Smart Tax Planning Isn’t Tax Evasion: Priya Kapil Todarwal vs. Revenue [I.T.A. No. 1838 of 2025]
Background of the Case
The Appellant, Priya Kapil Todarwal filed her return of income for the assessment year 2019–20 declaring a total income of Rs. 98,36,940. The return included a business loss of Rs. 11,60,579 from derivative transactions, a long-term capital gain of Rs. 1,02,45,891, a short-term capital gain of Rs. 6,164, and income from other sources amounting to Rs. 9,38,459. The appellant also claimed deductions under Chapter VI-A totaling Rs. 1,93,000, comprising sections 80C, 80D, 80G, and 80TTA. However, while processing the return under Section 143(1), the Centralized Processing Centre (CPC) disallowed these Chapter VI-A deductions on the ground that they constituted an “incorrect claim.” The appellant’s rectification application was also rejected, and the first appellate authority, the CIT(A), upheld the CPC’s position, leading the appellant to file an appeal before the Income Tax Appellate Tribunal (ITAT), Mumbai.
Arguments by the Appellant
The appellant argued that the disallowance of Chapter VI-A deductions was erroneous and contrary to the scheme of the Income Tax Act. The appellant submitted that the Act does not prescribe any specific sequence for the set-off of losses under Section 71(2), and that appellant had correctly and deliberately chosen to first set off a part of her business loss against income from other sources in order to maintain a positive gross total income and preserve her eligibility to claim Chapter VI-A deductions. The remaining portion of the business loss was set off against long-term capital gains. The appellant emphasized that the set-off method chosen was tax-neutral and within the boundaries of the law.
The appellant also cited decisions including Coated Fabrics Pvt. Ltd. vs. JCIT and Opus Realty Development Ltd. vs. ACIT, where similar bifurcated treatment of losses was allowed.
Respondent’s Response
The Respondent, Revenue defended by asserting that the set-off adopted by the appellant was not consistent with the automated processing logic and hence resulted in an “incorrect claim.” The respondent maintained that once losses are set off against gross total income, the net result should automatically determine eligibility for deductions. Since the CPC system, on its automated computation, did not find sufficient gross total income after loss set-off, it rejected the Chapter VI-A deductions. The respondent did not substantially counter the legal precedents or the circular cited by the appellant but relied on the justification that the system-based processing reflected a correct application of the law.
Court Findings and Decision
The ITAT Mumbai found merit in the appellant’s arguments and held that there was nothing in law to restrict the appellant from setting off part of the business loss against income from other sources in order to keep her gross total income positive. The Tribunal emphasized that Section 71(2) does not prescribe any rigid order for set-off, and thus, in the absence of statutory restrictions, the appellant’s computation must be accepted. The Tribunal noted that the set-off method did not lead to any tax avoidance or undue benefit, and the Chapter VI-A deductions were otherwise allowable. It also reiterated the binding nature of Circular No. 26 of 1955 and the consistent view of earlier judicial decisions that permitted flexible and strategic loss set-off.
Accordingly, the Tribunal directed the CPC to allow the deductions claimed under Chapter VI-A and deleted the disallowance made in the intimation under Section 143(1). The appeal was allowed in favour of the appellant.
Smart Tax Planning Isn’t Tax Evasion:
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