Income Tax Demand Notices Vs . Disallowance of Rebate under section Section
Many taxpayers are currently receiving Income Tax Demand Notices due to the disallowance of the 87A rebate in their ITRs.
There is a lot of confusion with regard to such demand amongst taxpayers. Let us know about it.
What’s the issue:
The issue is with regard to Rebate Disallowance U/s 87A.
Changes in the income tax portal’s utility is done from July 5th, 2024 with regard to the mode of treating the special rate income (e.g., capital gains or income from online gaming etc are treated. Now, no section 87A rebate is getting allowed on such income.
Some tax software hasn’t been updated with the new guidelines leading to claims not permitted in accordance with the updated version of the CPC. Whether the disallowance is correct or not is a matter of disputes and litigation. The same is discussed hereunder.
Interpretational Issue with regard to section 87A vis a vis proviso introduced to section 87A by Finance Act – 2023.
Entire section 87A reads as under:
Rebate of income-tax in case of certain individuals.
87A. An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less:
1[Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—
(a) does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;
(b) exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.]
One may note that section 87A doesn’t bar or restrict any deduction of special rate income. The views in favour of disallowance appears to be emerging from the following proviso introduced by FA-2023:
“Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—
One may note that the amendment in section 87A by the Finance Act – 2023 was to in respect of the following:
1. To enhance the limit of Rs. 12,500/- to Rs. 25,000/- if the person is following New Tax Regime U/s 115BAC.
2. To introduce the concept of marginal tax if the person is following New Tax Regime U/s 115BAC.
3. To provide a higher exemption limit of Rs. 3 Lakh if the person is following New Tax Regime U/s 115BAC as against Rs. 2.50 Lakh earlier for all categories of the taxpayers
In short, the purpose of 87(1A) was not to exclude the special rate income from the purview of rebate but only above 3 benefits.
If the conclusion taken by the CPC of disallowing rebate from the special rate income is taken then it may be noted that there will not be any concept of “Basic Exemption limit” as used in the entire Income Tax Act – 1961. Section 115BAC provides that tax on income up to Rs. 3 Lakh will be Nil. Effectively, if any individual has only LTCG income, he will not be eligible for deduction of even Rs. 3 Lakh. In short, the rebate U/s 87A is illegally denied by the CPC.
The logic and law are not at par when it comes to section 87A rebate. There need not be any difference in the tax liability if the return is filed prior to 5th July 2024 and one after that. In my view, the present processing of return is totally erroneous and illegal.
What to do now:
The taxpayers now have two options. Either pay the tax or litigate the issue before the appellate authorities, as under:
Pay the Tax:
If any taxpayers have received a demand notice, it is unlikely that the views of the department are going to change. The payment of the tax would be a peaceful option.
Litigate the issue with following options:
Not allowing rebates U/s 87A against special rate income is not in accordance with the provision of section 87A. In my view, there is a wrong interpretational issue which is resulting in the denial of rebate U/s 87A against special rate income.
If the taxpayers or tax professional doesn’t agree with the processing of ITR by CPC then following three options can be used:
1. File an application for rectification under section 154:
The processing U/s 143(1)(a) is prima-facie a mistake apparent from record and is within the scope of section 154. Taxpayers may file an application before Income Tax Officers for its rectification U/s 154. If accepted, the demand would stand corrected. If not, taxpayers can file an appeal either against order U/s 154 or against intimation U/s 143(1)(a).
2. Filing an appeal before CIT (A):
a) Taxpayer can directly file an appeal with CIT (A) against intimation U/s 143(1)(a) without resorting to rectification application u/s 154.
b) Alternatively, taxpayers can first explore options under section 154 and if it is not decided favourable by the income tax officer then Taxpayers may choose to file an appeal with CIT (A).
This appeal with CIT (A) has to be accompanied by a fee of Rs. 1000/- and has to be done within a period of one month of either the order U/s 154 or intimation U/s 143(1)(a) depending upon the order against which the appeal is preferred.
If accepted, the demand would stand corrected. If not, taxpayers can file an appeal before ITAT.
3. File an application for revision under section 264:
Option under section 154 may not be favourable in many cases and it may happen that the taxpayers may be required to approach CIT (A) and ITAT in sequence which may be little more time consuming. Taxpayers may choose to directly approach the Jurisdictional CIT for revision of intimation u/s 264. It may be noted that the CIT (A) are empowered with revisionary power in favour of the taxpayer u/s 264. This application has to be accompanied by a fee of Rs. 500/- and has to be done within a period of one year from the date of intimation U/s 143(1)(a).
If accepted, the demand would stand corrected. If not, taxpayers can file an appeal before ITAT as appeal in such cases cannot be filed with CIT (A).
The question now arises whether the assessee should follow the route of
a) ITO – CIT(A) – ITAT or
b) CIT U/s 264 – ITAT.
In my view, the first option would be better as there are chances of the issue getting settled before ITAT as well during appeal before CIT (A). In my view, CIT U/s 264 may not turn out to be favourable to the taxpayers.
