ITAT Allows leave encashment benefit u/s 10(10A) for service with Govt undertaking prior to restructuring

Chander Shekher Saini Vs ITO (ITAT Chandigarh)

Facts:

• The assessee, Shri Chander Shekher Saini, is a retired employee who served initially with the Punjab State Electricity Board (PSEB) and, pursuant to restructuring, with Punjab State Power Corporation Limited (PSPCL), a company wholly owned by the Government of Punjab. It is not in dispute that the assessee served with PSEB from 18.11.1983 to 16.04.2010 and thereafter continued in service with PSPCL till his
• For the assessment year 2016–17, the assessee received leave encashment on retirement from PSPCL. While filing his return of income, he did not claim full exemption in respect of such leave encashment under section 10(10AA) of the Income-tax Act, 1961. Subsequently, on realising that the leave encashment related to his long tenure under a State Government undertaking, he treated this as a mistake apparent from the record and moved an application under section 154 seeking rectification and grant of exemption.
• The Assessing Officer rejected the rectification application on the ground that the assessee had not retired from Government service but from PSPCL, which, though wholly owned by the Punjab Government, is a corporation and not the Government itself. On this reasoning, the Assessing Officer held that the assessee was not entitled to the benefit of full exemption on leave encashment available to Central/State Government employees under section 10(10AA)(i).
• In appeal, the Commissioner of Income Tax (Appeals), NFAC, accepted the stand of the Assessing Officer and held that employees of PSPCL cannot be treated as Government employees for the purposes of section 10(10AA). The appellate authority, therefore, declined to grant any relief either on the footing of full Government-employee exemption or even to the extent of the period of service rendered by the assessee with PSEB prior to restructuring, and upheld the rejection of the assessee’s claim.
• Aggrieved, the assessee carried the matter in further appeal before the Tribunal. It was specifically pleaded that the assessee had rendered more than 17 years of qualifying service with PSEB, an undertaking of the Punjab Government, before his employment was transferred to PSPCL pursuant to the State restructuring scheme, and that at least the portion of leave encashment relatable to his service period with PSEB, quantified at ₹13,02,816/- and noticed in the order of the CIT(A), ought to be treated as exempt, notwithstanding that the terminal benefit was actually received upon retirement from PSPCL.

Issue:

• Whether the assessee is entitled to full exemption of leave encashment under section 10(10AA)(i) by treating himself as a Government employee.
• Whether the assessee is entitled to proportionate exemption of leave encashment for the period of service rendered under PSEB prior to restructuring.

Observations:

• In examining the first issue, the Tribunal noted that the statutory scheme of section 10(10AA) draws a clear and deliberate distinction between Government employees and all other categories of employees. Clause (i) of the provision grants complete exemption of leave encashment only to employees of the Central or State Government, whereas clause (ii) limits the exemption in all other cases to the monetary ceiling notified by the Government. It is, therefore, a provision in which the Legislature has expressly made the nature of the employer determinative of the quantum of exemption. The Tribunal further observed that PSPCL, though wholly owned by the Punjab Government, is a statutory corporation incorporated under the Companies Act and operates as an independent legal entity distinct from the Government. It cannot, in law, be equated with the “State Government” for the purposes of section 10(10AA)(i).
• This interpretation, the Tribunal observed, has already been affirmed by the Coordinate Benches in Shri Ashwani Kumar Sharma v. ITO (ITA No. 652/Chd/2023) and Arvind Kumar Jolly v. ITO (ITA No. 952/Chd/2025). These decisions hold that employees of State power corporations are not Government employees for the purposes of complete exemption under section 10(10AA)(i). The assessee had retired from PSPCL and not from the State Government; therefore, in light of the clear statutory language and the consistent judicial view, the Tribunal concluded that the assessee was not eligible to claim full exemption of leave encashment under section 10(10AA)(i).
• Turning to the second issue, the Tribunal observed that the assessee had served for more than seventeen years under PSEB, which was a State Government undertaking before the restructuring of the electricity sector. The subsequent transfer of his service from PSEB to PSPCL was not voluntary but occurred by operation of the Government’s restructuring scheme. The Tribunal noted that the right to leave encashment is not created at the moment of retirement but accrues year after year during the period of active service. In such circumstances, it would be unjust and contrary to the beneficial character of section 10(10AA) to deny the assessee exemption for the portion of leave encashment that has accrued from his long tenure under PSEB, merely because the terminal payment was made by PSPCL after restructuring.
• The Tribunal also took note of the principle that beneficial provisions must be interpreted in a manner that advances the object of the statute and does not deprive an employee of rights that have accrued over time. The restructuring of PSEB into PSPCL was an act of the State; the assessee had no control over it. To hold that such restructuring would wipe out the assessee’s entitlement to exemption for the period he served under a Government undertaking would defeat the purpose of section 10(10AA) and operate harshly. Therefore, the Tribunal held that while full exemption under section 10(10AA)(i) could not be granted, the assessee remained entitled to exemption proportionate to the period of service rendered under PSEB.
• As quantified by the CIT(A) and not disputed by the Revenue, the portion of leave encashment relatable to his PSEB service amounted to ₹13,02,816, which the Tribunal directed to be treated as exempt. The balance amount attributable to his service under PSPCL was held to be taxable under section 10(10AA)(ii).

FULL TEXT OF THE ORDER OF ITAT CHANDIGARH