ITO Vs Kailash Mamodia (ITAT Jaipur)
A Future Ban Cannot Cancel a Present Rebate — ₹25,000 Relief Allowed on STCG for AY 2025-26
The Jaipur Bench of the ITAT has held that the express restriction introduced from AY 2026-27 against allowing rebate u/s 87A on special-rate income cannot be applied retrospectively to AY 2025-26. Under the earlier statutory language, tax payable on short-term capital gains u/s 111A was eligible for rebate because neither section 87A nor section 111A contained any prohibition.
The assessee, Kailash Mamodia, filed the return of income u/s 139(1) for AY 2025-26, declaring a total income of ₹5,97,594. The income comprised salary of ₹1,25,000, STCG u/s 111A of approximately ₹3,50,058, another small capital-gain component of ₹55 and income from other sources of ₹1,22,481.
The assessee was governed by the new tax regime u/s 115BAC. Since the total income did not exceed ₹7 lakh, he claimed the maximum rebate of ₹25,000 u/s 87A.
CPC processed the return u/s 143(1) on 10.01.2026 and denied the entire rebate because a substantial part of the tax arose from STCG taxable at a special rate.
The CIT(A) allowed the claim. It noticed that after the return utility was updated on 05.07.2024, section 87A rebate was systemically denied against several categories of special-rate income, including capital gains. As a result, even resident individuals whose total income remained within ₹5 lakh under the old regime or ₹7 lakh under the new regime were denied rebate on tax attributable to STCG.
The CIT(A) further observed that the Finance Act, 2025 expressly restricted such rebate from AY 2026-27 in respect of income chargeable at special rates, including capital gains under sections 111A and 112.
The later insertion of an express prohibition was regarded as significant. If the same restriction already existed under the earlier law, there would ordinarily have been no need to introduce it prospectively from AY 2026-27.
Accordingly, the CIT(A) directed the AO to grant rebate u/s 87A against the tax payable on the assessee’s STCG for AY 2025-26.
The Revenue challenged that relief before the Tribunal. It contended that special-rate income under Chapter XII was outside the intended scope of the rebate provisions. Reliance was also placed upon CBDT Circular No. 13/2025 dated 19.09.2025, which, according to the Revenue, clarified that rebate on tax attributable to special-rate income was never statutorily permissible.
No one appeared for the assessee before the Tribunal. The Bench nevertheless examined the matter and the available judicial precedents.
The Tribunal noted that the issue had been consistently decided in favour of taxpayers in several cases. It relied upon ITO v. Rajshree Kothari, ITA No. 399/Jpr/2026, dated 20.08.2026, which followed decisions including Pranay M. Kothari v. DCIT, Manojbhai C. Kamdar v. ITO, Jayshreeben Jayantibhai Palsana v. ITO and Basty Keshava Shenoy v. ITO.
These decisions held that section 87A granted a rebate from the amount of tax computed on the assessee’s total income. The provision applicable to the relevant year did not restrict the rebate to tax calculated only at ordinary slab rates.
Section 115BAC(1A) operates subject to Chapter XII, ensuring that specified income is taxed at the special rates prescribed therein. However, this does not mean that every special-rate tax is automatically excluded from a rebate available under Chapter VIII.
The Tribunal also examined the “subject to the provisions of this Chapter” language in section 115BAC(1A). It held that the expression preserved the special-rate computation under Chapter XII but did not automatically exclude the independently operating rebate provision contained in Chapter VIII.
The contrast between sections 111A and 112A was again regarded as important. Section 112A(6) expressly provides that the section 87A rebate cannot reduce tax payable on specified LTCG. There was no corresponding restriction in section 111A for AY 2025-26.
The subsequent amendment from AY 2026-27 could not be used to retrospectively supply the missing exclusion. Similarly, an explanatory memorandum or CBDT Circular could not override the plain language of the Act applicable to the earlier year.
The Departmental Representative was unable to distinguish the existing Tribunal decisions or cite any contrary judgment of the jurisdictional High Court or Supreme Court.
The Tribunal therefore upheld the CIT(A)’s order and allowed the assessee’s rebate of ₹25,000 against tax payable on STCG u/s 111A. The Revenue’s appeal was dismissed.
Author’s Comments
The decision highlights a basic rule of temporal interpretation: an amendment effective from tomorrow cannot ordinarily be used to declare that the same prohibition secretly existed yesterday.
Parliament expressly restricted the rebate against special-rate income from AY 2026-27. That prospective date must be respected. Treating the amendment as a mere clarification and applying it backwards would render the legislatively chosen commencement date meaningless.
The Revenue’s reliance upon CBDT Circular No. 13/2025 could not cure the difficulty. A circular may clarify departmental administration but cannot retrospectively impose a tax burden unsupported by the statute. Beneficial circulars may bind the Department, but an adverse circular cannot override the Act.
The distinction between section 111A and section 112A(6) also remains compelling. Parliament had expressly protected tax on specified LTCG from section 87A rebate. Its failure to create the same protection for STCG under the pre-amendment law cannot be dismissed as irrelevant.
The ruling is, however, strictly assessment-year specific. Taxpayers may rely on it for AY 2025-26 and similarly governed earlier years, subject to their total income and residential-status conditions. It does not support a claim from AY 2026-27 onwards under the amended provision.
The final principle is simple: a prospective amendment may change the law ahead; it cannot be driven in reverse to rewrite a completed assessment year.
Cases Discussed
- ITO v. Rajshree Kothari, ITA No. 399/JPR/2026, order dated 20.08.2026.
- Pranay M Kothari Vs. DCIT, ITA No. 3469/Chny/2025.
- Manojbhai C. Kamdar Vs. ITO, ITA No. 572/RJT/2025.
- Jayshreeben Jayantibhai Palsana Vs. ITO, ITA No. 1014/Ahd/2025.
- Basty Keshava Shenoy Vs. ITO, ITA No. 3134/Bang/2025.
- Venkatachalam Venkatraman Vs. ITO, ITA No. 1431/Chny/2025.
- The Chamber of Tax Consultants Vs. Director General of Income Tax (Systems), Bombay High Court.
- Rajiv G Shah, Bombay High Court.
- Avni Milanbhai Maniya, CIT(A)-1, Nagpur.
- Beena Manishbhai Fofaria, A.Y. 2024-25.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT JAIPUR
The present appeal has been filed by the Revenue against the order passed by the Office of the Commissioner of Income Tax, Appeal Addl./JCIT(A) Prayagraj(hereinafter referred to as “Ld. CIT(A)”), dated 13.02.2026under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The grounds raised read as under:-
1. Whether on the facts and circumstances of the case and in law, the Ld. Addl CIT(A)-Prayagraj is justified in allowing the rebate u/s 87A of the Act, on STCG, when rebate u/s 87A of the Act, 1961 is not available in respect of Income Tax payable on income chargeable to tax on special rates, which includes Short Term Capital Gain u/s 111A of the Act?
2. Whether on the facts and circumstances of the case and in law, the order of the Ld. Addl CIT(A)- Prayagraj is justified in view of the CBDT Circular No. 13/2025, dated 19.09.2025 which has made it expressly clear that it was never the statutory intent to allow rebate in cases where income is chargeable to tax u/s 115BAC(1) of the Act, 1961 and any such cases where rebate is erroneously claimed are to be rectified, thereby having no doubt that such claim was statutorily never permissible?
3. The appellant craves leave or reserves right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
3. The solitary issue in the present appeal relates to denial of rebate of tax claimed by the assessee u/s 87A of the Act, on the taxes paid on income earned on short term capital gain. The denial of rebate was made by the CPC while processing the return of income filed by the assessee, in the intimation made u/s 143(1) of the Act. The assessee had filed return of income u/s 139(1) of the Actdeclaring total income of Rs.5,97,594/- which included Income from salary Rs.1,25,000/-, income from Short Term Capital Gain u/s 111A of the Act of Rs.3,50,058/- and Rs.55/-, income from other sources of Rs.1,22,481/- and rebate oftax as per section 87A of the Act was claimed amounting to Rs.25,000/- . The return was processed u/s 143(1) of the Act on 10.01.2026 disallowing tax rebate of Rs.25,000/- claimed u/s 87A of the Act.
4. The same was allowed by the ld. CIT(A) holding asunder:-
…….
4. The ‘Grounds of Appeal’ and the above submission of the appellant are noted. The only issue in the present appeal is that rebate u/s 87A of the Act was not granted by the AO on Short-term Capital Gains as the AO was of the opinion that rebate cannot be granted on tax at special rate.
4.1 After updation of the new ITR utility on 05.07.2024, rebate u/s 87A of the Act was incorrectly disallowed for various special rate incomes including Capital Gains. As a result, in case of taxpayers with Total Income up to Rs. 5 lakhs (under the old regime) or Rs. 7 lakhs (under the new regime), rebate u/s 87A of the Act was not being allowed on Short-term Capital Gains.
4.2 Finance Act, 2025 has expressively barred such rebate with effect from AY 2026-27 wherein it is stated that such rebate is not available on tax on incomes chargeable at special rates (capital gains u/s 111A, 112 etc.).
4.3 Considering the above, the AO is directed to allow rebate u/s 87A of the Act in respect ofShort-term Capital Gains as claimed by the appellant in the Return of Income. Therefore, the appeal of the appellant vide Ground Nos. 1 is allowed.
4.4 Ground No. 2 of the appeal is general in nature and needs no adjudication.
5. In the light of the above, the appeal of the appellant is allowed.
5. None appeared on behalf of the assessee.
6. The issue of denial of rebate u/s 87A of the Act on the Short Term Capital Gains has been decided in favour of the assessee by the ITAT in a number of decisions. In the recent decision, in the case of ITO Vs. Rajshree Kothariin ITA No.399/JPR/2026 order dated 20.08.2026, the ITAT has held the assessee eligible to claim rebated u/s 87A of the Act on the Short Term Capital Gains holding as under:-
…….
7. Before us, at the outset itself ld. counsel for the assessee pointed out that this issue has been dealt in various decisions of the ITAT ruling consistently in favour of the assessee as under:-
i) Pranay M Kothari Vs. DCIT in ITA No.3469/Chny/2025
ii) Manojbhai C. Kamdar Vs. ITO in ITA No.572/RJT/2025
iii) Jayshreeben Jayantibhai Palsana Vs. ITO in ITA No.1014/Ahd/2025
iv) Basty Keshava Shenoy Vs. ITO in ITA No.3134/Bang/2025
8. Before us, ld. DR was unable to distinguish the decisions, referred to by ld. Counsel for the assessee as above, nor she was able to draw my attention to any contrary decision of either the Jurisdictional High Court or the Hon’ble Apex Court in this regard.
9. We have gone through the orders of the ITAT, referred to by the ld. Counsel for the assessee, and have noted that it has been consistently held that the provisions of Section 87A of the Act provide rebate on the entire tax liability computed on the “total income” without drawing any distinction between income taxable at normal rates, and income taxable at special rates, i.e. short term capital gain taxable at rates specified u/s 111A of the Act. The findings of the ITAT in the case of Pranay M Kothari Vs. DCIT in ITA No.3469/Chny/2025 dated 23.03.2026 at para 7 to 9 of the order as under:-
……….
7. We note that an identical issue came up for consideration before this Tribunal in the case of Venkatachalam Venkatraman v. ITO [ITA No.1431/Chny/2025, order dated 20.08.2025]. The Tribunal therein held that the provisions of section 87A of the Act provide rebate on the entire tax liability computed on the “total income” without drawing any distinction between income taxable at normal rates and income taxable at special rates. It was accordingly concluded that rebate u/s.87A of the Act is available even in respect of such incomes taxed under special provisions. The relevant findings are extracted below for ease of reference:-
“5.0 been concluded that to claim the rebate total income is to be computed after excluding any special rate income so as to determine the final tax liability. We have noted that the view taken by the Ld.CIT(A) of assessee filing return u/s 115BAC and consequently ineligible for rebate is not in order. The only controversy in this case is whether rebate u/s 87A is available on all the incomes or there is any exclusion. We have noted that the provisions of section 87A do not provide for such an exclusion. The first proviso to section 87A includes an exemption qua total income falling u/s 115BAC (1A) however the impugned amendment has been brought by Finance Act 2024 w.e.f 01.04.2025. The present AY-2024 25 would not be hit by the same. We have noted that Hon’ble Bombay High Court in the case of Rajiv G Shah supra has held that “…there is no indication in the plain language of Section 87A that any category of income or tax should be excluded from the computation. If the total income is within the threshold prescribed, rebate cannot be denied….”. It istrite law that when provisions of the statute granting any benefit to the tax payer are unambiguously clear, no different interpretation thereof can be adopted. Accordingly, we are of the view that the assessee is entitled for claim of rebate u/s 87A. The orders of lower authorities are therefore set aside and the Ld.AO is directed to allow the assessee its claim of rebate u/s 87A. All the grounds of appeal raised by the assessee are therefore allowed.”
8. Further, we find support from the decision of the Coordinate Bench in JayshreebenJayantibhaiPalsanaShingala Sheri ITO [ITA No.1014/Ahd/2025, order dated 12.08.2025), where it was held as under:-
“5.8 The amended first proviso to Section 87A [inserted by the Finance Act, 2023 w.e.f. A.Y. 2024-25] provides:
“Where the total income of the assessee is chargeable to tax under sub section (1A) of section 115BAC and the total income
(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction…’
5.9 This provision applies to any resident individual whose total income does not exceed Rs.7,00,000 and who is assessed under section 115BAC(1A). The statute does not draw any distinction between normal income and income chargeable at special rates, nor does it contain any express exclusion for tax arising under section 111A.
5.10 By contrast, the legislature has inserted an express bar on availability of section 87A rebate in section 112A(6), which states:
(6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.
5.11 The absence of a corresponding clause in section 111A is legally significant and supports the principle that when the legislature intended to deny rebate in respect of special income (as in section 112A), it has done so expressly. In contrast, the absence of any exclusion in section 111A or in section 87A must be construed in favour of the assessee.
5.12 At this point we discuss the interplay of Section 115BAC(1A) with Chapter XII where the scope is Confined to Computation of Tax Rates. Section 115BAC(1A) opens with the phrase:
“Notwithstanding anything contained in this Act but subject to the provisions of this Chapter…”
5.13 The purpose of this clause is to enable the computation of income tax under the concessional rate regime, subject to existing special rate provisions under Chapter XII, such as sections 111A, 112, 112A, etc. This clause governs the computation of tax and doesnot ipso facto affect eligibility to rebates or deductions unless specifically restricted. Section 87A is not part of Chapter XII; it is an independent rebate provision under Chapter VIII of the Act. Therefore, the overriding clause in section 115BAC(1A) does not derogate or modify section 87A, unless section 87A itself provides for exclusion, which, in the present case, it does not. Thus, section 87A operates on the total tax computed, whether it includes tax at slab rates or special rates, and applies so long as the total income threshold is met.
5.14 The CIT(A) placed strong reliance on the Explanatory Memorandum to the Finance Bill 2025, which clarified that rebate under section 87A is not available on tax arising from special rate incomes, including those under section 111A. However, we find this reliance to be misplaced for two reasons:
-Firstly, the Finance Bill 2025 itself proposes to insert new restrictions on rebate under section 87A w.e.f. A.Y. 2026-27, which implies that the existing law (i.e., as applicable to A.Y. 2024-25) does not contain such a restriction.
-Secondly, the Explanatory Memorandum cannot override the plain language of the statute. It is a tool of interpretation, not a source of substantive law.
Therefore, the prospective amendment in the Finance Act 2025 supports the view that under the unamended provision applicable for A.Y. 2024-25, rebate under section 87A cannot be denied merely because tax arises under section 111A.
5.15 In the recent judgment dated 24.01.2025 in the case of The Chamber of Tax Consultants vs. Director General of Income Tax (Systems) [TS 5026-HC-2025(Bombay)-O], the Hon’ble Bombay High Court considered the issue of system-based denial of 87A rebate on STCG under section 111A for assessees who had opted for 115BAC(1A). While the Hon’ble Court refrained from interpreting the substantive provisions, it held that the assessee must be allowed to claim rebate under section 87A, and it is for the quasi-judicial authority to decide on merits.
Thus, the Hon’ble High Court clearly held that the CPC utility or system configuration cannot override statutory rights, and that each case must be adjudicated on its own merits. We at the Tribunal, being such a quasi-judicial authority, are therefore duty-bound to examine the claim in light of the statutory framework and not be influenced by automated denial or procedural logic adopted by the CPC.
5.16 The assessee has also relied on an appellate order dated 27.05.2025 passed by CIT(A)-1, Nagpur in the case of Avni Milanbhai Maniya, wherein on identical facts the CIT(A) allowed the claim of rebate under section 87A in respect of STCG taxable under section 111A. We also note that such decision was taken by the JCIT/AddI.CIT(A) relying on the decision of Beena ManishbhaiFofaria for the A.Y. 2024-25. While not binding, the said appellate order affirms that divergent views exist and such benefit has been allowed in similar factual circumstances.
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. Respectfully following the ratio laid down in the above cases, we hold that the assessee in the instant case is entitled to rebate u/s.87A of the Act for the impugned assessment year, notwithstanding that the total income includes taxable long term capital gains chargeable at special rates. The AO is accordingly directed to allow the rebate of Rs.25,000/- claimed by the assessee u/s.87A of the Act and recompute the tax liability. Thus, the grounds of appeal raised by the assessee are allowed.
10. The ITAT in the other decisions has also reiterated the proposition of law as above. The decision rendered by the ITAT in the cases above, squarely applies to the facts of the present case, following which, we hold that there is no infirmity in the order of the Ld.CIT(A) holding the assessee entitled to rebate u/s 87A of the Act on the taxes paid on short term capital gain.
…….
6. Before me, ld. DR was unable to distinguish the decisions referred to above, nor was she able to draw my attention to any contrary decision of either the Jurisdictional High Court or the Hon’ble Apex Court in this regard.
7. I therefore hold that Ld. CIT(A) had rightly found the assessee to be eligible to claim rebate u/s 87A of the Act on the taxes paid on short term capital gain of Rs.25,000/-
8. Grounds raised by the Revenue are dismissed.
9. In effect, the appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 11.09.2026
