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TMI Blog1984 (9) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... s continuing in service. The surrender was made while he was continuing in service. The claim was rejected by the ITO, who merely observed that the claim for exemption of the leave surrender salary is disallowed since it is taxable. 3. The claim of the assessee was rejected by the AAC also. He observed that a reading of sections 16 and 17 of the Income-tax Act, 1961 ('the Act') will show that any payment received from an employer for the purpose of service rendered by an employee would come within the term 'salary' unless it is specifically exempted under section 10 of the Act. He rejected the claim of the assessee that leave was a privilege conferred on the employee. He observed that the assessee had the option to enjoy the leave or encas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s right for money is a capital receipt. The decision of the Madras Bench of the Tribunal referred to above related to the encashment of earned leave at the time of retirement of the employee. It was pointed out by the learned counsel for the assessee that the Madras Bench of the Tribunal in the case of ITO v. T. V. Hindoocha [IT Appeal No. 1637 (Mad.) of 1981] has held that leave surrender salary will not be taxable, even when the surrender was made while continuing in service. In the order dated 7-6-1982, in the above case, the Bench had followed the earlier decision in the case of N.B. Tendolkar. The learned counsel also relied upon the decision of CIT v. Manjushree Plantations Ltd. [1980] 125 ITR 150 (Mad.). This only lays down that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 10(10AA) introduced by the Finance Act, 1982, with retrospective effect from 1-4-1978 provided for exemption of encashment of leave salary at the time of retirement, will indicate that the encashment of leave salary while continuing in service is not exempt from tax. The reasoning of the Madras Bench of the Tribunal in the case of N.B. Tendolkar that the accumulated earned leave is a capital asset, cannot, in any case, hold good in the case of encashment of the leave while in service. The decision which related to a case of encashment at the time of retirement, cannot be applied to the present case. With regard to the subsequent decision of the Madras Bench of the Tribunal in the case of T.V. Hindoocha, it was contended by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be a capital receipt, will hold good even in the case of encashment while continuing in service. We are in agreement with the view taken by the Madras Bench, to which one of us, namely, the Vice President, was a party, that when an employee, who is entitled to leave, does not go on leave but works, he makes a sacrifice and that the sacrifice is permitted to be accumulated and carried over as an intangible asset and further that the right to go on leave will constitute a property in his hands in the same way as an intangible asset. It was observed by the Madras Bench that the accumulated earned leave will not cease to be an intangible asset merely because it could be exchanged for money or converted into money or because the encashment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciples stated therein are equally applicable to a case of encashment of leave while continuing in service. It is observed by the Tribunal that "Evidently, the amount is sought to be charged under the head 'salary'. The definition of salary in section 17, which is an inclusive one, sets out various items which fall within the expression 'salary' for the purpose of charge to income-tax in accordance with sections 14, 15 and 16 of the Act but none of the clauses apparently covers a payment of the nature involved in this case, namely, a payment received for surrendering the right to any leave with pay." Since the definition was an inclusive one, the Tribunal then examined whether the amount can fall under the ordinary meaning of salary and it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . These clauses are not attracted to the present case. We are, therefore, inclined to accept the contention of the learned counsel for the assessee that even if the encashment is a benefit, it will not constitute 'salary' within the meaning of section 17. 11. Then there remains the contention of the department that by introducing section 10(10AA) by the Finance Act, 1982, with retrospective effect from 1-4-1978, the Legislature has specifically excluded from taxation the amount received by encashment of earned leave at the time of retirement of an employee of the Central Government or a State Government and that this will indicate that no exemption was contemplated with regard to the encashment of earned leave while continuing in service. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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