Background
Dulquer Salman (imaginary name), a resident individual, filed his income tax return for Assessment Year 2024–25 under the new tax regime (Section 115BAC). His total income comprised predominantly of short-term capital gains (STCG) from the sale of listed equity shares, taxed under Section 111A of the Income Tax Act at 15%.
Since his total income was below ₹7,00,000, he claimed the rebate under Section 87A, which provides up to ₹25,000 in tax relief for eligible resident individuals under the new regime.
However, the Centralised Processing Centre (CPC), Bengaluru, while processing the return under Section 143(1), denied the rebate, raising a demand on the tax payable under Section 111A. The CPC’s software-driven logic treated STCG as ineligible for rebate.
The Dispute
Is the rebate under Section 87A available against tax payable on STCG under Section 111A, when the assessee is under the new tax regime and total income is below ₹7 lakh?
The CPC’s denial was based not on any legislative bar but on an implied interpretation, one that Dulquer and his tax consultant challenged as unfounded and contrary to both the law and intent of the legislature.
Legal Contentions Raised
Dulquer filed an appeal before the Additional Commissioner of Income Tax (Appeals), where he raised the following contentions:
1. Rebate under Section 87A Is Statutorily Available on All Income
Section 87A (as amended by Finance Act, 2023) offers a rebate up to ₹25,000 where the total income is less than or equal to ₹7,00,000.
The section does not differentiate between income taxed at regular slab rates and income taxed at special rates (like STCG u/s 111A).
Section 111A itself does not prohibit claiming a rebate under Section 87A. By contrast, Section 112A, which deals with long-term capital gains (LTCG), explicitly denies the rebate under 87A, making it clear that if the legislature wanted to deny it under 111A, it would have said so.
Thus, on a plain reading of the law, Dulquer was entitled to claim the rebate.
2. Legislative Intent Clearly Supports the Rebate
The Finance Minister’s Budget Speech, 2023 (Paragraph 146) stated:
“Persons in the new tax regime with income up to ₹7 lakh will not have to pay any tax.”
There was no exception stated for capital gains, reinforcing that the policy intent was to exempt all income up to ₹7 lakh under the new regime.
3. Procedural Lapse: No Intimation Before Adjustment
Section 143(1)(a) of the Act mandates that no adjustment shall be made unless an intimation is first given to the assessee, either in writing or electronically.
In this case, no such intimation was given. The e-proceeding portal showed no show-cause notice or communication of the proposed adjustment.
This was a clear violation of the law, rendering the CPC’s action invalid.
4. Adjustment Not Permissible on Debatable Issues
The applicability of rebate on STCG is debatable issue as Dulquer’s submissions highlighted multiple appellate authorities ruling in favour of allowing the rebate, including ITAT Ahmedabad bench (Re – Jayshreeben Jayantibhai Palsana), ADDL/JCIT (A)–2, Chandigarh, ADDL/JCIT (A)–1, Lucknow, ADDL/JCIT (A)–1, Pune and Appellate Commissioner, Mumbai.
Accordingly, the CPC’s adjustment under Section 143(1)(a) was not legally permissible.
This position is reinforced by the Supreme Court in:
CIT v. Rajesh Jhaveri Stock Brokers (P) Ltd.[(2007) 291 ITR 500 (SC)]
In that case, the Apex Court held that:
“The scope of Section 143(1) is limited to checking apparent errors and cannot be used to decide debatable legal issues. Hence, any difference of opinion on interpretation must be dealt with through regular assessment, not through automated adjustment.
In a similar procedural context, the ITAT Cochin Bench, in Chinmaya International Foundation v. ITO [(2021) 132 taxmann.com 235], ruled that:
“A debatable issue cannot be considered as an item fit for adjustment under Section 143(1)(a) and such adjustment becomes unsustainable.”
This further supported Dulquer’s contention that the CPC’s denial was not only wrong but also procedurally untenable.
Outcome: A Happy Ending
The first appellate authority allowed Dulquer Salman’s appeal in full, directing that:
- The adjustment made by CPC was void for failure to issue prior intimation.
- The issue involved was debatable, and thus not fit for adjustment under Section 143(1)(a).
- Most importantly, the rebate under Section 87A was allowed on STCG under Section 111A, as no legal bar existed.
- The entire tax demand was cancelled, providing full relief to the taxpayer.
Conclusion
This case study showcases how a well-informed taxpayer can successfully challenge system-driven errors using well-reasoned legal arguments and established judicial precedent. In the end, Dulquer Salman’s perseverance paid off, and the law stood by a genuine taxpayer, as it should, though, unfortunately, the cost of litigation overweighed the eligible benefit.
Author: CA. PRASANTH SRINIVAS, Kottayam
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