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Judgment
PER VIKAS AWASTHY, JUDICIAL MEMBER:
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘the CIT(A)’] dated 28.01.2026, for Assessment Year 2020-21.
Shri Sidhant Goyal, appearing on behalf of the assessee, narrating facts of the case submits that the assessee is an ex-employee of BSNL. For revival of BSNL and MTNL, the Department of Telecommunications introduced Voluntary Retirement Scheme (VRS) for the existing employees to reduce employee cost. He referred to office memorandum dated 29.10.2019 at pages 65 to 74 of the paper book and VRS at pages 68 to 75 of the paper book. Under the said scheme, the assessee opted for voluntary retirement during FY 2019-20. Under the Voluntarily Retirement Scheme (VRS), the assessee received Leave Encashment to the tune of Rs.19,62,940/- which was claimed as exempt u/s 10(10AA) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Further, the assessee received ex gratia compensation of Rs.22,28,537/- which was claimed as exempt by the assessee u/s 10(10B) of the Act. The case of the assessee was reopened and in reassessment proceedings, the assessee’s claim of exemption in respect of leave encashment u/s 10(10AA) of the Act was restricted to Rs.11,63,694/- and the remaining amount of Rs.7,99,246/- was disallowed on account of excess exemption claimed. Likewise, the assessee’s claim of ex gratia compensation claimed as exempt was restricted to Rs.5,00,000/- and exemption on the balance amount of Rs.17,28,537/- was disallowed. Thus, total addition of Rs.25,27,783/- was made in the hands of the assessee. The ld. Counsel submits that in so far as disallowance of leave encashment is concerned, the Ministry of Finance, Department of Revenue vide notification dated 24th May, 2023 had enhanced the exemption limit of leave encashment to Rs.25 lakhs. The said notification was issued consequent to the judgment rendered by the Hon’ble Delhi High Court in the case of Kamal Kumar Kalia vs. UOI reported as 111 taxmann.com 409. Therefore, in light of the enhanced limit of leave encashment, the amount of Rs.19,62,940/- claimed by the assessee as leave encashment u/s 10(10AA) of the Act is fully exempt. With regard to assessee’s claim of ex gratia compensation claimed as exempt, the ld. Counsel referred to the decision of Mumbai Bench of the Tribunal in the case of Bajirao Shankar Jagdale vs. ITO reported as 185 taxmann.com 455 (Mum-Trib.). to contend that the Assessing Officer (AO) erred in holding that ex- gratia compensation received by the assessee was in respect of voluntarily retirement, whereas, the claim of assessee is that the said compensation is in the nature of retrenchment compensation. In identical set of facts, the Coordinate 2 Bench has granted relief to assessee who had opted for VRS from BSNL. The Tribunal held that the ex-gratia received is in the nature of capital receipt fully exempt u/s.10(10B) of the Act. He thus prayed for allowing assessee’s claim of ex gratia compensation as exempt in full u/s.10(10B) of the Act.
Per contra, Shri Manoj Kumar, representing the Department vehemently defending the impugned order prayed for dismissing appeal of the assessee.
Both sides heard, orders of the authorities below examined. The decisions and material referred to during the course of submissions made by the ld. Counsel for the assessee also considered.
Undisputedly, the assessee was an employee of BSNL. The said Public Sector Undertaking introduced VRS-2019 to reduce employee cost. The revival package was approved by the Union Cabinet in its meeting held on 23.10.2019. Under the said scheme, the assessee opted for voluntary retirement. The assessee received Rs.19,62,940/- as leave encashment which was claimed as exempt u/s 10(10AA) of the Act. The AO restricted assessee’s claim of exemption to Rs.11,63,694/- and disallowed the balance amount of Rs.7,99,246/-. The Hon’ble Jurisdictional High Court in the case of Kamal Kumar Kalia vs. UOI (supra,) where the petitioners who had retired from various Nationalized Banks and had received leave encashment upon their retirement and had claimed exemption of the full amount u/s.10(10AA) of the Act. The AO restricted the claim of exemption in respect of leave encashment to Rs.3,00,000/-. The petitioners challenged the disallowance of exemption and had also sought revision in the exemption limit in Writ Petition. The Hon’ble High Court observed as under:
“8.We are however of the, prima facie, view that the grievances of the petitioner with regard to exemption limit under Clause (i) 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, 3 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.” The said judgment was delivered by the Hon’ble Jurisdictional High Court on 08.11.2019. Consequent to the directions of the Hon’ble Delhi High Court in the aforesaid case, the Ministry of Finance vide notification dated 24th May, 2023 revised the amount of exemption of leave encashment u/s.10(10AA) of the Act to Rs.25,00,000/-.
The Pune Bench of Tribunal in the case of Sudhakar Gundappa Paldewar vs. CIT, reported as 180 taxmann.com 123 (ITAT-Pune), in a case of appellant who had received leave encashment consequent to his retirement during the AY 2020-21, wherein the AO has restricted the exemption to Rs.3,00,000/-, the Tribunal allowed the claim of assessee in terms of notification dated 24th May, 2023 (supra). Similarly, in the case of Neelam Gupta vs. Addl. CIT in ITA No.81/Del/2025 for AY 2020-21 decided on 21.04.2025, the Coordinate Bench allowed the benefit of revised limit vide notification dated 24th May, 2023 (supra) in respect of leave encashment received by the assessee during FY 2019-20.
Thus, in light of the facts of the case and the decisions discussed above, the AO is directed to allow exemption in respect of leave encashment u/s.10(10AA) of the Act as per the revised limit under notification dated 24th May, 2023 (supra).
With regard to assessee’s claim of exemption of ex gratia compensation u/s.10(10B) of the Act, which was restricted to Rs.11,63,694/- by the AO, I find that in the case of Bajirao Shankar Jagdale vs. ITO (supra) wherein the assessee was employee of BSNL and had sought VRS under VRS 2019 scheme and had 4 claimed exemption of ex gratia compensation u/s.10(10B) of the Act and the AO restricted the compensation to Rs.5,00,000/- u/s.10(10C) of the Act, the Tribunal held that the assessee was entitle for exemption u/s.10(10B) of the Act. The relevant findings of the Tribunal reads as under:
“7.We have heard the rival submissions and perused the material available on record, including the judicial precedents relied upon by the Ld. AR. It is an undisputed fact that the Ld. CIT(A) has dismissed the appeal in limine on account of delay without adjudicating the issue on merits. We find that the assessee had placed on record an explanation for the delay and the issue involved relates to a substantive claim of exemption, which has been consistently adjudicated in favour of similarly placed assessees by various Coordinate Benches of the Tribunal. Respectfully following the decisions of the Coordinate Benches, including the ITAT-Pune Bench in Rajendra Himmatrao Patil (supra), Shraddha Pralhad Arote (supra), Meghmala Sudhir Pathak (supra), and the ITAT-Ahmedabad Bench in Jayesh Kumar Tulsidas Sutaria (supra), we are of the considered view that the delay in filing the appeal before the Ld. CIT(A) deserves to be condoned in the interest of substantial justice, particularly when the issue is covered in favour of the assessee and the delay is attributable to bona fide reasons, including reliance on professional advice.
The Ld. CIT(A) was not justified in dismissing the appeal solely on the ground of limitation without appreciating the merits of the claim and the settled legal position. On merits, following the consistent view taken by the Coordinate Benches, we hold that the compensation received by the assessee under the BSNI Voluntary Retirement Scheme, 2019 is in the nature of retrenchment compensation and is squarely covered under the provisions of section 10(10B) of the Act. Accordingly, the same is to be treated as a capital receipt exempt from tax, and not merely eligible for limited exemption under section 10(10B) of the Act. In view of the above, the impugned order passed by the Ld. CIT(A) is set aside. The delay in filing the appeal is condoned and the claim of the assessee is admitted. The Ld. Jurisdictional Assessing Officer (JAO) is directed to allow the exemption under section 10(10B) of the Act in respect of the compensation received under the BSNL VRS-2019 Scheme, subject to verification of necessary details. The assessee is also directed to file a revised computation of income before the Ld. JAO. Needless to say, the Ld. JAO shall grant due opportunity of hearing to the assessee and grant consequential relief, including refund, if any, in accordance with law.”
[Emphasized by us]
Thus, in light of facts of the case and aforesaid decision, the AO is directed to treat the ex gratia compensation as exempt u/s.10(10B) of the Act and allow the exemption, accordingly.
In the result, ground no. 4 to 6 are allowed.
The assessee in ground no. 2 of appeal has assailed validity of approval u/s.151 of the Act and has also challenged validity of reopening in ground no. 3 of appeal. No submissions were made on these two grounds, hence, the same are dismissed.
In the result, appeal of the assessee is partly allowed.