Leave encashment exemption upheld by applying separate treatment for Government and BSNL service components under section 10(10AA).

Leave encashment received on retirement was treated as partly attributable to service under the Department of Telecommunications and partly to BSNL service. Section 10(10AA)(i) was applied to the Government-service component, allowing full exemption for the amount linked to Central Government employment, while section 10(10AA)(ii) governed the BSNL component and permitted exemption within the prescribed ceiling for non-Government employees. On these facts, both components qualified for exemption under the respective sub-clauses, and the denial of exemption was reversed.

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Issues: Whether leave encashment received on retirement was fully exempt under section 10(10AA) of the Income-tax Act, 1961, where part of the amount related to service under the Department of Telecommunications and the balance related to BSNL service.

Analysis: The assessee produced uncontroverted material showing that the leave encashment comprised two distinct components, namely, the amount attributable to service under the Department of Telecommunications and the amount attributable to BSNL service. Section 10(10AA)(i) grants full exemption for leave encashment received by a Central or State Government employee, while section 10(10AA)(ii) governs non-Government employees and limits the exemption. On the facts, the amount received from the Department of Telecommunications was held eligible for full exemption under section 10(10AA)(i), and the BSNL component, being within the monetary ceiling applicable to non-Government employees, was also exempt under section 10(10AA)(ii).

Conclusion: The denial of exemption was reversed and the assessee's claim for exemption on the leave encashment amount was accepted.

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