ITAT Chandigarh: ₹25 Lakh Leave Encashment Limit Held Prospective – PSU Retiree Restricted to ₹3 Lakh Exemption

Arvind Kumar Jolly Vs ITO (ITAT Chandigarh)

ITAT Chandigarh: ₹25 Lakh Leave Encashment Limit Held Prospective – PSU Retiree Restricted to ₹3 Lakh Exemption

Assessee, a retired employee of Union Bank of India (PSU), received ₹9,56,280 as leave encashment upon superannuation. He claimed the entire amount as exempt u/s 10(10AA), but CPC, Bengaluru, restricted the exemption to ₹3,00,000 under Section 10(10AA)(ii) applicable to non-government employees. CIT(A) dismissed the appeal ex parte, holding that the enhanced limit of ₹25 lakh notified on 24.05.2023 was not applicable to retirees of earlier years.

Assessee’s Arguments

• Claimed that the CBDT Notification No.31/2023 dated 24.05.2023, enhancing the limit to ₹25 lakh, should be treated as beneficial & retrospective, since it sought to correct an outdated limit fixed in 2002.
• Cited various ITAT decisions – Ram Charan Gupta (Jaipur), Vijay Kumar Jain (Agra), Devendra Singh Bhaskar (Ahmedabad), Satishchandra Hiralal Berawala (Ahmedabad) – which extended the benefit of the enhanced limit by applying a liberal interpretation in favour of retirees.
• Argued that delay in issuing the notification should not deprive earlier retirees of legitimate relief.

Revenue’s Stand

• PSU employees fall strictly under Section 10(10AA)(ii) & are entitled only to the notified monetary ceiling applicable to non-Government employees.
• Relied on Delhi High Court decision in Kamal Kumar Kalia v. UOI upholding the classification between Government & PSU employees & confirming that the enhanced limit is prospective, not retrospective.

Tribunal’s Findings/Decision

Section 10(10AA) draws a clear legislative distinction:

Clause (i): Central/State Government employees – full exemption.

Clause (ii): Others (including PSUs, nationalized banks) – exemption restricted to 10 months’ salary or the notified ceiling, whichever is less.

• The last CBDT notification (2002) prescribed ₹3 lakh. The new Notification No.31/2023, effective from 01.04.2023, explicitly operates prospectively.
• Tribunal found that Ram Charan Gupta (Jaipur) & its followers did not analyse retrospectivity; they merely extended relief without considering the temporal effect of the notification.
• Relied on coordinate Chandigarh Bench ruling in Ashwani Kumar Sharma v. ITO (AY 2020-21), which held that PSU employees are covered under clause (ii) & ₹25 lakh limit applies only prospectively.
• The Tribunal held that the assessee, being a PSU employee, is entitled only to exemption up to ₹3 lakh.
• Notification No.31/2023 applies prospectively from 01.04.2023 & cannot be invoked for AY 2021-22.

Author’s Comment

A conflict of judicial views has now clearly emerged between the Chandigarh & Jaipur Benches of the ITAT on the temporal applicability of Notification No.31/2023:

The Jaipur Bench in Chandra Prakash Vashistha v. ITO (ITA No. 642/JPR/2025, order dated 07.10.2025) took the opposite view, holding that the enhancement of the exemption limit to ₹25 lakh was a beneficial measure intended to remove hardship & therefore must apply retrospectively even to employees who retired before 01.04.2023. The Bench treated the notification as a remedial clarification rather than a substantive amendment, thereby granting full exemption to an SBI retiree for AY 2021-22.

The Chandigarh Bench (present case), however, has adopted a strict literal interpretation, relying on the explicit wording “with effect from 1st April, 2023” in the notification & the Delhi High Court’s judgment in Kamal Kumar Kalia. It reasoned that only Parliament or delegated authority can extend retrospectivity, not judicial interpretation.

Thus, while Jaipur ITAT favoured purposive & equitable relief, the Chandigarh ITAT upheld statutory exactness.

Given this divergence, the issue is ripe for High Court or CBDT clarification, as inconsistent treatment across jurisdictions creates uncertainty for thousands of PSU & bank retirees who received leave encashment before April 2023.

Key Takeaway:

Chandigarh ITAT – Law says prospective – ₹3 lakh cap stands.

Jaipur ITAT –Beneficial notification – applies retrospectively.

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH

This appeal by the assessee is directed against the order of the Ld. CIT, Appeal ADDL/JCIT(A)-2, Kolkata dated 31.03.2025 passed under section 250 of the Income-tax Act, 1961 for the assessment year 2021-22.

2. At the outset the Registry has pointed out that the present appeal is barred by limitation by 56 days for which the assessee had filed the condonation application for condoning the delay.

3. Ld. DR strongly opposed the condonation of delay.

4. After considering the condonation application filed by the assessee in the present appeal, we condone the delay for which sufficient cause is shown, and admit the appeal for adjudication.

5. The assessee, a retired employee of Union Bank of India, received a sum of Rs.9,56,280/- on account of leave encashment upon his superannuation. He filed his return of income on 30.11.2021 claiming the entire amount as exempt under section 10(10AA). The Centralised Processing Centre (CPC), Bengaluru while processing the return under section 143(1) restricted the exemption to Rs.3,00,000 and computed a demand.

6. Aggrieved, the assessee preferred appeal before the Learned CIT(A). However, despite issuance of notice u/s 250, no reply or adjournment request was filed by the assessee. The Learned CIT(A), therefore, proceeded ex parte and dismissed the appeal, holding that being an employee of a PSU, the assessee fell under clause (ii) of section 10(10AA) and hence was entitled only to the notified limit of Rs.3,00,000.

“The Appellant has not replied to the Notice issued u/s 250. No information has been uploaded regarding the reason for non-submission of any reply. From non-compliance on the part of the Appellant to statutory notice issued, it is evident that the Appellant is intransigent in not complying. The Appellant has failed to display any action that can lead to believe that Appelant would co-operate in the proceedings. Therefore, there is no other option but to finalize the proceedings on ex-parte basis.

I have perused section 10(10AA). It is apparent that as the Appellant is an employee of a PSU, the maximum exemption is governed by clause (ii). The Central Government has enhanced the exemption limit from Rs.3,00,000 to Rs.25,00,000 vide Notification No. 31/2023 dated 24.05.2023, effective from 01.04.2023. However, the assessee retired during F.Y. 2019-20, and therefore, the benefit of the notification is not applicable to him.

Further, the Hon’ble Delhi High Court in the case of Kamal Kumar Kalia & Ors. v. Union of India has held that employees of PSUs cannot be treated at par with Government employees for the purposes of section 10(10AA). Similarly, in Babulal Patel v. ITO (ITAT Mum bai), the Tribunal has held that for PSU employees, clause (ii) alone applies. In view of the above, the exemption is restricted to Rs.3,00,000 and the appeal is dismissed.”

7. Before us, the assessee argued that the entire leave encashment should be exempt, placing reliance on the decision of the Chandigarh Bench of the Tribunal in Shyam Singh v. ITO and on other decisions including Babulal Patel and Kamal Kumar Kalia. He submitted that the failure of CBDT to timely issue notifications should not prejudice the assessee, and that the subsequent enhancement of the limit to Rs.25,00,000 shows legislative intent to extend relief. He also relied upon the following decisions:

A. Goverdhan Deepchand Bhambhani Vs. ITO in ITA No. 289/Ahd/2025 dt. 28/07/2025 (Ahmedabad Trib)

B. Devndra Singh Bhaskar Vs. DCIT in ITA No. 431/Ahd/2022 dt. 11/10/2023 (Ahmedabad Trib)

C. Vijay Kumar Jai Vs. ITO in ITA No. 175/Agr/2022 dt. 18/06/2025 & Anil Kumar Khattri Vs. ITO in ITA No. 187/Agr/2022 dt. 18/06/2025 (Agra Bench)

D. Ram Charan Gupta Vs. ITO in ITA No. 408/JPR/2022 dt. 27/06/2023 (Jaipur Bench)

E. Satischandra Hiralal Berawala Vs. DCIT in ITA No. 940/Ahd/2024 dt. 27/11/2024

8. The Ld. DR, on the other hand, supported the order of the CIT(A). It was contended that the statutory provision is clear and PSU employees fall under clause (ii) of section 10(10AA). The DR further emphasized that the Delhi High Court in Kalia has upheld the classification between Government and PSU employees, and that the notification of 24.05.2023 is prospective.

9. We have considered rival submissions and examined the record. The issue before us is whether the assessee, a retired PSU employee, is entitled to exemption of leave encashment beyond the limit of Rs.3,00,000.

9.1 For proper appreciation, we reproduce the bare provision of section 10(10AA):

“(i) 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 whether on superannuation or otherwise;

(ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government.”

9.2 The language of the provision makes a clear distinction between Government employees and non-Government employees. For Government employees, the exemption is absolute, whereas for other employees, the exemption is limited both in terms of period (ten months’ salary) and in terms of the monetary limit notified by the Government. The last such notification prior to the assessment year under consideration was issued in 2002, fixing the limit at Rs.3,00,000. The subsequent notification dated 24.05.2023 enhancing the limit to Rs.25,00,000 has expressly been made applicable with effect from 01.04.2023. The assessee, having retired prior thereto, cannot claim the benefit of the subsequent notification.

9.3 The reliance placed on the decisions referred hereinabove does not alter the legal position. We, therefore, are bound to follow the statutory mandate which limits the exemption for non-Government employees to the notified amount.

9.4 The first decision relied upon by the assessee was in the case of Satish Chandra Hiralal. We find that the said judgment does not advance the case of the assessee since the issue therein was entirely different and not related to the controversy under our consideration. Hence, the reliance placed thereon is misplaced.

9.5 The second judgment cited by the assessee was that of Ram Charan Gupta decided by the Jaipur Bench. In that case, the Coordinate Bench proceeded to allow the claim of deduction towards leave encashment, relying upon CBDT Notification No. 31/2023. However, it is material to note that the said notification was issued on 1 April 2023 and, by its plain terms, was prospective in nature. The Jaipur Bench had not examined the specific issue as to whether the notification could be given retrospective effect; the Bench merely proceeded to extend the benefit. A bare perusal of the notification, as has also been extracted by the learned CIT(A) in the impugned order, makes it manifest that the benefit was intended to be operative prospectively and not with retrospective force. Therefore, in our considered opinion, the reliance placed by the assessee on Ram Charan Gupta is of no avail.

9.6 The assessee further placed reliance on the decisions of Vijay Kumar Jain (Agra Bench), Devendra Singh Bhaskar (Ahmedabad Bench) and Goverdhan Deepchand (Ahmedabad Bench). In all these matters, the Coordinate Benches have simply followed the reasoning in Ram Charan Gupta. As already held above, the decision in Ram Charan Gupta cannot be construed as laying down any binding proposition of law to the effect that Notification No. 31/2023 operates retrospectively. It is only a fact-based relief granted without adjudicating the true scope and temporal applicability of the notification. Consequently, the subsequent decisions which merely echo the view taken in Ram Charan Gupta cannot assist the assessee.

9.7 In light of the foregoing discussion, we are of the view that the precedents cited on behalf of the assessee are clearly distinguishable and do not support the proposition sought to be canvassed.9.4 Further the issue is squarely covered by the coordinate decision of this very Bench in Shri Ashwani Kumar Sharma v. ITO (ITA No. 652/Chd/2023, AY 2020-21, order dated 23.06.2025) . In that case too, the assessee, a retired Chief Engineer of a State power utility (HVPNL), claimed full exemption of leave encashment. The Tribunal, after considering section 10(10AA), CBDT notifications, and case law, categorically held that:

“Section 10(10AA)(i) applies strictly to employees of the Central or State Government. The statute does not extend this benefit to statutory corporations or government-owned companies. Merely being under the ownership and control of the State Government or governed by State service rules does not convert the employer into a ‘State Government.’ Employees of PSUs/utilities are covered only under clause (ii), and the exemption is capped at Rs.3,00,000. The enhanced limit to Rs.25,00,000 applies prospectively from 01.04.2023.”

9.8 Respectfully following the above binding coordinate Bench decision, and applying the plain language of the statute, we hold that the assessee herein, being a PSU employee, is covered under section 10(10AA)(ii) and hence entitled only to exemption up to Rs.3,00,000.

10. In the result, appeal of the Assessee is dismissed.

Order pronounced in the open Court on 08/10/2025