Issue with CYLA auto-computation in Income Tax Online utility for ITR 3
This query is : Resolved
19 September 2023
The Income Tax Online utility for ITR 3 auto-fills the CYLA section without giving us a chance to manually enter or override the setoffs that it has computed.
First, it forcibly sets off Business Loss against other heads without giving us an option to NOT setoff (and carry forward) all or part of the Loss.
Second, it sets off the Business Loss against other heads of Income in a particular order by internal logic - e.g., in a case where there's no Salary or House income, the order used is :
1) OS , 2) STCG (Slab Rate), 3) LTCG (20%), 4) STCG-STT (15%), 5) LTCG-STT (10%).
Now, my question is :
Is the above forcible/no choice behaviour of the Online ITR Utility as per the Income Tax Act ?
My understanding of the IT Act Sections 71 & 72 is that the Assessee may choose to Setoff all or part of his/her Business / Profession Loss against Incomes under certain other Heads in the same year, but is not required to do so. He/she may instead choose to carry forward all or part of the Business Loss for setoff against Incomes under allowed Heads in future years.
Further, section 71 does not specify any particular order of other Heads to be chosen for the setoff. So, the Assessee should be able to choose how much of the Loss to setoff against Incomes under each of the other allowed Heads.
Is my understanding of the IT Law for Loss Setoffs correct ?
If yes, then the ITR Utility is enforcing an extra-judicial rule for Loss setoffs. Although the utility's behaviour & CYLA setoffs order seems logical at first glance, it is not always in the interest of the Assessee as in the following examples :
Example 1 :
There is a Loss under "Profits from Business/Profession", and Income only under LTCG (10%).
In this case, it may be better for the Assessee to carry forward the loss and set it off against next year's Business Profits instead of setting off against this year's LTCG (10%). That would give a return of more than 25% of the Loss carried forward. More interestingly, if you treat the extra Income Tax paid this year by not setting off the Loss (i.e., 10% of the Loss) as an "Investment", and the savings in Tax you could get next year when you setoff the carried forward Loss against next year's Business or OS Income (at 34-35%) as the "Return on Investment", then the ROI is like 250% !! Now, who wouldn't want to take that kind of an "assured" Return on Investment ? And this 250% return is what's being denied to us by the ITR Utility when it forcibly sets off Business Losses in CYLA.
Example 2 :
(Loss) from Business/Profession (F&O Trading Loss) : (10,00,000)
Income from Other Sources (Div, Bank FD & SB Int) : 8,00,000
LTCG from Debt MFs after Indexation (20% Tax) : 9,00,000
Ch VI A Eligible Deductions (80C, 80D, 80TTB) : ( 2,50,000)
In this case, if Rs. 8 L of Business Loss is setoff against OS Income and the remaining 2 L against LTCG (20%), then 7.0 L of LTCG will be taxed at 20% (ignoring surcharges for now). Then, there is no valid source left to deduct the eligible 80C, 80D, 80TTB amounts from, and so you lose those deductions.
If instead, only 5.5 L of Business Loss were setoff against OS Income and 4.5 L were setoff against LTCG (20%), leaving a balance of 2.5L of OS Income, then the Ch. VI A deductions can be taken against the OS Income, and only LTCG of 4.5 L would be taxed at 20%.
That's a tax saving of (7.0 - 4.5) * 20/100 = Rs.50,000 !!
My current case is like Example 2. So, I feel that the Online ITR utility is illegally fleecing me of Rs. 50,000 by computing CYLA in its own way instead of giving me choices as per the IT Act.
Is my feeling justified ? If yes, is there any way to escape this loot by the IT Dept ?
Does anyone here use a 3rd Party ITR utility that allows CYLA to be manually filled/overridden ?
If yes, can anyone here complain to the IT Dept regarding this flaw in their Online ITR utility ?
(The IT Dept is more likely to act on a complain from authoritative sources like experts of the CA Club than from a lay assessee like me.)
First, it forcibly sets off Business Loss against other heads without giving us an option to NOT setoff (and carry forward) all or part of the Loss.
Second, it sets off the Business Loss against other heads of Income in a particular order by internal logic - e.g., in a case where there's no Salary or House income, the order used is :
1) OS , 2) STCG (Slab Rate), 3) LTCG (20%), 4) STCG-STT (15%), 5) LTCG-STT (10%).
Now, my question is :
Is the above forcible/no choice behaviour of the Online ITR Utility as per the Income Tax Act ?
My understanding of the IT Act Sections 71 & 72 is that the Assessee may choose to Setoff all or part of his/her Business / Profession Loss against Incomes under certain other Heads in the same year, but is not required to do so. He/she may instead choose to carry forward all or part of the Business Loss for setoff against Incomes under allowed Heads in future years.
Further, section 71 does not specify any particular order of other Heads to be chosen for the setoff. So, the Assessee should be able to choose how much of the Loss to setoff against Incomes under each of the other allowed Heads.
Is my understanding of the IT Law for Loss Setoffs correct ?
If yes, then the ITR Utility is enforcing an extra-judicial rule for Loss setoffs. Although the utility's behaviour & CYLA setoffs order seems logical at first glance, it is not always in the interest of the Assessee as in the following examples :
Example 1 :
There is a Loss under "Profits from Business/Profession", and Income only under LTCG (10%).
In this case, it may be better for the Assessee to carry forward the loss and set it off against next year's Business Profits instead of setting off against this year's LTCG (10%). That would give a return of more than 25% of the Loss carried forward. More interestingly, if you treat the extra Income Tax paid this year by not setting off the Loss (i.e., 10% of the Loss) as an "Investment", and the savings in Tax you could get next year when you setoff the carried forward Loss against next year's Business or OS Income (at 34-35%) as the "Return on Investment", then the ROI is like 250% !! Now, who wouldn't want to take that kind of an "assured" Return on Investment ? And this 250% return is what's being denied to us by the ITR Utility when it forcibly sets off Business Losses in CYLA.
Example 2 :
(Loss) from Business/Profession (F&O Trading Loss) : (10,00,000)
Income from Other Sources (Div, Bank FD & SB Int) : 8,00,000
LTCG from Debt MFs after Indexation (20% Tax) : 9,00,000
Ch VI A Eligible Deductions (80C, 80D, 80TTB) : ( 2,50,000)
In this case, if Rs. 8 L of Business Loss is setoff against OS Income and the remaining 2 L against LTCG (20%), then 7.0 L of LTCG will be taxed at 20% (ignoring surcharges for now). Then, there is no valid source left to deduct the eligible 80C, 80D, 80TTB amounts from, and so you lose those deductions.
If instead, only 5.5 L of Business Loss were setoff against OS Income and 4.5 L were setoff against LTCG (20%), leaving a balance of 2.5L of OS Income, then the Ch. VI A deductions can be taken against the OS Income, and only LTCG of 4.5 L would be taxed at 20%.
That's a tax saving of (7.0 - 4.5) * 20/100 = Rs.50,000 !!
My current case is like Example 2. So, I feel that the Online ITR utility is illegally fleecing me of Rs. 50,000 by computing CYLA in its own way instead of giving me choices as per the IT Act.
Is my feeling justified ? If yes, is there any way to escape this loot by the IT Dept ?
Does anyone here use a 3rd Party ITR utility that allows CYLA to be manually filled/overridden ?
If yes, can anyone here complain to the IT Dept regarding this flaw in their Online ITR utility ?
(The IT Dept is more likely to act on a complain from authoritative sources like experts of the CA Club than from a lay assessee like me.)
19 September 2023
Would really appreciate any inputs on the above query...
If the issue raised is valid, but not possible to work around the software issue right now, can one file the ITR return with the forced CYLA setoffs for now, and then raise a grievance in IT E-filing portal to ask the IT Dept to change the CYLA setoffs so as to let me get the benefit of Ch VI A deductions (and ask for the resulting additional Refund) ?
Does the IT Dept ever process such Grievance posts or would it just be a waste of time & effort ?
If the issue raised is valid, but not possible to work around the software issue right now, can one file the ITR return with the forced CYLA setoffs for now, and then raise a grievance in IT E-filing portal to ask the IT Dept to change the CYLA setoffs so as to let me get the benefit of Ch VI A deductions (and ask for the resulting additional Refund) ?
Does the IT Dept ever process such Grievance posts or would it just be a waste of time & effort ?
09 November 2023
This query regarding the legality of the Income Tax Online Utility's behaviour on CYLA has been open for nearly 2 months now with no response from any Experts !! I was hoping the at least someone would have noticed this problem too and could give some inputs... So, not sure if no one has really read the query due to its length, or no one wants to openly say that the Income Tax Dept's software is behaving illegally ?
Come on tax gurus... please help me out... Thanks.
Come on tax gurus... please help me out... Thanks.
09 July 2024
Your understanding of the Income Tax Act provisions regarding the setoff of losses (Section 71 and Section 72) is correct. Let's address your concerns and queries systematically:
### 1. Forced Setoff by Online ITR Utility:
The Income Tax Return (ITR) utility provided online does auto-fill the Current Year Loss Adjustment (CYLA) section based on its internal logic. This logic may not always align with what is most beneficial for the taxpayer, as you've illustrated in your examples.
### 2. Provisions of the Income Tax Act:
- **Section 71:** Provides that any loss (other than loss from speculative business) can be set off against income from any other head in the same assessment year.
- **Section 72:** Allows carry forward of losses (other than loss from speculation business) to be set off against income of subsequent years under specified conditions.
### 3. Taxpayer's Right to Choose:
- As per the Income Tax Act, taxpayers have the right to choose how much of their losses to set off against income under different heads in the same assessment year.
- There is no statutory requirement to follow a specific order or method of setoff as mandated by the ITR utility. Taxpayers should ideally have the flexibility to decide based on their financial situation and tax planning objectives.
### 4. Practical Examples and Tax Planning:
- Your examples demonstrate situations where a different order of setoff could result in lower tax liability or higher future tax savings due to carry forward of losses.
- Taxpayers should have the flexibility to optimize their tax liability, which may not be fully accommodated by the rigid setoff rules applied by the online ITR utility.
### 5. Addressing the Issue:
- **Third-Party ITR Utilities:** There are third-party ITR filing utilities available that may provide more flexibility in manually filling or overriding the CYLA section. These utilities often cater to tax professionals and offer more options for manual input.
- **Complaint to IT Department:** If you believe that the online ITR utility's automated setoff mechanism is not in line with the provisions of the Income Tax Act and is resulting in undue tax burden, you can certainly provide feedback or lodge a complaint with the Income Tax Department. It's advisable to document your concerns clearly, citing specific sections of the Income Tax Act and how the utility's behavior differs.
- **Consultation with Tax Professionals:** Seeking advice from a tax consultant or a chartered accountant who is well-versed in tax laws and practices can also help you navigate such issues effectively.
### Conclusion:
Your concern about the automated setoff mechanism in the online ITR utility potentially leading to suboptimal tax outcomes is justified. Taxpayers should ideally have the flexibility to optimize their tax planning strategies within the framework of the Income Tax Act. Exploring third-party ITR filing utilities or providing feedback to the IT Department could help in improving the system's flexibility and adherence to statutory provisions. It’s recommended to explore these options further to ensure compliance and minimize tax implications effectively.
### 1. Forced Setoff by Online ITR Utility:
The Income Tax Return (ITR) utility provided online does auto-fill the Current Year Loss Adjustment (CYLA) section based on its internal logic. This logic may not always align with what is most beneficial for the taxpayer, as you've illustrated in your examples.
### 2. Provisions of the Income Tax Act:
- **Section 71:** Provides that any loss (other than loss from speculative business) can be set off against income from any other head in the same assessment year.
- **Section 72:** Allows carry forward of losses (other than loss from speculation business) to be set off against income of subsequent years under specified conditions.
### 3. Taxpayer's Right to Choose:
- As per the Income Tax Act, taxpayers have the right to choose how much of their losses to set off against income under different heads in the same assessment year.
- There is no statutory requirement to follow a specific order or method of setoff as mandated by the ITR utility. Taxpayers should ideally have the flexibility to decide based on their financial situation and tax planning objectives.
### 4. Practical Examples and Tax Planning:
- Your examples demonstrate situations where a different order of setoff could result in lower tax liability or higher future tax savings due to carry forward of losses.
- Taxpayers should have the flexibility to optimize their tax liability, which may not be fully accommodated by the rigid setoff rules applied by the online ITR utility.
### 5. Addressing the Issue:
- **Third-Party ITR Utilities:** There are third-party ITR filing utilities available that may provide more flexibility in manually filling or overriding the CYLA section. These utilities often cater to tax professionals and offer more options for manual input.
- **Complaint to IT Department:** If you believe that the online ITR utility's automated setoff mechanism is not in line with the provisions of the Income Tax Act and is resulting in undue tax burden, you can certainly provide feedback or lodge a complaint with the Income Tax Department. It's advisable to document your concerns clearly, citing specific sections of the Income Tax Act and how the utility's behavior differs.
- **Consultation with Tax Professionals:** Seeking advice from a tax consultant or a chartered accountant who is well-versed in tax laws and practices can also help you navigate such issues effectively.
### Conclusion:
Your concern about the automated setoff mechanism in the online ITR utility potentially leading to suboptimal tax outcomes is justified. Taxpayers should ideally have the flexibility to optimize their tax planning strategies within the framework of the Income Tax Act. Exploring third-party ITR filing utilities or providing feedback to the IT Department could help in improving the system's flexibility and adherence to statutory provisions. It’s recommended to explore these options further to ensure compliance and minimize tax implications effectively.
19 July 2025
Thanks to Mr. Asha Kanta Sharma for the detailed response confirming that my beef with the ITR utility's handling of Sch CYLA (non-beneficial default auto-setoffs of Losses with no option to override this) is a valid complaint of non-compliance of IT software with Inc Tax law...
Just an FYI update on my interaction with IT Dept on this issue after that :
- First raised a Grievance in the IT Portal in Jan-2024 against the ITR Utility for AY 2023-24 regarding the illegal & autocratic handling of CYLA section, and consequent higher Tax outgo for me. This Grievance kept getting bounced around between various IT Depts for a response, with each dept's handlers closing it as "not a problem of my Dept". I re-raised the Grievance 2-3 times saying my issue remained unresolved... Tried to tell them to assign the Grievance to the Central IT Software team instead of to Asst Commissioner's Offices (who had no real solution for the problem), but that didn't go anywhere either... My Grievance kept getting closed with idiotic responses... It all showed that most Income Tax Officers neither have a good understanding of Tax law, nor have the ability to grasp an issue raised against their software's behaviour and know whom to send the issue to for resolution...
Then fortunately got a contact in the Software Quality Assurance team in Central Inc Tax office in Bangalore, and explained my problem of CYLA to that person... After checking with others in their team, this QA person confirmed to me that this CYLA handling was indeed a mistake in their Software Requirement Specification itself, not just an implementation error... but that it cannot be fixed easily (definitely not for AY 2023-24) as they have to re-write the ITR Specs. So, I suggested that they can let the Default Setoffs code in CYLA section stay as is, but just change the User Interface to allow CYLA setoff values to be manually overridden by the Tax Payer.
That QA person accepted this suggestion, and got the IT Software management team to approve this change to the code of CYLA section of ITRs in the next year's ITR utility. So, in the ITR Utility for AY 2024-25, the CYLA section had an option to let us override the default setoffs computed by the system. It still had a validation to check that the manually entered values complied with rules for setoff, but you could change the auto-computed default setoffs.
However, this change was made only in the Tax Payer's ITR utility & ITR validation code in the Portal for upload of ITRs. The change was missed in the internal software used by the IT Dept for checking / processing filed ITRs. So, while processing my IT Return for AY 2024-25 with manually overridden values in CYLA, the Inc Tax team reverted the values back to default setoffs, and my Refund was reduced... Had to raise another complaint about this, and submit a request to re-process my ITR and re-compute my Tax dues... This issue was finally resolved in Jan-2025 with correction of CYLA handling code in IT Dept's internal software as well.
Just saw that this override option in CYLA is retained in the ITR-2 Excel utility for AY2025-26. Hopefully it will also be there in all the yet-to-be-released ITR utilities as well as in ITD's internal Returns processing software for this and subsequent years...
So, use the CYLA override option (while it lasts) to gain maximum advantage from your Loss setoffs... Don't just live with defaults set by the ITR utilities.
Krish.
Just an FYI update on my interaction with IT Dept on this issue after that :
- First raised a Grievance in the IT Portal in Jan-2024 against the ITR Utility for AY 2023-24 regarding the illegal & autocratic handling of CYLA section, and consequent higher Tax outgo for me. This Grievance kept getting bounced around between various IT Depts for a response, with each dept's handlers closing it as "not a problem of my Dept". I re-raised the Grievance 2-3 times saying my issue remained unresolved... Tried to tell them to assign the Grievance to the Central IT Software team instead of to Asst Commissioner's Offices (who had no real solution for the problem), but that didn't go anywhere either... My Grievance kept getting closed with idiotic responses... It all showed that most Income Tax Officers neither have a good understanding of Tax law, nor have the ability to grasp an issue raised against their software's behaviour and know whom to send the issue to for resolution...
Then fortunately got a contact in the Software Quality Assurance team in Central Inc Tax office in Bangalore, and explained my problem of CYLA to that person... After checking with others in their team, this QA person confirmed to me that this CYLA handling was indeed a mistake in their Software Requirement Specification itself, not just an implementation error... but that it cannot be fixed easily (definitely not for AY 2023-24) as they have to re-write the ITR Specs. So, I suggested that they can let the Default Setoffs code in CYLA section stay as is, but just change the User Interface to allow CYLA setoff values to be manually overridden by the Tax Payer.
That QA person accepted this suggestion, and got the IT Software management team to approve this change to the code of CYLA section of ITRs in the next year's ITR utility. So, in the ITR Utility for AY 2024-25, the CYLA section had an option to let us override the default setoffs computed by the system. It still had a validation to check that the manually entered values complied with rules for setoff, but you could change the auto-computed default setoffs.
However, this change was made only in the Tax Payer's ITR utility & ITR validation code in the Portal for upload of ITRs. The change was missed in the internal software used by the IT Dept for checking / processing filed ITRs. So, while processing my IT Return for AY 2024-25 with manually overridden values in CYLA, the Inc Tax team reverted the values back to default setoffs, and my Refund was reduced... Had to raise another complaint about this, and submit a request to re-process my ITR and re-compute my Tax dues... This issue was finally resolved in Jan-2025 with correction of CYLA handling code in IT Dept's internal software as well.
Just saw that this override option in CYLA is retained in the ITR-2 Excel utility for AY2025-26. Hopefully it will also be there in all the yet-to-be-released ITR utilities as well as in ITD's internal Returns processing software for this and subsequent years...
So, use the CYLA override option (while it lasts) to gain maximum advantage from your Loss setoffs... Don't just live with defaults set by the ITR utilities.
Krish.
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