Taxability Determined by Employment Status: ITAT Holds Employee Transferred from PSEB to PSPCL Eligible for Exemption Only for Service Period Under PSEB [Read Order]
The Tribunal observed that the current employer, PSPCL, was not a 'State Government' for tax purposes and granted the exemption for the service period under the previous employer, PSEB, to prevent unintended consequences to the transferred employee.
The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) held that the assessee was not entitled to full tax exemption on his entire leave encashment received upon retirement from Punjab State Power Corporation Limited (PSPCL) but only eligible for the exemption for the portion of service rendered under the erstwhile Punjab State Electricity Board (PSEB)
Chander Sheikher Saini (assessee), retired from PSPCL in the Assessment Year 2016-17. The assessee first served the Punjab State Electricity Board (PSEB) from November 18, 1983, until April 16, 2010.
Following a State restructuring scheme, the assessee employment was compulsorily transferred from PSEB to the newly formed company, Punjab State Power Corporation Limited (PSPCL), where he served until his retirement on November 30, 2015.
Upon retirement, the assessee received leave encashment. The assessee sought rectification of his assessment, claiming that the amount was fully exempt from tax and argued that PSPCL was 100% State-owned.
The Assessing Officer (AO) held that since he had retired from a corporation and not directly from a 'State Government' job, he was ineligible for the full exemption under Section 10(10AA)(i) and was instead limited to the restricted exemption available under Section 10(10AA)(ii) of the Income Tax Act.
Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) upheld the AO’s order and confirmed the addition. Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT.
The counsel for the assessee argued that the leave encashment received for the period served with PSEB (which was a State undertaking) should be treated as fully exempt.
The Single-member bench comprising LalietKumar (Judicial Member) confirmed that, based on prior Coordinate Bench decisions, PSPCL could not be treated as the 'State Government' for the purposes of Section 10(10AA) of the Act.
The tribunal observed that the service period from April 16, 2010, to the date of retirement under PSPCL did not qualify for the full exemption. The Tribunal noted that PSEB squarely qualified under the provisions of Section 10(10AA) as a State undertaking.
The tribunal observed that a strict and literal interpretation, which would disqualify the assessee for the benefit accrued during his PSEB service simply because his final employer was PSPCL which would defeat the very object and benevolent intent underlying section 10(10AA) of the Income Tax Act.
The tribunal concluded that since the assessee was compulsorily transferred from PSEB to PSPCL due to a State restructuring scheme and had no choice in the restructuring process, he should not be deprived of the benefit earned during his qualifying Government service.
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The Tribunal ruled that the exemption under Section 10(10AA) must be allowed to the extent of the service rendered under the Punjab State Electricity Board up to 16.04.2010, while the portion relatable to the subsequent service with PSPCL shall remain taxable.
The tribunal granted relief for the leave encashment amount of ₹13,02,816, which was relatable to his service under the PSEB. The appeal of the assessee was partly allowed.
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