Income less than Rs. 7 Lakh – Reasons & Remedy For tax demand
[Query]
a)I have filed my income tax return on 28.07.2024 with income of Rs. 5,29,300/- consisting of Business Income – Rs. 3,70,254/-, Other Source – Interest Income of Rs. 24,708/-, Short Term Capital Gain (STCG) income U/s 111A of Rs. 1,34,336/-. My tax liability as per return filed by me was Rs. 24,898 (on STCG – Rs. 20,150/- & on other income of Rs. 4,748/-). I claimed rebate U/s 87A of Rs. 24,898/- and my resultant final tax liability became Nil. I have claimed a refund of Rs. 289/- of TDS done on my interest income as my tax liability becomes Nil.
b)I have now received intimation under section 143(1) with a demand of Rs. 23,990/- (Tax Rs. 20,956/- plus Interest Rs. 3,108/- Less TDS Rs. 289/-).
c)I have opted for a new tax regime and believe that the tax is not payable if income is not exceeding Rs. 7 Lakh. I am unable to understand the reason as to why the demand has been raised even though the income was below Rs. 7 Lakh? Whether the demand is correct? On discussing with friends, I have been told that the Bombay High court has also allowed the rebate u/s 87A against special rate income? Is this correct? What is the remedy?
Opinion:
Decoding Section 87A: A Tax Rebate for Small Taxpayers
To understand the reason for demand, we first need to revisit Section 87A. This provision aims to lighten the tax burden on small taxpayers without raising the Basic Exemption Limit (BEL). For the financial year 2023-24, Rebate U/s 87A is as under:
a)Old Tax Regime (OTR): Maximum rebate of Rs. 12,500 for total income up to Rs. 5 lakh.
b)New Tax Regime (NTR): Maximum rebate of Rs. 25,000 for total income up to Rs. 7 lakh.
The Centralized Processing Cell’s (CPC) Approach: A Mixed Bag
Now, here’s where things get tricky. The CPC interprets Section 87A differently than many taxpayers. While there’s a common belief that those earning under Rs. 7 lakh should pay no tax, the CPC has taken a stance that restricts the rebate to normal income only, excluding special incomes like capital gains. This means -Taxpayers with mixed income sources may find themselves with unexpected tax liabilities, even when their overall income is within the exempted limit.As a result, many taxpayers with capital gain income are receiving the Income Tax Demand Notices due to the disallowance of the rebate U/s 87A even though their income below Rs. 7 Lakh.
The Real-Life Impact on Taxpayers: A Double-Edged Sword
Let’s illustrate this with two scenarios:
- Case 1: A taxpayer with a Long-Term Capital Gain (LTCG) of Rs. 1 lakh and business income of Rs. 6 lakh. Here, despite the total income not exceeding Rs. 7 lakh, they face tax on that LTCG due to the rebate restrictions.
- Case 2: Another taxpayer boasts an LTCG of Rs. 80 lakh and a business income of Rs. 7 lakh. Despite income exceeding Rs. 7 lakh threshold, they benefit from the rebate on the business income, leaving them to pay taxes only on the capital gain.
Impact:
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 Legality of CPC’s Interpretation: A Controversial Stand
In my opinion, the CPC’s narrow interpretation of Section 87A is flawed for several reasons:
1. No explicit ban exists on allowing rebates for special-rate income, except for LTCG from shares taxable under section 112A.
2. The amendments introduced by the Finance Act 2023 were designed to enhance benefits for taxpayers under the NTR, not to exclude special-rate incomes.The reference to Section 115BAC(1A) in Section 87A is intended to differentiate the benefits to taxpayers under OTR Vs. 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.
3. Prior to July 5, 2024, the CPC allowed rebates on all income types, including special-rate income.
Whether Bombay HC allowed Rebate U/s 87A:
Bombay HC judgement didn’t allow the rebate U/s 87A but rather urged the income tax department to update its software to accommodate rightful claims in the ITR filing by the taxpayers. The legality of the claim was simply left open for the appellate authorities to decide.
Options for Taxpayers Receiving Demand Notices
At present, the taxpayers who do not agree with the demand have following three options which may be exercised sequentially or simultaneously:
1. Rectification Application: File a rectification application under Section 154 with the Income Tax Officer. They may try to convince the Officer and if he agrees, the demand may be nullified by the ITO.
2. Revision Application:If the above doesn’t work out, taxpayers may approach the Commissioner of Income Tax (CIT) with a revision application under Section 264 and if the CIT agrees, he may pass the revisionary order accordingly.
3. Appeal:File an appeal before CIT (Appeals) under Section 254 against the erroneous demand. Appeal has to be filed within 30 days of the intimation u/s 143(1)(a).
While the first two steps might not lead to success, taxpayers may think of directly jumping to the 3rd option. However, it will not only be time consuming but may also be little costlier. Ignoring the professional fees, appeal filing fees is Rs. 1000/- before CIT (A) and later-on Rs. 10,000/- before ITAT.
Final View:
The intent behind Section 87A is to provide relief to small taxpayers. Yet, the current stance of the CPC seems to contradict that purpose, forcing many to face undue financial strain. Considering the cost & complexity involved, many taxpayers may prefer to pay the demand even if it’s based on a flawed interpretation by the CPC.
[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]
