Summary: Section 10(10AA) of the Income Tax Act provides for leave encashment exemption, with a limit of ₹25,00,000 for non-government employees at retirement. The term “retirement or otherwise” includes resignation, as clarified by judicial precedents. Madras High Court in CIT v. R.J. Shahney (1986) and Bombay High Court in CIT v. D.P. Malhotra (1998) held that resignation amounts to voluntary retirement, making leave encashment eligible for exemption under Section 10(10AA). Both judgments emphasize that the phrase “or otherwise” extends the scope of the statute to cover situations other than superannuation, including voluntary resignation. The tax authorities initially contended that resignation does not qualify for exemption; however, courts have consistently ruled otherwise, recognizing resignation as a valid mode of retirement. Therefore, employees resigning from their positions are entitled to claim leave encashment benefits up to the prescribed limit. This clarification ensures broader coverage of the exemption, promoting equitable treatment for all modes of service termination except termination due to misconduct.
Leave encashment exemption –
Section 10(10AA) – Maximum amount received by non-government employees as leave encashment at the time of their retirement, whether superannuation or otherwise is Rs. 25,00,000 (twenty-five lakhs’ rupees only) [amended by FA 2023] –
Q – What is the meaning of the term ‘otherwise’? Does it include resignation?
A – Yes.
Analysis –
As per the relevant provision of the Income Tax Act 1961, amended by Finance Act, 2011 – the meaning of term retirement and otherwise as per Taxmann’s Direct Taxes Manual, Vol. 3 reads –
1. “The word ‘otherwise’ covers the case of retirement which takes place not at the time of superannuation but at any other time. According to the –
- Madras HC in CIT v. R.J. Shahney (1986)
- Bombay HC in CIT v. D.P. Malhotra (1998)
Voluntary retirement from service is one such case that falls within the four corners of the words “otherwise than superannuation.”
The words “or otherwise” should not be construed ejusdem generis, but rather as extending the scope of the statute to include the case of retirement which does not take place at the superannuation but some other time. Barring the case of “termination” of service, any other case of leaving service (whether under the voluntary retirement scheme of the employer or by way of resignation by the employee) is covered by section 10(10AA)”.
2. Further, as per Advanced learning on Retirement Benefits (Theoretical) issued by the Income Tax Department, –
3. Case Laws –
- CIT VS R J Shahney 1986 – Madras HC
Facts: The assessee resigned and retired from his employment and claimed exemption under section 10(10AA) on account of leave encashment. The Tribunal held that the provisions of section 10(10AA) would apply to the assessee’s case in respect of the encashment of leave salary even though the payment was received not at the time of his retirement but at the time of resignation of his employment.
The contention on behalf of the revenue is that since the words ‘Whether on superannuation or otherwise’ in section 10(10AA) qualify retirement, unless it was a case of retirement from service on attaining a particular age, or on some other reasons, a case of resignation will not be covered by section 10(10AA), was not acceptable. Retirement may be of various kinds. It may be on superannuation, or it may be voluntary. If there is any voluntary retirement from service, section 10(10AA) provisions would apply. Therefore, no question of law could be said to arise out of the order of the Tribunal.
Section 10(10AA), of the Income-tax Act, 1961 – Leave salary – Whether provisions of section 10(10AA) would apply even if there is voluntary retirement from service – Held, yes – Whether, therefore, where assessee resigned from his employment and received payment on account of leave encashment at the time of his resignation, he was entitled to exemption under section 10(10AA) – Held, yes.
- CIT VS D P Malhotra 1998 – Bombay HC
Facts – During the assessment year 1982-83, the assessee resigned from his service and claimed a deduction under section 10(10AA) of the amount received by him from his former employer by way of the cash equivalent of unutilized earned leave. The Assessing Officer rejected his claim on the ground that the assessee having resigned from the employment, the amount received by him by way of leave encashment was not exempt under section 10(10AA).
On appeal, the Commissioner (Appeals), however, accepted the assessee’s claim. The Tribunal confirmed the order of the Commissioner (Appeals). Section 10(10AA) of the Income-tax Act, 1961 – Exemption – Leave encashment – The assessment year 1982-83 – Whether, if on retirement or even on resignation from employment, assessee gets by way of leave encashment any amount, he is entitled to benefit of section 10(10AA) – Held, yes.
Conclusion –
Based on the above discussion, it is amply clear that both ‘retirement’ and ‘resignation’ result in the conclusion of the service career. Resignation from service is also one of the modes of retirement from service. Resignation is a voluntary act of the employee to retire from service.
The word ‘retirement’ has not been used in clause (10AA) in the restricted sense to mean ‘retirement on superannuation’. On the other hand, it is clear from the language of clause (10AA) itself that it has been used in the widest possible terms to mean and include all cases of retirement, whether on superannuation or otherwise.
Therefore, if on retirement, even on resignation by the employee, an employee gets by way of leave encashment any amount, clause (10AA) would apply, and the assessee would be entitled to the benefit of the said clause to the extent mentioned therein.
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