From the midnight ITR utility change on 5 July 2024 to the Bombay High Court PIL, the ITAT Ahmedabad landmark ruling, mass demand notices, and the Finance Act 2025 prospective bar — the complete story and what thousands of affected taxpayers must do now.
What Section 87A Actually Says — and What It Does Not Say
The entire controversy over the Section 87A rebate and special-rate income is, at its core, a dispute about statutory interpretation. Before examining the battle, it is essential to understand the precise language of the law — because the legal arguments on both sides flow entirely from what Section 87A says, and more importantly, what it does not say.
“An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees [old regime], shall be entitled to a deduction from the amount of income-tax (before deducting any rebate) on his total income, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less.”
“For assessees under the new tax regime under section 115BAC(1A), where total income does not exceed seven lakh rupees, the rebate shall be 100% of income-tax or twenty-five thousand rupees, whichever is less.”
The critical absence: Section 87A — as it stood for AY 2024-25 and AY 2025-26 — contains no express exclusion for any particular type of income. It simply says: if your total income is below the threshold and you are a resident individual, you get the rebate. It does not say “except income from capital gains” or “except income taxable at special rates.” The entire controversy flows from this silence in the statute.
Understanding “Special-Rate Income”
Indian income tax law imposes flat rates on certain types of income, overriding the normal progressive slabs. These are called “special rates” and include:
| Income Type | Section | Rate (AY 2024-25) | Rate (AY 2025-26 onwards) | Express Bar on 87A Rebate? |
|---|---|---|---|---|
| STCG on listed equity / equity MF | Sec. 111A | 15% | 20% (from 23 Jul 2024) | No express bar — this is the battleground |
| LTCG on listed equity / equity MF (above ₹1 lakh) | Sec. 112A | 10% | 12.5% (from 23 Jul 2024) | Yes — Sec. 112A(6) expressly bars 87A rebate on LTCG >₹1L |
| LTCG on other capital assets (land, unlisted shares, etc.) | Sec. 112 | 20% (with indexation) | 12.5% (without indexation, from 23 Jul 2024) | No express bar in Sec. 112 itself — contested |
| Winnings from lottery, online games, horse racing | Sec. 115BB / 115BBJ | 30% | 30% | No express bar — but rarely arises given income levels |
| VDA / Crypto gains | Sec. 115BBH | 30% | 30% | No express bar in statute (pre-AY 2026-27) |
The Trigger: What Happened on 5 July 2024
The controversy did not arise from a legislative amendment, a CBDT circular, or a court order. It arose from a unilateral change to the ITR filing utility — the software tool used by taxpayers and their CAs to file Income Tax Returns online. On 5 July 2024, the Income Tax Department quietly updated the ITR utility to prevent taxpayers from claiming the Section 87A rebate where their income included short-term capital gains under Section 111A, long-term capital gains under Section 112, or any other income taxable at special rates.
There was no prior notification, no circular, no press release. The utility simply stopped computing the rebate on special-rate income — effectively treating the denial as if it were the law, before any amendment to the law had been made. Taxpayers who had filed before 5 July 2024 and received the rebate started receiving defective return notices under Section 139(9) asking them to revise their returns without the rebate claim. Those who tried to file after 5 July found that the utility would not permit the rebate at all.
Software denial ≠ denial by law — the fundamental legal flaw
- The ITR utility is a tool — not a statute. It cannot create or remove legal rights. A citizen’s right to claim a rebate that is expressly provided in law cannot be taken away by a software update that provides no opportunity to contest the denial.
- The change was made without any corresponding amendment to the Income Tax Act, 1961. Section 87A as it stood on 5 July 2024 contained no provision restricting the rebate to non-special-rate income.
- Thousands of taxpayers — particularly small retail investors and senior citizens with modest total incomes including equity mutual fund gains — were effectively subjected to an additional tax demand without any amendment to the statute they were taxed under.
- This is the core legal infirmity that the Bombay High Court, the CIT(A) Nagpur, and the ITAT Ahmedabad have all acknowledged — a system-level denial cannot override a statutory entitlement.
LTCG vs. STCG — A Critical Legal Distinction
The law did not treat all special-rate income identically before the Finance Act 2025 amendment. There was — and remains for AY 2024-25 and AY 2025-26 — a fundamental asymmetry between how Section 112A (LTCG on equity) and Section 111A (STCG on equity) treat the Section 87A rebate. This asymmetry is the bedrock of the taxpayer’s strongest legal argument.
Section 112A(6) — Express Bar for LTCG
Section 112A, which governs tax on long-term capital gains from listed equity shares and equity MFs, contains a specific sub-section (6) that reads: “No deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee under any provision of this Act in computing the income by way of long-term capital gains under this section and the tax computed on such capital gains shall not be reduced by the rebate under section 87A.”
Parliament explicitly wrote the Section 87A bar into Section 112A. The legislature knew how to exclude 87A — it did it here.
Section 111A — Conspicuous Silence on STCG
Section 111A, which governs short-term capital gains on listed equity shares and equity MFs, contains no such sub-section. It prescribes the flat tax rate (15%, now 20%) but does not contain any provision corresponding to Section 112A(6) that bars the Section 87A rebate.
The absence of a Section 111A(6) equivalent is not an oversight — it is a deliberate legislative choice that the ITAT Ahmedabad has specifically relied upon.
The expressio unius argument: A fundamental canon of statutory interpretation holds that where the legislature has used an expression in one place and omitted it in another, the omission is presumed to be deliberate. Parliament barred the Section 87A rebate for LTCG under Section 112A by inserting an express provision. It did not insert an equivalent bar for STCG under Section 111A. Therefore, the rebate must be available for STCG — the omission in Section 111A is intentional, not inadvertent.
Legal Arguments — Both Sides of the Battle
🟢 Taxpayer / Assessee Arguments
- No express bar in statute: Section 87A contains no restriction on the type of income against which the rebate can be applied. The statute simply requires total income ≤ ₹7 lakh. Nothing more.
- Section 112A(6) contrast: Parliament knew how to bar Section 87A for capital gains — it did so for LTCG in Section 112A(6). The absence of a similar provision for STCG under Section 111A is a deliberate legislative choice, not an oversight.
- Chapter structure argument: Section 87A is a rebate provision in Chapter VIII. The special-rate provisions (Sections 111A, 112A) are in Chapter XII. The new regime’s non-obstante clause in Section 115BAC(1A) says tax shall be computed “subject to the provisions of this Chapter” (Chapter XII) — but Chapter VIII rebates operate after this computation and are expressly not subject to the non-obstante clause.
- Prospective amendment proves prior omission: The Finance Act 2025 introduced an express bar on 87A rebate for special-rate income with effect from AY 2026-27. This prospective amendment is the clearest possible evidence that no such bar existed in the unamended law for AY 2024-25 and AY 2025-26. A prospective amendment cannot be used to interpret a provision that pre-existed it.
- Software denial ≠ legal denial: The CPC utility change on 5 July 2024 has no statutory basis. The Bombay High Court in Chamber of Tax Consultants has held that procedural or system-based denials cannot override substantive statutory rights.
- Finance Bill Memorandum not binding: The explanatory memorandum to a Finance Bill is a tool of legislative intent — it cannot override the plain text of the statute as it exists at the time.
🔴 Department / Revenue Arguments
- Legislative intent: The intent was always to restrict rebate to normal slab-rate income. The CBDT’s position is that the rebate was designed as relief for taxpayers with modest incomes, not as a mechanism to eliminate tax on capital gains income taxed at beneficial flat rates.
- Special rate = special treatment: Incomes taxed under special rate provisions (Chapter XII) are segregated from slab-rate income precisely because Parliament wanted them to bear a different (often concessional) tax burden. Allowing the 87A rebate to eliminate this tax entirely — even for modest income earners — distorts this special regime.
- Prospective amendment clarifies intent: The Finance Act 2025 amendment “clarifies” what was always the legislative intent, even if it was not expressly stated. It is a matter of corrective legislation rather than a change in position.
- Finance Bill Memorandum: The explanatory memorandum to the Finance Bill 2025 states that the amendment is proposed “to clarify” the existing position — i.e., it is declaratory, not a new restriction. This was the argument relied upon by the CIT(A) in cases before the ITAT Ahmedabad ruling.
- Section 115BAC “subject to Chapter XII”: The new regime computation under Section 115BAC(1A) is “subject to” Chapter XII, which includes Section 111A. This brings the special rates into the computation regime in a manner that should take precedence.
The Judicial Journey — A Complete Timeline
Department Action
ITR Utility Updated — Rebate Denied on Special-Rate Income
The Income Tax Department silently updated the ITR filing utility to block Section 87A rebate claims where income included STCG under Section 111A, LTCG under Section 112, or any other special-rate income. No prior notification was issued. Taxpayers who had already filed before this date and claimed the rebate began receiving Section 139(9) defective return notices. Those filing after this date were automatically denied the rebate in the utility itself.
Mass Impact
Thousands of Taxpayers Denied Rebate — Practitioners Sound Alarm
CA practitioners and taxpayer forums across India flagged the issue. Taxpayers with total income below ₹7 lakh — including small retail investors, equity mutual fund holders, and senior citizens — found themselves facing demands of ₹5,000 to ₹25,000 purely because their modest income included STCG or LTCG. The CA community highlighted that no statutory amendment had been made and the utility change had no legal basis.
High Court
Chamber of Tax Consultants Files PIL in Bombay High Court
The Chamber of Tax Consultants, Mumbai, filed a Public Interest Litigation (PIL) — Public Interest Litigation (L) No. 32465 of 2024 — before the Bombay High Court. The petition challenged the Income Tax Department’s system-driven denial of Section 87A rebate on special-rate income, arguing that the utility change had no statutory basis and violated taxpayers’ fundamental rights to claim benefits expressly provided under the law.
Bombay HC Interim Order
Bombay High Court — Interim Order Directing CBDT to Allow Revised ITRs
The Bombay High Court issued an interim order directing CBDT to issue a notification and extend the deadline for revised and belated return filing until 15 January 2025. The Court ruled that flaws in the ITR utility should not prevent taxpayers from making valid claims under the statute. The Court did not decide the substantive question of whether 87A rebate was available against STCG — it reserved that issue — but directed that each claim should be decided on its own merits, not mechanically denied by the CPC system.
CBDT Action
Revised Return Window Opened — But Utility Still Didn’t Allow Rebate
CBDT opened a 15-day window (1–15 January 2025) for affected taxpayers to file revised returns. However, even after the utility was updated on 4 January 2025, practitioners found that the ITR filing forms still denied the 87A rebate on special-rate income. Thousands of taxpayers filed revised returns but the system continued to deny the rebate — creating a surreal situation where the court had directed access and the portal continued to bar it.
Finance Bill 2025
Finance Act 2025 Introduces Express Bar — Effective from AY 2026-27
The Finance Act 2025, presented on 1 February 2025, amended Section 87A to expressly provide that the rebate shall not be available against income chargeable at special rates under Chapter XII (including STCG under Section 111A and LTCG under Section 112A). Critically, this amendment was made effective from Assessment Year 2026-27 only. The Parliament’s choice to make the bar prospective — rather than clarificatory or retroactive — became the most powerful argument in the taxpayer’s favour for prior AYs.
CBDT Circular
CBDT Circular — Interest Waiver on 87A Demand Notices
CBDT issued a circular providing that interest under Section 220(2) would be waived on tax demands arising from the denial of Section 87A rebate — provided the demands were cleared by 31 December 2025. This was a double-edged move: it offered interest relief but simultaneously reaffirmed the Department’s position that the rebate was not available against special-rate income. Taxpayers who had already received refunds or “processed” status were now receiving fresh demand notices reversing those refunds.
ITAT Ahmedabad
ITAT Ahmedabad — Landmark Ruling in Favour of Taxpayer (Jayshreeben Palsana)
The Income Tax Appellate Tribunal, Ahmedabad SMC Bench (comprising Ms. Suchitra R. Kamble, Judicial Member, and Shri Makarand V. Mahadeokar, Accountant Member), in Jayshreeben Jayantibhai Palsana v. ITO, Ward-1(9), Ahmedabad [2025 (8) TMI 842], ruled that a resident individual under the new tax regime with total income of ₹6.76 lakh (including ₹3.79 lakh STCG under Section 111A) was entitled to the Section 87A rebate for AY 2024-25. The AO was directed to allow the rebate and delete the demand.
Continuing Dispute
Mass Demand Notices Continue — Matter Not Conclusively Settled
Despite the ITAT ruling and several favourable CIT(A) orders, the CPC has continued to deny Section 87A rebate claims for AY 2025-26 at the processing stage. Taxpayers who received earlier refunds are receiving notices reversing them. The matter is expected to travel to the High Courts and potentially the Supreme Court before a final authoritative resolution is achieved. For AY 2026-27, the statutory position is clear — no rebate against special-rate income.
ITAT Ahmedabad’s Landmark Ruling — The Law Explained
The ITAT Ahmedabad order in Jayshreeben Jayantibhai Palsana v. ITO is the most authoritative judicial pronouncement on the Section 87A vs. STCG issue to date. The Tribunal’s reasoning — spanning several legal grounds — provides the framework for all subsequent advocacy in this area.
Ground 1: Section 87A is a Chapter VIII provision
The Tribunal held that Section 87A, situated in Chapter VIII, is an independent rebate provision that operates after the computation of total tax. The special-rate provisions (Sections 111A, 112A) in Chapter XII compute the rate of tax on specific income — but they do not operate to restrict Chapter VIII rebates unless they contain an express bar. The two Chapters operate in different fields.
Ground 2: Section 115BAC non-obstante clause is limited
Section 115BAC(1A) says tax shall be computed “notwithstanding anything contained” in various sections, and “subject to the provisions of this Chapter.” The Tribunal held that this non-obstante clause governs the computation of tax at special rates, not the entitlement to rebates under Chapter VIII. The clause expands tax computation under the new regime but does not inherently restrict post-computation rebates.
Ground 3: Section 112A(6) contrast is decisive
The Tribunal specifically noted that Section 112A contains a sub-section (6) that expressly bars the Section 87A rebate against LTCG. Parliament knew how to write this bar. The complete absence of any equivalent provision in Section 111A must be treated as a deliberate legislative choice — the rebate is available for STCG because Parliament chose not to bar it there.
Ground 4: Finance Act 2025 amendment is strictly prospective
The Tribunal firmly rejected the Department’s reliance on the Finance Bill 2025 explanatory memorandum. It held that the Finance Act 2025 introduced the bar prospectively from AY 2026-27 only. A prospective amendment, by definition, does not alter the legal position for prior years. The CIT(A)’s reliance on the Finance Bill memorandum to deny the rebate for AY 2024-25 was specifically held to be erroneous.
Ground 5: CPC denial has no statutory force
The Tribunal relied on the Bombay High Court’s direction in the Chamber of Tax Consultants PIL to hold that a system-driven denial by the CPC is not equivalent to a denial by law. The CPC utility change of 5 July 2024, having no statutory basis, cannot defeat a taxpayer’s substantive legal right under Section 87A as it existed for AY 2024-25.
The “solely” qualifier — an important caveat
Practitioners have noted that in the specific facts of Jayshreeben Palsana, the taxpayer’s tax liability arose solely from STCG under Section 111A — there was no income taxable at slab rates. The Tribunal’s use of “solely” has led to debate about whether the ruling applies equally where the assessee has both slab-rate income and STCG — and the rebate covers the STCG tax component. This nuance has not yet been definitively resolved.
🎓 Practitioner’s Note — Earlier CIT(A) Orders Supporting Taxpayer
The ITAT Ahmedabad ruling was preceded by several favourable orders from the Commissioner of Income Tax (Appeals) — notably Avni Milanbhai Maniya (CIT(A), Nagpur, 2025) and a February 2025 order from ADDL/JCIT(A)-6, Mumbai, allowing Section 87A rebate against a mix of STCG (₹1,09,842 under Section 111A) and LTCG (₹12,853 under Section 112A) in a case where total income was below ₹7 lakh. These first-appellate orders, while not binding on the ITAT, provided a strong persuasive base for the Tribunal’s subsequent ruling.
Mass Demand Notices & the CBDT September 2025 Circular
By the second half of 2025, the controversy had created a chaotic situation on the ground. Three categories of taxpayers found themselves receiving unexpected demand notices:
| Taxpayer Category | What Happened | Demand Received? | Legal Position |
|---|---|---|---|
| Filed before 5 July 2024 — rebate allowed by CPC at processing | Return processed; rebate granted; refund received or demand nil | Yes — retroactive demand reversing the refund/rebate | Strongest position — rebate was granted under then-existing law; Department reversing a processed return requires Section 154 rectification proceedings, which are subject to legal challenge |
| Filed after 5 July 2024 — claim denied by utility; filed without rebate | Paid tax on STCG without claiming rebate; suffered excess tax | No demand — but excess tax paid | Can file a revised return (if within time limit) or a rectification application claiming the rebate. Interest may be receivable on excess tax paid if claim succeeds. |
| Filed revised return in Jan 2025 window (Bombay HC direction) — claiming rebate | Revised return filed claiming 87A on STCG; later received demand notice | Yes — demand notices issued despite Bombay HC direction | Strongest grounds for appeal — filed under court direction; demand despite court order should be contested. ITAT Ahmedabad ruling directly supports this position. |
CBDT Circular 19 September 2025 — Interest Waiver with a sting
- The CBDT circular waived Section 220(2) interest on 87A-related demand notices if demands were paid by 31 December 2025.
- However, the circular simultaneously reaffirmed the Department’s position that the rebate was not available against special-rate income — making it a pressure device to get taxpayers to pay up without contesting.
- Taxpayers who paid the demand by December 2025 to avail the interest waiver have not necessarily surrendered their right to claim a refund later — a payment under protest, followed by a rectification claim or appeal, remains an option.
- Taxpayers who chose to contest the demand (rather than pay) are now in the appeal pipeline — with the ITAT Ahmedabad ruling as their primary authority.
Finance Act 2025 — The Prospective Bar from AY 2026-27
The Finance Act 2025, as passed, amended Section 87A to expressly bar the rebate against income chargeable at special rates under Chapter XII of the Income Tax Act. This is now the law from Tax Year 2026-27 (AY 2027-28 under the IT Act 2025’s new terminology). The position from AY 2026-27 is now unambiguous and beyond dispute.
“Provided that no rebate shall be available under this section in respect of income chargeable to tax under the provisions of Chapter XII [which includes Section 111A (STCG on equity), Section 112 (LTCG on other assets), Section 112A (LTCG on equity), Section 115BB (lottery), Section 115BBJ (online games), Section 115BBH (VDA/crypto), and all other special-rate provisions].”
Why the prospective amendment is the taxpayer’s strongest argument for prior years
- Argument by implication: If Section 87A already excluded special-rate income as a matter of law (as the Department claims), there would have been no need to amend it through the Finance Act 2025. The amendment exists precisely because Parliament recognised that a bar did not previously exist and needed to be inserted.
- Prospective date is deliberate: Parliament specifically chose AY 2026-27 as the effective date — not AY 2024-25, the first year the issue arose. This date choice is itself an implicit concession that the restriction did not exist for earlier years.
- Explanatory memorandums cannot override statute: The Finance Bill 2025 explanatory memorandum describes the amendment as “clarificatory.” However, settled law holds that a memorandum cannot override the plain text of the statute. If the statute as it stood for AY 2024-25 contained no bar, a later memorandum cannot introduce one retrospectively.
- This is the precise reasoning adopted by the ITAT Ahmedabad in Jayshreeben Palsana, by CIT(A) Nagpur in Avni Milanbhai Maniya, and by CIT(A)-6 Mumbai in the February 2025 order.
Current Position — Assessment Year by Assessment Year
AY 2024-25 (FY 2023-24) — Filed and processed; most controversial
AY 2025-26 (FY 2024-25) — Currently being filed (due July 2026)
AY 2026-27 (TY 2026-27) — First year under IT Act 2025 — Settled by statute
What Affected Taxpayers Should Do Now
If you are a taxpayer with total income below ₹7 lakh (AY 2024-25 or 2025-26) that includes STCG under Section 111A or LTCG under Section 112 — and you have received a demand notice, or your rebate was denied at processing — here is the step-by-step action plan.
Do not pay the demand impulsively — evaluate first
Before paying any 87A-related demand, assess whether your case is worth contesting. Factors favouring contestation: total income clearly below ₹7 lakh (new regime) or ₹5 lakh (old regime); the demand amount is material (above ₹5,000); your STCG is under Section 111A (not LTCG under Section 112A where the statutory bar is clear); and you or your CA can handle the appeal process. If you paid the demand to avail the September 2025 interest waiver, you can still file a rectification/appeal to claim a refund.
File a rectification application under Section 154 before the CPC
For demand notices issued by CPC under Section 143(1), the first step is to file a rectification application under Section 154 on the income tax portal, selecting “Taxpayer is correct” and providing the legal ground — namely, that the denial of Section 87A rebate on STCG is contrary to the plain text of the statute as applicable for AY 2024-25/2025-26. Cite the ITAT Ahmedabad ruling in Jayshreeben Jayantibhai Palsana v. ITO [2025 (8) TMI 842] as the direct authority. The CPC may still reject the rectification — but this creates a documented trail for the appeal.
Appeal to CIT(A) / NFAC within the statutory time limit
If the rectification is rejected, file an appeal before the Commissioner of Income Tax (Appeals) / National Faceless Appeal Centre within 30 days of the order rejecting the rectification (or of the intimation order under Section 143(1)). In the appeal, cite: (a) ITAT Ahmedabad in Jayshreeben Palsana; (b) CIT(A) Nagpur in Avni Milanbhai Maniya; (c) Bombay HC in Chamber of Tax Consultants v. DGIT (Systems); (d) the prospective Finance Act 2025 amendment as evidence that no bar existed for the relevant AY.
Apply for stay of demand pending appeal
Pending the appeal, apply for a stay of the demand amount before the CIT(A) or the Assessing Officer. The primary ground for stay is that the matter is covered in favour of the taxpayer by the ITAT Ahmedabad ruling. A 20% pre-deposit of the disputed demand may be required — check current instructions. The stay prevents recovery proceedings while the appeal is pending.
For AY 2025-26 filing — claim the rebate; be prepared for dispute
For the FY 2024-25 return (AY 2025-26) currently due by 31 July 2026: claim the Section 87A rebate on STCG under Section 111A if your total income is below ₹7 lakh and you are in the new regime. The ITR utility will likely deny it — but file a paper trail noting the claim. After processing, if denied, follow the same rectification → CIT(A) → ITAT path. The ITAT Ahmedabad ruling applies equally to AY 2025-26 on the same statutory grounds. Do NOT voluntarily exclude the rebate claim — it weakens your subsequent appeal.
Practitioner’s Litigation Strategy
Identify affected clients proactively
Run a review of all clients’ ITRs for AY 2024-25 and AY 2025-26 where: (a) total income is below ₹7 lakh in the new regime or ₹5 lakh in the old regime, (b) there is any STCG under Section 111A, and (c) the Section 87A rebate was denied at processing. These are all potentially reclaimable. Create a list and approach clients before limitation periods for rectification expire.
Limitation periods — act before they lapse
Section 154 rectification can be filed within 4 years from the end of the financial year in which the order was passed. For AY 2024-25 intimations under 143(1) passed in FY 2024-25, the Section 154 window remains open until 31 March 2029. For CIT(A) appeals, file within 30 days of the rectification rejection order. Do not let limitation periods lapse while waiting for a High Court ruling — file the appeal to preserve the right.
Ground your arguments in statutory text
The strongest argument in every appeal or rectification is the plain language of Section 87A as it existed for the relevant AY — no express exclusion of special-rate income. Reinforce with: Section 112A(6) contrast, prospective Finance Act 2025 amendment, and ITAT Ahmedabad ruling. Avoid reliance on the Finance Bill memorandum, which is the Department’s primary weapon.
AY 2026-27 — counsel clients on planning
From AY 2026-27, the statutory bar is absolute. Advise clients with modest incomes (near ₹12 lakh threshold in new regime) who have capital gains to plan their realisation carefully: spread realisations across years; keep STCG/LTCG in years where slab-rate income is low; do not assume the 87A rebate will cover their capital gains tax — it will not, under the new statute.
The practitioner’s bottom line
For AY 2024-25 and AY 2025-26: the law is on the taxpayer’s side for STCG under Section 111A. The ITAT ruling, the Bombay HC direction, and the prospective Finance Act 2025 amendment all converge to support the position that no statutory bar existed. Contest demands confidently. For AY 2026-27 and beyond: the door is closed by statute — plan accordingly and counsel clients to restructure their investment timing and quantum to optimise within the new framework.