2025 (4) TMI 598 - AT - Income Tax

Restricting claim of leave encashment u/s 10(10AA) - assessee being retired employee of State Govt. of Rajasthan - Assessee argued that the limit of leave encashment which has been enhanced by CBDT should be given benefit to the assessee - CIT(A) has dismissed the appeal of the assessee merely on the grounds that the assessee has not filed form No. 16 and thereby he could not verify the claim of the assessee u/s 10(10AA) HELD THAT - Records reveals in the order under challenged passed by the AO CPC that CPC was having information that the assessee has claimed Rs. 20, 29, 482/- as per provision of section 10(10AA) of the Act. Thus contention of the ld. CIT(A) has no leg to stand. Now coming to the issue as to allowability of the claim between Rs. 3 or to Rs. 20, 29, 482/- as claimed by the assessee the bench noted that the limit of leave encashment to be claimed by the assessee was revised to Rs. 25, 00, 000/- as specified vide notification No. 31/2023/F. NO. 200/3/2023-ITA-1 dated 24th May 2023. Therefore the assessee is eligible to claim Rs. 20, 29, 482/- as deduction which was restricted to Rs. 3 lac as the limit was revised on 24th May 2023. On being consistent with that finding we direct the Id. AO to allow the claim to the extent of the revised limit as per the circular as referred herein above. Based on that observation ground no. 1 to 3 are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this case are:

1. Whether the appellant's claim for leave encashment under section 10(10AA) of the Income Tax Act, 1961, should be fully exempted to the extent of Rs. 20,29,482/- as claimed, or limited to Rs. 3,00,000/- as determined by the assessing officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Whether the proceedings and orders issued under section 143(1) and section 154 of the Act were valid and lawful, considering the appellant's claims of jurisdictional errors and procedural defects.

3. Whether the appellant was denied the opportunity to be heard, constituting a violation of natural justice.

4. The legality of interest charged under sections 234A, 234B, and 234C of the Act.

ISSUE-WISE DETAILED ANALYSIS

1. Leave Encashment Exemption under Section 10(10AA)

Relevant Legal Framework and Precedents:

Section 10(10AA) of the Income Tax Act provides that any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement is exempt from being included in the total income.

Court's Interpretation and Reasoning:

The Tribunal noted that the appellant, a retired state government employee, claimed an exemption for leave encashment of Rs. 20,29,482/-. The AO restricted this exemption to Rs. 3,00,000/-, which was upheld by the CIT(A) due to the appellant's failure to submit Form 16, which was necessary to verify the claim.

Key Evidence and Findings:

The appellant failed to submit Form 16 despite reminders, which was crucial for verifying the claim. However, the Tribunal considered the revised limit of leave encashment exemption to Rs. 25,00,000/- as per CBDT notification No. 31/2023.

Application of Law to Facts:

The Tribunal found that the appellant's claim of Rs. 20,29,482/- was within the revised exemption limit and thus eligible for full exemption.

Treatment of Competing Arguments:

The Tribunal addressed the CIT(A)'s reliance on the absence of Form 16, emphasizing the revised exemption limit, which rendered the earlier restriction irrelevant.

Conclusions:

The Tribunal directed the AO to allow the appellant's claim for leave encashment exemption under the revised limit of Rs. 25,00,000/-.

2. Validity of Proceedings and Orders under Sections 143(1) and 154

Relevant Legal Framework and Precedents:

Sections 143(1) and 154 of the Income Tax Act pertain to the processing of returns and rectification of mistakes, respectively.

Court's Interpretation and Reasoning:

The appellant challenged the validity of the proceedings and orders, citing jurisdictional errors and procedural defects. However, the Tribunal did not find substantial merit in these claims, focusing instead on the substantive issue of leave encashment exemption.

Conclusions:

The Tribunal did not specifically address the validity of the proceedings and orders, as the primary issue of leave encashment exemption was resolved in favor of the appellant.

3. Opportunity to be Heard and Natural Justice

Relevant Legal Framework and Precedents:

The principle of natural justice requires that parties be given an opportunity to be heard before a decision is made.

Court's Interpretation and Reasoning:

The appellant contended that the CIT(A) decided the appeal without providing an opportunity to be heard. The Tribunal did not explicitly address this issue but resolved the substantive issue of leave encashment exemption in the appellant's favor.

Conclusions:

The Tribunal's decision to allow the full exemption effectively addressed the appellant's grievances, rendering the issue of natural justice moot in this context.

4. Interest Charged under Sections 234A, 234B, and 234C

Relevant Legal Framework and Precedents:

Sections 234A, 234B, and 234C of the Income Tax Act deal with interest for defaults in furnishing return of income, payment of advance tax, and deferment of advance tax, respectively.

Court's Interpretation and Reasoning:

The appellant challenged the interest charged under these sections. The Tribunal noted that the issue of interest was consequential and did not require a separate finding.

Conclusions:

The Tribunal did not make a specific finding on the interest charged, as it was consequential to the resolution of the main issue of leave encashment exemption.

SIGNIFICANT HOLDINGS

The Tribunal held that the appellant was entitled to claim a full exemption for leave encashment under section 10(10AA) of the Income Tax Act to the extent of Rs. 20,29,482/-, within the revised limit of Rs. 25,00,000/- as per CBDT notification No. 31/2023.

Core Principles Established:

The decision underscores the importance of adhering to updated legal provisions and guidelines, such as revised exemption limits, in the assessment and appellate processes.

Final Determinations on Each Issue:

The Tribunal allowed the appellant's claim for leave encashment exemption, rendering other procedural and jurisdictional issues secondary. The interest charged under sections 234A, 234B, and 234C was deemed consequential and did not require separate adjudication.