SimplifiTax - Tax, Accounting & Financial Advisory

Ved Jain & CA Ayush Garg – [2025] 179 taxmann.com 3 (Article)

1. Background

1.1. A taxpayer is required to file its return of income electronically. To facilitate this process, the Income Tax Department issues an online utility each year, enabling taxpayers to fill in its data, compute taxable income, determine the tax payable, and, where applicable, claim refunds. This utility is intended merely as a facilitative tool to assist taxpayers in filing their returns. It cannot, however, curtail a taxpayer’s statutory right to compute income in accordance with their own interpretation of the provisions of the Income-tax Act. Taxpayers are entitled to claim deductions and exemptions they consider proper and permissible under the Act. Yet, the utility released by the Department often restricts such claims, effectively compelling the taxpayers to compute income and pay tax not as the taxpayer deems correct but as the Income Tax Department intends.

1.2. An issue has arisen last year regarding rebate under Section 87A, whereby the utility was not allowing the taxpayer to claim the rebate under section 87A against the short-term capital gains taxable u/s 111A of the Act, despite the taxpayer being eligible to make such claim. This denial compelled taxpayers to compute and pay tax contrary to the provisions of law. The matter was carried before the Hon’ble Bombay High Court in Chamber of Tax Consultants v. DGIT (Systems), [W.P. No. 2852 of 2023, dated 22-12-2023]. The Court held that the utility is only a facilitative mechanism and cannot override or restrict the statutory rights of taxpayers under the Act. It was further directed that the Income Tax Department must ensure that the utility functions strictly in conformity with the law and permits taxpayers to make all claims legitimately available to them.

1.3. A similar issue has come up in this year in respect of the Capital Gain tax liability arising consequent to the change in the tax on Capital Gain by the Finance (No. 2) Act of 2024 whereby Income Tax Utility released by Income Tax Department is not allowing the taxpayer to avail the benefit available under second proviso to Section 112 (1) of the Act.

1.4. The Finance (No. 2) Act, 2024 introduced a significant amendment to Section 112 of the Income-tax Act, 1961 (“Act”) with effect from 23rd July 2024. The amended provision provides that:

- For transfers before 23.07.2024, long-term capital gains (LTCG) on land/building are taxable @ 20% with indexation.
- For transfers on/after 23.07.2024, such LTCG are taxable @ 12.5% without indexation.

1.5. Further, the second proviso to Section 112 clarifies that where land/building was acquired before 23.07.2024, and income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of the Act as they stood immediately before amendment, the excess shall be ignored.

1.6. The relevant extracts of provisions of section 112 of the Act is as follows:
112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,—

(a) in the case of an individual or a Hindu undivided family, being a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income; and
(ii) the amount of income-tax calculated on such long-term capital gains,—

(A) at the rate of twenty per cent for any transfer which takes place before the 23rd day of July, 2024; and
(B) at the rate of twelve and one-half per cent for any transfer which takes place on or after the 23rd day of July, 2024:

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate as applicable in sub-clause (ii):
Provided further that in the case of transfer of a long-term capital asset, being land or building or both, which is acquired before the 23rd day of July, 2024, where the income-tax computed under item (B) exceeds the income-tax computed in accordance with the provisions of this Act, as they stood immediately before their amendment by the Finance (No. 2) Act, 2024, such excess shall be ignored;

1.7. Thus, the second proviso is a legislative safeguard to ensure that tax payable by a resident individual taxpayer after the amendment does not cause higher tax liability compared to the position before amendment, in respect of land/building acquired before the cut-off date.