When Tax Software Oversteps: The Section 87A Rebate Battle on Short-Term Capital Gains

Bhagya Lakshmi
Aug 14
3 min read

Introduction

In India’s fully digital income tax regime, taxpayers trust the ITR utility and Central Processing Centre (CPC) to follow the law. But what happens when the software enforces rules that don’t actually exist in the statute?

That’s exactly what happened in hundreds of cases where the Section 87A rebate was denied on Short-Term Capital Gains (STCG) under Section 111A—even though, for Assessment Year (AY) 2024–25, the law allowed it.

This mismatch between the Income-tax Act and CPC’s internal “business rules” triggered a flood of demand notices across India, forcing taxpayers to fight back.

How Widespread Is the Problem?

Since February 24, 2025, many taxpayers (especially those who filed revised returns before January 15) received demand notices disallowing Section 87A rebates on STCG.
CA Association Surat (CAAS) confirmed over 500 notices among its members alone.
Media outlets like Economic Times, Outlook Money, and Angel One report hundreds, if not thousands of such cases nationwide.
Most notices are automated 143(1)(a)(ii) adjustments during CPC processing.

What the Law Says for AY 2024–25

Section 87A: Rebate up to ₹25,000 (₹7 lakh income limit in new regime) for resident individuals whose total income does not exceed ₹7 lakh.
Section 111A: STCG from equity/equity-oriented mutual funds taxed at 15%.
No Exclusion: For AY 2024–25, there is no provision excluding STCG from rebate eligibility. The exclusion only applies prospectively from AY 2026–27 under the Finance Act 2025.

Why CPC Denied the Rebate

CPC’s software applied the future law early:

Business rule logic flagged STCG under Section 111A as ineligible for rebate.
This interpretation was embedded in the system after July 5, 2024, even though Parliament had not yet made it applicable for AY 2024–25.
Result: Notices for additional tax demand.

Key Case Laws Supporting Taxpayers

1. ITAT Ahmedabad – Jayshreeben Jayantibhai Palsana v. ITO (TS-1054-ITAT-2025(Ahd))

AY: 2024–25
Facts: Income ₹6.76 lakh under new regime, included STCG; CPC denied 87A rebate.
Ruling:
- No legal restriction in AY 2024–25.
- Finance Act 2025 change applies only prospectively.
- Section 143(1) adjustments only for “patently incorrect” claims; this wasn’t one.
Outcome: Demand deleted; rebate allowed.
Quote: “Software logic cannot override statutory provisions.”

2. CIT(A) Mumbai – Individual Taxpayer

Facts: CPC denied rebate; CIT(A) held “total income” includes all income heads unless statute says otherwise.
Outcome: Rebate restored.

3. Shri Ranjit Kumar Nag v. ITO (CIT(A), 2023)

Facts: Similar denial; taxpayer cited CBDT Circular No. 10/2019.
Outcome: CIT(A) reinstated rebate, confirming no exclusion for STCG.

Why This Matters:

Section 143(1)(a)(ii) allows CPC to correct obvious legal errors—not to pre-empt future law. By doing so, the system effectively rewrote the law for one assessment year.

Practical Steps for Affected Taxpayers

Check the Law: For AY 2024–25, you are eligible if total income ≤ ₹7 lakh, even with STCG.
File Rectification (Section 154): Point out the statutory provisions and ITAT precedents.
Appeal to CIT(A): If rectification fails.
Document Everything: Keep computation notes and section references handy.

Key Takeaways

Hundreds of notices issued; over 500 confirmed by CAAS members alone.
At least three major rulings favour taxpayers on this exact issue.
The problem is systemic—not taxpayer error.
Vigilance is essential; automated systems are not infallible.

Conclusion

The Section 87A-STCG dispute is a wake-up call in India’s e-filing era:

Automation is powerful, but it is not the law.

Taxpayers and professionals must remember: When CPC’s algorithms get it wrong, the appeal route is not just available—it’s often winnable.