When CPC Says “NO” to Rebate under Section 87A – Nagpur ITAT Says, Yes!
A significant ruling on Section 87A rebate against Short-Term Capital Gains under Section 111A
Sometimes, a tax dispute is not really about the amount involved. It is about a principle. Recently, I argued before the Nagpur Bench of the Income Tax Appellate Tribunal in a matter concerning a seemingly simple question:
“Can an individual be denied the rebate under Section 87A merely because a part of the total income consists of Short-Term Capital Gains taxable at the special rate under Section 111A?”
The dispute in the case of Smt. Bina Pradeep Malli for AY 2024-25 involved a tax demand of only around ₹18,000. But the legal issue had much wider implications because the controversy arose from the manner in which returns were being processed electronically.
The Tribunal, vide order dated 7 August 2026, has allowed the appeal and directed the Assessing Officer to grant the Section 87A rebate.
Let us first understand the numbers
Smt. Bina Pradeep Malli had filed her return for AY 2024-25 declaring total income of ₹4,73,467.
The income comprised business income of ₹2,38,452, Short-Term Capital Gain of ₹1,47,898 and income from other sources of ₹87,117. The computation specifically showed Short-Term Capital Gain taxable at 15%, resulting in tax of ₹22,185. The total tax, including tax on regular income, worked out to ₹23,464.
The assessee claimed a Section 87A rebate of ₹23,464, resulting in nil tax liability.
The computation was quite straightforward.
But the computer had a different view!
CPC accepted the income—but not the rebate
The return was processed under Section 143(1).
Interestingly, the CPC did not make any adjustment to the returned income. The total income declared by the assessee and the total income processed under Section 143(1) remained the same at ₹4,73,467.
The problem arose only while allowing the Section 87A rebate.
Against the rebate of ₹23,464 claimed by the assessee, the CPC allowed only ₹1,279, effectively denying the rebate against the tax payable on the Short-Term Capital Gain. As a result, a demand of ₹18,050 was raised.
In other words, the CPC accepted the income, accepted the capital gain and accepted the tax computation—but did not accept the taxpayer’s claim for the complete rebate.
That was the dispute before the Tribunal.
Why was the assessee entitled to Section 87A rebate?
For AY 2024-25, the new tax regime under Section 115BAC(1A) provided that total income up to ₹7 lakh would fall within the specified slab structure. The statutory material placed before the Tribunal clearly showed the ₹3 lakh basic slab and the subsequent slabs applicable for the year beginning 1 April 2024.
The assessee had not exercised the option under Section 115BAC(6) to opt out of the new regime. Consequently, Section 115BAC(1A) applied.
Her total income was only ₹4.73 lakh.
Therefore, the basic eligibility for the Section 87A rebate was not really in dispute.
The controversy was something more specific:
Does the special rate of tax applicable to Section 111A income automatically take that income outside the scope of Section 87A?
The language of Section 87A became crucial
The version of Section 87A applicable from 1 April 2024, as amended by the Finance Act, 2023, provided that where the total income was chargeable under Section 115BAC(1A) and did not exceed ₹7 lakh, the assessee would be entitled to a rebate from the amount of income-tax payable on such total income, subject to the statutory conditions.
There was, however, an important question:
Where does the law say that tax payable on Section 111A STCG is excluded from this rebate?
The answer, for AY 2024-25, was significant.
There was no express exclusion in Section 87A for such Short-Term Capital Gains.
Nor did Section 111A itself provide that tax payable thereunder would be outside the scope of Section 87A.
This became one of the central planks of the arguments before the Tribunal.
An interesting comparison with Section 112A
The distinction becomes even more interesting when one looks at Section 112A.
The computation itself recognised that the assessee had Long-Term Capital Loss under Section 112A. The legal position regarding rebate in respect of such income was different because Section 112A contained a specific statutory restriction.
My submission therefore proceeded on the basis that where Parliament wanted to restrict the rebate, it knew how to do so.
If the legislature expressly creates a restriction in one provision, but does not create a similar restriction in another provision, can the tax authority create that restriction by interpretation?
That was the larger question.
Finance Act, 2025 provides an interesting legislative clue
Another important aspect placed before the Tribunal was the subsequent amendment made by the Finance Act, 2025.
The Finance Act, 2025 inserted a further proviso to Section 87A, restricting the rebate under the first proviso to the amount of income-tax payable as per the rates specified under Section 115BAC(1A). Significantly, the amendment was made effective from 1 April 2026.
That raises an interesting interpretational question.
If the legislature intended a particular restriction to operate from 1 April 2026, can the same restriction be read into the law applicable to AY 2024-25?
The answer, in my view, cannot be obtained merely by looking at the departmental software. It has to come from the statute applicable to the relevant assessment year.
A large judicial arsenal was placed before the Tribunal
The case was not argued merely on the basis of one Tribunal decision.
The Paper Book placed before the Nagpur Bench contained 13 decisions of various Benches of the Income Tax Appellate Tribunal, including decisions from Mumbai, Ahmedabad, Delhi, Bangalore, Agra, Chandigarh, Indore, Raipur, Jaipur, Surat, Rajkot and Chennai.
Among the important decisions relied upon was the decision of the Mumbai ITAT in Pushpa Prakash Misar v. ITO, ITA No. 741/Mum/2026, dated 23 March 2026.
The Mumbai Bench had examined the very issue and held that on a plain reading of the statutory provisions, there was no express bar either under Section 87A or Section 111A for denying the rebate in respect of tax payable on Short-Term Capital Gains arising from transfer of listed equity shares taxable under Section 111A.
The Nagpur Bench considered this judicial precedent and respectfully followed it.
Nagpur ITAT settles the issue—at least for the case before it
After considering the rival submissions and the judicial precedents placed on record, the Nagpur SMC Bench directed the respective Assessing Officers to grant the Section 87A rebate claimed by the assessees.
The appeal of Smt. Bina Pradeep Malli was accordingly allowed. The connected appeal involving the same grievance was also allowed.
The larger lesson: Tax software is not the tax law
For me, the most important lesson from this case goes beyond Section 87A.
Today, income-tax returns are processed through sophisticated automated systems. That certainly brings speed and efficiency.
But an automated adjustment cannot override the statute.
In this case, the assessee had disclosed the income, the capital gain, the tax and the rebate in the return itself. The computation clearly showed total income of ₹4,73,467, tax of ₹23,464 and Section 87A rebate of ₹23,464.
The CPC accepted the returned income but restricted the rebate.
The issue ultimately travelled to the Tribunal because the question was not what the computer permitted; the question was what the law permitted.
And that is an important distinction.
What should taxpayers do now?
Taxpayers who faced a similar denial for AY 2024-25 should examine their individual facts carefully.
If the assessee was otherwise eligible for Section 87A, the total income was within the prescribed limit, and the rebate was denied essentially because the total income included STCG taxable under Section 111A, the Nagpur ITAT decision is certainly an important judicial precedent to consider.
Whether relief should be sought through rectification, appeal or another appropriate proceeding will depend upon the status of the particular assessment/intimation and the facts of the case.
But one thing is clear:
A taxpayer should not accept an automated tax demand merely because it has been generated by a computer.
Sometimes, the most effective way of correcting a computer is to open the Income-tax Act!
The TAX Talk
The Bina Pradeep Malli decision is a good example of how a small tax demand can raise a question of considerable importance.
The Tribunal’s order may be brief, but behind those three pages was an extensive legal exercise involving the statutory provisions, legislative amendments and judicial precedents from several Benches of the Tribunal. I had the privilege of arguing the matter on behalf of Smt. Bina Pradeep Malli before the Nagpur Bench of the ITAT.
The final message from the Tribunal is simple:
If the law does not expressly prohibit the rebate, the prohibition cannot simply be presumed. And in taxation, sometimes the most important word in the entire statute is the word that is not there.
The copy of the order is as under:
