One demerger, three portfolio gaps: Why a Mumbai trader received a surprise tax notice?

He carefully tracks his annual statements, but a recent corporate restructuring involving his shares of Reliance Industries Limited (RIL) and Jio Financial Services Limited (JFS) created a series of unexpected hurdles.

Splitting his original purchase costs accurately between the two companies proved highly challenging. Despite his detailed record-keeping, a few minor calculation differences and missing entries from his trading history caught the attention of the tax portal.

A few months after filing, Mahesh received an automated tax notice from the Income Tax Department, turning his standard tax season into a problem that required expert intervention.

Decoding the calculation

To resolve the issue, Mahesh reached out to ClearTax for help. Tax experts CA Shreenandan Hegde and CA Subrahmanya Hegde reviewed his transaction history, trading accounts, and dividend income to find out exactly why the tax portal flagged his return.

The review showed that the tax department’s automated system caught three separate issues, mostly centered around how the corporate split affected his share values.

Problem 1: Splitting the Purchase Cost

When Reliance split into two companies, a single share turned into two different shares. The tax department requires investors to split the original purchase price using an official ratio: 95.32% stays with Reliance (RIL) and 4.68% goes to Jio Financial (JFS).

For example, if Mahesh originally bought a share of Reliance for Rs 2,340, he had to manually calculate the new cost basis for each stock:

• New RIL Cost: Rs 2,340 × 95.32% = Rs 2,230.49 per share
• New JFS Cost: Rs 2,340 × 4.68% = Rs 109.51 per share

Problem 2: The Historical Value Rounding Error

A second issue involved calculating the older value of the shares held before 2018 (known as the Fair Market Value for grandfathering tax rules). On that specific date in 2018, the parent Reliance stock was worth Rs 965 per share. Using the same 4.68% rule, the exact historical value for the new Jio shares had to be calculated:

Exact JFS 2018 Value: Rs 965 × 4.68% = Rs 45.16 per share

Mahesh’s initial calculation used a rounded estimate of Rs 44.00 per share. Because the tax portal’s computer looks for an exact match down to the paise, the Rs 1.16 difference per share flagged the entire tax return as incorrect.

Problem 3: Omitted Trading Records and Income Mismatches

Because Mahesh is an active trader, a few other investment details were accidentally left out of the first filing draft. This included two short-term profit entries from his Axis Direct account, a transaction history log from a Nippon Debt Mutual Fund, and his corporate ESOP records. His reported dividend income also had a small mismatch, which the experts corrected to the exact portal value of Rs 56,565.

Finding the right approach

To resolve the automated notice and correct his tax records, the ClearTax experts used a step-by-step process:

• Correcting the stock math: The experts recalculated every single lot of RIL and JFS shares using the exact official percentages to eliminate the decimal errors.
• Adding missing files: They updated the filing to include the omitted short-term profits, mutual fund logs, and ESOP data.
• Filing a formal correction: After reviewing the final calculations with Mahesh on a live call, the team submitted an official Rectification Return under Section 154 of the Income Tax Act.

After these corrections, the Income Tax Department processed the updated return, accepted the corrected math, and successfully cleared the notice while issuing his rightful tax refund.

Lessons for stock market investors

Managing an active stock portfolio requires keeping your data perfectly aligned with automated tax rules. This case highlights three simple guidelines:

• Use exact corporate ratios: When a company splits or restructures, you cannot guess or round off the cost numbers. The tax portal uses automated matching, so your entries must use the exact corporate percentages down to the decimal point.
• Precision matters for older stocks: Historical share values from 2018 require exact paise compliance. Even a tiny rounding error of one rupee can flag your entire return.
• Fix mistakes with a rectification return: If you receive an automated demand notice due to a math mismatch or a missing document, you do not need to panic. Filing a formal rectification return lets you correct the data errors and secure your refund.

(The author is the founder and CEO of ClearTax)

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. Tax laws and regimes are subject to frequent changes by the government. Readers should verify details with official Income Tax Department notifications or consult a Chartered Accountant before making any financial decisions.  

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