Unjust Tax Demands: The Confusion over Rebate Under Section 87A
Many taxpayers are receiving the Income Tax Demand Notices due to the disallowance of the rebate claimed in their ITRs under section 87A. This issue has caused considerable confusion not only among taxpayers but also among accountants and tax professionals. Let’s break down why it is happening & the options available with the taxpayers.
What is section 87A:
1. To offer the tax benefits to small taxpayers without enhancing the Basic Exemption Limit (BEL), the concept of tax rebate under section 87A was introduced.
2. Tax rebate under section 87A for the FY 2023-24 operates as under:
a) For taxpayers opting for the Old Tax Regime (OTR):Tax rebate shall be maximum of Rs. 12,500/- subject to the condition that the total income doesn’t exceed Rs. 5 Lakh.
b) For taxpayers opting for the New Tax Regime (NTR): Tax rebate shall be a maximum of Rs. 25,000/- subject to the condition that the total income doesn’t exceed Rs. 7 Lakh.
How Centralized Processing Cell (CPC) of Income Tax Department is granting rebate U/s 87A:
1. There is a general understanding that taxpayers with income not exceeding Rs. 7 lakh should not be liable to pay any tax, regardless of the type & nature of income—whether it’s normal income taxable at slab rates or special income taxed at concessional rates, like:
a) Long-Term Capital Gains (LTCG), taxed at 10% (Section 112A) or 20% (Section 112)
b) Short-Term Capital Gains (STCG) on shares, taxed at 15% (Section 115A)
2. However, the CPC has taken a different approach during return processing as under:
a)Rebate under Section 87A is granted only for normal income, provided the total income doesn’t exceed Rs. 7 lakh.
b)No rebate is granted on special income such as LTCG or STCG.
Impact of CPC’s Interpretation – Illustration:
The above view adopted by CPC has repercussions on either side, in favour of the taxpayers and also against the taxpayers. Let us understand it with an illustration:
Case – 1:
A Taxpayer has LTCG on sale of property of Rs. 1 Lakh and regular business income of Rs. 6 Lakh. In this case, though the income is not exceeding Rs. 7 Lakh, still the rebate U/s 87A is restricted to income of Rs. 6 Lakh and the taxpayer is made liable to pay the tax on income of Rs. 1 Lakh.
Case – 2:
A taxpayer has LTCG on sale of property of Rs. 80 Lakh and regular business income of Rs. 7 Lakh. In this case, though the total income is Rs. 87 Lakh i.e., exceeding Rs. 7 Lakh, still the rebate U/s 87A is allowed to the taxpayers on the income of Rs. 7 Lakh and the taxpayer is liable to pay the tax only on income of Rs. 80 Lakh of LTCG.
In the first case, the taxpayer is liable to pay the tax despite the income not exceeding Rs. 7 Lakh whereas in the second case, the taxpayer is eligible for rebate U/s 87 despite income being far more than Rs. 7 Lakh.
The Logic Behind CPC’s Interpretation:
The CPC’s stance appears to be based on the proviso to Section 87A, which grants the rebate subject to the condition that:
“The total income of the assessee is chargeable to tax under Section 115BAC(1A) and does not exceed Rs. 7 lakh.”
CPC while processing the return has probably adopted the view that only regular income covered by section 115BAC (1A) will be eligible for rebate U/s 87A and other income like STCG, LTCG, etc which are taxable at a special rate are not eligible for the said rebate.
Is the CPC’s Approach Correct?
In my considered view, the CPC’s interpretation is incorrect and flawed for the following reasons:
1. There is no such explicit bar or restriction placed in section 87A for rebate against special rate income.
2. The reference to Section 115BAC(1A) in Section 87A is intended to differentiate the benefits to taxpayers under the OTR vis a vis NTR, as under:
a) Under the NTR, taxpayers can benefit from income up to Rs. 7 lakh and claim higher rebate up to Rs. 25,000 with the benefit of marginal relief as well.
b) Under the OTR, the benefits are capped up to income of Rs. 5 lakh and a rebate of Rs. 12,500, without any marginal relief benefit.
The amendment to Section 87A was not meant to exclude special-rate income but to offer enhanced benefits to taxpayers under the NTR & restricts the benefit available to taxpayers under OTR.
3. Prior to July 5, 2024, the CPC was allowing the rebate on all types of income including special-rate income.
4. In my view, as long as a taxpayer’s total income, including special-rate income, does not exceed Rs. 7 lakh under the NTR, they should be eligible for the full rebate. The change in processing post-July 5, 2024 that restricts the rebate only to normal income in my view is totally unjustified and inconsistent.
Options for Taxpayers Receiving Demand Notices
Taxpayers now have two choices:
1. Pay the Tax: This could be a pragmatic option to avoid time-consuming litigation, even though the demand may be unjust.
2. Challenge the Demand: Taxpayers can opt to litigate the issue by:
i) Filing a rectification application under Section 154 with the Income Tax Officer.
ii) Filing an appeal with the CIT (Appeals) under Section 254 against the erroneous demand.
iii) Filing a revision application under Section 264 with the jurisdictional CIT.
However, these legal routes are likely to be prolonged and costly, and might involve further appeals to the ITAT. Given the complexity, many taxpayers may prefer to settle the demand, even if it’s based on a flawed interpretation by the CPC.
Conclusion:
Section 87A is incorporated as an alternative to raising the BEL, which could have otherwise significantly reduced the number of tax return filers. Though the purpose of section 87A is to offer the benefit to the small taxpayers but above erroneous processing may not yield the desired result in all the cases. Even the person with income exceeding Rs. 7 Lakh may be benefited whereas the taxpayers with income less than Rs. 7 Lakh may be liable to pay the tax. Section 87A is ill drafted from day one & the logic and law are not at par when it comes to section 87A rebate. Poor drafting & implementation is also defeating the very basic purpose of tax simplification.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
