Leave encashment exemption for BSNL absorbees applies under Central Government retirement rules, barring TDS under the residuary provision.

Rule 37A of the Central Civil Services (Pension) Rules, 1972 treats employees absorbed from the Central Government into BSNL as having retired from Government service for pensionary purposes, and that special framework prevails over general executive instructions. On that basis, leave encashment paid on retirement is to be considered under the Central Government exemption in Section 10(10AA)(i) of the Income-tax Act, rather than the general residuary treatment in Section 10(10AA)(ii). The result is that tax deduction at source under Section 192 on the footing of clause (ii) is not justified where the absorbee is covered by the deemed-retirement scheme.

---

---

Issues: Whether leave encashment paid to employees originally from the Central Government service but absorbed in BSNL on retirement was exempt under Section 10(10AA)(i) of the Income-tax Act, 1961, and whether tax could be deducted at source under Section 192 on the footing that Section 10(10AA)(ii) applied.

Analysis: The employees had initially served in the Department of Telecommunications and were later absorbed in BSNL. The Court read Rule 37A of the Central Civil Services (Pension) Rules, 1972 as a special framework governing such absorption, particularly the deeming provision treating them as having retired from Government service and the provisions ensuring pensionary benefits for BSNL absorbees in the same manner as Central Government servants. On that basis, the Court held that their retirement had to be treated as retirement from Central Government service for the purpose of Section 10(10AA). The Court also held that general executive instructions could not override the statutory scheme and that the two enactments had to be harmoniously construed so that one did not defeat the benefits conferred by the other.

Conclusion: The petitioners were entitled to exemption under Section 10(10AA)(i), and the deduction of tax on leave encashment by invoking Section 10(10AA)(ii) was not justified.

Final Conclusion: The impugned communication was quashed and the writ petition was allowed, leaving the petitioners free to claim the consequential tax benefit in their returns.

Ratio Decidendi: Where a special pension rule deems absorbed Government servants in a PSU to have retired from Government service and preserves Government-equivalent pensionary treatment, leave encashment on retirement must be assessed under the Central Government exemption rather than the general residuary provision.

---