Leave encashment during service was treated as capital conversion, not salary or perquisite, and held not taxable.

Receipt on surrender of earned leave while the employee continued in service was analysed under the Income-tax Act, 1961 as to whether it constituted salary or a perquisite. The Tribunal view treated accumulated earned leave as an intangible capital asset, and its encashment as conversion of that asset into money rather than remuneration for services rendered. The fact that the payment arose under the employment terms, or that section 10(10AA) specifically exempts leave encashment on retirement, did not require a finding that leave encashment during service was taxable. On the facts considered, the amount did not fall within the charging ambit of salary and was not taxable.

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Issues: Whether the amount received by an assessee on surrender of earned leave while continuing in service was taxable as salary or perquisite under the Income-tax Act, 1961.

Analysis: The receipt was examined in the light of the statutory definition of salary and perquisite and the earlier Tribunal view treating accumulated earned leave as an intangible capital asset. The amount was held to represent conversion of that asset into money, and not remuneration for services rendered. The mere fact that the receipt arose under the terms of employment or that section 10(10AA) specifically exempted leave encashment on retirement did not compel the conclusion that encashment during service was taxable. Even if the payment was regarded as a benefit, it did not fall within the charging ambit of salary on the facts considered.

Conclusion: The receipt of Rs. 5,925 on surrender of earned leave while continuing in service was not taxable.

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