Assessee entitled to leave encashment deduction under Section 10(10AA)(ii) with revised exemption limit of ₹25 lakhs

The ITAT Ahmedabad held that the assessee is entitled to claim deduction under section 10(10AA)(ii) for leave encashment salary as per the revised exemption limit increased from ₹3 lakhs to ₹25 lakhs. Relying on the precedent set by ITAT Jaipur in Govind Chhatwani, the tribunal confirmed that this issue is no longer res integra. The assessee's appeal was allowed accordingly.

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ISSUES:

Whether the exemption limit under section 10(10AA)(ii) of the Income Tax Act, 1961 for leave encashment salary can be applied retrospectively to non-government employees who retired prior to the notification increasing the limit.Whether the revised exemption limit of Rs. 25,00,000 notified by the Central Board of Direct Taxes (CBDT) with effect from 01.04.2023 applies to private sector retirees for Assessment Year 2020-21.Whether the restriction of leave encashment exemption to Rs. 3,00,000 under section 10(10AA)(ii) is sustainable in law in light of the new notification increasing the limit.

RULINGS / HOLDINGS:

The Court held that the exemption limit under section 10(10AA)(ii) has been increased from Rs. 3,00,000 to Rs. 25,00,000 by CBDT Notification No. 31/2023 dated 24.05.2023, and this revised limit applies to non-government employees including private sector retirees.The notification is deemed to have come into force from 01.04.2023 but the Court found that the revised limit has retrospective effect as per the explanatory memorandum stating "no person is being adversely affected by giving retrospective effect to this notification."The Court overruled the prior restriction of exemption to Rs. 3,00,000 for the leave encashment amount and held that the assessee is entitled to exemption up to Rs. 25,00,000 or actual amount received whichever is less under section 10(10AA)(ii).The Court declined to follow the view that the increased limit benefits only those who retired after 01.04.2023, holding that the revised limit applies regardless of the retirement date.

RATIONALE:

The Court applied the statutory framework of section 10(10AA)(ii) of the Income Tax Act, 1961, and the CBDT Notification No. 31/2023 dated 24.05.2023 specifying the increased exemption limit for leave encashment salary.The Court relied on precedents from coordinate Benches of the Tribunal, including decisions in Govind Chhatwani and Devendra Kumar Gupta, which interpreted the notification as having retrospective effect and applying to private sector employees.The Court noted the explanatory memorandum accompanying the notification explicitly certifying that "no person is being adversely affected by giving retrospective effect," supporting the retrospective application of the increased exemption limit.The Court distinguished earlier decisions and orders restricting exemption to Rs. 3,00,000 on the basis that the new notification supersedes prior limits and applies to all employees irrespective of retirement date.No dissenting or concurring opinions were recorded; the Court followed a doctrinal shift recognizing retrospective application of the increased exemption limit under section 10(10AA)(ii).

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