In a highly anticipated final judgment, the Bombay High Court gave its order on 24 January, 2025, that the Income Tax Department is wrong in arbitrary modification of utility software for denial of Section 87A tax rebate on special rate incomes, post July 5, 2024. The HC directed the Income Tax Department to fix the ITR utility software and accept all Section 87A tax rebate claims. Eligible taxpayers who have an taxable income up to Rs 5 lakh under the old tax regime or up to Rs 7 lakh under the new tax regime can claim Section 87A tax rebate to bring their tax liability to nil.
The Bombay High Court also criticised the Income Tax Department for preventing taxpayers from claiming benefit of Section 87A tax rebate on special rate incomes. The HC said no taxpayer can be prevented from claiming any benefit outlined in the Income Tax Act, 1961. If the tax department has any issue with the claim of the said benefit by the taxpayer, it should be taken for scrutiny assessment under Section 143(1)/143(3). It cannot happen that the tax department prevents the taxpayer from claiming any benefit under the law because the department “thinks” it’s incorrect.
The Bombay High Court cited a classic analogy in this regard. “This is almost like some court registry declining to accept a filing because, in the opinion of the filing clerk, the suitor’s suit was untenable on merits.”
On whether to honour such Section 87A tax rebate claims or not, the Bombay High Court said to use Section 143(1) or 143(3) scrutiny assessment provisions if the tax department wants. The HC said, the Section 87A tax rebate in this respective situation is something that needs to be studied and analysed further; hence the reason why the utility should not be the gate stopper for such claims. The Bombay High Court said judicial interpretation and process must be followed to interpret the Section 87A tax rebate law, something which administrative tax officials can’t do.
Read below to find out why the Income Tax Department thinks Section 87A tax rebate must be denied on chapter 12 (special rate) incomes and how the Bombay High Court challenged this rationale and reversed this thinking. Experts say despite the HC holding the tax department’s actions as unconstitutional the issue of claiming Section 87A is still far from over. Know why:
ASG of India says there are “two types” of total income and 87A tax rebate can’t be given on chapter 12 income
While in common parlance the term total means a singular figure showing summation of all the incomes, but the defence argument of the Additional Solicitor General of India (ASG) mentions there are two types of total income:
- Total income under clause 1A of section 115BAC, and
- Total income under chapter 12.
The ASG said before the Bombay High Court, “Two things are therefore apparent and evident from a plain reading of clause 1A of Section 115BAC:
- Total income is one which is scattered over various provisions of Chapter 12 and what is taken into reckoning for reduced rates of taxation are only such categories of total income which would fall under clause (1A) of Section 115BAC, excluding every other total income falling under other Sections of Chapter 12.
- Once this is clear, the second inference in natural and consequential. Only such of those total income which falls under clause (1A) will get the benefit of reduced rate of taxation while such of those total income falling under other provisions of Chapter 12 will continue to be taxed at the specified rates referred to in those respective provisions.
- Even though both sets of income, one falling under clause (1A) and the rest falling under other provisions of Chapter 12 would constitute elements of total income, the segregation and treatment for such total income falling under clause (1A) and rest of the provisions of Chapter 12 are distinct and different.
The ASG said before the Bombay High Court, “It is clear that the benefit of rebate of Rs 25,000 on a total income of Rs 7 lakh would only mean such total income which falls under clause (1A) of Section 115BAC and would not include total income falling under other provisions of Chapter 12, namely Sections 110-115BBJ.”
Chapter 12 incomes refers to various special rates of income like short-term capital gains (STCG), etc.
Bombay HC rejects ASG’s claim about law being clear about denial of 87A tax rebate on special rate incomes
While the Additional Solicitor General of India (ASG) argued for four hours about how the law is very “crystal clear” about denial of Section 87A tax rebate on special rate incomes like short-term capital gains, the Bombay High Court rejected this argument.
The Bombay High Court says: “In our view, after hearing the arguments of the learned senior counsel and the learned ASG, we cannot say that the provisions of the Act are so crystal clear as to arrive at a definite conclusion that a rebate under Section 87A cannot be granted from the tax computed under other provisions of Chapter XII. Though the learned senior counsel for the petitioners and the learned ASG argued the matter for four hours each, we were unconvinced that either of the contentions was not even debatable or would admit to only one conclusion.”
The Bombay HC said: “The facility to raise a claim, which was very much available till 5 July 2024, could not have been abruptly discontinued simply because the revenue officials, acting in their administrative capacities, felt that such a claim was untenable.”
Putting restriction on the ITR utility for denial of Section 87A tax rebate on special rate income is unconstitutional
The Bombay High Court asked the tax department when there are sufficient safeguards in the Act which checks for wrong claims, then why did the tax department make changes in the utility level to prevent the supposed wrongful claims of Section 87A tax rebate.
The Bombay High Court said: “Therefore, looking at the scheme of the Act, restraining/prohibiting an assessee from making a bona fide claim based on his reading of the said provisions of the Act would be unfair and arbitrary. In any event, it cannot be left to the utility to determine whether a claim is legal and valid and, therefore, should be allowed to be raised at all.
“In our view, any such attempt which restricts or prohibits an assessee from making a particular claim concerning the determination of income and/or tax payable thereon would be contrary to the scheme of the Act and would also be unconstitutional since by the said prohibition or restriction an assessee is prohibited not only from making a claim, but would also be denied his right to access justice by not permitting him to test such claim by the process provided under the Act i.e., assessment, appeal, etc. Any such restriction or prohibition is not permissible and would be unconstitutional.”
Bombay High Court says we need to analyse the term ‘total income’ to judge whether 87A tax rebate needs to be given
The Bombay High Court says, “In our opinion, whether a rebate under Section 87A can be granted only from the tax arrived at under Section 115BAC or also from the tax computed under other provisions of Chapter 12 is a highly debatable and arguable issue. This would require interpreting various provisions of Chapter 12 and Section 87A of the Act.
The Bombay High Court said this present case (section 87A tax rebate) is not a case where the tax department can give a blanket denial. “….It is a case where the assessee and revenue should enter the arena, fight with equal might, and leave it to the Umpire to decide who is right and the winner of the game,” said the Bombay High Court.
The HC said Section 139D, read with Rule 12, does not empower the authorities to design the form on the basis of their reading of law or provisions which debar an assessee from making a claim at the threshold itself.
The Bombay High Court orders the tax department to continue to allow taxpayers claim Section 87A tax rebate
Rule is made absolute in terms of prayer clause (a) which reads as under:
(a) that this Hon’ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order directing the Respondents to modify the utilities for filing of the return of income under section 139 of the Act immediately, thereby allowing assessees to make a claim of rebate under Section 87A of the Act read with the proviso to Section 87A, in their return of income for the AY 2024-25 and subsequent years, including revised returns to be filed under Section 139(5) of the Act
“Since we have allowed prayer clause (a), prayer clause (b) does not survive, which deals with filing a manual return of income for claiming a rebate under Section 87A,” said the Bombay High Court.
Does this judgement mean you can now get Section 87A tax rebate on special rate incomes?
The Bombay High Court explained in its judgement:
- Therefore, it is not that an assessee can be debarred from making a claim in the return of income whether online or manual.
- We may, however, clarify that if any such claim is made, the revenue would certainly be free to examine the same as per the provisions of the Act. Both the revenue and the assessee have remedies under the Act for testing the validity of such a claim.
Source #ET
