Income Tax Returns: Capital Gains Calculation Glitch Haunts Taxpayers
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Income Tax Returns: Capital Gains Calculation Glitch Haunts Taxpayers

An upward revision in capital gains by the revenue department in the income tax returns this year is confounding taxpayers.

The central processing cell of the tax department recently issued notices to hundreds of taxpayers, making or proposing to make adjustments in the disclosed capital gains. Some notices also state that the returns are defective. The sudden spate of notices is attributable to a glitch in the tax departments’ ITR processing software, experts told BloombergQuint.

The deadline for filing income tax returns for Assessment Year 2019-20 was Aug. 31 for individual tax payers. Reporting of long-term capital gains arising from transfer of listed equity shares became applicable from AY 19-20. Budget 2018 had introduced taxation on long-term capital gains arising from the sale of listed equity shares or an equity-oriented mutual fund unit if such gains exceeded Rs 1 lakh.

“Some of the taxpayers who received notices have now been informed by the central processing cell that the problem relates to a technical error and the department is working to rectify it,” Ameet Patel, chairman of the taxation committee in Bombay Chartered Accountants Society, told Bloomberg Quint.

LTCG Notices: What’s Prompted Them?

The CBDT revises tax returns every year to accommodate the changes made by the Finance Act. Forms ITR-1 to ITR-4 were revised in April this year to incorporate the introduction of capital gains on shares and equity-oriented mutual funds.

Initially, taxpayers had struggled to prepare their returns since revenue department’s utility failed to validate data entered by them. The return form did not support scrip-wise entry. It allowed taxpayers to only enter the final amount of LTCG. At that time, experts had feared that this may lead to the final taxable amount being disputed owing to different calculations.

The revenue department had addressed this by issuing a circular on July 19. It granted discretion to taxpayers to provide the details on a scrip-wise basis or by pre-calculated value of capital gains on an aggregated basis.

Taxpayers who had opted for scrip-wise details had to provide cost of acquisition, fair market value, expenditure and other details for each scrip separately. But most taxpayers had opted to disclose capital gains on a ‘total or aggregated basis’ as the revised utility was made available very close to the deadline of Aug. 31, experts BloombergQuint spoke with said.

Both categories of taxpayers have received notices from the revenue department — an issued flagged off by the Bombay Chartered Accountants’ Society in a recent letter to the CBDT chairman.

The department’s software hasn’t gone into scrip-wise details while processing the tax returns which has led to increased liability on account of capital gains, the letter stated.

Certain omissions by the CPC utility in processing data on capital gains is also causing mismatch in the numbers.

Brought forward capital losses are not being considered by the CPC software, resulting in higher income under capital gains, Patel said.

For shares acquired between February and March 2018, the CPC software is failing to deduct the cost of acquisition from sale consideration, resulting in an inflated amount of capital gains due to a higher consideration amount.
Ameet Patel, BCAS

The error is equally attributable to the manner in which the CPC software processes the capital gains details, Rohinton Sidhwa, partner at Deloitte India, said.

Computation of capital gains emanating from listed securities from demat transactions are generally done on a first-in, first-out basis. A taxpayer can also do individual matching of transactions under certain circumstances. CPC is supposed to calculate capital gains/loss basis this for a security first and then aggregate for different securities. 
Rohinton Sidhwa, Partner, Deloitte India

Further advance tax and interest are also to be calculated depending on the periods within which the gains are realised. This lends itself to a fair degree of complexity and errors seem to have crept in the calculation, probably leading to the issuance of the notices, Sidhwa said.

Government Working On A Fix

The government has issued individual communication to taxpayers that the notices are attributable to a technical error which will be rectified shortly. No general public notification has been issued.

The department has dealt swiftly in similar instances before, the notices may either be withdrawn by the government or would become infructuous, Sameer Gupta, partner at EY, said. This is seemingly not an issue where there is a difference in technical opinion regarding the manner of computation of capital gains, he said.

Ankit Jain, partner at tax consultancy firm Ved Jain and Associates, said, if the issue remains unresolved, taxpayers could approach the department for reprocessing of the return, and in certain instances, they could apply for rectification of an error since it is apparent from the record. Alternatively, taxpayers may file an appeal to the commissioner as the last resort, he said.

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