The Hindu Business Line : The order of rebate

THERE are four rebates under chapter VIII of the Income-Tax Act, 1961 which contain a similar refrain — "as computed before allowing the deduction under this chapter". Section 88 grants rebate from tax liability if one makes specified investments. Section 88B offers senior citizens a rebate amounting to the entire tax liability subject to a ceiling of Rs 20,000. And Section 88C offers ladies a rebate amounting to the entire tax liability subject to a ceiling of Rs 5,000.

Section 88D ushered in by the Finance (No.2) Act, 2004 grants a rebate of such an amount so as to leave an individual with a post-tax income of at least Rs 1 lakh where his total income exceeds this figure, besides granting a complete reprieve from taxation to those individuals whose total income does not exceed Rs 1 lakh.

The common feature of all these four sections is that all these rebates are available from the tax as computed before giving the deductions under this chapter.

Let us take the case of Mr Bhola Ram, 70, a senior citizen. His total income let us say is Rs 2.5 lakh. The tax liability on this works out to Rs 49,000. Let us say he has purchased ICICI tax-saving bonds for Rs 50,000 during the relevant financial year. Being a senior citizen he makes the grade for rebate under Section 88B. He also makes the grade for rebate under Section 88 having invested in a prescribed avenue. Both the sections however grant the rebates only from the tax liability computed before making any deductions under this chapter. This would put poor Mr Bhola Ram in a bind because if he chooses the Section 88 first then he has to kiss the more alluring Section 88B relief a goodbye inasmuch as the first deduction would leave him with a tax liability, which is after claiming a deduction under this chapter. This would put paid to his claim for deduction under Section 88B.

Strictly speaking, he should plump for Section 88B deduction and forego the less alluring Section 88 deduction. Mercifully, the tax administration is not placing this hyper-technical interpretation on the whole issue. But should a stickler for the written word turn out to be one's assessing officer, one's goose would be cooked.

Let us consider another scenario. Ms Briganza may be getting a taxable salary of Rs 1,11,000. Her tax liability on this works out to Rs 11,200. She is entitled to a tax rebate of a piffling Rs 200 under Section 88D that will leave her with a post-tax income of Rs 1 lakh all right but would simultaneously saddle her with a tax liability of Rs 11,000 should an obstinate assessing officer stick to the letter of law and refuse to grant her the rebates under Section 88C (Rs 5,000) and Section 88 on prescribed investments that she might have made on the ground that having claimed the rebate under Section 88D what is left is the tax liability after claiming one of the deductions under chapter VIII.

In that case, she might have to forego the small relief of Rs 200 under Section 88D and settle for rebate under Section 88 that comes with a price tag — heavy investments with a lock-in period — in favour of the limited Rs 5,000 rebate under Section 88C that comes without a price tag.

Parliament's intention of course is to give all these rebates ungrudgingly to those being eligible. But the language of the relevant sections may come as the villain of the piece.

To pre-empt this dangerous possibility, Parliament should coin a new term, `gross tax liability', and define it under Section 2 to mean the tax liability on the total income. The four sections offering rebates should be amended simultaneously to provide rebate from the gross tax liability.

(The author is a Delhi-based chartered accountant.)