2023 (10) TMI 1509 - AT - Income Tax

Exemption claimed u/sec. 10(10AA)(ii) denied - leave encashment received upon retirement - addition made contending that deduction is available to the extent of Rs. 3, 00, 000/- only and therefore the amount was added - whether the exemption was limited to Rs. 3, 00, 000 as per the prevailing notification? HELD THAT - CPC and ld. CIT (A) contended that in the light of this specific notification being not issued the leave encashment allowable up to Rs. 3, 00, 000/- only whereas we note from the submission of the assessee that the assessee has relied upon the notification No. 31/2023/F.No. 200/3/2023-ITA-1 dated 24th May 2023 and submitted that the revised limit of Rs. 25, 00, 000/- increased on account of leave salary is applicable and to be considered in the light of fact that government has issued this notification belatedly. The assessee has already claimed the leave salary as exemption the benefit should be given to the assessee. The similar issue has been decided by the bench in the case of Ram Charan Gupta 2023 (6) TMI 1476 - ITAT JAIPUR Thus we held that the assessee is entitled to get the deduction as claimed in the return of income u/s 10(10AA) of the Act as the limit has been increased from 3 lac to 25 lacs. Appeal of assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue considered in this judgment was whether the assessee, an employee of a Rajasthan State Government-owned company, was entitled to an exemption under Section 10(10AA) of the Income Tax Act, 1961, for the full amount of leave encashment received upon retirement, amounting to Rs. 17,68,479, or whether the exemption was limited to Rs. 3,00,000 as per the prevailing notification.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

Section 10(10AA) of the Income Tax Act, 1961, provides for an exemption on leave encashment received by employees upon retirement. The provision distinguishes between government employees and others, with different exemption limits applicable. The Central Board of Direct Taxes (CBDT) issues notifications to specify the exemption limits for non-government employees.

Court's Interpretation and Reasoning

The Tribunal examined whether the assessee, being an employee of a state government-owned company, qualified for the higher exemption limit applicable to government employees or was subject to the limit specified for non-government employees. The Tribunal referenced a recent notification (No. 31/2023) that increased the exemption limit for non-government employees from Rs. 3,00,000 to Rs. 25,00,000, effective from April 1, 2023.

Key Evidence and Findings

The Tribunal considered the fact that the assessee had received Rs. 17,68,479 as leave encashment and claimed it as exempt under Section 10(10AA). The lower authorities had restricted the exemption to Rs. 3,00,000 based on the absence of a specific notification increasing the limit at the time of the assessee's retirement.

Application of Law to Facts

The Tribunal applied the revised notification to the facts of the case, noting that the CBDT had belatedly issued the notification increasing the exemption limit. The Tribunal found that the revised limit should be considered applicable to the assessee's case, given the retrospective effect of the notification and the absence of any adverse impact on the assessee.

Treatment of Competing Arguments

The Tribunal addressed the argument from the revenue that the exemption was limited to Rs. 3,00,000 based on the notification in effect at the time of the original assessment. The Tribunal countered this by referencing the recent notification and similar judicial precedents, including a Delhi High Court case, which supported the view that the exemption limit should be aligned with the revised notification.

Conclusions

The Tribunal concluded that the assessee was entitled to the full exemption claimed under Section 10(10AA) of the Act, as the revised limit of Rs. 25,00,000 applied to the assessee's case.

SIGNIFICANT HOLDINGS

The Tribunal held that the exemption limit for leave encashment under Section 10(10AA) should be considered in light of the revised notification, which increased the limit to Rs. 25,00,000. This decision aligns with the principle that tax exemptions should reflect current economic realities and inflation adjustments.

Core Principles Established

The Tribunal reinforced the principle that tax exemption limits should be applied consistently with the most recent notifications, especially when such notifications are intended to have retrospective effect. The decision also emphasized the importance of aligning tax provisions with economic changes and the practical realities faced by taxpayers.

Final Determinations on Each Issue

The Tribunal determined that the assessee was entitled to the full exemption claimed for leave encashment under Section 10(10AA), as the revised limit of Rs. 25,00,000 was applicable. Consequently, the appeal was allowed, and the lower authorities' decisions were overturned.