ITAT Chandigarh Remands Leave Encashment Exemption Dispute of Rs. 18,13,500 Back to Assessing Officer — Natural Justice Violation Found
Background and Overview
The Chandigarh Bench of the Income Tax Appellate Tribunal adjudicated an appeal filed by Shri Satish Kumar Thakur for Assessment Year 2018-19, arising from the order dated 16 February 2023 passed by the National Faceless Appeal Centre (NFAC), Delhi. At the heart of this dispute was the assessee's entitlement to full exemption on leave encashment of Rs. 18,13,500 under Section 10(10AA)(i) of the Income-tax Act, 1961. The case ultimately turned not on the substantive merits of the exemption claim, but on a fundamental procedural failure — the consistent denial of an opportunity of hearing to the assessee at every stage of the proceedings.
Profile of the Assessee and Employment History
Shri Satish Kumar Thakur had commenced his career with the Himachal Pradesh State Electricity Board on 15 June 1983, joining as an Assistant Engineer. He served for approximately 34 years before retiring on 30 April 2017 from what had by then become the Himachal Pradesh State Electricity Board Limited (HPSEBL).
The Himachal Pradesh State Electricity Board was originally constituted in 1971 as a statutory body under Section 5 of the erstwhile Electricity (Supply) Act, 1948. It was subsequently reorganised into HPSEBL with effect from 14 June 2010 under the Companies Act, 1956, pursuant to Notification No. MPP-A(3)-1/2001-IV dated 10 June 2010 issued by the Government of Himachal Pradesh (Department of MPP & Power).
The said notification was issued in exercise of powers under Section 131(2), Section 132, Section 133 and other enabling provisions of the Electricity Act, 2003, and effectuated a comprehensive transfer of functions, undertakings, assets, properties, rights, liabilities, obligations, proceedings and personnel from the erstwhile board to the newly constituted company.
The Transfer Scheme and Its Significance
A critical element of the assessee's case was Clause 5(5) of the Transfer Scheme contained in the Government of Himachal Pradesh notification, which read as under:
"All transferred employees from 'HPSEB' shall be employees of 'HPSEB Ltd.' and their rank, scale or pay and inter-se-seniority as existing in the Board on the effective date of Transfer shall be maintained and the retirement benefits and other facilities shall in no way be reduced or made inferior to that immediately before the effective date of re-vesting."
The assessee's position was that this provision effectively preserved his status as a State Government employee for all practical purposes, including entitlement to retirement benefits. Accordingly, at the time of superannuation, he had approximately 300 days of earned leave standing to his credit which had remained unavailed, and the leave encashment of Rs. 18,13,500 received upon retirement was claimed as fully exempt under Section 10(10AA)(i) of the Income-tax Act, 1961.
Statutory Framework: Section 10(10AA)
Section 10(10AA) of the Income-tax Act, 1961 provides exemption in two distinct categories:
Section 10(10AA)(i)— Covers any payment received by an employee of the Central Government or a State Government as the cash equivalent of leave salary in respect of the period of earned leave at his credit at the time of retirement, whether on superannuation or otherwise. This exemption is unlimited in quantum for such employees.