PIL to challenge Sec 87A rebate denial unfair demand by Govt

Public Interest Litigation filed to challenge Sec 87A rebate denial & unfair demand raised by Govt

A Public Interest Litigation was recently filed before Gujarat High Court on October 16, 2024, by Chartered Accountant Chintan N. Patel, represented by Advocate Chartered Accountant Rutvij Patel, challenging income tax demands raised by Tax Dept in relation to Sec 87A of the Income Tax Act 1961.

Issue revolves around denial of rebate u/s 87A for income taxpayer’s whose income includes capital gains, particularly under new tax regime. Starting after July 5, 2024, following an update to  e-filing utility, Income tax dept allegedly began incorrectly disallowing Section 87A rebate for special rate incomes like short-term capital gains taxable at 15% u/s  111A.

Legal and Constitutional Implications

• Violation of Article 14 (Equality Before Law): Denial of Section 87A rebate, despite it being applicable under the law, may be seen as discriminatory & in violation of Article 14 of the Indian Constitution. This principle guarantees equality before the law, and the PIL argues that the arbitrary disallowance of the rebate unfairly targets certain taxpayers, particularly those with capital gains income.
• Lack of Procedural Fairness: Sudden change in Income tax-filing utility after July 5, 2024, without adequate notice or communication to taxpayers, undermines procedural fairness. Taxpayers, who were initially allowed Rebate, are now facing unexpected demands without any legislative changes to support this action. This raises concerns about the Govt’s adherence to the rule of law and due process.
• Public Interest Litigation underscores the need for accountability in the handling of public money. The issuance of erroneous demand notices and subsequent refunds not only causes confusion but also represents a misuse of Govt resources. This petition argues that this practice is not in National interest, as it involves avoidable administrative costs and inefficiencies.

The petition claims that prior to this update, there was no confusion, and the portal was functioning correctly, allowing the rebate as intended by the law. However, after the changes, taxpayers began receiving demands, especially those whose incomes include capital gains. In many cases, Income taxpayers were only granted basic rebate of INR 25 thousand with unexhausted threshold limits not being considered.

Relief Sought by the Petitioners CA Chintan N. Patel

Public Interest Litigation makes several specific requests for relief from the Gujarat High Court:

• Declare Government Action Illegal: The petitioner seeks a declaration that the Income Tax Department’s denial of the Section 87A rebate and the issuance of demand notices are illegal & arbitrary, violating fundamental right to equality.
• Update the Tax-Filing Utility: The petition urges the Gujarat High Court to direct the government to modify the tax-filing utility to allow the Section 87A rebate, in compliance with the law. This would prevent further confusion and unfair demands.
• Reprocessing of Affected Returns: Public Interest Litigation seeks a directive for the reprocessing of income tax returns that were improperly assessed due to the denial of the rebate, ensuring that taxpayers receive the benefits to which they are entitled.
• Extend Time for Filing Rectifications: Given the statutory time limits for filing rectification requests, the petitioner asks the court to allow taxpayers to rectify their returns after the court’s final judgment, ensuring they are not penalized by time constraints during the litigation.
• Public Information Disclosure: Public Interest Litigation also calls for the government to inform the public about the court proceedings and interim orders by displaying updates on its official website. This would enhance transparency and ensure that affected taxpayers are kept informed.

Impact on Taxpayers and Future Implications

• If the Gujarat High Court rules in favor of the petitioners, the judgment could provide relief to thousands of taxpayers who have been hit with unjust demands. This would set a precedent for ensuring fair treatment and consistency in tax administration, particularly regarding the interpretation of Section 87A and the handling of capital gains income.
• A favorable ruling for the petitioners could compel the government to ensure better communication and policy implementation, especially concerning changes that affect individual taxpayers. It could also prompt greater accountability in the handling of public resources, reducing the likelihood of similar issues arising in the future.
• On the other hand, if the court upholds the government’s action, it may discourage individuals from opting for the new tax regime, as the denial of rebates and unexpected demands could outweigh the potential benefits of tax simplification.

Conclusion

This has led to frustration among income tax taxpayers, as there have been no amendments to Section 87A or any relevant provisions for these special rate incomes. The Public Interest Litigation seeks relief & clarification from the court on the legality of these demands and the correct application of Section 87A rebates. Outcome of this Public Interest Litigation could have Important Implications for affected income taxpayers, mainly for those who have received unfair income tax demands. Outcome of this matter will have far-reaching consequences, shaping future tax practices and potentially setting a precedent for income taxpayer rights. Court Decision will be closely followed by taxpayers, legal experts, and policymakers, as it has the potential to influence the future of tax Govt in India.

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