Case Law Details
Shevgoor Namratha Kamath Vs ITO (ITAT Bangalore)
Bangalore ITAT : Rebate U/s 87A Allowed on LTCG U/s 112 – CPC Cannot Deny Relief Merely Because Income is Taxed at Special Rate
In a significant 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 long-term capital gains taxable u/s 112. The assessee had opted for the new tax regime u/s 115BAC(1A), declared total income below ₹7 lakh, and claimed rebate of ₹25,000/-. CPC denied the rebate on the ground that income taxable at special rates does not qualify for rebate and even rejected rectification u/s 154.
The Tribunal disagreed with the Revenue and held that section 87A uses the expression “total income”, and once LTCG forms part of total income as defined u/s 2(45), it cannot be artificially excluded unless the statute specifically provides so. The ITAT noted that while section 112A(6) expressly bars rebate against certain LTCG, there is no similar restriction under section 112 for the relevant assessment year. Therefore, such restriction cannot be imported into the law by implication.
The ITAT relied on the Ahmedabad Tribunal ruling in Jayshreeben Jayantibhai Palsana and observed that the subsequent amendment made by the Finance Act, 2025 restricting rebate against special-rate income was prospective in nature and itself demonstrated that no such restriction existed earlier. The Tribunal further remarked that the denial by CPC appeared to be based on “system-driven logic and not on any statutory mandate.”
Accordingly, the Tribunal held that where total income does not exceed ₹7 lakh, rebate u/s 87A is allowable even against tax payable on LTCG taxable u/s 112 for AY 2024-25, and directed CPC/AO to grant the rebate 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 08.10.2025.
2. The assessee in the memo of appeal has raised 6 grounds of appeal 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. 6,68,040/- only. The income comprised of business income of Rs. 28,125/-, long-term capital gains on sale of residential house property of Rs. 5,62,974/-, long-term capital gains from sale of listed equity shares of Rs. 47,273/- and income from other sources of Rs. 29,664/- only. The assessee filed the return of income under the new tax regime provided 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.
3.1 However, while processing the return of income, CPC denied the rebate claimed u/s 87A of the Act and raised an additional tax demand of Rs. 30,740/- only. 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 of the Act is not allowable in respect of income taxable at special rates.
4. Aggrieved by the intimation/ rejection issued u/s 143(1)/ 154 of the Act, the assessee filed an appeal before the Ld. CIT(A).
5. 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 long-term capital gains taxable u/s 112 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 com411, 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. It was submitted that while section 112A specifically restricts rebate u/s 87A, no such restriction is provided under section 112 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.
5.1 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) of the Act and not in respect of income taxable at special rates under other provisions of Chapter XII such as long-term capital gains taxable u/s 112 of the Act. The Ld. CIT(A) observed that though income taxable u/s 112 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.
5.2 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 of the Act is not allowable against income taxable under special rate provisions such as section 112 of the Act. Accordingly, the appeal of the assessee was dismissed.
6. Aggrieved by the order of the Ld. CIT(A), the assessee preferred an appeal before us.
7. None appeared before us on behalf of the assessee at the time of hearing. But the assessee filed written submission having 2 pages. It was 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/-. It was contended that there is no express restriction either under section 87A or section 112 of the Act denying rebate u/s 87A in respect of long-term capital gains taxable u/s 112 of the Act. The Ld. AR submitted that while section 112A(6) specifically bars rebate u/s 87A, no such prohibition exists under section 112 of the Act and therefore the benefit cannot be denied by implication. In support of the said contention, reliance was placed on the decision of the Ahmedabad Bench of the Tribunal in the case of Jayshreeben Jayantibhai Palsana vs. ITO reported in 177 com411, wherein it was held that in the absence of an express statutory bar, rebate u/s 87A cannot be denied merely because income is taxable at special rates.
7.1 The assessee further 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. In support of the said proposition, reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. reported in 367 ITR 466 for the proposition that substantive amendments restricting existing benefits are presumed to be prospective unless specifically made retrospective.
7.2 The assessee further contended that the issue is highly debatable in nature and therefore denial of rebate while processing the return u/s 143(1) of the Act and rejection of rectification application u/s 154 of the Act were beyond the scope of such proceedings. Reliance in this regard was placed on the decision of the Hon’ble Supreme Court in the case of T.S. Balaram, ITO vs. Volkart Bros. reported in 82 ITR 50 and decision of the Hon’ble Allahabad High Court in the case of Anil Kumar Sharma vs. ACIT reported in 445 ITR 155, wherein it was held that debatable issues cannot be treated as mistakes apparent from record.
8. On the other hand, the Ld. DR strongly relied upon the order of the Ld. CIT(A) and submitted that rebate u/s 87A of the Act is not allowable in respect of income taxable at special rates under Chapter XII of the Act, including long-term capital gains taxable u/s 112 of the Act. The Ld. DR submitted that section 115BAC(1A) is specifically made subject to the provisions of Chapter XII and therefore only such income which is taxable under the slab rates prescribed u/s 115BAC(1A) would qualify for rebate u/s 87A of the Act.
8.1 The Ld. DR further submitted that the subsequent amendment brought by the Finance Act, 2025 and CBDT Circular No. 13/2025 merely clarified the original legislative intent and therefore the rebate claimed by the assessee was rightly denied. 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).
9. We have carefully considered the submissions of ld. DR and perused the materials available on record. The short issue before us is whether the assessee whose total income is admittedly below Rs. 7,00,000/- and who has opted for the new regime u/s 115BAC(1A) of the Act is entitled to rebate u/s 87A of the Act in respect of tax arising on long-term capital gain taxable u/s 112 of the Act.
9.1 In the present case, the assessee declared total income of Rs. 6,68,040/-. The said income included long-term capital gain on sale of residential house property taxable u/s 112 of the Act. The rebate u/s 87A of the Act was denied by CPC only on the ground that part of the income was taxable at special rate. The Ld. CIT(A) has upheld the said denial by holding that income taxable under Chapter XII of the Act, including income u/s 112 of the Act, would not be eligible for rebate u/s 87A of the Act.
9.2 We are unable to approve the view taken by the Ld. CIT(A). Section 87A of the Act, as applicable for the year under consideration, grants rebate to a resident individual where the total income does not exceed the prescribed limit. The expression used in the section is “total income”. The said expression has to be understood as defined u/s 2(45) of the Act. Once the long-term capital gain is included in the total income of the assessee, the same cannot be excluded for the limited purpose of section 87A of the Act unless there is an express statutory exclusion. 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—–
9.3 We also note that the Legislature, wherever it is intended to deny rebate u/s 87A of the Act in respect of income taxable at special rate, has specifically provided so. Section 112A(6) of the Act expressly provides that rebate u/s 87A shall not be allowed in respect of tax payable on long-term capital gains covered u/s 112A of the Act. However, no such restriction has been provided either u/s 112 or u/s 87A of the Act for the year under consideration. Therefore, in our considered view, such restriction cannot be read into the statute by implication.
9.4 The assessee has rightly relied upon 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 it has been held that in the absence of any express statutory bar, rebate u/s 87A of the Act cannot be denied merely because the income is taxable at special rate. Though the said decision was rendered in the context of section 111A, the principle laid down therein applies with equal force to income taxable u/s 112 of the Act, because section 112 also does not contain any express bar similar to section 112A(6) of the Act. The relevant para 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.”
9.5 We further note that the Finance Act, 2025 has amended the provisions so as to restrict rebate u/s 87A in respect of income taxable at special rates. The said amendment is applicable prospectively. In our view, if the law already contained such restriction for the year under consideration, there was no need for Parliament to introduce a specific amendment subsequently. A later substantive amendment which restricts a benefit cannot ordinarily be treated as retrospective unless the statute clearly says so. The assessee’s reliance on the decision of the Hon’ble Supreme Court in Commissioner of Income-tax (Central)-I, New Delhi vs. Vatika Township (P.) Ltd. reported in [2014] 49 taxmann.com 249 (SC)/[2014] 227 Taxman 121 (SC)/[2014] 367 ITR 466 (SC)/[2014] 271 CTR 1 (SC) dated 15-09-2014 is therefore well placed. The relevant para is reproduced below:
Furthermore, an amendment made to a taxing statute can be said to be intended to remove ‘hardships’ only of the assessee, not of the Department. On the contrary, imposing a retrospective levy on the assessee would have caused undue hardship and for that reason Parliament specifically chose to make the proviso effective from 1.6.2002.
40. The aforesaid discursive of ours also makes it obvious that the conclusion of the Division Bench in Suresh N. Gupta’s case (supra) treating the proviso as clarificatory and giving it retrospective effect is not a correct conclusion. Said judgment is accordingly overruled.
41. As a result of the aforesaid discussion, the appeals filed by the Income Tax Department are hereby dismissed. Appeals of the assessees are allowed deleting the surcharge levied by the assessing officer for this block assessment pertaining to the period prior to 1st June, 2002.
9.6 The Ld. DR relied upon the decision of the Hon’ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. vs. Union of India reported in [1985] 22 Taxman 49 (SC)/[1985] 155 ITR 120 (SC)/[1985] 47 CTR 349 (SC) dated 01-07-1985 to contend that a later amendment can be clarificatory. There can be no dispute with the said proposition. However, whether a later amendment is clarificatory or substantive has to be examined in the context of the statutory language. In the present case, the amendment brought by Finance Act, 2025 restricts a rebate which was otherwise available on the basis of the existing language of section 87A of the Act. Therefore, the said amendment cannot be applied retrospectively to deny the claim of the assessee for the year under consideration.
9.7 In view of the above discussion, we hold that the assessee is entitled to rebate u/s 87A of the Act in respect of tax payable on long-term capital gain taxable u/s 112 of the Act, as the total income of the assessee does not exceed Rs. 7,00,000/- for the year under consideration. Accordingly, we set aside the order of the Ld. CIT(A) and direct the AO/CPC to allow rebate u/s 87A of the Act and delete the consequential demand. The grounds raised by the assessee are allowed.
10. In the result, the appeal of assessee is allowed.
Order pronounced in court on 26th day of May, 2026
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