Section 87A Rebate Allowable Against Tax on Long-Term Capital Gains Under Section 112 — ITAT Ahmedabad

Case Reference

Veenaben Arvindbhai Shah Vs Centralised Processing Center
Forum: Income Tax Appellate Tribunal, Ahmedabad
Assessment Year: 2024-25
Order Date: 16.06.2026

Background and Facts of the Case

This matter arose from an appeal preferred by the assessee against the order dated 27.11.2025 passed by the Commissioner of Income Tax (Appeals), Raipur, pertaining to Assessment Year 2024-25. The central controversy revolved around the denial of rebate under Section 87A of the Income Tax Act, 1961 at the time of processing the return under Section 143(1), specifically in relation to tax liability computed under Section 112 on long-term capital gains (LTCG) arising from the sale of a residential flat.

The assessee — a resident individual — originally filed a return of income on 27.07.2024 declaring total income of ₹4,22,913. A revised return was subsequently filed on 23.11.2024, retaining the same figure of ₹4,22,913. Embedded within this total income was an LTCG of ₹2,64,000 from the sale of a residential property, chargeable to tax under Section 112 of the Income Tax Act, 1961. The aggregate tax liability on the total income worked out to ₹24,583.

Importantly, the assessee had not exercised the option available under Section 115BAC(6) and was accordingly governed by the provisions of Section 115BAC(1A) for the relevant assessment year. Since the total income remained below ₹7,00,000, the assessee claimed a full rebate under Section 87A against the entire tax payable and consequently sought a refund of TDS amounting to ₹8,203.

Action Taken by the CPC and Subsequent Appeal

When the Centralised Processing Centre (CPC) processed the revised return under Section 143(1), it issued an intimation dated 24.02.2025 disallowing the entire Section 87A rebate of ₹24,583 without furnishing any reasoning or prior notice to the assessee. As a direct consequence, the refund of ₹8,203 was denied, and instead a fresh demand of ₹17,360 was raised against the assessee.

The assessee challenged this intimation before the CIT(A), who, however, dismissed the appeal, upholding the CPC's action. The assessee thereafter approached the ITAT Ahmedabad.

Grounds of Appeal Before the Tribunal

The assessee raised the following grounds before the Tribunal:

  1. The CIT(A) erred in upholding the prima facie adjustment made by the CPC under Section 143(1) with respect to the Section 87A rebate, which is a debatable and contentious issue requiring an elaborate reasoning process.
  2. The CIT(A) erred in confirming denial of rebate of Rs. 24,583/- claimed u/s. 87A of the Act in respect of tax payable u/s. 112 of the Act on long term capital gain earned on sale of residential flat.
  3. The CIT(A) erred in upholding the action of CPC in denying rebate u/s. 87A of the Act while processing return of income without providing any prior opportunity of hearing to the assessee resulting in gross violation of principles of natural justice.
  4. Both the lower authorities have erred in not appreciating the facts of the case and law on the issue in its correct perspective.
  5. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.

Submissions on Behalf of the Assessee

The Authorised Representative for the assessee advanced the following key arguments:

  • The CPC failed to issue any prior notice regarding the proposed adjustment and provided no basis or reasoning in the intimation for rejecting the Section 87A rebate claim, thereby violating the principles of natural justice.

  • Section 87A, as modified by the Finance Act, 2023, provides a rebate on income tax where the total income of a resident individual assessed under Section 115BAC(1A) remains within ₹7,00,000. The term "total income" as defined under the Act necessarily encompasses capital gains as well.

  • Tax payable under Section 112 constitutes a component of the overall tax on total income and must, therefore, be considered within the scope of Section 87A for the purpose of the rebate.

  • Notably, while Section 112A(6) contains an explicit restriction barring the Section 87A rebate in specific circumstances relating to LTCG covered under that section, neither Section 112, nor Section 115BAC(1A), nor Section 87A itself carries any analogous restriction for long-term capital gains taxable under Section 112. This legislative distinction is deliberate and must be respected.

  • The assessee placed reliance on the following judicial decisions: