Advance Tax , STCG , Business Losses

You're dealing with a complex tax issue involving multiple heads of income, advance tax liability, Section 71 set-off rules, and penalty provisions under Section 270A, arising from a scrutiny assessment for FY 2017–18. Let’s walk through each issue systematically and assess whether the AO’s conclusions are valid, and how you may challenge them in an appeal.

🔍 KEY POINTS FROM YOUR CASE:

➤ Sources of income:

1. Salary – Primary source.

2. STCG (Short-Term Capital Gains) – On listed securities.

3. Interest on savings account – Minor.

4. Perquisite gains from sale of shares without STT – Taxable as salary/perquisite.

5. Business losses:

   • Non-speculative losses (F&O) – Substantial, ₹12.5L + ₹63L.

   • Speculative losses (intra-day) – ₹8.5L.

🎯 AO’s Conclusions & Your Grounds for Appeal

🔸 Issue 1: AO taxed STCG at 15% and ignored Section 71 set-off

Your View:
You believe STCG should not be taxed at 15% since it has been set off against business losses.

Legal Position:

• Section 111A: STCG on listed shares (with STT paid) is taxable at 15%, regardless of slab.

• Section 71: Allows set-off of business losses (non-speculative) against capital gains.

• However, Section 111A rate still applies even if losses are set off against gains. The loss reduces the taxable STCG, but the balance STCG (if any) is still taxed at 15%.

✅ Assessment:

• If the entire STCG was fully set off against business loss, there should be no taxable STCG, so no 15% tax.

• If only partial set-off, then tax applies on balance STCG at 15%.

📌 Check:

• How much STCG was there?

• How much was actually set off against business losses in the return and allowed by AO?

• If all STCG is absorbed, no 111A tax arises.

🟨 Conclusion: AO appears partially correct, but if the full set-off was claimed and AO accepted it, no 15% tax should apply. This is appealable if tax is being levied on an amount already adjusted.

🔸 Issue 2: Advance Tax Penalty – Interest under 234B/234C

Your View: Tax liability in Q1 & Q2 was < ₹10,000, hence no advance tax requirement.

Legal Position:

• Advance tax is not applicable if total tax payable after TDS ≤ ₹10,000 (Section 207).

• However, once STCG/lump income arose in Q4 and caused tax liability to exceed ₹10,000, advance tax should have been paid on or before 15 March.

• If STCG arose in Q4, then Section 234C provides relief (capital gains being unpredictable). If full tax paid before 31 March, no 234C interest.

• However, 234B interest (for total shortfall) may still apply if 90% of tax was not paid.

✅ Assessment:

• Penalty/interest under 234C is not valid if:

  • Gains arose in Q4, and

  • Full tax paid before 31 March 2018.

• If no payment made before 31 March → 234C and 234B interest may apply.

🟨 Conclusion: You can challenge 234C interest if gains arose late (Q4) and were unpredictable. 234B interest may still be valid if total shortfall >10%.

🔸 Issue 3: Penalty for Late Filing

Return originally filed on 03/10/2018, revised on 06/10/2018.

For FY 2017–18 (AY 2018–19):

• Due date for audit cases was extended to 31 October 2018.

• If audit was applicable, your return is within time.

• Otherwise, for non-audit cases, due date was 31 July 2018.

✅ Assessment:

• If you were liable for tax audit (due to derivative business), your return was on time, and no late filing penalty applies.

• If audit not done, and income > ₹5L, penalty of ₹5,000 under Section 234F may apply.

🟨 Conclusion: If you were under audit scope, penalty is invalid. Clarify audit status.

🔸 Issue 4: Revised return – Underreporting of Losses

You revised the return to report higher:

• STCG

• LTCG (though exempt)

• Business losses (non-speculative and speculative)

✅ This is not penal. You’ve disclosed more income and reported higher losses, which can benefit future years through carry forward.

🟨 Conclusion: Make it clear in appeal/reply that revision was bona fide and to correct omissions, not to evade tax.

🔸 Issue 5: Penalty Notice under Section 270A

Section 270A deals with underreporting/misreporting of income.

Underreporting penalty is:

• 50% of tax on underreported income (normal).

• 200% if misreporting (deliberate falsification).

✅ If your assessed income hasn’t changed, and tax impact is only due to differing interpretations (e.g. 71 set-off), no underreporting arises.

🟨 Conclusion: You can challenge 270A penalty by showing:

• All income was disclosed.

• Losses and STCG were disclosed.

• Misreporting was not intentional.

• Revisions were voluntary and prompt.

✅ RECOMMENDED COURSE OF ACTION

📝 File an Appeal Before Commissioner of Income Tax (Appeals) [CIT(A)]

• Appeal to dispute the demand order.

• Grounds:

  • Incorrect levy of STCG tax post set-off.

  • 234C interest wrongly applied (capital gain arose in Q4).

  • No penalty for late filing if under audit.

  • 270A penalty not justified; no underreporting.

📑 Supporting Documents:

• Computation statements showing business loss and STCG set-off.

• Proof of return filing dates.

• Revised return details.

• Copy of demand notice and assessment order.

• Audit report (if applicable).

• Bank challans (for any tax paid).

✍️ Draft Sample Grounds for Appeal (for CIT(A))

1. That the Learned AO erred in taxing Short-Term Capital Gains under Section 111A without giving full effect to the set-off under Section 71.

2. That the appellant was not liable to pay advance tax in Q1–Q3, and gains arose in Q4 only, hence interest u/s 234C is not applicable.

3. That the return was filed before the due date as extended for assessees requiring tax audit.

4. That the penalty initiated under Section 270A is not tenable as there is no misreporting or underreporting of income; the revised return disclosed higher income.

5. That the demand raised is based on computational differences, not income suppression, and is hence unjustified.

📌 Final Notes:

• You have a strong case if capital gains arose late, audit was applicable, and disclosures were full.

• File Form 35 for appeal within 30 days from date of demand notice.

• Consider hiring a tax consultant or CA for filing detailed appeal with annexures.