In a recent ruling, the Bombay High Court ruled that the rebate under Section 87A of the Income Tax Act, 1961, applies to the total tax liability of eligible taxpayers, including tax on income charged at special rates, unless explicitly excluded by law.
The case was brought by The Chamber of Tax Consultants, represented by its President, and three individual petitioners, who filed a Public Interest Litigation (PIL) against respondents including the Director General of Income Tax (Systems) and the Union of India.
The Public Interest Litigation pinpointed grievances arising from modifying the tax filing utility on July 5, 2024, which restricted taxpayers from claiming the Section 87A rebate. This rebate is important for taxpayers whose total income does not exceed Rs. 7,00,000 under the new tax regime.
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The petitioners argued that the updated tax filing system went against the principle of self-assessment, which is a key part of the Income Tax Act. They said it stopped taxpayers from declaring their income and claiming deductions based on their honest understanding of the law.
The petitioners also claimed this change violated their constitutional rights under Articles 14 (equality), 19(1)(g) (freedom to practice a profession), and 265 (no tax without the authority of law). They pointed out that the system forced the tax department’s interpretation of the law on taxpayers, beyond the legal powers granted to the department.
The tax authorities, represented by the Additional Solicitor General (ASG), defended the restrictions, saying they were in line with the law and ensured compliance. The petitioners referred to earlier court cases, such as Samir Narain Bhojwani vs. DCIT and Goetze (India) Ltd. vs. CIT, to argue that taxpayers can file claims in their tax returns. They said the validity of these claims should be decided during the assessment or appeal process, not at the time of filing.
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The Bench Comprising Justice M. S. Sonak and Justice Jitendra Jain observed that the restrictions violated the right to equality under Article 14 by treating taxpayers differently based on their income type or tax regime.
The court discussed whether the Section 87A rebate can only be applied to tax calculated under Section 115BAC (the new tax regime) or if it can also be applied to taxes on income taxed at special rates under Chapter XII.
The court clarified that taxpayers are allowed to claim the rebate on their total tax liability, including special rate income. However, it acknowledged that this is still a complex and debatable issue, leaving room for further discussions and interpretations in the future.
The court directed the CBDT to ensure the e-filing utility aligns with the law, allowing taxpayers to exercise their statutory right to self-assessment and claim the rebate as per their understanding. The court ordered tax authorities to review previous filings where Section 87A claims were disallowed due to utility restrictions and to process refunds for eligible taxpayers.
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