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Taxpayers, CAs File Appeal Against Notices Over Section 87A Rebate Claims: What Can You Do For Resolution?

The Section 87A rebate issue has highlighted the challenges arising out of mid-cycle updates by the tax administration. The absence of any uniform stances from the tax department has put many taxpayers in a quandary. Should you challenge the demand or pay it up? Read to know more

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Even after revising their income tax returns (ITRs) in line with a Bombay High Court directive, many taxpayers, particularly those with income below Rs 7 lakh, are facing demand notices from the Income Tax Department. At the heart of this issue lies the confusion around the interpretation of Section 87A of the Income Tax Act 1961 and understanding the taxability of special rate incomes like Short-term Capital Gains (STGC) under Section 111A.

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What’s the issue?

Section 87A allows a rebate to taxpayers who have lower taxable incomes (meaning income less than the taxation threshold limit). This is how this rebate works under both tax regimes:

Old Tax Regime (OTR): Rebate of up to Rs 12,500 is allowed for income up to Rs 5 lakh

New Tax Regime (NTR): Rebate of up to Rs 25,00 is allowed for incomes up to Rs 7 lakh

However, there has been ambiguity on whether this rebate applies to income taxed at special rates, particularly the STGC which is taxed at 15 per cent. In the past few months, this has triggered a wave of demand notices under Section 143(1), disallowing the rebate even after returns were revised during the window provided by the Income Tax Department (January 15, 2025).

This revision window was opened precisely following a Bombay High Court ruling in December 2024 which acknowledged the need for correction after the ITR utility update of July 5, 2024, had blocked rebate claims on STGC income.

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Still, why is Section 87A rebate denial affecting so many STCG taxpayers even after the Bombay HC order?

Says CA Ashish Niraj, Partner, A S N & Company, Chartered Accountants, “If you read the Bombay HC detailed Judgement in The Chamber of Tax Consultants v. Director General of Income Tax (Systems) then you realise that in it the HC only asked the Income Tax Department to re-enable the claiming of 87A Rebate claim in the utility. It said that taxpayers should be allowed to make a claim, whether it's correct or not can be checked by authorities later by quasi-judicial authorities.”

Since the court only asked the department to modify ITR utility to allow taxpayers to claim the rebate, without giving judgment on the correctness of the claim, it was open for Income Tax Authorities to process it as per their judgment.

“Consequently, the CPC is making demand after processing,” CA Ashish Niraj states.

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Budget Clarification Adds Fuel

In a twist though, Budget 2025 had clarified that from FY 2025-26 onwards, Section 87A rebate will not apply to incomes taxed at special rates. However, this clarification did not apply to FY 2023-24 (AY 2024-25) further frustrating taxpayers who had complied with the previous interpretation, but were stuck in limbo.

Resolution Granted In Some Cases

Parallely, some taxpayers who challenged the demand notices were able to get a resolution in this matter. One such case, documented in an appellate order from February 27, 2025, showed that the CIT(A) ruled in favour of the appellant.

The order had acknowledged that the assessee filed a revised return claiming the Section 87A rebate within the permitted time frame in accordance with the current tax laws. It noted that no adjustment was warranted under Section 143(1) and the demand (by tax officials) was cancelled.

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Now, tax experts are optimistic that such orders, though case-specific, could help establish a consistent precedent.

So, what should taxpayers do if they are facing such tax notices from the tax authorities?

In a recent judgement on the same issue by additional JCIT Appeals, the order was given in favour of the assessee saying Rebate under section 87A is allowed through Chapter VIII.

“If you read Section 87A Rebate along with Section 111A and 112A and 115BAC (1A), the law does not anywhere bar 87A Rebate on Short Term Capital Gains. CPC is disallowing the claim by reading Chapter VIA without considering the fact that 87A Rebate is through Chapter VIII and 115BAC (1A) has an overriding effect on Income Tax Act,” clarifies CA Ashish Niraj.

Is it advisable to pay smaller demands rather than go through the appeal process?

Since judgements are coming in favour of the assessee, CA Niraj says the chances of an order in favour are high but whether to file an appeal or pay a small demand will depend upon the cost involved in filing an appeal.

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It is important to know that ‘appeal charges’ vary from professional to professional. “If taxpayers think they will save more than what's being charged by his professional then he can go for appeal or else pay demand,” he advises.

What documents should a taxpayer ensure are filed along with Form 35 to strengthen their appeal?

According to CA Niraj, taxpayers should compile the proper capital gain statement along with the attachment of the concerned Ledger with the order against which the appeal was filed. This should include:

  • Details of the appeal

  • Taxes paid details

  • Statement of facts, and

  • Ground of appeal etc.

Here’s what you should keep in mind:

  1. Check the date of the intimation order under Section 143(1). Typically, a taxpayer has 30 days to file an appeal via Form 35 (following the date on which the demand has been issued).

  2. Collect all relevant documents including your original and revised ITRs, computation sheets, the Bombay HC order, and the demand notice you have received.

  3. If you are thinking of filing an appeal against the demand, don’t forget to evaluate the cost of the appeal. For small amounts, it might be more beneficial to pay up and avoid procedural delays, however, for larger sums an appeal could help you better. The decision would vary from case to case, therefore it is best to consult a professional for making such choices.

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The Section 87A rebate issue highlights the challenges arising out of mid-cycle updates by tax administration. While appellate orders like the one from February 21 offer ray hope for some, the absence of uniform stances from the tax department has put many taxpayers in a quandary - despite them doing their best to comply with tax laws.

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