Kajol Patel Vs ITO (ITAT Ahmedabad)
For AY 2025-26, rebate under Section 87A cannot be denied merely because part of the income comprises short-term capital gains taxable under Section 111A, as no such statutory restriction existed during the relevant year.
Summary: The Ahmedabad Bench of the Income Tax Appellate Tribunal considered whether, for A.Y. 2025-26, rebate under the first proviso to Section 87A could be denied to the extent tax liability included Short Term Capital Gain chargeable under Section 111A. The assessee had declared total income of Rs. 6,95,720/-, including STCG of Rs. 1,54,411/-, and claimed rebate of Rs. 25,000 under Section 87A. While processing the return under Section 143(1), the CPC restricted the rebate to Rs. 12,066/-, and the Addl. CIT(A) upheld the adjustment, relying upon CBDT Circular No. 13/2025 dated 19.09.2025. The Tribunal examined the statutory language applicable to A.Y. 2025-26 and found that Section 87A did not contain an express exclusion of income chargeable at the special rate under Section 111A. It noted that the Finance Act, 2025 subsequently amended Section 87A with effect from 1st April 2026, corresponding to A.Y. 2026-27, and inserted a restriction concerning tax payable at the rates under Section 115BAC(1A). The Tribunal held that the subsequent amendment could not be applied retrospectively and that an administrative circular could not impose a substantive restriction absent from the statute applicable to the relevant assessment year. Following the reasoning in Jayshreeben Jayantibhai Palsana v. ITO and relying also upon the principle recognised in The Chamber of Tax Consultants v. Director General of Income-tax (Systems) & Ors., the Tribunal directed the Assessing Officer/CPC to allow the full Rs. 25,000 rebate, subject to verification of other statutory conditions and consequential tax and cess computation, and deleted the CPC demand. The assessee’s appeal was accordingly allowed.
Core Issue: The issue before the Tribunal was whether an assessee, whose total income for AY 2025-26 was below ₹7 lakh, could claim the full rebate of ₹25,000 under Section 87A against the total tax liability, including tax payable on short-term capital gains chargeable under Section 111A.
Facts: The assessee filed her return of income for AY 2025-26 declaring total income of ₹6,95,720, which included short-term capital gains of ₹1,54,411 taxable at the special rate under Section 111A. The total tax liability was computed at ₹35,857, against which the assessee claimed the maximum rebate of ₹25,000 under Section 87A. While processing the return under Section 143(1), the CPC restricted the rebate to ₹12,066 by excluding the tax attributable to the short-term capital gains taxable under Section 111A.
AO/CIT(A) Finding: The CPC restricted the rebate under Section 87A on the ground that income taxable at the special rate under Section 111A could not be considered for granting the rebate. The Addl./JCIT(A) confirmed the adjustment and relied upon CBDT Circular No. 13/2025 dated 19 September 2025. It was held that the short-term capital gains of ₹1,54,411 taxable at the special rate were required to be excluded while computing the rebate available under Section 87A.
ITAT Finding: The Tribunal held that the statutory provisions applicable to AY 2025-26 did not contain any express restriction preventing rebate under Section 87A from being granted against tax payable on short-term capital gains taxable under Section 111A. Section 111A merely prescribed a special rate of tax and did not prohibit the grant of rebate under Section 87A. The Tribunal further held that the subsequent amendment made by the Finance Act, 2025, restricting the rebate and making the revised provisions applicable from AY 2026-27, could not be applied retrospectively to AY 2025-26. It was also held that an administrative circular or the manner in which the CPC utility operated could not curtail a substantive statutory benefit available to the assessee. Since the assessee’s total income was ₹6,95,720, below the statutory threshold of ₹7 lakh, she was entitled to the full rebate of ₹25,000, subject to satisfaction of other statutory conditions.
Cases Relied Upon: The Tribunal relied upon the coordinate Bench decision in Jayshreeben Jayantibhai Palsana v. ITO, Ward-1(9), Ahmedabad, ITA No. 1014/Ahd/2025, order dated 12 August 2025, which held that there was no express statutory bar against granting Section 87A rebate in respect of tax payable on short-term capital gains under Section 111A. Reliance was also placed upon the Bombay High Court decision in The Chamber of Tax Consultants through its President Vijay Bhatt v. Director General of Income Tax (Systems) & Ors., reported at 2024 (12) TMI 1277 – Bombay High Court, wherein it was held that a statutory rebate could not be taken away merely through changes in the departmental utility or procedural mechanism.
Outcome: The assessee’s appeal was allowed. The restriction of rebate from ₹25,000 to ₹12,066 was held to be unsustainable, and the Assessing Officer/CPC was directed to recompute the tax liability and allow the full rebate under Section 87A, subject to verification of other statutory conditions. The demand arising from the CPC intimation was consequently deleted.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal is filed by the Assessee against the order of Addl/JCIT (Appeal), Madurai, [hereinafter referred to as “Addl. CIT(A)”] dated 16.03.2026 for the Assessment Year (A.Y.) 2025-26 in the proceeding u/s 143(1) of the Income Tax Act [hereinafter referred as “the Act”].
2. The brief facts of the case are that the assessee had filed her return of income for A.Y. 2025-26 on 15.09.2025, disclosing income of Rs. 6,95,720/-, which included Short Term Capital Gain (STCG) of Rs. 1,54,411/- chargeable at special rate u/s. 111A of the Act. The tax on the returned income was computed at Rs. 35,857/- against which rebate of Rs. 25,000/- was claimed u/s. 87A of the Act by the assessee. The return of income was processed u/s. 143(1) of the Act by the CPC. In the intimation the rebate u/s. 87A of the Act was restricted to Rs. 12,066/- as against claim of Rs. 25,000/- made by the assessee.
3. Aggrieved with the intimation order, the assessee had filed an appeal before the first appellate authority, which was decided by the Ld. Addl. CIT(A) vide the impugned order and the appeal of the assessee was dismissed. The Ld. Addl. CIT(A) while confirming the adjustment made by the CPC, had observed that income of Rs. 1,54,411/- chargeable to tax at the special rate was rightly excluded from the total income of Rs. 6,95,720/- for the purpose of computing rebate. The Ld. Addl. CIT(A) relied upon the CBDT Circular No. 13/2025 dated 19.09.2025, wherein reference was made to cases where rebate u/s. 87A was allowed at income chargeable to tax at special rates and directions were issued for carrying out rectification in such cases. T h
4. Aggrieved with the order of Ld. Addl. CIT(A), the assessee is in second appeal before us. The following grounds have been taken in this appeal:
1. Erroneous Denial of Rebate u/s 87A against STCG u/s 111A
The Ld. ADDL/JCIT(A) erred in law and on facts by confirming the action of the CPC in restricting the rebate u/s 87A to Rs. 12.066/- instead of allowing the full eligible rebate of Rs 25,000/- claimed by the Appellant. The Ld. ADDL/JCIT(A) failed to appreciate that the Income Tax Act, 1961, as applicable for A.Y 2025-26, contains no statutory embargo on setting off the rebate under Section 87A against the tax liability arising from Short Term Capital Gains under Section 111A
2. Invalid Reliance on CBDT Circular No. 13/2025 Overriding the Statute:
The Ld. ADDL/JCIT(A) fundamentally erred in placing unilateral reliance on CBDT Circular No. 13/2025 dated 19.09.2025 to sustain the disallowance. It is a well-settled principle of law that beneficial provisions of a statute cannot be curtailed or amended by way of administrative circulars or instructions. The circular effectively rewrites the law for A.Y. 2025-26, which is impermissible
3. Ignoring the Prospective Application of the Finance Act 2025 Amendment
The Ld. ADDL/JCIT(A) failed to consider the legislative intent behind the subsequent amendments to Section 87A. The Finance Act, 2025, specifically inserted a proviso to exclude incomes chargeable at special rates from the ambit of the Section 87A rebate explicitly making this amendment effective only from 1st April 2026 (ie, from A.Y. 2026-27 onwards). Applying this restriction to the current A. Y 2025-26 amounts to an unlawful retrospective application of the law
4. Disregarding the Principle of Expressio Unius Est Exclusio Alterius:
The Ld. ADDL/JCIT(A) ignored the established maxim of statutory interpretation. The pre-existing proviso to Section 87A explicitly excludes only tax payable on Long Term Capital Gains under Section 112A from the benefit of the rebate. The deliberate omission of Section 111A from this exclusion clearly demonstrates the legislature’s intent to allow the rebate against STCG for the year under consideration
5. General Ground:
The Appellant craves leave to add, alter, amend, or withdraw any of the above grounds of appeal either before or at the time of the hearing of the appeal
5. We have heard Shri Jaimin Patel, the Ld. AR of the assessee and Smt. Deeba Farhat, the Ld. SR-DR and considered the material placed on record. The precise question to be considered is whether in respect of A.Y. 2025-26, the rebate prescribed under the first proviso to section 87A of the Act, can be denied to the extent the tax liability includes tax payable on STCG chargeable u/s. 111A of the Act. It will be relevant here to reproduce the 1st Proviso to section 87A of the Act, which is as under:
[Provided that 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 3[seven] hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of 4[twenty-five] thousand rupees, whichever is less; |
6. It is thus found that for AY 2025-26, where the total income did not exceed Rs.7,00,000/-, the assessee would be entitled to a deduction from the amount of income-tax computed on such total income, of an amount equal to 100 per cent of such income-tax or Rs.25,000/-, whichever was less. The statutory language, as applicable for the year under consideration, did not contain any express exclusion of income chargeable to tax at the special rate under section 111A. The provision of section 111A of the Act merely prescribes the rate at which tax is to be charged on specified short-term capital gains. Section 87A, on the other hand, operates at the stage of granting rebate from the amount of income- tax. For the assessment year under consideration, neither section 87A nor section 111A contained an express prohibition against granting the rebate with reference to tax payable on short-term capital gains chargeable u/s 111A of the Act. The subsequent legislative amendment vide the Finance Act, 2025, amended section 87A of the Act with effect from 1st April 2026. The amendment increased the threshold and quantum of rebate applicable under the new regime and inserted a further proviso restricting the deduction under the first proviso to the amount of income-tax payable as per the rates provided in section 115BAC(1A). The amendment was thus made expressly effective from 1st April 2026, corresponding to A.Y. 2026-27.
7. The Co-ordinate Bench of this Tribunal, in Jayshreeben Jayantibhai Palsana v. ITO, Ward-1(9), Bhavnagar, ITA No.1014/Ahd/2025, order dated 12.08.2025, considered an analogous controversy concerning denial of rebate under section 87A on short-term capital gains chargeable under section 111A under the new tax regime. The Tribunal, on examination of the statutory provisions, held that there was no express bar in section 87A or section 111A for denial of rebate in respect of tax payable on such short-term capital gains. It further held that the prospective amendment proposed by the Finance Bill, 2025 reinforced the conclusion that such restriction was not contained in the law applicable to the relevant assessment year. The aforesaid reasoning is also consistent with the principle that a substantive benefit available under the statute cannot be curtailed merely by the manner in which the return-processing utility operates. The Hon’ble Bombay High Court, in The Chamber of Tax Consultants v. Director General of Income-tax (Systems) & Ors. [2024] 169 taxmann.com 506 (Bombay), examined the controversy concerning the denial of section 87A rebate through modification of the departmental utility and held that a statutory rebate cannot be taken away merely by a procedural change in the utility. The Addl. CIT(A) has referred to CBDT Circular No.13/2025 dated 19.09.2025, for confirming the adjustment made by CPC. We are of the opinion that an administrative circular cannot impose a substantive restriction which is not found in the statutory provision applicable to the relevant assessment year. The question has to be determined with reference to the law as it stood during AY 2025-26. The subsequent amendment made by Parliament with effect from AY 2026-27 cannot be applied retrospectively to AY 2025-26.
8. In the present case, the assessee’s total income was Rs.6,95,720/-, which was below the statutory threshold of Rs.7,00,000/- prescribed under the first proviso to section 87A for AY 2025-26. The assessee had claimed rebate of Rs.25,000/-, being the maximum rebate prescribed under the said provision. The fact that a component of the total income, namely Rs.1,54,411/-, was chargeable to tax at the special rate under section 111A, by itself, cannot operate as a ground for denying the rebate for AY 2025-26 in the absence of an express statutory restriction. We, therefore, find that the restriction of the rebate u/s 87A from Rs.25,000/- to Rs.12,066/- merely by excluding the tax attributable to the income chargeable under section 111A, is not sustainable for the assessment year under consideration. The Assessing Officer/CPC is, therefore, directed to recompute the tax liability accordingly and allow full rebate u/s 87A of the Act, subject to verification of the assessee’s eligibility under the other conditions prescribed in the Act and consequential computation of tax and cess. The demand raised in CPC intimation stands deleted. Refund, if any, shall be granted as per law.
9. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 01/09/2026 at Ahmedabad.
