2025 (10) TMI 994 - AT - Income Tax

Section 10(10AA)(i) applies only to Central/State government employees; PSU and statutory corporation staff capped at Rs.3,00,000

ITAT held that section 10(10AA)(i) applies only to Central/State Government employees and does not extend to statutory corporations or government-owned ... Exemption u/s 10(10AA) - assessee, a retired employee of Union Bank of India, received a sum on account of leave encashment upon his superannuation - whether the assessee, a retired PSU employee, is entitled to exemption of leave encashment beyond the limit of Rs. 3,00,000? - HELD THAT:- The issue is squarely covered by the coordinate decision of this very Bench in Shri Ashwani Kumar Sharma [2025 (6) TMI 2068 - ITAT CHANDIGARH] as the assessee, a retired Chief Engineer of a State power utility (HVPNL), claimed full exemption of leave encashment as section 10(10AA)(i) applies strictly to employees of the Central or State Government. The statute does not extend this benefit to statutory corporations or government owned companies. Merely being under the ownership and control of the State Government or governed by State service rules does not convert the employer into a ‘State Government.’ Employees of PSUs/utilities are covered only under clause (ii), and the exemption is capped at Rs. 3,00,000. We hold that the assessee herein, being a PSU employee, is covered under section 10(10AA)(ii) and hence entitled only to exemption up to Rs. 3,00,000. Appeal of the Assessee is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether a retired employee of a public sector undertaking (PSU) is entitled to exemption of entire leave encashment under section 10(10AA) or is limited to the monetary ceiling notified by the Central Government applicable to non-Government employees. 2. Whether a notification issued by the Central Government on 24.05.2023 (effective from 01.04.2023) enhancing the notified limit can be applied retrospectively to an assessee who retired prior to the notification's effective date. 3. Whether decisions of Coordinate Benches that allowed relief by relying on the 2023 notification or otherwise are binding or distinguishable on the present facts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Scope of section 10(10AA): entitlement of PSU employees to exemption Legal framework: Section 10(10AA) distinguishes between (i) employees of the Central or a State Government, who receive exemption for cash equivalent of leave salary without a monetary ceiling, and (ii) employees other than Government employees, whose exemption is limited to ten months' average salary and 'subject to such limit as the Central Government may, by notification ... specify.' Precedent Treatment: Coordinate decisions have taken differing approaches. Some Benches have confined PSU employees to clause (ii), while other decisions cited by the assessee attempted to extend relief by operation of subsequent notifications. A coordinate decision of the same Bench applied clause (ii) to PSU employees and limited exemption accordingly. Interpretation and reasoning: The Court applies the plain language of section 10(10AA), observing a clear statutory dichotomy between Government employees and non-Government employees. The phraseology makes exemption absolute for Government employees under clause (i) and conditional for others under clause (ii). The Tribunal emphasises that ownership, control, or application of State service rules does not convert a statutory corporation or government-owned company into the 'State Government' for the purpose of clause (i). Ratio vs. Obiter: Ratio - clause (i) is strictly for Central/State Government employees; clause (ii) governs PSU employees. Obiter - observations on policy intent or perceived inequity are ancillary and not binding. Conclusion: The assessee, being a retired PSU employee, falls under section 10(10AA)(ii) and is therefore eligible for exemption only up to the notified monetary limit applicable to non-Government employees. Issue 2 - Temporal applicability of Notification dated 24.05.2023 (effective 01.04.2023) Legal framework: Clause (ii) permits the Central Government to specify a monetary limit by notification 'having regard to the limit applicable in this behalf to the employees of that Government.' The legal question is whether a later notification can be given retrospective effect to cover retirements/payouts preceding the notification's effective date. Precedent Treatment: Some Coordinate Benches (relying on a Jaipur Bench decision and others that followed it) have allowed relief by applying Notification No. 31/2023 to past cases; those decisions did not examine the notification's temporal scope in detail. Other decisions, including a coordinate decision of the same Bench, held the notification to be prospective and therefore inapplicable to retirees before 01.04.2023. Interpretation and reasoning: The Tribunal examines the notification's terms and the statutory scheme. The notification expressly states its applicability from 01.04.2023. The Tribunal reasons that in absence of an express retrospective provision, a statutory notification that changes a monetary ceiling should be treated as prospective. The Tribunal finds that Coordinate Benches that applied the notification retrospectively did so without adjudicating the notification's temporal applicability and therefore did not establish a rule of law that the notification is retrospective. Ratio vs. Obiter: Ratio - Notification No. 31/2023 is prospective in operation from 01.04.2023 and cannot be applied to retirees whose retirement and leave encashment occurred prior to that date. Obiter - commentary on the desirability of CBDT issuing timely notifications is not part of the operative ratio. Conclusion: The 24.05.2023 notification enhancing the limit to Rs. 25,00,000 is prospective (effective 01.04.2023) and does not entitle an assessee who retired prior to that date to the enhanced limit. Issue 3 - Binding effect and distinguishability of Coordinate Bench decisions relied upon by the assessee Legal framework: Coordinate Bench decisions are persuasive but not binding on other Benches; however, decisions of the same Bench are treated as precedent unless distinguished. The Court must assess whether earlier decisions are factually and legally on point. Precedent Treatment: The assessee cited multiple Coordinate Bench decisions (Ahmedabad, Agra, Jaipur) that allowed full or enhanced exemptions by reference to the 2023 notification or other reasoning. The Tribunal notes that several of those decisions followed the Jaipur Bench which relied on the notification without examining retrospectivity; at least one cited decision involved a different legal issue and is inapplicable. Interpretation and reasoning: The Tribunal distinguishes the relied-upon decisions on two grounds: (a) some decisions simply applied Notification No. 31/2023 without adjudicating whether it could operate retrospectively and are fact-specific; (b) at least one cited decision concerned an entirely different issue and therefore does not support the present contention. The Tribunal also relies on a prior decision of the same Bench (coordinate decision) that directly addresses and rejects the contention that PSU employees are entitled to unlimited exemption or that the 2023 notification applies retrospectively. Ratio vs. Obiter: Ratio - decisions that merely echo a prior reasoning without examining temporal applicability are distinguishable and do not create a binding proposition permitting retrospective application of the notification. The coordinate decision of the same Bench holding clause (ii) applicable to PSU employees and treating the notification as prospective is followed as binding for present purposes. Conclusion: The decisions cited by the assessee are distinguishable on facts and legal analysis, and do not alter the statutory position; the Tribunal follows the prior coordinate decision of the same Bench and declines to apply the 2023 notification retrospectively. Overall Conclusion and Disposition The Tribunal, applying the plain language of section 10(10AA) and following the binding coordinate decision of the same Bench, concludes that a retired PSU employee is covered under section 10(10AA)(ii) and is entitled only to exemption up to the monetary limit notified by the Central Government in force at the relevant time (Rs. 3,00,000 for the period in question). Notification No. 31/2023 (effective 01.04.2023) is prospective and does not benefit retirees whose retirement and leave encashment occurred prior to its effective date; consequently the appeal is dismissed.