2024 (11) TMI 1296 - AT - Income Tax

Employee gets proportionate retirement benefit exemptions under sections 10(10) and 10(10AA) based on state versus PSU service tenure

Mohan Shriniwas Bhise Versus Income Tax Officer, Ward – 3, Sangli

Mohan Shriniwas Bhise Versus Income Tax Officer, Ward – 3, Sangli - TMI Issues Involved:1. Eligibility for full exemption of retirement gratuity and leave encashment under Sections 10(10) and 10(10AA) of the Income Tax Act, 1961.2. Addition on account of unexplained investment in mutual funds under Section 69 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Exemption for Retirement Gratuity and Leave Encashment:The primary issue was whether the assessee, a retired employee of a Public Sector Undertaking (PSU), was entitled to full exemption for retirement gratuity and leave encashment under Sections 10(10) and 10(10AA) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the full exemption claimed by the assessee, limiting it to Rs. 20,00,000 for gratuity and Rs. 3,00,000 for leave encashment, as per the statutory limits applicable to non-government employees. The AO's stance was based on the classification of the Maharashtra State Electricity Transmission Co. Ltd. as a PSU rather than a government entity, thus not qualifying the assessee as a government employee eligible for full exemption.The assessee contended that he was a government employee since the company was formed by a government notification and argued for full exemption. However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that PSUs are separate legal entities from the government, and their employees do not hold civil posts under the state.Upon appeal, the Tribunal accepted the alternate plea of the assessee for a proportionate exemption based on his employment tenure with the Maharashtra State Electricity Board (a government entity) and the PSU. The Tribunal directed the AO to verify the details and calculations submitted by the assessee and allow the exemption on a proportionate basis, considering the employment tenure with both entities.2. Addition on Account of Unexplained Investment in Mutual Funds:The second issue involved the addition of Rs. 50,00,000 to the assessee's income under Section 69 of the Income Tax Act, 1961, due to unexplained investment in mutual funds. The AO proposed this addition as the source of the investment was not satisfactorily explained by the assessee. The CIT(A) reduced this addition to Rs. 25,00,000, acknowledging partial explanation provided by the bank statements but noting the lack of detailed evidence regarding the deposits.The Tribunal noted the assessee's argument that the investments were made from retirement benefits and observed that the bank statements showed relevant deposits and investments. The Tribunal remanded the issue back to the AO for verification of the source of investments and directed that if the assessee's claim is substantiated, the addition should be deleted.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the exemption claims for gratuity and leave encashment on a proportionate basis and to verify the source of mutual fund investments, potentially modifying the assessment order based on the findings.