2004 (12) TMI 32 - HC - Income Tax

Court rules leave encashment exemption under Income-tax Act applies only on retirement, not during employment.

The court ruled against the assessee, affirming the Revenue's position that exemption under section 10(10AA) of the Income-tax Act, 1961 for leave ... Payments received in lieu of leave encashment to the assessee while in service – exemption – retrospective amendment to section 10(10AA) by the Taxation Laws (Amendment) Act, 1984 (Part I) - Tribunal was not justified in granting exemption to the payments received in lieu of leave encashment to the assessee while in service - Tribunal was not justified in not giving effect to the amendment to section 10(10AA) by the Taxation Laws (Amendment) Act, 1984 (Part I) which has been amended retrospectively with effect from the assessment year 1978-79 – revenue’s appeal is allowed Issues:1. Whether the Tribunal was justified in granting exemption to payments received in lieu of leave encashment to the assessee while in serviceRs.2. Whether the Tribunal was justified in not giving effect to the amendment to section 10(10AA) retrospectively from the assessment year 1978-79Rs.Analysis:Issue 1:The case involved the interpretation of section 10(10AA) of the Income-tax Act, 1961 regarding exemption for leave encashment payments received by an employee while in service. The Income-tax Officer treated the leave encashment as salary income, but both the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal accepted the assessee's claim for exemption under section 10(10AA). The Department argued that leave encashment during employment is not exempt under the provision. The court considered the legislative intent and previous judgments to determine the scope of exemption. The Tribunal's interpretation of the words 'or otherwise' in section 10(10AA) was deemed too broad, as the exemption was intended for retiring employees, not those still in service. The court referred to Circular No. 394 to clarify the legislative intent and held in favor of the Revenue, denying the exemption for leave encashment received during employment.Issue 2:The second issue pertained to the retrospective amendment of section 10(10AA) by the Taxation Laws (Amendment) Act, 1984, with effect from the assessment year 1978-79. The court analyzed the legislative history and the purpose of the amendment to determine its applicability. The amendment clarified that the exemption under section 10(10AA) is allowed only upon retirement, whether on superannuation or otherwise. Previous judgments were cited to support the interpretation that the exemption covers cases of severance of the employer-employee relationship, including resignation. The court held that the amendment was intended to provide limited relief to retiring employees and that the exemption does not apply to leave encashment received while still in service. Therefore, the court ruled in favor of the Revenue on this issue as well.In conclusion, the court answered both questions in the negative, siding with the Revenue and against the assessee, emphasizing the limited scope of exemption under section 10(10AA) for leave encashment payments received by employees only upon retirement or severance of the employer-employee relationship.