KSCAA Flags ITR Form Delays, Portal Glitches, AIS Mismatches & Threatening tone

The Karnataka State Chartered Accountants Association (KSCAA) has submitted a detailed representation to the Central Board of Direct Taxes highlighting serious concerns with recent automated e-Verification communications for FY 2024-25. While appreciating the Department’s technology-led initiatives such as AIS, TIS and Project Insight, KSCAA flags that the tone and content of recent emails are adversarial and prematurely presume taxpayer fault. The representation notes that taxpayers—many of whom have correctly filed returns—are being directed to compulsorily revise ITRs instead of being asked to explain perceived mismatches. It identifies multiple algorithmic false positives, including misclassification of rental income, investments mistaken as income, TDS under sections 194Q and 194-IA triggering incorrect business or capital gains flags, rigid PGBP classification, and timing mismatches in property transactions. KSCAA argues that these system-driven conclusions cause anxiety and force incorrect compliance. The Association urges refinement of language, improved algorithmic logic, an explanation-first approach, and equal procedural guidance for disputing data to preserve fairness and taxpayer trust.

KARNATAKA STATE
CHARTERED ACCOUNTANTS ASSOCIATION (R)

To,
Shri Ravi Agarwal,
The Chairman,
Central Board of Direct Taxes (CBDT),
New Delhi.

Ref No: 004/2025-26 | Date: 18 December 2025

Respected Sir,

Subject: Representation Regarding Tone and Content of Recent E-Verification Communications and Algorithmic Mismatches for the Financial Year 2024-25

The Karnataka State Chartered Accountants Association (R) (KSCAA), established in 1957, is a premier professional body representing the Chartered Accountancy profession in Karnataka. With a legacy of fostering professional excellence, we have actively collaborated with the Income Tax Department, Central Board of Direct Taxes (CBDT), and other stakeholders through seminars, workshops, policy consultations and representations to facilitate seamless tax compliance, promote economic growth and uphold principles of transparency and efficiency in tax administration. KSCAA continues to serve as a bridge between taxpayers and policymakers, contributing to the development of a robust and practical tax ecosystem.

At the outset, we wish to place on record our sincere appreciation for the Department’s tireless efforts in integrating technology into tax administration. The use of advanced data analytics, particularly through Project Insight and the robust implementation of the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), has revolutionized the reporting framework.

We laud the Department’s initiative to identify non-filers who have entered into high-value transactions and the proactive steps taken to widen the tax net. These “nudge” communications effectively encourage voluntary compliance and help to safeguard against the loss of rightful tax revenues. We believe these technological advancements are pivotal for a transparent and efficient tax regime.

THE PRESENT GRIEVANCE

While we support the objective of these verification drives, we wish to draw your kind attention to the tone, content and procedural logic of the recent batch of e-Verification emails sent to assessees for the Financial Year 2024-25.

It has been brought to our notice that a large number of taxpayers including those who have already filed their Income Tax Returns (ITR) are receiving communications with the subject line “ITR Action required by 31st December… ITR mismatch identified.” These emails mandatorily direct the assessee to revise their return by 31st of December 2025.

We wish to bring to your kind attention that the language used in these communications and the conclusions drawn by the system without human intervention are causing undue anxiety, panic and hardship to genuine taxpayers. We highlight the specific concerns below:

1. Adversarial and threatening tone of the communication

The communication received by taxpayers contains the following text:

“We have treated this mismatch between your ITR and our records to be an error. However, if you don’t act now, we will treat it as a deliberate choice. That may mean your case is selected for detailed investigation.”

We respectfully submit that such language is threatening and inconsistent with the Department’s citizen-centric approach. To label a mismatch as a “deliberate choice” implies mens rea (guilty intention) on the part of the taxpayer before they have even been afforded an opportunity to explain.

For a layperson, especially senior citizens or salaried employees who may not be well-versed in tax laws, receiving a mail threatening “detailed investigation” creates immense mental stress, compelling incorrect self-compliance. It contradicts the spirit of the Citizen’s Charter, which promotes a relationship of trust between the Department and the taxpayer.

2. Premature Conclusion demanding “Revision” vs. “Explanation”

The communication explicitly states: “You are required to revise your ITR by 31st Dec 2025”

This directive presumes that the Department’s data is absolute and the taxpayer’s return is erroneous. It effectively bypasses the stage of “verification.” In many cases, the taxpayer’s return is correct and the mismatch is merely interpretive or technical. By mandating a revision, the Department is forcing the assessee to alter a correct return, which is legally untenable. The logical first step should be to seek a response or feedback, not a revision.

3. Algorithmic False Positives and Lack of contextual Nuance

The automated system appears to be flagging “mismatches” based on rigid mapping that does not account for the flexibility provided by the Law. We wish to highlight specific instances where these communications are erroneous:

• Classification of Rental Income (Rent vs. Other Sources)

We have observed numerous communications flagging a mismatch in “Rent Received” solely because the data source relies on TDS deducted u/s 194I. The automated system appears to operate on a presumption that all receipts subject to TDS u/s 194I must be reported exclusively under the head “Income from House Property.”

This presumption is legally flawed and fails to account for statutory exceptions:

a. Scope of Section 194I: This section applies to rent not just for buildings, but also for land, plant, furniture, and fittings. Rent derived from vacant land or plant and machinery is taxable under “Income from Other Sources” or “Business Income,” not “House Property.”

b. Sub-letting of Property: A prerequisite for taxing income under the head “House Property” (Section 22) is that the assessee must be the owner of the property. In cases of sub-letting, where a tenant receives rent from a sub-tenant, the income is legally chargeable under “Income from Other Sources” (Section 56) or PGBP, as the recipient is not the owner.

In such scenarios, assessees have duly offered the income under “Income from Other Sources.” However, since the “House Property” schedule in the ITR is blank, the system flags this as a mismatch, completely ignoring the corresponding income reported in the “Other Sources” schedule. Directing such an assessee to “revise” the return is factually incorrect and legally untenable.

• Investments vs. Income

Communications have been sent to assessees where the value of deposits (e.g., Fixed Deposits) exceeds the reported income. For instance, an assessee reporting an income of Rs. 1 Lakhs but making FD investments of Rs. 50 Lakhs is flagged.

The system fails to appreciate that investments are often made from past savings, maturity proceeds of earlier deposits, or exempt income (like PPF maturity). A high asset turnover does not automatically imply concealed income. While this merits an inquiry, concluding that the return is “wrong” and demanding a revision is erroneous.

• TDS u/s 194Q on Sale of Unlisted Shares vs. Business Receipts

A significant anomaly has been observed regarding transactions involving the sale of unlisted shares. Since shares fall under the definition of ‘goods’ under the Sale of Goods Act, buyers often deduct TDS u/s 194Q on such purchases when statutory thresholds are met. However, the automated logic appears to hard-code Section 194Q solely to “Business Turnover.” Consequently, when an investor sells shares and offers the income under “Capital Gains,” the system flags the gross transaction value as “Unreported Business Receipts.” The resulting email, stating that the assessee has suppressed business turnover and must revise their return, creates panic among genuine investors who have correctly applied the law. The system fails to distinguish between the sale of goods in the course of trade (Business) and the sale of shares held as investments (Capital Asset).

• Rigid Classification of incomes (PGBP vs. Other Sources)

We have noted numerous instances where assessees earning passive incomes like commission income have received communications insisting they file their returns under ITR-3 (or ITR-4) and report the income strictly under the head “Profits and Gains of Business or Profession” (PGBP).

This directive is legally flawed as it ignores the specific facts of the case. Under the scheme of the Act, commission income is not invariably “Professional or Business Income.” Where such income is earned passively, such as occasional referral fees or commissions earned by individuals not actively engaged in a continuous trade or profession, it is rightly classifiable under “Income from Other Sources” u/s 56. The automated insistence on reclassifying such income under PGBP and forcing a change in the ITR Form type is a mechanical application of rules that disregards the jurisprudential distinction between active business / professional engagement and passive income earning.

• Timing Mismatch – Agreement to Sell vs. Actual Transfer (Section 194-IA)

We have encountered cases where assessees have entered into an “Agreement to Sell” for an immovable property, triggering TDS deduction u/s 194-IA. As per the law, TDS is deducted at the time of credit or payment, whichever is earlier. However, the actual “Transfer” as defined u/s 2(47) of the Act (e.g., execution of Sale Deed or handing over possession) has not yet taken place during the financial year.

Since the transfer is not complete, no Capital Gains have accrued, and consequently, the assessee has rightly not offered any income under the “Capital Gains” head. The TDS so deducted has been legally carried forward in the return (in accordance with Rule 37BA(3)) to be claimed in the subsequent year when the sale is concluded.

However, the automated system relies on TDS entry. Finding the “Capital Gains” schedule blank, the system flags this as mismatch. Directing an assessee to “revise” the return in such cases is incorrect, as it forces the premature recognition of income before the tax liability has legally crystallized.

4. Bias in procedural guidance

We wish to draw attention to the closing remarks of the email, which state: “In almost all cases, the transaction information above is accurate and you need to revise your ITR. However, if you find inaccuracies you can dispute them in the AIS portal.”

While the email provides a detailed, numbered, step-by-step guide on how to revise the return (Login > e-File > Select Year > Start New Filing), it conspicuously fails to provide similar procedural guidance on how to dispute the data. By making the revision process easy and the dispute process vague, the communication inherently biases the taxpayer towards revision, even in cases where the Department’s data might be incorrect.

PRAYER

In light of the above, to balance the need for verification with the rights of the honest taxpayer, we respectfully urge the Board to consider the following suggestions:

1. Refinement of Language:

The tone of such automated emails should be “facilitative”, “nudging” and “inquiring” rather than “threatening.” Words implying “deliberate choice” or “detailed investigation” should be avoided in the initial communication and replaced with neutral language seeking clarification or explanation.

2. Change in call to action:

The communication should request the assessee to “submit a response” or “provide feedback” on the Compliance Portal, rather than mandating a “Revision of ITR.” The option to revise should remain voluntary if the assessee accepts the error.

3. Enhance Algorithmic Logic:

The logic used for identifying mismatches should be refined to look for income across all heads (e.g., checking “Other Sources” for Rent) before flagging a file.

4. Feedback Mechanism:

A simple “Agree/Disagree” interface in the e-Verification window may be provided. In addition to indicating disagreement, the assessee must also be given an open text field to explain their case in detail and submit a justification. Where such explanation is found acceptable based on available records, the proceedings should be dropped without insisting on the filing of a revised return.

5. Include step-by-step guidance for feedback mechanism:

In the spirit of fairness, the communication should provide equal prominence to the grievance redressal mechanism. Just as the email lists the steps to file a revised return, it should also include a “Step-by-Step Guide to Submit Feedback”. This will empower taxpayers to correct the Department’s records rather than being forced to alter their own correct returns.

We are confident that the Board will appreciate the practical implications of the current approach and take suitable steps to remove these anomalies, thereby upholding the spirit of fairness that has consistently guided its approach in matters of taxpayer facilitation.

Yours sincerely,

For Karnataka State Chartered Accountants Association ®

CC:

1. Nirmala Sitharaman, Hon’ble Union Minister of Finance and Corporate Affairs, Government of India

2. Shri Pankaj Chaudhary, Union Minister of State for Finance

3. Shri Arvind Shrivastava, Hon’ble Revenue Secretary

4. Smt. Preeti Garg, PCCIT, Karnataka and Goa