Bengaluru ITAT: BSNL VRS Employee Entitled to Full Exemption for Ex Gratia and Leave Encashment Despite 1,577-Day Delay

Kuppahally Venkatasubbaiah Vani Vs ITO (ITAT Bangalore)

Bengaluru ITAT: BSNL VRS Employee Entitled to Full Exemption for Ex Gratia and Leave Encashment Despite 1,577-Day Delay

The Bengaluru ITAT condoned a delay of 1,577 days and held that a BSNL VRS employee could not be denied statutory exemptions merely because the appeal was filed belatedly. The assessee had challenged the denial of exemption for ₹12.31 lakh received as ex gratia under section 10(10B) and ₹11.60 lakh received towards earned leave encashment under section 10(10AA). The Tribunal observed that the delay was attributable to genuine confusion arising from BSNL’s FAQs and clarifications on the taxability of VRS benefits and the assessee’s bona fide belief, based on professional advice, that only limited exemption was available. It reiterated that substantive statutory relief cannot be denied on account of procedural lapses where the assessee is otherwise eligible.

The Tribunal further held that the issue stood covered by several judicial precedents, including the Kerala High Court decision holding that former Department of Telecommunications (DoT) employees absorbed in BSNL continue to be treated as Central Government employees for the purpose of exemption under section 10(10AA). Following the Kerala High Court and its own earlier decision in Pradeep Hegde, the ITAT held that the assessee was entitled to the claimed benefits in respect of leave encashment and retrenchment compensation/ex gratia received under the BSNL Voluntary Retirement Scheme, 2019, and directed the Assessing Officer to grant the exemptions in accordance with law. The appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal, relating to Assessment Year 2020-21, is filed by Kuppahally Venkatasubbaiah Vani against the order dated 30 January 2026 passed by the Commissioner of Income-tax (Appeals)-1, Guwahati. The assessee had preferred the appeal before the CIT(A) on 21 January 2026 against the intimation dated 28 August 2021 issued under section 143(1) of the Income-tax Act, 1961.

2. The learned CIT(A) dismissed the assessee’s appeal solely on the ground of delay. The assessee challenges the impugned order, submitting that the delay of 1,577 days should have been condoned as there was sufficient cause for not filing the appeal within the prescribed time. It is also submitted that the learned CIT(A) failed to decide the assessee’s substantive claims for exemption of ex gratia received under section 10(10B) of the Income-tax Act, 1961, and earned leave encashment received on retirement under section 10(10AA) of the Act. The assessee therefore prays that, in the interest of substantial justice, the appeal be admitted and the claims be decided on merits.

3. The assessee is in appeal contending that the CPC erred in denying exemption of Rs. 12,30,969 for ex gratia under section 10(10B) and Rs. 11,60,420 for earned leave encashment on retirement under section 10(10AA) of the Act. Relying on CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. [(2012) 349 ITR 336 (Bom.)], the assessee submits that the appellate authority may admit fresh claims and that substantive statutory exemptions cannot be denied merely because of delay or procedural lapse where eligibility is otherwise established. Reliance is also placed on Circular No. 14 (XL-35) dated 11.04.1955, Dayal Singh v. ITO, Harish Kumar v. ITO, Chandraprakash Vasistha v. ITO, and Ravinder Kumar v. State of Punjab to submit that the claims should be admitted and decided on merits to prevent excessive and unjust taxation.

4. The learned Authorized Representative reiterated these submissions. The learned Departmental Representative opposed the appeal, arguing that the matter arose from an intimation under section 143(1) of the Act and that the learned CIT(A) rightly dismissed the appeal as it was delayed by 1,577 days.

5. We have considered the rival submissions and examined the orders of the lower authorities. The appellant, a woman employee with limited knowledge of income-tax deductions, filed her original return on professional advice that only Rs. 5,00,000 and Rs. 3,65,757 were allowable under sections 10(10C) and 10(10AA) of the Act. When she opted for VRS, BSNL’s FAQs dated 07.11.2019, clarifications dated 29.01.2020, and addendum dated 11.02.2020 on the taxability of retirement benefits created ambiguity and were understood to limit the exemption to Rs. 5 lakhs under section 10(10C).

6. The appellant later became aware that, where retirement is under a special scheme framed by the Central Government, ex gratia receipts may be fully exempt and leave encashment may be exempt up to Rs. 25 lakhs. The Chandigarh Bench, in Harish Kumar (BSNL Employee) v. ITO (ITA No. 42/CHD/2025), order dated 30.05.2025, held that compensation received under BSNL VRS, 2019 is fully exempt under section 10(10B). As the assessee is similarly placed, she is entitled to the same benefit.

7. The issue in this appeal is whether the amount received from Bharat Sanchar Nigam Limited (BSNL) on retirement under the BSNL Voluntary Retirement Scheme, 2019 is retrenchment compensation, and whether leave encashment is a capital receipt not liable to tax under section 10(10B) of the Act.

8. We find that the issue is covered in favour of the assessee by several decisions of coordinate benches, including Meghmala Sudhir Pathak v. Income Tax Officer, Ward 2(1), Nashik and Uttam Laxmanrao Shinde v. Income Tax Officer, Ward-2, Ahmednagar & Others [2026 (4) TMI 1111 – ITAT Pune]. These decisions held that retrenchment compensation and leave encashment received under the BSNL VRS should be treated for taxability purposes, in the same manner as benefits available to Government employees.

9. The Hon’ble Kerala High Court, in WP(C) No. 16360 of 2023, judgment dated 6 February 2026 [2026: KER:11584; 2026 TAXSCAN (HC) 425], held as under:

7. The issue arising for consideration, as noticed earlier, is as to whether the respondents are justified in taking the stand that while disbursing the leave encashment amounts, they can deduct the tax at source with reference to the provisions of Section 192 of the Act. It is to be noticed that the provisions of Section 192 of the Act provide for the deduction of tax with reference to the payment of salaries. Pension, for the purpose of deduction of tax, is with reference to the mandate under Section 192 of the Act. The provisions of Section 192 of the Act would apply only in a situation where a particular amount paidto an employee is chargeable under the head “salaries”. Therefore, ultimately, it is only in a situation where the particular payment is chargeable under the provisions of the Act, the provisions of Section 192 of the Act will apply. It is with reference to the aforementioned position that the issue arising for consideration in this case requires to be analysed.

8. As already noticed, the learned Senior Counsel for the petitioners seeks to rely on the provisions of Section 10(10AA) of the Act, which would read as under:

“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be includedxxx xxx xxx (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 subclause (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 whether on superannuation or otherwise, 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: Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this subclause shall not exceed the limit so specified: Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause shall not exceed the limit so specified, as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years:” (underlining supplied)

9. Sub-clause (i) of Section 10(10AA) of the Act provides for the benefits with reference to the payments received by an employee of the “Central Government or a State Government” as a cash equivalent of the leave salary. A reading of clause (i) would show that whatever amount received towards the leave salary is entitled to the benefits extended thereunder. As against this, clause (ii) provides for a maximum eligibility for the cash equivalent, which does not exceed ten months. Clause (ii) would apply with respect to cases which are not covered by clause (i). The case of the BSNL is to the effect that the retirement of the petitioner Nos.2 and 3 would fall under clause (ii). As against this, the petitioners contend that their case falls under clause (i).

10. The fact that the 2nd and 3rd petitioners were admittedly employed with the DoT originally is not in dispute. It is only subsequently, upon the formation of the 6th respondent company, that the 2nd and 3rd petitioners have opted to continue with the company. The circumstances, like the afore, are visualised with reference to the provisions of Rule 37A of CCS Rules. Rule 37A of the CCS Rules specifically provides for the conditions for payment of pension on absorption consequent upon conversion of a Government Department into a Public Sector Undertaking (PSU). In the case at hand, as noticed earlier, the DoT has been converted as the 6th respondent herein, and therefore, there is no dispute that the provisions of Rule 37A of the CCS Rules would apply. With respect to afore, the provisions thereunder also requires to be noticed. For ease of reference, the relevant provisions of Rule 37A of the CCS Rules are extracted as under: “37-A. Conditions for payment of pension on absorption consequent upon conversion of a Government Department into a Public Sector Undertaking (1) On conversion of a department of the Central Government into a Public Sector Undertaking, all Government servants of that Department shall be transferred en masse to that Public Sector Undertaking, on terms of foreign service without any deputation allowance till such time as they get absorbed in the said undertaking, and such transferred Government servants shall be absorbed in the Public Sector Undertaking with effect from such date as may be notified by the Government. xxx xxx xxx (4) The permanent absorption of the Government servants as employees of the Public Sector Undertaking shall take effect from the date on which their options are accepted by the Government and on and from the date of such acceptance, such employees shall cease to be Government servants and they shall be deemed to have retired from Government service. xxx xxx xxx (8) A permanent Government servant who has been absorbed as an employee of a Public Sector Undertaking and his family shall be eligible for pensionary benefits (including commutation of pension, gratuity, family pension or extraordinary pension), on the basis of combined service rendered by the employee in the Government and in the Public Sector Undertaking in accordance with the formula for calculation of such pensionary benefits as may be in force at the time of his retirement from the Public Sector Undertaking or his death or at his option, to receive benefits for the service rendered under the Central Government in accordance with the orders issued by the Central Government. EXPLANATION.- The amount of pension or family pension of the absorbed employee on retirement from Public Sector Undertaking or on death shall be calculated in the same way as calculated in the case of a Central Government servant, retiring or dying, on the same day. xxx xxx xxx (22) Nothing contained in sub-rules (13) to (21) shall apply in the case of conversion of the Departments of Telecom Services and Telecom Operations into Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited in which case the pensionary benefits including family pension shall be paid by the Government. (23) For the purposes of payment of pensionary benefits including family pension referred to in subrule (22), the Government shall specify the arrangements and manner including the rate of pensionary contributions to be made by Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited to the Government and the manner in which financial liabilities on this account shall be met. (24) The arrangements under sub-rule (23) shall be applicable to the existing pensioners and to the employees who are deemed to have retired from the Government service for absorption in Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited and shall not apply to the employees directly recruited by the Bharat Sanchar Nigam Limited for whom they shall devise their own pension schemes and make arrangements for funding and disbursing the pensionary benefits.”

11. The provisions of sub-rule (4) of Rule 37 A of the CCS Rules specifically states that upon absorption of the Government servants as the employees of the PSU, that shall take effect from the date on which their options are accepted by the Government, and from the date of such acceptance, those employees shall cease to be Government servants and they shall be deemed to have retired from the Government service. Sri.Jose Joseph, the learned Standing Counsel for the Income Tax Department, seeks to rely on the aforementioned provisions to contend that on the date on which the 2nd and 3rd petitioners joined the service of the 6th respondent, they had already retired from the service of the Government.

12. At the first blush, the afore contention raised by Sri.Jose Joseph appears to be attractive. But in my opinion, the provisions of Rule 37A (4) of the CCS Rules is not to be read in isolation. It also requires to be noticed that the provisions of subrule (8) of Rule 37A of the CCS Rules, further provides that with respect to cases of the afore nature, when a Government servant, who joins or get absorbed in a PSU, ultimately, retires, the calculation of the pension /family pension under the Rules has to be carried out in the manner prescribed thereunder. It is also to be further noticed that the explanation makes the position clear that in the aforementioned circumstances, the pension requires to be calculated in the same way as would be applicable in the case of “Central Government Servant retiring or dying, on the same day”. Therefore, when the provisions of sub-rule (4) and sub-rule (8) to Rule 37A of the CCS Rules are read together, there cannot be any dispute about the fact that the 2nd and 3rd petitioners, upon their retirement, also requires to be extended pension that will be applicable for a Central Government Servant. It is also to be further seen that sub-rule (22) of Rule 37A of the CCS Rules provides that the pensionary benefits, including family pension in the aforementioned circumstances, requires to be paid by the Government. The provisions of sub-rule (23) of Rule 37A of the CCS Rules further make it clear that the cases of the employees of DoT who joined BSNL are to be seen as a specific class and they are to be extended pension in the manner prescribed under subrule (23). Furthermore, sub-rule (24) of Rule 37A of the CCS Rules makes the position more clear by providing that in the cases of employees who joined directly with BSNL, they will not be entitled for the afore benefits.

13. In view of the above position, I am of the opinion that the petitioners service and the retirement have to be taken as a case of retirement from the service of the Central Government.

14. The submission made by Sri. Jose Joseph to the effect that the provisions of Section 10 (10AA) (i) of the Act has to be read as they appear requires to be analysed now. True, as suggested by Sri. Jose Joseph, on a literal reading of the provisions of clause (i), it is only in a situation where a person retires from the service of the Central Government, the benefits provided thereunder can be applied. But it is to be noticed that the framers of the statute did not visualise a situation like the present one, and that is why similar provisions as in CCS Rules, taking care of such aspects, have not been introduced in the provisions at that point of time. A Division Bench of this Court in State of Kerala v. Falcon Infrastructure Limited [2025 (4) KHC 375] has already found that provisions under different enactments should be read harmoniously so that provisions of one statute are not invoked to defeat the rights/privileges extended under another Statute. I have also followed the said decision in Manojkumar P.P v. Secretary, Thalassery Municipality [2025 (6) KHC 371].

15. Therefore, insofar as the provisions of the CCS Rules referred to above specifically treat the cases of the employees of the BSNL, who joined the service of the BSNL from the DoT in a particular manner, I am of the opinion that the interpretation provided in Ext.P11 cannot be accepted. 16. This Court also notices the judgment of the Apex Court in Senior Supdt. of Post Office and Others v. Izhar Husssain [AIR 1989 SC 2262], wherein it has been categorically laid down that executive instructions cannot modify or amend the statutory provisions.

Therefore, I am of the opinion that the petitioners are entitled to succeed. Hence, this writ petition would stand allowed, quashing Ext.P11. If any amounts have been deducted from the payments, the petitioners are free to claim the benefits of Section 10 (10AA) (i) of the Act with reference to the respective returns filed by them.”

10. I adopted the same view in Pradeep Hegde v. Income Tax Officer, Ward 1(1), Mysore [2026 (6) TMI 1269 – ITAT Bangalore], decided on identical facts, holding that such BSNL employees are to be treated as Central Government employees for these benefits.

11. Following the above decision of the Hon’ble Kerala High Court, we hold that the assessee must be treated as a Central Government employee for granting the claimed benefits in respect of leave encashment and retrenchment compensation. The Assessing Officer is directed to allow the benefits in accordance with that decision.

12. Accordingly, the assessee’s appeal is allowed.

Order pronounced in the open court on 29^thJune, 2026.