2025 (9) TMI 291 - AT - Income Tax

Assessee entitled to rebate under section 87A for short-term capital gains; AO denial set aside and remanded for compliance

ITAT (Agra) allowed the assessee's claim for rebate under section 87A in respect of short-term capital gains, set aside the AO's denial, and directed the ... Denying the claim of rebate u/s 87A - short-term capital gains - HELD THAT:- As relying on JAYSHREEBEN JAYANTIBHAI PALSANA VERSUS ITO, WARD-1 (9) AHMEDABAD. [2025 (8) TMI 842 - ITAT AHMEDABAD] Assessee would be eligible for claim of rebate under section 87A of the Act for the year under consideration. The Learned AO is directed accordingly. The grounds raised by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a resident individual who has opted for taxation under Section 115BAC(1A) and whose total income does not exceed the prescribed threshold is eligible to claim rebate under Section 87A of the Income-tax Act against tax payable on short-term capital gains taxable under Section 111A. 2. Whether the 'subject to the provisions of this Chapter' clause in Section 115BAC(1A) or any provision in Chapter XII operates to exclude or deny the rebate under Section 87A in respect of tax on short-term capital gains under Section 111A. 3. Whether explanatory notes or prospective legislative proposals (Finance Bill / Explanatory Memorandum) applicable to later assessment years can be invoked to deny Section 87A rebate for the assessment year in question. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Availability of Section 87A rebate against tax on STCG under Section 111A where taxpayer opts for Section 115BAC(1A) Legal framework: Section 87A provides a rebate from income-tax for resident individuals whose total income does not exceed the statutory threshold; the amended first proviso (Finance Act, 2023) grants rebate to individuals chargeable under Section 115BAC(1A) subject to the threshold. Section 111A prescribes a special rate (15%) for short-term capital gains on specified transfers. Section 112A contains an express limitation in subsection (6) denying rebate in respect of certain long-term capital gains. Precedent Treatment: The Tribunal relied on authoritative appellate orders and the direction of the High Court in related disputes which required the processing of claims and recognized that merits must be adjudicated by quasi-judicial authorities. Coordinate appellate decisions allowing rebate on identical facts were followed. Interpretation and reasoning: The Tribunal undertook a plain-language statutory interpretation. The proviso to Section 87A refers to 'total income' and to amounts 'chargeable to tax under subsection (1A) of section 115BAC' without expressing any exclusion of incomes taxed at special rates under Chapter XII. Section 111A contains no express prohibition on applying Section 87A. By contrast, where the legislature intended to restrict rebate for special-rate capital gains it did so expressly (see Section 112A(6)). The 'notwithstanding' and 'subject to' language in Section 115BAC(1A) governs computation and rates but does not by itself negate entitlement to a rebate under Chapter VIII absent explicit statutory language to that effect. The Tribunal held that Section 87A operates after computation of tax and grants a deduction from computed tax; therefore, it applies to the computed tax (including tax on STCG) unless expressly excluded. Ratio vs. Obiter: Ratio - The core holding that Section 87A rebate is allowable against tax on STCG under Section 111A for an eligible resident individual who has opted for Section 115BAC(1A) and whose total income does not exceed the threshold (for the relevant assessment year). Obiter - Observations on the absence of system rationale being a permissible basis for denial and references to other appellate orders illustrating divergent views. Conclusions: Rebate under Section 87A must be allowed in respect of tax on short-term capital gains under Section 111A where the assessee is a resident individual, total income is within the threshold, and the assessee has opted for taxation under Section 115BAC(1A). The demand raised for denial of the rebate is to be deleted and tax liability recomputed. Issue 2 - Effect of the 'subject to the provisions of this Chapter' clause in Section 115BAC(1A) and Chapter XII on Section 87A entitlement Legal framework: Section 115BAC(1A) begins with a non-obstante clause but is expressly made 'subject to the provisions of this Chapter' (Chapter XII), which contains special-rate provisions (including Section 111A). Section 87A is located in Chapter VIII (rebates and reliefs) and operates to reduce computed tax. Precedent Treatment: The Tribunal referred to appellate orders which confined the scope of Section 115BAC(1A)'s override to computation of tax and did not accept that the clause nullifies other statutory rebates unless specifically provided. Interpretation and reasoning: The Tribunal construed the 'subject to' language as limiting Section 115BAC(1A)'s operation to the method of computing tax (ensuring special-rate incomes are taxed at their rates) but not as an instrument to abrogate separate statutory rebates under other chapters. Since Section 87A is not a charging provision but a post-computation rebate provision, the 'subject to Chapter XII' qualification does not ipso facto preclude Section 87A unless Section 87A or the relevant special-rate provision expressly provides exclusion. Absent such express language in Section 111A or Section 87A, the rebate remains available. Ratio vs. Obiter: Ratio - The 'subject to' clause in Section 115BAC(1A) does not, by itself, operate to exclude entitlement to Section 87A rebate for STCG under Section 111A. Obiter - Analysis of the functional distinction between computation (Chapter XII) and rebate (Chapter VIII) and general principles of statutory construction applied to taxing statutes. Conclusions: The qualifying language in Section 115BAC(1A) confines its override to computation and rates; it does not negate a separately enacted rebate under Section 87A in the absence of an express exclusion. Issue 3 - Role of explanatory notes and prospective legislative proposals in construing entitlement for the assessment year in question Legal framework: Explanatory memoranda and Finance Bill notes are aids to interpretation but cannot alter the plain statutory language or have retrospective application beyond what Parliament enacts. Prospective amendments apply from the date legislated. Precedent Treatment: The Tribunal relied on the principle that explanatory notes and proposed amendments are interpretive aids and cannot override the existing statutory text for the assessment year under dispute. Interpretation and reasoning: The Tribunal rejected reliance on the Explanatory Memorandum to the Finance Bill (proposing restriction from a later assessment year) as a basis to deny rebate for the current assessment year. Two reasons were given: (i) the proposed amendment is prospective (applicable to subsequent assessment years) and (ii) explanatory notes cannot supplant the clear statutory text. The Tribunal also noted that the CPC's system-driven denial cannot substitute for statutory mandate. Ratio vs. Obiter: Ratio - Explanatory memoranda or prospective legislative proposals cannot be used to curtail statutory rights under the unamended law for the relevant assessment year. Obiter - Comments on administrative/system errors and the duty of quasi-judicial authorities to adjudicate merits despite systemic denials. Conclusions: The explanatory notes and proposed amendments are not a valid ground to deny Section 87A rebate for the assessment year under consideration; the statutory text applicable to that year governs the outcome. Ancillary Reasoning and Directions 1. The Tribunal directed the assessing authority to allow the rebate and recompute the tax liability, deleting any demand raised on account of the denial. 2. The Tribunal treated earlier appellate authority and High Court directions as persuasive, following decisions that required processing of claims and that recognized merits must be decided by competent quasi-judicial fora; such precedents were followed rather than distinguished. 3. The Tribunal emphasized the applicability of the settled principle that exemption or rebate provisions must be strictly construed against the taxing statute only where the statute so provides, and in absence of explicit exclusion, benefit accrues to the assessee.