Interim Relief for Claiming 87A Rebate AY 2024-25

Interim Relief for Claiming 87A Rebate AY 2024-25 

1. Hon’ble Bombay High Court vide interim order dated 20/12/2024 directed CBDT to issue the requisite notification and extend the deadline for the revised and belated ITR filing date till 15/01/2025.

2. This deadline is being extended for those taxpayers who are eligible to claim Rebate U/S 87A . A resident individual whose income does not exceed Rs. 7,00,000 in the new regime and Rs. 5,00,000 in the old regime are eligible for Rebate u/s 87A.income.

3. The benefit of Rebate U/S 87A can be availed  for various special rate incomes, including short-term capital gains on equity shares or equity oriented mutual funds taxable at 15% under Section 111A. 

4. A peculiar situation happened on July 5, 2024. Until 4th July 2024, Income Tax Utility correctly calculated the amount of rebate. However, an update to the Income Tax Utility on 5th July 2024 prevented new regime taxpayers from claiming rebate under 87A from Short Term or Long Term Capital Gain.

5. The modification of the utility for Assessment Year 2024-2025 midway through the assessment year has caused undue hardship to taxpayers, particularly those relying on the rebate under Section 87A.

6. The situation was not better even for taxpayers who filed ITR before 5th July 2024 . Once the ITR filing deadline was over, the tax department started sending defective notices under section 139(9) to taxpayers who claimed a rebate under 87A. A defective notice would mean that the original ITR will get accepted only if the defect is cured. Owing to this, the taxpayers were indirectly forced to give up on the claim of 87A and pay the difference amount of tax.

7. All over the country, taxpayers approached the courts in the hope of justice. The Chamber of Tax Consultants filed Public Interest Litigation (PIL). The Chamber of Tax Consultants argued before the Bombay High Court that the primary problem was the tax department modifying the logic of its own ITR filing utility software for AY 2024-25 (FY 2023-24) midway through the assessment year.

8. The Income Tax Department answering the allegations claimed that the modifications were required to align with the legal needs and avert the peculiarities in rebate claims.

9.  But this reasoning has been dismissed by the court, saying that procedural amendments must not override the substantive rights granted through legislation. The principle behind Section 87A has always been to ensure that taxpayers in lower-income brackets are not burdened unduly, and the arbitrary disabling of the rebate through the modification of utility software undermines this legislative intent.

10. Now, thanks to Bombay High Court Judgement, taxpayers who filed an ITR by forgoing 87A in response to the defective notice can now file a revised ITR claiming the tax rebate under section 87A before the extended due date of 15th January 2025. 

11. The issue still is not resolved for those taxpayers who took no action after getting the defective ITR notice to claim section 87A rebate. These taxpayers as of now seem to have only option of filing a belated ITR, the same as those who did not file any ITR, but they may be disadvantaged as they may have to forgo certain deductions and losses. 

12. The High Court also directed in this interim order, that all taxpayers should be given the opportunity to exercise their rights without procedural impediments. A notification to this effect from CBDT is expected, and it is hoped that it brings some procedural clarity in such cases where the returns are invalidated as no response was filed to defective notices.” 

13. This is only an interim relief as the final judgement will be pronounced on January 9, 2025. The court will analyze the wider implications of software changes and their impact on the rights of the taxpayer. 

14. The decision of HC is a welcome step and relief to Tax Payers. Also, the extended date of 15th January will help in smooth filing of revised returns. 

15. However, the CBDT has yet to release any official order on the extension of the deadline to file rebates under Section 87A. In light of the HC Judgement, the Income Tax Department is expected to bring a Notification soon.

Courtesy of TAXGURU

Indexation Benefits on Capital Gains

 History 

 Originally, capital gains were made taxable vide insertion of Section 12-B into the Income Tax Act, 1922. The present income tax legislation, viz. the Income Tax Act, 1961 (IT Act) taxes income of the nature of capital gains under Section 45. Initially, capital gains as per Section 48, was determined as the di erence between the full value of consideration and the total cost of acquisition/improvement and expenses incurred in connection with the transfer. Vide the Finance Act, 1987, an amendment was carried out conferring a standard deduction at speci ed percentages in computing the income under the head “capital gains”. 

 Introduction of concept of indexation 

 In the year 1991, a Tax Reforms Committee, Ministry of Finance, Government of India (‘Government’), spearheaded by Dr Raja J. Chelliah, was constituted to examine the structure of direct and indirect taxes. The Committee, through a published interim report, recommended that the Government should factor indexation in computation of capital gains. Taking due cognizance of the said recommendation, the then Finance Minister stated in the Budget Speech dated 29-02-1992 of Financial Year (FY) 1992-1993: “The present tax treatment of long-term capital gains (LTCG) has been criticised on the grounds that the deduction allowed in computing taxable gain is not related to the period of time for which the asset has been held. It does not consider the in ation that may have occurred over time.” 2 A second proviso was inserted into Section 48 to provide that while computing capital gains in respect of a long-term capital asset, an assessee will be permitted to reduce indexed cost of acquisition and indexed cost of improvement. The manner of computing the indexed costs was also stipulated and was linked to the noti ed cost in ation index(ices) (CII) of respective years in which the asset was acquired and transferred. The base year for CII was initially kept at 1-4-1981. However, vide the Finance Act, 2017, an amendment was made to Section 55(2)(b) of the IT Act and the said base year for CII shifted to 1-4-2001. Further, for the purposes of cost of acquisition, an assessee was permitted to adopt either the actual cost or the fair market value as on 1-4-2001, wherever the date of acquisition of the capital asset was prior to the said date. 

 Proposed amendment vide the Finance Bill, 2024 and subsequent amendment to the said Bill 

 Section 112 of the IT Act provides for taxation of LTCG. At present, the rate of tax on long-term capital gains is 20% and the capital gains is computed by considering the indexed cost of acquisition and indexed cost of improvement. The Finance Bill, 2024 amended Section 112 to reduce the rate of taxation of long-term capital gains to 12.5%, while withdrawing the bene t of indexation for any transfers that took place after 23-6-2024. However, this Amendment proposed by the Government met with a lot of hue and cry from all taxpayers and one signi cant criticism was that removal of indexation bene t can greatly a ect the lower income and middle-class groups. Thus, the Government moved an amendment to Section 112 of the IT Act. Post the said Amendment, the second proviso to Section 112 has been inserted wherein it is provided that in case of transfer of land or building or both, which is acquired before 23-7-2024, where the income tax computed exceeds the income tax computed in accordance with the provisions of the IT Act, as they stood immediately before their amendment by the Finance Act, 2024, such excess shall be ignored. In essence, the second proviso provides that for long-term capital assets (being land or building) acquired before 23-7-2024, the assessee has been conferred with the following alternatives for computation of LTCG— 

 1. Compute the tax on LTCG at 20% after considering the bene t of indexation. 

 2. Compute the tax on LTCG at 12.5% without considering the bene t of indexation. 

 It is pertinent to note that the option of choosing between the said regimes is available only to individuals and Hindu Undivided Family (HUF). The same does not extend to other assessees i.e. domestic companies, rms, limited liability partnerships (LLP), etc. Further, the above choice between two alternatives is only available to transfer of land or building. It clearly does not cover other long term capital assets like gold. The applicability of bene t to transfer of other capital assets like leasehold rights can be a potential subject-matter of dispute on whether such rights should be treated on par with land or building or otherwise. 

 Removal of the bene t of indexation — an effect of treatment in other countries 

 If one were to examine the tax treatment accorded by other countries, USA does not currently provide for a bene t of indexation. The United Kingdom originally conferred the said bene t, however, in 2008, the indexation bene t was altogether removed for individuals and the indexation bene t was paused from 2018 for corporates. Australia confers indexation bene t, and the tax laws provide for indexation as one of the methods for calculating capital gains. However, Australian tax laws permit indexation for in ation only up to 30-9-1999 i.e. the indexation factor shall be the consumer price index as on 30-9 1999. The proposal to withdraw indexation bene ts eventually could be an attempt towards tax simpli cation and aligning with certain global practices in general in calculating tax liabilities. 

 Parity with other sources of income

 Indexation bene t under the law was conferred only to income under the head capital gains. The grant of such bene t ensured that accretion to investments made solely on account of in ation was not taxed and only the appreciation in value of the underlying asset was taxed. Such a bene t though may have been equally relevant, was not conferred to any other source of income. For instance, if a real estate dealer engaging in purchase and sale of immovable properties as a business, purchased a land parcel in 2009 and sold it in 2023, the net gain being the simple di erence between the sale consideration and cost of acquisition would be taxed, while permitting such a person to claim for all expenses incurred in this connection. On the contrary, for an assessee holding such a land parcel as capital asset, gains would be computed factoring indexation. Thus, the legislature’s intent to ultimately sunset the indexation bene t for capital gains would lead to greater parity between the computation of income under di erent heads. However, a person carrying on business may still enjoy a better tax bene t stemming from the larger bucket of possible expense deductions available. 

 Conclusion 

 Indeed, when the Budget proposals originally contained a move to completely whitewash indexation bene t, it sent shock waves across the taxpayers considering that such a proposal notwithstanding the reduction in taxes could result in an increased tax out ow especially for the taxpayers belonging to lower and middle-income groups for whom the additional out ow could be a serious cause of concern. The subsequent amendment made to the Finance Bill to provide individuals and HUFs with an option to choose the method of computation has been welcome across the nation. If tax simpli cation is one of the objectives, then certainly, reducing rates and withdrawing multiple complications would ease the tax compliances and tax administration. However, it would be in the interest of both taxpayers and tax administrators alike that the legislature achieves its goal of tax simpli cation in a slow and seamless manner that equally takes into cognizance the pulse of the taxpayers and the impact on the exchequer