Pranav B Prem

The Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, has held that the appellant is entitled to exemption on leave encashment only for the period during which he served the Punjab State Electricity Board (PSEB), an undertaking of the Punjab Government, but not for the subsequent service rendered under the Punjab State Power Corporation Limited (PSPCL). The Tribunal ruled that PSPCL cannot be treated as the State Government or its undertaking for the purpose of Section 10(10AA) of the Income Tax Act, thereby restricting complete exemption to only State or Central Government employees.

Also Read: Incorrect Computation Of Deduction U/s 54F Not Misrepresentation Or Suppression Of Facts: ITAT Ahmedabad

Background

The appellant, Chander Shekher Saini, served with PSEB from 18 November 1983 to 16 April 2010. Following restructuring undertaken by the Government of Punjab, PSEB was unbundled and its operations were transferred to PSPCL, resulting in the appellant’s compulsory transfer to the newly constituted corporation. He continued in service with PSPCL until retirement on 30 November 2015, after which he received leave encashment and claimed full exemption under Section 10(10AA). The Assessing Officer rejected the claim on the ground that PSPCL employees are not government employees, and therefore only the limited exemption under Section 10(10AA)(ii), capped at the notified limit, can be allowed. The CIT(A) upheld the assessment order, leading to the present appeal before the Tribunal.

Tribunal’s Findings

The Bench of Laliet Kumar (Judicial Member) noted that the plain and literal interpretation of Section 10(10AA) restricts full exemption only to employees of the Central or State Government, and does not extend the benefit to employees of government-owned corporations or utilities. The Tribunal observed that PSPCL does not qualify as the State Government for the purposes of Section 10(10AA), and therefore service rendered under PSPCL cannot attract the complete exemption available to government employees.

Also Read: Kolkata ITAT: HUF Can Be Donee But Not Donor; Exemption Denied on ₹5.84 Lakh Gift Claimed From HUF

At the same time, the Tribunal accepted that the appellant had rendered more than 26 years of service with PSEB, which was an undertaking of the State Government and permitted full exemption with respect to service under PSEB. It rejected the argument that compulsory transfer to PSPCL due to restructuring should deprive the appellant of the benefit already accrued from government service. The Tribunal observed that Section 10(10AA) is a beneficial provision and should not inflict unintended hardship where an employee had no choice in the restructuring process. It remarked that “merely because the assessee was compulsorily transferred from PSEB to PSPCL by operation of a State restructuring scheme, he cannot be deprived of the benefit earned during qualifying Government service.”

Accordingly, the Tribunal held that exemption must be allowed proportionately for the period during which the appellant served PSEB, while the portion of leave encashment relatable to service with PSPCL would remain taxable, as PSPCL employees do not fall within the ambit of Section 10(10AA)(i).

Also Read: Delhi ITAT Rules, Reopening Notice Under Sec 148 Income Tax Act Falling Outside Completion Period Prescribed By ‘TOLA’ Cannot Sustain

The Tribunal granted relief to the appellant to the extent of the leave encashment amount attributable to PSEB service, quantified at ₹13,02,816, and held that the remaining amount relating to service rendered under PSPCL is taxable. With this finding, the appeal was partly allowed.

Appearance

Assessee by: Sh. Tej Mohan Singh, Advocate

Revenue by: Smt. Priyanka Dhar, Sr. DR

Cause Title: Chander Shekher Saini vs ITO 

Case No: ITA No. 769/CHD/2023

Coram: Laliet Kumar (Judicial Member)