Income Tax Exemption Denied for Wrong PAN? ITAT Clarifies Relief under Section 10(26AAA)

21 July 2025 /

Category : efiletax

Denied for PAN Error? ITAT Restores Sikkimese Tax Exemption u/s 10(26AAA)

Income tax exemption under Section 10(26AAA) is available to individuals residing in Sikkim. But what if the PAN used doesn’t reflect Sikkim as the state of residence? The ITAT has now clarified that mere technical errors in the PAN database can’t override genuine tax exemptions under the law.

Let’s break down the case, legal interpretation, and what Sikkimese taxpayers should keep in mind.

What Is Section 10(26AAA)?

Section 10(26AAA) of the Income Tax Act, 1961 provides a full exemption from income tax to individuals residing in Sikkim for income earned within the state. This was introduced post-Sikkim’s merger with India to protect their economic interests.

Exemption Conditions:

  • Individual must be a Sikkimese as defined under the Sikkim Subjects Regulation, 1961.
  • Income must be accrued or arisen in Sikkim.
  • Income should not arise from business outside Sikkim.

What Went Wrong in the ITAT Case?

Case Reference:
Chhimi Doma Bhutia vs ITO, ITAT Kolkata, Order dated 16.07.2024
[View order on itat.gov.in]

Key Facts:

  • Assessee was a Sikkimese woman carrying out a business in Gangtok.
  • Claimed income tax exemption under Section 10(26AAA).
  • AO denied exemption because PAN address showed West Bengal, not Sikkim.
  • CIT(A) upheld the AO’s view.

ITAT Ruling: PAN Mismatch Not a Ground to Deny Exemption

The Income Tax Appellate Tribunal (ITAT) ruled in favour of the assessee with strong reasoning:

Tribunal’s Key Observations:

  • Residential address in PAN is not conclusive proof of tax residency.
  • Assessee produced Sikkim Subject Certificate, Aadhar with Gangtok address, and business documents in Sikkim.
  • AO failed to verify the genuineness of documents submitted.
  • Section 10(26AAA) does not require PAN to reflect Sikkim as the address.

Verdict: Income earned by the Sikkimese individual in Sikkim is exempt, despite PAN error.

Legal Takeaway: Don’t Lose Exemption Due to PAN Database Issues

Many Sikkimese individuals may still hold PAN cards issued in other states (like West Bengal), especially before digitisation. This case sets a strong precedent that technical address mismatches cannot override statutory exemptions.

How to Avoid This Problem? Step-by-Step Guide

If you’re a Sikkimese taxpayer claiming Section 10(26AAA) exemption:

  1. Get a valid Sikkim Subject Certificate (from the state authority).
  2. Update PAN and Aadhaar to reflect Sikkim address, if not already.
  3. Keep proof of:
    • Local business or employment in Sikkim
    • Utility bills or rent agreements in Sikkim
  4. Always attach exemption claim and relevant proof in your ITR submission.
  5. Respond to any scrutiny with documented proof, not just PAN data.

Expert Tip from Efiletax

“PAN is only a database record, not a substitute for legal identity or domicile. Focus on furnishing jurisdictional documents that prove Sikkimese status and local source of income.”
— Efiletax Compliance Expert Team

Why This Matters for You

This ITAT ruling provides relief to many genuine Sikkimese residents who may face wrongful tax demands due to mismatches in PAN data. It also reaffirms that substance over form is a guiding principle in Indian tax law.

Related Blog:

Who is a Sikkimese for Income Tax Exemption? Read CBDT’s Clarification →

FAQs

Q1. I’m a Sikkimese but my PAN was issued in Delhi. Can I still claim exemption?
Yes, if you hold a valid Sikkim Subject Certificate and income is earned in Sikkim, you can claim exemption.

Q2. Do I need to update my PAN for exemption?
Not legally mandatory, but it’s advisable to update address to avoid scrutiny issues.

Q3. Is business income outside Sikkim also exempt for Sikkimese?
No, only income earned within Sikkim is exempt under Section 10(26AAA).

Q4. Where to get a Sikkim Subject Certificate?
You can apply at the Office of the District Collector in Sikkim. Official link: sikkim.gov.in

Summary
Sikkimese individuals are entitled to income tax exemption under Section 10(26AAA). In a recent ruling, ITAT clarified that PAN address mismatch can’t deny this benefit if other proof establishes domicile and source of income in Sikkim.

Need help claiming exemption under Section 10(26AAA)?
Let Efiletax handle your ITR filing and documentation — error-free, on time, and legally backed.
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