Full Leave Encashment Exemption Upheld for Employees Absorbed from DOT into BSNL: ITAT Pune in Prakash Dhondiram Gavali Vs ITO
Overview of the Case
The Income Tax Appellate Tribunal, Pune Bench, delivered a significant ruling in Prakash Dhondiram Gavali Vs ITO (ITAT Pune), bearing Appeal No. ITA No. 1214/PUN/2026, vide order dated 21/07/2026, pertaining to Assessment Year 2021-22. The core controversy revolved around the correct application of Section 10(10AA) of the Income Tax Act, 1961 to leave encashment received upon retirement by an individual who had originally served as a Central Government employee in the Department of Telecommunication (DoT) and was subsequently absorbed into Bharat Sanchar Nigam Limited (BSNL), a public sector undertaking.
The Tribunal's determination settled a question that had been the subject of repeated disputes among similarly placed assessees — namely, whether the portion of leave encashment attributable to Central Government service rendered prior to absorption into BSNL retains its character as fully exempt under Section 10(10AA)(i), even when the assessee ultimately retires as an employee of a PSU.
Background and Service History of the Assessee
The assessee, an individual, commenced his employment with the Department of Telecommunication, Central Government of India, on 06.04.1984. When BSNL was incorporated and came into operational existence, the assessee was transferred and formally absorbed into BSNL on 01.10.2000. He continued in BSNL's service until his retirement on 31.05.2020.
Upon superannuation, BSNL disbursed total leave encashment of Rs. 6,48,620/- to the assessee. Notably, BSNL's payslip itself categorically bifurcated this amount into two distinct components:
- Rs. 4,15,117/- — representing leave encashment for the period of service rendered as a Central Government employee under the Department of Telecommunication.
- Rs. 2,33,503/- — representing leave encashment for the period of service rendered as a PSU employee under BSNL.
This employer-issued bifurcation formed the cornerstone of the assessee's exemption claim.
The Exemption Claim and Initial Processing
In his return of income for AY 2021-22, the assessee claimed full exemption under Section 10(10AA) for the entire leave encashment of Rs. 6,48,620/-, applying the two sub-clauses of the provision in the following manner:
- The amount of Rs. 4,15,117/- was claimed as fully exempt under
Section 10(10AA)(i), applicable to Central Government and State Government employees, where no monetary ceiling is prescribed. - The amount of Rs. 2,33,503/- was claimed as exempt under
Section 10(10AA)(ii), applicable to non-government employees, since the said amount was below the statutory ceiling of Rs. 3,00,000/-.
However, the Centralised Processing Centre (CPC), while processing the return, issued an intimation order dated 22.03.2022 restricting the exemption under Section 10(10AA) to only Rs. 3,00,000/-, effectively taxing the balance amount in the hands of the assessee.
Rectification Proceedings Under Section 154
Aggrieved by the CPC's treatment of the leave encashment, the assessee filed a rectification application under Section 154 of the Income Tax Act, 1961 on 12.08.2025, seeking correction of what he regarded as a mistake apparent from the record. The CPC, however, rejected the rectification application by order dated 20.08.2025, maintaining its original position.
The assessee thereafter preferred an appeal before the Ld. Addl./JCIT(A)-2, Gurugram.