – December 2025

Processing of Income-tax Return, Related Notices and Way Forward Processing of Income-tax Returns

Filing an Income-tax Return (ITR) is only the first step in compliance. After submission and verification, the return is processed by the Income-tax Department and taxpayers may receive communications or notices. Understanding the process helps ensure timely responses, avoids unnecessary stress and reduces the risk of penalties.

Below, we explain how the return is processed, the notices that may arise and the appropriate actions to take

Processing of Income-tax Returns

Once an ITR is filed and verified, it is processed by the Centralized Processing Centre (CPC) under Section 143(1) of the Income-tax Act. During this process, the CPC:

• Verifies arithmetical accuracy
• Matches income and tax payments (TDS, TCS, Advance Tax) with Form 26AS, AIS, and TIS
• Examines eligibility of deductions and exemptions

Based on this verification, the CPC computes tax payable or refund due. Following processing, an Intimation under Section 143(1) is issued, which may either accept the return as filed or show adjustments, resulting in a refund, tax demand, or no change. Common reasons for adjustments include:

• Mismatch in TDS or advance tax
• Incorrect deduction claims
• Arithmetical or clerical errors

Tax-payers should carefully review the intimation to confirm that all income, deductions, and tax credits are correctly reflected as per the Return of Income (ITR). For refunds, it is also important to verify that interest under Section 244A (if applicable) has been calculated accurately.

Way Forward

• If the intimation is correct, no action is required.
• If errors are identified, a rectification request under Section 154 should be filed within the prescribed time.
• If the adjustment is not permissible under Section 143(1), involves legal interpretation, or cannot be rectified, an appeal can be filed with the Commissioner of Income-tax (Appeals) within 30 days of receiving the intimation.

Proposed Adjustment under Section 143(1)(a) Before making any adjustment during the processing of a return under Section 143(1), the Income-tax Department may issue an Intimation for Proposed Adjustment under Section 143(1)(a). These proposed adjustments generally arise when there is a difference between the figures reported in the tax audit report and the income or deductions declared in the filed return. Such adjustments may include disallowance of deductions or exemptions, corrections of apparent inconsistencies, or mismatches in income or tax credits based on the information available to the CPC.

The purpose of this intimation is to provide the tax-payer, an opportunity to respond before the adjustment is finalized. Tax-payers are required to examine the proposed adjustment carefully and submit their response online within the prescribed time, generally 30 days. If the taxpayer agrees, the adjustment will be made while processing the return. If the tax-payer disagrees and submits a proper explanation with supporting details, CPC may drop the proposed adjustment after due consideration.

Way Forward

• Review the proposed adjustment thoroughly with reference to the ITR filed.
• Respond within the specified time through the incometax portal. Failure to respond may result in the adjustment being made automatically.
• Provide clear explanations and relevant supporting documents while disagreeing with the proposal.
• If the adjustment is made despite a valid response, the tax-payer may subsequently seek rectification under Section 154 or file an appeal before the Commissioner of Income-tax (Appeals), as applicable.

Timely and accurate response to a proposed adjustment notice under Section 143(1)(a) can prevent incorrect demands and unnecessary litigation.

Notice under Section 139(9) – Defective Return

A return may be considered defective due to missing information, incorrect ITR form selection, or nonsubmission of required statements (e.g., balance sheet)

Way forward:

• Rectify the defect within the specified time (generally 15 days)
• Failure to respond may render the return invalid and lead to non-compliance

Messages and Nudges from the Income-tax Department – CBDT's NUDGE Initiative.

In addition to formal notices, tax-payers may also receive SMS or e-mail communication from the Income-tax Department as a part of the CBDT's NUDGE (Non-Intrusive Usage of Data to Guide and Enable) initiative. In December 2025, the CBDT issued a press release out-lining a targeted, risk-based compliance drive under this framework, reflecting the Department's increasing use of data analytics and risk management systems to identify potential inaccuracies in ITRs.

Under this initiative, cases for Assessment Year 2025–26 were identified where deductions or exemptions appeared potentially ineligible based on system-based risk indicators. Key areas flagged included claims of bogus donations to Registered Unrecognized Political Parties (RUPPs), quoting of incorrect or invalid PANs of donees, and errors in the extent or eligibility of deductions and exemptions claimed. These indicators suggested possible under-statement of income or ineligible refund claims.

Way Forward

With the due date for filing revised returns having expired on 31 December 2025, taxpayers who did not act on these nudges may still consider filing an updated return from 1 January 2026, subject to payment of additional tax, as permitted under the Income-tax Act.

General Guidance for Taxpayers

• Always verify notices on the official income-tax portal
• Adhere strictly to response deadlines
• Maintain records of filings and acknowledgements
• Avoid ignoring communications from the department
• Seek expert advice where matters involve interpretation or large amounts

Conclusion

• Income-tax notices are a part of the compliance eco-system and when handled properly, can be resolved smoothly. Timely response, correct documentation, and professional guidance go a long way in avoiding penalties and prolonged litigation.
• For any assistance in responding to income-tax notices or understanding return processing, tax-payers are advised to consult their tax advisor.

Direct Tax

Whether off-shore supply of equipment and off-shore design services by a foreign consortium member, executed under FOB contracts, can be taxed in India on the allegation of existence of a Permanent Establishment (PE)?

Alstom Transport SA [TS-1595-ITAT-2025(DEL)]

Facts

The Assessee-company was incorporated in France and was a tax resident of France. During the period relevant to assessment year under appeal, the Assessee had entered into international transactions with Delhi Metro Rail Corporation (DMRC) and Bangalore Rail Corporation Ltd. (BMRCL) for design, manufacture, supply, installation, testing, commissioning of 'Train Control, Signaling and Telecommunication Systems'.

The Assessee along with other consortium partners had entered into contract with DMRC and BMRCL. The Assessee had received payments in respect of off-shore supply of equipment and spare parts and off-shore designing and other services. The Assessee claimed that receipts in respect of off-shore designing and other services were not taxable in India.

The role of the Assessee under the consortium was restricted to off-shore supply of equipment/spares and offshore design and engineering services. Invoices for offshore supply were raised on FOB basis, where the title and risk in goods were passed outside India. The activities of installation, erection and commissioning in India were carried out by Indian consortium members, who were paid separately in INR.

AO's Arguments

• The Revenue contended that the Assessee had a PE in India on the ground that the Assessee was continuously involved in execution of metro rail projects in India.
• It was alleged that the off-shore supply of equipment and the off-shore design and engineering services were connected with activities carried out in India, income arising through it, is taxable in India.

Assessee's Arguments

• The AO placed reliance on earlier directions issued by the Dispute Resolution Panel (DRP) and proceeded on the same basis, without undertaking an independent or fresh examination of the consortium agreements and contractual arrangements for the relevant assessment years.
• It was emphasized that the Assessee was not the consortium leader and did not have any fixed place or installation PE in India.
• The Assessee further submitted that the off-shore supply transactions were completed outside India, with transfer of title and risk-taking place on an FOB basis.
• It was also stated that the off-shore design and engineering services were inseparably linked to the offshore supply of equipment and therefore followed the same tax treatment.
• Additionally, the Assessee pointed out that the Assessing Officer had failed to comply with the earlier remand directions of the ITAT, which required a fresh and independent examination of the consortium contracts before drawing any conclusion on the existence of a PE.

Held

The Tribunal held that the Revenue failed to establish the existence of a PE in India for the relevant AY. It was observed that neither a Fixed Place PE nor an Installation PE was made out, and accordingly, the issue was decided in favor of the Assessee on the basis of the following reasons:

• The AO mechanically followed earlier assessment orders and DRP directions without carrying out a fresh and independent examination of the consortium agreements and contractual arrangements.
• The Assessee was not the consortium leader and did not exercise control over onshore installation activities carried out in India by Indian consortium members.
• Offshore supply transactions were completed outside India, with title and risk in the goods passing outside India on an FOB basis, negating any business connection in India.
• Installation, erection, and commissioning activities were undertaken exclusively by Indian consortium members, who were separately compensated for such activities.

Our Comments

The ruling highlights that offshore supplies executed on FOB basis and ancillary offshore services cannot be taxed in India in the absence of a year-specific PE in India and PE cannot be inferred merely from consortium participation or past assessments.

Whether DDT paid by taxpayer is to be governed by DTAA or to be dealt with only in accordance with Section 115-O of the Act?

Colorcon Asia Pvt. Ltd [TS-1623-HC-2025(BOM)]

Facts

Colorcon Asia Pvt. Ltd. (Assessee) is a wholly owned subsidiary of Colorcon Limited, United Kingdom (Colorcon UK). Colorcon UK was a tax resident of UK with a valid Tax Residency Certificate. The tax-payer paid dividend to Colorcon UK during Assessment Years 2016- 17 to 2019- 20.

The tax-payer consequently paid DDT thereon at the rate specified under Section 115-O of the Act. The tax-payer filed an application before the Board for Advance Ruling ("BFAR") seeking an advance ruling on whether Colorcon India would be entitled to restrict the tax rate on dividends distributed to Colorcon UK at 10 per cent under Article 11 of the India-UK DTAA.

The BFAR held that the dividend tax rate prescribed under Article 11 of India-UK DTAA shall not restrict the tax rate of DDT. The BFAR observed that DDT does not fall within "Taxes covered" under Article 2 of India –UK DTAA and thus the same is outside the scope of DTAA between India and UK.

Aggrieved by this, the tax-payer filed an appeal before Bombay High Court (Bombay HC) against the BFAR ruling.

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