The Income Tax Appellate Tribunal, Surat, has clarified that an individual opting for the new tax regime under Section 115BAC is entitled to claim the rebate under Section 87A on tax payable on short-term capital gains arising from listed equity shares, provided the total income does not exceed Rs. 7,00,000. This ruling resolves a widespread dispute over system-driven denials and affirms the primacy of statutory language over administrative convenience.
Background & Facts
The Dispute
The appellant, Nimishaben Laljibhai Ghevariya, filed her income tax return for Assessment Year 2024-25 under the new tax regime provided under Section 115BAC(1A). She declared a total income of Rs. 6,76,402, which included short-term capital gains (STCG) from the sale of listed equity shares amounting to Rs. 88,800, taxed at 15% under Section 111A. The tax liability on this STCG was Rs. 13,320. The Centralized Processing Centre (CPC), Bengaluru, denied her claim for rebate under Section 87A, resulting in a demand of Rs. 15,820. The Commissioner of Income Tax (Appeals) upheld this denial.
Key Facts
- The appellant is a resident individual.
- She opted for taxation under Section 115BAC(1A) for A.Y. 2024-25.
- Her total income of Rs. 6,76,402 is below the Rs. 7,00,000 threshold for rebate eligibility under the proviso to Section 87A.
- The STCG of Rs. 88,800 was taxed at 15% under Section 111A, generating a tax liability of Rs. 13,320.
- The CPC denied the rebate under Section 87A on the ground that it is not available on income taxed at special rates under Section 111A.
- The CIT(A) relied on the Explanatory Memorandum to the Finance Bill 2025 and the "subject to" clause in Section 115BAC(1A) to uphold the denial.
- The appellant filed an appeal before the ITAT, Surat, on 18.03.2026.
Procedural History
- 01.07.2024: Filing of original return for A.Y. 2024-25 under Section 115BAC(1A)
- 15.08.2024: CPC, Bengaluru, processed return under Section 143(1) and issued intimation denying rebate under Section 87A
- 27.11.2025: CIT(A) passed order upholding denial of rebate
- 12.12.2025: Appeal filed before ITAT, Surat (ITA No. 1336/Srt/2025)
- 18.03.2026: Hearing conducted before ITAT, Surat
- 24.03.2026: Order pronounced by Accountant Member Smt. Annapurna Gupta
The Parties' Positions
For the Appellant
The appellant contended that Section 87A does not contain any express exclusion for tax arising under Section 111A. She relied on the plain language of the statute and the absence of any restriction in either Section 87A or Section 111A. She cited multiple ITAT decisions, including Jayshreeben Jayantibhai Palsana v. ITO, which held that rebate under Section 87A is available on STCG taxed under Section 111A when total income is within the prescribed limit. She emphasized that the legislative intent, as evidenced by the subsequent proposed amendment in the Finance Bill 2025, confirms that no such restriction existed for A.Y. 2024-25.
For the Respondent
The Revenue argued that the phrase "subject to the provisions of this Chapter" in Section 115BAC(1A) overrides the rebate under Section 87A. It contended that Section 87A is not applicable to income taxed at special rates under Chapter XII, including Section 111A. It relied on the Explanatory Memorandum to the Finance Bill 2025, which stated that rebate under Section 87A is not available on special rate incomes. It further argued that the CPC’s automated denial was consistent with administrative practice.
Relief Sought
The appellant sought deletion of the demand of Rs. 15,820, allowance of the rebate of Rs. 13,320 under Section 87A, and recalculation of tax liability with refund of any excess tax paid.
The Legal Issue
Is the rebate under Section 87A of the Income Tax Act available to a resident individual whose total income does not exceed Rs. 7,00,000 and who has opted for taxation under Section 115BAC(1A), even when part of the income consists of short-term capital gains taxed at 15% under Section 111A?
Arguments Presented
For the Appellant
The appellant’s counsel argued that Section 87A is an independent rebate provision under Chapter VIII and is not part of Chapter XII, which governs special rates under Sections 111A, 112, and 112A. The proviso to Section 87A, inserted by the Finance Act, 2023, applies to any resident individual whose total income under Section 115BAC(1A) does not exceed Rs. 7,00,000, without distinguishing between slab income and special rate income. The absence of an express exclusion in Section 87A or Section 111A, in contrast to the explicit bar in Section 112A(6), supports the inference that the legislature intended to permit the rebate. The reliance on the Explanatory Memorandum was misplaced, as it cannot override statutory text. The ITAT decisions in Palsana, Singh, Kamdar, and others uniformly supported the appellant’s position.
For the Respondent
The Revenue contended that Section 115BAC(1A) operates as an overriding provision, and the phrase "subject to the provisions of this Chapter" excludes the application of rebate provisions like Section 87A to income taxed at special rates. It argued that the Explanatory Memorandum to the Finance Bill 2025, which proposed restricting Section 87A for special rate incomes, reflected the legislative intent even for A.Y. 2024-25. It maintained that the CPC’s automated denial was a legitimate administrative measure and that the appellant’s interpretation would lead to revenue leakage.
The Court's Analysis
The Tribunal undertook a detailed statutory interpretation of Section 87A, Section 115BAC(1A), and Section 111A. It observed that Section 87A is a standalone provision under Chapter VIII, while Section 115BAC(1A) is a computation mechanism under Chapter XII. The phrase "subject to the provisions of this Chapter" in Section 115BAC(1A) governs the computation of tax rates and does not extend to the denial of rebates unless explicitly stated. The Tribunal noted that the legislature had expressly excluded Section 87A from applying to long-term capital gains under Section 112A(6), but had omitted any such exclusion for short-term capital gains under Section 111A. This omission was deemed intentional and significant.
"The absence of a corresponding clause in section 111A is legally significant and supports the principle that - when the legislature intended to deny rebate in respect of special income (as in section 112A), it has done so expressly. In contrast, the absence of any exclusion in section 111A or in section 87A must be construed in favour of the assessee."
The Tribunal rejected the Revenue’s reliance on the Explanatory Memorandum to the Finance Bill 2025, holding that such documents are interpretative aids and cannot override the plain language of the statute. It further noted that the proposed amendment for A.Y. 2026-27 implicitly confirmed that no such restriction existed for A.Y. 2024-25. The Tribunal also cited the Bombay High Court’s decision in The Chamber of Tax Consultants v. DGIT (Systems), which held that system-based denials cannot override statutory rights. The ITAT concluded that the denial by the CPC was based on automated logic, not statutory mandate, and that the CIT(A) erred in upholding it.
The Verdict
The appeal was allowed. The ITAT held that the appellant is entitled to the rebate of Rs. 13,320 under Section 87A for A.Y. 2024-25, despite the inclusion of STCG taxed under Section 111A. The demand of Rs. 15,820 raised by the CPC is deleted. The Assessing Officer is directed to allow the rebate and recalculate the tax liability accordingly. Any refund due shall be processed in accordance with law.
What This Means For Similar Cases
Rebate Eligibility Is Not Dependent on Income Source
- Practitioners can now confidently claim Section 87A rebate for clients opting for Section 115BAC, even if their income includes STCG taxed at 15%, provided total income is below Rs. 7,00,000
- The source of income (slab rate vs. special rate) is irrelevant; only the total income threshold matters
- System-generated denials by CPC must be challenged on statutory grounds, not procedural ones
Legislative Silence Is a Legal Advantage
- Where the statute does not explicitly exclude a benefit, courts and tribunals will interpret it in favour of the taxpayer
- The contrast between Section 112A(6) (explicit exclusion) and Section 111A (no exclusion) establishes a clear legislative distinction
- Future litigation on similar issues should focus on the absence of express restrictions, not administrative convenience
Explanatory Memoranda Cannot Override Statutory Text
- Revenue authorities cannot rely on Explanatory Memoranda or Finance Bill notes to deny rights granted by unambiguous statutory provisions
- Proposed amendments for future years do not alter the law applicable to the current assessment year
- Taxpayers must insist on adjudication based on the law as it stood on the date of filing, not on prospective changes
