A significant relief has been granted to a retired Bharat Sanchar Nigam Limited (BSNL) employee after the Commissioner of Income Tax (Appeals) [CIT(A)] allowed his appeal challenging the denial of exemption on leave encashment received at the time of retirement.

The appeal arose from an intimation issued by the Centralized Processing Centre (CPC), Bengaluru under Section 143(1) of the Income Tax Act for Assessment Year 2020-21, wherein a portion of the taxpayer’s leave encashment exemption claim was disallowed, resulting in an increased taxable income and consequential tax demand.

The appellant, a retired employee who had initially served under the Department of Telecommunications (DoT) before being absorbed into BSNL, received leave encashment upon retirement during FY 2019-20. In his income tax return, he claimed exemption under Section 10(10AA)(i) in respect of leave attributable to his period of Central Government service.

However, while processing the return under Section 143(1), CPC treated him as a non-government employee and restricted the exemption, thereby disallowing part of the claim and enhancing the assessed income.

Before examining the merits of the case, the appellate authority dealt with a substantial delay of 1,523 days in filing the appeal. The taxpayer argued that he had been continuously pursuing the matter with the jurisdictional tax authorities and was under the bona fide belief that the issue could be resolved administratively.

Relying on judicial precedents favoring a liberal approach in matters of condonation where substantial justice is involved, the CIT(A) condoned the delay and admitted the appeal for adjudication on merits.

The central issue before the appellate authority was whether leave encashment attributable to service rendered under the Central Government prior to absorption in BSNL qualifies for full exemption under Section 10(10AA)(i) of the Income Tax Act.

The taxpayer contended that for the period he served under the Department of Telecommunications, he remained a Central Government employee and, therefore, leave accumulated during that period continued to enjoy the benefit of complete exemption even though retirement occurred after absorption into BSNL.

The appellant relied upon several judicial decisions, including the Mumbai ITAT ruling in Babulal Patel v. ITO, where it was held that leave earned during service under the Central Government prior to absorption in MTNL would continue to qualify for exemption under Section 10(10AA)(i). Similar views had also been expressed in decisions of other benches of the Income Tax Appellate Tribunal involving former DoT employees absorbed into public sector telecom entities.

The appellate authority also took note of the CBDT Notification No. 31/2023 dated 24 May 2023, which enhanced the aggregate exemption limit for non-government employees and was cited by the appellant as a beneficial measure intended to mitigate hardship.

After examining the facts and legal position, the CIT(A) observed that the dispute concerned exemption under Section 10(10AA) in respect of leave encashment received from BSNL upon retirement. The authority noted that judicial precedents had consistently recognized that leave earned during Central Government service prior to absorption into telecom public sector undertakings retains its character for purposes of exemption.

The appellate order specifically referred to the Mumbai ITAT ruling in Babulal Patel, which held that leave accrued before absorption into MTNL remained eligible for exemption applicable to Central Government employees, whereas leave earned after absorption would be governed by the provisions applicable to non-government employees.

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