87A Rebate: When the Computer Said “No”, Nagpur ITAT Said “Yes”
Nagpur ITAT allows rebate on special-rate income for AY 2024-25; but was this litigation really necessary?
Imagine a taxpayer with a total income of less than ₹7 lakh. The law says such a taxpayer, if covered by the new tax regime, can get a rebate of up to ₹25,000. The taxpayer calculates the tax, claims the rebate and files the return.
Then comes the computer.
The computer says: “Rebate not allowed.”
The taxpayer asks: “Why?”
The answer is essentially: “Because the system has been programmed that way.”
Welcome to one of the more interesting tax controversies of recent times—section 87A rebate on income taxable at special rates, particularly short-term capital gains taxable under section 111A.
The good news is that the Nagpur Bench of the Income Tax Appellate Tribunal has now joined the growing list of Tribunals holding in favour of taxpayers.
In a common order dated 7 August 2026, in ITA Nos. 406/NAG/2026 and 414/NAG/2026, relating to AY 2024-25, the Nagpur SMC Bench, comprising Dr. Manish Borad, Accountant Member, directed the Assessing Officers to grant section 87A rebate on short-term capital gains included in the total income.
Importantly, the Nagpur order followed the Mumbai ITAT decision in Pushpa Prakash Misar v. ITO, where the Tribunal had held that there was no express bar either under section 87A or section 111A against allowing the rebate on STCG taxable at the special rate.
The case in simple numbers
One of the appeals was that of Bina Pradeep Malli, a Nagpur taxpayer wherein I have argued the matter.
For AY 2024-25, her total income was ₹4,73,467. This consisted substantially of capital gains, including short-term capital gains of ₹11,47,898, along with business income and income from other sources. The tax worked out to ₹23,464.
She claimed rebate under section 87A of the entire ₹23,464.
The return showed nil tax payable.
But when the return was processed under section 143(1), the CPC allowed rebate only to the extent of ₹1,279—the tax on regular income—and denied the balance rebate relating to the tax on STCG.
The result?
A taxpayer whose total income was below ₹7 lakh suddenly found herself facing a tax demand of ₹18,045, apart from consequential interest and cess. The comparative computation placed before the Tribunal clearly brought out the difference between the return and the CPC intimation.
This was not a case where the returned income was increased.
The CPC accepted the income.
The dispute was only about whether the rebate could be set off against the tax arising on special-rate capital gains.
What did section 87A actually say?
This is where the story becomes interesting.
The Finance Act, 2023 introduced, with effect from AY 2024-25, a new proviso to section 87A for taxpayers under section 115BAC(1A).
It provided that where total income did not exceed ₹7 lakh, the assessee would be entitled to a deduction from the amount of income-tax on the total income, subject to the prescribed limit of ₹25,000.
Notice the language:
“on his total income.”
There was no sentence saying:
“But this rebate shall not be available against tax payable on income taxable at special rates.”
There was no such exclusion in section 87A.
And, importantly, there was no such exclusion in section 111A either.
That became the heart of the litigation.
If the law wanted to deny it, why didn’t it say so?
This was one of the principal arguments advanced before the Tribunal.
The Income-tax Act itself provides an excellent example of how Parliament can impose a restriction when it wants to.
Section 112A(6) specifically deals with the section 87A rebate and restricts the rebate in relation to the tax attributable to specified long-term capital gains.
So the drafting question becomes quite simple:
If Parliament knew how to put an exclusion in section 112A, why was a similar exclusion not inserted in section 111A or section 87A when the new ₹7 lakh rebate was introduced?
The argument before the Tribunal was that the absence of such a restriction could not simply be supplied by the tax-processing software, an explanatory memorandum or an administrative interpretation.
If the legislature wanted to take away a benefit, the safest and simplest way was to say so in the statute.
The “subject to Chapter XII” argument
The Revenue’s case was not without logic.
Section 115BAC(1A), while prescribing the new regime, begins with the familiar words:
“Notwithstanding anything contained in this Act but subject to the provisions of this Chapter…”
Revenue’s argument was that income taxable under special provisions of Chapter XII—such as section 111A—has its own rate and computation mechanism and therefore the tax arising from such income should remain outside the section 87A rebate mechanism. The same reasoning had been advanced before various Tribunals.
But there was a fundamental difficulty.
Section 115BAC determines the rate and computation of tax.
Section 87A is a rebate provision under Chapter VIII.
Therefore, as argued before the Tribunal, the words “subject to the provisions of this Chapter” cannot automatically be converted into a prohibition against a rebate under another chapter—particularly when section 87A itself contains no such prohibition.
The Ahmedabad ITAT had analysed this distinction in detail and held that section 87A operates on the total tax computed, unless the statute specifically excludes the relevant income.
Then came Finance Act, 2025
Here, the controversy becomes even more interesting.
The Finance Act, 2025 amended section 87A with effect from 1 April 2026. The amended provision introduces an additional restriction concerning the amount of rebate that can be allowed.
In other words, the legislature subsequently changed the statutory framework.
That raised an obvious question:
If the law already prohibited the rebate on special-rate income, why was a further restriction required from AY 2026-27?
The taxpayer’s argument was that the subsequent amendment could not be used to rewrite the law applicable to AY 2024-25.
The Ahmedabad ITAT accepted this reasoning, observing that the prospective amendment itself supported the conclusion that the earlier law did not contain the same restriction.
This is an important principle of tax interpretation:
A subsequent amendment cannot ordinarily be used as a shortcut to insert words into an earlier statute when those words were consciously absent.
The Tribunal’s verdict
The Nagpur ITAT did not embark on an unnecessarily complicated exercise.
It examined the existing judicial precedents placed in the paper book and followed the Mumbai ITAT decision in Pushpa Prakash Misar.
The Tribunal noted that there was no express bar under section 87A or section 111A against allowing the rebate on STCG taxable under section 111A. It accordingly directed the respective Assessing Officers to grant the rebate claimed by both assessees.
Thus, the Nagpur ITAT has now given its first ruling on this particular controversy, holding in favour of the taxpayers for AY 2024-25.
And Nagpur was certainly not alone
Perhaps the most revealing part of the litigation is the number of Benches which have had to consider essentially the same question.
The legal paper book filed before the Nagpur Bench contained decisions from Mumbai, Ahmedabad, Delhi, Bangalore, Agra, Chandigarh, Indore, Raipur, Jaipur, Surat, Rajkot and Chennai.
The Mumbai ITAT itself recorded that the Ahmedabad decision in Jayshreeben Jayantibhai Palsana had subsequently been followed by several other Benches, including Chennai, Rajkot, Bangalore, Indore and Chennai again.
This tells us something beyond the individual taxpayer’s case.
A drafting issue became a litigation issue.
A litigation issue became a CPC processing issue.
A CPC processing issue became a taxpayer grievance.
And ultimately, several Benches of the Tribunal had to spend judicial time deciding what could perhaps have been settled by a few additional words in the original legislation.
Could the litigation have been avoided?
In my view, yes.
This is not a criticism of the judicial process. Quite the opposite.
The judiciary has done its job.
Taxpayers challenged the adjustment.
Counsels argued the statutory language.
The Tribunals examined the provisions.
But the better question is:
Did the litigation need to arise in the first place?
When the Finance Act, 2023 introduced the enhanced rebate of ₹25,000 for taxpayers having total income up to ₹7 lakh under the new regime, the legislature could have inserted one simple sentence if it intended to exclude special-rate income.
For example:
“Provided that such rebate shall not be available against tax payable on income chargeable at special rates.”
Had such language been included in 2023, there would have been little room for this controversy.
Alternatively, if the intention was to allow the rebate against special-rate income, the Department’s processing utility should have followed the statutory language rather than adopting a contrary system logic.
Instead, taxpayers were placed in a situation where the return said one thing, the statute appeared to say another, and the computer said something else.
That is hardly an ideal tax administration model.
Can software override the Income-tax Act?
This controversy also carries a larger message in the age of faceless assessment and automated processing.
A computer program is extremely efficient at applying rules.
But it cannot create rules.
The Bombay High Court, while dealing with the system-based denial of section 87A claims, had emphasised that taxpayers should be permitted to make their claims and that the substantive question could be decided by the appropriate quasi-judicial authority. The Ahmedabad ITAT also noted that CPC/system configuration cannot override statutory rights.
The Nagpur decision reinforces the same broader philosophy:
The Income-tax Act is the law. The computer system is only the mechanism for implementing the law.
The sequence cannot be reversed.
One small rebate, one big lesson
For the taxpayer, the controversy may have involved ₹13,000, ₹23,000 or ₹25,000.
But the larger issue was much bigger.
It was about whether an automated system could deny a statutory benefit when the statute itself contained no express prohibition.
It was about whether an explanatory note could supply words missing from the enacted legislation.
And it was about whether a subsequent amendment could be used to interpret an earlier provision differently.
The Tribunals have, for AY 2024-25, largely answered these questions in favour of the taxpayer.
The Ahmedabad ITAT’s decision, followed by various Benches, held that there was no express bar in section 87A or section 111A.
The Nagpur ITAT has now added its voice to that judicial chorus.
The irony of tax simplification
The new tax regime was promoted as a simpler tax regime.
Yet, for one small provision, taxpayers had to travel through:
ITR → CPC → demand → appeal → CIT(A) → ITAT → multiple judicial precedents.
All this for answering one basic question:
Can a resident individual with total income below ₹7 lakh claim section 87A rebate against tax on STCG under section 111A for AY 2024-25?
The Nagpur ITAT’s answer is Yes.
And perhaps the most valuable lesson is not merely about section 87A.
It is about tax drafting itself.
A good tax law should leave less work for the litigant and more certainty for the taxpayer.
If the intention is to deny a benefit, say it clearly in the statute.
If the benefit is available, let the system implement it faithfully.
Because when the law is clear, the taxpayer should not have to prove it before the Tribunal.
The best tax litigation is often the litigation that never arises.
And this particular litigation, in my humble view, could have been avoided at the drafting table itself.
The copy of the order is as under:
