Section 87A tax rebate on STCG income allowed by CIT (Appeals); Know how this legal battle was won
The Mumbai bench of Commissioner of Income-tax (Appeals) has decided in the favour of Section 87A tax rebate on special rate incomes. The CIT (A) Mumbai held on February 27, 2025 that Section 87A tax rebate is available on special rate income like Short Term Capital Gains (STCG) and accordingly issued instructions to the assessing officer (AO) to allow it in the case under its consideration.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} To recall, since July 5, 2024 the Income Tax Department had disabled the option on the utility software to claim Section 87A tax rebate on special rate income like STCG. For those who could claim Section 87A tax rebate on STCG in their ITR, were later given a tax demand notice. Once you get this notice, you could either give up and pay the tax demand or fight it in court like this taxpayer did.
There are at least two CIT (A) cases in India (Gujarat and Delhi) which have given favourable orders with respect to Section 87A tax rebate on STCG income. In one such case (Gujarat) the AO has already issued the order giving effect (OGE), meaning allowing 87A rebate on STCG. The other case is still new and it is expected the AO gives OGE to this one as well.
However, mind you when the Chamber of Tax Consultants filed a case in the Bombay High Court about this very issue, the court said they will not decide whether 87A rebate is to be given or not on STCG income. The court decided its best to let the individual issues come to court and then on a case to case basis it be decided by the judiciary officials. The court however criticised the tax officers who in their administrative capacities disabled the option to claim 87A rebate on STCG post July 5, 2024.
Read below to learn how this taxpayer put up a fight without caving into the tax department’s demand and ultimately won the battle. The legal arguments and analogies accepted by CIT (A) can help your own Section 87A case.
Artificial Intelligence(AI)
Java Programming with ChatGPT: Learn using Generative AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Basics of Generative AI: Unveiling Tomorrows Innovations
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
Generative AI for Dynamic Java Web Applications with ChatGPT
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Performance Marketing for eCommerce Brands
By - Zafer Mukeri, Founder- Inara Marketers
Artificial Intelligence(AI)
Mastering C++ Fundamentals with Generative AI: A Hands-On
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
A2Z Of Money
By - elearnmarkets, Financial Education by StockEdge
Artificial Intelligence(AI)
Master in Python Language Quickly Using the ChatGPT Open AI
By - Metla Sudha Sekhar, IT Specialist and Developer
Office Productivity
Zero to Hero in Microsoft Excel: Complete Excel guide 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Artificial Intelligence(AI)
AI and Analytics based Business Strategy
By - Tanusree De, Managing Director- Accenture Technology Lead, Trustworthy AI Center of Excellence: ATCI
Technology
Certified Jenkins Professional
By - Vskills, India's Leading Certification Body
Astrology
Vastu Shastra Course
By - Sachenkumar Rai, Vastu Shashtri
Data Science
SQL for Data Science along with Data Analytics and Data Visualization
By - Metla Sudha Sekhar, IT Specialist and Developer
Web Development
A Comprehensive ASP.NET Core MVC 6 Project Guide for 2024
By - Metla Sudha Sekhar, IT Specialist and Developer
Office Productivity
Mastering Microsoft Office: Word, Excel, PowerPoint, and 365
By - Metla Sudha Sekhar, IT Specialist and Developer
Marketing
Digital marketing - Wordpress Website Development
By - Shraddha Somani, Digital Marketing Trainer, Consultant, Strategiest and Subject Matter expert
Web Development
Mastering Full Stack Development: From Frontend to Backend Excellence
By - Metla Sudha Sekhar, IT Specialist and Developer
Finance
Financial Literacy i.e Lets Crack the Billionaire Code
By - CA Rahul Gupta, CA with 10+ years of experience and Accounting Educator
Leadership
Business Storytelling Masterclass
By - Ameen Haque, Founder of Storywallahs
Marketing
Future of Marketing & Branding Masterclass
By - Dr. David Aaker, Professor Emeritus at the Haas School of Business, UC Berkeley, Author | Speaker | Thought Leader | Branding Consultant
Strategy
ESG and Business Sustainability Strategy
By - Vipul Arora, Partner, ESG & Climate Solutions at Sattva Consulting Author I Speaker I Thought Leader
How did this Section 87A battle between the taxpayer and tax department start?
According to the order of the CIT (A) dated February 27, 2025 here are the details:The taxpayer filed ITR-3 for AY 2024-25 (FY 2023-24) on July 27, 2024 under the new tax regime. She declared her total taxable income to be Rs 5,40,670 which included Rs 1,09,842 short term capital gains (STCG) income. This ITR was processed on September 19, 2024.The Centralised Processing Centre (CPC) disallowed Rs 16,422 as Section 87A tax rebate claim on STCG income and allowed only Rs 5,917 with respect to other incomes.She filed an appeal with CIT (A) and under the faceless assessment scheme. CIT (A) Mumbai was chosen by the system to hear her case.
Legal arguments by this taxpayer which influenced CIT (A)’s judgement about Section 87A tax rebate on STCG
According to the order of CIT (A) here’s what legal arguments was made by the taxpayer: Section 87A should not be read in isolation but should be read with Section 115 BAC (1A)
Interpreting the proviso to Section 87A in isolation, without considering Section 115 BAC (1A), renders the interpretation ambiguous and imposes undue hardship on many Individual taxpayers in India. Section 115BAC, which provides a special tax regime, is contained within Chapter XII: Determination of Tax in Certain Special Cases. Chapter XII also encompasses other provisions prescribing special tax rates for specific categories of income, including STCG under Section 111A, long term capital gains under Section 112A and 112,....
For the above legal argument about Section 87A tax rebate not to be read in isolation, the taxpayer gave the following reasoning:
The term “under” in the Proviso to Section 87A has been legally defined as “directive” or “in accordance with,” implying that Section 87A must be read in strict alignment with the stipulations in Section 115BAC (1A) concerning the chargeability of tax on total income.Thus, a liberal interpretation of the Proviso to Section 87A requires that its scope be understood in direct connection with Section 115BAC (1A). Interpreting the Proviso broadly, to suggest that only income chargeable at slab rates is covered by the Proviso, would be legally unsound without drawing a clear distinction between total income and special income."This order by CIT (A) (as discussed here) provides further clarity that rebate under Section 87A on special rates income such as short term capital gains is valid," says Kunal Savani, Partner, Cyril Amarchand Mangaldas.
Section 115BAC (1A) has an overriding effect on the entire Income Tax Act, 1961
Section 115BAC (1A) states that notwithstanding anything contained in this Act but subject to the provisions of this Chapter, the income tax payable in respect of the total income of a person, being an individual….There are four limbs in Section 115BAC. The first limb starts with a “Non-obstante clause” and a “Subordination clause”, and ends with a comma (,). The first limb of Section 115BAC (1A) overrides all the provisions of Income tax but it is made subject to the provisions of Chapter XII. (Chapter XII contains provisions for the taxability of special rate income like STCG, LTCG, etc.
The comma separates the first limb from the other provisions of this clause. Consequently, the primary interpretation of Section 115BAC(1A) is that it has an overriding effect over the Income Tax Act. However, it must strictly adhere to the provisions of Chapter XII wherever applicable, and those provisions will form an integral part of Section 115BAC (1A).
Whenever a provision contains a “Subordinate clause” indicating that it is subject to the other provisions of this chapter, that provision does not constitute an independent provision. Instead, it must be interpreted in conjunction with the other provisions to give full effect to the provisions that contain the “Subordinate clause”.
Case precedent cited for the above:
Supreme Court case: South India Corporation (P) Ltd vs Secretary, Board of Revenue Trivandrum and Another 1964.Supreme Court case: Union of India vs Brigadier P.S. Gill 2012CESTAT: KEI Industries vs Commissioner, Service Tax AppealThere is only one total income and not two total incomes
The second limb, and Section 87A talks about the total income. Total income is defined in Section 2(45) of the Income Tax Act and it means total amount of income referred to in Section 5. The total income under Section 115BAC(1A) includes all five heads of income, including capital gains. If the legislative intent were to deny the rebate on portions of total income comprising special income, such as that chargeable under Section 111A and 112, these exclusions would have been expressly stated in the provisions.
Law did not expressly state disallowance of Section 87A tax rebate on STCG income
The rebate under Section 87A is explicitly disallowed on long-term capital gains under Section 112A due to specific provisions enacted by the legislature… However, no similar legislative intent is evident for disallowing the rebate under Section 87A on income such as short-term capital gains under Section 111A or long term capital gains under Section 112, nor does it appear to have been intended by Parliament.
Government made no announcement about limiting benefit given
The taxpayer said: “It is well established that when governments worldwide limit benefits previously available to citizens, they typically make a formal announcement in public or in parliament explaining the rationale behind the change.” The taxpayer referred to the Finance Minister Nirmala Sitharaman Budget 2024 speech and said there is no indication from the FM that rebate is available only on income taxable at slab rates under Section 115 BAC (1A). “On the contrary, the literal interpretation and intent were to provide a higher rebate benefit to those choosing the new tax regime.
CIT (A)’s judgement about Section 87A tax rebate on STCG income
CIT (A) said: “The submission made is considered. It is seen from the return that the total income of the appellant, comprised of Rs 1,09,842 of STCG u/s 111A and Rs 12,853 of LTCG u/s 112A. The appellant had claimed the rebate of Rs 22, 339 on such STCG income of Rs 1,09,840. However, the AO, CPC had restricted the rebate to Rs 5,917. Before adjudicating the issue it will be apposite to refer here Section 87A which provides for allowance of rebate of Income Tax in case of certain individuals.”“The restriction on income from LTCG and STCG is that the deductions under Chapter VIA will not be allowed on such income. Since Section 87A is incorporated in Chapter VIII the above provision is not applicable in this case. Thus, a composite reading of Section 87A read with Section 111A and 112A does not bar the appellant from claiming rebate u/s 87A. In view of the above discussion and also for the fact that the appellant has continued the option exercised u/s 115BAC, it is held that the AO, CPC had erred in restricting the rebate u/s 87A. The AO is directed to allow the deduction u/s 87A as per provisions. These grounds of appeal are consequently allowed for statistical purpose.”
Chartered Accountant Mayank Mohanka and author of the book Numbers, Taxes & An Amazing Love Story, says "In atleast two appeal orders, recently passed by CIT(appeals), which we have come across, the CIT(appeals) had allowed the tax rebate under section 87A on special rate income like short term capital gain under section 111A. The appellate authority had agreed that in the absence of any specific provision expressly denying 87A rebate, like subsection (6) of section 112A in case of long term capital gains on shares, there is no lawful justification to deny 87A rebate on such special rate incomes like short term capital gain income under section 112A. The CPC interpretation of proviso to section 87A to restrict 87A rebate to only normal rate income in section 115BAC(1A) is erroneous. Thus, the assesses in order to get the required 87A rebate benefit now may file an appeal before the CIT(Appeals) against their respective 143(1)/154 orders for financial years upto FY 2024-25."
Chartered Accountant Shivam Sharma, says, "All the Assessee's and Tax Practitioners is that they must follow the Appeal procedure and must file Appeal with CIT(A). Till the time that any judgment comes from any Hon'ble High Court or by Hon'ble Supreme Court, it is better to file an Appeal with CIT(A) with Simple and Straightforward contentions, that where the Legislative Intent as per Amendments carried on in Finance Act was never to disallow the rebate on tax calculations made under Section 111A (STCG), Section 112 (LTCG), the unilateral disallowance by Legislative Policy Implementation Agency i.e. The tax department is unjust and inequitable in the spirit of law and the Constitution of India."
CIT (A) orderSource: CIT (A) orderWhat might be the key legal takeaways from this judgement
ET Wealth Online has asked various experts about what might the key legal takeaways from this judgement, here's what they said: Chartered Accountant Akhil Aggarwal, partner, A A S S & Associates: The amendments that were made to Section 87A as well as Section 115BAC(1A) of Income Tax Act, 1961 by the Finance Act, 2023 were very clear and unambiguous that one who exercise the option to choose New Tax regime for Tax Calculations, the rebate will be allowed tax payable on Total Income of upto 7 Lakh Rupees.
The income tax department, post 5th July, interpreted the proviso to 87A that the income that falls under the slab rate taxability as given in 115BAC(1A) is only eligible for rebate under 87A, and rebate is not allowed on any other Income chargeable as per Chapter XII of Income Tax Act.
The CIT(A) in the proceedings of our appeal has relatively agreed on our contentions and agreed that in conjecture reading of Section 87A with Section 111A, that nowhere the legislation has outlined in either of the provisions that rebate on tax calculated as per Section 111A will not be allowed to assessee, contrary to clearly stated by the Legislation in Section 112A of Income Tax Act, that no rebate will be allowed for tax calculations made under Section 112A. Hence, the CIT(A) agreed that the income tax authorities are bound to strictly follow the Legislative Intent and not to draw unilateral interpretations.
Kunal Savani, Partner, Cyril Amarchand Mangaldas: The recent ruling by the Bombay High Court in a PIL challenging the Income Tax Department’s restrictions on claiming rebates on its software utility for special rates income, under Section 87A has been a significant win for taxpayers. The Court found that the Department's limitations on rebate claims for certain income types, were arbitrary and unfair. It emphasized that taxpayers have a statutory right to claim rebates on their income of choice, and the Department cannot impose restrictions on such claims. While the Court’s decision validated the right of taxpayers to claim the Section 87A rebate on all income types, it also made it clear that these claims will still be subject to individual scrutiny by the Department.
A strict interpretation of tax laws may have contributed to solve the ambiguity surrounding the eligibility of special rate incomes for claim of rebates under Section 87A. While the benefit of the rebate has always been available to taxpayers, the question of whether it applies to special rates income, such as capital gains, has been a point of contention. This order has decisively addressed this issue, offering clear guidance on how the provisions should be interpreted. By providing references to budget speeches, the order has further clarified the eligibility criteria, particularly for capital gains.
Rashi Khanna, Associate Partner, DMD Advocates: Given the recent trend wherein rebate claimed under section 87A of the I.T. Act, on special incomes such as short term and long term capital gains is being increasingly denied by the ITD, this order definitely brings a ray of hope for the middle class taxpayers of our country. The CIT(A) has extensively examined the provisions of Chapter XII of the I.T. Act and has given a very elaborate and convincing finding in favour of the taxpayers.
On a conjoint reading of Sections 87A and 115BAC of the Income Tax Act, 1961 it may be seen that there is no exclusion carved out for incomes taxed at special rates, such as STCG/LTCG and therefore, in absence of specific provision / clarification by CBDT / judicial precedent, it is unfair on part of the ITD to prevent the taxpayers from claiming this benefit. This position has also been accepted by the Bombay High Court in a PIL filed by the Chamber of Tax Consultants challenging the modification in utility portal with effect from July 5, 2024 which unilaterally disabled assessees from claiming rebate under section 87A. The High Court though has not ruled on the allowability of the rebate in respect of special incomes and has only observed that allowability of rebate under section 87A in respect of special income is a highly contentious issue and that the ITD cannot modify the utility and prevent the taxpayers from even making this claim.
Be that as it may, it would be slightly far-fetched to assume that the order passed by the CIT(A) will provide a quietus on the issue. The dispute is far from over. The taxpayers, however, can use this order to demonstrate that divergent views are present even within the Revenue Officers.
While the taxpayers can most definitely claim the rebate but they should also be alive to the fact that is a contentious issue and may take some time to settle and may involve a cost that could even exceed the rebate claimed. Therefore, commerce chambers and NGOs should consider filing representation before the CBDT requesting for a speedy resolution of the issue. The CBDT should also not take this as an ego tussle and should act for the greater good of middle class taxpayers.
Chartered Accountant Ashish Niraj, Partner A S N & Company: The order of appeal passed by the Assistant Commissioner Appeal is very much justified. Order is Positive from Assesse’s point of view as Rebate under section 87A is allowed through Chapter VIII. If we read Section 87A Rebate along with Section 111A and 112A , law does not bar 87A Rebate on Short Term Capital Gains. There is some lack of clarity in Chapter VIA but as 87A Rebate is through Chapter VIII which is very clear about rebate and hence there is no bar on STCG Gain from 87A. The CPC system erred in not allowing the rebate and was correctly allowed by Additional JCIT (Appeals) in favor of Assesse.
Adithya Reddy, International Tax Lawyer: This is a significant judgment because it confirms that taxpayers having short-term capital gains (STCG) under Section 111A can claim the rebate under Section 87A as long as their total income is below the prescribed threshold. The order emphasizes that STCG is not subject to any rebate restrictions, as opposed to LTCG under Section 112A, which is expressly prohibited. While this ruling only relates to taxpayers in this case, it also establishes a strong precedent on which other taxpayers in similar situations can depend.
And this doesn't mean that all taxpayers can automatically claim section 87A on STCG. This is an appellate order by CIT(A), not a general ruling for everyone. However, it makes a compelling case that everyone in the same position, STCG under 111A and total income below the 87A limit should be eligible for a tax rebate. Unless the Income Tax Department contests this or publishes new guidance, taxpayers facing similar disallowances may need to contest their cases individually.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
This story originally appeared on: India Times - Author:Faqs of Insurances
