Rebate under Section 87A allowed on 115BAC(1A) income including Section 111A STCG for AY 2024-25

The ITAT Rajkot allowed the assessee's appeal, holding that a resident individual, assessed under the new tax regime u/s 115BAC(1A) for AY 2024-25 with total income not exceeding Rs. 7,00,000, is entitled to rebate u/s 87A even where income includes STCG taxable at special rates u/s 111A. The Tribunal found no statutory prohibition in ss. 87A or 111A against granting such rebate and held that denial of rebate by CPC, Bengaluru, based on system-driven logic, lacked legal foundation. The assessment was directed to be modified accordingly.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether, for the relevant assessment year, a resident individual assessed under section 115BAC(1A) with total income not exceeding Rs. 7,00,000, including short-term capital gains chargeable under section 111A, is eligible to claim rebate under section 87A.

1.2 Consequentially, whether the adjustment made in processing under section 143(1), and its confirmation in appeal, disallowing rebate under section 87A and raising a tax demand, is legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Eligibility of rebate under section 87A where total income (including STCG under section 111A) does not exceed Rs. 7,00,000 and assessee is under section 115BAC(1A)

Legal framework (as discussed)

2.1 The Tribunal reproduced and relied upon the reasoning of a Coordinate Bench which had examined: (i) section 87A as amended by Finance Act, 2023 (first proviso applicable from A.Y. 2024-25); (ii) section 111A; (iii) section 112A(6); (iv) section 115BAC(1A) and its opening "notwithstanding" and "subject to" clauses; and (v) the proposed amendments and Explanatory Memorandum to Finance Bill, 2025 concerning section 87A.

Interpretation and reasoning

2.2 The Tribunal, following the Coordinate Bench, noted that the amended first proviso to section 87A, applicable from A.Y. 2024-25, grants rebate to a resident individual whose total income is chargeable to tax under section 115BAC(1A) and does not exceed Rs. 7,00,000, without carving out any exception for income taxed at special rates.

2.3 It was emphasized that neither section 87A nor section 111A contains any express restriction denying rebate in respect of tax on short-term capital gains on listed equity shares taxable at 15% under section 111A.

2.4 By contrast, section 112A(6) specifically restricts the availability of rebate under section 87A by providing that the rebate shall be allowed from income-tax on total income as reduced by tax payable on specified long-term capital gains. The absence of any analogous exclusion in section 111A was treated as a deliberate legislative choice supporting the assessee's claim.

2.5 Regarding the "subject to the provisions of this Chapter" clause in section 115BAC(1A), the Coordinate Bench reasoning adopted held that this clause operates only for computation of tax and deference to the special rate provisions in Chapter XII. Section 87A, being in Chapter VIII and not in Chapter XII, is not overridden or curtailed by section 115BAC(1A) in the absence of explicit statutory language.

2.6 The Tribunal accepted the view that section 87A applies to the total tax so computed (whether comprising slab-rate income or special-rate income), as long as the statutory conditions regarding residential status, regime under section 115BAC(1A), and monetary ceiling of total income are satisfied.

2.7 As to reliance placed by the lower authority on the Explanatory Memorandum to the Finance Bill, 2025, the Coordinate Bench reasoning (followed in this case) held that: (i) the Finance Bill, 2025 introduced new restrictions prospectively from A.Y. 2026-27, implying that no such restriction existed for A.Y. 2024-25; and (ii) an Explanatory Memorandum is an interpretative aid and cannot override clear statutory language. Hence, the prospective nature of the amendment supported the position that, for the relevant year, rebate under section 87A could not be denied merely because the tax arose from section 111A gains.

2.8 The Tribunal further took note (through the Coordinate Bench decision) that higher judicial and appellate authorities have recognized that automated or system-based denial of rebate under section 87A cannot supersede statutory entitlement, and that the issue must be determined by a quasi-judicial authority on the basis of the law as it stood during the relevant assessment year.

Conclusions

2.9 Relying fully and respectfully on the binding Coordinate Bench decision on identical facts and law, the Tribunal concluded that, for the relevant assessment year, a resident individual with total income not exceeding Rs. 7,00,000, assessed under section 115BAC(1A), is eligible for rebate under section 87A even where such income includes short-term capital gains taxable under section 111A.

Issue 2 - Sustainability of adjustment under section 143(1) disallowing rebate under section 87A

Interpretation and reasoning

2.10 The Tribunal noted that the lower authorities had proceeded to deny rebate under section 87A in processing under section 143(1) and in appellate confirmation, effectively following the system-driven logic adopted by the CPC and the interpretation that rebate was not available on tax payable on section 111A gains under the new regime.

2.11 Once the substantive issue of eligibility to rebate under section 87A was held in favour of the assessee by following the Coordinate Bench, and no contrary material or change in facts or law was shown by the Revenue, the Tribunal found no justification to uphold the adjustment or the consequent demand.

Conclusions

2.12 As a corollary to the finding that the assessee was substantively entitled to rebate under section 87A, the Tribunal held that the adjustment made under section 143(1) denying such rebate and the resultant addition/demand were unsustainable. The addition made by the Assessing Officer was deleted and the appeal was allowed in full.

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