Assessee wins leave encashment exemption up to ₹25 lakh under section 10(10AA)(ii) against Revenue's ₹3 lakh restriction

ITAT AGRA allowed the assessee's appeal regarding leave encashment exemption under section 10(10AA)(ii). The Revenue had restricted the exemption to ? 3,00,000, but the assessee claimed higher deduction based on increased limits. The Tribunal held that CBDT circulars have force of law when beneficial to assessees and cannot curtail statutory benefits. Citing Supreme Court precedent in Union of India vs. Wood Paper Limited, the Tribunal emphasized liberal interpretation of benefit computation conditions. Following coordinate bench decisions from Jaipur, ITAT ruled the assessee eligible for deduction up to ? 25,00,000 as per Notification No. 31/2023 dated 24.05.2023, deciding in favor of the assessee against Revenue.

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ISSUES:

• Whether the exemption limit on leave encashment under section 10(10AA)(ii) of the Income-tax Act, 1961, restricting exemption to ? 3,00,000, is applicable to the assessee who is a retiree from a nationalized bank.
• Whether the revised exemption limit prescribed by CBDT Notification No. 31/2023 dated 24.05.2023, raising the limit to ? 25,00,000, applies to the assessee's claim for leave encashment exemption.
• Whether the rectification order under section 154 of the Act restricting the exemption to ? 3,00,000 is valid in light of the subsequent CBDT notification increasing the exemption limit.

RULINGS / HOLDINGS:

• The court held that the assessee is entitled to claim exemption of leave encashment exceeding ? 3,00,000 under section 10(10AA)(ii) of the Act as per the revised limit prescribed by CBDT Notification No. 31/2023 dated 24.05.2023, which increased the exemption limit to ? 25,00,000.
• The rectification order passed under section 154 of the Act restricting the allowable exemption to ? 3,00,000 was correctly challenged and set aside because it did not consider the subsequent notification increasing the exemption limit.
• It was affirmed that a CBDT circular or notification has the force of law and can "mitigate or relax the rigors of law" and "supplant the law in case where it is beneficial to the assessee," provided it does not contravene substantive provisions of the Act.

RATIONALE:

• The court applied the framework under section 10(10AA)(ii) of the Income-tax Act, 1961, which exempts leave encashment received at retirement subject to limits prescribed by the Central Government via notification.
• The court relied on CBDT Notification No. 31/2023 dated 24.05.2023, which revised the exemption limit from ? 3,00,000 to ? 25,00,000, and held that this notification governs the exemption limit for the relevant assessment years.
• The court referenced precedent from coordinate Benches of the Tribunal which had followed the same reasoning, including reliance on a High Court notice in a writ petition challenging the outdated exemption limit and the Supreme Court's principle that circulars beneficial to the assessee should be interpreted liberally.
• The decision reflects a doctrinal position that administrative instructions or notifications that extend or enhance relief to taxpayers are valid and binding unless expressly prohibited by statute.

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