Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Rule, mismatch, clarification— complexities of tax filing

Adjustments to processing income tax returns should be based on enquiry into the mismatch, rather than assuming that there is untaxed incomekaveri 4 mins

One of the significant areas of improvement by the income tax department in recent times is in the speed of processing of income tax returns. This has been achieved by setting up a Centralised Processing Centre (CPC) in Bengaluru, where all the e-filed income tax returns are electronically processed. Till March 2017, this processing merely involved adjustments of arithmetical errors and incorrect claims based on information available in the return. However, from April 2017, the scope of adjustments, which can be made while processing the returns, has been increased. One of the new items of permissible adjustments is of addition of income appearing in Form 26AS (online record of tax deducted at source or TDS) or Forms 16 and 16A (TDS certificates). This new item of adjustment, however, has created significant difficulties in many cases. 

One such type of case has been that of salaried employees filing returns in Form 1. Their Form 26AS reflects their gross salaries, while their income tax return Form 1 reflects net salaries after exemptions and deduction for profession tax. Salaried taxpayers were receiving notices from CPC proposing to add the difference to their taxable incomes. Another type of case is where the taxpayer is following the cash method of accounting, and has, therefore, not accounted for certain incomes on which tax has been deducted at source, and which are thus appearing in Form 26AS. These are genuine cases, where no adjustment is called for at all. 

Fortunately, the CBDT has now issued instructions providing guidelines as to in which situations, adjustment is to be made to the taxable income due to TDS mismatch. The main substance of the clarification is that where the gross income is evident from the return of income, comparability with the income as per Form 26AS is possible, and hence adjustments can be made. Where such gross income is not evident from the return forms, no adjustments can be made, since comparability of the gross figures with those in Form 26AS is not possible. 

As per the instructions, in certain return forms, where only the net income from salaries, income from house property or income from other sources is available in the return, no adjustments are to be made as the gross income as per Form 26AS cannot be compared. However, where no such income has been offered to tax at all though it appears in Form 26AS, adjustments are permissible to add such income. 

In presumptive tax cases, in return forms where the gross receipts are not evident, no adjustments can be made; however, in return forms where the gross receipts are also required to be disclosed, and there is a mismatch with the gross receipts as per Form 26AS, additions can be made to the returned income. 

Where a person is carrying on business, interest, commission, rent or gains on sale of property may be business income, which is shown net of expenses in the tax return form. Therefore, a comparison would not be possible with the figures as per the Form 26AS, and hence the instructions clarify that no adjustment should be made in such cases. 

When one looks at the amendment and the clarifications contained in the instructions, one wonders as to whether this was the right way to go about the whole matter. Instead of amending the law to provide for adjustments, would it not have been wiser to just issue notices in such cases to verify whether there were valid reasons for the mismatch in income returned as compared to the income on which TDS was deducted? 

There is a provision for issue of a prior intimation to be given before adjustment is made, and the taxpayer can respond as to why no adjustment is called for. Response to the notice has to be given within 30 days, and the adjustment is to be made after considering the response. Practically, however, often a taxpayer may not receive such notice, and an adjustment may be made without her explanation. 

The instructions in any case do not and cannot possibly cover all reasons for mismatch. TDS may be deducted by the payer of the income at the time of making provision of the liability, while the recipient of the income may be offering such income to tax on a cash basis. Similarly, TDS may have been deducted on an advance payment, while the recipient may offer such income to tax on accrual. In law, such cases of mismatch should not lead to an adjustment to returned income. Practically, unless there is a clarification, adjustments may be made, resulting in unnecessary litigation. How many instructions will the CBDT keep on issuing from time to time when more such valid reasons for mismatch are noticed? And more importantly, how much harassment will taxpayers have to go through till such time as the clarification is received, if at all? 

The basic problem is the provision itself, which provides for such adjustments. It seems to be based on the principle that you are presumed guilty, unless you are able to prove yourself innocent. It is far better to scrap the provision requiring adjustment in such cases of mismatch, and deal with such cases through enquiry into the reasons for mismatch. In other words, a mismatch should only trigger a suspicion of income not having been taxed, not an assumption, as is the current case.

Gautam Nayak is a chartered accountant