In a significant relief for small taxpayers, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has ruled that the Section 87A rebate is available on Short-Term Capital Gains (STCG) under the new tax regime (Section 115BAC(1A)), provided the total income does not exceed ₹7 lakh for AY 2024-25.
Case Background
- Assessee’s Income: The taxpayer opted for the new tax regime and declared a total income of ₹6,76,402 for Assessment Year 2024-25, which included STCG on listed equity shares taxable at 15% under Section 111A.
- CPC Adjustment: The Centralized Processing Centre (CPC) denied the ₹13,320 rebate under Section 87A and raised a tax demand of ₹15,820.
ITAT Observations & Ruling
- No Restriction in Law: The Tribunal clarified that neither Section 87A nor Section 111A contained any express bar on claiming rebate against STCG for AY 2024-25.
- Prospective Amendment: The restriction excluding special-rate incomes (like STCG and LTCG) from rebate applicability was only introduced by the Finance Act 2025, effective from AY 2026-27 onwards.
- Explanatory Memorandum Not Binding: The ITAT emphasized that explanatory notes in the Finance Bill cannot override the actual wording of the statute.
- Software Error by CPC: The system-driven denial of rebate was held to be without legal backing.
Verdict: The ITAT directed the Assessing Officer to allow the ₹13,320 rebate under Section 87A, cancel the tax demand, and process any refund due as per law.
Wider Significance of the Ruling
- Judicial Precedents: Similar relief had been earlier allowed by the CIT(A), Mumbai (Feb 2025), while the Bombay High Court (July 2024) acknowledged the unfairness of CPC’s system restrictions but left the rebate issue to judicial resolution.
- Policy Change from FY 2025-26: The Union Budget 2025 explicitly amended Section 87A to exclude STCG and LTCG from rebate, but the change applies only from AY 2026-27, not retrospectively.
- Taxpayer Impact: Many taxpayers faced confusion and demand notices after claiming rebate on STCG in earlier years. This ruling strengthens their position and offers a legal remedy for refund claims.
Key Takeaways
- Tribunal Decision: Section 87A rebate allowed on STCG under new regime when income ≤ ₹7 lakh (AY 2024-25).
- Legal Basis: No statutory prohibition existed; amendment applies prospectively.
- Relief Granted: Tax demand deleted, rebate allowed, refund ordered.
- Alignment: Consistent with earlier CIT(A) orders and HC observations.
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Policy Roadmap: Rebate available till AY 2025-26; barred from AY 2026-27.