Abhay Hiralal Gandhi Vs ITO (ITAT Ahmedabad)
Enhanced Leave Encashment Limit Applied to AY 2019-20: Ahmedabad ITAT Deletes Restriction to ₹3 Lakh
Case Details
In Abhay Hiralal Gandhi v. Income Tax Officer, Ward-6(1)(1), Ahmedabad, the Ahmedabad Bench of the Income Tax Appellate Tribunal allowed a retired State Bank of India employee’s appeal against restriction of his leave encashment exemption to ₹3 lakh.
The decision in ITA No. 1955/Ahd/2024, concerning Assessment Year 2019-20, was pronounced on 7 October 2026 by Shri Tapas Ram Misra, Judicial Member, and Shri Gangadhar Panda, Accountant Member.
Following earlier coordinate Bench decisions concerning the enhanced ₹25 lakh exemption ceiling, the Tribunal directed deletion of the ₹5,90,808 disallowance. Allowance of the exemption remained subject to verification of the actual receipt and other applicable statutory conditions.
Background: Exemption Initially Accepted, Subsequently Restricted
The assessee was employed with State Bank of India and retired during the relevant year. On retirement, he received leave encashment of ₹8,90,808.
In his return for AY 2019-20, he claimed the entire amount as exempt under section 10(10AA) and declared total income of ₹10,99,280. The return was processed under section 143(1) on 23 November 2019, and the exemption claim was initially accepted.
Subsequently, the Assessing Officer passed an order under section 154 on 29 October 2021, restricting the exemption to ₹3 lakh. The balance ₹5,90,808 was added to the assessee’s total income.
The assessee challenged this rectification before the CIT(A), National Faceless Appeal Centre. However, the CIT(A), by order dated 14 November 2024, confirmed the restriction.
CIT(A)’s Reasoning and Assessee’s Challenge
The CIT(A) observed that an employee of State Bank of India, being an employee of a public sector undertaking, could not be regarded as a Central Government employee for section 10(10AA).
Before the Tribunal, the assessee disputed the restriction of the exemption and separately challenged the use of section 154. He contended that the Assessing Officer had decided a contentious legal issue through rectification, without providing an opportunity of hearing.
The appeal therefore raised both the substantive extent of the exemption and the procedural question whether the adjustment could properly be made as a correction of a mistake apparent from the record.
Earlier Decisions Followed by the Tribunal
The Tribunal found the substantive issue covered by Govardhan Deepchand Bhambhani v. ITO, ITA No. 289/Ahd/2025, dated 28 July 2025.
That decision concerned leave encashment received by a retired Punjab National Bank employee. It considered CBDT Notification No. 31/2023 dated 24 May 2023, enhancing the prescribed exemption ceiling, and allowed the claim by following earlier Tribunal decisions.
The reproduced reasoning referred to Govind Chhatwani v. CIT(A), ITA No. 385/JP/2023, dated 31 October 2023, which in turn followed Ram Charan Gupta, ITA No. 408/JP/2022. Those decisions granted relief by applying the increased ₹25 lakh ceiling to the claims before them.
The precedent also referred to the Delhi High Court proceedings in Kamal Kumar Kalia and Others v. Union of India and Others, where the Court had expressed a prima facie view that the grievance concerning the long-standing exemption ceiling appeared justified in light of salary revisions and inflation.
That reference must be understood accurately: the reproduced High Court passage concerned issuance of notice on the exemption-limit grievance, rather than a final judgment granting retrospective exemption.
The Tribunal further noted that the Ahmedabad Bench had followed Govardhan Deepchand Bhambhani in Mohdhussain Gulamhussain Qureshi v. ITO, ITA No. 295/Ahd/2026, dated 7 April 2026.
Tribunal’s Findings and Decision
Respectfully following these coordinate Bench decisions, the Tribunal held that the CIT(A)’s restriction of the assessee’s exemption to ₹3 lakh was unsustainable.
It also found merit in the alternative contention concerning section 154. The original return had been processed under section 143(1), while the subsequent rectification involved determining the applicability and extent of an exemption whose legal position had been considered judicially.
However, because relief was already being granted on the substantive issue, the Tribunal expressly stated that separate adjudication of the section 154 ground was unnecessary.
Accordingly, it directed deletion of the ₹5,90,808 disallowance and instructed the Assessing Officer to allow the exemption, subject to verification of the actual receipt and other statutory conditions. The appeal was allowed, rather than merely restored for a fresh merits decision.
Author’s Comments
The decision is favourable to retired bank employees whose leave encashment exemption was restricted to ₹3 lakh. Its precise basis, however, is application of the enhanced ceiling through the cited Tribunal precedents. It does not declare SBI employees to be Central Government employees entitled to exemption on that footing.
The order also does not undertake a detailed examination of the notification’s commencement provisions or expressly formulate a general rule of retrospective operation. Its conclusion should therefore be presented as the Tribunal’s application of the enhanced limit to this AY 2019-20 claim, without expanding it into an unrestricted proposition covering every earlier retirement.
Finally, the section 154 observations support the assessee’s procedural objection, but the Tribunal did not separately invalidate rectification jurisdiction. The operative relief was substantive deletion, with verification preserved for the actual receipt and remaining statutory conditions.
Cases Discussed
- Govardhan Deepchand Bhambhani v. ITO, ITA No. 289/Ahd/2025, ITAT Ahmedabad, order dated 28.07.2025 — Directly followed for applying the enhanced leave encashment exemption ceiling to a retired bank employee.
- Govind Chhatwani v. CIT(A), ITA No. 385/JP/2023, ITAT Jaipur, order dated 31.10.2023 — Referred to within the reproduced reasoning in Govardhan Deepchand Bhambhani; applied the enhanced exemption ceiling.
- Ram Charan Gupta, ITA No. 408/JP/2022, ITAT Jaipur — Earlier coordinate Bench decision reproduced through Govind Chhatwani, granting leave encashment relief under the revised ceiling.
- Devendra Kumar Gupta v. CIT(Appeals), M.A. No. 49/JP/2023, ITAT Jaipur, order dated 18.02.2025 — Cited within the reproduced Govardhan Deepchand Bhambhani decision as following the earlier leave encashment exemption rulings.
- Kamal Kumar Kalia & Others v. Union of India & Others, W.P.(C) No. 11846/2019, Delhi High Court, proceedings dated 08.11.2019 — Reproduced through earlier Tribunal decisions for the High Court’s prima facie observations on the unchanged exemption ceiling; the passage records issuance of notice, not final relief.
- Mohdhussain Gulamhussain Qureshi v. ITO, ITA No. 295/Ahd/2026, ITAT Ahmedabad, order dated 07.04.2026 — Followed Govardhan Deepchand Bhambhani on the same leave encashment exemption issue; cited by the Tribunal as consistent coordinate Bench authority.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals), (hereinafter referred to as “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi dated 14.11.2024 under Section 250 of the Income Tax Act, 1961, arising out of the assessment order dated 29.10.2021 completed under section 154 of the Income-tax Act, 1961 (“the Act”) for A.Y. 2019-20, whereby the claim of exemption under section 10(10AA) of the Act in respect of leave encashment received on retirement was restricted to ₹3,00,000/- and the balance amount of ₹5,90,808/- was disallowed.
2. The assessee has raised the following grounds of appeal:
“1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming disallowance of exemption claimed u/s 10(10AA) of the Act amounting to Rs.5,90,808/-.
2. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred confirming contentious legal issue in order of assessing officer u/s 154. disallowing exemption claimed u/s 10(10AA) of the Act amounting to Rs.5,90,808/- without giving any opportunity of being heard.
3. It is therefore prayed that the above addition/disallowance made by the assessing officer may please be deleted.
4. Appellant craves leave to add, alter or delete any ground(s) either before or in the course of hearing of the appeal.”
3. Briefly stated, the assessee is an individual and was employed with State Bank of India. During the year under consideration, the assessee retired from service and received leave encashment of ₹8,90,808/-. While filing the return of income for Assessment Year 2019-20, the assessee claimed the entire amount of ₹8,90,808/- as exempt under section 10(10AA) of the Act. The return declaring total income of ₹10,99,280/- was processed under section 143(1) of the Act on 23.11.2019 and the claim was initially accepted.
4. Subsequently, an order under section 154 of the Act was passed by the AO on 29.10.2021, whereby the exemption under section 10(10AA) of the Act was restricted to ₹3,00,000/- and the balance amount of ₹5,90,808/- was added to the total income of the assessee. The assessee challenged the said action before the learned CIT(A)/NFAC. The learned CIT(A), however, confirmed the disallowance, observing that an employee of State Bank of India, being an employee of a public sector undertaking, could not be regarded as a Central Government employee for the purposes of section 10(10AA) of the Act.
5. We have heard the rival submissions and perused the material available on record. The short issue arising for consideration is whether the assessee is entitled to exemption in respect of leave encashment received on retirement under section 10(10AA) of the Act and whether the restriction of the exemption to ₹3,00,000/- is sustainable.
6. We find that the issue is covered by the decision of the Ahmedabad Bench of the Tribunal in Govardhan Deepchand Bhambhani v. ITO, ITA No. 289/Ahd/2025, order dated 28.07.2025, wherein, on an identical issue relating to leave encashment received by a retired employee of Punjab National Bank, the Tribunal considered CBDT Notification No. 31/2023 dated 24.05.2023 enhancing the prescribed limit for exemption under section 10(10AA) of the Act, and held that the assessee was entitled to the deduction as claimed, subject to the statutory conditions. The Hon’ble Tribunal allowed the appeal with the following observations:
“7. We have given our thoughtful consideration and perused the materials available on record. This issue of deduction u/s. 10(10AA)(ii) is no more res-integra based on the decisions passed by Co-ordinate Bench of this Tribunal in the case of Govind Chhatwani Vs. CIT(Appeals) in ITA No. 385/JP/2023 dated 31-10-2023 wherein it is held as follows:
“7. We have heard the rival contentions and perused the material placed on record. The bench noted that the apple of discord in this case that the assessee has received a sum of Rs. 17,68,479/- as leave encashment which was claimed in the return of income filed as exempt u/s 10(10AA) of the Act. The CPC and ld. CIT(A) contended that in the light of this specific notification being not issued the leave encashment allowable up to Rs. 3,00,000/- only whereas we note from the submission of the assessee that the assessee has relied upon the notification No. 31/2023/F.No. 200/3/2023-ITA-1 dated 24th May, 2023 and submitted that the revised limit of Rs. 25,00,000/- increased on account of leave salary is applicable and to be considered in the light of fact that government has issued this notification belatedly. The assessee has already claimed the leave salary as exemption the benefit should be given to the assessee. The similar issue has been decided by the bench in the case of Ram Charan Gupta in ITA No. 408/JP/2022 wherein the bench has already held as under:-
“8. We have heard the rival contentions and perused the material placed on record. The bench noted that the assessee relying the decision of Hon’ble Delhi High Court has issued a notice to the Union of India in the case of Kamal Kumar Kalia & Ors. Vs. Union of India & Ors in WP(C) 11846/2019 dated 08.11.2019 wherein the court has given following directions :-
“8. We are however of the, prima facie, view that the grievances of the petitioner with regard to exemption limit under Clause (ii) of Section 10 (10AA) not being raised since 1998, appears to be justified. This is so because over the decades, the pay-scales admissible to government servants, and even employees of the Public Sector Undertaking and Nationalised Banks and all others have been upwardly revised, keeping in view, the financial growth in the country as well as on account of rising inflation. The last drawn salaries have increased manifold since time and notification issued under Clause (ii) of Section 10(10AA) was lastly issued, as taken note of hereinabove, on 31.05.2002. We therefore, issue notice to the respondents limited to this aspect.
9. Issue notice, learned counsel for the respondents accepts notice. Respondents should file counter affidavits be filed within six weeks. Rejoinder thereto, if any, be filed before the next date.”
8.1 Recently the Central Board of Direct Taxes Suo motu revised the limit for deduction u/s 10(10AA) of the Act and the revised limit now stood at Rs. 25,00,000 as specified vide notification no. 31/2023 issued by the ministry of finance. Since the leave encashment amount as claimed by the assessee is amount to Rs. 6,97,100/- which is below the revised limit of leave encashment exempt prescribed by the Board, the assessee is eligible to claim of deduction of said Rs. 6,97,100/-. Based on these observations the ld. AO is directed to allow the claim of the assessee u/s. 10(10AA) of the act within the revised limit as prescribed. In terms of these observations the appeal of the assessee is allowed.”
On being consistent to the said finding, we held that the assessee is entitled to get the deduction as claimed in the return of income u/s 10(10AA) of the Act as the limit has been increased from 3 lac to 25 lacs.
8. Further this decision is followed in the case of Devendra Kumar Gupta Vs. CIT(Appeals) in M.A. No. 49/JP/2023 dated 18-02-2025. Thus respectfully following the above decisions, the restricting the deduction u/s. 10(10AA) of Rs. 4,65,404/- made by the lower authorities are not sustainable in law. Therefore the same is liable to be deleted.
9. In the result, the appeal filed by the Assessee is hereby allowed.”
7. The aforesaid view has subsequently been followed by the Ahmedabad Bench in the case of Mohdhussain Gulamhussain Qureshi vs. ITO in ITA No. 295/Ahd/2026, vide order dated 07.04.2026, wherein the Tribunal, after considering the same issue, followed the decision in the case of “Govardhan Deepchand Bhambhani” and allowed the appeal of the assessee.
8. Respectfully following the aforesaid decisions of the Co-ordinate Bench, we hold that the order of Ld. CIT(A) confirming the restriction of the assessee’s claim of exemption under section 10(10AA) to ₹3,00,000/- is not sustainable.
9. We also find merit in the assessee’s alternative contention regarding the exercise of jurisdiction under section 154 of the Act. The original return had been processed under section 143(1) and the subsequent action under section 154 of the Act, involving determination of the applicability and extent of exemption under section 10(10AA) of the Act, is an issue on which the legal position has been the subject matter of judicial consideration. However, in view of our decision on the substantive issue and the binding effect of the aforesaid Co-ordinate Bench decisions on the present issue, it is not necessary to adjudicate the “Section 154 of the Act” ground separately.
10. Accordingly, the disallowance of ₹5,90,808/- made under section 154 of the Act by AO and confirmed by the learned CIT(A) is directed to be deleted. The Assessing Officer is directed to allow the exemption under section 10(10AA) of the Act subject to verification of the actual receipt and other statutory conditions, if any, in accordance with law.
11. In the result, the appeal of the assessee is allowed.
This Order pronounced in Open Court on 07/10/2026
