Leave Encashment Dispute Remanded as Assessee Was Denied Opportunity of Hearing

Satish Kumar Thakur Vs ITO (ITAT Chandigarh)

The appeal before the Income Tax Appellate Tribunal (ITAT), Chandigarh, arose from an order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), which had upheld a rectification order passed under Section 154 of the Income Tax Act, 1961. The dispute concerned the tax exemption available on leave encashment received by the assessee. The assessee had claimed exemption of ₹18,13,500 under Section 10(10AA)(i), whereas the CPC, Bengaluru, through a rectification order, allowed exemption only under Section 10(10AA)(ii), restricting the exemption to ₹3,00,000.

The assessee had originally filed the return of income declaring income of ₹11,59,150 and claimed exemption under Section 10(10AA)(i). The return was processed under Section 143(1), and a refund along with interest was granted. Subsequently, the CPC passed a rectification order under Section 154 allowing exemption under Section 10(10AA)(ii) instead of Section 10(10AA)(i), resulting in a reduction of the exemption claimed.

Before the CIT(A), the assessee contended that he was eligible for exemption under Section 10(10AA)(i) as a State Government employee in terms of Clause 5(5) of the transfer scheme of the Government of Himachal Pradesh. The assessee also argued that the rectification order was passed without providing an opportunity of hearing as required under Section 154(3), thereby violating the principles of natural justice. Further, it was submitted that the order was non-speaking, mechanically passed, and ignored relevant facts and legal submissions. The assessee also challenged the appellate proceedings, alleging that the CIT(A) had disposed of the appeal without granting an opportunity of hearing and without adequately considering the submissions and judicial precedents relied upon.

The CIT(A) rejected the appeal and upheld the restriction of exemption to ₹3,00,000. In doing so, reliance was placed on the decision of the Madras High Court in K. Gopalakrishnan v. CBDT, where the distinction between government employees and non-government employees, including employees of public sector undertakings, was held to be constitutionally valid. The CIT(A) observed that the statutory classification under Section 10(10AA) was valid and that attempts to reclassify eligibility under a different sub-clause were untenable. Accordingly, the action of the CPC in restricting the exemption was sustained.

The Tribunal examined the procedural history of the matter and found that the assessee had not been provided any opportunity of hearing either during the processing of the rectification proceedings under Section 154 or during the appellate proceedings before the CIT(A). The Tribunal noted that the original return had been processed under Section 143(1) without any hearing, and the subsequent rectification order under Section 154 was also passed in the absence of the assessee. The fact that no opportunity had been granted was recorded in the appellate order and remained undisputed by the revenue authorities.

The Tribunal further observed that the impugned order of the CIT(A) had also been passed ex parte and did not contain any indication regarding service of notice upon the assessee. It concluded that the assessee’s grievance regarding denial of opportunity of hearing was justified and that the principles of natural justice had been violated. Since neither the Assessing Officer nor the CIT(A) had provided the assessee with an opportunity to present his case, the Tribunal held that the matter required reconsideration.

Accordingly, the Tribunal set aside the matter and remitted it to the file of the Assessing Officer for fresh adjudication in accordance with law after providing the assessee due opportunity of hearing. The Tribunal clarified that all legal pleas available to the assessee would remain open for consideration during the fresh proceedings. The appeal was allowed for statistical purposes.

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:

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 pre­conceived 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.