Full Leave Encashment Exemption Allowed under Section 10(10AA)(i) within Revised ₹25 Lakh Cap

Background of the Dispute

The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) in Mangla Ram Nimbark Vs ITO examined whether an assessee was entitled to full exemption of leave encashment under Section 10(10AA)(i) for Assessment Year 2018-19, keeping in view the subsequently enhanced monetary ceiling of ₹25,00,000 notified by the Central Board of Direct Taxes (CBDT) vide Notification No. 31/2023.

The appeal arose from an order dated 07-08-2023 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [CIT(A) / NFAC], which had upheld partial denial of exemption claimed on leave encashment and had confirmed addition of ₹3,87,040.

The assessee carried the matter to the ITAT, challenging the correctness of the disallowance and asserting entitlement to full exemption on the entire leave encashment amount of ₹6,87,030.

Facts of the Case

Employment History and Leave Encashment

  • The assessee had initially been employed with the Department of Telecom (DOT), a Central Government department.
  • Pursuant to Government Notification Order No. 27-1(Raj)/Ajmer/798/2002-2002 dated 30-01-2022, employees of DOT, including the assessee, were absorbed into Bharat Sanchar Nigam Ltd. (BSNL) with effect from 01-10-2000.
  • The assessee continued in BSNL service until retirement on superannuation.
  • On retirement, the assessee received leave encashment aggregating ₹6,87,030, consisting of:
    • ₹4,25,959 attributable to service rendered with DOT, and
    • ₹2,61,071 attributable to service rendered with BSNL.

This entire sum of ₹6,87,030 was treated as exempt under Section 10(10AA)(i) in the return of income for AY 2018-19.

Processing of Return and Rectification Application

  • While processing the return, the Assessing Officer (AO) did not allow full exemption on the leave encashment and restricted the relief, resulting in a disallowance of ₹3,87,040 (rounded figure as per appellate order).
  • The assessee then filed an application under Section 154 of the Income Tax Act 1961 before the AO, seeking rectification of the alleged mistake in not granting complete exemption.
  • The AO rejected the application under Section 154 and maintained the disallowance.

First Appeal before CIT(A)/NFAC

  • Aggrieved by the Section 154 order dated 02-02-2022 (by ADIT, CPC, Bangalore), the assessee appealed to the CIT(A), NFAC.
  • The appellate authority examined the assessee’s contentions and the CPC order but concluded that no error warranting rectification existed.
  • Accordingly, the CIT(A) sustained the addition of ₹3,87,040 and dismissed the appeal, holding that the assessee was not entitled to full exemption as claimed.

Grounds Raised before ITAT

In the further appeal to ITAT Jaipur, the assessee, inter alia, raised the following grounds:

  1. Violation of principles of natural justice.
  2. Being an employee originally of DOT, later absorbed in BSNL with effect from 01-10-2000, the assessee should be treated as a Government employee and thus entitled to full exemption of ₹6,87,030 under Section 10(10AA)(i).
  3. The CIT(A) had erred in disallowing ₹3,87,030 of the exemption claim under Section 10(10AA)(i) without properly appreciating the facts.

Proceedings before the Tribunal