Section 87A Rebate Disallowance Appeal: Victory of Taxpayers

In a landmark decision, the tax authorities have passed an order favouring assessee in a case concerning the Section 87A rebate. This case arose due to updation in the Income Tax Return (ITR) utility on 5th July 2024, which affect  many taxpayers in filing their return of income for the Assessment Year 2024-25 (i.e. financial year 2023-24 ) as the taxpayers were not allowed to claim rebate u/s 87A against special rate income after such updation in utility.

Understanding rebate u/s 87A if assessee opting new tax regime u/s 115BAC

If a resident individual having total income upto Rs.7,00,000 and he is opting new tax regime of section 115BAC  then a he can avail rebate under section 87A of Rs. 25,000 or actual tax liability, whichever is lower. In such case his tax liability shall be nil if his total income is upto Rs. 7,00,000. Considering the same provision many individuals filed their income tax return and availed a benefit of this section.

However a notable discrepancy arise when after 5th July 2024, those taxpayers were filing their income tax return (ITR) were denied to claim rebate of section 87A against special rate income. Prior to 5th July 2024, the ITR utility allowed taxpayers to claim the rebate under Section 87A and this rebate was allowed against special income including short term capital gain. However after 5th July 2024, the income tax utility was updated and taxpayers filing ITR after this update, the updated utility was not allowing tax payers to claim rebate under the same conditions. This led to confusion and inconvenience for many taxpayers who had filed their returns after 5th July 2024.

Similar incident took place with the assessee named  Beena Manishbhai Fofaria. Where she claim rebate against short term capital gains which was denied by the CPC and she prefer to appeal before CIT (appeals) against Assessing Officer. Lets understand her case overview ;

Facts of the case

Assessee filed her Income Tax Return (ITR)  for AY 2024-25 on 29th July 2024. she declared total income of Rs 6,93,260 comprising

• • Long-term capital gains (LTCG): Rs.1,38,049
  • Short-term capital gains (STCG): Rs.65,066
  • Other taxable income: Rs.4,90,145

She claim a rebate u/s 87A of Rs. 20,010/- and total refund of Rs. 21,513/- in her income tax return. Rebate of Rs. 20,010/- includes ;

• • Rs. 9,760 on STCG (15% on Rs. 65,066)
  • Rs. 10,250 on regular income.

The Issue

While filing the ITR she claimed rebate u/s 87A on short term capital gain (STCG). However the CPC (Centralised Processing Centre) processed the return and disallowed  the rebate of Rs 9,760/- claimed on STCG income and restrict the overall rebate to Rs. 10,250/-.  This resulted in an increased in tax liability of the assessee and reduced her refund by Rs. 9,760/-. The screenshot of the computation of rebate u/s 87A of the Act by CPC in the intimation order passed u/s 143(1) of the Act is below given

The Utility Change and Its Impact

The problem arose because of a utility update on 5th July 2024 which altered the rules for calculating the rebate u/s 87A . The update restricted the rebate for incomes taxed at special rates such as STCG and LTCG. Hence those taxpayers were filing return  after 5th July 2024 had to comply with the revised rules. Whereas those who had filed there ITR before 5th July 2024 and claimed rebate against such special rates income, their claim was denied as CPC retrospectively disallowed such rebates. This Created inconsistency and confusion and prompting affected taxpayers to file appeals.

Filing the Appeal: Grounds and Arguments

Aggrieved with the intimation order passed by CPC us 143(1) of the ACT, assessee filed an appeal, Appeal no.- ADDL/JCIT (A)-1 Pune/10004/2023-24, u/s 246 of the Income Tax Act 1961, on 2nd October 2024.The assessee challenged the rebate disallowance on the following grounds :

Grounds of Appeal

• Violation of natural justice: CPC processed the return based on new rules disregarding the rules placed at the time of filing return of income.
• Erroneous Computation: Section 87A did not explicitly excludes STCG from rebate when the return was filed.
• Principle of Equity: Taxpayers filing before and after the utility change were treated differently, creating inequity.
• Lack of justification: The CPC provided no explanation for the disallowance in the intimation under section 143(1).

Arguments Presented

The taxpayer submitted the following key arguments:

• The total income, excluding LTCG, was Rs 5,55,211, well within the Rs.7,00,000 limit for rebate eligibility.
• The rebate of Rs.9,760 on STCG at 15% was valid under the rules applicable before July 5, 2024.
• Retroactive denial of the rebate contradicted established legal principles and caused undue hardship.

The Decision: A Win for the Taxpayer

The Commissioner of Income Tax (Appeals) reviewed the case and ruled in favour of the taxpayer.

Key points from the judgment include:

1. Utility Change and Its Retroactive Impact:
   The CIT acknowledged that the utility at the time of filing allowed the rebate. Retroactive application of changes was deemed unjust and inconsistent with principles of natural justice.
2. Legal Interpretation of Section 87A:
   The rebate was correctly claimed based on the taxpayer’s total income and the tax rates applicable at the time of filing.
3. Direction to Assessing Officer:
   The jurisdictional assessing officer was instructed to verify the taxpayer’s claims and allow the rebate and refund accordingly.

Key Takeaways from the Case

1. Always Verify Utility Changes: Stay updated with the latest notifications and changes in the Income Tax filing utility to avoid surprises during processing.
2. Maintain Records: Keep a copy of the ITR filing utility used and computation details as proof in case of discrepancies during processing.
3. Respond to Notices Promptly: If a rebate or deduction is disallowed then Review the notice for details and file an appeal under Section 246A within the stipulated time.
4. Seek Legal Support: For complex cases, consult a tax advisor or legal expert to present your case effectively before the appellate authority.

Steps to File an Appeal

Here’s a step-by-step guide to filing an appeal if you face similar issues:

1. File Form 35: Log in to the Income Tax e-filing portal and fill out Form 35, detailing the grounds of your appeal.
2. Attach Supporting Documents:Include copies of the ITR acknowledgment, computation sheets, and the relevant section of the utility used.
3. Submit Online: Appeals are now processed via the Faceless Appeal System, ensuring transparency and efficiency.
4. Prepare for E-Hearings: Be ready to respond to queries and provide additional documentation through the e-response system.

Conclusion

Section 87A rebate is a significant relief for eligible taxpayers, but its application can sometimes be misinterpreted. This case emphasize the importance of staying informed, maintaining clear records, and leveraging the appeals system to resolve disputes. By following a systematic approach and seeking professional advice when needed, taxpayers can ensure compliance while protecting their rights.

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