KSCAA writes letter to income tax dept about taxpayers being wrongly charged late penalty for ITR filing
Multiple experts have voiced their concerns about the Centralised Processing Centre (CPC) of the income tax department making errors in processing income tax returns (ITR). The Karnataka State Chartered Accountants Association (KSCAA) has sent a representation to the CBDT in this regard. KSCAA's representation says that the CPC has erred in considering the due date for filing ITR and has imposed penalties even for those who filed ITR well within the deadline.
CPC Processing Errors, according to KSCAA
According to the representation by KSCAA (a copy of which was seen by ET Wealth Online) the errors in processing of ITRs noticed by them are as follows:
Old/ New tax regime: Numerous taxpayers have received intimations from CPC erroneously calculating their tax liability under the old tax regime, despite these taxpayers having opted for the new tax regime at time of filing their returns.
Incorrect due date considered: Certain taxpayers, specifically partners of firms liable to tax audit, have filed their income tax returns by the extended due date of November 15, 2024. However, the CPC has issued demand notices to these taxpayers, incorrectly considering the due date as July 31, 2024, and levying late filing fees of Rs 5,000 under Section 234F.
Interest under Section 234A and 234B: Many taxpayers have reported receiving demand notices where the CPC has incorrectly calculated interest under Sections 234A and 234B of the Act, resulting in inflated tax liabilities. Additionally, the absence of a detailed breakdown of the interest calculations in the intimation is creating difficulties for taxpayers to verify and address discrepancies.
Late fees for revised Return under section 234F: In certain cases, taxpayers have received demand notices imposing a late fee of Rs 5,000 under Section 234F on filing of revised returns under section 139(5) of the Act. This is erroneous, as in such cases the original return was filed within the due date specified under Section 139(1) of the Act and accordingly no late fee should be levied for filing a valid revised return.
Proportionate TDS credit allowed: In cases where TDS is deducted on non-income components like GST or other reimbursements, the credit of TDS is not allowed in total, though the assessee has suffered the deduction. This creates an unjust situation where the taxpayer has to forego the TDS credit forever.
Defective ITR Notices issued incorrectly: Classification of Income Head Based on TDS Deduction Section: Certain taxpayers have received defective notices incorrectly suggesting that income should be classified under the head "Profits and Gains from Business and Profession" rather than "Income from Other Sources" solely based on the section under which tax was deducted (such as Sections 194J or 194C of the Act), says the representation.
This treatment of income overlooks the fact that classification of an income item by the deductor cannot override/overshadow the true nature of income as received and recorded by the taxpayer. The representation adds: "Further, such an exercise requires application of mind which is often debatable and outside the domain of the adjustments stipulated under section 143(1). Therefore, such issues cannot be subject matter of automated proceedings by CPC under Section 143(1) of the Act.''
Notices for defective ITRs issued due to incorrect TDS classification in Form 26AS
KSCAA said in its representation:Many taxpayers have received notices for filing defective ITR after filing their Income Tax Return (ITR) in Form ITR-1, where Tax Deducted at Source (TDS) on interest income was initially, and erroneously, shown under Sections 194J and 194C in Form 26AS. Subsequently, form 26AS was corrected/ updated to reflect these deductions under the appropriate section for interest for interest income (Section 194A of the Act). Despite this correction, the CPC has issued defective notices, disregarding the updated and accurate classification in Form 26AS at the time of return filing.
Other ITR processing problems faced by taxpayers
ET Wealth Online has spoken with various other chartered accountants (CAs) who related the problems faced by some of the taxpayers whose ITRs the CAs had filed.. Here's what they said:
Chartered Accountant Abhishek Soni, co-founder, Tax2Win said: "We are receiving defective return notices, even though, according to the 26AS and our filed returns, everything appears to be correct. Below are some examples:
Net Income Amount as 0 in 26AS: In some cases, the 26AS reflects both positive and negative values, resulting in a net amount of 0. We have excluded this from our client's ITR. However, we have now received a defective notice from the department stating that you have ignored the income mentioned in the 26AS.
Presumptive Income Cases: We have declared income above the limit specified under the presumptive taxation sections. Despite this, we received a defective notice claiming that we have declared income lower than the prescribed 8% or 50%, as applicable.
Chartered Accountant Divya Jokhakar, partner, B. D. Jokhakar & Co: Some of our clients are partners of firms where tax audit is applicable. So, we noticed that CPC has recently processed ITR of partners of firms which are liable to tax audit, with a late filing penalty of Rs 5000. The due date of such return was November 15, 2024, extended from October 31, 2024. In another case the partners who had losses under certain income heads were barred from carrying forward (the loss) saying it's a belated return. CPC's processing despite filing in time is creating a lot of problems. The taxpayers have to apply for reprocessing and file grievance complaints.
Chartered Accountant Ashish Niraj, partner, A S N & company, says:
We filed an income tax return for a taxpayer who was subject to tax audit. So, we had filled a column in the ITR with the appropriate value of an income which is what should have been done as per the law. However, CPC flagged the return and sent a notice saying why we did not declare this income in another column of the ITR instead of the column we used. It was a small dispute, so we did not argue about the logic with CPC and ultimately did whatever CPC asked and the client's ITR got processed.
Sujit Bangar, founder, TaxBuddy says: Several issues reported by KSCAA were also observed in the cases of our clients. Some of the prominent problems as per our client ITR included:
TDS Mismatch for TCS Employees: Many employees from TCS who filed their ITRs received defective notices or demand notices after processing. Initially, these were assumed to be CPC errors, but upon review, it was found that TCS itself had filed incorrect TDS details. TCS acknowledged this issue and informed employees that they had approached the tax department for rectification. Eventually, these errors were corrected, and fresh intimations were issued to the employees, resolving the discrepancies.
Presumptive Income Under Section 44AD: Several ITRs filed under the presumptive taxation scheme (Section 44AD) with income declared at 6% or 8% were flagged with defective notices due to CPC errors during processing. This caused undue panic among taxpayers. As a tax service provider, we actively communicated with our clients to explain the issue and assist in resolving it. However, individuals filing independently or through unregulated channels may have faced significant challenges.
Processing ITRs Under Incorrect Tax Regime: A few cases were observed where ITRs filed under the old tax regime were processed under the default new regime, leading to demand notices. This issue was minor but present. When taxpayers filed revised returns or rectifications, the demand notices were resolved.
Incorrect Interest Under Sections 234A and 234B: Many taxpayers received demand notices with inflated interest amounts under Sections 234A and 234B due to calculation errors by the CPC. The lack of a detailed breakdown in the intimation made it challenging for taxpayers to verify the accuracy of the calculations, further complicating the resolution process.
Carry Forward of Losses with Incorrect Filing Dates:When pre-filled JSON files were downloaded for taxpayers, errors were noted in the carry-forward loss schedules. The filing dates for previous assessment years were incorrectly mentioned, resulting in the non-adjustment of eligible losses during processing. This led to inaccurate demands being raised.
Common ITR processing issue faced by some taxpayers- demand notice for late ITR filing
Both KSCAA and Jokhakar say that their clients had to pay late fees despite filing the ITR on time. "In certain cases, taxpayers have received demand notices imposing a late fee of Rs 5,000 under Section 234F of the Act on filing of revised returns under section 139(5) of the Act. This is erroneous, as in such cases the original return was filed within the due date specified under Section 139(1) of the Act," said KSCAA in its representation.
Jokhakar said: "Some clients of mine who faced this, even got a section 245 notice for adjusting this Rs 5,000 late filing fee with their tax refund due. This happened despite them filing the ITR before the deadline."
"Our representation to the Central Board of Direct Taxes highlights critical systemic issues in income tax return processing that are causing undue hardship to taxpayers and professionals. We are seeking urgent intervention to address defective notices, incorrect tax regime calculations, and processing errors at the Centralized Processing Centre, which are creating unnecessary compliance burdens for professionals and anxieties for taxpayers. Our goal is to work constructively with the tax authorities to ensure a fair, efficient, and taxpayer-friendly system," says Chartered Accountant Vijaykumar M Patel, President, Karnataka State Chartered Accountants Association (KSCAA).
What CPC needs to do, as per KSCAA's representation
In its representation KSCAA suggested the following steps be taken by CPC to solve the above issues:
Review and rectify defective ITR notice issuance
Ensure the classification of income is based on its true nature rather than solely going by the section under which TDS has been deduced by independent third party, to prevent undue misclassification for assessees.
Ensure that updated Form 26AS is considered for processing the income tax return filed by assessee.
TDS credit should be allowed in full especially if it is reflected in Form 26AS. The allowability of the same may be taken up during assessments, etc and not restricted while processing intimation.
Implement enhanced validation checks in CPC processing
KSCAA requested the implementation of stronger validation protocols to prevent processing errors in tax regime selection, due date recognition, and interest calculations. This would include:
Ensuring taxpayers' chosen tax regimes are respected in demand notices, avoiding unnecessary disputes.
Correctly identifying extended due dates in cases of tax audit, particularly for partners in audited firms, to prevent unwarranted demand notices.
Providing detailed breakdowns of interest under Sections 234A and 234B in demand notices, allowing taxpayers to verify calculations and address any discrepancies effectively.
Request that late fees under Section 234F not be imposed on returns filed within the due date under Section 139(1), even if subsequently revised.
Source Link: https://economictimes.indiatimes.com/wealth/tax/kscaa-writes-letter-to-tax-dept-about-taxpayers-being-wrongly-charged-late-penalty-for-itr-filing/articleshow/115886305.cms
Website Link: https://www.taxbuddy.com/
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