[Opinion] Getting ITR Mismatch Messages? Your Tax Return May Still Be Correct

CA Naveen Wadhwa & CA Ankur Kamra – [2025] 181 taxmann.com 717 (Article)

In the financial year 2024-25, two co-founders transferred their holdings in a start-up to a big corporation. One co-founder received the total consideration of Rs. 75 lakhs, while the other got Rs. 45 lakhs. Both filed their return of income on time in ITR-2 and declared the capital gains. When December began, the former co-founder received an automated message from CPC about a significant mismatch in his tax return. To his surprise, the other co-founder got no such communication, and his ITR was processed smoothly. Automated Tax Matching Systems used by the CPC are the core reason for this asymmetry in how the same transaction is treated.

The Automated Tax Matching Systems use machine-learning-based algorithms to reconcile the income and tax details reported by a taxpayer in their Income Tax Return (ITR) with a vast array of financial data and the AIS. In case of any mismatch, an automated notice is sent to the taxpayers. The mismatch could be due to many reasons, such as non-reporting of income or improper disclosure.

In the last few weeks, thousands of taxpayers have been confronted with sharply worded emails and SMS alerts from the Income Tax Department warning of a “significant mismatch” between their income tax returns and the data available with the Department. The communication is often accompanied by a firm deadline of 31st December to revise the return or respond online. For many recipients, the notice has created a troubling and confusing situation, as a return that is fully compliant with the law is still flagged as erroneous.

Despite complete and accurate disclosures, an automated notice is being triggered for a share sale transaction in which tax is deducted under Section 194Q. The systems are misreading capital gains from unlisted share sales as business receipts, triggering widespread compliance alerts for FY 2024–25.

At the heart of the issue is Section 194Q, a withholding provision that requires buyers to deduct tax at source on the purchase of goods exceeding a specified threshold. This provision requires a buyer to deduct tax if he carries on a business and pays a resident seller for goods where the value or aggregate value exceeds INR 50 lakh in any previous year. Though the IT Act does not explicitly define “goods” for this section, it is understood that “securities” (including shares, whether listed or unlisted) are not treated as “goods” in the broader tax context.

However, the CBDT has clarified that, as transactions in listed securities carried out through exchanges do not involve direct contact between buyers and sellers, the provisions of Section 194Q shall not apply to transactions in securities (and commodities) traded through recognised stock exchanges or settled by recognised clearing corporations. Since unlisted shares are not traded through recognised stock exchanges or cleared by recognised clearing corporations, the specific exemption mentioned in the circular would not directly apply to them. Nonetheless, based on the general interpretation of “goods” in Indian tax laws and the specific nature of Section 194Q, TDS under Section 194Q is generally not required on the purchase of unlisted shares, as shares are typically not considered “goods”. Still, in several unlisted share transactions, buyers deduct TDS under this section either as a conservative compliance measure or due to internal interpretations of its scope.

When the buyer reports this deduction, it appears on the seller’s Annual Information Statement (AIS). The system’s logic treats the receipt as business turnover, even though the seller may have correctly disclosed the transaction as capital gains in the income tax return form. This treatment is in accordance with the CBDT’s Circular, which clarified that income arising from the transfer of unlisted shares would be considered under the head ‘Capital Gain’, irrespective of the period of holding, except where the taxpayer himself treats the same as stock-in-trade.

Click Here To Read The Full Article