Rebate Under Section 87A Cannot Be Denied by Excluding LTCG: ITAT Chennai’s Important Ruling

Rebate Under Section 87A Cannot Be Denied by Excluding LTCG: ITAT Chennai’s Important Ruling

The Income Tax Appellate Tribunal (ITAT) Chennai recently delivered a significant ruling in the case of Venkatachalam Venkatraman vs. Income Tax Officer (AY 2024-25). The Tribunal clarified an important point of law: whether long-term capital gains (LTCG) can be excluded when calculating “total income” to determine eligibility for the rebate under Section 87A of the Income Tax Act, 1961.

This judgment is extremely relevant for individual taxpayers earning small amounts of capital gains. Many assessees face unnecessary disputes when the Assessing Officer restricts or denies the Section 87A rebate merely because the income includes capital gains taxed at special rates. By analysing the plain wording of the law, the Tribunal has now given clear direction on how Section 87A should operate for AY 2024-25.

Facts of the Case

The assessee, Shri Venkatachalam Venkatraman, filed his income tax return for Assessment Year 2024-25, and his total income came to ₹4,97,220. This amount included long-term capital gains (LTCG) which are taxed at a special rate under Section 112A. Since his total income was less than the threshold of ₹5 lakh, he claimed the rebate under Section 87A, amounting to ₹12,500, which is the maximum allowable rebate for the relevant year.

However, the Assessing Officer issued an intimation under section 143(1) and denied the rebate for two primary reasons:

1. LTCG taxed at special rates should not be considered when computing “total income” for Section 87A eligibility.
   The AO argued that since LTCG is taxed separately, it cannot be included for determining whether the assessee’s income falls below ₹5 lakh.
2. The assessee chose the “new tax regime” under Section 115BAC, and therefore, he was allegedly not eligible for the rebate under Section 87A.

The assessee challenged this disallowance before the Commissioner of Income Tax (Appeals). However, CIT(A) upheld the AO’s decision, again maintaining that LTCG should be excluded while testing the income threshold and that filing under Section 115BAC bars the rebate.

Aggrieved by the denial, the assessee approached the ITAT Chennai, arguing that:

• Section 87A does not exclude LTCG or any other income taxed at special rates.
• “Total income” is already defined in Section 2(45) and cannot be re-interpreted by the department.
• Amendments restricting rebate for new tax regime filers apply from AY 2025-26 and are not relevant for AY 2024-25.
• Courts, especially the Bombay High Court in Rajiv G. Shah, have already held that LTCG cannot be excluded while computing eligibility for rebate under Section 87A.

Observations of the Tribunal

The Chennai bench of the Tribunal examined the case thoroughly and made several important observations that clarify the correct legal position.

(a) Section 87A does not exclude LTCG from “total income”

The Tribunal noted that neither Section 87A nor any other provision of the Act excludes LTCG or similar special-rate income for the purpose of determining total income. The language of the section is simple:

• Rebate is available if “total income” does not exceed ₹5 lakh.
• The law does not say total income excluding LTCG.
• Therefore, any attempt by the department to exclude LTCG is illegal because the statute itself does not authorize such exclusion.

(b) Definition of “Total Income” is clear and includes all incomes

The Tribunal relied on Section 2(45), which defines “total income” as:

“Total amount of income referred to in Section 5, computed in the manner laid down in this Act.”

This means all incomes under all heads—including capital gains—form part of total income unless the Act specifically excludes them.
Since Section 87A does not create any exclusion, total income must be computed as per law, not based on departmental interpretation.

(c) Amendment to Section 87A effective ONLY from 1 April 2025

The department relied on the proviso introduced by the Finance Act 2024, which states that individuals filing returns under Section 115BAC(1A) (default new tax regime) may not get the rebate.
The Tribunal clarified:

• This amendment applies from AY 2025-26 onwards.
• The present case pertains to AY 2024-25, so the amendment is irrelevant.
• The AO and CIT(A) wrongly applied future amendments to a past assessment.

(d) Support from Bombay High Court’s judgment

The Tribunal also took note of the Bombay High Court’s judgment in Rajiv G. Shah, where the court clearly held that:

• Section 87A does not impose any restriction on including LTCG when testing eligibility for rebate.
• The department cannot artificially exclude LTCG when the law does not provide for it.

This reinforced the assessee’s position and supported ITAT’s reasoning.

(e) Taxpayer correctly claimed the rebate

After analysing the law, the Tribunal held that the assessee’s total income of ₹4,97,220—including LTCG—was correctly considered for rebate purposes. Since the total income was below ₹5 lakh, the assessee was clearly eligible for the full rebate of ₹12,500.

Accordingly, the Tribunal directed the Assessing Officer to allow the rebate and grant relief to the taxpayer.

Conclusion

This judgment by ITAT Chennai provides much-needed clarity on how Section 87A should be interpreted, especially for Assessment Year 2024-25. The Tribunal has reaffirmed that:

• LTCG cannot be excluded from total income unless the statute specifically provides for such exclusion.
• Total income must be computed as per the definition in Section 2(45), which includes all types of income.
• Departmental officers cannot deny the rebate based on assumptions or future amendments.
• The rebate under Section 87A must be allowed when the legally computed total income does not exceed ₹5 lakh.
• Amendments applicable from AY 2025-26 cannot be used to deny benefits for earlier years.

For taxpayers, especially middle-class individuals who earn small amounts of capital gains, this decision is an important protection from wrongful disallowance of tax relief. It also reinforces that tax benefits cannot be denied unless the law clearly disallows them.

In simple words, for AY 2024-25, if your total income is below ₹5 lakh—whether it includes LTCG or not—you are eligible for the ₹12,500 rebate under Section 87A.

This ruling strengthens taxpayer rights and brings much-needed clarity in tax administration, helping avoid unnecessary litigation and confusion.