The Income Tax Appellate Tribunal clarified that the rebate under Section 87A of the Income-Tax Act is available on short-term capital gains taxed at special rates, provided the assessee’s total income stays within the prescribed threshold. The decision overturns a lower-authority denial and sets a clear precedent for future rebate claims.
Background & Facts
The Dispute
The Revenue (appellant) challenged an order dated 15.12.2025 of the Commissioner of Income Tax (Appeals) (Gwalior), which had allowed the assessee, Rajshree Kothari (respondent), a rebate under Section 87A on short-term capital gains (STCG) taxed at the special rate of Section 111A. The Revenue argued that such income is excluded from the rebate under the statutory scheme and the CBDT Circular No. 13/2025.
Key Facts
- The assessee filed her income-tax return on 24/07/2024, declaring total income of Rs 4,81,640 and opting for the new tax regime under Section 115BAC.
- The CPC processed the return on 24/09/2024 and denied the rebate under Section 87A.
- A rectification order dated 21/11/2024 reiterated the denial.
- The assessee appealed before the Ld. CIT(A), which allowed the rebate; the Revenue filed an appeal under Section 250 of the Act.
- The Revenue relied on CBDT Circular No. 13/2025 (dated 19.09.2025) asserting that income taxed at special rates is ineligible for the rebate.
- The assessee contended that Section 87A provides a rebate on the total tax liability without distinguishing between normal-rate and special-rate income, citing several ITAT decisions.
- The Finance Act 2023 inserted a proviso to Section 87A effective 01 April 2024, but did not expressly exclude special-rate income.
Procedural History
- 15.12.2025: Order of Ld. CIT(A) allowing rebate under Section 87A.
- 19.08.2026: Hearing before the ITAT, Jaipur Bench.
- 20.08.2026: Judgment pronounced.
Relief Sought
- Revenue (Appellant): Set aside the CIT(A) order and deny the rebate on STCG.
- Assessee (Respondent): Confirm entitlement to rebate of Rs 25,000 under Section 87A and direct recomputation of tax liability.
The Legal Issue
Whether Section 87A of the Income-Tax Act permits a rebate on short-term capital gains taxed at special rates under Section 111A when the assessee’s total income is within the Rs 7 lakh threshold and the assessee has opted for the new tax regime under Section 115BAC.
Arguments Presented
For the Appellant
- Relied on CBDT Circular No. 13/2025, asserting that income taxed at special rates is excluded from the rebate.
- Submitted that the statutory scheme of Section 87A must be read harmoniously with Section 111A and Section 115BAC, which prescribe special rates, thereby precluding the rebate.
- Cited the legislative intent behind the amendment of Section 87A (Finance Act 2023) to restrict rebate in future years, implying an existing restriction.
For the Respondent
- Cited multiple ITAT decisions (Pranay M Kothari v. DCIT, Manojbhai C. Kamdar v. ITO, Jayshreeben Palsana v. ITO) holding that Section 87A provides a rebate on the total tax liability without distinction.
- Emphasised the plain language of Section 87A and the absence of any express exclusion for special-rate income.
- Pointed out that the Finance Act 2023 amendment is prospective and does not affect the assessment year 2024-25.
- Referred to the Bombay High Court’s observation that “there is no indication in the plain language of Section 87A that any category of income or tax should be excluded”.
The Court's Analysis
The Tribunal began by examining the statutory text of Section 87A and its 2023 amendment. It noted that the proviso inserted by the Finance Act 2023 applies only to assessment years commencing 01 April 2024, but the amendment’s operative clause is prospective and does not retroactively restrict the rebate for AY 2024-25.
"section 87A operates on the total tax computed, whether it includes tax at slab rates or special rates, and applies so long as the total income threshold is met."
The Tribunal rejected the Revenue’s reliance on the CBDT Circular, observing that a circular cannot override the plain language of the statute. It stressed that the legislative intent, as reflected in the amendment, was to introduce a future restriction, not to retrospectively deny rebates.
The Tribunal then surveyed the ITAT precedents, finding a consistent line that the rebate is available on the entire tax liability irrespective of the nature of income. It distinguished the Section 112A(6) exclusion, which expressly bars rebate on long-term capital gains, noting that no analogous provision exists in Section 111A or Section 87A.
Further, the Tribunal addressed the argument that the new-regime clause in Section 115BAC(1A) could implicitly exclude special-rate income. It held that the clause merely governs the computation of tax rates and does not affect eligibility for rebates unless expressly stated.
Finally, the Tribunal observed that the CPC’s system-driven denial was not grounded in statutory authority and could not supplant the assessee’s right under Section 87A. Consequently, the appeal by the Revenue was dismissed, and the rebate of Rs 25,000 was ordered to be allowed.
The Verdict
The Tribunal dismissed the Revenue’s appeal. It held that the assessee is entitled to a rebate of Rs 25,000 under Section 87A for the assessment year 2024-25. The Assessing Officer is directed to allow the rebate and recompute the tax liability accordingly. No costs were awarded, and the order of the Ld. CIT(A) is set aside to the extent it denied the rebate.
What This Means For Similar Cases
Rebate Applies Across Rate Categories
- Practitioners can claim Section 87A rebate on STCG taxed under Section 111A provided the total income is within the Rs 7 lakh limit.
- The absence of an express exclusion in the statute means that special-rate income is treated like normal-rate income for rebate purposes.
CBDT Circulars Are Not Controlling
- Circulars cannot override clear statutory language; reliance on them alone is insufficient to deny a rebate.
- Only a legislative amendment can effect such a restriction, and it must be prospective.
ITAT Precedent Carries Weight
- Recent ITAT decisions (2025-2026) consistently support a liberal interpretation of Section 87A; citing them strengthens a rebate claim.
- Courts will look to the plain meaning of the provision before considering policy-based exclusions.
System-Driven Denials Must Be Challenged
- Automated CPC rejections must be contested on statutory grounds; the Tribunal affirmed that procedural logic cannot defeat a statutory right.
- Tax practitioners should ensure that any system-generated denial is reviewed against the statutory text and relevant case law.
