Prakash Dhondiram Gavali Vs ITO (ITAT Pune)
Summary: The appeal was filed by Prakash Dhondiram Gavali against the order dated 16.01.2026 passed by the Ld. Addl./JCIT(A)-2, Gurugram for Assessment Year 2021-22. The dispute concerned the exemption claimed under Section 10(10AA) of the Income Tax Act, 1961 in respect of leave encashment received on retirement and the validity of the rectification under Section 154.
The assessee had joined the Department of Telecommunication, Central Government of India, on 06.04.1984. Subsequently, when Bharat Sanchar Nigam Limited (BSNL), a public sector undertaking, came into existence, he was transferred and absorbed in BSNL on 01.10.2000. He retired from BSNL on 31.05.2020. At retirement, he received total leave encashment of Rs.6,48,620/-. The employer specifically bifurcated the amount into Rs.4,15,117/- relating to the period during which the assessee served as a Central Government employee in the Department of Telecommunication and Rs.2,33,503/- relating to the period of service in BSNL as an employee of a public sector undertaking.
The assessee claimed exemption under Section 10(10AA) for the leave encashment. However, the CPC, by order dated 22.03.2022, restricted the exemption to Rs.3,00,000/-. The assessee thereafter filed a rectification application under Section 154 on 12.08.2025. The CPC rejected the rectification application by order dated 20.08.2025 and retained the earlier position.
Before the CIT(A), the assessee remained absent and the appeal was dismissed. The CIT(A), however, recorded that the assessee had been absorbed in BSNL from 01.10.2000 and retired from BSNL on 31.05.2020, and therefore was a non-government employee at the time of retirement. The CIT(A) referred to BSNL’s letter dated 04.05.2012 and recorded that leave encashment attributable to the Government service period was eligible for full exemption under Section 10(10AA)(i), whereas leave encashment attributable to the period of service after absorption in BSNL was governed by Section 10(10AA)(ii), subject to the monetary limit of Rs.3,00,000/-. Nevertheless, the CIT(A) upheld the restriction made in the rectification proceedings.
Before the Tribunal, the assessee relied upon the detailed salary slip and certificate of joining service as a Central Government employee. The Tribunal found that the assessee had admittedly joined the Department of Telecommunication on 06.04.1984 as a Central Government employee and was subsequently transferred and absorbed in BSNL on 01.10.2000. It further found that the payslip issued by BSNL specifically bifurcated the retirement leave encashment of Rs.6,48,620/- into Rs.4,15,117/- pertaining to Central Government service and Rs.2,33,503/- pertaining to BSNL service.
The Tribunal observed that, according to the assessee, the amount of Rs.4,15,117/- was exempt under Section 10(10AA)(i), while the amount of Rs.2,33,503/- relating to BSNL service was exempt under Section 10(10AA)(ii), being below Rs.3,00,000/-. The CPC, however, had allowed exemption under Section 10(10AA)(ii) of only Rs.3,00,000/- and taxed the balance.
The Tribunal noted that the CIT(A)’s own order had accepted the legal position in paragraphs 4.8 and 4.9 that leave encashment attributable to Central Government service was fully exempt, while leave encashment relating to PSU service was exempt up to Rs.3,00,000/-. The Tribunal therefore found the dismissal of the assessee’s appeal unsustainable.
The Tribunal relied upon its coordinate Bench decision in Tanaji Kedari Sapkal vs. ITO, ITA No.2478/PUN/2024, order dated 07.01.2025. In that case also, the assessee had served in the Department of Telecommunications before being absorbed in BSNL, and the leave encashment had been separately identified for the Government and BSNL service periods. The coordinate Bench held that the amount relating to Government service was fully exempt under Section 10(10AA)(i), while the amount relating to BSNL service, being below Rs.3,00,000/-, was exempt under Section 10(10AA)(ii).
Following the coordinate Bench decision, the Tribunal allowed the grounds raised by the assessee and directed the CPC to delete the addition of Rs.4,09,297/-. The appeal filed by the assessee was accordingly allowed.
Cases Discussed
- Tanaji Kedari Sapkal vs. ITO, ITA No.2478/PUN/2024, dated 07.01.2025 — followed on identical facts concerning separate treatment of leave encashment attributable to Department of Telecommunications service and BSNL service under Section 10(10AA).
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT PUNE
This appeal filed by the assessee is directed against the order dated 16.01.2026 passed by Ld. Addl./JCIT(A)-2, Gurugram [‘Ld. CIT(A)’] for the assessment year 2021-22.
2. The appellant has raised the following grounds of appeal :-
“1. On the facts and in the circumstances of the case, the Learned Commissioner of Income Tax (Appeals) erred in law and on merits in confirming the addition of Rs.4,09,297/- on account of disallowance of exemption under Section 10(10AA) of the Income Tax Act in respect of leave encashment received on retirement.
2. On the facts and in the circumstances of the case, the Learned CIT(A) erred in law and on merits in stating that the disallowance of exemption under Section 10(10AA) on account of leave encashment on retirement in the intimation passed under Section 143(1) is not a mistake apparent from record under Section 154 of the Income Tax Act and therefore not rectifiable under section 154 of the Act.
3. The appellant craves leave to amend, modify or add to any of the above grounds of appeal and/or to take any additional ground of appeal, if necessary.”
3. Facts of the case, in brief, are that the assessee is an individual who joined as employee of the Department of Telecommunication, Central Government of India on 06.04.1984. Subsequently, on 01.10.2000, the assessee was absorbed in Bharat Sanchar Nigam Limited (BSNL, which is public sector undertaking) and on 31.05.2020 retired from BSNL. At the time of retirement, the assessee was paid leave encashment amounting in all to Rs.6,48,620/-, which was segregated by his employer BSNL in two parts as under :-
(i) Leave Encashment for the period of service provided in Department of Telecommunication as Central Government Employee – Rs.4,15,117/-.
(ii) Leave Encashment for the period of service provided in BSNL as employee of public sector undertaking – Rs.2,33,503/-.
4. Accordingly, in its return of income the assessee claimed exemption u/s 10(10AA) of the IT Act with regard to above leave encashment. CPC vide order dated 22.03.2022 restricted the exemption u/s 10(10AA) of the IT Act to only Rs.3,00,000/-. Being aggrieved, the assessee filed rectification application u/s 154 of the IT Act on 12.08.2025 before CPC, however, CPC vide order dated 20.08.2025 rejected the rectification application and issued same intimation order as it issued earlier on 22.03.2022.
5. Being aggrieved with the above order dated 20.08.2025, the assessee preferred an appeal before Ld. CIT(A). Since the assessee remained absent, Ld. CIT(A) dismissed the appeal filed by the assessee by observing as under :-
“4.6 It is an undisputed fact that the appellant was absorbed in BSNL w.e.f. 01.10.2000 and retired from BSNL on 31.05.2020. BSNL is a Public Sector Undertaking and not a department of the Central Government. Therefore, at the time of retirement, the appellant was a non-government employee.
4.7 In this regard, reliance is placed on the guidelines issued by BSNL vide letter No. 1001-04/2011-12/Taxation/BSNL/LE/176 dated 04.05.2012, issued after due consultations, which clearly state as under:
4.8 The full amount received by a retiring absorbed employee as cash equivalent of leave salary in respect of the period of earned leave at his credit for the Government service period, calculated as per accepted norms applicable to Government service, shall be eligible for full exemption under section 10(10AA)(i) of the Income Tax Act, 1961.
4.9 Leave encashment pertaining to the period of service rendered after absorption in BSNL (i.e., PSU service) shall be governed by section 10(10AA)(ii) and shall be eligible for exemption only up to the monetary limit prescribed therein (Rs. 3,00,000), and the balance amount, if any, shall be taxable.
4.10 From the above, it is clear that exemption under section 10(10AA) is to be apportioned between: Government service period (fully exempt), and PSU service period (exempt only up to the statutory limit). The Assessing Officer has followed the statutory provisions of section 10(10AA) read with the applicable guidelines and has correctly treated the appellant as a non-government employee for the period of service rendered in BSNL. The adjustment made under section 154 is in accordance with law and cannot be said to be erroneous.
4.11 The claim of full exemption merely on the basis of Form No.16 issued by the employer cannot override the clear provisions of the Act. Rectification under section 154 has rightly been carried out to correct a mistake apparent from record. In view of the facts discussed above, the action of the Assessing Officer in restricting the exemption of leave encashment in accordance with section 10(10AA) of the Income Tax Act, 1961 is found to be correct and in consonance with law. No infirmity is found in the order passed under section 154.
5. Accordingly, the appeal filed by the appellant is dismissed.”
6. It is the above order against which the assessee is in appeal before this Tribunal.
7. We have heard Ld. Counsels from both the sides and perused the material available on record including the written submission, detailed salary slip and certificate of joining service as Central Government Employee furnished by the assessee. In this regard, we find that admittedly the assessee joined service on 06.04.1984 in Department of Telecommunication as Central Government Employee and subsequently when Bharat Sanchar Nigam Limited came into existence on 01.10.2000, the assessee was transferred and absorbed in Bharat Sanchar Nigam Limited which is a public sector undertaking. We further find that when the assessee retired leave encashment of Rs.6,48,620/- was paid to him out of which Rs.4,15,117/- pertains for the period of service as Central Government Employee in Department of Telecommunication and Rs.2,33,503/- pertains for the period of service as public sector undertaking employee in Bharat Sanchar Nigam Limited and this bifurcation was specifically mentioned in the payslip issued by Bharat Sanchar Nigam Limited. According to the assessee, leave encashment of Rs.4,15,117/- was exempted u/s 10(10AA)(i) of the IT Act being Central Government Employee and leave encashment of Rs.2,33,503/- was exempted u/s 10(10AA)(ii) of the IT Act being employee other than the Central and State Government since less than Rs.3,00,000/-. However, we find that the CPC allowed exemption u/s 10(10AA)(ii) of the IT Act of Rs.3,00,000/- only and taxed the balance amount as taxable income in the hands of the assessee. The position remained same even after filing of rectification application u/s 154 of the IT Act before the CPC. We are surprised to see that when the matter reached before Ld. CIT(A), the appeal was dismissed even after admitting the legal position in para 4.8 & 4.9 of his order that leave encashment as Central Government Employee shall be exempt in full and leave encashment as public sector undertaking employee shall be exempt upto Rs.3,00,000/- only.
8. We find support from coordinate bench decision passed in the case of Tanaji Kedari Sapkal vs. ITO in ITA No.2478/PUN/2024 order dated 07.01.2025 wherein the Tribunal under identical facts allowed the appeal of the assessee by observing as under :-
“6. I have heard the ld. Departmental Representative and perused the record placed before me. I have also gone through the contents of the Rectification application filed by the assessee before the lower authorities and also the proof of appointment of the assessee as Deputy General Manager with Department of Telecommunications, Maharashtra Circle vide order dated 31.10.1983. The assessee has given the bifurcation of the Leave Encashment of Rs.10,87,092/- which comprises of Rs.8,35,256/- received from Department of Telecommunications (Govt. of India) which is eligible for exemption u/s.10(10AA) of the Act and the remaining amount of Rs.2,51,836/- received from BSNL. While filing the application u/s.154 of the Act, the assessee has enclosed the letter dated 04.05.2012 regarding Leave Encashment amount, issued by Taxation section of BSNL, New Delhi. Copy also provided of the pay-slip regarding Leave Encashment period (DOT & BSNL) issued by BSNL which indicates the receipt of Leave Encashment for DOT & BSNL period separately. These facts remain uncontroverted at the end of the Revenue authorities at any stage. Section 10(10AA)(i) of the Act applies to the Central and State employees and section 10(10AA)(ii) to Non-Government employees. Leave Encashment for Central/State Govt. is fully exempt and therefore the amount of Rs.8,35,256/- received by the assessee from Department of Telecommunications (Govt. of India) deserves to be exempt from taxation u/s.10(10AA)(i) of the Act. As far as the remaining of Rs.2,51,836/- is concerned, the same being less than Rs.3.00 lakh is also exempt u/s.10(10AA)(ii) of the Act. Therefore, the impugned order denying exemption u/s.10(10AA) of the Act is reversed. Grounds of appeal raised by the assessee are allowed.
7. In the result, the appeal of the assessee is allowed.”
9. Respectfully following the above decision of the Tribunal in the case of Tanaji Kedari Sapkal (supra), we allow the grounds of appeal raised by the assessee and accordingly, direct CPC to delete the addition of Rs.4,09,297/-.
10. In the result, the appeal filed by the assessee is allowed
Order pronounced on this 21st day of July, 2026.
