ITAT Delhi rules that wrongly taxed exempt interest cannot be pocketed by the department, even when the revised-return window has closed.
A ₹3 Crore Bet on Tax-Free Income
Ajay Kumar Bakaya, a resident senior citizen from Gurugram and a regular income tax filer, parked ₹3 crore in tax-free bonds back in February 2013. He put ₹2 crore into India Infrastructure Finance Company Ltd (IIFCL) bonds carrying 8.48 per cent interest and ₹1 crore into Rural Electrification Corporation (REC) bonds yielding 8.46 per cent. Interest on both is exempt from tax under section 10(15)(iv)(h) of the Income-tax Act, 1961, which is exactly why such bonds are a favourite among retirees looking for safe and predictable income.
One Wrong Column, One Costly Year
For years, Bakaya correctly showed his bond interest as exempt in his returns, from assessment year 2018-19 right through 2024-25. In assessment year 2022-23, however, the ₹25.42 lakh he earned (₹16.96 lakh from IIFCL and ₹8.46 lakh from REC) was wrongly listed as taxable income under “income from other sources.” The slip meant he paid excess tax of ₹9,91,370 on money the law had never meant to tax.
The Revised-Return Window Slams Shut
By the time Bakaya spotted the error, the deadline for filing a revised return under section 139(5) had already passed. He did not give up. On January 19, 2024, he approached the assessing officer under section 154, which allows correction of mistakes apparent from the record, and asked for a rectification and a refund of the excess tax.
Taxman Admits the Error, Still Says No
On April 7, 2025, the assessing officer rejected the plea purely on a technical ground: that a claim cannot be entertained without a revised return, relying on the Supreme Court’s Goetze (India) Ltd. judgment. The twist was that the officer’s own order accepted that the bond income had been wrongly added as taxable and deserved to be treated as exempt. The CIT(A)/NFAC later upheld the addition, leaving the senior citizen with no option but to knock on the tribunal’s door.
Not a Fresh Claim, Just a Fix
The ITAT sided with Bakaya’s counsel and drew a sharp line between a new claim and a correction. Since the interest had been disclosed in the return itself and only its classification was wrong, the bench held that the rectification was the correction of a mistake apparent from the record and not a fresh claim. It also ruled that the Goetze precedent, which deals with fresh deductions, had no application to these facts.
Article 265 and the Right Amount of Tax
Leaning on its earlier ruling in Kapil Dev Nikhanj v. ACIT, the tribunal reiterated a foundational principle: only the right amount of tax can be collected from the right person, and Article 265 of the Constitution bars any tax without the authority of law. When the statute exempts a receipt, it cannot be taxed simply because the taxpayer offered it by mistake, and the revenue cannot take advantage of an assessee’s ignorance.
Relief With Interest
The ITAT directed that the ₹25.42 lakh interest be treated as exempt under section 10(15)(iv)(h) and ordered the assessing officer to grant a consequential refund of ₹9,91,370, along with interest as admissible under law. The ruling will be read with relief by many investors who have faced similar problems.
Lesson for Every Investor
The takeaway is practical: tax paid by mistake on exempt income can be recovered even after the revised-return deadline, provided the income was disclosed in the original return and was merely misclassified. Still, prevention beats cure, so taxpayers holding tax-free bonds should double-check the exempt income schedule before hitting the submit button.
