The Income Tax Appellate Tribunal, Ahmedabad (SMC Bench), in Jayshreeben Jayantibhai Palsana v. Income-tax Officer (ITA No. 1014/Ahd/2025), examined the eligibility of a resident individual assessee to claim rebate under Section 87A of the Income-tax Act, 1961, against tax payable on short-term capital gains taxable under Section 111A, where the assessee had opted for the new tax regime under Section 115BAC(1A).

The assessee filed a revised return for Assessment Year 2024–25 declaring total income below ₹7,00,000 and exercised the option to be governed by Section 115BAC(1A). The tax liability arose solely on account of short-term capital gains taxable at 15% under Section 111A. The assessee claimed rebate under Section 87A in terms of the first proviso inserted by the Finance Act, 2023. However, the Centralised Processing Centre disallowed the rebate while processing the return under Section 143(1), resulting in a demand, which was upheld by the CIT(A).

The CIT(A) denied the rebate primarily on the ground that Section 115BAC(1A) is subject to the provisions of Chapter XII and that special rate incomes such as those taxable under Section 111A cannot be reduced by rebate under Section 87A. Reliance was placed on the Explanatory Memorandum to the Finance Bill, 2025, to infer legislative intent.

Upon appeal, the Tribunal held that the amended first proviso to Section 87A grants rebate to a resident individual whose total income does not exceed ₹7,00,000 and who is chargeable to tax under Section 115BAC(1A), without making any distinction between normal income and income chargeable at special rates. The Tribunal noted that while Section 112A(6) expressly restricts the availability of rebate under Section 87A in respect of certain long-term capital gains, no such restriction exists either in Section 111A or in Section 87A.

The Tribunal further held that the phrase “subject to the provisions of this Chapter” in Section 115BAC(1A) governs only the computation of tax rates under Chapter XII and does not curtail the applicability of rebate provisions contained in Chapter VIII, including Section 87A. It was observed that Section 87A operates after computation of tax and applies unless expressly barred by statute.

The Tribunal also held that reliance on the Finance Bill, 2025 was misplaced, as the proposed amendment restricting rebate on special rate incomes is prospective and applicable only from Assessment Year 2026–27, thereby reinforcing that no such restriction existed for the year under consideration. Reference was made to the Bombay High Court decision in The Chamber of Tax Consultants v. Director General of Income Tax (Systems), wherein it was held that system-driven denial cannot override statutory rights and that such claims must be adjudicated on merits.

Accordingly, the Tribunal concluded that the assessee was eligible for rebate under Section 87A notwithstanding the inclusion of short-term capital gains taxable under Section 111A. The Assessing Officer was directed to allow the rebate, delete the demand raised, and grant consequential relief. The appeal was allowed.

Source- https://itat.gov.in/public/files/upload/1754978689-2p4cnk-1-TO.pdf

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