Leave encashment exemption depends on the nature of service earned, and rectification cannot restrict it without an apparent mistake.

Leave encashment on retirement attributable to leave accumulated during Central Government service was treated as retaining its government-service character even after later absorption in BSNL, so exemption under section 10(10AA)(i) was to be determined by the source and nature of the earned leave rather than the employer at retirement. A rectification under section 154 was held impermissible because restricting the exemption required factual examination and legal interpretation and was not a mistake apparent from the record. The assessee was therefore entitled to full exemption, and the disallowance was deleted.

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Issues: Whether leave encashment received on retirement, relating to leave accumulated during Central Government service before absorption in BSNL, was fully exempt under section 10(10AA)(i) of the Income-tax Act, 1961, and whether the rectification under section 154 could validly restrict the exemption.

Analysis: The leave encashment was found to pertain to service rendered under the Department of Telecommunication, a Government of India department, and its character was held not to change merely because the employee was later absorbed in BSNL. The accumulated leave retained its government-service character, and the exemption had to be determined by the source and nature of the leave earned, not merely the employer at the time of retirement. The attempt to restrict the claim through rectification was also held to be impermissible because the issue required factual examination and legal interpretation and was therefore not a mistake apparent from the record.

Conclusion: The assessee was entitled to full exemption of the leave encashment, and the disallowance sustained by the first appellate authority was deleted.

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