The uncertainty regarding the eligibility of small taxpayers’ special rate income—particularly short-term capital gains tax—for the rebate under Section 87A in the new tax regime has resurfaced. The recent ruling by the ITAT-Ahmedabad (Income Tax Appellate Tribunal) has ignited further discussion, opening a pathway for such taxpayers to assert a rebate while filing their returns for the financial year 2024-25 (assessment year 2025-26).

Understanding the Context of the Finance Act

According to the Finance Act for FY 2025-26, the 87A rebate on incomes up to Rs 12 lakh (an increase from Rs 7 lakh) under the new tax regime is not applicable to special rate incomes, such as short-term capital gains from the sale of equity shares or equity-oriented mutual fund units. However, the case at hand revolves around the prior financial year.

The Case of Jayshreeben Jayantibhai Palsana

In this case, taxpayer Jayshreeben Jayantibhai Palsana declared a total income of Rs 4,27,635 for FY 2023-24 (AY 2024-25), which included short-term capital gains under Section 111A amounting to Rs 3,79,559, long-term capital gains of Rs 38,840 under Section 112A, and income from other sources of Rs 9,236. After revising her return before December 31, 2024, her total tax payable was calculated at Rs 13,320. Since her total income fell below Rs 7 lakh, she claimed a rebate of Rs 13,320 under Section 87A, which permits up to Rs 25,000 on incomes of up to Rs 7 lakh.

Despite this, the Income Department and the Commissioner of Income Tax – Appeals (CIT-A) denied her claim. Motived by these denials, Palsana approached the ITAT-Ahmedabad, which ultimately overruled the Bengaluru CPC and CIT(A) decisions, granting her favor.

Key Highlights of the ITAT-Ahmedabad Order

The tribunal noted that:

  1. Proposed Legislative Changes: The Finance Bill 2025 intends to introduce new restrictions on the rebate under Section 87A effective from AY 2026-27. This indicates that the existing law applicable to AY 2024-25 does not contain such a restriction.
  2. Statutory Interpretation: The tribunal emphasized that the explanatory memorandum cannot supersede the clear language of the statute. Therefore, under the unamended provision applicable for AY 2024-25, a rebate under Section 87A should not be denied simply because tax stems from Section 111A.
  3. Legislative Intent: Additionally, there was no stipulation within either Section 87A or Section 111A that should restrict the rebate based on short-term capital gains for financial years preceding FY 2025-26.

Implications for Taxpayers

Although this ruling specifically pertains to Palsana’s case in FY 2023-24 (AY 2024-25), it raises questions about whether other taxpayers with income below Rs 7 lakh (plus a standard deduction of Rs 75,000 for salaried individuals) can leverage this decision to claim Section 87A rebate on their short-term capital gains component for the financial year 2024-25.

Tax professionals have divergent perspectives on the matter. As SR Patnaik, Partner at Cyril Amarchand Mangaldas, pointed out, the Ahmedabad ITAT’s ruling clarifies that neither Section 87A nor Section 111A bars the rebate. The absence of explicit exclusion for short-term capital gains under Section 111A is significant and should favor the taxpayer.

Conversely, Abhishek Soni, Founder of TaxWin, cautions that this ruling is specific to the taxpayer involved. Anyone else seeking similar benefits would need to appeal, and assistance would only follow if the new ruling is in their favor.

The ruling from ITAT is encouraging for taxpayers but does not suggest a straightforward path ahead in claiming rebates on STCG for FY 2024-25 (AY 2025-26). Ankit Jain, Partner at Ved Jain and Associates, indicated that the disconnect between the legal interpretation by judicial authorities and the automated denials from the Central Processing Centre (CPC) raises the likelihood of disputes and subsequent appeals.

High volumes of cases may continue to arise, prompting taxpayers and the department to escalate their appeals to higher judicial forums, including High Courts and potentially the Supreme Court. This judicial decision indeed fortifies taxpayers’ legal grounds in disputing rebate denials.

Despite resistance from the income tax department, which Soni notes may not pursue appeals in cases involving small amounts, the ramifications of this ruling will likely resonate through various jurisdictions, allowing affected taxpayers a stronger standing to challenge adverse decisions.

In conclusion, while the ITAT-Ahmedabad ruling provides some clarity, it also underscores that ongoing disputes are probable until clearer administrative guidelines are established. Affected taxpayers are encouraged to explore their legal avenues while remaining informed of potential implications from this pivotal decision.

Radhika Goyal is Author of Taxconcept Gurugram head office, for deeply reported tax, gst and income tax articles on issues that matter. He splits her time between New Delhi and Bengaluru, and has worked as a reporter, a podcaster and an editor for publications across India.