Facts of the Case

The petitioners, being private discretionary trusts, were filing their income tax returns as individual assessees using ITR-2. However, from Assessment Years 2021–22 and 2022–23, they were required by the Income Tax Department to switch to ITR-5.

The transition resulted in a significant issue: deductions and rebates previously available under ITR-2 were not accessible in ITR-5. This caused prejudice to the petitioners, as they were unable to claim legitimate tax benefits through the new system.

The Revenue acknowledged the existence of this issue but failed to provide an effective remedy.

Issues Involved

  1. Whether private discretionary trusts forced to shift from ITR-2 to ITR-5 can be denied deductions/rebates due to system limitations.
  2. Whether the Income Tax Department is obligated to resolve technical glitches in the e-filing system affecting substantive rights.
  3. Whether Section 119 of the Income Tax Act can be invoked to address such systemic issues.

Petitioner’s Arguments

  • The mandatory switch to ITR-5 deprived them of deductions/rebates previously available.
  • The e-filing system failed to accommodate legitimate claims, thereby causing unjust tax consequences.
  • The issue was systemic and recurring, affecting similarly placed trusts.
  • The remedy suggested by the Revenue (appellate forum) was not appropriate for a technical/systemic failure.

Respondent’s Arguments

  • The Revenue contended that:
    • Petitioners could seek relief through regular appellate mechanisms.
    • Alternatively, they could approach the Central Board of Direct Taxes under Section 119 for redressal.
  • It was also indicated that efforts were being made to resolve the e-filing glitches. 

Court’s Findings / Order

  • The Court held that the Revenue’s response was unsatisfactory.
  • It observed that deductions/rebates should ideally be embedded within the Return of Income (ROI) system itself.
  • The issue was identified as recurring and systemic, requiring institutional resolution.

Key Directions

  1. The writ petitions were disposed of with directions to CBDT to examine and resolve the issue.
  2. The petitions were to be treated as applications under Section 119 of the Income Tax Act.
  3. CBDT was directed to pass a reasoned (speaking) order.
  4. The Court emphasized that similar issues may arise in future and require proactive resolution.

Important Clarification by the Court

  • Technical glitches in tax filing systems cannot override substantive taxpayer rights.
  • Authorities must ensure that procedural frameworks (like e-filing formats) do not deprive taxpayers of lawful deductions.
  • Section 119 serves as an important remedial mechanism for systemic and administrative issues.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS24082023CW150052022_124134.pdf

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