ITAT Chennai Allows Full Leave Encashment Exemption Under Section 10(10AA)(ii): Enhanced Rs. 25 Lakh Limit Held Applicable to AY 2020-21

Background and Context

A significant ruling has emerged from the Chennai Bench of the Income Tax Appellate Tribunal concerning the scope and applicability of the enhanced exemption ceiling under Section 10(10AA)(ii) of the Income Tax Act, 1961, in the context of leave encashment received by a non-government employee upon retirement. The central question before the Tribunal was whether an assessee who retired prior to the issuance of CBDT Notification No. 31/2023 dated 24.05.2023 could claim the benefit of the revised exemption limit of Rs. 25,00,000/-, or whether such claim remained restricted to the earlier ceiling of Rs. 3,00,000/-.

The case involved Gopalakrishnan Sriram Vs ITO (ITAT Chennai), pertaining to Assessment Year 2020-21. The assessee had retired from Indian Bank during the financial year 2019-20 and received a leave encashment amount of Rs. 12,27,232/- upon superannuation. When filing the return of income on 10.09.2020, the assessee declared a total income of Rs. 24,36,260/- after claiming exemption of Rs. 3,00,000/- under Section 10(10AA)(ii) — the maximum permissible under the then-applicable notification. The return was processed by CPC, Bengaluru under Section 143(1) of the Income Tax Act, 1961 on 13.12.2020, accepting the restricted exemption of Rs. 3,00,000/-.

Subsequently, CBDT issued Notification No. 31/2023 dated 24.05.2023, which significantly revised the monetary ceiling for leave encashment exemption available to non-government employees from Rs. 3,00,000/- to Rs. 25,00,000/-. This prompted the assessee to seek the benefit of the higher limit in respect of leave encashment already received on retirement.

Proceedings Before the CIT(A)

Aggrieved by the CPC's processing order, the assessee filed an appeal before the learned CIT(A), ADDL/JCIT(A)-1, Lucknow on 07.01.2026. Before the appellate authority, the assessee advanced the following contentions:

  • The earlier Notification No. 123/2002/F.No. 200/23/98-ITA-I had become outdated and failed to account for the economic and wage realities that had evolved significantly since 2002.
  • Public sector undertaking employees, including those of nationalised banks like Indian Bank, were entitled to parity with Central Government employees with respect to benefits under Section 10(10AA) of the Act.
  • Notification No. 31/2023 dated 24.05.2023 was clarificatory and remedial in character, and its explanatory memorandum expressly stated that no person would be adversely affected by its retrospective operation.
  • Reliance was placed on decisions of the Agra Bench of the ITAT in Vijay Kumar Jain vs. ITO (ITA No. 175/Agr/2022) and Anil Kumar Khattri vs. ITO (ITA No. 187/Agr/2022) for AY 2019-20 and AY 2020-21 respectively.

However, the ld. CIT(A) dismissed the appeal, holding as follows:

"6.6 The appellant's case pertains to the Assessment year 2020-21, therefore, Notification No.123/2002/F.No.200/23/98-ITA-I dated 31.05.2002 is applicable in the appellant's case. The appellant's assertion that this notification lacks applicability in his circumstances is devoid of merit.

6.7 In view of the above, it is held that the CPC AO had rightly restricted the claim of earned leave encashment u/s.10(10AA) of the Act to the limit of Rs.3,00,000/- in the appellant's case."

The ld. CIT(A) thus confirmed the restriction of the exemption to Rs. 3,00,000/-, prompting the assessee to approach the Tribunal.

Issues Framed and Arguments Advanced Before ITAT Chennai

Issue for Consideration

The Tribunal framed the sole question as follows: whether the assessee was entitled to exemption under Section 10(10AA)(ii) of the Income Tax Act, 1961, in respect of leave encashment received upon retirement, up to Rs. 25,00,000/- as per the enhanced ceiling, or whether the exemption had to be confined to Rs. 3,00,000/- as applicable when the return was originally processed.