ITAT Chennai Confirms Section 87A Rebate on Total Income Including Long-Term Capital Gains at Special Rates

The Income Tax Appellate Tribunal, Chennai Bench, in the case of Venkedapathy Venugopal Vs ITO, has clarified a crucial issue relating to the availability of rebate under Section 87A where the assessee’s total income includes long-term capital gains (LTCG) taxed at special rates. The Tribunal ruled that for Assessment Year (AY) 2024-25, rebate under Section 87A cannot be denied merely because a part of the total income is taxed at special rates under Chapter XII of the Income Tax Act 1961, so long as the total income does not exceed ₹7,00,000 and the statutory conditions are otherwise satisfied.

This ruling directly addresses system-driven denials of rebate by the Centralized Processing Centre (CPC), Bengaluru, and overturns the restrictive view taken by the Commissioner of Income Tax (Appeals) [CIT(A)] in this case.

Background of the Dispute

Facts of the Case

  • The assessee, an individual resident, filed his return of income for AY 2024-25 on 26.07.2024.
  • Total income declared: ₹6,75,940.
  • The computation of total income included:
    • Taxable long-term capital gains (LTCG) of ₹4,72,175, chargeable at special rates under Chapter XII.
  • The assessee claimed rebate of ₹25,000 under Section 87A on the tax liability, which necessarily included tax on the LTCG component.
  • The return was processed by CPC, Bengaluru under Section 143(1) on **15.04.2025`.
  • CPC denied the Section 87A rebate of ₹25,000 in the intimation, without setting out any specific statutory basis or speaking reasons in the order.

Appeal Before CIT(A)

Aggrieved by denial of rebate, the assessee preferred an appeal before the CIT(A), Addl./JCIT(A)-2, Delhi.

The assessee raised, in substance, the following contentions:

  • The assessee’s “total income” did not exceed ₹7,00,000 for AY 2024-25, and therefore the statutory threshold under Section 87A stood clearly satisfied.
  • The proviso to Section 87A, as applicable for AY 2024-25, does not provide that capital gains or other special rate income must be excluded while determining eligibility for the rebate.
  • The reliance placed by the CIT(A) on the Memorandum to the Finance Bill, 2025 to interpret the law for AY 2024-25 was legally untenable, as subsequent legislative proposals cannot be used to retrospectively curtail an existing benefit.
  • The assessee also alleged breach of principles of natural justice, contending that an effective opportunity of hearing was not granted.

Despite these submissions, the CIT(A) sustained CPC’s action and upheld denial of the rebate.

Reasoning Adopted by CIT(A)

The CIT(A) proceeded on the premise that:

  1. The assessee had opted for taxation under Section 115BAC(1A).
  2. Section 115BAC(1A) begins with a non obstante clause and is subject to the provisions of Chapter XII, which prescribes special tax rates for certain incomes, including various capital gains.
  3. The proviso to Section 87A (post amendments considered by the CIT(A)) was read as implying that income taxable at special rates under Chapter XII should effectively be excluded while granting rebate under Section 87A.