2024 (11) TMI 1296 - AT - Income Tax

Eligibility of exemption u/s 10(10) and 10(10AA) - Eligibility for full exemption - assessee being an employee of Maharashtra State Electricity Transmission Co. Ltd. which is a Public Sector Undertaking (PSU) - disallowance of excess exemption claimed by the assessee for retirement gratuity and leave encashment respectively - HELD THAT - Perusal of the chart submitted by the Ld. AR reveals that the assessee joined Maharashtra State Electricity Board on 02.07.1981 and he retired on 30.11.2018 from Maharashtra State Electricity Transmission Co. Ltd. Out of his total service tenure of about 37 years, his tenure with Maharashtra State Electricity Board was about 24 years and with Maharashtra State Electricity Transmission Co. Ltd. was about 13 years. Accordingly, the assessee is entitled to claim exemption for retirement gratuity and leave encashment received by him at the time of superannuation on the proportionate/prorata basis based on his employment tenure with the State Government i.e. Maharashtra State Electricity Board and his employment tenure with PSU i.e. Maharashtra State Electricity Transmission Co. Ltd. - assessee has contended before us that the balance amount of retirement gratuity of Rs. 11,49,579/- is also eligible for full exemption as it is fully covered within the limit laid down as per section 4(3) of the Payment of Gratuity Act, 1972 (as amended) - With respect to the claim of exemption for leave encashment amounting to Rs. 23,99,740/- full exemption shall be available in respect of the proportionate amount of Rs. 15,33,910/- and for the balance of Rs. 8,65,830/- the assessee shall be entitled to claim exemption to the extent of Rs. 3,00,000/- only and the remaining amount of Rs. 5,65,830/- shall be taxable. This view finds support by the decision of Adinath Wandhekar 2024 (4) TMI 666 - ITAT PUNE . However, the present facts need verification. Accordingly, we set aside this issue to the file of Ld. AO for verification of the details/calculation submitted by the assessee and allow the claim of exemption for retirement gratuity and leave encashment received by the assessee at the time of his superannuation on proportionate basis, as per law keeping in view his employment tenure with Maharashtra State Electricity Board and Maharashtra State Electricity Transmission Co. Ltd. The assessee shall co-operate fully before the Ld. AO and provide requisite details/explanation as may be required/called for in support of his claim. Unexplained investments made in mutual funds u/s 69 - CIT(A) restricted the said addition for the same reason in spite of the bank statement furnished by the assessee showing the deposits and investments made during the relevant period - AR therefore urged that given an opportunity the assessee is in a position to explain the source of investments in mutual funds by filing supporting documentary evidence before the Ld. AO - HELD THAT - As we deem it fit to restore this issue back to the file of Ld. AO to verify the claim of the assessee and if found correct delete the addition sustained by the Ld. CIT(A) by suitable modifying the assessment order. We order accordingly.

Summary

Issues Involved:

1. Eligibility for full exemption of retirement gratuity and leave encashment under Sections 10(10) and 10(10AA) of the Income Tax Act, 1961.
2. Addition on account of unexplained investment in mutual funds under Section 69 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Exemption for Retirement Gratuity and Leave Encashment:

The primary issue was whether the assessee, a retired employee of a Public Sector Undertaking (PSU), was entitled to full exemption for retirement gratuity and leave encashment under Sections 10(10) and 10(10AA) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed the full exemption claimed by the assessee, limiting it to Rs. 20,00,000 for gratuity and Rs. 3,00,000 for leave encashment, as per the statutory limits applicable to non-government employees. The AO's stance was based on the classification of the Maharashtra State Electricity Transmission Co. Ltd. as a PSU rather than a government entity, thus not qualifying the assessee as a government employee eligible for full exemption.

The assessee contended that he was a government employee since the company was formed by a government notification and argued for full exemption. However, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that PSUs are separate legal entities from the government, and their employees do not hold civil posts under the state.

Upon appeal, the Tribunal accepted the alternate plea of the assessee for a proportionate exemption based on his employment tenure with the Maharashtra State Electricity Board (a government entity) and the PSU. The Tribunal directed the AO to verify the details and calculations submitted by the assessee and allow the exemption on a proportionate basis, considering the employment tenure with both entities.

2. Addition on Account of Unexplained Investment in Mutual Funds:

The second issue involved the addition of Rs. 50,00,000 to the assessee's income under Section 69 of the Income Tax Act, 1961, due to unexplained investment in mutual funds. The AO proposed this addition as the source of the investment was not satisfactorily explained by the assessee. The CIT(A) reduced this addition to Rs. 25,00,000, acknowledging partial explanation provided by the bank statements but noting the lack of detailed evidence regarding the deposits.

The Tribunal noted the assessee's argument that the investments were made from retirement benefits and observed that the bank statements showed relevant deposits and investments. The Tribunal remanded the issue back to the AO for verification of the source of investments and directed that if the assessee's claim is substantiated, the addition should be deleted.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the exemption claims for gratuity and leave encashment on a proportionate basis and to verify the source of mutual fund investments, potentially modifying the assessment order based on the findings.