Leave Encashment Exemption Under Section 10(10AA): ITAT Jaipur Rules in Favour of Assessee Based on Revised Rs. 25 Lakh Threshold

Case Background

Govind Chhatwani Vs CIT (Appeals)
Forum: Income Tax Appellate Tribunal (ITAT), Jaipur
Assessment Year: 2020-21

The matter came before the ITAT Jaipur as an appeal challenging the order passed by the National Faceless Appeal Centre (NFAC), Delhi, dated 05.06.2023, which in turn had arisen from an intimation dated 19.10.2021 processed under Section 143(1) of the Income Tax Act, 1961 by the ADIT, CPC, Bangalore.

Background of the Dispute

The assessee in this case had served as an employee of M/s Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. (RVPN), a State Government undertaking of Rajasthan with 100% shareholding vested in the Governor of Rajasthan. Upon retirement during the relevant financial year, the assessee received ₹17,68,479 as leave encashment and duly claimed the entire amount as exempt in the return of income filed under Section 10(10AA) of the Income Tax Act, 1961.

What Happened at the CPC Level

When the return was processed by the Central Processing Centre (CPC) under Section 143(1), the exemption claim was restricted to only ₹3,00,000, and the remaining ₹14,68,480 was added back to the assessee's total income. The CPC took the position that the notification applicable at that point of time capped the leave encashment exemption at ₹3,00,000 for non-government employees covered under Section 10(10AA)(ii).

Note: Subsequently, the ADIT, CPC, Bangalore, through a rectification order under Section 154 dated 07.12.2022, allowed the full claim of ₹17,68,479. However, by that time, the assessee had already filed an appeal before the NFAC.

First Appellate Authority's Ruling

The NFAC/CIT(A) dismissed the assessee's appeal. The appellate authority reasoned that since the assessee was not a State Government employee in the strict sense — being employed by a government undertaking rather than directly by the State — he did not qualify for exemption under Section 10(10AA)(i). Instead, his case fell under Section 10(10AA)(ii), which applies to employees other than Central and State Government employees.

The CIT(A) held that the exemption under Section 10(10AA)(ii) was capped at ₹3,00,000 as per the notification prevalent at the time of deciding the appeal, and the balance claim of ₹14,68,479 was rightly disallowed. Importantly, the appellate authority did not even grant the basic old exemption of ₹3,00,000, effectively disallowing the entire claim of ₹17,68,479.

Contentions Raised Before ITAT

Assessee's Arguments

The Authorised Representative (AR) of the assessee placed detailed written submissions before the Tribunal, making the following key arguments:

  1. Nature of Employment: The assessee retired from RVPN, a Rajasthan State Government undertaking with 100% shareholding held by the Governor of Rajasthan, making it effectively a State-owned entity.

  2. Leave Encashment Amount: The assessee received ₹17,68,479 as leave encashment strictly as per applicable service rules and claimed the same as exempt under Section 10(10AA).