I have already written three articles to on several deficiencies in Income Tax Returns (ITRs) and associated utilities:
- Jun 30, 2019: “Faulty utility for ITR2 for AY 2019-20”. Link: https://www.devendranarain.com/faulty-utility-f…2-for-ay-2019-20/
- Jul 15, 2019: “Filling Income Tax Returns needs to be simplified”. Link: https://www.devendranarain.com/filling-income-t…to-be-simplified/
- Jul 26, 2019: “CBDT makes long-term capital gain painful”. Link: https://www.devendranarain.com/cbdt-makes-long-…tal-gain-painful/
The main victims of the deficiencies are the assesses who earned Long-Term Capital Gain (LTCG) from sale of equity shares and/or units of Mutual Fuds (shares, for short). With effect from assessment year 2019-20, LTCG on sale of shares (shares, in short) are taxable. The taxable portion is only what is in excess of LTCG of Rs. one lakh. In other word, If LTCG on sale of shares is Rs. 2 lakhs, only Rs. 1 lakh is taxable. The tax rate is 10%.
I am constrained to write one more article because in a news item “Now, I-T to Communicate Through Digital ID Number” published in Economic Times” (August 15, 2019), the CBDT has claimed that henceforth, as a rule all communications from the Department to the tax payers will be in electronic form; where it is necessary to communicate manually, it will be done after recording the reason for doing so after obtaining the approval of Chief Commissioner or Director general of Income Tax.
The step has been taken following an instruction from Prime Minister Narendra Modi (on Aug 12, 2019) for measures to ensure that honest tax payers are not harassed. The complaint of harassment is not a new one nor is the assurance to protect honest taxpayers. What is new is increased use of information technology to improve service to taxpayers.
That is very nice of the CBDT. However, who will check the harassment due to the inefficiencies of the IT department? To be more precise, how will tax payers be saved from harassment if the operational people in the IT Department lack adequate knowledge of tax laws and are unable to develop proper software for filling ITR, filing rectification application, etc?
The history of use of computers by the department is nearly five decade old.
The Department started taking help of computers for assessment (in Delhi) way back in 1970-71 when I was a junior assessing officer posted in Delhi. During those days, computers were at the early stage of development. Programmers used computer language. There was only one computer centre in Delhi, located in R.K. Puram. The senior officers of the department selected the ward under my jurisdiction for experiment but I firmly refused because I feared that the programmes who were not familiar with tax laws would commit blunders in processing IT returns. My fear turned out to be true. The ward that was ultimately selected faced wrath of assesses (officers of Air Force) because of blunders committed by the programmers of the Computer Centre.
In 1991, the Department decided to acquire in-house facilities for processing IT returns. I had the privilege of preparing the first feasibility report but the programme ran into difficulties because the then Financial Adviser was incapable of understanding what computerisation meant. (Incidentally, during 1980s and 1990s I came across a number of Financial Advisers who would oppose modernisation and improvement because of their poor understanding. Quite a few them would not understand difference between hardware and software. I should not blame them. We were passing through a learning stage.)
Anyway, the department launched its computerisation programme in a big way in mid 1990s. By and large, it has been a success. Without computerisation, it would have impossible to receive, store and process crores of IT returns. However, snags remain. More problems crop in when the department is unable to cope with changes in law.
In this article, I am concentrating on pain caused to the tax payers who earned LTCG on sale of shares and also incurred Short-term capital Loss (STCL) on sale of shares and have to fill ITR2.
Since the CBDT issued first ITR2 (I am referring to ITR2 in particular because of familiarity with it) this year, it has been revised three times – on July 11, on August 01 and on August 07 – apparently to remove snags. What the CBDT has done may be with good intention but is violation of the order of the Delhi High Court order dated September 21, 2015 in the case of Avinash Gupta Vs. UOI W.P.(C) No. 9032/2015. Taking cognizance of cognizance of delay by CBDT in release of ITR forms, the High Court said:
“There appears to be no justification for delay beyond the assessment year in prescribing the said forms. Accordingly, though not granting any relief to the petitioner for the current assessment year, the respondents are directed to, with effect from the next assessment year, at least ensure that the forms etc. which are to be prescribed for the Audit Report and for filing the ITR are available as on 1st April of the assessment year unless there is a valid reason therefor and which should be recorded in writing by the respondents themselves, without waiting for any representations to be made.”
The amendment of Income tax Act to tax LTCG on sale of shares in excess of Rs. one lakh was moved in Lok Sabha on February 18, 2018. The department had more than 14 months to design ITRs to incorporate changes and to develop utilities. However, it did not do its work efficiently. It appears, those who design ITR2 and develop associated utility are not fully aware of the consequences of what they are doing.
In addition to what I have discussed in earlier articles, let me explain the problem created by the latest ITR2 and associated utility with a concrete example.
According to the provisions of set off of losses, Short-term capital loss (STCL) on sale of shares can be adjusted only against LTCG on sale of shares but LTCL on sale of shares cannot be set off against STCG on sale of shares. The reason is that while STCG is taxed at 15%, LTCG is taxed at 10% Setting off LTCL against STCG will result in loss of revenue.
Now, a tricky question is whether, for the purpose of set off of LTCG against STCL, total LTCG (before deduction of Rs.one lakh) should be considered or the balance after deduction of LTCG of Rs. One lakh.
Part B4 of Schedule CG in the ITR2 issued on August 08, says that deduction of LTCG of Rs. one lakh will be made in Schedule SI. In actual practice, depending on the circumstances, this provision may or may not allow mandatory deduction of LTCG of Rs. one lakh. This is explained in the table set out below.
|Category of taxpayer||Situation||Reflection in Schedule SI||Impact on provision regarding deduction of Rs. One lakh from LTCG|
|1||LTCG is more than STCL (current or current as well as carried forward from earlier years).||Balance LTCG will be reflected in Schedule SI; LTCG in excess of Rs. One lakh will be taxed @10%.||Taxpayer gets benefit of deduction of Rs. one lakh from total LTCG.|
|2||LTCG is less than STCL (current or current as well as carried forward from earlier years).||Nothing will be reflected in Schedule SI||taxpayer does not benefit of deduction of Rs. one lakh from total LTCG.|
The second situation means that less LTCL will be carried forward to the future years and the benefit of set off of LTCG or STCG in future will be less. Such a situation goes against the letter and spirit of treating only excess of Rs. one lakh of LTCG as taxable.
The situations I have described are not hypothetical. I myself fall in the second category. When I filled ITR2, I was denied deduction of Rs. one lakh from the total LTCG on sale of shares and the STCL to be carried forward is less than what I am entitled to under law.
The deficiency in ITR2 can be easily removed by allowing deduction of Rs. one lakh in Part B4 itself and the balance to be set off (in case there is LTCL) or taxed. By denying deduction in Part B4 itself, ITR2 has violated the mandatory deduction of Rs. one lakh from LTCG in case of assesses falling in category 2. Income Tax Act does not say that deduction of Rs. one lakh from LTCG is available only to those assesses who have either no STCL to be set off or who earned LTCG more than they incurred LTCL.
The IT department should ensure availability of experts who understand provisions of law and are competent to develop correct utility.