Bangalore ITAT Applies Enhanced ₹25 Lakh Leave Encashment Exemption to Pre-2023 Retirement: Yashavanth Nayak vs ITO
Overview of the Dispute
A retired State Bank of India employee who received leave encashment upon retirement in July 2019 successfully secured the benefit of the enhanced exemption limit of ₹25 lakh under Section 10(10AA)(ii) of the Income-tax Act, 1961 — even though the government notification revising this limit was issued only in 2023 and expressly stated an effective date of 1 April 2023. The Income Tax Appellate Tribunal, Bangalore Bench, ruled in his favour in Yashavanth Nayak Vs ITO (ITAT Bangalore), ITA No. 37/Bang/2026, vide order dated 28 September 2026, covering Assessment Year 2020–21.
This ruling addresses two distinct legal questions that frequently arise in post-retirement tax disputes: (a) whether a prolonged appellate delay can be condoned where the assessee relied on professional advice and (b) whether Notification No. 31/2023 dated 24 May 2023 — which enhanced the leave encashment exemption ceiling from ₹3 lakh to ₹25 lakh — can be applied to assessment years preceding its stated effective date.
Factual Background
The assessee, a former employee of the State Bank of India, retired on 31 July 2019. Upon retirement, he received ₹9,22,762 as leave encashment. In his return of income filed under Section 139(1) of the Income-tax Act, 1961 on 2 November 2020 for Assessment Year 2020–21, he claimed the entire amount of ₹9,22,762 as exempt under Section 10(10AA) of the Act.
The Centralised Processing Centre (CPC), however, processed his return and issued an intimation dated 29 November 2021 under Section 143(1) of the Income-tax Act, 1961, restricting the leave encashment exemption to ₹3 lakh — the ceiling prescribed under the earlier government notification of 31 May 2002. As a result, the CPC computed total income at ₹17,16,860 against the returned income of ₹10,94,090. Of the ₹29,31,212 claimed as exempt under Section 10, only ₹23,08,450 was allowed.
The assessee challenged this before the National Faceless Appeal Centre (NFAC), Delhi. The learned CIT(A), however, upheld the CPC's treatment and confirmed that the applicable exemption cap was ₹3 lakh as per the 2002 notification. The assessee's appeal was dismissed vide order dated 14 October 2022 passed under Section 250 of the Income Tax Act 1961. The dispute before the Tribunal, therefore, pertained to the exemption on the balance amount of ₹6,22,762.
The Procedural Hurdle: Delay of 1,102 Days
Before the Tribunal could adjudicate the substantive question, it had to address a significant procedural obstacle — the appeal before it was filed with a delay of 1,102 days beyond the prescribed limitation period.
Assessee's Explanation for Delay
The assessee explained that after the CIT(A) order was passed, he had engaged a Jaipur-based tax consultant recommended by the Pensioners' Association. Despite repeated follow-ups, this consultant failed to provide clear guidance on whether or how to pursue the matter further. Subsequently, the assessee became aware that the Central Board of Direct Taxes (CBDT) had issued Notification No. 31/2023 dated 24 May 2023 raising the leave encashment exemption limit, and that the explanatory memorandum accompanying the notification suggested that its retrospective application would not adversely affect any person. Operating under the bona fide belief that the Income Tax Department would reprocess the returns of affected employees on its own initiative, the assessee awaited relief that never materialised.
The assessee was approximately 65 years of age and was unfamiliar with appellate procedures. It was only after he received Circular No. 66/2025 dated 2 December 2025 issued by the All India Punjab National Bank Pensioners' Association — which outlined the remedies available to retired bank employees seeking tax refunds in the wake of Notification No. 31/2023 — that he engaged a new tax adviser, CA Akashdeep Pai, and promptly filed the present appeal.
Revenue's Opposition
The learned Senior Departmental Representative, Mr Sandeep Kumar, Additional Commissioner of Income Tax, opposed the condonation application, contending that the assessee had failed to establish sufficient cause for such an inordinate delay.