PIL Challenges Denial of rebate under Section 87A and Unjust Demand notices

A Public Interest Litigation has been filed in the Gujarat High Court to contest the government’s denial of the Section 87A rebate under the new tax regime. This denial in this rebate have led to many unjustified demand notices which were been sent to various taxpayers across the country, hence causing a significant amount of confusion and hardships amongst assessees.

The PIL, initiated by Chartered Accountant Chintan N. Patel and represented by Advocate CA Rutvij Patel, aims to provide relief to thousands of affected taxpayers, particularly those from middle-class backgrounds, for whom tax litigation is financially expensive or not feasible.

The PIL brings to the legal, administrative, and economic concerns in front, over the inconsistent disallowance of tax rebates, seeking the practice of fairness and compliance with the Income Tax Act, 1961.

This article is in continuation of my previous article stating “Ongoing issues of Tax Rebate Section 87A on Special income wef 5th July 2024”.

Here we will explore the facts, legal arguments, and implications of the PIL which have been filed in High court, in depth.

What is the background of the case relating to Section 87A and the new tax regime?

Section 87A of the Income Tax Act, 1961, introduced by the Finance Act, 2013, was introduced to provide relief to individual taxpayers. As per the above section, individuals who are resident of India as well as whose total income does not exceed a specified threshold are eligible for a tax rebate, Rs. 5 lakhs as per old scheme and Rs. 7 lakhs as per new scheme, which would help taxpayers to reduce their tax liability, this provision has been instrumental in providing relief, especially to middle-income individuals.

However, a recent government action of disallowing such relief in case of inter alia short term capital gains has disrupted the process, and have violated the intention of this rebate. As I discussed earlier until July 5, 2024, the government’s tax utility software allowed rebates under Section 87A, even for taxpayers opting for the new tax regime.

Post this date, the rebate was disallowed, and demand notices were issued to those who had already filed returns assuming the rebate was applicable, and my clients are in confusion whether to pay the demand or wait as this sudden change in the processing mechanism has caused confusion, financial strain, and a sense of injustice among taxpayers.

PIL addressing an arbitrary denial of rebate 

The PIL, filed under Article 226 of the Indian Constitution, seeks judicial intervention to challenge what the petitioner describes as the “illegal, arbitrary, irrational, and unjust” for the disallowance of this rebate which also emphasized that the government’s action has violated taxpayers’ rights and is contrary to the spirit of fairness enshrined in the Income Tax act.

As per the petition, this denial of the rebate affects a large number of taxpayers, primarily from the middle class, who are not equipped to pursue expensive litigation. Furthermore, the petition argues that the sudden modification of the tax-filing utility, without adequate notice or communication, has caught taxpayers off-guard.

This PIL also highlights that the arbitrary denial of rebates not only burdens individuals with unjust tax demands but also wastes public resources. If the government’s action is found illegal, processing refunds for thousands of individuals will require significant administrative effort and cost, resulting in unnecessary wastage of taxpayer money.

What were the grounds for interim relief? 

The petitioners have sought interim relief from the Gujarat High Court to protect taxpayers from further hardship.

The key grounds have been advanced for immediate intervention like economic hardship and unfair demands as many affected individuals cannot afford the time and cost involved in pursuing litigation. For a small tax demand, legal expenses often prove more than the disputed amount, which is forcing taxpayers helplessly to accept unjust demands and pay them.

Next one is belated filings and extended deadlines, that is the PIL also points out that the due dates for filing income tax returns vary, while July 31, 2024, was the due date for most individuals, others have until September 30, 2024. This creates an additional layer of confusion and financial hardship for those filing belatedly under the revised utility system.

Hence as I stated above in this article, this petition or PIL focus on same argument focusing on that continuing to process tax returns under the current framework will lead to economic losses and unnecessary disputes. A stay on the government’s action is requested to prevent further issuance of erroneous demand notices, this was dueto the risk of refund delays leading to the wastage of public resources, in case the court eventually rules against the government, affected taxpayers will need to claim refunds, which would involve extensive administrative efforts. Preventing such an outcome is in the national interest, according to the petition.

Relief expected from the High Court by Taxpayers

The PIL makes several specific requests for judicial relief to address the arbitrary disallowance of the Section 87A rebate

First one is to declare the action illegal and arbitrary, the petitioner requests that the court declare the government’s action of denying the rebate and issuing demand notices as illegal, irrational, and a violation of Article 14 of the Indian Constitution, which guarantees equality before the law.

Second expectation from the court is to order the department to modify the tax-filing utility, PIL urges the court to direct the government to update the tax-filing utility to allow rebates under Section 87A, ensuring compliance with the law and avoiding further confusion.

Third one is the direct reprocessing of returns in which the petitioner seeks a directive for the reprocessing of returns for taxpayers affected by the rebate denial. This would allow individuals to claim the benefits they are entitled to under the law.

Forth one is to rectify the opportunity for the taxpayers, given that the statutory time limit for filing rectification requests may expire during the pendency of the petition, the petitioner asks the court to ensure that taxpayers retain the right to rectify their returns based on the court’s final judgment.

The last expectation from high court is to inform the public about this court proceedings, for ensuring the transparency, the PIL also requests that the government display information about the court case and any interim orders on its official website, keeping taxpayers informed about the status of the litigation.

What are the legal and constitutional implications of the case?

This PIL raises several significant legal and constitutional questions like violation of Article 14 as the denial of the Section 87A rebate, despite being applicable under the law, may be seen as discriminatory, violating the principle of equality under Article 14 of the Indian Constitution.

Next one is the sudden change in the tax-filing utility without adequate notice or communication to taxpayers’ points to a lack of procedural fairness, undermining the rule of law, hence this PIL also underscores the need for government accountability in handling public money. Issuing erroneous demand notices and subsequently processing refunds involves a misuse of public resources, which the petition argues is against the national interest.

Impact on Taxpayers and Future Implications

If the Gujarat High Court rules in the favour of the petitioners, the judgment will have wide-ranging implications for the tax administration system in India. A favourable verdict would not only provide relief to thousands of taxpayers but also establish a precedent for fair and transparent tax practices. It could compel the government to ensure better communication and consistency in policy implementation, particularly in areas affecting individual taxpayers.

On the other hand, if the court upholds the government’s action, taxpayers will have to bear the burden of unjust demands. It may also discourage individuals from opting for the new tax regime, impacting the government’s policy goals of tax simplification.

Conclusion

The PIL filed in the Gujarat High Court highlights the challenges faced by middle-class taxpayers in dealing with arbitrary tax demands and rebate denials. At the heart of the case lies the principle of fairness and accountability, both of which are crucial for maintaining public trust in the tax system. The court’s decision will not only determine the fate of the affected taxpayers but also shape the future of tax administration in India, emphasizing the need for transparency, predictability, and adherence to statutory provisions.

As the matter progresses, it will be closely watched by taxpayers, legal experts, and policymakers alike, given its potential to set a critical precedent in the realm of tax law and public governance.

*****

The Author can be contacted at [email protected]