The Income Tax Department's automated return-processing system is issuing mismatch intimations to taxpayers who sold unlisted shares, after incorrectly treating capital gains as business receipts, according to tax experts. The issue has surfaced during routine reconciliation of ITR data with AIS and TDS information, causing confusion among investors who have otherwise filed accurate returns.
What is Going Wrong in the System?
The problem arises when buyers of unlisted shares deduct tax under Section 194Q, which applies to the purchase of goods exceeding Rs 50 lakh. Although shares are classified as securities and not goods under the Income Tax Act, the deduction entry reflects in the seller's AIS and Form 26AS.
The Income Tax Department's algorithm interprets this TDS entry as proof of business income, even when the taxpayer has rightly declared the transaction under "Capital Gains" in the return.
Why This Is a Serious Concern for Taxpayers
As a result of this misinterpretation, taxpayers are receiving automated emails and alerts claiming a mismatch between reported income and third-party data. In some cases, taxpayers are asked to respond within a specified deadline, raising concerns of scrutiny or reassessment.
Tax professionals warn that such system-generated intimations do not necessarily mean wrongdoing and are often the result of technical classification errors, not incorrect disclosures by taxpayers.
Capital Gains vs Business Income: Legal Position
Experts have clarified that TDS provisions do not decide the nature of income. Whether income is treated as capital gains or business income depends on:
- Intention of holding shares
- Period of holding
- Frequency of transactions
- Treatment in the books of accounts
If unlisted shares were held as an investment, gains arising from their sale must be taxed as capital gains, irrespective of the TDS section under which tax was deducted by the buyer.
What Should Taxpayers Do If They Receive Such Intimation?
Tax experts advise taxpayers not to panic or rush into filing a revised return. Instead, they should:
- Respond through the Income Tax Compliance Portal
- Clarify that the income has been correctly offered under Capital Gains
- Cross-verify AIS and Form 26AS data
- Attach or explain the capital gains computation, if required
This ensures that the explanation is on record without disturbing the original return filing.
Experts Seek CBDT Clarification
Tax professionals have urged the CBDT to issue a clarification directing the processing system that Section 194Q deductions should not automatically classify receipts as business income, especially in cases involving unlisted shares. Such guidance could prevent unnecessary taxpayer harassment and litigation.
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