Online tax return utility blocking capital loss set-off u/s70(2): authorities ordered to enable claim or accept paper revised return.

The dominant issue was whether the tax authorities could be compelled to enable an assessee to claim set-off under s.70(2) of the IT Act when the online return-filing utility prevented the statutory claim. Relying on prior HC precedents permitting claims blocked by the utility, the HC held that administrative/technical limitations cannot defeat substantive entitlements under the Act. Accordingly, the authority maintaining the utility was directed to modify it to permit set-off of STCL (STT paid) first against STCG (non-STT paid), and thereafter against STCG (STT paid); failing timely modification, the revenue was directed to accept and process a revised return for AY 2025-26 in paper mode as a valid s.139(5) return.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether the income-tax e-filing utility can lawfully prevent an assessee from making a particular claim in the return of income by enforcing a programmed order of set-off, thereby effectively foreclosing statutory assessment and appellate remedies.

(ii) Whether, to preserve the assessee's ability to make a bona fide claim within the statutory time for filing a revised return, the Court should direct modification of the online utility and, failing that within a fixed timeline, direct acceptance and processing of a revised return in paper mode as a valid return under Section 139(5).

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Blocking a claim at the return-filing stage by utility design

Legal framework (as discussed by the Court): The Court considered the statutory scheme that the assessee first performs "self-assessment" while filing the return (Sections 139 and 140A), after which the return is processed (Section 143(1)) and may be scrutinised (Sections 143(2) and 143(3)). The Court also accepted that making the claim in the return is foundational because, if a claim is not made in the return, the Assessing Officer may not entertain it otherwise than through a revised return (as noted in the judgment's discussion on the impact of that principle).

Interpretation and reasoning: The Court held that preventing an assessee from making a claim in the return amounts to an impermissible threshold determination of the claim. Such a design defeats the Act's structure, under which the allowability of claims is to be examined after filing through processing, assessment, and appellate mechanisms. The Court accepted that the online utility's logic, which compels a specific sequence of set-off and provides no option to adopt the assessee's preferred sequence, cannot be used to bar a claim that the assessee seeks to raise as part of self-assessment.

Conclusion: The Court conclusively decided that the assessee should not be denied the ability to raise the claim in the return merely because the e-filing utility blocks it; the Revenue remains free to examine the claim on merits under the Act, but the filing mechanism cannot foreclose the claim at inception.

Issue (ii): Appropriate mandamus-utility modification and/or acceptance of paper revised return under Section 139(5)

Legal framework (as discussed by the Court): The Court focused on the statutory deadline for filing a revised return (Section 139(5)) and the necessity of enabling the assessee to make the claim within that time. It also proceeded on the basis that the Court has previously directed relief where the electronic system does not permit a claim to be reflected in the return, and that the inability to file an effective revised return would prejudice the assessee.

Interpretation and reasoning: Given the imminent last date for filing a revised return, and the continued non-redressal of the grievance, the Court found it necessary to grant immediate, operational directions to ensure the assessee can file a revised return containing the claim. The Court preferred modification of the utility as the primary remedy, but treated acceptance of a paper revised return as an alternative safeguard if the utility could not be modified within a short, fixed timeframe. The Court expressly confined itself to enabling the making of the claim and did not adjudicate the correctness of the underlying set-off position.

Conclusions (directions): The Court directed the competent authority to modify the return-filing utility to allow the assessee to first set off the specified short-term capital loss against the specified short-term capital gains, and only thereafter apply any remaining loss against the other specified short-term capital gains. If the utility could not be modified by a specified date, the Court directed the Assessing Officer to accept and process the assessee's revised return for the relevant assessment year in paper mode by the statutory last date, and to treat and process it as a valid return under Section 139(5) notwithstanding the statutory mandate for electronic filing. The Court further directed that the utility be modified even if paper filing becomes necessary, to avoid recurrence for future returns. The Court expressly clarified that it expressed no opinion on the merits of the set-off claim.

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