ITAT Chennai Grants Relief: Section 87A Rebate Applicable on Special Rate Capital Gains for AY 2024-25

The intersection of automated tax processing systems and statutory legal interpretation often leads to disputes between the revenue department and the assessee. A prominent example of this conflict has recently been resolved by the Chennai Bench of the Income Tax Appellate Tribunal (ITAT). In a significant judicial pronouncement, the Tribunal addressed the highly debated issue of whether an assessee is eligible to claim a tax rebate under Section 87A of the Income-tax Act, 1961 against tax liabilities arising from income chargeable at special rates, specifically Short-Term Capital Gains (STCG).

In the case of Pranay M Kothari Vs DCIT, the ITAT Chennai ruled in favor of the assessee, firmly establishing that the rebate under Section 87A cannot be denied merely because a portion of the total income is subjected to special tax rates, provided the overall income remains within the prescribed statutory threshold. This detailed analysis explores the factual background, the legal arguments presented, and the comprehensive rationale adopted by the Tribunal in delivering its verdict.

Factual Matrix of the Dispute

The controversy originated from the income tax return filed by the assessee, an individual, for the Assessment Year (AY) 2024-25.

  1. Filing of Return: On 08.01.2025, the assessee submitted his return of income, declaring a total income of Rs. 5,28,020.
  2. Processing by CPC: The Centralized Processing Centre (CPC), Bangalore, processed the submitted return under Section 143(1) of the Income-tax Act, 1961.
  3. Denial of Rebate: During the processing phase, an intimation dated 28.02.2025 was issued to the assessee. The CPC software automatically rejected the assessee's claim for a rebate under Section 87A. The system's logic dictated that since the assessee had declared short-term capital gains—which are taxed at special rates—the rebate could not be extended to such income.
  4. Tax Demand: Consequently, the CPC made adjustments to the computation and raised a formal tax demand of Rs. 25,510 against the assessee.
  5. First Appellate Authority: Feeling aggrieved by the automated adjustment and the resultant demand, the assessee escalated the matter by filing an appeal before the Learned Addl/JCIT(A), Raipur. However, via an order dated 31.10.2025, the appellate authority upheld the CPC's action, confirming the rejection of the Section 87A rebate.

Following this adverse ruling, the assessee approached the ITAT Chennai to seek a definitive resolution on the interpretation of the law.

The solitary question placed before the Tribunal for adjudication was whether the tax rebate provided under Section 87A of the Income-tax Act, 1961 is legally available to an assessee whose total income comprises components that are chargeable to tax at special rates under Chapter XII of the Act, particularly when the assessee has opted for the new tax regime under Section 115BAC(1A).

Arguments Advanced by the Assessee

The Authorized Representative (AR) appearing on behalf of the assessee mounted a robust defense based on statutory interpretation and judicial precedents. The primary contentions were: