Denial of Rebate u/s 87A by the CPC and consequent order by the Bombay High Court
The Bombay High Court, in The Chamber of Tax Consultants v. Director General of Income Tax (Systems) (2025), ruled that flaws in the ITR utility should not prevent taxpayers from making valid claims, particularly the rebate under Section 87A of the Income Tax Act. The petition challenged the system flaw that barred taxpayers from claiming this rebate while filing returns online for AY 2024-25. Citing precedents like Lupin Ltd. and Tata Sons Pvt. Ltd., where similar electronic filing restrictions were overridden by permitting manual returns, the court emphasized that procedural limitations in tax return utilities should not preclude taxpayers from making claims that could later be adjudicated upon. The ruling upholds the principle that substantive tax benefits cannot be denied due to mere technical issues in the filing system, specifically recognizing that the ITR software wrongly blocked 87A rebates on STCG (taxable under Section 111A), thereby unjustly disadvantaging taxpayers.
The court clarified that while taxpayers must be allowed to claim rebates in their returns, revenue authorities retain the right to verify and decide on the validity of such claims. It stressed that neither the tax department nor the system design should preemptively bar legally valid claims. However, the court refrained from ruling on the correctness of the petitioners’ or revenue’s submissions, stating that such determinations should first be made by quasi-judicial authorities under the Act rather than through a writ petition. Consequently, it issued a writ of mandamus, directing the tax authorities to immediately modify the ITR utility to allow taxpayers to claim rebates under Section 87A for AY 2024-25 and subsequent years, including revised returns under Section 139(5).
With this ruling, affected taxpayers can now seek rectification or appeal relief against wrongful tax demands arising from system errors. While the court has removed the procedural hurdle, revenue authorities still have the power to verify the legitimacy of claims before granting relief. Taxpayers who were denied the rebate should promptly take corrective action by filing rectification applications, appeals, or refund claims. However, the court denied broader relief sought by the petitioners, agreeing with the ASG that general directives should not be issued without specific instances of injustice.
SUMMARY OF THE ORDER
Relief Sought in the above PIL
1) Prayer Clause (a)
That this Hon’ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order directing the Respondents to modify the utilities for filing of the return of income under section 139 of the Act immediately, thereby allowing assessees to make a claim of rebate under section 87A of the Act read with the proviso to section 87A, in their return of income for the AY 2024-25 and subsequent years including revised returns to be filed under section 139 (5) of the Act.
Order by the Court
(i) Rule is made absolute in terms of prayer clause (a). Relief Granted – Allowed:
The court granted the primary relief sought in prayer clause (a), directing the Income Tax Department to modify the return-filing utilities under Section 139 of the Income Tax Act. This modification will allow taxpayers to claim a rebate under Section 87A, including in their original and revised returns for AY 2024-25 and future years.
(ii) Impact:
The government must ensure that the tax-filing system allows eligible assessees to claim a rebate under Section 87A. Those who were previously unable to claim the rebate due to software restrictions can now do so, including by filing revised returns under Section 139(5).
2) Prayer Clause (b)
(b) That this Hon’ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order directing the Respondents to allow assesses to file a manual return of income for claiming rebate under section 87A of the Act in their return of income for the AY 2024-25 and subsequent years including revised returns to be filed u/s 139 (5) of the Act.
Order by the Court
Since we have allowed prayer clause (a), prayer clause (b) does not survive, which deals with filing a manual return of income for claiming a rebate under Section 87A.
Since the court has allowed prayer (a) (mandating software changes to allow claims), prayer (b) (which sought permission for filing manual returns to claim the rebate) is no longer needed.
Impact: Taxpayers will not need to file manual returns, as the system will be updated to allow electronic claims.
3) Prayer Clause (c)
(c) That this Hon’ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order directing the Respondents to make the utilities for filing the return of income online flexible so as to allow an assessee to self-compute his/her income and there should not be any restriction on making of any claim whatsoever and to direct the Respondents to not release any utilities or make any changes in the utilities for filing of the Return of Income under section 139 of the Act which does not allow any assessee to raise any claim which it seeks to make/ raise in the return of income.
Order by the Court
Prayer clause (c) is not adjudicated upon and would be considered in an appropriate case as and when the need arises.
The court did not adjudicate on prayer (c), which sought a broader order requiring that return-filing utilities remain flexible, allowing assessees to self-compute their income without restrictions.
Impact:
The issue remains open for future litigation if required. For now, taxpayers must work within the existing system, but future cases may address broader concerns about utility flexibility.
4) Prayer Clause (d)
(d) That this Hon’ble Court be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, direction or order and be pleased to direct the Respondents to:
(i) take appropriate steps to allow a claim of rebate under section 87A of the Act from tax payable at special rates except tax levied in accordance with section 112A of the Act, where the assessees have opted for the new tax regime enacted in section 115BAC of the Act, for those assessees who could not claim such relief in their returns already filed for the AY 2024-25 and to issue consequential refund in this regard.
(ii) take appropriate steps to allow a claim of rebate under section 87A of the Act from tax payable at special rates except tax levied in accordance with section 112A of the Act, where the assessees have opted for the new tax regime enacted in section 115BAC of the Act, for those assessees who have made claim of such relief in their returns already filed for the AY 2024-25 and where such returns are yet to be processed.
(iii) withdraw or modify the intimations already issued under section 143 (1) of the Act processing the return of income, denying the claim of rebate under section 87A of the Act, from tax payable at special rates except tax levied in accordance with section 112A of the Act, where the assessees have opted for the new regime enacted in section 115BAC of the Act and to direct the Respondents to allow such claim.
5) Order by the Court
The issue of adjudication of eligibility of a claim under Section 87A is left to the authorities under the Act while processing the returns filed by the assessees.
Adjudication of Eligibility Left to Authorities. Matter Referred to Tax Authorities:
The court did not decide on whether taxpayers are actually eligible for the 87A rebate. Instead, it held that the Income Tax Department will adjudicate eligibility while processing tax returns.
Impact:
Even though the system will allow the rebate claim, the department can still reject ineligible claims during processing. This means taxpayers must ensure they meet all conditions for the rebate before claiming it.
6) Prayer Clause (e)
(e) That this Hon’ble Court be pleased to issue a Writ of Prohibition or any other Writ, Order or Direction in Article 226 of the Constitution of India ordering and directing the Respondents not to implement the intimations already issued under section 143 (1) of the Act processing the return of income, denying the claim of rebate under section 87A of the Act from tax payable at special rates except tax levied in accordance with section 112A of the Act.
Order by the Court
Prayer clause (e) is rejected, with liberty to the assessee to avail of the remedies available under the Act.
Prayer (e) sought a Writ of Prohibition to stop the Income Tax Department from implementing intimations under Section 143(1) that denied the rebate. The court refused to grant this relief. However, it granted liberty to assessees to seek remedies under the Income Tax Act (e.g., appeals, rectifications, or revisions).
Impact:
Taxpayers whose claims have already been denied under Section 143(1) cannot automatically get them overturned. Instead, they must pursue legal remedies like appeals before CIT(A) or seek rectification under Section 154.
7) Prayer Clause (f)
(f) That pending the hearing and final disposal of this petition the Respondents, their subordinates, servants and agents be directed by an order of this Hon’ble Court:
(i) to change the utilities for filing of the Return of Income under section 139 of the Act immediately and forthwith allowing assessees to make a claim of rebate under section 87A of the Act in their return of income for the AY 2024-25 and subsequent years including revised returns to be filed u/s 139 (5) of the Act.
(ii) To restore the utility which was available before 05.07.2024 for filing return of income which allowed assessees to make a claim of rebate under section 87A of the Act in their return of income for the AY 2024-25 and subsequent years including revised returns to be filed under section 139 (5) of the Act;
(iii) Or in the alternate, to allow filing of a manual return of income for claiming rebate under section 87A of the Act in the return of income for the AY 2024-25 and subsequent years including revised returns to be filed under section 139 (5) of the Act.
8) Prayer Clause (g)
(g) That pending the hearing and final disposal of this petition the Respondents, their subordinates, servants and agents be restrained by an order and injunction of this Hon’ble Court from implementing the intimations already issued under section 143 (1) of the Act processing the return of income, denying the claim of rebate under section 87A of the Act from tax payable at special rates except tax levied under section 112A of the Act.
Order by the Court
Prayer clauses (f) and (g) deal with interim and ad-interim reliefs, and since we have finally disposed of the petition, the same would not survive. The interim orders are now made absolute.
Prayer Clauses (f) & (g) – No Longer Relevant
Prayer clauses (f) and (g) sought interim reliefs while the case was pending, such as immediate changes to the filing system and stopping the implementation of tax notices denying the rebate. Since the final order has been passed, the court ruled that these interim prayers no longer apply.
Impact:
Any previous interim reliefs granted by the court are now made permanent (e.g., system changes allowing 87A claims). However, ongoing disputes about past cases will need to be resolved under standard tax procedures.
9) Final Comments on the Order
- Update the tax-filing utilities: The court has ordered the Income Tax Department to update the tax-filing utilities so that taxpayers can claim the Section 87A rebate.
- No Manual Filing Needed: Since the software will be updated, filing manual returns is not required.
- No Automatic Relief for Past Denials: If taxpayers were previously denied the rebate via Section 143(1) intimations, they must use normal tax remedies like appeals or rectifications.
- Flexibility of Tax Filing System Not Addressed: The broader issue of whether taxpayers should be allowed to enter claims freely in tax utilities is left open for future cases.
10) Future Course of Actions for affected assessees
10.1 If an assessee’s claim was denied solely due to the software restriction, they can now file a rectification under Section 154 or approach the appellate authorities with stronger grounds.
10.2 If their case is already under appeal, this judgment strengthens their argument.
10.3 If any CIT(A) had rejected the appeal on the basis that the rebate claim was not allowable at the return-filing stage, the assessees now have stronger grounds to seek relief citing this ruling to support cases where the software flaw prevented valid rebate claims.
11.1 Identifying Affected Taxpayers
a) Taxpayers who had total income below ₹5 lakh (for AY 2020-21 to AY 2022-23) or ₹7 lakh (for AY 2023-24 onwards).
b) Had STCG under Section 111A but were denied the Section 87A rebate due to ITR software restrictions.
c) Were issued demand notices, disallowed the rebate in assessments, or had their appeals dismissed.
11.2 Immediate Actions for Taxpayers
a) If Return Was Filed and Processed Without Rebate:
b) File a Rectification Application (Section 154) with CPC or AO, citing the HC judgment.
c) If time-barred, file a condonation request under Section 119(2)(b) with CBDT.
11.3 If Already in Appeal Before CIT(A) or ITAT:
- Submit an additional written submission citing the Bombay HC judgment and request relief.
- If the appeal was dismissed, explore a review or rectification application.
- If Tax Was Paid Due to Incorrect Demand:
- File a refund claim under Section 237, citing that tax was wrongly collected.
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