Introduction
This case commentary critically examines the recent order of the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, in Basty Keshava Shenoy vs. Income Tax Officer (ITA No. 3134/Bang/2025, pronounced on 26.05.2026). The central controversy revolves around the eligibility of rebate under Section 87A of the Income Tax Act, 1961 (the Act) in respect of short-term capital gains (STCG) taxable under Section 111A, when the assessee has opted for the new tax regime under Section 115BAC(1A). The ITAT, by allowing the appeal, clarified that in the absence of an express statutory bar, rebate under Section 87A is to be computed on the “total income” irrespective of the rate at which a particular component of income is taxed. The decision provides significant relief to taxpayers with modest incomes under the new regime for Assessment Year (AY) 2024-25.
Facts
The assessee, an individual, filed a return of income for AY 2024-25 under the new tax regime (Section 115BAC(1A)) declaring total income of ₹6,25,580. This comprised business income (₹3,942), STCG on listed equity shares under Section 111A (₹1,13,067), and other sources. The total tax computed on normal income (₹5,12,513) was ₹10,626, while tax on the STCG at the special rate of 15% amounted to ₹16,960. The assessee claimed full rebate under Section 87A of ₹25,000, contending that the total income did not exceed ₹7,00,000.
The Central Processing Centre (CPC), while processing the return under Section 143(1), restricted the rebate to only the tax on normal income (₹10,626), denying the balance ₹14,374 attributable to the STCG tax. The assessee’s rectification application under Section 154 was rejected by the CPC on the ground that rebate under Section 87A is not allowable against income taxable at special rates. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the CPC’s action, holding that income taxable under Chapter XII (such as Section 111A) falls outside the scope of rebate under the proviso to Section 87A when read with the new regime. Aggrieved, the assessee appealed to the ITAT.
Reasoning
The ITAT, after hearing the Departmental Representative (the assessee remained absent), allowed the appeal with detailed reasoning, which forms the longest and most substantive part of the order. The Tribunal’s analysis can be broken down into the following key strands:
1. Statutory Interpretation of “Total Income” under Section 87A
The Tribunal first examined the plain language of Section 87A, which grants a rebate from the income-tax payable by an individual whose total income does not exceed the prescribed threshold (₹7,00,000 for AY 2024-25). The expression “total income” is defined under Section 2(45) read with Section 5 of the Act, which encompasses all income from whatever source derived, computed in the manner laid down. The Tribunal observed that neither Section 87A nor Section 111A contains any express restriction denying rebate on tax payable on STCG. The phrase “total income” is unqualified and does not carve out income taxed at special rates. Therefore, once the total income of the assessee (including STCG) remained below ₹7,00,000, the rebate under Section 87A cannot be denied merely because part of the income is subject to a special rate of taxation under Chapter XII.
2. Contrast with Section 112A – Deliberate Legislative Omission
The Tribunal placed significant emphasis on the contrast between Sections 111A and 112A. Section 112A, which deals with long-term capital gains on listed equity shares, expressly provides in Section 112A(6) that rebate under Section 87A shall be allowed from the income-tax on total income as reduced by the tax payable on gains covered under Section 112A. No such restrictive language exists in Section 111A. The Tribunal applied the principle that where the Legislature has consciously enacted a specific restriction in one provision and omitted it in another, the omission cannot be supplied by judicial interpretation. This deliberate omission indicates that for AY 2024-25, Parliament did not intend to restrict rebate against STCG under Section 111A.
3. Prospective Amendment by Finance Act, 2025 – Indicators of Legislative Intent
The Tribunal noted that the Finance Act, 2025, introduced a specific restriction denying rebate under Section 87A against income taxable at special rates, including Section 111A, effective from AY 2025-26. The assessee argued—and the Tribunal agreed—that a prospective amendment confirms that no such restriction existed for earlier years. The Department’s argument that the amendment was clarificatory in nature (relying on the Supreme Court’s decision in Distributors (Baroda) Pvt. Ltd. vs. Union of India) was not accepted. The Tribunal implied that if the amendment was indeed clarificatory, the Legislature would have made it retrospective. Since it was expressly prospective, it reinforced the position that for AY 2024-25, the rebate was available without any such limitation.
4. Binding Precedent from Ahmedabad ITAT
The Tribunal relied on the decision of the Ahmedabad Bench in Jayshreeben Jayantibhai Palsana vs. Income-tax Officer (2025) 177 Taxmann.com 411, which held that rebate under Section 87A cannot be denied in respect of income taxable under Section 111A in the absence of an express statutory prohibition. The Bangalore ITAT respectfully concurred with this view, finding it directly applicable to the facts. The Tribunal noted that the CPC’s adjustment under Section 143(1) was not based on any statutory mandate but on a misinterpretation of the law as it stood.
5. Rejection of the Department’s Stand
The Department contended that income taxable under Chapter XII (like Section 111A) must be excluded from the operation of rebate under the new regime because Section 115BAC(1A) is made subject to other provisions of Chapter XII. The Tribunal rejected this argument, holding that Section 87A is a separate relief provision that applies to the tax computed on the total income. The special rates under Chapter XII only determine the quantum of tax on a specific income stream; they do not alter the definition of “total income” or the applicability of rebate. The CPC’s action, therefore, was unsustainable.
Conclusion
The ITAT allowed the appeal and directed the deletion of the consequential demand. The order firmly establishes that for AY 2024-25, an individual opting for the new tax regime under Section 115BAC(1A) whose total income does not exceed ₹7,00,000 is entitled to the full rebate under Section 87A, including on the tax payable on short-term capital gains under Section 111A. The Tribunal’s reasoning underscores the importance of strict statutory language: if the Legislature intends to restrict a beneficial provision, it must do so explicitly. The decision also serves as a caution to the CPC and lower authorities against reading implied restrictions into clear statutory provisions. Taxpayers who have suffered similar denials in their assessment orders should consider filing rectifications under Section 154 or appeals before the CIT(A) in light of this ruling.