Weekly Round-up on Tax and Corporate Laws | 4th to 9th May 2026

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from May 04th to 09th 2026, namely:

1. SC Sets Aside HC Rulings Quashing Reassessment Notices Issued by JAO; Validity of Retrospective Amendment Left Open
2. Govt. Amends FEM (Non-debt Instruments) Rules; Hikes FDI Limit in Insurance Sector to 100% Under Automatic Route
3. Govt. Notifies Industrial Relations (Central) Rules, 2026
4. Interim Bank Guarantee Need Not Secure Penalty as the Primary Purpose Was to Cover Short-paid Tax for Perishable Goods: HC
5. Summary Assessment Misclassified Demand as Penalty Instead of Tax, Interest & Penalty; Amnesty Benefit Not Denied: HC
6. Decline in Inventory Prices After Year-end – Should It Impact Inventory Valuation Under Ind AS 2?
7. Optimistic Trends in Accounting Estimates – Does This Indicate Management Bias Under SA 540?

1. SC Sets Aside HC Rulings Quashing Reassessment Notices Issued by JAO; Validity of Retrospective Amendment Left Open

The assessee was engaged in the business of land development, as well as the buying and selling of land and buildings. During the year under consideration, the assessee sold land and offered Long-Term Capital Gain (LTCG) on the sale. While computing LTCG, the assessee claimed improvement cost as compensation paid to encroachers to obtain vacant possession. The Assessing Officer (AO) disallowed the entire improvement cost, as the assessee failed to furnish complete details of the persons, including their names, PANs, and the nature of payments (cash or bank), etc. Aggrieved by the order, the assessee preferred an appeal to the CIT(A).

A large batch of reassessment matters arose under the Income-tax Act, 1961, after the Finance Act, 2021, overhauled Sections 147 to 151 with effect from 01.04.2021. Subsequently, on 29.03.2022, the CBDT notified the e-Assessment of Income Escaping Assessment Scheme, 2022 under Section 151A, providing that reassessment under Section 147 and issuance of notice under Section 148 would be carried out through automated allocation and in a faceless manner.

This gave rise to a dispute on whether, after this Scheme, the Jurisdictional Assessing Officer (JAO) or the National Faceless Assessment Centre/Faceless Units (NFAC) had authority to act at the pre-notice and notice stages under Sections 148A and 148.

In several cases, JAOs issued orders under Section 148A(d) and consequential notices under Section 148 without routing them through the faceless mechanism. Multiple writ petitions were filed before various High Courts. Divergent views emerged; some High Courts held that the JAO and NFAC had concurrent jurisdiction and that the Scheme did not displace the JAO, others quashed the notices and proceedings on the ground that they were not issued through the faceless mechanism, thereby rendering the subsequent reassessment steps invalid.

During the pendency of appeals arising from these judgments, Parliament enacted the Finance Act, 2026 (effective 01.04.2026), inserting Section 147A into the Act with retrospective effect from 01.04.2021 to clarify that the Assessing Officer, for purposes of Sections 148 and 148A, shall mean an Assessing Officer other than the NFAC or any assessment unit referred to in Section 144B(3).

Aggrieved-assessee filed the instant writ petition contending that the High Court quashed the reassessment notice only on the ground that it was not issued by the National Faceless Assessment Centre (NFAC) and the very foundation of that view now stands altered by the amending legislation, the impugned judgment in favour of the assessee should be set aside, and the matter should be remitted to the High Court for fresh consideration.

The Hon’ble Supreme Court had to decide whether to quash the reassessment notices on the ground that the Jurisdictional Assessing Officers (JAOs) lacked competence to initiate such proceedings or not.

The Supreme Court has set aside the orders of various High Courts holding that the JAOs have no jurisdiction to issue notices for reassessment under Section 148A(d) and Section 148, and that such notices should be issued by the NFAC. The Apex Court held that the Parliament, from the outset, intended that while notices could be issued by either the Jurisdictional AO or the Faceless AOs, the subsequent quasi-judicial adjudication of such notices was to be undertaken by the FAOs.

The power to enact retrospective amendments is well settled in law, and fresh notices will now be issued to assessees in accordance with the clarified position, so that pending reassessment proceedings may be concluded in accordance with the law.

It is not necessary for the Supreme Court to examine the merits of the rival submissions concerning the correctness of the impugned judgments or the scope of the competing precedents at this juncture. The High Courts have primarily quashed the reassessment notices on the ground that the Jurisdictional AOs lacked competence to initiate such proceedings, and the very foundation of that view now stands altered by the amending legislation.

Thus, the impugned judgments in favour of the assessee were set aside on this limited ground. The matter was remitted to the respective High Courts for fresh consideration. The assessee was granted liberty to amend their writ petitions, if so advised, within a period of four weeks from the date of uploading of this order, so as to enable them to challenge Section 147A of the IT Act, as introduced by Act No. 4 of 2026, or to any other connected or consequential provision.

Read the Ruling

2. Govt. Amends FEM (Non-debt Instruments) Rules; Hikes FDI Limit in Insurance Sector to 100% Under Automatic Route

On May 2, 2026, the Government notified the Foreign Exchange Management (Non-debt Instruments) (Second Amendment) Rules, 2026. An amendment has been made to Schedule I of the existing rules. As per the amended norms, the FDI limit in the insurance sector has been increased from 74% to 100% under the automatic route. Accordingly, foreign investment in Indian insurance companies and intermediaries is now permitted up to 100% of the total paid-up equity capital, including investments by portfolio investors. This move is expected to increase foreign participation in India’s insurance industry.

2.1 FDI Limit Increased to 100% in the Insurance Sector

Under the earlier framework, foreign investment was capped at 74%. The amended rules now permit foreign investment up to 100% under the automatic route in insurance companies as well as insurance intermediaries, including brokers, re-insurance brokers, insurance consultants, corporate agents, third-party administrators, Surveyors and Loss Assessors, managing general agents, insurance repositories, and such other entities as may be notified by the IRDAI from time to time.

However, foreign investment in Life Insurance Corporation of India (LIC) continues to remain capped at 20% under the automatic route. Such foreign investment in LIC is subject to compliance with the provisions of the Life Insurance Corporation Act, 1956 and such other provisions of the Insurance Act, 1938, as apply to LIC under section 43 of the Life Insurance Corporation Act, 1956.

The amendment follows the enactment of the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025, which, inter alia, also provides for foreign investment up to 100% in the insurance sector.

2.2 Conditions Applicable to Indian Insurance Companies and Insurance Intermediaries

The conditions applicable to Indian insurance companies and insurance intermediaries are as follows:

• The foreign investment up to 100% of the total paid-up equity capital of an Indian Insurance Company must be allowed under the automatic route, subject to approval and verification by the IRDAI.
• The foreign investment in the insurance sector must be subject to compliance with the provisions of the Insurance Act, 1938 and the condition that companies receiving FDI must obtain the necessary license or approval from the IRDAI to undertake insurance and related activities.
• In an Indian Insurance Company having foreign investment, at least one among the Chairperson of its Board, its Managing Director, and its Chief Executive Officer must be a resident Indian Citizen.
• Foreign portfolio investment in an Indian Insurance Company must be governed by the provisions contained in Chapter IV, Rule 10 and 11, read with Schedule II of the FEM (Non-debt Instruments) Rules, 2019, and the provisions of SEBI (FPI) Regulations, 2019.
• Any increase in foreign investment in an Indian Insurance Company must be in accordance with the pricing guidelines specified under these rules.
• The foreign equity investment cap of 100% must apply on the same terms to insurance brokers, re-insurance brokers, insurance consultants, corporate agents, third-party administrators, Surveyors and Loss Assessors, managing general agents, insurance repositories and such other entities as may be notified by the IRDAI from time to time.
• Where banks operate as insurance intermediaries, the foreign equity investment caps applicable to banking sector must continue to apply, subject to the condition that the revenues of such entities from their primary (i.e., non-insurance related) business remain above 50% of their total revenues in any financial year.

Further, an insurance intermediary having a majority shareholding of foreign investors must undertake the following:

• Be incorporated as a limited company under the provisions of the Companies Act, 2013.
• Ensure that at least one from among the Chairman of the Board of Directors, the Chief Executive Officer, the Principal Officer, or the Managing Director of the insurance intermediary must be a resident Indian citizen.
• Must bring in the latest technological, managerial and other skills and
• Must make disclosures in the formats to be specified by the Authority of all payments made to its group, promoter, subsidiary, interconnected, or associate entities.

2.3 Impact of the Amendment

The amendment is aimed at improving the attractiveness of India’s insurance sector for foreign investors by allowing full foreign ownership under the automatic route. This is expected to facilitate greater capital inflows, encourage competition, improve operational efficiency, and expand insurance penetration across the country by enhancing access to capital, technology, and global expertise.

Read the Notification

3. Govt. Notifies Industrial Relations (Central) Rules, 2026

On May 8, 2026, the Central Government notified the Industrial Relations (Central) Rules, 2026, in the exercise of powers conferred by section 99 of the Industrial Relations Code, 2020 and in supersession of the Industrial Disputes (Central) Rules, 1957 and the Industrial Employment (Standing Orders) Central Rules, 1946.

Section 99 of the Industrial Relations Code, 2020, empowers the appropriate Government to make rules for giving effect to the provisions of the Code. The rules lay down provisions relating to the constitution of the works committee, the manner of recognition of negotiating unions or negotiating councils, voluntary reference of disputes to arbitration, mechanisms for the resolution of industrial disputes, procedures for strikes and lockouts, workers’ re-skilling fund, offences & penalties, and other miscellaneous matters.

Key Highlights

Some of the key highlights of the Industrial Relations (Central) Rules, 2026 are as follows:

(a) Constitution of Works Committee – As per the rules, employers must constitute a Works Committee to promote measures for securing and preserving amity and good relations between the employer and workers. The Committee must be constituted with a maximum of 20 members, ensuring that the number of representatives of workers is not less than the number of representatives of the employer.

(b) Formation of Grievance Redressal Committee – The rules prescribe the formation of a Grievance Redressal Committee comprising an equal number of members representing the employer and workers, which shall not exceed 10. There must be an adequate representation of women workers in the Committee, and such representation must not be less than the proportion of women workers to the total workers employed in the establishment. The tenure of members of the Committee must be three years.

(c) Manner of recognition of Negotiating Union or Negotiating Council – The rules specify the manner of recognition of Negotiating Union or Negotiating Council, which includes the matters for negotiation, criteria for recognising single registered trade union, manner of verification of membership of trade unions, issuance of verification reports and applications for adjudication of disputes before the Tribunal.

(d) Voluntary Reference of Disputes to an Arbitrator – The rules provide that an employer and worker may mutually agree to refer an industrial dispute to an arbitrator by entering into an arbitration agreement in Form-V. The agreement must be signed by the parties and accompanied by consent, either in writing or electronically, of the arbitrator or arbitrators.

(e) Procedure for Strikes and Lockouts – The rules formalise the procedures for strikes and lockouts. The notice of strike must be given to the employer of an industrial establishment in Form XI, which must be duly signed by the Secretary and five elected representatives of the workers. The employer must give the notice of lock-out in Form-XII to the Secretary of every registered trade union, either by speed post or electronically.

(f) Re-employment to Retrenched Workers – The rules require the employer to prepare a list of all workers in the particular category from which retrenchment is contemplated, arranged according to the seniority of their service in that category and cause a copy to be pasted on a notice board at a conspicuous place in the premises of the industrial establishment at least 7 days before the actual date of retrenchment.

(g) Special Provisions Relating to Lay-offs, Retrenchment and Closure – As per the rules, an application must be made by the employer in Form-XIV to the Central Government seeking permission for Lay-offs, retrenchment and Closure, and a copy of the application must be served simultaneously to the workers electronically or in person or by speed post. The application must also be displayed by the employer on the notice board or on the electronic board at the main entrance of the industrial establishment.

(h) Workers Re-Skilling Fund – The rules require employers retrenching a worker to electronically transfer an amount equivalent to 15 days’ last drawn wages of the retrenched worker into the accounts to be maintained by the Chief Labour Commissioner (Central)/Office of the Deputy Chief Labour Commissioner (Central)/Office of the Regional Labour Commissioner (central)/Office of the Assistant Labour Commissioner (Central) as required. The worker must utilise the amount for his re-skilling.

(i) Protected Workers – The rules mandate that every registered Trade Union connected with an industrial establishment must communicate to the employer before the 30th April of every year, the names and addresses of the officers of the Union who are employed in the establishment and who, in the opinion of the Union, must be recognised as protected workers.

(j) Manner of Composition of Offence by Gazetted Officer – Under the rules, the officer notified by the Central Government for compounding of offences must send a notice to the accused in Form-XV through the designated portal of the Ministry of Labour and Employment. The accused to whom the notice is served may send the duly filled-up application in Part III of Form XV to the compounding officer electronically and deposit the compounding amount electronically within 15 days of the receipt of the notice.

Read the Notification

4. Interim Bank Guarantee Need Not Secure Penalty as the Primary Purpose Was to Cover Short-paid Tax for Perishable Goods: HC

The High Court held that an interim bank guarantee furnished for the release of perishable goods need only secure the alleged short-paid tax and not the penalty component. It was observed that the interim arrangement was consciously limited to safeguarding revenue under Section 73, while the Department’s right to recover penalty remained preserved independently.

4.1 Facts

The petitioner was engaged in a dispute arising from proceedings initiated by the Directorate General of GST Intelligence (DGGI) concerning alleged short payment of tax on consignments of perishable areca nuts and associated vehicles. An interim order had been passed directing the release of the detained goods upon furnishing of a bank guarantee equivalent to the amount of alleged short-paid tax. The DGGI subsequently filed an interlocutory application seeking to modify the interim order to increase the bank guarantee. It was contended that the question of penalty had already been considered at the stage of passing the interim order and that no further enhancement was warranted. It was further submitted that the interim arrangement was limited to securing the alleged tax liability and should not be expanded to include penalty at this stage. The matter was accordingly placed before the High Court.

4.2 Held

The High Court held that the interim order had been consciously passed taking into account the requirement of securing the alleged short-paid tax in respect of perishable goods, where immediate release was necessary to prevent deterioration. The departmental tabulation included a penalty component; the primary objective at the interim stage was to safeguard the tax demand under Section 73 of the CGST Act and the Assam GST Act. It was observed that the interim arrangement protected the revenue’s interests without extending the scope to penalty security. It was clarified that the Department’s right to enforce a penalty remained fully preserved. Accordingly, the Court found no justification for modifying or enhancing the bank guarantee and rejected the request for alteration of the interim order, while permitting substitution of the beneficiary of the bank guarantee.

Read the Ruling

5. Summary Assessment Misclassified Demand as Penalty Instead of Tax, Interest & Penalty; Amnesty Benefit Not Denied: HC

The High Court held that a benefit under Section 128A could not be denied merely because the summary assessment wrongly classified the entire demand as penalty instead of tax, interest, and penalty. It was observed that the original adjudication order clearly quantified the components separately, and the misclassification in summary proceedings was only a clerical error incapable of defeating the amnesty claim.

5.1 Facts

The petitioner challenged the rejection of its application seeking a waiver under Section 128A of the CGST Act and the Tamil Nadu GST Act pursuant to the GST Amnesty Scheme, 2025. It was submitted that the assessment proceedings culminated in an adjudication order in which tax, interest, and penalty were quantified separately, and an appeal against such order remained pending. It was contended that upon the introduction of the scheme, it paid the tax dues and withdrew the appeal. The application was rejected on the ground that in the summary assessment the entire demand was treated as ‘penalty’ with nil tax and interest. The petitioner contended that this was an apparent clerical mistake, as the original order clearly included tax, interest, and penalty components, and hence the benefit under the scheme could not be denied. The matter was accordingly placed before the High Court.

5.2 Held

The High Court held that the original adjudication order clearly quantified tax, interest, and a limited penalty, and mere misclassification of the entire demand as ‘penalty’ in the summary proceedings was an apparent clerical error. It held that such an error could not be perpetuated while considering an application under Section 128A of the CGST Act and the Tamil Nadu GST Act. The Court observed that the jurisdictional officer under CGST ought to have correctly appreciated the original order and treated the amounts under the appropriate heads while examining the claim. It was held that the denial of the benefit of the amnesty scheme solely on account of such a clerical mistake was unsustainable. Accordingly, the matter was remanded to the authority for fresh consideration.

Read the Ruling

6. Decline in Inventory Prices After Year-end – Should It Impact Inventory Valuation Under Ind AS 2?

Inventory valuation under Ind AS 2 is based on the principle that inventories should be measured at the lower of cost and Net Realisable Value (NRV). Although NRV is determined as of the reporting date, Ind AS 2 permits consideration of events occurring after year-end if they provide additional evidence of conditions that already existed at the reporting date. This becomes particularly relevant where market prices decline significantly after year-end, raising the question whether such a decline should result in an adjustment of inventory valuation or merely require disclosure as a post-reporting event.

Under Ind AS 10, Events after the Reporting Period, the key consideration is whether the subsequent decline in prices represents an adjusting event that confirms conditions existing at the reporting date, or a non-adjusting event arising from new conditions after year-end. Ind AS 2 also clarifies that post-year-end price fluctuations should be considered in determining NRV only to the extent they confirm conditions existing at the end of the reporting period.

Consider a situation in which a commodity trading and manufacturing company holds significant inventory at year-end and concludes, based on prevailing market prices, that the inventory’s cost is lower than its NRV. Accordingly, no inventory write-down is recognised. However, before the financial statements are approved, commodity prices decline sharply due to global market disruptions and weakening demand, and actual sales are recorded at prices substantially lower than those prevailing at year-end.

In such a case, the accounting treatment depends on the nature of the decline. If the lower prices merely confirm market weakness, oversupply, or declining demand conditions that already existed at year-end, the event would be regarded as an adjusting event requiring inventory write-down. Conversely, where the decline results from new developments arising after the reporting date, such as unexpected geopolitical or economic disruptions, it would constitute a non-adjusting event under Ind AS 10. In the present case, the facts indicate that the decline resulted from developments occurring after year-end rather than conditions existing at the reporting date. Accordingly, non-adjustment of inventory valuation may be appropriate, though adequate disclosure of the event and its financial impact would still be necessary.

Read the Story

7. Optimistic Trends in Accounting Estimates – Does This Indicate Management Bias Under SA 540?

A company, while preparing its financial statements, made several accounting estimates relating to impairment testing, provisions, and Expected Credit Loss (ECL). Individually, each estimate appeared reasonable and was supported by management explanations and data. However, certain patterns were observed.

Impairment assessments across various cash-generating units did not result in any impairment loss, mainly due to optimistic assumptions regarding future growth, margins, and discount rates. Provisions for litigation, warranties, and other obligations were recognised at the lower end of the range of possible outcomes, thereby reducing expected liabilities. Similarly, ECL calculations reflected improving credit quality and low default expectations despite uncertain economic conditions and industry stress.

Further, comparison with prior periods showed that actual outcomes had often been less favourable than management’s earlier estimates, indicating a recurring pattern of optimism. Although no single estimate appeared unreasonable on a standalone basis, all estimates collectively pointed towards a favourable presentation of the financial statements.

SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures requires the auditor to understand how management makes accounting estimates, including the assumptions, methods, and judgments involved. The Standard also specifically requires auditors to review prior-period estimates to identify circumstances that may indicate management bias. Importantly, SA 540 recognises that indicators of management bias may exist even where individual estimates fall within a reasonable range.

In the case discussed above, the issue does not arise from a single estimate, but from a cumulative pattern of assumptions consistently favouring better financial outcomes. The use of optimistic growth assumptions in impairment testing, lower-end provisioning, and favourable ECL assumptions together creates an overall optimistic bias in financial reporting. The retrospective review of earlier estimates further strengthens this concern, as prior estimates had regularly been overly optimistic relative to actual results.

SA 540 also clarifies that management bias need not always involve intentional manipulation. Bias may arise from unconscious optimism or a tendency to select assumptions that support favourable financial reporting outcomes. Therefore, the auditor is required to apply professional scepticism and assess whether management’s judgments are consistently tilted towards favourable results.

Accordingly, even though individual estimates may appear acceptable when viewed separately, the overall pattern may still indicate possible management bias. In such circumstances, the auditor should conduct a more thorough evaluation of assumptions, compare them with external evidence, and assess whether the financial statements, taken as a whole, present a neutral and unbiased view.

Read the Story