ITAT Jaipur Allows Complete Leave Encashment Exemption for Retired Bank Employee as CBDT Raises Section 10(10AA) Ceiling to Rs. 25 Lakh

Case Overview

Case: Ram Charan Gupta Vs ITO
Forum: Income Tax Appellate Tribunal, Jaipur
Assessment Year: 2020-21
Outcome: Appeal Allowed

Background and Facts of the Case

A retired bank employee — the assessee — received leave encashment of Rs. 6,97,100 at the time of retirement and claimed the full amount as exempt under Section 10(10AA) of the Income Tax Act, 1961 while filing his return of income. The return was processed by CPC Bengaluru under Section 143(1) of the Act, vide order dated 02.12.2021.

During processing, CPC Bengaluru restricted the exemption to only Rs. 3,00,000, treating the remaining Rs. 3,97,100 as taxable income. This resulted in total assessed income being computed at Rs. 11,88,620 and a consequent tax demand of Rs. 1,18,280 being raised against the assessee. Aggrieved by this treatment, the assessee challenged the order before the National Faceless Appeal Centre (NFAC), Delhi.

Proceedings Before CIT(A) / NFAC

Before the NFAC, the assessee pressed the argument that he ought to be considered a government employee, since nationalised banks are regulated and controlled by the Central Government. On that basis, he contended that the full leave encashment amount of Rs. 6,97,100 should be treated as exempt without any monetary ceiling, in the same manner as Central or State Government employees enjoy under Section 10(10AA)(i).

The CIT(A) did not accept this position. Referring to settled judicial precedents, the CIT(A) held that employees of public sector undertakings and nationalised banks cannot be equated with Central or State Government employees merely because such institutions may qualify as "State" under Article 12 of the Constitution of India for purposes of Article 226 proceedings or enforcement of fundamental rights.

Key Precedents Relied Upon by CIT(A)

The CIT(A) placed reliance on the following decisions:

  1. Kamal Kumar Kalia v/s Union of India (2020) 268 Taxman 398 / 313 CTR 779 (Delhi) (HC) dated 08.11.2019 — The Delhi High Court dismissed a writ petition filed by employees of PSUs and nationalised banks who sought parity with Central and State Government employees for leave encashment exemption. The Court ruled:

"Merely because Public Sector Undertaking and Nationalised Banks are considered as State under Article 12 of the Constitution of India for the purpose of entertainment of proceedings under Article 226 of the Constitution and for enforcement of fundamental right under the Constitution, it does not follow that the employees of such Public Sector Undertaking, Nationalised Banks or other institutions which are classified as 'State' assume the status of Central Government and State Government employees. Accordingly the petition is rejected."

  1. KPTCL Davangere V/s ITO (2018), ITA No. 170 ITD 587 (Bang.) (Trib.) — The ITAT Bangalore bench held that employees of a statutory corporation could not be treated as Central or State Government employees, and accordingly exemption under Section 10(10AA)(i) was not available to such employees.