Issues in Corporate Assessments

A Legal and Procedural Analysis

(Referencing both the Income-tax Act, 1961 and the Income-tax Act, 2025)

Introduction

The assessment of corporate taxpayers has long been governed by the Income-tax Act, 1961 ("the 1961 Act"). Effective 1 April 2026, the Income-tax Act, 2025 ("the 2025 Act") has replaced the 1961 Act in its entirety, applicable from Tax Year 2026-27 onward. Importantly, the 2025 Act is, by design, a re-codification rather than a substantive overhaul: charging provisions, exemptions, deductions, and the core procedural machinery of assessment continue in recognisable form, but almost every section has been renumbered and the drafting simplified. Section 536(2)(c) of the 2025 Act contains an express saving clause: proceedings already initiated under the 1961 Act — including pending reassessment notices — continue to be governed by the 1961 Act until concluded. Practitioners today must therefore work fluently with both statutes: the 1961 Act for legacy assessments and pending litigation, and the 2025 Act for Tax Year 2026-27 and subsequent periods.

Companies operate through layered financial structures, related-party arrangements, cross-border transactions, and sophisticated accounting policies — all of which create fertile ground for disputes between the Assessing Officer ("AO") and the assessee. A sound understanding of the legal and procedural framework governing corporate assessments, coupled with awareness of the issues that recur most often, is essential for tax professionals, in-house counsel, and revenue officers alike. This article examines that framework under both the 1961 Act and the 2025 Act, identifies the principal issues encountered during corporate assessments, and analyses the leading judicial precedents that shape how these issues are resolved — precedents that continue to guide interpretation of the corresponding 2025 Act provisions, since the doctrines they establish are conceptual and not tied to a particular section number — before outlining the skills needed to conduct, or defend, an assessment that is fair, efficient, and legally sound.

Concordance: Key Corporate-Assessment Provisions, 1961 Act vs 2025 Act

Note: This table reflects publicly available CBDT section-to-clause correspondence and professional commentary as of mid-2026. A few provisions (method of accounting, the transfer pricing chapter, and the Dispute Resolution Panel mechanism) have been reorganised across a cluster of sections in the 2025 Act rather than mapped one-to-one; readers should verify the exact section number against the bare Act or Rules for any specific matter, since this area is still settling in practice.

1. Who is a "Company" and How Is It Assessed

A company is a distinct "person" under Section 2(31) of the Act, and its income is computed under the same five heads applicable to any assessee, subject to special provisions applicable only to corporate entities (e.g., dividend distribution history, buy-back tax under Section 115QA, and Minimum Alternate Tax under Section 115JB).

2. Modes of Assessment

●        Section 139 (1961 Act) / Section 263 (2025 Act) — filing of the return of income, mandatory for every company irrespective of income or loss.

●        Section 143(1) (1961 Act) / Section 270 (2025 Act) — summary/intimation processing, limited to arithmetical corrections and prima facie adjustments.

●        Section 143(3) (1961 Act) — regular/scrutiny assessment, where the AO examines the return in detail after issuing notice under Section 143(2); the corresponding scrutiny mechanism under the 2025 Act is set out within Sections 268–270.

●        Section 144 (1961 Act) / Section 271 (2025 Act) — best judgment assessment, invoked where the assessee fails to comply with statutory notices or does not cooperate.

●        Section 147/148 (1961 Act) / Sections 279–284 (2025 Act) — reassessment of income that has escaped assessment. Under the 1961 Act this was substantially restructured in 2021 with the introduction of Section 148A, requiring a show-cause procedure before a notice is issued; the 2025 Act carries this structure forward at Sections 279 (income escaping assessment), 280 (notice), 281 (show-cause procedure), 282 (time limit), and 284 (sanction).

●        Sections 153A to 153C (1961 Act) — assessment in search and requisition cases; the 2025 Act folds search assessments into the general reassessment framework.

●        Section 144C (1961 Act) — the Dispute Resolution Panel ("DRP") mechanism, mandatory for "eligible assessees" (including most companies with transfer pricing or foreign-company issues) before a variation prejudicial to the assessee is finalised; retained in substance under the 2025 Act's assessment chapter.

●        Faceless Assessment Scheme (Section 144B, 1961 Act) — the current default mode of scrutiny assessment for most corporate taxpayers, designed to remove physical interface between the AO and the assessee; the 2025 Act gives this scheme a firmer statutory footing within its electronic-proceedings provisions.

3. Time Limits

Section 153 of the 1961 Act (reorganised within Sections 282–286 of the 2025 Act) prescribes outer limits for completion of assessment and reassessment. These limits are frequently a battleground issue, since an assessment or reassessment order passed beyond the statutory period is void for want of jurisdiction, regardless of its merits. The interaction between the DRP timeline under Section 144C and the general limitation period under Section 153 has itself generated significant litigation, including a recent split verdict of the Supreme Court on whether the outer time limit under Section 153(3) applies to DRP proceedings involving eligible assessees.

4. Supervisory and Corrective Powers

●        Section 263 (1961 Act) / Section 377 (2025 Act) — revision by the Principal Commissioner/Commissioner (and, under the 2025 Act, also the Principal Chief Commissioner or Chief Commissioner) of an order that is erroneous and prejudicial to the interests of the revenue. The 2025 Act expressly extends this power to orders of the Transfer Pricing Officer as well as the Assessing Officer.

●        Section 264 (1961 Act) — revision in favour of the assessee, reorganised alongside Section 377 in the 2025 Act.

●        Sections 154/155 (1961 Act) — rectification of mistakes apparent from the record, retained in substance and renumbered under the 2025 Act.

Issue 1: Rejection of Books of Account and Best Judgment Assessment (Section 145 and Section 144, 1961 Act; corresponding provisions and Section 271, 2025 Act)

Section 145 of the 1961 Act requires income to be computed in accordance with the method of accounting regularly employed by the assessee and the notified Income Computation and Disclosure Standards (ICDS). Where the AO is not satisfied about the correctness or completeness of the accounts, the books may be rejected and income estimated under Section 144 (now Section 271 of the 2025 Act, which retains the same twin requirements of a show-cause opportunity and an assessment to "the best of his judgment"). This power is not unfettered — an AO cannot reject books merely on suspicion; there must be specific defects pointed out, and the resulting estimate must have a rational basis rather than being arbitrary or punitive. This underlying constraint is a judicial gloss on the statutory text and applies equally to Section 271 of the 2025 Act.

Issue 2: Reassessment and the "Change of Opinion" Doctrine (Sections 147/148, 1961 Act; Sections 279–281, 2025 Act)

Reopening a completed assessment is one of the most litigated areas in corporate tax. The Supreme Court's decision in CIT v. Kelvinator of India Ltd., (2010) 2 SCC 723, remains the touchstone authority. The Court held that, after the 1989 amendment to Section 147, the Assessing Officer does not have the power to reopen an assessment on a mere change of opinion; there must be "tangible material" indicating escapement of income, and the reasons must have a live link with the belief formed. The Court drew a clear conceptual distinction between the power to review (which the AO does not possess) and the power to reassess (which is conditional). This principle continues to guide courts even under the restructured reassessment regime introduced from April 2021, which requires the AO to first issue a show-cause notice under Section 148A and consider the assessee's reply before issuing notice under Section 148. The 2025 Act carries this same sequence forward at Sections 279 (income escaping assessment), 280 (notice), and 281 (the pre-notice show-cause procedure), and — for pending 1961 Act proceedings — Section 536(2)(c) of the 2025 Act preserves the old numbering and framework until the proceeding concludes.

A related and equally foundational authority is Calcutta Discount Co. Ltd. v. ITO, (1961) 41 ITR 191 (SC), which held that even an erroneous conclusion drawn by the AO from facts already disclosed cannot, by itself, justify reopening — the assessee's obligation is to disclose primary facts fully and truly, not to draw the correct legal inference for the AO.

Issue 3: Unexplained Cash Credits, Share Capital, and the "Test of Human Probabilities" (Section 68, 1961 Act; Section 102, 2025 Act)

Section 68 of the 1961 Act — renumbered as Section 102 ("Unexplained credits") under the 2025 Act, with the substantive test unchanged — empowers the AO to treat any sum credited in the books as income if the assessee's explanation regarding its nature and source is unsatisfactory. This provision is central to disputes involving share capital, share premium, unsecured loans, and accommodation entries routed through shell or paper companies.

The governing principle was laid down in Sumati Dayal v. CIT, (1995) 214 ITR 801 (SC), where the Court held that the genuineness of a transaction must be tested against the "surrounding circumstances" and the "test of human probabilities," rather than accepting documentary evidence at face value. The Court relied on its earlier ruling in CIT v. Durga Prasad More, (1971) 82 ITR 540 (SC), which held that taxing authorities are entitled to look beyond self-serving recitals in documents and examine whether the apparent state of affairs is the real one.

For corporate assessees specifically, Section 68 is supplemented by the proviso requiring closely-held companies to also prove the source of the source — i.e., the creditworthiness and genuineness of the funds in the hands of the share subscriber — a requirement that has generated extensive litigation on share capital and premium received from unrelated investors, and interacts closely with Section 56(2)(viib) (1961 Act), which taxes share premium received in excess of fair market value by closely-held companies. Section 56 has been renumbered as Section 92 under the 2025 Act ("Income from other sources"), which continues to house the corresponding excess-share-premium provision.

Issue 4: Disallowance of Expenditure

Several recurring disallowance provisions dominate corporate scrutiny assessments:

●        Section 40(a)(ia) (1961 Act) — disallowance for failure to deduct or deposit tax at source on payments to residents; Section 40 as a whole is renumbered as Section 35 under the 2025 Act ("Amounts not deductible in certain circumstances").

●        Section 40A(2) (1961 Act) — disallowance of excessive or unreasonable payments to related parties; renumbered as Section 36 under the 2025 Act ("Expenses or payments not deductible in certain circumstances").

●        Section 14A read with Rule 8D (1961 Act) — disallowance of expenditure attributable to earning exempt income, an area marked by continuing controversy over whether disallowance can exceed the exempt income actually earned, and whether it applies where no exempt income was earned at all in the relevant year; renumbered as Section 14 under the 2025 Act.

●        Section 43B (1961 Act) — disallowance of certain statutory liabilities (taxes, employee contributions, interest to specified institutions) unless paid before the due date of filing the return; renumbered as Section 37 under the 2025 Act ("Certain deductions allowed on actual payment basis only").

On the question of interest disallowance for funds advanced to related concerns, S.A. Builders Ltd. v. CIT (Appeals), (2007) 288 ITR 1 (SC), is the leading authority. The Court held that the test is not whether the advance itself yielded a direct return, but whether it was made as a measure of commercial expediency from the point of view of the businessman and not the Revenue.

Issue 5: Transfer Pricing Adjustments (Sections 92 to 92F and 144C, 1961 Act)

For companies engaged in international transactions or specified domestic transactions with associated enterprises, Chapter X of the 1961 Act requires income to be computed having regard to the arm's length price. The transfer pricing chapter and the DRP mechanism are retained in substance under the 2025 Act, reorganised within its international-transactions provisions; the Section 263 revisionary power under the 1961 Act (Section 377 under the 2025 Act) has also been expressly extended to cover orders passed by the Transfer Pricing Officer, not merely the Assessing Officer. Recurring issues include selection of the most appropriate method, comparability analysis and selection/rejection of comparable companies, characterisation of the tested party's functions (routine service provider versus entrepreneurial risk-taker), and adjustments for working capital and risk. Transfer pricing additions are typically routed through the DRP under Section 144C before a final assessment order is passed, and the DRP's directions are binding on the AO but appealable by the assessee directly to the Tribunal.

The Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, decision — although concerned principally with the taxability of an offshore share transfer indirectly deriving value from Indian assets — remains a landmark reference point in corporate tax jurisprudence for the principle that a transaction must be examined for its genuine commercial substance, and that tax authorities cannot disregard a legitimate corporate structure merely because it results in tax efficiency, as distinct from a colourable device.

Issue 6: Revision of Assessment Orders Prejudicial to Revenue (Section 263, 1961 Act; Section 377, 2025 Act)

Where the AO's order is regarded as both erroneous and prejudicial to the interests of the revenue, the Commissioner may revise it. The seminal authority is Malabar Industrial Co. Ltd. v. CIT, (2000) 2 SCC 718, where the Supreme Court held that both conditions — the order being erroneous, and it being prejudicial to the revenue — must coexist; an order is not erroneous merely because the Commissioner disagrees with a view that was reasonably open to the AO in law. This was refined in CIT v. Max India Ltd., (2007) 15 SCC 401, which reiterated that where two views are possible and the AO adopts one permissible view, the order cannot be revised simply because the Commissioner prefers another view. Corporate assessees frequently invoke this line of cases to resist Section 263 proceedings triggered by "inadequate enquiry" as opposed to a complete "lack of enquiry," the latter being more readily treated as rendering an order erroneous.

Issue 7: Minimum Alternate Tax (Section 115JB, 1961 Act; Section 206, 2025 Act)

Companies with substantial book profits but low taxable income under normal provisions are subject to MAT, computed on "book profit" as adjusted by the specific additions and deductions listed in Explanation 1 to Section 115JB. Disputes commonly arise over whether the AO can go behind the audited profit and loss account prepared in accordance with Schedule III of the Companies Act to rework book profits — an area where courts have generally limited the AO's power to the specific adjustments enumerated in the section, rather than a general re-computation. Section 115JB has been renumbered as Section 206 under the 2025 Act, which consolidates MAT (for companies) and the Alternate Minimum Tax regime (for other taxpayers) within the same provision, and requires certification in a new Form No. 66 (replacing the erstwhile Form 29B) certifying the computation of book profit.

Issue 8: Limitation of Claims Outside the Return (Rule in Goetze India)

Goetze (India) Ltd. v. CIT, (2006) 284 ITR 323 (SC), held that the AO cannot entertain a fresh claim for deduction made otherwise than through a revised return of income, although the Court clarified that this restriction does not affect the appellate authorities' power to admit additional claims. This issue frequently surfaces where a company discovers an eligible deduction or exemption after the original return has been filed but before assessment is completed.

Issue 9: Natural Justice and Faceless Assessment

With assessments increasingly conducted under the faceless regime, procedural issues — such as inadequate opportunity of hearing, failure to consider a timely reply, or a draft assessment order under Section 144C not being followed correctly — have become a distinct category of challenge. Courts have consistently held that even summary or faceless proceedings must comply with the principles of natural justice, and an order passed in violation of a mandatory procedural safeguard (such as failing to grant a personal hearing where requested, or bypassing the DRP mechanism where mandatory) is liable to be set aside on that ground alone, independent of the merits of the addition.

Drawing on the issues above, conducting or defending a corporate assessment competently calls for a combination of the following skills:

1.       Statutory literacy across both statutes — a working command of the charging, computation, and procedural provisions of the Act, the ability to track frequent legislative amendments (e.g., the restructured reassessment regime, faceless assessment rules), and — going forward — fluency in translating between 1961 Act section numbers and their 2025 Act equivalents, since assessments for different tax years, and appeals arising from them, will for some years be governed by different statutes running in parallel.

2.       Financial statement analysis — the ability to read audited financial statements, tax audit reports (Form 3CD), related-party disclosures, and reconcile book profit with taxable income.

3.       Evidentiary reasoning — applying the "test of human probabilities" and substance-over-form analysis while remaining alive to the taxpayer's right not to have genuine transactions recharacterised without cogent material.

4.       Case law research and precedent application — identifying the binding authority applicable to a given fact pattern and distinguishing precedents that are factually inapposite.

5.       Procedural discipline — tracking limitation periods under Section 153, ensuring mandatory procedural steps (notice under 143(2), draft order under 144C, show-cause under 148A) are followed, since a breach can be fatal to an otherwise sound addition.

6.       Negotiation and representation skills — presenting submissions effectively before the AO, DRP, Commissioner (Appeals), and Tribunal, and engaging constructively in faceless proceedings where written submissions substitute for oral argument.

7.       Ethical balance — for revenue officers, exercising the power to assess or reassess without succumbing to a target-driven or high-pitched approach; for practitioners, advising clients toward genuine compliance rather than aggressive positions that invite prolonged litigation.

Conclusion

Corporate assessments sit at the intersection of accounting complexity, cross-border commerce, and a constantly evolving procedural code — a code that has, with the commencement of the Income-tax Act, 2025, just undergone its most significant restructuring in over six decades. The issues canvassed above — reassessment on change of opinion, unexplained credits, related-party disallowances, transfer pricing, revisionary jurisdiction, MAT computation, and procedural fairness — recur across virtually every scrutiny cycle involving corporate taxpayers, and they recur under the 2025 Act just as they did under the 1961 Act, because the reform is one of structure and language rather than substance. The judicial precedents discussed, from Kelvinator and Sumati Dayal to Malabar Industrial and Goetze, do not merely resolve individual disputes; they establish interpretive guardrails that are conceptual in nature and will continue to bind the corresponding provisions of the 2025 Act — Sections 279–281 in place of 147/148, Section 102 in place of Section 68, Section 377 in place of Section 263, and so on. A grasp of both statutory schemes, the concordance between them, and this body of case law is indispensable to conducting — or contesting — a corporate assessment that is fair, effective, and legally sustainable, whichever Act happens to govern the tax year in question.