2023 (6) TMI 1476 - AT - Income Tax

Retired bank employee wins leave encashment exemption under section 10(10AA)(i) after CBDT revised limit to Rs 25 lakh

Ram Charan Gupta Versus ITO, Ward-4 (2), Jaipur.

ITAT Jaipur allowed the appeal of a retired bank employee regarding leave encashment exemption under section 10(10AA)(i). The AO had rejected the claim ... Exemption u/s 10(10AA)(i) - assessee who has retired is a bank employee - CIT(A) rejecting the amount which is earned leave encashment on retirement made by AO - HELD THAT:- Recently the Central Board of Direct Taxes Suomotu revised the limit for deduction u/s 10(10AA) and the revised limit now stood at Rs. 25,00,000 as specified vide notification no. 31/2023 issued by the ministry of finance. Since the leave encashment amount as claimed by the assessee which is below the revised limit of leave encashment exempt prescribed by the Board, the assessee is eligible to claim of deduction of said. Based on these observations the ld. AO is directed to allow the claim of the assessee u/s.10(10AA) of the act within the revised limit as prescribed. In terms of these observations the appeal of the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the learned CIT(A) was justified in confirming the order of the AO under section 143(1) of the Income Tax Act, assessing the total income and confirming the demand.Whether the CIT(A) was correct in restricting the exemption claim under section 10(10AA) to Rs. 300,000, thereby rejecting the amount of Rs. 397,100 out of Rs. 697,100, which was claimed as earned leave encashment on retirement.Whether the employer of the assessee should be treated as a government or non-government organization for the purposes of section 10(10AA) exemption.Consideration of a stay on the demand raised by the AO.ISSUE-WISE DETAILED ANALYSIS1. Confirmation of Order under Section 143(1) and Demand:Relevant Legal Framework and Precedents: The assessment was made under section 143(1) of the Income Tax Act, which allows for adjustments to be made to the returned income without providing an opportunity for hearing.Court's Interpretation and Reasoning: The Tribunal noted that the AO assessed the total income at Rs. 1,188,620 and confirmed a demand of Rs. 118,280, based on the disallowance of part of the leave encashment exemption.Key Evidence and Findings: The AO treated the employer as a non-government organization, leading to the partial disallowance of the exemption claim.Application of Law to Facts: The Tribunal considered whether the AO's action was justified based on the classification of the employer.Treatment of Competing Arguments: The assessee argued that the organization is regulated by central government bylaws, thus qualifying as a government organization.Conclusions: The Tribunal found that the initial assessment was based on the classification of the employer, which was a central issue in the appeal.2. Restriction of Exemption under Section 10(10AA):Relevant Legal Framework and Precedents: Section 10(10AA) of the Income Tax Act provides for exemption of leave encashment on retirement, with different limits for government and non-government employees.Court's Interpretation and Reasoning: The Tribunal referred to precedents, including the Delhi High Court decision in Kamal Kumar Kalia v. Union of India, which clarified that employees of public sector undertakings and nationalized banks are not considered government employees for the purposes of this exemption.Key Evidence and Findings: The Tribunal noted that the assessee's claim was based on the classification of the employer as a government entity.Application of Law to Facts: The Tribunal examined whether the bank employee could be classified as a government employee under section 10(10AA).Treatment of Competing Arguments: The assessee argued for full exemption based on the nationalized status of the bank, while the revenue maintained the restriction based on existing legal interpretations.Conclusions: The Tribunal upheld the restriction of exemption to Rs. 300,000, aligning with existing legal interpretations.3. Classification of Employer as Government or Non-Government:Relevant Legal Framework and Precedents: The classification affects the exemption limit under section 10(10AA). The Tribunal referred to legal precedents distinguishing between government and non-government employees.Court's Interpretation and Reasoning: The Tribunal considered the regulatory framework and management of the bank, noting that nationalized banks are not automatically classified as government entities for tax purposes.Key Evidence and Findings: The Tribunal noted the lack of explicit classification of bank employees as government employees in the relevant section.Application of Law to Facts: The Tribunal assessed the applicability of the exemption based on the legal status of the bank as a nationalized entity.Treatment of Competing Arguments: The assessee's argument for classification as a government employee was weighed against legal precedents.Conclusions: The Tribunal concluded that the classification of the employer as non-government was consistent with legal precedents.SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: The Tribunal referenced the Delhi High Court's decision, stating, 'employees of such Public Sector Undertaking, Nationalised Banks or other institutions which are classified as 'State' do not assume the status of Central government and State Government employees.'Core Principles Established: The classification of employees for tax exemption purposes is based on legal status rather than regulatory control or management by the government.Final Determinations on Each Issue: The Tribunal allowed the appeal based on a revised notification increasing the exemption limit, thereby granting the full claim of Rs. 697,100 under section 10(10AA) as it fell within the new limit of Rs. 25,00,000.