Senior Citizen Paid Tax On Tax-Free Bond Interest, Wins Rs 9.91 Lakh Refund

An entry in the wrong column of an income tax return (ITR) cost a Gurugram senior citizen nearly Rs 10 lakh. Recovering the money took a rectification request, a rejected appeal and, finally, a favourable ruling from the Income Tax Appellate Tribunal (ITAT).

The senior citizen, Bakaya had invested Rs 3 crore in tax-free bonds in February 2013. While filing his return for assessment year 2022-23, he included Rs 25.42 lakh of interest from those investments under taxable income from other sources.

The mistake resulted in excess tax payment of Rs 9,91,370. On September 23, 2026, the Delhi ITAT directed the assessing officer to treat the interest as exempt and refund the excess tax, along with interest admissible under law.

How The Filing Error Became A Dispute

Bakaya’s interest receipts comprised Rs 16.96 lakh from India Infrastructure Finance Company Limited (IIFCL) bonds and Rs 8.46 lakh from Rural Electrification Corporation (REC) bonds. He had reported the interest as exempt in other assessment years, but had mistakenly classified it differently in this ITR.

He discovered the error after the deadline for filing a revised return had expired. He then submitted a rectification application under Section 154 of the Income-tax Act, 1961, on January 19, 2024, according to a recent Times of India report.

The assessing officer rejected the request, citing the Supreme Court’s (SC) decision in Goetze (India) versus Commissioner of Income Tax (CIT). The officer’s position was that a claim for deduction could not be entertained without a revised return.

The Commissioner of Income Tax (Appeals) upheld the rejection. Bakaya subsequently approached the tribunal.

Why The Tribunal Allowed The Refund

The distinction between correcting an existing error and making a fresh claim proved decisive.

The tribunal observed that Bakaya’s request concerned a mistake apparent from the record. The bond interest had already been disclosed; the error was in treating an exempt receipt as taxable.

It held that the Goetze ruling did not apply to the circumstances. Referring to the earlier decision in Kapil Dev Nikhanj’s case, the tribunal also noted that the restriction on assessing authorities entertaining fresh claims did not curtail the powers of appellate authorities.

The interest from Bakaya’s IIFCL and REC tax-free bonds qualified for exemption under Section 10(15)(iv)(h). The tribunal therefore directed the assessing officer to grant the consequential refund.

The assessing officer had himself acknowledged that the bond income was erroneously included as taxable. That acknowledgement supported Bakaya’s case for correcting the mistake.

Check The Classification Before Filing

For investors, the case underlines the importance of checking where each receipt appears in the return. Matching the interest amount with a bank statement is only part of the exercise; its tax treatment needs checking too.

Keep bond allotment records, interest statements and earlier returns together. Before submitting the return, review taxable interest and exempt income separately, particularly when holding several investments.

Rectification, however, is not a general substitute for a revised return. The Income Tax Department’s (ITD) guidance limits it to mistakes apparent from the record and says taxpayers cannot use it to claim new exemptions or deductions.

Where a processed return contains an error, the appropriate route depends on the order and the nature of the mistake. Bakaya secured relief because the tribunal accepted that he was correcting the classification of an already disclosed receipt. Taxpayers facing a similar problem should examine their records and the available remedy before filing a request.

FAQs

1. Why did the ITAT allow a refund of nearly Rs 10 lakh?
The tribunal found that Bakaya had wrongly reported exempt bond interest as taxable income. It treated this as a mistake apparent from the record.

2. Can rectification be used after the revised return deadline has passed?
Rectification is limited to mistakes apparent from the record. It cannot generally be used to claim new exemptions or deductions.

3. What should tax-free bond investors check before filing their ITR?
Verify that eligible tax-free bond interest is reported under exempt income. Keep bond records and interest statements handy to support its classification.