Anant Chintaman Gundalwar Vs ITO (ITAT Nagpur)
MSEB Employee Cannot Lose Full Gratuity and Leave Encashment Exemptions Due to Restructuring into MSEDCL: ITAT Nagpur
Material Facts of the Case
The assessee, Shri Anant Chintaman Gundalwar, joined the Maharashtra State Electricity Board as a Steno Typist pursuant to an appointment letter dated 30 September 1989.
Following reforms under the Electricity Act, 2003, the activities of the Maharashtra State Electricity Board were reorganised into separate entities undertaking generation, transmission and distribution functions. As a result of this restructuring, the assessee became an employee of Maharashtra State Electricity Distribution Company Limited.
During the assessment year 2020-21, the assessee retired from MSEDCL. Upon retirement, he received:
- Gratuity of Rs. 20,00,000; and
- Leave encashment of Rs. 13,82,240.
The assessee filed his return of income on 10 October 2020, declaring total income of Rs. 2,35,278. He disclosed salary income of Rs. 36,67,918 from MSEDCL.
Treating himself as a State Government employee, the assessee claimed the entire gratuity of Rs. 20 lakh as exempt under section 10(10)(i). He similarly claimed the complete leave encashment amount of Rs. 13,82,240 as exempt under section 10(10AA)(i).
Based upon a preliminary verification report, the Assessing Officer formed the view that the assessee had claimed excessive exemptions and reopened the assessment.
The Assessing Officer held that, on the date of retirement, the assessee was an employee of MSEDCL and not directly an employee of the Government of Maharashtra. Therefore, according to the AO, he was not entitled to claim the exemptions available specifically to Central or State Government employees.
The AO restricted the admissible exemptions and made the following additions:
- Disallowance of gratuity exemption: Rs. 6,28,245; and
- Disallowance of leave encashment exemption: Rs. 10,82,240.
Thus, a total addition of Rs. 17,10,485 was made in the reassessment order passed under section 147 read with section 144B.
The Commissioner (Appeals), NFAC, confirmed the additions. The assessee consequently approached the ITAT.
Assessee’s Arguments
The assessee submitted that he had originally joined the Maharashtra State Electricity Board, which functioned under the control of the Government of Maharashtra.
The subsequent restructuring of MSEB and the formation of MSEDCL were policy decisions taken by the State Government. The employee neither requested nor exercised any option for such restructuring. Therefore, an administrative reorganisation taking place during the continuation of service could not deprive him of the retirement benefits and corresponding income-tax exemptions applicable to a State Government employee.
Reliance was placed upon the decision of the Pune Bench of the Tribunal in Adinath Vasantrao Wandhekar v. ITO, ITA No. 1388/PUN/2023, decided on 8 March 2024.
The assessee also produced his original appointment letter and identity card to demonstrate that he entered service under the State Government-controlled electricity establishment.
The legal grounds challenging the validity of reassessment proceedings were not pressed before the Tribunal and were accordingly dismissed.
Findings of the ITAT
The Tribunal observed that the facts of the present case were identical to those considered by the Pune Bench in the case of Adinath Vasantrao Wandhekar.
The Maharashtra State Electricity Board was constituted in 1960 and operated under the direct control of the Government of Maharashtra. Subsequently, pursuant to electricity-sector reforms, its generation, transmission and distribution functions were transferred to three separate companies. MSEDCL became the entity responsible for electricity distribution.
The Tribunal acknowledged that, in a strict technical sense, the assessee had served partly under the State electricity board and partly under a State public sector undertaking. However, the restructuring was entirely beyond the assessee’s control.
The assessee had originally joined as a State Government employee and merely followed the directions issued by the State authorities after restructuring. His appointment documents and identity card also supported his claim regarding the original character of employment.
The Tribunal held that an employee who had joined Government service could not be deprived of legitimate retirement benefits merely because the Government subsequently decided to reorganise the employer into a corporate entity.
It consequently directed the Assessing Officer to grant:
- Balance gratuity exemption of Rs. 6,28,245 under section 10(10)(i); and
- Leave encashment exemption of Rs. 10,82,240 under section 10(10AA)(i).
The assessee’s appeal was therefore allowed.
Author’s Comments
This is an important ruling for employees who originally joined statutory electricity boards or similar Government-controlled establishments but later became employees of successor companies because of compulsory restructuring.
The decisive consideration was not merely the legal status of MSEDCL on the retirement date. The Tribunal examined the origin of employment, continuity of service, Government control and involuntary nature of the restructuring.
However, the decision should not be interpreted as granting Government-employee exemptions to every employee of a public sector undertaking. An individual directly recruited by a successor company after corporatisation may stand on a different footing.
Employees making similar claims should preserve their original appointment letters, transfer or vesting orders, service-continuity rules, identity cards, retirement documents and employer certificates. These records can establish that the change in the employer’s legal structure did not alter the essential continuity of Government service.
Cases Discussed
- Adinath Vasantrao Wandhekar Vs ITO — ITA No. 1388/PUN/2023, decided on 08.03.2024.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT NAGPUR
1. This appeal by the assessee is directed against the order of Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi (for short, “CIT(A)”) dated 15.01.2026 passed u/sec. 250 of the Income Tax Act, 1961 (for short, “Act”) which is arising out of assessment order dated 24.03.2025 passed u/sec. 147 r.w.s. 144B of the Act for the Assessment Year (A.Y.) 2020-21.
2. Assessee has raised 16 grounds of appeal, of which the grounds raising legal issues challenging the validity of the assessment proceedings have not been pressed and, therefore same are dismissed as not pressed. On merits, the grievance is against the denial of exemption u/sec. 10(10)(i) of the Act for the gratuity amount at Rs. 6,28,245/- and exemption u/sec. 10(10AA)(i) of the Act for leave encashment received on retirement to the extent of Rs. 10,82,240/-.
3. At the outset, learned counsel for the assessee submitted that assessee joined on the post of Steno Typist in Maharashtra State Electricity Board (MSEB) vide appointment letter dated 30.09.1989. During the year under consideration, assessee retired from Maharashtra State Electricity Distribution Company Ltd. (MSEDCL) and received retirement benefits including gratuity at Rs. 20,00,000/- and leave encashment at Rs. 13,82,240/-. However, Ld. Assessing Officer (AO) while concluding the assessment proceedings has restricted the exemption u/sec. 10(10)(i) for gratuity at Rs. 13,71,755/- and u/sec.10(10AA)(i) for leave encashment at Rs. 3,00,000/-, thereby denying benefit exemption for gratuity at Rs. 6,28,245/- and leave encashment at Rs. 10,82,240/-. He submitted that the assessee had joined the State Government service and that the subsequent changes pursuant to the restructuring of the MSEB and formation of the MSEDCL would not disentitle the assessee from claiming the benefits available to the Central and State Government employees.
4. On the other hand, Ld.DR vehemently argued supporting the order of Ld.CIT(A).
5. I have heard the rival submissions and perused the material placed before me. I observe that assessee is an individual, filed his return of income on 10.10.2020 declaring income of Rs. 2,35,278/-. Based on the preliminary verification report about alleging the excess claim of gratuity and leave encashment, notice u/sec. 148 of the Act was issued and re-assessment proceedings were carried out. Assessee received salary of Rs. 36,67,918/- from MSEDCL. In the return of income, assessee has claimed exemption for gratuity u/sec. 10(10)(i) at Rs.20,00,000/- and leave encashment u/sec. 10(10AA)(i) at Rs.13,82,240/-. Ld.AO concluded the proceedings observing that assessee has not retired as an employee of State Government and, therefore special benefits for Central and State Government employees are not available to the assessee and accordingly, restricted the exemption for gratuity at Rs.13,71,755/- and leave encashment at Rs. 3,00,000/-, thereby making addition of Rs. 17,10,485/- (leave encashment Rs. 10,82,240 + gratuity Rs. 6,28,245). Thereafter assessee challenged the said addition by filing appeal before the Ld.CIT(A), but failed to succeed.
6. Before me, learned counsel for the assessee has relied on the decision of coordinate Bench of Pune Tribunal in the case of Adinath Vasantrao Wandhekar vs. ITO in ITA No. 1388/PUN/2023 dt. 08.03.2024. On perusal of the same, I find that the Tribunal has observed in that case that assessee was in service with MSEB constituted in 1960 and operating under the direct control of Government of Maharashtra. Owing to reforms by virtue of amendment brought in Electricity Act, 2003, the erstwhile MSEB demerged its three principal activities i.e. generation, transmission and distribution through restructuring and assigned it to three newly formed companies. I find that in the instant case also, facts are also identical and owing to restricting of MSEB, the assessee became employee of State under the public sector undertaking company-MSEDCL (PSU). In strict sense, the assessee has rendered service in State Government and the balance service with PSU.
7. However, in my considered view, the restructuring of the MSEB by forming three separate companies, including MSEDCL, was beyond the control of the assessee. The assessee had joined the services as a State Government employee and thereafter acted in accordance with the directions issued by the State Government. Therefore, the subsequent restructuring of the MSEB and formation of MSEDCL cannot disentitle the assessee from claiming the benefits available to State Government employees. Assessee has been appointed by the State Government vide appointment letter dated 31.09.1989 and even on the identity card also mentions Government of Maharashtra. Therefore, in my considered view, assessee deserves the benefit which are applicable to Central and State Government employees for the retirement in the form of gratuity and leave encashment u/sec.10(10)(i) & 10(10AA)(i) respectively. Accordingly, finding of Ld.CIT(A) is reversed and Ld. AO is directed to allow the balance claim of exemption for gratuity of Rs. 6,28,245/- and leave encashment of Rs. 10,82,240/-. Effective grounds of appeal on merits are hereby allowed.
7. In the result, appeal of the assessee is allowed.
Order pronounced on 10th September, 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963
