Taxpayers, CAs challenge I-T notices on rebate claims before appellate body

CAs await outcomes of appeals filed over tax rebate denial

After the income tax department issued demand notices to taxpayers – mainly those with total incomes of less than Rs 7 lakh – who had revised their income tax returns in January 2025 to claim the rebate under section 87A, several chartered accountants have approached the tax appellate body for resolution.

Chartered accountants Moneycontrol spoke to said they have already knocked on the doors of the Commissioner of Income Tax (Appeals) against the I-T department’s action and are awaiting the outcome.

The rebate denial saga continues

In July 2024, many taxpayers who had ‘special rate’ incomes, such as short-term capital gains (STCG) tax @15 percent (for financial year 2023-24 – that is assessment year 2024-25), had claimed the rebate under section 87A, as their total incomes were less than Rs 7 lakh. The rebate provisions – the limits were Rs 5 lakh and Rs 7 lakh in the old and new tax regimes respectively in FY24 (assessment year 2024-25) – in the I-T Act, 1961, bring the effective tax liability down to zero.

However, those who filed returns after July 5 – when the ITR utility was updated – were denied the rebate on this (STCG) portion of their income while filing their returns last July. The grievance reached the Bombay High Court, which, in December 2024, directed the I-T department to allow them to revise their returns and consider their cases again. Subsequently, a 15-day window was created to allow such taxpayers to revise their ITR between January 1 and January 15, 2025 (ordinarily, the deadline for filing belated or revised returns is December 31) on the official e-filing portal. Many did, hoping to get the rebate on their STCG income too.

In the meantime, on February 1, the Union Budget 2025 clarified that all the special rate incomes, including STCG under Section 111A, would not be eligible for the rebate from FY26. This section deals with the taxation of STCG from the sale of listed equity shares and equity-oriented mutual funds.

Also read: Tax rebate denied in July 2024? Revise your return by Jan 15 to claim the same

Notices to all assessees with rebate claim

Taxpayers who revised their returns before January 15, 2025, in the hope of the rebate being allowed have now received intimations. “All such taxpayers who have claimed 87A rebates in their ITRs – be it revised, original or rectification return – have received demand orders via Intimations under section 143(1),” said chartered accountant Himank Singla. In fact, even those who had filed their returns prior to July 5 and had been granted rebate on special rate income under the new regime have received such notices. “In cases where intimation orders were served in June allowing rebate under section 87A under the new regime, suo-moto rectification orders have been served with demands for disallowance of 87A rebate against special rate incomes,” he added.

Effectively, the situation is back to square one, despite the I-T department updating the ITR utility in January and affected taxpayers making the effort to revise their returns. “The utility modification followed the Bombay High Court's directive, which deemed the previous utility restrictions unjustified. However, the court did not rule on the eligibility of such claims, leaving their validity to be determined in individual assessments,” pointed out Singla.

Also read: Will your Rs 12-lakh salary enjoy ‘nil’ tax even with additional STCG income? Here’s what experts say

The way forward

CAs whom Moneycontrol spoke to favour filing appeals against the I-T orders with the Commissioner of Income Tax (Appeals).

“Taxpayers and CAs have 30 days from the date of receipt of the demands to file such appeals – in most cases, these are faceless appeals. In some cases, the outcomes – for example, in Gujarat and Mumbai – have been in favour of the taxpayers,” said Mayank Mohanka, Partner, SM Mohanka and Associates, a chartered accountancy firm.

If 30 days have not passed since the receipt of the I-T intimation, you can consider filing an appeal. You have to use Form 35 to do so. “This can be done electronically through the e-filing portal. Include copies of the demand notice, filed returns, computation sheets, and any correspondence with the tax department and also cite the jurisprudence of the Bombay HC judgement. By following these steps, taxpayers can effectively address the demand notices and ensure that their cases are appropriately reviewed,” said Singla. CIT(A) will examine individual cases and pass an order.

“This is an ongoing issue with many of our clients receiving such notices. If the amount is substantial, appeals can be filed. However, where the amount to be paid is small, we are advising taxpayers to simply pay up,” said Abhishek Soni, Founder, Tax2Win, a tax consultancy firm. For instance, a demand order accessed by Moneycontrol entailed an amount of just Rs 160.