1. This is an appeal by the assessee against the order dated 26-7-2006 of Commissioner (Appeals), Ghaziabad relating to the assessment year 2004-05.
2. The assessee is an individual. He filed his return of income for the assessment year 2004-05 declaring a total income of Rs. 5,62,280. The assessee has claimed exemption of a sum of Rs. 2,15,449 under Section 10(10AA)(ii) of the Act. The assessee had taken up premature retirement in the army on 14-6-1994. On retirement from the army, he had received a sum of Rs. 81,378 being the leave encashment of 215 days in the assessment year 1995-96 the assessee had claimed Rs. 81,370 as exemption under Section 10(10AA)(i) of the Act. After his retirement from the army the assessee worked with M/s. Microwave Communications Ltd. and resigned from this company in January, 2004. At the time of his resignation from Microwave Communications Ltd. He received a total sum of Rs. 6,89,448. Out of this he claimed that a sum of Rs. 2,15,449 as exempt under Section 10(10AA)( ii) of the Act. The sum received during the P.Y. represents leave encashment in respect of 180 days. The assessing officer was of the view that under the provisions of Section 10(10AA) of the Act the period of leave encashment cannot exceed more than 300 days as laid down in the Second Proviso to Section 10(10AA)(ii) of the Act. Since the assessee had already availed an exemption in respect of leave encashment of 215 days in his service with the army the assessing officer was of the view that the total period of leave encashment would be 395 days (180 days + 215 days). The assessing officer therefore proposed to restrict the claim for exemption under Section 10(10AA)(zz) for leave encashment in respect of 85 days and disallow the claim for exemption in respect of leave encashment for 95 days.
3. The assessee submitted that while allowing exemption claimed under Section 10(10AA)(iz) of the Act the number of days for which leave encashment had been obtained while in army service should not be added and that the period of 300 days has to be computed with reference to the private employment with Microwave Communications Ltd. under Section 10(10AA)(z'z) of the Act. It is only for considering the monetary limit of Rs. 3 lakhs as mentioned in Second Proviso to Section 10(10AA)(z'z) of the Act that the amount received as leave encashment from employment in the army has to be considered and not the period spent in the employment F of army ie., with the Government. The assessing officer however refused to accept the plea of the assessee. For the following reasons the assessing officer disallowed the claim for exemption to the extent of Rs. 1,13,707.
The submissions made by the assessee are not correct because it has been clarified in the proviso that where any such payment or payments was or were received in any one or more earlier previous years also and the whole of any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or previous years, the amount exempt from income-tax under this sub- A clause shall not exceed the limit so specified as reduced by the amount or as the case may be the aggregate amount not included in the total income of any PY or PYs.
Thus, the assessee is not entitled to claim the exemption more than the period as provided in the Act. Therefore, the excess claim of the assessee i.e., for 95 days is disallowed and only for 85 days out of the current claim is allowed on the pro ratabasis of the average salary of last 10 months i.e., Rs. 35,909 per month - Rs. 1,01,742 (35,909 divided by 30 days and multiplied by 85 days) and the balance of Rs. 1,13,707 B (Rs. 2,15,449 minus Rs. 1,01,742) is disallowed and added to the income of the assessee being excess claim under Section 10( 10AA) of the Income Tax Act, 1961. Addition of Rs. 1,13,707.
4. On appeal by the assessee the Commissioner (Appeals) confirmed the order of the assessing officer. Hence the present appeal by the assessee before the Tribunal. We have heard the submissions of the Id.
Counsel for the assessee and the Id. DR. The provisions of Section 10(10AA) reads as follows : 10. Incomes not included in total income 10 : In computing the total income of a Previous Year of any person, any income falling within any one of the clauses shall not be included : (10AA)(i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of the retirement (whether) on superannuation or otherwise; (ii) any payment of the nature referred to in Sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement (whether) on superannuation or otherwise as does not exceed (ten) months calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement (whether) on superannuation or p otherwise (subject to such limit as the Centra! Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government): Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause (shall not exceed the limit so specified): Provided further that where any such payments or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause (shall not exceed the limit so specified), as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.
5. A plain reading of the above provisions clearly shows that in the case of exemption the payment received from the Central Government in respect of period of Earned Leave is totally exempt under Section 10(10AA)(t) of the Act, subject to the monetary limit laid down in the Second Proviso to Section 10(10AA)(n), which is Rs. 3 lakhs. As far as the exemption under Section 10(10AA)(iz) is concerned, the time-limit of 10 months of leave encashment is the overall ceiling limit for which exemption is allowed. This period of 10 months has to be construed with reference to the employment of the assessee other than as an employee of the Central Government or a State Government. The period of leave encashment as a Government servant should not be added under Section 10(10AA)(n). A combined reading of Sub-clauses (i) and (ii) of Section (10AA) clearly shows that a maximum period of 20 months of leave i.e., 10 months as a Government employee and 10 months as a private employee may be encashed for the purpose of exemption from income-tax at the time of retirement or resignation subject to the ceiling monetary limit of Rs. 3,00,000 in accordance with the proviso to Section 10(10AA)(n).
Subclauses (i) and (ii) of Section 10(10AA) are independent provisions and, therefore, it does not mean that once a Government employee avails his full period of leave encashment i.e., ten months under Sub-clause (i) he is debarred from encashing any period of leave salary under Sub-clause (ii). The above interpretation would put the Government employee to a disadvantage when he takes up a job in the private sector and such a consequence could not have been the intention of the Legislature. The two provisos appear under Sub-clause (ii) only and, therefore, these provisos control only that sub-clause as is evident from the words "in this sub-clause" occurring in the said two provisos.
Hence any period of leave encashment availed of by a Government employee should not be counted towards the period of leave encashment availed of by him as a private employee. The object of the two provisos inserted under Sub-clause (n) of Section 10(10AA) is to ensure that a private employee does not avail leave encashment of more than Rs. 3,00,000 by adopting the device of resignation from service under one employer and then joining another employer for the purpose of leave encashment. The expression "at the time of his retirement" occurring in Sub-clause (ii) of Section 10(10AA) refer to the period of earned leave at the credit of the private employee and not at the credit of a Government employee which he might have encashed at the time of his retirement. Therefore, a private employee is entitled to encash up to ten months of his leave salary for the purpose of exemption from income-tax subject to a ceiling monetary limit of Rs. 3,00,000 notwithstanding the fact that such an employee might have encashed any period of his leave salary for the purpose of exemption from income-tax as a Government employee under Section 10(10AA)(i).
Wherein the Chennai Bench of the ITAT had explained the scheme A of allowing exemption under Section 10(10AA). Prior to introduction of Section 10(10AA) even leave encashment on retirement from Government service was taxable. While introducing the exemption the Legislature categorized Government and Non-Government employees and in respect of the conditions to be present in a scheme of leave encashment had thought it fit to apply the parameters that were prevailing in the Government schemes as a condition even in respect of leave encashment scheme of employees other than Central and State Government. This also shows that both subclauses (i) and (ii) of Section 10(10AA) are mutually exclusive.
Bombay High Court has also taken the view in the context of identical provisions of exemption in the case of death-cum-retirement gratuity that the Second Proviso was relevant only for calculating the overall monetary ceiling limit.
(c) Further reliance was placed on the decision of the Hon'ble Supreme Court in the case of Mahim Patram (P.) Ltd. v. UOI wherein the Hon'ble Supreme Court had emphasized the need for a strict construction of tax statutes and the necessity of not subjecting a person to tax without there being conditions existing for such liability within the letter of the law.
We find that all the aforesaid decisions support the plea of the assessee and the interpretation of the provisions of Section 10(10AA) as sought to be made by the assessee which we have already extracted above and with which we agree. We therefore hold that the assessee's claim for exemption under Section 10(10AA) as made has to be allowed.
The appeal of the assessee is allowed.