Introduction
The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, in Kajol Patel v. Income Tax Officer (ITA No. 1613/AHD/2026), delivered a significant ruling on 01.09.2026 concerning the interaction between Section 87A rebate and Short Term Capital Gains (STCG) chargeable at a special rate under Section 111A of the Income Tax Act, 1961. For Assessment Year (A.Y.) 2025-26, the Tribunal held that the revenue authorities could not restrict the Section 87A rebate merely because a component of the total income comprised STCG taxed under Section 111A. The decision reinforces the principle that administrative circulars cannot override a clear statutory provision, and that a substantive beneficial provision cannot be denied through procedural processing mechanisms. This commentary provides a deep, legal analysis of the Tribunal’s reasoning, its reliance on precedents from the ITAT and the Hon’ble Bombay High Court, and the significance of the prospective amendment introduced by the Finance Act, 2025.
Facts
The assessee, Kajol Patel, filed her return of income for A.Y. 2025-26 declaring total income of Rs. 6,95,720/-, which included STCG of Rs. 1,54,411/- chargeable at a special rate under Section 111A. Tax on the returned income was computed at Rs. 35,857/-, and the assessee claimed a rebate of Rs. 25,000/- under Section 87A. On processing the return under Section 143(1) of the Act, the Central Processing Centre (CPC) restricted the rebate to Rs. 12,066/-, effectively excluding the tax attributable to the STCG component chargeable under Section 111A. Aggrieved, the assessee appealed to the Addl. CIT(A), who dismissed the appeal relying on CBDT Circular No. 13/2025 dated 19.09.2025. The assessee then filed a second appeal before the ITAT, raising several grounds, including erroneous denial of rebate, invalid reliance on a CBDT circular overriding the statute, and the impermissibility of retrospectively applying the Finance Act, 2025 amendment.
Reasoning
The core legal question before the Tribunal was whether, for A.Y. 2025-26, the rebate under the first proviso to Section 87A could be denied to the extent the tax liability includes tax payable on STCG chargeable under Section 111A. The Tribunal began its analysis by reproducing the relevant first proviso to Section 87A, which provided that where the total income of an assessee chargeable under Section 115BAC(1A) does not exceed Rs. 7,00,000/-, the assessee is entitled to a deduction from the amount of income-tax computed on his total income, equal to 100% of such income-tax or Rs. 25,000/-, whichever is less. The key observation was that the statutory language applicable to A.Y. 2025-26 contained no express exclusion of income chargeable at a special rate under Section 111A.
The Tribunal clarified the role of Section 111A. It stated that Section 111A merely prescribes the rate at which tax is to be charged on specified short-term capital gains. Section 87A, by contrast, operates at the rebate stage, granting a deduction from the amount of income-tax computed. As per the law in force for A.Y. 2025-26, neither Section 87A nor Section 111A contained an express prohibition against granting the rebate with reference to tax payable on such STCG. This point is critical in statutory interpretation: a provision fixing the rate of charge does not, without more, displace another provision granting a rebate from tax payable.
The Tribunal then examined the legislative history and the subsequent amendment made by the Finance Act, 2025. The amendment altered Section 87A and inserted a further proviso restricting the deduction under the first proviso to the amount of income-tax payable as per the rates under Section 115BAC(1A). However, this amendment was made expressly effective from 1st April 2026, corresponding to A.Y. 2026-27. The Tribunal held that a subsequent amendment containing a substantive restriction, being expressly prospective, cannot be read backward to deny a benefit available in an earlier year. Applying the restrictive amendment to A.Y. 2025-26 would amount to impermissible retrospective application of a substantive provision.
The Tribunal drew strength from a Co-ordinate Bench decision of the same Tribunal in Jayshreeben Jayantibhai Palsana v. ITO (ITA No. 1014/Ahd/2025, order dated 12.08.2025), which had considered an analogous controversy for the same tax regime. That Bench held that there was no express bar in Section 87A or Section 111A for denial of the rebate on tax payable on such short-term capital gains. It also observed that the prospective amendment proposed by the Finance Bill, 2025 reinforced the conclusion that the restriction was not present in the law for the relevant assessment year. The Tribunal agreed with this reasoning, adding that a substantive benefit available under the statute cannot be curtailed merely by the manner in which the return-processing utility functions.
The ITAT also referred to the Hon’ble Bombay High Court’s decision in The Chamber of Tax Consultants v. Director General of Income-tax (Systems) & Ors. [2024] 169 taxmann.com 506 (Bombay), which examined a similar controversy concerning denial of the Section 87A rebate through modification of the departmental utility. The Bombay High Court held that a statutory rebate cannot be taken away merely by a procedural change in the utility. This principle was applied directly by the ITAT to the present case: the CPC intimation, an automated processing mechanism, was not a valid instrument to deny the rebate when the statute, as applicable to A.Y. 2025-26, permitted it.
The Tribunal expressly addressed the reliance placed by the Addl. CIT(A) on CBDT Circular No. 13/2025 dated 19.09.2025. It observed that an administrative circular cannot impose a substantive restriction absent from the statutory provision applicable to the relevant assessment year. The question of entitlement to a rebate must be determined only with reference to the law as it stood during A.Y. 2025-26. A circular cannot amend, restrict, or rewrite a statutory provision. Since Parliament had consciously inserted the restrictive provision with effect from A.Y. 2026-27, no circular could bring that restriction into effect for an earlier year.
Applying these legal principles to the facts, the Tribunal noted that the assessee’s total income of Rs. 6,95,720/- was below the statutory threshold of Rs. 7,00,000/- prescribed under the first proviso to Section 87A for A.Y. 2025-26. The assessee claimed the maximum rebate of Rs. 25,000/-, being eligible. The mere fact that Rs. 1,54,411/- of the total income was chargeable at the special rate under Section 111A was not a ground to deny the rebate in the absence of an express statutory restriction. The Tribunal therefore held that restricting the rebate from Rs. 25,000/- to Rs. 12,066/-, solely by excluding the tax attributable to the Section 111A income, was unsustainable. It directed the Assessing Officer/CPC to recompute the tax liability and allow the full rebate under Section 87A, subject to verification of the assessee’s eligibility under the other conditions prescribed in the Act and consequential computation of tax and cess. The demand raised through the CPC intimation was deleted, and refund, if any, was to be granted as per law.
Conclusion
The Tribunal’s decision in Kajol Patel is a clear and well-reasoned affirmation of the rule that tax benefits available under the statute for an assessment year must be construed strictly according to the words of the law, without importing restrictions from later amendments or through administrative circulars. By distinguishing the function of Section 111A from Section 87A, relying on the prospective nature of the Finance Act 2025 amendment, and following binding judicial reasoning from the ITAT and the Bombay High Court, the Tribunal protected the taxpayer from the unlawful contraction of a substantive statutory rebate. The appeal was allowed, and the CPC was directed to recompute the assessment by granting the full Section 87A rebate for A.Y. 2025-26.