Bombay High Court Directs CBDT to Ensure Flexibility in E-Filing Utilities for Claims under Section 87A: “Taxpayers Cannot Be Denied Their Right to Self-Assessment”

Court’s Decision:

The Bombay High Court ruled that the Central Board of Direct Taxes (CBDT) must revise the e-filing utilities to ensure that taxpayers can freely claim rebates under Section 87A of the Income-tax Act, 1961. The court emphasized that the right to self-assessment is fundamental under the Income-tax Act and cannot be curtailed by procedural limitations in the e-filing system. The court also directed that earlier intimations denying rebates under Section 87A be withdrawn.

Facts:

1. The Petition:
   • The case was filed as a Public Interest Litigation (PIL) by a professional tax body and three individual taxpayers.
   • The dispute arose from changes introduced in the e-filing utility on July 5, 2024, which prevented taxpayers from claiming a rebate under Section 87A if their income included components taxable at special rates.
2. The Petitioners’ Background:
   • The lead petitioner, a professional association, represented over 3,800 tax professionals, including advocates, chartered accountants, and tax practitioners.
   • The individual petitioners were regular taxpayers who faced challenges due to the utility’s restrictions.
3. The Issue:
   • Before July 5, 2024, taxpayers could claim rebates under Section 87A even if their income included special-rate components. However, the modified utility blocked such claims, affecting taxpayers’ ability to file returns as per their understanding of the law.

Issues:

1. Does the modification in the e-filing utility that blocks Section 87A claims violate the taxpayers’ statutory right to self-assessment?
2. Do these procedural restrictions breach constitutional guarantees under Articles 14 (equality before law), 19(1)(g) (right to profession), and 265 (no taxation without authority of law)?

Petitioners’ Arguments:

1. Right to Self-Assessment:
   • Taxpayers have the statutory right under the Income-tax Act to compute their income and tax liabilities and make claims based on their bona fide understanding of the law.
   • The utility’s restrictions infringe on this right by pre-determining the claims taxpayers can make.
2. Violations of Constitutional Principles:
   • The modification violates Article 14 (equality before the law) by treating taxpayers differently based on the composition of their income.
   • It contravenes Article 265, as it imposes higher tax liabilities than permitted under the law.
   • It breaches Article 19(1)(g) by denying taxpayers the ability to file returns freely as part of their professional or business activities.
3. Ultra Vires Action:
   • The design of the utility, which precludes claims under Section 87A, is beyond the powers granted under the Income-tax Act and Rules.
4. Past Precedents:
   • The petitioners relied on earlier judgments, including the Bombay High Court’s ruling in Samir Narain Bhojwani v. DCIT, which stated that procedural systems must not limit statutory rights.
5. Discriminatory Treatment:
   • Taxpayers opting for the new tax regime under Section 115BAC are treated unfairly compared to those under the old regime, where similar rebates are allowed.

Respondents’ Arguments:

1. Utility Design Justification:
   • The respondents argued that the utility design reflects their interpretation of Section 87A, which, in their view, does not allow rebates when income includes components taxed at special rates.
2. Regulatory Compliance:
   • They contended that taxpayers who believe they are entitled to such claims can seek relief through appellate mechanisms instead of challenging the utility design.

Analysis of the Law:

1. Section 87A:
   • Provides a rebate of up to ₹25,000 for taxpayers with a total income below ₹7,00,000. It does not restrict the rebate based on whether income is taxed at normal or special rates.
2. Self-Assessment Principle:
   • The Income-tax Act mandates taxpayers to compute their income and tax liabilities independently. The utility design must support, not hinder, this process.
3. Constitutional Protections:
   • Article 14 ensures equal treatment under the law, and procedural barriers cannot create disparities between similarly placed taxpayers.
   • Article 265 prohibits the government from collecting taxes without explicit legal authority.
4. Past Judicial Decisions:
   • Courts have consistently held that taxpayers must have the flexibility to file returns reflecting their bona fide understanding of the law, with disputes to be resolved during assessments.

Precedent Analysis:

1. Samir Narain Bhojwani v. DCIT (Bombay HC):
   • Held that e-filing utilities must not prevent taxpayers from claiming entitlements under the law.
2. CIT v. N. Khan and Bro. (Allahabad HC):
   • Emphasized the concept of self-assessment, allowing taxpayers to determine their income based on bona fide beliefs.
3. Goetze (India) Ltd. v. CIT (SC):
   • Established that claims must be made in returns, underscoring the importance of a functional filing system.

Court’s Reasoning:

1. Violation of Self-Assessment Rights:
   • The court held that preventing taxpayers from making legitimate claims in their returns disrupts the self-assessment process and undermines the statutory framework.
2. Unconstitutional Restrictions:
   • The design of the utility, which discriminates between taxpayers based on the composition of their income, violates Article 14 and leads to arbitrary taxation.
3. No Legal Basis for Restrictions:
   • Section 87A does not impose any restrictions on claiming rebates based on income composition. The utility’s design is therefore ultra vires the Income-tax Act.

Conclusion:

The Bombay High Court directed the CBDT to:

1. Modify the e-filing utility to allow taxpayers to claim rebates under Section 87A freely.
2. Withdraw all intimations issued under Section 143(1) denying such claims.
3. Ensure future compliance with the statutory and constitutional principles governing taxation.

Implications:

1. Clarity for Taxpayers:
   • The judgment reinforces the principle that procedural tools cannot override statutory rights.
2. Accountability for Tax Authorities:
   • The decision sets a precedent for ensuring that tax administration systems align with the law.
3. Increased Taxpayer Confidence:
   • By safeguarding self-assessment rights, the judgment strengthens trust in the tax system.

Also Read – Supreme Court Upholds Conviction for Dowry Harassment under Sections 498-A IPC and 4 DP Act; Reduces Sentence to Time Served, Orders ₹3 Lakh Compensation for 19-Year-Old Case of Demanding 100 Sovereigns of Gold