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Issues:
1. Taxability of amount received by surrender of earned leave. 2. Interpretation of sections 16 and 17 of the Income-tax Act, 1961. 3. Exemption under section 10 of the Act. 4. Levy of interest under section 217 of the Act. Detailed Analysis: The appeal before the Appellate Tribunal ITAT COCHIN concerned the taxability of an amount received by an individual, who was the Chief Secretary to the Government of Kerala, by surrendering earned leave during the assessment year 1981-82. The Income Tax Officer (ITO) and the Appellate Authority Commissioner (AAC) rejected the assessee's claim that the amount was not taxable, asserting that it constituted 'salary' under sections 16 and 17 of the Income-tax Act, 1961 unless specifically exempted under section 10. The AAC held that the payment for leave surrender was taxable as it was earned through service and not an ex gratia payment. The assessee contended that the leave surrender salary should not be taxable and challenged the levy of interest under section 217 of the Act. During the hearing, the assessee relied on precedents such as the decision in N.B. Tendolkar v. ITO, arguing that the encashment of earned leave should be considered a capital receipt and not taxable income. The assessee also cited the decision in CIT v. Manjushree Plantations Ltd. to support their stance. On the other hand, the departmental representative argued that the encashment of leave constituted a benefit and should be considered part of 'salary' under section 17(2)(iii). The department relied on the decision of the Kerala High Court in CIT v. Commonwealth Trust Ltd. to support their position. The Tribunal analyzed the nature of the amount received by surrendering earned leave, referencing the decision in N.B. Tendolkar to establish that encashment of leave could be considered a capital asset and a capital receipt. The Tribunal agreed with the view that accumulated earned leave constitutes a capital asset, regardless of whether it is encashed while in service or at retirement. The Tribunal rejected the department's argument that leave encashment should be treated as a benefit forming part of 'salary' under section 17. Additionally, the Tribunal addressed the department's contention regarding the introduction of section 10(10AA) by the Finance Act, 1982, exempting encashment of earned leave at retirement. The Tribunal held that this specific exemption did not imply that encashment during service was taxable, emphasizing that each case must be evaluated on its merits. Ultimately, the Tribunal ruled in favor of the assessee, holding that the amount received by surrender of earned leave was not taxable. In conclusion, the appeal was allowed in part, with the Tribunal determining that the amount received by the assessee through leave surrender was not subject to taxation.
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