An error in tax filing led to a senior citizen paying ₹9.91 lakh in tax on interest from tax-free bonds. Fortunately, the individual has now received relief from the Income Tax Appellate Tribunal (ITAT).
After analyzing the case’s facts, the tribunal has given directions to the relevant tax authorities to issue a refund along with the applicable interest. The case’s final order was pronounced on 23 September 2026.
This case is significant for taxpayers as it provides several important lessons for everyday tax filing. The tribunal made a key distinction between submitting a new tax-related claim and correcting an error that was already evident in the originally filed income tax return.
Senior Citizen Wrongly Paid Tax on Tax-Exempt Bond Interest
In this case, Gurugram-based senior citizen Ajay Kumar Bakaya made a total investment of ₹3 crore in tax-free bonds in February 2013. The portfolio comprised ₹2 crore in India Infrastructure Finance Company Ltd (IIFCL) bonds at an interest rate of 8.48% per annum, and ₹1 crore in Rural Electrification Corporation (REC) bonds offering an 8.46% annual coupon rate.
Under Section 10(15)(iv)(h) of the Income Tax Act, 1961, interest derived from these specified public sector bonds is entirely tax-exempt. In accordance with these statutory provisions, the assessee (Mr. Bakaya) had consistently disclosed the interest earnings as ‘exempt income’ in his returns across Assessment Years (AYs) 2018-19 through 2024-25.
However, while filing his return for AY 2022-23, he inadvertently declared the ₹25.42 lakh interest earned from bonds as taxable income under ‘Income from Other Sources’. This amount comprised ₹16.96 lakh received from IIFCL and ₹8.46 lakh from REC. Due to this error, he had to pay an additional tax of ₹9,91,370.
Furthermore, by the time the error regarding the outstanding amount was discovered, the deadline for filing a revised return u/s 139(5) of the Income Tax Act, 1961, had already lapsed. On January 19, 2024, they approached the Assessing Officer (AO) u/s 154 to rectify the error and claim the refund.
The AO rejected this request in an order dated April 7, 2025, citing the Supreme Court’s judgment in the case of ‘Goetze (India) Limited vs. CIT’. The AO mentioned that the claim could not be considered without filing a revised return through the proper procedure.
Why Did the ITAT Order the ₹9.91 Lakh Refund?
The case has reached the ITAT after the CIT(A) upheld the position. The tribunal observed that Bakaya was not asking for a new exemption claim. The income from interest was already reported in the return without concealing material facts. The error was that a receipt, otherwise considered tax-exempt, had been classified as ‘taxable income’.
Therefore, the ITAT held that the rectification was intended only to correct a ‘mistake apparent from the record,’ not to make a new claim. It was also held that the decision in the Goetze (India) Ltd. case did not apply to the facts and circumstances of the present case.
The Tribunal relied on the decision in the ‘Kapil Dev Nikhanj vs. ACIT’ case, which clarified that tax recovery must be in accordance with the law of the land and not arbitrary. Consequently, the Tribunal directed the Assessing Officer (AO) to treat the interest earned on the bonds as tax-free under Section 10(15)(iv)(h) and to issue a refund of ₹9,91,370, along with applicable interest as per the law.
Important takeaways for taxpayers
- Report exempt income correctly: Place interest or exempt receipts in the designated section of your return.
- Keep records: Retain bond certificates, interest statements, and proof of exemption.
- Misclassification vs. fresh claim: Correcting disclosed income that was mistakenly marked taxable is not a new claim.
- Explore corrections: Use Section 154 or other provisions to correct apparent errors in returns or assessments.
- Fact-dependent ruling: Relief depends on prior disclosure and the facts of your case; verify your circumstances first.
If there is a delay in discovering the mistake, then paying tax on legally exempt income may or may not resolve the case. The taxpayer must take quick action.
Read Also: Ahmedabad ITAT Grants Relief to Senior Citizen, Condones 153-Day Delay; Orders Fresh Assessment
The cautious approach to income, deductions, and tax classifications helps avert excess tax payments and the need for time-consuming correction proceedings.
News Source: www.livemint.com
