Bombay HC Directs IT Dept to Restore Section 87A Tax Rebate in ITR Utility

In a significant ruling on January 24, 2025, the Bombay High Court held that the Income Tax Department (ITD) acted arbitrarily by modifying the ITR utility software to deny Section 87A tax rebate claims on special rate incomes post-July 5, 2024. The court directed the ITD to reverse these modifications and allow all eligible taxpayers to claim the rebate.

Key Highlights of the Bombay High Court's Verdict

• The ITR utility should not be a gatekeeper preventing taxpayers from making claims permitted by law.
• Eligible taxpayers (income up to ₹5 lakh under the old tax regime or ₹7 lakh under the new tax regime) can claim a rebate under Section 87A.
• The tax department must process rebate claims through assessment procedures under Section 143(1) or 143(3) instead of outright rejection.
• Any restriction at the utility level is unconstitutional and violates the right to access justice.

Tax Department's Argument for Denial of Section 87A Rebate

The Additional Solicitor General (ASG) of India argued that two types of total income exist:

1. Total income under Section 115BAC (1A)
2. Total income under Chapter 12 (special rate incomes like short-term capital gains, lottery winnings, etc.)

The ASG contended that Section 87A rebate applies only to income under Section 115BAC (1A) and not to special rate incomes taxed under Chapter 12.

Bombay HC Rejects ASG's Justification

The High Court disagreed, stating that:

• The law is not crystal clear on whether Section 87A rebate applies to special rate incomes.
• The issue is debatable and should be decided through scrutiny assessments, not software restrictions.
• The ITR utility must allow taxpayers to claim rebates, and the tax department can challenge them through due process.

Implications of the Judgment

1. Taxpayers can now claim Section 87A tax rebate, including on special rate incomes.
2. Income Tax Department must update ITR utilities to allow such claims.
3. Claims will be subject to scrutiny, but they cannot be denied outright by software restrictions.

What Happens Next?

While the ruling is in favor of taxpayers, experts caution that the final word on Section 87A applicability to special rate incomes is yet to be determined. The tax department may challenge the ruling in the Supreme Court or issue fresh clarifications.

For now, taxpayers should ensure they claim the rebate and stay updated on further developments.