In a major relief for income tax assessees, a select committee of the Lok Sabha has recommended the scrapping of a contentious clause in the Income Tax Bill, which had originally proposed that taxpayers would be eligible for a refund only if they file their return on time.
The Income Tax Bill, 2025, once approved, seeks to replace the six-decade-old Income Tax Act, 1961.
Clause 263(1)(a)(ix) of the bill, which was tabled in Parliament in February, stipulates that a person seeking a refund must file their return of income within the prescribed due date. Experts and various stakeholders had suggested that this clause should be removed.
“The committee observed that the current mandatory requirement to file a return solely to claim a refund could inadvertently lead to prosecution, particularly for small taxpayers whose income falls below the taxable threshold but from whom tax has been deducted at source. In such scenarios, the law should not compel a return merely to avoid penal provisions for non-filing. The committee, therefore, recommended to remove sub-clause (1)(ix) from Clause 263 to provide flexibility for allowing refund claims in cases where the return is not filed in due time,” a statement from the 31-member select committee chaired by BJP leader Baijayant Panda said.
NPO taxation
The committee recommended that the government redraft clause 332 of the Income Tax Bill, which relates to provisions applicable to non-profit organisations, as it has led to significant confusion, especially for those NPOs with mixed charitable and religious objectives regarding the interpretation of “wholly for charitable or religious purposes”.
“This ambiguity could lead to uncertainty for existing trusts and those established after 1961, increasing litigation risks. The committee recommended to redraft Clause 332 suitably to resolve this issue,” the statement said.
The Committee noted that Clause 337 of the bill imposes a 30 per cent tax on anonymous donations for all NPOs, exempting only those wholly religious.
“This omitted ‘religious-cum-charitable’ trust is a significant category previously exempt under section 115BBC (of the Income Tax Act). To prevent undue burden and support India’s hybrid NPO sector, the committee strongly recommended reintroducing a provision similar to section 115BBC’s explanation,” the statement said.
Further, the committee also opposed taxing ‘receipts’ of NPOs as it contravenes the principle of real income taxation under the Income Tax Act. It is recommended to reintroduce the term ‘income’ to ensure only the net income of NPOs is taxed.
“The government should recognise the role of NPOs in the delivery of useful services to the community, as the government alone cannot perform the desired services in all fields,” said tax advocate Narayan Jain.
Other changes
On deductions from income from house properties, the committee has recommended amendments to clause 22 such that the standard 30 per cent deduction to be computed on the annual value will be after deducting municipal taxes, and the deduction for pre-construction interest shall be available for let-out properties in addition to self-occupied ones, aligning it with the existing Act.
The committee has also recommended amending clause 181, which deals with the consequences of impermissible avoidance arrangements under the GAAR provisions, by reinstating the phrase “in the circumstances of the case”.
“By anchoring the application of GAAR to the specific facts of each case, the amendment seeks to uphold a fair balance between robust enforcement and the protection of taxpayer rights,” said Riaz Thingna, partner, Grant Thornton Bharat.
The committee commended the tax department’s move to replace the dual concepts of “previous year” and “assessment year” with a single, unified term: “tax year” that streamlines the tax period references throughout the legislation, making the law more accessible and easier to understand.
The committee has also suggested modernising definitions such as “capital asset” and “infrastructure capital company”.
Parliamentary committee reports are recommendatory, and the government may choose to accept them in part or in full. A total of 566 observations/reccomendations have been made in the report, with a majority seeking to correct drafting errors in the bill.