Selected Wrong Tax Regime in ITR? ITAT Delhi Grants Relief for Inadvertent Section 115BAC Errors

Filing an Income Tax Return (ITR) under the incorrect tax regime is a common pitfall that taxpayers and tax professionals frequently encounter, especially following the major procedural shifts under Section 115BAC of the Income-tax Act, 1961. With the New Tax Regime becoming the default regime starting Assessment Year (AY) 2024-25, inadvertent selection errors during Form ITR filing can trigger unexpected tax demands, CPC processing notices, and significant administrative distress.

However, a landmark ruling by the Income Tax Appellate Tribunal (ITAT), Delhi Bench brings massive relief to aggrieved taxpayers. The Tribunal held that where a taxpayer inadvertently selects the wrong tax regime in the return filing software, but their underlying tax payments and computations demonstrably reflect the intention to opt for the alternate regime, the revenue authorities cannot penalize the assessee for a mere clerical oversight.

Background: The Growing Complexity of Tax Regime Selection

The introduction of the dual tax regime framework under Section 115BAC presented taxpayers with a choice between:

• The Old Tax Regime: Higher slab rates combined with deductions and exemptions (e.g., Section 80C, 80D, HRA, LTA).
• The New Tax Regime: Lower concessional tax slab rates with limited deductions and exemptions.

For non-business taxpayers, the option to switch between regimes is available annually. However, during the ITR filing process, minor technical glitches, pre-filled software defaults, or simple human errors often result in selecting the wrong regime check-box. When the Central Processing Centre (CPC), Bengaluru processes such returns under Section 143(1), it calculates tax liability based strictly on the selected check-box rather than the actual advance tax or TDS deposited, resulting in inflated tax demands and statutory interest under Sections 234B and 234C.

Factual Matrix of the Case

In the case under consideration, the taxpayer (Late Divya Kala Sharma, represented by her legal heir Mr. Sanjay Sharma) calculated and deposited her income tax liability for the relevant assessment year strictly in accordance with the concessional slab rates under the New Tax Regime (Section 115BAC). Advance tax and self-assessment tax payments were deposited accordingly.

However, while submitting the ITR online, an inadvertent clerical error occurred: the radio button for the Old Tax Regime was erroneously selected instead of the New Tax Regime. Because the deductions under the Old Tax Regime were not claimed in the return (as the tax had been computed per the New Regime without deductions), the CPC processed the return under the Old Tax Regime without granting deductions. This mechanical processing generated a substantial tax demand along with statutory interest.

Seeking remedy, the taxpayer filed a rectification application under Section 154 of the Income-tax Act, pointing out the obvious clerical error supported by advance tax challans and computation sheets. However, the Assessing Officer (AO) rejected the rectification, holding that regime selection made in the return is final. Subsequent appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] was also dismissed, forcing the taxpayer to approach the ITAT Delhi.

Key Observations & Ruling by ITAT Delhi

The Delhi Bench of the ITAT meticulously examined the financial records, tax computation statements, and payment receipts submitted by the assessee. The Tribunal highlighted several key legal principles:

1. Substance Over Form

The Tribunal emphasized that hyper-technical procedural lapses should not overwrite substantive rights. The tax records clearly proved that the total tax paid prior to filing matched the exact calculation under Section 115BAC. The selection of the Old Tax Regime check-box was an obvious human error.

2. Intent Supported by Financial Conduct

Where the taxpayer's financial conduct—specifically advance tax deposits, self-assessment tax calculations, and non-claiming of exemptions—consistently points to the New Tax Regime, the department cannot force the taxpayer into the Old Tax Regime merely due to a tick-box error.

3. Direction to the Assessing Officer

Setting aside the orders of the CIT(A) and the Assessing Officer, the ITAT directed the AO to recompute the taxpayer’s tax liability under the New Tax Regime (Section 115BAC) and grant full credit for taxes already paid, thereby nullifying the artificial tax demand.

Practical Impact on Taxpayers & Practitioners

This ruling serves as an essential judicial precedent for Chartered Accountants, CFOs, and tax consultants facing similar CPC demand notices. Key practical implications include:

1. Remedial Relief under Section 154: Mistakes in checking tax regime boxes can be argued as "mistakes apparent from the record" when supported by payment challans and computation sheets.
2. Protection Against Arbitrary Demands: CPC's automated processing under Section 143(1)(a) often lacks human discretion. This ruling empowers taxpayers to seek judicial relief when administrative applications are mechanically rejected.
3. Strengthening Appellate Grounds: If your rectification under Section 154 is rejected by the AO, this ITAT Delhi judgment provides a solid foundation for appeals before CIT(A) and ITAT.

Conclusion

While the ITAT Delhi decision in Sanjay Sharma vs. ITD offers strong judicial protection against genuine clerical errors, prevention remains better than cure. Taxpayers and practitioners must exercise double diligence when selecting tax regimes on the e-filing portal. However, if a mistake does occur, this ruling confirms that justice prevails over inadvertent technical slip-ups when supported by clear, verifiable tax records.