CAs, taxpayers push back after Income Tax dept sends rebate notices

One option taxpayers have is challenging demand notice before tax appellate authorities, using the Bombay High Court's ruling as legal support, says one expert

Chartered accountants have approached the tax appellate authority on behalf of their clients after the Income Tax Department sent notices to people — mostly with total incomes below Rs 7 lakh — who revised their tax returns in January 2025 to claim rebate under Section 87A.

 

“We have observed a growing concern among taxpayers regarding the Income Tax Department's issuance of demand notices, particularly to individuals with total incomes below Rs 7 lakh who revised their ITRs in January 2025 to claim the Section 87A rebate,” said Amit Bansal, partner, Singhania & Co. (a law firm).

 

“Despite the Bombay High Court's directive allowing a revision window, the tax department has continued to deny the rebate on short-term capital gains (STCG) taxed at special rates, leading to unnecessary demand notices,” he said.

 

Kunal Savani, partner at Cyril Amarchand Mangaldas (a law firm), said: “Taxpayers who revised their returns before January 15, 2025, hoping to claim the rebate, have now received demand notices.

 

“Similarly, individuals who filed before July 5 and were granted a rebate under the new regime, including those with special rate income such as capital gains, have also received such similar notices. Therefore, the tax fraternity has already approached the concerned to resolve this confusion,” said Savani.

 

What is the matter?

 

In July 2024, several taxpayers with 'special rate' incomes, such as STCG tax at 15 per cent for FY24 (assessment year 2024-25), claimed rebates under Section 87A, as their total incomes were below Rs 7 lakh. The Income Tax Act, 1961, provides provisions that effectively reduce the tax liability to zero, with limits of Rs 5 lakh and Rs 7 lakh in the old and new tax regimes, respectively, for FY24.

 

However, those who filed returns after July 5, when the income tax return utility was updated, were denied the rebate on their STCG income. The matter was taken to the Bombay High Court, which directed the tax department in December 2024 to allow taxpayers to revise their returns and reconsider their cases. Consequently, a 15-day window was opened between January 1 and January 15, 2025, for taxpayers to revise their ITRs.

 

On February 1, the Union Budget 2025 clarified that special rate incomes, including STCG under Section 111A, would not be eligible for the rebate from FY26 onward.

 

Bansal suggested likely solutions for taxpayers:

 

Filing a rectification request: Taxpayers who have received demand notices can file a rectification request under Section 154 of the Income Tax Act, asserting that the tax demand is erroneous based on recent court decisions.

 

Lodging a grievance: If the rectification request does not yield a favorable outcome, taxpayers can lodge a formal grievance with the tax department, highlighting the inconsistency and referencing the Bombay High Court's directive. 

 

Legal challenge: As a further step, taxpayers may consider challenging the demand notice before the tax appellate authorities, using the Bombay High Court’s ruling as legal support. This approach, however, may require additional resources and time.

 

Settlement of demand: If the amounts involved are relatively small and the taxpayer prefers to avoid prolonged disputes, settling the tax demand might be a “pragmatic approach” to prevent further complications.