Case Law Details
Basty Keshava Shenoy Vs ITO (ITAT Bangalore)
Bangalore ITAT : 87A Rebate Available Even on STCG u/s 111A – CPC’s ‘System Driven’ Denial Quashed
In another important ruling for AY 2024-25, the Bangalore ITAT held that rebate under section 87A cannot be denied merely because part of the assessee’s income consists of short-term capital gains taxable u/s 111A. The assessee had total income below ₹7 lakh under the new tax regime u/s 115BAC(1A), including STCG on listed shares taxable at special rates. CPC restricted rebate only to tax on normal income and denied rebate attributable to STCG tax u/s 111A.
The Tribunal held that section 87A grants rebate based on “total income” and once STCG forms part of total income as defined u/s 2(45), rebate cannot be denied unless there is an express statutory prohibition. The ITAT emphasized that while section 112A(6) specifically restricts rebate against certain capital gains, there was no such restriction under section 111A for AY 2024-25. Hence, the Revenue could not import such limitation through interpretation.
Relying on the Ahmedabad Tribunal ruling in Jayshreeben Jayantibhai Palsana, the ITAT observed that the denial of rebate by CPC appeared to be based purely on “system-driven logic and not on any statutory mandate.” The Tribunal further held that the amendment introduced by the Finance Act, 2025 restricting rebate against special-rate income was prospective in nature and itself indicated that no such restriction existed earlier.
Accordingly, the Bangalore ITAT directed CPC/AO to grant full rebate u/s 87A even against tax payable on STCG taxable u/s 111A and delete the consequential demand.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal has been instituted by the Assessee against the order of the Ld. CIT(A) passed u/s 250 of the Act dated 06.10.2025.
2. The assessee in the memo of appeal has raised 12 grounds of appeal along with sub-grounds which we for the sake of brevity and convenience are not inclined to reproduce here. The grounds raised by the assessee are interconnected and pertains to denial of rebate u/s 87A of the Act.
3. The brief facts of the case are that the assessee is an individual who filed her ROI for the year the captioned AY offering an income to taxation for Rs. 6,25,580/- only. The income comprised of business income of Rs. 3,942/-, short-term capital gains on sale of listed equity shares of Rs. 1,13,067/- and balance income from other sources/other head. Income tax payable at normal rates on the normal income amounting to Rs. 5,12,513 was Rs. 10,626/- and Income tax payable at special rates on the specified income amounting to Rs. 1,13,067 was Rs. 16,960/-. Therefore, total tax payable was Rs. 27,586 and assessee claimed rebate u/s 87A of the Act to the tune of Rs. 25,000.00 only. The assessee filed the return of income under the new tax regime u/s 115BAC(1A) of the Act and claimed rebate u/s 87A of the Act amounting to Rs. 25,000/- on the ground that the total income did not exceed Rs. 7,00,000/- only. However, while processing the return of income, CPC restricted the rebate claimed u/s 87A of the Act to the tune of Rs. 10,626 and denying rebate of Rs. 14,374 attributable to tax on STCG u/s 111A of the Act.
4. Aggrieved by the same, the assessee filed an application u/s 154 of the Act seeking rectification of the mistake. However, the said rectification application was rejected by CPC on the ground that rebate u/s 87A is not allowable in respect of income taxable at special rates.
5. Aggrieved by the intimation issued u/s 143(1) of the Act and rejection of rectification application u/s 154 of the Act, the assessee filed an appeal before the Ld. CIT(A).
6. Before the Ld. CIT(A), the assessee submitted that rebate u/s 87A of the Act cannot be denied merely because part of the income consists of short-term capital gains taxable u/s 111A of the Act. The assessee relied upon various appellate orders and the decision of the Ahmedabad Bench of the Tribunal in the case of Jayshreeben Jayantibhai Palsana vs. ITO reported in 177 taxmann.com 411, wherein it was held that rebate u/s 87A is available where the total income does not exceed the prescribed threshold and the statute does not distinguish between normal income and income taxable at special rates.
6.1 It was submitted that while section 112A specifically restricts rebate u/s 87A, no such restriction is provided under section 111A of the Act. The assessee further contended that the proposed amendment brought by the Finance Bill, 2025 is prospective in nature and therefore confirms that no such restriction existed for the year under consideration. Accordingly, the assessee prayed for grant of rebate u/s 87A of the Act and deletion of the consequential demand.
6.2 The Ld. CIT(A), after considering the submissions of the assessee and examining the provisions of sections 87A and 115BAC(1A) of the Act, held that rebate u/s 87A is available only in respect of income chargeable under section 115BAC(1A) and not in respect of income taxable at special rates under other provisions of Chapter XII such as short-term capital gains taxable u/s 111A of the Act. The Ld. CIT(A) observed that though income taxable u/s 111A forms part of total income, the same continues to be governed by separate charging provisions under Chapter XII and therefore falls outside the scope of rebate contemplated under the proviso to section 87A of the Act.
6.3 The Ld. CIT(A) further held that the adjustment made while processing the return u/s 143(1) of the Act was valid since the incorrect claim of rebate was apparent from the return of income itself. The Ld. CIT(A) further observed that the amendment brought by the Finance Act, 2025 and CBDT Circular No. 13/2025 clarified the legislative intent that rebate u/s 87A is not allowable against income taxable under special rate provisions such as section 111A of the Act. Accordingly, the appeal of the assessee was dismissed.
7. Aggrieved by the order of the Ld. CIT(A), the assessee preferred an appeal before us.
8. None appeared before us on behalf of the assessee at the time of hearing. However, the assessee through grounds of appeal submitted that the assessee had opted for taxation under the new regime u/s 115BAC(1A) of the Act and the total income declared by the assessee was below Rs. 7,00,000/- only. It was submitted that the short-term capital gains earned by the assessee were taxable u/s 111A of the Act and neither section 111A nor section 87A contained any express restriction denying rebate u/s 87A of the Act in respect of such gains. It was submitted that the Legislature, wherever it intended to restrict rebate u/s 87A of the Act, has specifically provided so, as evident from section 112A(6) of the Act. However, no similar restriction existed u/s 111A of the Act during the year under consideration.
8.1 The assessee further submitted that the CPC while processing the return of income wrongly restricted rebate u/s 87A only to tax payable on income taxable at normal rates and denied rebate attributable to tax payable on STCG u/s 111A of the Act. It was contended that the expression used in section 87A is “total income” and once the total income of the assessee admittedly remained below Rs. 7,00,000/-, rebate could not be denied merely because part of the income was taxable at special rates.
8.2 The assessee further relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of Jayshreeben Jayantibhai Palsana vs. ITO reported in 177 taxmann.com 411, wherein it was held that rebate u/s 87A of the Act cannot be denied in respect of income taxable u/s 111A in the absence of any express statutory prohibition. The assessee also submitted that the amendment brought by the Finance Act, 2025 restricting rebate against special rate income is prospective in nature and itself demonstrates that no such restriction existed during the year under consideration.
9. The learned DR, on the contrary, vehemently relied upon the orders of the lower authorities and submitted that rebate u/s 87A of the Act is not allowable in respect of tax payable on short-term capital gains taxable u/s 111A of the Act. The learned DR submitted that section 111A forms part of Chapter XII of the Act and prescribes a separate special rate of taxation. Therefore, income taxable u/s 111A cannot be treated at par with income taxable at normal slab rates under section 115BAC(1A) of the Act for the purpose of granting rebate u/s 87A of the Act.
9.1 The learned DR further submitted that the provisions of section 115BAC(1A) are specifically made subject to other provisions of Chapter XII and therefore rebate u/s 87A can be allowed only in respect of tax computed under normal slab rates and not against tax payable on income taxable at special rates. The learned DR also submitted that the amendment brought by the Finance Act, 2025 and CBDT Circular No. 13/2025 merely clarify the original legislative intent that rebate u/s 87A was never intended to be available against tax payable on special rate income such as income taxable u/s 111A of the Act.
9.2 The learned DR further contended that the CPC rightly restricted the rebate while processing the return u/s 143(1) of the Act since the incorrect claim was apparent from the return of income itself. In support of the proposition that a subsequent amendment can be clarificatory and retrospective in nature, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. vs. Union of India reported in 155 ITR 120 (SC). It was therefore prayed that the order passed by the learned CIT(A) to be upheld.
10. We have carefully considered the submissions of ld. DR and perused the materials available on record. The short issue arising for consideration is whether the assessee, whose total income admittedly does not exceed Rs. 7,00,000/- and who has opted for taxation under the new regime u/s 115BAC(1A) of the Act, is entitled to rebate u/s 87A of the Act in respect of tax payable on short-term capital gains taxable u/s 111A of the Act.
10.1 In the present case, the assessee declared total income of Rs. 6,25,580/-, which included short-term capital gains taxable u/s 111A of the Act amounting to Rs. 1,13,067/-. The CPC while processing the return of income restricted rebate u/s 87A of the Act only to tax payable on income taxable at normal slab rates and denied rebate attributable to tax payable on STCG u/s 111A of the Act.
10.2 We are unable to approve the action of CPC as sustained by the learned CIT(A). Section 87A of the Act, as applicable for the year under consideration, provides rebate with reference to the “total income” of the assessee. The expression “total income” has been defined u/s 2(45) of the Act and includes income chargeable under various heads including capital gains. Neither section 87A nor section 111A of the Act, as applicable for the year under consideration, contains any express restriction denying rebate u/s 87A of the Act in respect of tax payable on STCG taxable u/s 111A of the Act. Section 2(45) & Section 5 is reproduced below for the sake of reference:
2(45)”total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act;
Scope of total income.
5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—–
10.3 We further notice that wherever the Legislature intended to restrict rebate u/s 87A of the Act, it has specifically provided so. Section 112A(6) of the Act expressly provides that rebate u/s 87A shall be allowed from the income-tax on total income as reduced by tax payable on capital gains covered u/s 112A of the Act. Thus, Parliament consciously enacted a specific restriction in respect of gains taxable u/s 112A of the Act. However, no such restriction existed u/s 111A of the Act during the year under consideration. In our considered opinion, where the Legislature has consciously provided a restriction in one provision and omitted to provide similar restriction in another provision, the same cannot be supplied by way of interpretation.
10.4 We further find that the issue is no longer res integra in view of the decision of the Ahmedabad Bench of the Tribunal in the case of Jayshreeben Jayantibhai Palsana vs. Income-tax Officer reported in [2025] 177 taxmann.com 411 (Ahmedabad – Trib.) dated 12-08-2025, wherein the Tribunal held that rebate u/s 87A of the Act cannot be denied in respect of income taxable u/s 111A of the Act in the absence of an express statutory prohibition. We respectfully concur with the aforesaid view. The relevant part is reproduced below:
5.17 In view of the above discussion, we find that the assessee is a resident individual and the total income declared for the assessment year 2024-25 does not exceed Rs.7,00,000. It is also an admitted position that the assessee has exercised the option to be assessed under the new tax regime in accordance with the provisions of section 115BAC(1A) of the Act. On a plain reading of the statutory provisions, there exists no express bar either in section 87A or section 111A for denial of rebate in respect of tax payable on short-term capital gains arising from transfer of listed equity shares taxable at special rates under section 111A. The legislative intent is further clarified by the subsequent amendment proposed in the Finance Bill, 2025, which is prospective in nature and thereby reinforces that no such restriction was in force during the relevant assessment year. The denial of rebate under section 87A by the CPC, Bengaluru, appears to be based solely on system-driven logic and not on any statutory mandate. Moreover, the interpretation adopted by the CIT(A) in upholding such denial is, in our considered view, not in consonance with the plain and unambiguous language of the law as applicable for A.Y. 2024–25.
10.5 The Revenue has heavily relied upon the amendment brought by the Finance Act, 2025 and CBDT Circular No. 13/2025. However, in our considered opinion, the subsequent amendment restricting rebate against special rate income is prospective in nature and itself indicates that no such restriction existed during the year under consideration. Had the statute already contained such prohibition, there would have been no necessity for Parliament to introduce a specific amendment subsequently. In view of the aforesaid discussion, we hold that the assessee is entitled to rebate u/s 87A of the Act as claimed in the return of income. Accordingly, we set aside the order of the learned CIT(A) and direct the AO/CPC to grant rebate u/s 87A of the Act and delete the consequential demand. Accordingly, the grounds raised by the assessee are allowed.
11. In the result, the appeal of assessee is hereby allowed.
Order pronounced in court on 26th day of May, 2026
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