Taxpayer is entitled to claim benefit of exempted income in revised ITR if it is filed within the deadline
May 14, 2024
Synopsis
Income tax return: The Supreme Court of India has refused to accept a petition wherein the tax department's assessing officer (AO) contested that a individual be denied the benefit of exempted income which he claimed by filing a revised ITR. The reason behind this denial was that the AO received information from 'entry operators'.
The Supreme Court set a precedent when it refused to accept a Special Leave Petition (SLP) by the Income Tax Department and allowed a taxpayer's claim for income that was not declared in the original ITR but was declared in the revised tax return.
This taxpayer had long-term capital gains income under section 10(38) of Income Tax Act, 1961 from selling of equity shares after holding it for more than 12 months; however, he forgot to include this income while filing his original income tax return (ITR). So, he filed a revised ITR to claim exemption on this LTCG income. However, the income tax assessing officer rejected this claim by citing certain reasons. The Income Tax Appellate Tribunal (ITAT) and Orissa High Court rejected the reasons cited by the income tax assessing officer (AO).
Read on to find out why the tribunal and court rejected AO's reasons and how this may also impact you.
What was the reason for the assessing officer to deny the income claim made in the revised ITR?
The reason given by the AO was that he had received statements from 'entry operators' about this income.
According to Suresh Surana, founder, RSM India, a tax and business consultancy company, "Entry operators' typically refer to individuals or entities who facilitate the creation of fictitious transactions or entries in financial records with the intention of evading taxes or laundering money."
Based on the statements from 'entry operators' the AO denied the taxpayer's claim of adding exempted income in the revised ITR and imposed sections 68 and 69 on him.
Section 68 is imposed in cases where unexplained cash credits are found. Under this section, any income received should be declared for taxation unless it is specifically exempted by law. Section 69 relates to unexplained investments wherein if a taxpayer cannot explain the nature and source of any investment, then the value of such investments will be deemed to be the income of the taxpayer.
Why did the courts and tribunals reject the reasons cited by the AO?
Legal experts say there were two reasons why the AO's contention was not made applicable. The reasons are:
Taxpayers have a legal right to make corrections in their original ITR by filing revised ITR within the deadline,
If an AO relies on information received from entry operators, then the taxpayer must be given an opportunity to challenge it or cross-examine it.
"Denial of assessee's plea despite him filing revised income tax return claiming exemption in respect of long-term capital gains on shares under section 10(38) of the Income Tax Act, 1961, which is permitted under the CBDT circular, coupled with failure to adhere to the principles of natural justice by denying opportunity to the assessee to cross-examine the entry providers was the root cause why the department lost this matter," says Sameer Tapia, founder and senior partner, ALMT Legal Advocates and Solicitors.
As per Surana, the court highlighted the unjust nature of the Assessing Officer's reliance on statements from 'entry operators' to support additions under sections 68 and 69. "These statements from entry operators were recorded in unrelated proceedings prior to the survey on the assessee, and he was not given a chance to challenge or cross-examine the providers," he says.
How may this impact you and what lesson can be learned from this case
In this case, long-term capital gain (sold after 12 months) on shares was exempt from tax because it was purchased and sold before February 1, 2018, when the long-term capital gains from equity shares was fully exempted. However, if you bought equities after February 1, 2018, and sold it after holding for 12 months, LTCG on selling is exempt from income tax up to Rs 1 lakh in a financial year.
So, the lesson to be learned here is if equity shares were sold through a recognised stock exchange and this income is not shown in the original ITR but it is shown later in the revised ITR, then it has to be accepted by the AO. If the AO got information about this income from other sources, then the taxpayer should be given an opportunity to challenge this information.
"Even if an income is exempt from tax like in case of long-term capital gains from shares (exempt up to Rs 1 lakh in a financial year), an individual has to declare this income in his/her ITR. However, in case the individual forgot to do so, this income can very well be declared in the revised ITR, provided it is being filed within the deadline and before the completion of the assessment of the original ITR filed by this individual," says Fellow Chartered Accountant (FCA) Ashish Niraj, partner, ASN & COMPANY.
As per Tapia from ALMT Legal, this judgment will assist those assessees whose rightful claims for exemption under the revised returns have not been granted by the department because they were not claimed in the original returns. "Further, this judgment will provide relief to those assessees who have been denied an opportunity to cross-examine and challenge the statements of the entry-providers relying upon which the assessing officer has passed assessment order in this case cited above," he says.
When may income tax AO deny claim for exempted income?
If you have not followed the prescribed procedure as followed by this taxpayer cited in the case, then no exemption can be claimed.
"The shares in question were acquired via Account Payee cheques, held in a Demat Account for over 12 months, and sold through a recognized stock exchange after the payment of securities transaction tax, hence, he was eligible to claim exemption under section 10(38)," says Surana from RSM India.
Although this individual, whose case is cited above, revised his ITR, experts suggest not revising ITR so often, as doing it once or twice is fine. "In my experience I have seen the chance of picking an ITR for scrutiny get higher if it is revised too many times. However, the last revised ITR will stand to be the final ITR and if the assessment has not been completed then it has to be started based on this ITR," says Niraj.
Another important point to note is that revised ITR should be filed (if required) either within the prescribed time period or 'before completion of the assessment'.
"As this case pertains to Assessment Year 2014-15, Section 139(5) stated that the revised return can be filed at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. In the given case, the Assessee was eligible to claim the benefit of exemption of Section 10(38)," says Surana.
[The Economic Times]
