19 September 2023
The Income Tax Online utility for ITR 3 auto-fills the CYLA section without giving us a chance to manually enter or override the setoffs that it has computed. First, it forcibly sets off Business Loss against other heads without giving us an option to NOT setoff (and carry forward) all or part of the Loss. Second, it sets off the Business Loss against other heads of Income in a particular order by internal logic - e.g., in a case where there's no Salary or House income, the order used is : 1) OS , 2) STCG (Slab Rate), 3) LTCG (20%), 4) STCG-STT (15%), 5) LTCG-STT (10%).
Now, my question is : Is the above forcible/no choice behaviour of the Online ITR Utility as per the Income Tax Act ?
My understanding of the IT Act Sections 71 & 72 is that the Assessee may choose to Setoff all or part of his/her Business / Profession Loss against Incomes under certain other Heads in the same year, but is not required to do so. He/she may instead choose to carry forward all or part of the Business Loss for setoff against Incomes under allowed Heads in future years. Further, section 71 does not specify any particular order of other Heads to be chosen for the setoff. So, the Assessee should be able to choose how much of the Loss to setoff against Incomes under each of the other allowed Heads.
Is my understanding of the IT Law for Loss Setoffs correct ? If yes, then the ITR Utility is enforcing an extra-judicial rule for Loss setoffs. Although the utility's behaviour & CYLA setoffs order seems logical at first glance, it is not always in the interest of the Assessee as in the following examples :
Example 1 : There is a Loss under "Profits from Business/Profession", and Income only under LTCG (10%).
In this case, it may be better for the Assessee to carry forward the loss and set it off against next year's Business Profits instead of setting off against this year's LTCG (10%). That would give a return of more than 25% of the Loss carried forward. More interestingly, if you treat the extra Income Tax paid this year by not setting off the Loss (i.e., 10% of the Loss) as an "Investment", and the savings in Tax you could get next year when you setoff the carried forward Loss against next year's Business or OS Income (at 34-35%) as the "Return on Investment", then the ROI is like 250% !! Now, who wouldn't want to take that kind of an "assured" Return on Investment ? And this 250% return is what's being denied to us by the ITR Utility when it forcibly sets off Business Losses in CYLA.
Example 2 : (Loss) from Business/Profession (F&O Trading Loss) : (10,00,000) Income from Other Sources (Div, Bank FD & SB Int) : 8,00,000 LTCG from Debt MFs after Indexation (20% Tax) : 9,00,000 Ch VI A Eligible Deductions (80C, 80D, 80TTB) : ( 2,50,000)
In this case, if Rs. 8 L of Business Loss is setoff against OS Income and the remaining 2 L against LTCG (20%), then 7.0 L of LTCG will be taxed at 20% (ignoring surcharges for now). Then, there is no valid source left to deduct the eligible 80C, 80D, 80TTB amounts from, and so you lose those deductions. If instead, only 5.5 L of Business Loss were setoff against OS Income and 4.5 L were setoff against LTCG (20%), leaving a balance of 2.5L of OS Income, then the Ch. VI A deductions can be taken against the OS Income, and only LTCG of 4.5 L would be taxed at 20%. That's a tax saving of (7.0 - 4.5) * 20/100 = Rs.50,000 !!
My current case is like Example 2. So, I feel that the Online ITR utility is illegally fleecing me of Rs. 50,000 by computing CYLA in its own way instead of giving me choices as per the IT Act.
Is my feeling justified ? If yes, is there any way to escape this loot by the IT Dept ? Does anyone here use a 3rd Party ITR utility that allows CYLA to be manually filled/overridden ?
If yes, can anyone here complain to the IT Dept regarding this flaw in their Online ITR utility ? (The IT Dept is more likely to act on a complain from authoritative sources like experts of the CA Club than from a lay assessee like me.)
19 September 2023
Would really appreciate any inputs on the above query... If the issue raised is valid, but not possible to work around the software issue right now, can one file the ITR return with the forced CYLA setoffs for now, and then raise a grievance in IT E-filing portal to ask the IT Dept to change the CYLA setoffs so as to let me get the benefit of Ch VI A deductions (and ask for the resulting additional Refund) ? Does the IT Dept ever process such Grievance posts or would it just be a waste of time & effort ?
09 November 2023
This query regarding the legality of the Income Tax Online Utility's behaviour on CYLA has been open for nearly 2 months now with no response from any Experts !! I was hoping the at least someone would have noticed this problem too and could give some inputs... So, not sure if no one has really read the query due to its length, or no one wants to openly say that the Income Tax Dept's software is behaving illegally ? Come on tax gurus... please help me out... Thanks.
09 July 2024
Your understanding of the Income Tax Act provisions regarding the setoff of losses (Section 71 and Section 72) is correct. Let's address your concerns and queries systematically:
### 1. Forced Setoff by Online ITR Utility:
The Income Tax Return (ITR) utility provided online does auto-fill the Current Year Loss Adjustment (CYLA) section based on its internal logic. This logic may not always align with what is most beneficial for the taxpayer, as you've illustrated in your examples.
### 2. Provisions of the Income Tax Act:
- **Section 71:** Provides that any loss (other than loss from speculative business) can be set off against income from any other head in the same assessment year. - **Section 72:** Allows carry forward of losses (other than loss from speculation business) to be set off against income of subsequent years under specified conditions.
### 3. Taxpayer's Right to Choose:
- As per the Income Tax Act, taxpayers have the right to choose how much of their losses to set off against income under different heads in the same assessment year. - There is no statutory requirement to follow a specific order or method of setoff as mandated by the ITR utility. Taxpayers should ideally have the flexibility to decide based on their financial situation and tax planning objectives.
### 4. Practical Examples and Tax Planning:
- Your examples demonstrate situations where a different order of setoff could result in lower tax liability or higher future tax savings due to carry forward of losses. - Taxpayers should have the flexibility to optimize their tax liability, which may not be fully accommodated by the rigid setoff rules applied by the online ITR utility.
### 5. Addressing the Issue:
- **Third-Party ITR Utilities:** There are third-party ITR filing utilities available that may provide more flexibility in manually filling or overriding the CYLA section. These utilities often cater to tax professionals and offer more options for manual input. - **Complaint to IT Department:** If you believe that the online ITR utility's automated setoff mechanism is not in line with the provisions of the Income Tax Act and is resulting in undue tax burden, you can certainly provide feedback or lodge a complaint with the Income Tax Department. It's advisable to document your concerns clearly, citing specific sections of the Income Tax Act and how the utility's behavior differs. - **Consultation with Tax Professionals:** Seeking advice from a tax consultant or a chartered accountant who is well-versed in tax laws and practices can also help you navigate such issues effectively.
### Conclusion:
Your concern about the automated setoff mechanism in the online ITR utility potentially leading to suboptimal tax outcomes is justified. Taxpayers should ideally have the flexibility to optimize their tax planning strategies within the framework of the Income Tax Act. Exploring third-party ITR filing utilities or providing feedback to the IT Department could help in improving the system's flexibility and adherence to statutory provisions. It’s recommended to explore these options further to ensure compliance and minimize tax implications effectively.
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