Assessees now received Intimation demand Orders on Feb 2025

Assessees have now received Intimation Orders on Feb 2025 for demands- Due to Post-Filing Disallowance Section 87A rebate 

Taxpayers who claimed Sec 87A rebate in Income Tax return’s for AY 2024-25, But later rebate disallowed by AO – What is Solution for Such demand case?

This situation has created a lot of confusion among taxpayers who initially claimed the Section 87A rebate while filing Income Tax return’s for AY 2024-25, only to see the rebate disallowed later during processing. Here’s a breakdown of the issue and possible next steps:

Key Issues: Taxpayers who claimed Sec 87A rebate in Income Tax Returns for AY 2024-25, But later rebate disallowed by AO – What options are there for Taxpayer Now?

1. Initial Allowance of Rebate: When Income Tax returns were filed using the Income Tax Department’s utility, the rebate u/s 87A was allowed for taxpayers under the new tax regime, even on special rate incomes (e.g., short-term capital gains u/s 111A or long-term capital gains u/s 112A).
2. Post-Filing Disallowance: Many assessees have now received Intimation Orders u/s 143(1) or Rectification Orders u/s 154 (in cases where the original intimation was issued earlier), disallowing the 87A rebate against such special rate incomes.
3. Income Tax return Utility Changes in July 2024: The Income Tax Department updated its Income Tax Returns filing utility mid-year, removing the 87A rebate against special rate incomes. However, taxpayers who filed before this change are now being asked to pay additional tax.
4. No Option to Shift to Old Regime: Since taxpayers opted for the new tax regime at the time of filing, they cannot switch to the old tax regime through a revised return (ITR-U or ITR-5), leaving them with no option other than to pay the additional demand.

Possible Actions for Affected Taxpayers: Due to Post-Filing Disallowance Section 87A rebate

1. Filing an Appeal: Taxpayers can appeal before the Commissioner of Income Tax (Appeals) u/s 246A against the 143(1) intimation order or rectification order under Section 154, citing: The Bombay High Court ruling in The Chamber of Tax Consultants v. Director General of Income Tax (Systems) dated 24.01.2025, which ruled in favor of taxpayers regarding the improper application of the updated utility. The principle of legitimate expectation, as the utility initially allowed the rebate.
2. Await Further Clarifications: The Income Tax Department should officially clarify its stand on this issue. If they acknowledge their own system’s inconsistencies, a relief mechanism (such as a special circular) may be introduced.
3. Pay the Demand and Seek Refund Later: If a taxpayer doesn’t wish to go through an appeal process, they may pay the demand and then explore filing a rectification request or appeal for a refund once clarity emerges.

This issue is critical because it affects a large number of taxpayers who filed returns in good faith based on the department’s own utility. A clarification from the Central Board of Direct Taxes or the Income Tax Department is essential to address this anomaly fairly.

Conclusion: What Should Taxpayers Do?

• Wait for Further Updates: Since experts anticipate another utility update, it may be best to hold off on filing a revised ITR until official confirmation.
• File a Rectification Request: Some taxpayers have seen tax demands disappear after submitting a rectification request (u/s 154) via the CPC e-filing portal.
• Consider an Appeal if Demand Persists: If the rebate remains disallowed, taxpayers may appeal to CIT(A) under Section 246A, citing past rulings in favor of taxpayers.

Although the ITR filing utility was updated on January 4, 2025, it still does not allow the 87A rebate on special rate incomes. The Income Tax Department may release another update to fix this, but until then, taxpayers are left with rectification requests or appeals as their only recourse.