The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, dismissed the Revenue's appeal challenging the allowance of section 87A rebate on short-term capital gains (STCG) under the new tax regime, holding that the absence of an express exclusion in section 87A or section 111A mandates construing the benefit in favour of the assessee when total income remains below the Rs 7 lakh threshold.
Background & Facts
The Dispute
The assessee, Shashi Kant Tulsian, filed a revised return of income for Assessment Year (AY) 2024-25 declaring total income of Rs 4,65,440/- comprising short-term capital gain (STCG) on listed equity shares taxable at 15% under section 111A of the Income Tax Act, 1961 (the Act). He opted for taxation under the new regime via section 115BAC(1A) and claimed a rebate of Rs 19,857/- under section 87A. The Central Processing Centre (CPC), Bengaluru, processed the return under section 143(1) and denied the rebate, raising a demand of Rs 15,820/-. The assessee's rectification application under section 154 was dismissed by the Assessing Officer (AO), leading to an appeal before the Commissioner of Income Tax (Appeals), Bhubaneswar [Ld. CIT(A)], which allowed the rebate claim.
Key Facts
- The assessee filed the original return on 20.06.2024 declaring total income Rs 4,32,280/- (STCG Rs 2,12,152/-) and claimed section 87A rebate of Rs 19,857/-
- CPC, Bengaluru, issued intimation under section 143(1) denying rebate and raising demand Rs 15,820/- (para 5.4)
- Rectification application under section 154 filed by assessee was dismissed by AO
- Ld. CIT(A), Bhubaneswar, passed order dated 20.01.2026 allowing rebate (para 2)
- Revenue filed appeal before ITAT Jaipur (ITA No.620/JPR/2026)
- Assessee filed revised return declaring total income Rs 4,65,440/- (STCG Rs 2,12,152/-) and claimed section 87A rebate of Rs 25,000/- (para 5.4, 5.16, 9)
- ITAT Ahmedabad in Jayshreeben Jayantibhai Palsana vs. ITO (ITA No.1014/Ahd/2025) held identically that rebate is allowable on STCG under new regime
- Bombay High Court in Chamber of Tax Consultants vs. Director General of Income Tax (Systems) [TS-5026-HC-2025(Bombay)-O] dated 24.01.2025 held CPC's system-driven denial cannot override statutory rights
- CIT(A)-1, Nagpur, in Avni Milanbhai Manya vs. ITO (order dated 27.05.2025) allowed rebate on identical facts
Procedural History
- 20.06.2024: Assessee filed original return of income for AY 2024-25
- [Date unspecified]: CPC, Bengaluru, issued intimation under section 143(1) denying section 87A rebate of Rs 19,857/- and raising demand Rs 15,820/- (para 5.4)
- [Date unspecified]: Assessee filed rectification application under section 154 (dismissed by AO)
- 20.01.2026: Ld. CIT(A), Bhubaneswar, passed order allowing section 87A rebate (para 2)
- 27.05.2025: CIT(A)-1, Nagpur, passed order in Avni Milanbhai Manya vs. ITO allowing rebate on identical facts (para 5.16)
- 01.10.2026: Date of hearing before ITAT Jaipur
- 06.10.2026: Date of pronouncement of judgment (para 9)
Relief Sought
The Revenue sought to set aside the order of Ld. CIT(A), Bhubaneswar, dated 20.01.2026, which had allowed the assessee's claim of section 87A rebate on STCG income.
The Legal Issue
The central question was whether an assessee who has opted for taxation under section 115BAC(1A) of the Income Tax Act, 1961, with total income not exceeding Rs 7,00,000/-, is eligible to claim rebate under section 87A on tax payable arising from short-term capital gains chargeable at special rates under section 111A, when no express exclusion exists in section 87A or section 111A for such income.
Arguments Presented
For the Appellant (Revenue)
The Revenue relied primarily on the Explanatory Memorandum to the Finance Bill 2025, which clarified that rebate under section 87A is not available on tax arising from special rate incomes, including those under section 111A (para 5.14). It argued that section 112A(6) contains an express bar on section 87A rebate for long-term capital gains, and by analogy, a similar restriction should be read into section 87A for STCG under section 111A. The Revenue contended that the CPC's system-driven denial of rebate was correct and that the Ld. CIT(A), Bhubaneswar, erred in allowing the claim by disregarding automated processing logic.
For the Respondent (Assessee)
The assessee argued that the amended section 87A (post Finance Act 2023, effective AY 2024-25) contains no express exclusion for income chargeable under section 111A (para 5.6, 5.11). He emphasized that the legislature inserted an express bar for long-term capital gains in section 112A(6) but omitted any corresponding clause in section 111A, indicating legislative intent to allow rebate on STCG. The assessee relied on the plain language of the statute, the prospective nature of the restriction proposed in Finance Bill 2025 (effective AY 2026-27), and coordinate bench decisions (ITAT Ahmedabad, Bombay High Court, CIT(A) Nagpur) holding that section 87A applies to total tax computed without distinguishing between normal and special rate income when the total income threshold is met (para 5.12, 5.13).
The Court's Analysis
The Tribunal began by noting that section 87A, as amended by the Finance Act 2023 applicable to AY 2024-25, provides a rebate where total income does not exceed Rs 7,00,000/- and is chargeable under section 115BAC(1A) (para 5.6). It observed that the statute draws no distinction between normal income and income chargeable at special rates under Chapter XII (such as sections 111A, 112, 112A) and contains no express exclusion for tax arising under section 111A (para 5.7). The Tribunal highlighted the legislative contrast: section 112A(6) expressly bars section 87A rebate for long-term capital gains, while section 111A contains no such provision (para 5.9, 5.11).
"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 for two reasons: first, the Finance Bill 2025 itself proposes to insert new restrictions on section 87A rebate w.e.f. AY 2026-27, implying that the existing law (applicable to AY 2024-25) contains no such restriction (para 5.14); second, the Explanatory Memorandum is merely a tool of interpretation and cannot override the plain language of the statute (para 5.14). It further held that section 87A, being an independent rebate provision under Chapter VIII of the Act, is not overridden by the overriding clause in section 115BAC(1A) (Chapter XII) unless section 87A itself provides for exclusion, which it does not in the present case (para 5.12, 5.13).
The Tribunal affirmed that 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 of Rs 7,00,000/- is met (para 5.12). It relied on the Bombay High Court's judgment in Chamber of Tax Consultants vs. Director General of Income Tax (Systems) to hold that the CPC's utility or system configuration cannot override statutory rights, and each case must be adjudicated on its merits (para 5.15). Applying this principle, the Tribunal found the assessee to be a resident individual with total income Rs 4,65,440/- (< Rs 7,00,000/-) who had opted for section 115BAC(1A), with STCG taxable under section 111A, and thus eligible for section 87A rebate.
The Verdict
Revenue's appeal challenging the CIT(A) Bhubaneswar order allowing section 87A rebate on STCG income was dismissed. The assessee was held eligible for section 87A rebate of Rs 25,000/- on his revised return income. The AO is directed to allow this rebate and recompute tax liability, thereby deleting the demand of Rs 15,820/- raised in the CPC intimation under section 143(1). Refund, if any, shall be granted in accordance with law.
What This Means For Similar Cases
Rebate Eligibility Depends on Express Statutory Bars
Practitioners must verify whether a tax benefit provision contains an express statutory exclusion before denying benefits based on income character. The Tribunal emphasized that where the legislature intends to restrict a benefit (as it did for LTCG via section 112A(6)), it does so expressly; absence of such clause in section 111A mandates allowing rebate on STCG under the new tax regime.
Prospective Amendments Do Not Retroactively Restrict Current Law
The Finance Bill 2025's proposed restriction on section 87A rebate for special rate incomes (effective AY 2026-27) confirms that no such restriction existed for AY 2024-25. Quasi-judicial authorities cannot rely on explanatory memoranda of future bills to deny current benefits; only the substantive law as applicable to the relevant assessment year governs.
System-Driven Denials Cannot Override Statutory Rights
The CPC's automated denial of rebate based on system logic was rejected as contrary to statutory principles. Tribunals and appellate authorities must examine tax benefit claims on their merits per the statutory framework, disregarding automated processing outcomes that conflict with express provisions (relying on Bombay High Court's ratio in Chamber of Tax Consultants case).
Consistency with Coordinate Bench Decisions
While not binding, decisions from coordinate benches (ITAT Ahmedabad, CIT(A) Nagpur) on identical factual scenarios strengthen the assessee's position. Practitioners should cite such persuasive precedents when challenging system-generated denials of tax benefits.
