2025 (12) TMI 1694 - AT - Income Tax

Leave encashment tax exemption u/s10(10AA) for employee claiming Central Government status rejected; exemption capped at Rs 3 lakh.

The dominant issue was whether leave encashment received by the assessee qualified for full exemption under s. 10(10AA) on the footing that the assessee ... Exemption u/s. 10(10AA) - AO restricting the claim in respect of leave encashment u/s. 10(10AA) as against the total claim by holding that exemption u/s. 10(10AA) of the Act is restricted to Rs. 3,00,000/- as the appellant cannot be treated as employee of Central Government - HELD THAT:- Similar issue came up for consideration of the Bengaluru Bench of this Tribunal in the case of National Dairy Research Institute [2018 (6) TMI 162 - ITAT BANGALORE] to hold that the assessee is not entitled for deduction u/s. 10(10AA) of the Act on account leave encashment, as the appellant cannot be treated as a central government servant - Appeal filed by the assessee stands dismissed. Issues: Whether the CIT(A) was justified in confirming the AO's restriction of exemption under section 10(10AA) of the Income-tax Act, 1961 to Rs. 3,00,000 for leave encashment on the ground that the assessee could not be treated as an employee of the Central Government.Analysis: The appeal raised a single substantive issue concerning the entitlement to exemption under section 10(10AA) as applicable to leave encashment, which turns on whether the assessee qualifies as a Central Government employee for the relevant rule-based valuation and exemption ceiling. The Tribunal examined the decisions of coordinate benches interpreting Rule 3 of the Income-tax Rules, 1962 and related authorities, and considered the doctrine distinguishing statutory or government-controlled corporations' employees from Central Government employees for the purpose of tax rules and exemptions. The Tribunal also noted authorities addressing bona fide estimates of perquisites but, following the coordinate-bench precedent on the applicability of Rule 3 and the status of employees, concluded that the assessee does not qualify as a Central Government employee and that the exemption ceiling applied by the AO and confirmed by the CIT(A) was correct.Conclusion: Held against the assessee. The restriction of exemption under section 10(10AA) to Rs. 3,00,000 was upheld; the appeal is dismissed in favour of the Revenue.