ITO Vs Rajshree Kothari (ITAT Jaipur)
Summary: The appeal by the Revenue arises from the order dated 15.12.2025 passed by the Office of the Commissioner of Income Tax (Appeal), Addl./JCIT(A), Gwalior under section 250 of the Income-tax Act, 1961. The dispute concerns the denial of rebate under section 87A on tax payable on short-term capital gains. The Central Processing Centre (CPC), while processing the assessee’s return under section 143(1), had not allowed the rebate; the CIT(A) subsequently allowed it.
The assessee, an individual, filed her return on 24.07.2024 declaring total income of Rs. 4,81,640/- after opting for the default regime under section 115BAC. The CPC processed the return on 24.09.2024 without allowing the section 87A rebate, and a rectification order dated 21.11.2024 also did not allow it. Before the CIT(A), the assessee contended that neither section 87A nor section 111A nor section 115BAC contained an express restriction denying rebate against tax on special-rate income, unlike the specific treatment contained in section 112A(6) for specified long-term capital gains.
The CIT(A) recorded that the returned income comprised capital gains chargeable at special rates and other income chargeable at normal rates. It noted that the legislature had expressly dealt with rebate in section 112A(6), but found no corresponding provision in sections 87A, 111A or 115BAC restricting the rebate in respect of short-term capital gains. The CIT(A) therefore directed the Assessing Officer/CPC to allow the section 87A rebate on the short-term capital gains.
Before the Tribunal, the assessee relied on decisions of the ITAT in Pranay M Kothari Vs. DCIT, Manojbhai C. Kamdar Vs. ITO, Jayshreeben Jayantibhai Palsana Vs. ITO and Basty Keshava Shenoy Vs. ITO. The Departmental Representative could not distinguish those decisions and did not bring to the Tribunal’s notice any contrary decision of the jurisdictional High Court or the Supreme Court.
The Tribunal examined the cited decisions and recorded that they had consistently held that section 87A operates on the tax liability computed on “total income” without drawing a distinction between income taxable at normal rates and income taxable at special rates under section 111A. The Tribunal reproduced the reasoning in Venkatachalam Venkatraman v. ITO, which referred to the absence of an exclusion in section 87A and to the Bombay High Court decision in Rajiv G Shah.
The Tribunal also reproduced the reasoning in Jayshreeben Jayantibhai Palsana Vs. ITO. That reasoning contrasted section 111A with section 112A(6), where the statute expressly addresses the rebate in relation to specified long-term capital gains. It also considered the interaction between section 115BAC(1A) and Chapter XII, observing in the reproduced reasoning that section 115BAC(1A) concerns the concessional tax-rate framework and does not, by itself, modify the independent rebate provision in section 87A.
The reproduced reasoning further considered the Explanatory Memorandum to the Finance Bill 2025 and the prospective restriction proposed from A.Y. 2026-27. It treated the proposed prospective amendment as relevant to the statutory position applicable to A.Y. 2024-25 and observed that an Explanatory Memorandum could not override the language of the statute. It also referred to the Bombay High Court’s decision in The Chamber of Tax Consultants Vs. Director General of Income Tax (Systems), concerning system-based denial of a section 87A claim, while noting that the High Court left the substantive issue to be decided by the competent quasi-judicial authority.
The Tribunal noted an appellate order of CIT(A)-1, Nagpur in the case of Avni Milanbhai Maniya and the reliance placed there on Beena Manishbhai Fofaria, observing that those orders reflected divergent views and allowance of the benefit in similar factual circumstances. On the facts before it, the Tribunal recorded that the assessee was a resident individual, her total income for A.Y. 2024-25 did not exceed Rs. 7,00,000/-, and she had exercised the option under section 115BAC(1A). It held that there was no express bar in section 87A or section 111A, as applicable for the relevant assessment year, to denial of the rebate in respect of tax payable on the short-term capital gains.
Following the cited ITAT decisions, the Tribunal held the assessee entitled to the section 87A rebate for the impugned assessment year and directed the Assessing Officer to allow the rebate of Rs. 25,000/- claimed by the assessee and recompute the tax liability. The Tribunal thereafter held that the order of the CIT(A) allowing section 87A rebate on the taxes paid on short-term capital gain contained no infirmity and, in effect, dismissed the Revenue’s appeal. The order was pronounced in the Open Court on 20.08.2026.
Cases Discussed
- 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 v. ITO, ITA No.1431/Chny/2025.
- The Chamber of Tax Consultants Vs. Director General of Income Tax (Systems), Bombay High Court.
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), Gwalior(hereinafter referred to as “Ld. CIT(A)”), dated 15.12.2025 under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The Revenuehas raised the following grounds of appeal:-
1. Whether on the facts & the circumstances of the case and in law the Ld. CIT(A) has erred in allowing rebate u/s 87A of the Act to the assessee on Short Term Capital Gains, without appreciating that income chargeable to tax at special rates is not eligible for rebate u/s 87A, as clarified by CBDT Circular No. 13/2025 dated 19.09.2025 and the capital gains taxable under specific provisions prescribing special rates constitute income chargeable at special rates; hence, fall outside the ambit of rebate under section 87A in terms of the statutory scheme read with the binding clarification issued by the CBDT?
2. Whether on the facts & circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating that rebate under section 87A of the Act is allowable from the Income-tax computed in accordance with the provisions of the Act and cannot be applied in a manner that neutralizes or overrides the statutory scheme prescribing special rates of tax u/s 111A and other charging provisions; AND, in holding that in absence of an express restriction in sections 87A, 111A or 115BAC of the Act, rebate is allowable on Short Term Capital Gains, ignoring the settled principle of harmonious construction and the legislative intent underlying taxation at special rates?
3. That the appellant craves to add, amend, alter, delete or modify any or all the above grounds of appeal before or at the time of hearing.
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 same was allowed by the ld. CIT(A). The ld. CIT(A) hasdealt with the issue at para 5 to 5.7 of his order asunder:-
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5. Decision on Ground Nos. 1 & 2:
I have carefully considered facts of case and order u/s 154 against which appeal has been preferred. I have gone through appellant’s submission, Form 35, order u/s 154 and provisions of relevant section and rules.
5.2 The solitary issue raised by the Appellant vide all the grounds of the present appeal is that the CPC has denied the rebate u/s 87A of the Act on Short Term Capital Gain.
5.3 The appellant is an individual and filed return of Income on 24/07/2024 declaring total Income at Rs. 4,81,640/- by opting default tax regime u/s 115BAC. The CPC has processed the return on 24.09.2024 by not allowing the rebate u/s 87A. Further rectification order dated 21.11.2024 was passed not allowing rebate u/s.87A. Aggrieved from the above order, the appellant preferred to appeal before the CIT(A)
5.4 In the course of appellate proceedings, the Appellant has contended that during the year under consideration, there is no provision either in section 87A or in Section 111A or Section 115BAC restricting or denying rebate u/s.87A from such special rate tax like subsection 6 of Section 112A which pertains to Long Term Capital Gain from shares
5.5 I have gone through the facts of the case along with statement of facts/grounds of appeal/submission filed by the Appellant. The documents filed by the Appellant has been perused thoroughly. The relevant portion of Finance Act, 2023 in respect of rebate u/s 87A of the Act is reproduced below:
44. In section 87A of the Income-tax Act, the following proviso shall be inserted with effect from 1st day of April, 2024, namely:-
[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 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 twenty-five thousand rupees, whichever is less;
(b) exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.]
5.5 The contention of the Appellant is correct. Undisputedly, the appellant has not opted out of new tax regime as per section 115BAC of the Act. The returned income included capital gains chargeable at special rates and other income chargeable at normal rates. The appellant has not disputed the tax payable on total income including capital gains. The rebate claimed under section 87A is explicitly disallowed on the Long-Term Capital Gains under section 112A due to the specific provisions enacted by the legislature.
Relevant extracts of section 112A are reproduced below:
Section 112A- (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.
5.6 The CPC has excluded the amount of Rs. 4,29,675/-. (being the income from short term capital gain and long term capital gain chargeable at special rates) from the total income of the Appellant, while calculating the taxable income for the purpose of allowing rebate u/s 87A of the Act. Thus, there is no provision either in section 87A or in Section 111A or Section 115BAC restricting or denying rebate u/s.87A from such special rate tax like subsection 6 of Section 112A which pertains to Long Term Capital Gain from shares.
5.7 In view of the above discussion and also for the fact that the appellant has continued the option exercised u/s 115BAC, it is held that the AO, CPC had erred in restricting the rebate u/s 87A on Capital gains. Therefore, the AO is directed to allow rebate u/s 87A on the Short Term Capital gains only. This ground of appeal is allowed.
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4. 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
5. 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.
6. 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:-
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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.
7. 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.
8. In effect, the appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 20.08.2026
