Satish Kumar Thakur Vs ITO (ITAT Chandigarh)
Summary: The Chandigarh Bench of the Income Tax Appellate Tribunal considered the appeal of Shri Satish Kumar Thakur for Assessment Year 2018-19 against the order dated 16 February 2023 passed by the National Faceless Appeal Centre (NFAC), Delhi. The dispute concerned the assessee’s claim for complete exemption of leave encashment amounting to ₹18,13,500 under Section 10(10AA)(i) of the Income-tax Act, 1961. The assessee had joined the Himachal Pradesh State Electricity Board as an Assistant Engineer and subsequently continued in service after the Board was reorganised into Himachal Pradesh State Electricity Board Limited. He maintained that the transfer scheme implemented by the Government of Himachal Pradesh preserved the service conditions and retirement benefits of the transferred employees and that he was consequently entitled to the exemption applicable to State Government employees. The Assessing Officer, however, treated him under Section 10(10AA)(ii), applicable to other employees, and restricted the exemption to ₹3 lakh.
The assessee filed his return of income on 21 July 2018 declaring income of ₹11,59,150. His return was processed under Section 143(1) by CPC, Bengaluru, and a refund with interest was issued. Subsequently, a rectification order under Section 154 was passed on 29 October 2021, reclassifying the leave encashment exemption from Section 10(10AA)(i) to Section 10(10AA)(ii). The assessee contended that the resulting addition of ₹15,13,500 and the demand created against him had been made without a reasonable opportunity of hearing. His submissions explained the original establishment of the State Electricity Board, its subsequent reorganisation and the transfer scheme, under which existing employees’ rank, pay, seniority and retirement benefits were to be maintained. He also relied on other appellate decisions concerning similarly situated employees.
The NFAC sustained the restriction of the exemption, relying upon the Madras High Court’s decision in K. Gopalakrishnan Vs CBDT, (1994) 206 ITR 193, which upheld the constitutional validity of the statutory distinction between Government and non-Government employees. The appellate authority considered that employees of public sector undertakings could not automatically claim the exemption available to Government employees under Section 10(10AA)(i). Before the Tribunal, the assessee challenged both the classification of his employment and the procedure followed by the tax authorities. He emphasised that Section 154(3) requires an opportunity of hearing where rectification enhances an assessment, reduces a refund or otherwise increases the taxpayer’s liability.
After examining the record, the Tribunal observed that the assessee’s original return had been processed under Section 143(1) without an opportunity to present his case. More importantly, the CPC passed the subsequent rectification order under Section 154 without hearing him. The Tribunal further found that the NFAC had decided the first appeal ex parte and that its order contained no discussion establishing service of a hearing notice on the assessee. The absence of an opportunity of hearing was not disputed by the Revenue. The Bench accordingly concluded that the assessee had been denied a hearing at each of the relevant stages, resulting in a violation of the principles of natural justice.
The ITAT therefore restored the matter to the Assessing Officer for fresh adjudication in accordance with law after providing the assessee a proper opportunity of being heard. It directed the assessee to cooperate in the fresh proceedings and clarified that all legal pleas would remain available to him. The appeal was allowed for statistical purposes. Significantly, the Tribunal did not finally hold that employees transferred from the Himachal Pradesh State Electricity Board to HPSEBL were entitled to the full Government-employee exemption, nor did it finally allow the claimed ₹18,13,500 exemption. Its decision was confined to the procedural defect and the requirement that the dispute be reconsidered after an adequate hearing.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
This is Assessee’s appeal against the order of the ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi, dated 16.02.2023, passed in the Assessee’s appeal against assessment order dated 29.10.2021, passed u/s 154 of the Income Tax Act, 1961 (in short ‘the Act’), giving exemption to the Assessee u/s 10 (10AA) (ii) of the Act and not u/s 10(10AA )(i), as claimed by the Assessee. The Assessee claimed exemption of leave encashment of Rs. 18,13,500/-.
2. The facts are that the Assessee filed the Return of Income for the AY on 21.07.2018 by declaring income of Rs.11,59,150/-. While filing the Return of Income, the Assessee claimed exemption u/s 10(10AA)(i) of the Act. The Return was processed u/s 143(1) by CPC, Bengaluru and the assessee was granted refund along with interest of Rs. 2,05,790/- Subsequently, a Rectification Order – u/s 154 was passed by the AO-CPC, Bengaluru on 29.10.2021 by allowing the claim of exemption u/s 10(10AA) (ii) of the Act, as against the assessee’s claim of exemption u/s 10(10AA)(i) of the Act.
3. The Assessee submitted before the ld. CIT(A) as follows:
1.1 Brief facts of the case is that the Assessee had joined Himachal Pradesh State Electricity Board, a State Government Undertaking on 15th, June, 1983 as Assistant Engineer and retired on 30.04.2017 after putting in almost 34 years of service from Himachal Pradesh State Electricity Board Limited. The benefit of leave encashment was allowed for holidays to be availed not during the service period.
1.2 The Himachal Pradesh State Electricity Board was established in 1971, as a body constituted under Section 5 of the erstwhile Electricity (Supply) Act, 1948 and had been responsible for coordinated development of power potential, generation, transmission and distribution of electricity within the State of Himachal Pradesh.
1.3 Later on, “The Himachal Pradesh State Electricity Board” had been re-organized as “Himachal Pradesh State Electricity Board Limited” w.e.f. 14.06.10 under Companies Act 1956 vide notification No. MPP-A (3)-1/2001-IV dated 10-06-2010 (copy enclosed).
1.4 The above said notification reads as under:
In exercise of Power under Section 131(2), 132, 133 and other enabling provisions of Electricity Act 2003, The Government of Himachal Pradesh (herein after called State Government), hereby makes the following ‘Transfer Scheme’ for providing and giving effect to the transfer of functions, undertakings, assets, properties, rights, liabilities, obligations, proceedings and personnel’s of erstwhile Himachal Pradesh State Electricity Board.
From the above said notification, it is amply clear that the State Government Undertaking “HPSEB” had been transferred to the “HPSEB Ltd”.
1.5 In the present case, it is not in dispute that the assessee claimed the exemption u/s 10(10AA)(i) of the Act while the AO allowed exemption u/s 10(10AA)(ii) of the Act. In the instance case, it is an admitted fact that the assessee was earlier employee of the “Himachal Pradesh State Electricity Board” which later on had been re-organized as “Himachal Pradesh State Electricity Board Limited”, which adopted the Himachal Pradesh Government Instructions.
1.6 The Government of Himachal Pradesh (Department of MPP & Power) in its Notification No. MPP-A (3)-1/2001-IV (copy enclosed) dated 10-06-2010 provided the conditions at the time of transfer of personnel in Clause 5(5) which read as under:
“(5) All transferred employees from ‘HPSEB’ shall be employees of ‘HPSEB Ltd.’ and their rank, scale or pay and inter-se-seniority as existing in the Board on the effective date of Transfer shall be maintained and the retirement benefits and other facilities shall in no way be reduced or made inferior to that immediately before the effective date of re-vesting”.
1.7 From the above notification, it is clear that the employees who were transferred in the Himachal State Electricity Board Limited were the employees of Himachal Pradesh State Electricity Board i.e. State Government employees. As per the provisions contained in Section 10(10AA)(i) of the Act, the exemption as available for leave encashment received at time of superannuation, to the employees of the State or Central Government, therefore, the assessee was eligible for exemption u/s 10(10AA)(i) of the Act.
1.8 Keeping in view the above assessee also filed his return of Income on 21/07/2018 by declaring income of Rs.1159150/- and while filing the return of Income assessee claimed exemption u/s 10(10AA)(i).
1.9 That the return was processed under section 143(1) return of the assessee on 03/04/2019 as per the information given by the assessee and determined the Income Tax refund of Rs. 205789 including interest of Rs. 12558. However, on 29/10/2021 Ld. AO at CPC suo-moto passed the order under section 154 and made an addition of Rs. 1513500 after allowing exemption of Rs. 300000 under section 10(10AA)(ii) and thus raised a demand of Rs. 529760 (including refund already paid Rs. 205790).
1.10 However, the assessee was eligible for exemption u/s 10(10AA)(i) of the Act not under section 10(10AA)(ii). Even at the time of conversion of board into company there was around 300 days earned leaves in the credit of the employee and the same was un-availed at the time of retirement.
1.11 That the assessing officer passed the order without giving any opportunity of being heard. Thus, the order passed by the Ld. AO is totally illegal and not sustainable in the eyes of law.
1.2 That the leave encashment received by the assessee is totally exempt from tax and the same view had been expressed by the Hon’ble Jurisdictional ITAT and Hon’ble Jurisdictional CIT(A) Ludhiana (Camp at Panchkula) in the following cases:
a) Hon’ble ITAT Delhi’s decision in case of Jagdeep Singh vs ITO, Ward-2, Hisar (copy of order attached)
b) Further the Jurisdictional Hon’ble CIT(A) Ludhiana Camp at Panchkula decision in case of Jyoti Prasad Aggarwal vs AO (copy of order attached)
c) Jurisdictional Hon’ble CIT(A) Panchkula decision in case of Mahesh Singhal vs AO (copy of order attached)
1.3 Hence, as per above discussion, Assessee is to be considered as an State Government employee and accordingly the exemption from the taxability of leave encashment would be applicable as per provision of Section 10(10AA)(i) of the Income Tax Act, 1961.
1.4 As the said addition has been made just for the sake of making additions and that too on surmises and conjectures, the same is not sustainable in the eyes of law and as such it is most respectfully prayed that the addition be quashed and this ground of appeal be allowed or any other order be passed which this Hon’ble Forum deems fit and proper in the facts and circumstances of the case be passed.
2. On legal Front
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As per the provision section 10(10AA) of Income Tax 1961 the assessee shall be eligible for exemption least of the following amount
1. 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;
2. 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 [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.
However, as per the Notification No. SO 588(E), dated 31-5-2002 issued by the CBDT the amount of exemption has been notified Rs. 300000.
The limit has not been revised by the CBDT since 2002. However as per the provision of the Act, the notification issued should have specified the limit keeping in regard the limit applicable to the employees of the govt.
The said notification has not been revised since 2002, however there has been huge increase in salary since that time. Keeping in view the same, the limit should have been computed accordingly however the same has not been done.
3. Keeping in view the above it is prayed that the same may kindly be deleted or any other relief be given which this Hon’ble forum deems fit and proper in the facts and circumstances of the case.
4. The ld. CIT(A), by virtue of the impugned order, confirmed the order dated 29.10.2021 passed by the A.O. u/s 154 of the Act, observing as follows:-
“4.3. The discrimination between government employees and non-government employees including employees of Public Sector Undertakings came up before the Hon’ble High Court of Madras in the case of K. Gopalakrishnan Vs. CBDT (1994) 206 ITR 193(Mad.) dated 21.4.1993 wherein the Hon’ble High Court after taking into consideration, the various aspects including the legislative intent held that, there is no substance in the contention of the appellant that Section 10(10) and 10(10AA) of the Income-tax Act are unconstitutional and void. Further, the Hon’ble High Court did not hesitate to hold that the classification found in the said Section is valid and based on sound reasoning.
4.4. In such circumstances, when the provisions in the IT Statute provides for such discrimination and while it is found to be constitutionally valid, questioning its applicability and attempting to re-classify the sub-clause of eligibility is found to be untenable and therefore, the grounds of appeal are dismissed. Therefore, the action of the AO-CPC to restrict the claim of deduction u/s 10(10AA) to the extent of Rs.3.00 Lakhs and not beyond it is upheld.”
5. The ld. Counsel for the Assessee has contended that the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre has committed a grave legal error in upholding the Rectification Order u/s 154 of the Income Tax Act, 1961 passed by AO without following the procedure prescribed u/s 154(3), without providing opportunity of being heard to the Assessee, thus, violating the Principles of Natural Justice; that the ld. Assessing Officer had made a grave legal error in making the addition of Rs. 15,13,500/- on account of Leave Encashment; that the AO had restricted the exemption of Leave Encashment to Rs. 3,00,000 u/s 10 (10AA) (ii) instead of exemption of Rs. 18,13,500/- claimed by the Assessee u/s 10 (10AA) (i) of the Income Tax Act, 1961 without considering the facts and circumstances of the present case; that the Assessee is eligible to claim exemption on account of Leave Encashment u/s 10 (10AA) (i) of the Act as the assessee is a State Government Employee in accordance with the clause 5(5) of the transfer scheme of the Government of Himachal Pradesh; that the AO has erred in restricting the exemption u/s 10 (10AA) (ii) to Rs. 3,00,000/- considering him employee of PSU ignoring the clause 5(5) of Transfer Scheme of Government of Himachal Pradesh; that the Rectification Order u/s 154 of the Income Tax Act, 1961 dated 03.09.2021 is bad in law, erroneous, opposed to law, and facts of the case and, thus is liable to be set-aside / is untenable; that the Rectification order u/s 154 is a non-speaking order passed in a mechanical manner without providing any opportunity of being heard to the appellant, violating the provisions of Section 154(3) of the Income Tax Act, 1961 and the already settled Principles of natural justice; that the Order u/s 250(6) of the Income Tax Act, 1961 is erroneous and opposed to law, thus liable to be set-aside as the ld. Commissioner of Income Tax (Appeals) had dismissed the appeal of the assessee, in a hurry, with a pre-conceived mind without following the procedure prescribed u/s 250(1) of the Income Tax Act, 1961, without providing any opportunity of being heard, thus violating the already settled Principles of natural justice; that no opportunity has been provided to the assessee for making submissions stating non-applicability of the decisions being relied upon by the department; and that the order u/s 250(6) of the Income Tax Act, 1961 passed by ld. Commissioner of Income Tax (Appeals) is liable to be set-aside as the order is a non-speaking order and the ld. Commissioner had not discussed the submissions made by the assessee in full along with the decision of ITAT and ld. CIT(A) on which the Assessee had placed his reliance upon (facts being identical); and that the order has been passed with a pre-conceived mind, and it is, thus, liable to set-aside.
6. The ld. Counsel for the Assessee has also filed Ground wise submissions before us.
7. On the other hand, the ld. DR has placed strong reliance on the impugned order.
8. We have heard the parties and have perused the material on record. We find that the return filed by the Assessee, wherein, the Assessee claimed exemption u/s 10(10AA) (i) of the Act, was processed u/s 143(1) of the Act by the CPC, Bengaluru, on 3.4.2019. So, there was no occasion for the Assessee to present its case before the A.O. Then, the aforesaid order was passed by the CPC, Bengaluru u/s 154 of the Act on 29.10.2021, again, in the absence of the Assessee. The Assessee, thus, again remained deprived of the opportunity of hearing. This fact, as contended by the Assessee, stands noted by the ld. CIT(A) (NFAC), Delhi, in para 1.11 at page 4 of the impugned order and the same does not stand disputed, either by the ld. CIT(A) (NFAC), or by the ld. Sr. DR before us.
9. Then, the ld. CIT(A) (NFAC) has also passed the impugned order ex-parte qua the Assessee. The order under appeal does not contain anything regarding service of notice to the Assessee. Thus, the Assessee is right in contending by way of Ground No.1, that the ld. CIT(A) did not provide opportunity of hearing to the Assessee, thereby violating the principles of natural justice.
10. From the above, we find that neither of the Taxing Authorities has provided the Assessee with any opportunity of hearing. Accordingly, the matter is remitted to the file of the A.O., to be decided afresh, in accordance with law on providing due opportunity of hearing to the Assessee. Ordered accordingly. The Assessee no doubt shall cooperate in the fresh proceedings before the A.O. All pleas under the law shall remain so available to the Assessee.
11. In the result, for statistical purposes, the appeal is allowed.
Order pronounced on 12.09.2023.
