2025 (6) TMI 138 - AT - Income Tax

Late filing of return under section 139(1) doesn't bar claim of losses from equity derivative transactions

Sarath Manari Gopinathan Versus Deputy Commissioner of Income Tax 34 (3) (1), Mumbai

ITAT Mumbai allowed the assessee's appeal regarding denial of losses from equity and derivative transactions despite late filing of return under section ... Denial of Loss claimed from equity and derivative transactions - return of income was not filed within the stipulated time u/s 139(1) - HELD THAT:- Admittedly, the return revised along with computation of income and capital gain/loss statement has not been rejected by both the authorities below. It is the mandate of law as enshrined in Article 265 of the Constitution of India, as reminded by Hon’ble Apex Court as well as Hon’ble High Courts that no tax can be levied or collected except by authority of law. In simple terms, tax can be levied only in accordance with law, but not otherwise. Admittedly in the instant case, the Assessee has incurred losses from the share transactions carried out by him and therefore, considering the mandate of law mentioned above, this court is inclined to allow the appeal of the Assessee and consequently the AO is directed to re-compute the tax liability by taking into consideration all transactions of shares, carried out by the Assessee, in the AY under consideration. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this appeal are:- Whether the Assessing Officer (AO) was justified in disallowing the loss claimed by the Assessee from equity and derivative transactions on the ground that the return of income was not filed within the stipulated time under section 139(1) of the Income Tax Act, 1961 (the Act).- Whether the AO was correct in adding the profit of Rs. 7,69,411/- from one broker as short term capital gain to the Assessee's income despite the overall net loss from all equity and derivative transactions.- Whether the Assessee is entitled to have the tax liability recomputed by considering the aggregate losses and profits from all share transactions, notwithstanding the delayed filing of the return.- The applicability of the time limit prescribed under section 139(1) for filing returns in the context of claiming losses from share transactions.- The legal principle regarding levy of tax only by authority of law, as enshrined under Article 265 of the Constitution of India, in relation to the assessment and taxation of capital gains or losses.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Disallowance of Loss Claimed Due to Delay in Filing Return under Section 139(1)Relevant Legal Framework and Precedents: Section 139(1) mandates filing of income tax returns within the prescribed time limit. Failure to file within this period can lead to rejection or disallowance of certain claims. However, the law also recognizes that tax can only be levied in accordance with law, as mandated by Article 265 of the Constitution of India, which prohibits taxation without statutory authority.Court's Interpretation and Reasoning: The AO disallowed the loss claimed by the Assessee on the ground that the return was not filed within the stipulated time under section 139(1). The Commissioner of Income Tax (Appeals) upheld this addition, confirming the short term capital gain of Rs. 7,69,411/- from one broker's transactions.The Tribunal noted that while the Assessee did not file the return on time, the revised computation of income and capital gain/loss statements submitted were not rejected by the authorities below. The Tribunal emphasized the constitutional mandate under Article 265 that no tax can be levied except by authority of law and that tax must be levied in accordance with law and not otherwise.Key Evidence and Findings: The Assessee initially filed a return declaring only salary income and did not disclose share transactions. Subsequently, the Assessee submitted a revised computation showing net losses aggregating Rs. 11,79,329/- across three brokerage accounts, including losses from Progressive Share Brokers Pvt. Ltd. and Globe Capital Market Ltd., which were not reflected earlier.Application of Law to Facts: The Tribunal held that despite the delay in filing, the Assessee's claim of net loss from share transactions could not be ignored or disallowed outright. Since the losses were genuine and the revised computation was on record, the AO was required to consider the net effect of all transactions rather than taxing the profit from only one broker.Treatment of Competing Arguments: The Revenue relied on the strict interpretation of section 139(1) and the procedural lapse by the Assessee. The Assessee argued that the overall losses meant no tax liability arose and that the delay should not lead to taxation of profits selectively. The Tribunal sided with the Assessee, prioritizing substantive justice over procedural technicalities.Conclusions: The Tribunal concluded that the loss claimed by the Assessee should be allowed and the addition of Rs. 7,69,411/- as short term capital gain was not justified solely on the ground of delayed filing.Issue 2: Taxation of Profit from One Broker Despite Overall LossRelevant Legal Framework and Precedents: Income from capital gains under the Act is computed on the net result of transactions. The law permits set-off of losses against gains in the same head of income, subject to conditions. The principle of netting off gains and losses is well established.Court's Interpretation and Reasoning: The AO taxed the profit of Rs. 7,69,411/- earned from ICICI Direct broker without considering the losses from other brokers. The Tribunal observed that the Assessee's revised computation showed an overall net loss of Rs. 11,79,329/- after aggregating all transactions.Key Evidence and Findings: The Assessee submitted detailed capital gain/loss statements from all three brokers. The loss figures from Progressive Share Brokers Pvt. Ltd. and Globe Capital Market Ltd. were substantial and exceeded the profit from ICICI Direct.Application of Law to Facts: The Tribunal held that the AO erred in taxing the profit from only one broker without considering the aggregate losses. The law requires computation of capital gains on net basis, and the Assessee's overall loss position should have been recognized.Treatment of Competing Arguments: The Revenue contended that since the Assessee did not file the return timely and did not disclose all transactions, the profit must be taxed. The Assessee argued for netting off losses against gains. The Tribunal accepted the latter view.Conclusions: The Tribunal directed the AO to recompute the tax liability by considering all transactions collectively, allowing the Assessee to set off losses against gains.Issue 3: Applicability of Time Limit under Section 139(1) for Claiming LossesRelevant Legal Framework and Precedents: Section 139(1) prescribes the time limit for filing returns. However, the law distinguishes between cases where tax is payable and where losses are claimed. The Supreme Court and High Courts have held that loss claims may not be barred by delayed filing if genuine and supported by evidence.Court's Interpretation and Reasoning: The Tribunal noted that the Assessee was a retired Armed Forces officer and a layman with limited knowledge of tax laws. The Assessee had not declared losses initially due to lack of awareness but later submitted revised computations.Key Evidence and Findings: The revised return and computations were on record and not rejected. The Assessee's claim was for setting off losses, not for carrying forward losses or claiming refunds beyond statutory limits.Application of Law to Facts: The Tribunal held that the time limit under section 139(1) should not be rigidly applied to deny genuine loss claims, especially where the Assessee has made full disclosures subsequently and no prejudice is caused to the Revenue.Treatment of Competing Arguments: The Revenue emphasized strict compliance with procedural timelines, while the Assessee highlighted the substantive right to claim losses. The Tribunal favored the substantive right.Conclusions: The Tribunal ruled that the delay in filing should not disentitle the Assessee from claiming losses and directed recomputation accordingly.Issue 4: Constitutional Mandate Under Article 265 and Levy of TaxRelevant Legal Framework and Precedents: Article 265 of the Constitution of India mandates that no tax shall be levied or collected except by authority of law. This principle safeguards taxpayers against arbitrary taxation.Court's Interpretation and Reasoning: The Tribunal reiterated that taxation must be in accordance with law and that the AO's addition without considering the net loss position violated this principle.Key Evidence and Findings: The Assessee's overall loss position was established on record and not disputed substantively.Application of Law to Facts: The Tribunal held that taxing the profit alone without allowing set-off of losses was contrary to the statutory scheme and constitutional mandate.Treatment of Competing Arguments: The Revenue's procedural objection was overridden by the substantive right of the Assessee to be assessed correctly.Conclusions: The Tribunal emphasized adherence to constitutional principles and directed reassessment in line with law.3. SIGNIFICANT HOLDINGS'It is the mandate of law as enshrined in Article 265 of the Constitution of India, as reminded by Hon'ble Apex Court as well as Hon'ble High Courts that no tax can be levied or collected except by authority of law. In simple terms, tax can be levied only in accordance with law, but not otherwise.''Considering the above facts, addition made by the AO is confirmed.' (Ld. CIT(A)) contrasted with the Tribunal's holding that the addition was not justified.'Admittedly in the instant case, the Assessee has incurred losses from the share transactions carried out by him and therefore, considering the mandate of law mentioned above, this court is inclined to allow the appeal of the Assessee and consequently the Assessing Officer is directed to re-compute the tax liability by taking into consideration all transactions of shares, carried out by the Assessee, in the AY under consideration.'Core principles established include:- The right to claim genuine losses from capital gains transactions cannot be denied solely on the ground of delayed filing of return under section 139(1) when revised computations are on record and not rejected.- Taxation must be in accordance with law and not by mechanical application of procedural provisions that defeat substantive justice.- The netting off of profits and losses from all share transactions is mandatory for correct computation of capital gains income.- Procedural lapses by a taxpayer, especially a layman, should be viewed with leniency if substantive rights are not prejudiced.Final determinations on each issue were in favor of the Assessee, resulting in the setting aside of the addition of Rs. 7,69,411/- and directing recomputation of tax liability considering all share transactions and net losses.