The Income Tax Appellate Tribunal (ITAT), Pune, has clarified a critical ambiguity in the application of Section 87A rebate under the Income Tax Act, 1961. In a landmark ruling, the Tribunal held that resident individuals opting for the new tax regime under Section 115BAC(1A) are entitled to the full rebate under Section 87A on their total income, including short-term capital gains (STCG) taxable under Section 111A, for the Assessment Year 2024-25. The judgment underscores the principle that statutory benefits cannot be denied in the absence of an express legislative bar, setting a precedent for similar cases.
Background & Facts
The Dispute
The appellant, Vilas Jagannath Patil, a resident individual, filed his return of income for Assessment Year (AY) 2024-25 on 29.07.2024, declaring a total income of Rs. 6,99,160. This income comprised profits from business (computed presumptively under Section 44AD), STCG, and income from other sources. The appellant opted for the new tax regime under Section 115BAC(1A) of the Income Tax Act. The Centralized Processing Centre (CPC), Bengaluru, processed the return under Section 143(1) but restricted the rebate under Section 87A to Rs. 14,778 (instead of the claimed Rs. 25,000), denying the rebate on tax payable on STCG under Section 111A. Consequently, a demand of Rs. 12,310 was raised vide order dated 14.03.2025.
Key Facts
The appellant filed his original return on 29.07.2024 and a revised return declaring total income of Rs. 6,99,160
The income included STCG taxable at 15% under Section 111A
The appellant opted for the new tax regime under Section 115BAC(1A)
The CPC restricted the Section 87A rebate to Rs. 14,778, denying it on STCG
A demand of Rs. 12,310 was raised on 14.03.2025
Procedural History
29.07.2024: Original return filed
14.03.2025: CPC processed return, restricted rebate, and raised demand
Post-14.03.2025: Appellant filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]
CIT(A) Order: Confirmed CPC’s action and dismissed the appeal
02.07.2026: Appeal filed before ITAT, Pune (ITA No. 1750/PUN/2026)
13.07.2026: ITAT pronounced judgment, allowing the appeal
Relief Sought
The appellant sought:
Full rebate of Rs. 25,000 under Section 87A, including on tax payable on STCG under Section 111A
Quashing of the demand of Rs. 12,310 raised by the CPC
Recomputation of tax liability in accordance with the law
The Legal Issue
The central question before the Tribunal was:Whether a resident individual, whose total income does not exceed Rs. 7,00,000 and who has opted for the new tax regime under Section 115BAC(1A), is entitled to the rebate under Section 87A on tax payable on STCG under Section 111A, in the absence of an express statutory bar for AY 2024-25?
Arguments Presented
For the Appellant
The amended provisions of Section 87A (effective from AY 2026-27) do not apply to AY 2024-25
There is no express bar in Section 87A or Section 111A denying rebate on STCG
The CPC’s denial was based on system-driven logic, not statutory mandate
Relied on judicial precedents, including Jayshreeben Jayantibhai Palsana vs. ITO (ITA No. 1014/Ahd/2025) and The Chamber of Tax Consultants vs. Director General of Income Tax (Systems) [TS5026-HC-2025(Bombay)-O], which supported the appellant’s claim
Cited appellate orders (e.g., Avni Milanbhai Maniya) where similar relief was granted
For the Revenue
Contended that rebate under Section 87A is not available on tax arising from special rate incomes, including STCG under Section 111A
Relied on the "subject to" clause in Section 115BAC(1A) and provisions of Chapter XII of the Act
Argued that the Explanatory Memorandum to the Finance Bill 2025 clarified the legislative intent to deny rebate on STCG
The Court's Analysis
The Tribunal conducted a detailed analysis of the statutory provisions and judicial precedents, arriving at the following conclusions:
"The amended first proviso to section 87A [inserted by the Finance Act, 2023 w.e.f. A.Y. 2024-25] provides 'Where the total income of the assessee is chargeable to tax under subsection (1A) of section 115BAC and the total income -- (a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction...'"
The Tribunal observed that Section 87A does not distinguish between normal income and income chargeable at special rates, nor does it exclude tax arising under Section 111A. In contrast, the legislature explicitly barred rebate under Section 87A for long-term capital gains under Section 112A(6), indicating that the absence of a similar bar for Section 111A was deliberate.
"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 further examined the interplay between Section 115BAC(1A) and Chapter XII of the Act. It held that the "subject to" clause in Section 115BAC(1A) governs the computation of tax but does not affect eligibility for rebates or deductions unless expressly restricted. Since Section 87A is an independent provision under Chapter VIII, it remains applicable to the total tax computed, whether at slab rates or special rates.
"Section 87A is not part of Chapter XII; it is an independent rebate provision under Chapter VIII of the Act. Therefore, the overriding clause in section 115BAC(1A) does not derogate or modify section 87A, unless section 87A itself provides for exclusion, which, in the present case, it does not."
The Tribunal also rejected the Revenue’s reliance on the Explanatory Memorandum to the Finance Bill 2025, noting that:
The Finance Bill 2025 proposed restrictions on Section 87A rebate w.e.f. AY 2026-27, implying no such restriction existed for AY 2024-25
Explanatory memoranda are tools of interpretation, not substantive law, and cannot override the plain language of the statute
The Tribunal relied on the Bombay High Court’s judgment in The Chamber of Tax Consultants vs. Director General of Income Tax (Systems), which held that system-based denials cannot override statutory rights. It also noted that the CIT(A)-1, Nagpur, had allowed a similar claim in Avni Milanbhai Maniya, reinforcing the divergent views on the issue.
The Verdict
The ITAT allowed the appellant’s appeal and set aside the order of the CIT(A). The Tribunal held that the appellant is entitled to the full rebate under Section 87A for AY 2024-25, including on tax payable on STCG under Section 111A. The Assessing Officer was directed to:
Allow rebate of Rs. 25,000 under Section 87A
Recompute the tax liability accordingly
Delete the demand of Rs. 12,310 raised by the CPC
Grant any refund due in accordance with the law
What This Means For Similar Cases
Rebate Under Section 87A Applies to STCG Unless Expressly Barred
No Legislative Bar: For AY 2024-25, Section 87A rebate applies to the total income of resident individuals, including STCG under Section 111A, unless there is an express statutory exclusion. The absence of such a bar in Section 111A or Section 87A must be construed in favor of the assessee.
Prospective Amendments: Subsequent amendments (e.g., Finance Bill 2025) cannot retrospectively restrict statutory benefits for earlier assessment years. Practitioners should argue that the law as it stood during the relevant AY governs the assessee’s rights.
System-Driven Denials Cannot Override Statutory Rights
Judicial Precedent: The Bombay High Court’s ruling in The Chamber of Tax Consultants establishes that automated or system-based denials by the CPC cannot override statutory rights. Assessees should challenge such denials before quasi-judicial authorities, who are duty-bound to adjudicate claims on merits.
Divergent Views: The existence of appellate orders allowing similar claims (e.g., Avni Milanbhai Maniya) underscores that the issue is not settled. Assessees should cite these precedents to strengthen their cases.
Interpretation of "Subject To" Clauses in Tax Provisions
Computation vs. Eligibility: The "subject to" clause in Section 115BAC(1A) governs the computation of tax under the new regime but does not affect eligibility for rebates or deductions under other chapters (e.g., Section 87A under Chapter VIII).
Chapter-Specific Provisions: Practitioners must distinguish between provisions governing tax computation (Chapter XII) and those governing rebates/deductions (Chapter VIII). The former does not ipso facto restrict the latter unless expressly provided.
