Introduction

One of the most debated income-tax issues in the current year has been the scope of rebate under Section 87A, particularly in situations where the assessee’s income comprises short-term capital gains (STCG) on listed equity shares taxable under Section 111A while opting for the default new regime under Section 115BAC(1A).

The matter attained significance because, post the Finance Act 2023, Section 87A was expanded to grant a rebate up to ₹25,000 for resident individuals with total income not exceeding ₹7,00,000 under the new regime.

However, confusion arose when the Centralised Processing Centre (CPC) systems began mechanically denying such rebate on incomes taxed at special rates, especially STCG under Section 111A.

The Ahmedabad ITAT (SMC Bench) in the case of Jayshreeben Jayantibhai Palsana vs. ITO (ITA No. 1014/Ahd/2025, order dated 12.08.2025) has now decisively addressed this controversy

Facts of the Case

The assessee, a resident individual, filed her revised return of income for Assessment Year 2024–25 opting for the new regime under Section 115BAC(1A). The income declared consisted of short-term capital gains of ₹3,79,559 taxable at 15% under Section 111A, long-term capital gains of ₹38,840 which was below the exemption threshold under Section 112A, and income from other sources of ₹9,236.

Her total income thus stood at ₹6,76,402, which was well within the prescribed limit of ₹7,00,000. On this basis, she claimed a rebate of ₹13,320 under Section 87A, equal to the entire tax liability arising on STCG.

The CPC, Bengaluru, while processing the return under Section 143(1), denied the rebate without assigning any specific reason and raised a tax demand of ₹15,820, inclusive of cess and interest.

The first appellate authority (CIT(A)) upheld the CPC’s adjustment, primarily relying on the interpretation that incomes falling under Chapter XII, being taxable at special rates, cannot be offset by rebate under Section 87A. Reliance was also placed on the Memorandum to the Finance Bill, 2025, which suggested that rebate was not intended to apply to such incomes.

The Issue for Consideration

The central question before the Tribunal was whether a resident individual, whose total income does not exceed ₹7,00,000 and who has opted for the new tax regime under Section 115BAC(1A), is entitled to rebate under Section 87A even when the income comprises short-term capital gains taxable at 15% under Section 111A.

Arguments of the Parties

The Revenue, through the order of the CIT(A), argued that the rebate was not available in this case because Section 115BAC(1A) is expressly made “subject to” the provisions of Chapter XII, which includes incomes like STCG under Section 111A and LTCG under Section 112A. The view taken was that rebate cannot be granted on such special rate incomes and that the Memorandum to the Finance Bill 2025 only clarified what was already implicit in the law.

The Assessee, on the other hand, argued that Section 87A, as amended by the Finance Act 2023, is unambiguous in granting a rebate up to ₹25,000 to a resident individual opting for the new regime where total income does not exceed ₹7,00,000.

The provision does not distinguish between normal income and special rate income. Importantly, the legislature has, in Section 112A(6), specifically barred rebate against long-term capital gains exceeding ₹1 lakh, but no such bar exists for short-term capital gains under Section 111A.

It was contended that the express exclusion for LTCG and the absence of a similar exclusion for STCG is a deliberate legislative choice and cannot be ignored.

Further, the Finance Bill 2025 amendment, proposing to extend such exclusion to all special rate incomes from A.Y. 2026–27, is prospective and cannot be applied to earlier years. The assessee also placed reliance on appellate orders in similar matters, such as Avni Milanbhai Maniya (CIT(A), Nagpur, 2025), and on the judgment of the Bombay High Court in The Chamber of Tax Consultants vs. DGIT (Systems) which directed that CPC cannot deny rebate claims mechanically.

Tribunal’s Analysis

The Tribunal carefully examined the statutory provisions and rival arguments. It noted that Section 87A, as amended, simply provides that where the total income of a resident individual is chargeable under Section 115BAC(1A) and does not exceed ₹7,00,000, a rebate up to ₹25,000 shall be granted. There is no language in Section 87A which excludes tax on STCG under Section 111A from the scope of rebate.

The reliance by the CIT(A) on the Finance Bill 2025 memorandum was found misplaced. The Tribunal observed that the amendment proposed therein, effective only from A.Y. 2026–27, actually supports the assessee’s case by confirming that no such restriction existed earlier. Furthermore, the explanatory notes to a Finance Bill are only aids to interpretation and cannot override the clear language of the statute.

Reference was also made to judicial developments, including the Bombay High Court’s ruling that CPC system configurations cannot curtail statutory rights. The Tribunal emphasised that the disallowance by CPC appeared to be driven by automated logic rather than any statutory mandate.

Tribunal’s Decision

On this reasoning, the Tribunal held that the assessee, being a resident individual with total income below ₹7,00,000 and assessed under Section 115BAC(1A), was eligible for rebate under Section 87A in respect of her tax liability on STCG under Section 111A. The adjustment made by CPC and confirmed by CIT(A) was therefore not sustainable. The demand of ₹15,820 was deleted, and the Assessing Officer was directed to allow the rebate of ₹13,320 and recompute the tax liability accordingly.

Key Takeaways for Professionals

This ruling has important implications for both taxpayers and professionals. For A.Y. 2024–25 and A.Y. 2025–26, rebate under Section 87A is available even where total income includes STCG taxable under Section 111A, provided the total income does not exceed ₹7,00,000 and the assessee has opted for the new regime. From A.Y. 2026–27 onwards, however, the amendment introduced by the Finance Act 2025 will bar rebate against all special rate incomes, including STCG under Section 111A and LTCG under Section 112A.