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Section 87A Rebate Allowed on Short-Term Capital Gains under New Tax Regime – ITAT Ahmedabad Ruling

The Income Tax Appellate Tribunal (ITAT) Ahmedabad has delivered a significant judgment on August 12, 2025, clarifying that Section 87A rebate can be claimed even on short-term capital gains (STCG) taxable under Section 111A under the new tax regime (Section 115BAC(1A)), for Assessment Year (AY) 2024–25.

This order has come as a major relief for small taxpayers whose incomes fall below the ₹7 lakh threshold but who were being denied rebate due to automated system checks by the Central Processing Centre (CPC), Bengaluru.

Background of the Case

The assessee, Miss Jayshreeben, a resident individual, filed a revised return for AY 2024–25 declaring a total income of ₹6,76,402, which primarily consisted of STCG on listed equity shares taxable at 15% under Section 111A.

  • She opted for the new tax regime u/s 115BAC(1A).
  • While processing the return under Section 143(1), the CPC denied her claim of rebate under Section 87A amounting to ₹13,320.
  • As a result, a tax demand of ₹15,820 was raised against her.

Miss Jayshreeben challenged this before the Commissioner of Income Tax (Appeals) [CIT(A)], but the appeal was dismissed, with the CIT(A) heavily relying on the Finance Bill, 2025, which proposed restrictions on Section 87A rebate in respect of special-rate incomes.

 

ITAT Ahmedabad’s Ruling

The ITAT bench comprising Judicial Member Smt. Suchitra R. Kamble and Accountant Member Shri Makarand V. Mahadeokar reversed the CIT(A)’s decision.

Key points from the judgment:

  1. No Restriction in Law for AY 2024–25
    • Section 87A, as applicable to AY 2024–25, did not contain any restriction on granting rebate where income includes STCG taxable under Section 111A.
    • The restriction has been proposed only in the Finance Bill, 2025 to take effect from AY 2026–27.
  2. Explanatory Memorandum Cannot Override Law
    • The Explanatory Memorandum to the Finance Bill, 2025 clarifies intent but cannot be used as a source of law.
    • Substantive rights must be determined by the plain language of the statute.
  3. Comparison with Long-Term Capital Gains (LTCG)
    • Section 112A(6) specifically provides that rebate u/s 87A shall not apply to tax on LTCG.
    • No such exclusion exists for STCG under Section 111A.
    • This absence of restriction is significant and supports the taxpayer’s claim.
  4. Section 115BAC(1A) Does Not Deny Rebate
    • Section 115BAC(1A) deals with concessional slab rates and applicability of Chapter XII provisions.
    • It does not alter the scope of Section 87A, which remains applicable to the total tax liability, including special-rate taxes, unless specifically excluded.
  5. System-Based Denial is Invalid
    • The CPC’s automated denial of rebate was based on system logic and not statutory mandate.
    • ITAT noted that judicial bodies cannot rely on CPC configurations to deny a taxpayer’s statutory rights.

Final Decision

The ITAT held that:

  • Jayshreeben was eligible for rebate under Section 87A for AY 2024–25.
  • The AO was directed to grant the rebate of ₹13,320 and recompute the tax liability.
  • The CPC’s tax demand of ₹15,820 was deleted, and any refund due was ordered to be processed.

Our View

This judgment is a reminder that small taxpayers must not be penalized due to system-driven disallowances. Section 87A was designed as a relief measure for lower-income groups, and denying it without explicit statutory backing was unfair.

👉 Taxpayers with STCG income below ₹7 lakh under the new regime for AY 2024–25 and AY 2025–26 can now confidently claim rebate u/s 87A, while also being prepared for the restrictions that will apply from AY 2026–27 onwards

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