A retired employee from Bharuch has won a legal battle against the Income Tax Department over the processing of his leave encashment tax exemption claim. The Income Tax Appellate Tribunal (ITAT), Surat Bench, on October 28, 2026, set aside a rectification order through which the department had added ₹5.02 lakh to his taxable income without providing him an opportunity to explain his position.
The ruling highlights the importance of following due process before the tax authorities modify an already processed income tax return (ITR), particularly when such changes increase an individual's tax liability or reduce a refund.
How the leave encashment tax dispute started
The case concerns Patel, a resident of Bharuch, who received ₹8.02 lakh as leave encashment upon retirement from a reputed company.
However, his employer's human resources department mentioned only ₹3 lakh as the tax-exempt portion of leave encashment in his salary certificate. Patel, meanwhile, claimed exemption on the entire ₹8.02 lakh under Section 10(10AA)(ii) of the Income Tax Act, 1961, while filing his ITR.
He also claimed a tax refund of approximately ₹1.53 lakh.
Initially, the Income Tax Department processed his return and issued a refund of ₹1.54 lakh, including ₹1,280 as interest for the delay in processing the refund.
However, the discrepancy between the exemption claimed in his ITR and the amount mentioned in his salary certificate subsequently attracted the department's attention.
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