On February 27, 2025, the Mumbai bench of the Commissioner of Income-tax (Appeals) (CIT(A)) delivered a landmark ruling in favor of allowing the Section 87A tax rebate on special rate incomes, including Short Term Capital Gains (STCG). This decision has significant implications for taxpayers who have faced disallowances of Section 87A rebates on such incomes since the Income Tax Department disabled the option to claim these rebates on its utility software starting July 5, 2024.
Background
Since July 5, 2024, the Income Tax Department had restricted the ability to claim Section 87A tax rebates on special rate incomes like STCG. Taxpayers who claimed these rebates in their Income Tax Returns (ITR) subsequently received tax demand notices. These taxpayers had the option to either pay the tax demand or challenge the decision in court. This recent ruling by the CIT(A) Mumbai provides a favorable outcome for taxpayers who chose to fight the disallowance.
Other Relevant Cases
There are at least two other CIT(A) cases in India—one in Gujarat and another in Delhi—that have also ruled in favor of allowing Section 87A tax rebates on STCG incomes. In the Gujarat case, the Assessing Officer (AO) has already issued an order giving effect to the ruling, allowing the rebate. The Delhi case is relatively new, but it is expected that the AO will similarly allow the rebate.
However, when the Chamber of Tax Consultants filed a case in the Bombay High Court regarding this issue, the court decided not to rule on whether the Section 87A rebate should be allowed on STCG incomes. Instead, the court chose to let individual cases come to court and be decided on a case-by-case basis. The court did, however, criticize tax officers for disabling the option to claim the Section 87A rebate on STCG incomes after July 5, 2024.
The Mumbai CIT(A) Case
The taxpayer in the Mumbai case filed ITR-3 for the Assessment Year (AY) 2024-25 (Financial Year (FY) 2023-24) on July 27, 2024, under the new tax regime. She declared a total taxable income of Rs 5,40,670, which included Rs 1,09,842 in STCG income. The Centralised Processing Centre (CPC) disallowed Rs 16,422 as a Section 87A tax rebate claim on STCG income and allowed only Rs 5,917 for other incomes. The taxpayer subsequently filed an appeal with the CIT(A) under the faceless assessment scheme, and the Mumbai bench was chosen to hear her case.
Legal Arguments
The taxpayer argued that Section 87A should not be interpreted in isolation but should be read in conjunction with Section 115BAC(1A). She contended that interpreting the proviso to Section 87A in isolation would render the interpretation ambiguous and impose undue hardship on many individual taxpayers. Section 115BAC, which provides a special tax regime, is part of Chapter XII of the Income Tax Act, which also includes provisions for special tax rates for specific categories of income, such as STCG under Section 111A and long-term capital gains under Sections 112A and 112.
The taxpayer further argued that the term “under” in the proviso to Section 87A should be interpreted as “directive” or “in accordance with,” implying that Section 87A must be read in strict alignment with the stipulations in Section 115BAC(1A). A broad interpretation of the proviso suggesting that only income chargeable at slab rates is covered would be legally unsound without distinguishing between total income and special income.
CIT(A) Judgment
The CIT(A) held that the taxpayer’s total income included Rs 1,09,842 of STCG under Section 111A and Rs 12,853 of long-term capital gains (LTCG) under Section 112A. The taxpayer had claimed a rebate of Rs 22,339 on the STCG income, but the AO and CPC had restricted the rebate to Rs 5,917. The CIT(A) noted that Section 87A provides for a rebate of Income Tax in certain cases and that the restriction on deductions under Chapter VIA does not apply to Section 87A, which is part of Chapter VIII. Therefore, the CIT(A) ruled that the taxpayer was entitled to claim the rebate under Section 87A and directed the AO to allow the deduction accordingly.
Expert Opinions
An tax expert highlighted that in at least two appeal orders, the CIT(A) had allowed the tax rebate under Section 87A on special rate incomes like STCG. He emphasized that in the absence of any specific provision denying the rebate, there is no lawful justification to disallow it. Chartered Accountant Shivam Sharma advised taxpayers to file appeals with the CIT(A) until higher courts provide a definitive judgment.
Key Legal Takeaways
Experts have identified several key legal takeaways from this judgment:
- The amendments to Section 87A and Section 115BAC(1A) by the Finance Act, 2023, were clear that taxpayers choosing the new tax regime could claim rebates on total income up to Rs 7 lakh. The CIT(A) agreed that the income tax authorities must follow legislative intent strictly and not impose unilateral interpretations.
- The Bombay High Court’s ruling in a PIL challenging the Income Tax Department’s restrictions on rebate claims was a significant win for taxpayers. The court emphasized that taxpayers have a statutory right to claim rebates, and the Department cannot impose arbitrary restrictions.
- The CIT(A) extensively examined the provisions of Chapter XII and found no exclusion for incomes taxed at special rates. This order provides hope for middle-class taxpayers, but the issue remains contentious and may require further resolution by the CBDT.
- The order is justified and positive for taxpayers. The law does not bar Section 87A rebates on STCG, and the CPC erred in not allowing the rebate.
- The judgment confirms that taxpayers with STCG under Section 111A can claim rebates under Section 87A if their total income is below the prescribed threshold. While this ruling is specific to this case, it sets a strong precedent for other taxpayers in similar situations.
Conclusion
The CIT(A) Mumbai’s ruling is a significant victory for taxpayers seeking Section 87A rebates on special rate incomes. While this order does not automatically apply to all taxpayers, it provides a compelling legal argument for those facing similar disallowances. Taxpayers should be aware that the issue remains contentious and may involve further legal challenges.
Source #ET
