Leave encashment exemption split between pre-absorption government service and post-absorption service under section 10(10AA).

Leave encashment received on retirement was treated differently depending on when the entitlement accrued. Amount attributable to service rendered under the Central Government before permanent absorption in BSNL qualified for full exemption under section 10(10AA)(i), because it arose from Central Government service. The balance attributable to post-absorption service was governed by the restricted exemption under section 10(10AA)(ii). Applying the coordinate bench view on identical facts, the tribunal rejected full restriction by the lower authorities and granted relief partly in favour of the assessee.

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Issues: Whether leave encashment received on retirement, to the extent attributable to service rendered under the Central Government before absorption in a public sector undertaking, was eligible for full exemption, while the balance was governed by the restricted exemption applicable to other employees.

Analysis: The assessee had rendered service under the Department of Telecommunications before permanent absorption in BSNL under Rule 37A of the CCS (Pension) Rules. The amount of leave encashment was found to comprise a substantial component earned during Central Government service and a smaller component earned after absorption. In such a situation, the exemption under section 10(10AA)(i) applies to leave accrued during Central Government service, whereas the amount attributable to post-absorption service falls under section 10(10AA)(ii). Following the coordinate bench view on identical facts, the restricted treatment adopted by the lower authorities was not accepted in full.

Conclusion: Leave encashment attributable to pre-absorption Central Government service was held eligible for full exemption under section 10(10AA)(i), and the remaining amount was directed to be considered under section 10(10AA)(ii); the relief was therefore granted partly in favour of the assessee.

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