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Facts
The assessee claimed leave encashment exemption under Section 10(10AA) of the Income Tax Act. The revenue denied this exemption on the grounds that the assessee's employer, a former state electricity board which underwent reorganization into separate companies, was not a 'State Government'.
Held
The Tribunal held that employees of entities constituted under a State Act, like the Maharashtra State Electricity Board which was reorganized, are considered employees of the 'State Government' for the purpose of Section 10(10AA) exemption. The nature of their employment is that of 'status' rather than 'contract'.
Key Issues
Whether employees of a reorganized state electricity board, now operating as separate corporate entities, are eligible for leave encashment exemption under Section 10(10AA) as employees of the 'State Government'.
Sections Cited
154, 10(10AA), 10(10A)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘SMC’, NEW DELHI
Before: Sh. Satbeer Singh Godara
Asstt. Year : 2019-20 Tara Chand Kansal, Vs Income Tax Officer, H. No. 524, Sector-46, Faridabad, Ward-1(4), Haryana-121010 Faridabad-121001 (APPELLANT) (RESPONDENT) PAN No. ACEPK7790B Assessee by: Sh. D. C. Garg, CA Revenue by : Ms. Indu Bala Saini, Sr. DR Date of Hearing: 23.06.2025 Date of Pronouncement: 23.06.2025 ORDER This assessee’s appeal for Assessment Year 2019-20, arises against the CIT(A)/NFAC, Delhi’s DIN & order No. ITBA/NFAC/S/250/2024-25/1072856980(1) dated 03.02.2025, in proceedings u/s 154 of the Income Tax Act, 1961 (in short “the Act”).
Heard both the parties at length. Case file perused.
3. It emerges during the course of hearing that the sole substantive issue which arises that the tribunal’s apt adjudication herein is that of correctness of the learned lower authorities’ action denying the assessee his section 10(10AA)(ii) leave encashment exemption of Rs. 19,22,276/- received from the state electricity board undertaking(s); in
The Revenue’s case as per the learned lower authorities respective findings is that neither the assessee’s original employer M/s Haryana State Electricity Board nor the subsequent corporate undertakings i.e. M/s Dakshin Haryana Bijli Vitaran Nigam Ltd.; as the case may be, could be taken as “State” for the purpose of the above impugned exemption.
5. This tribunal has given it’s thoughtful consideration to both the parties above rival submissions reiterating their respective stands. It is noted that the instant issue of the assessee’s employee entitlement to claim his leave encashment exemption u/s 10(10AA) of the Act is no more res integra in light of Mohan Baliramji Thakre Vs. ITO (2024) 166 taxmann.com 158 (Nagpur-Trib.) deciding the same against the department as under:
”2. It transpires at the outset that although this tribunal had heard all these four appeals separately, they are being disposed of by the instant common order since raising the very nature of issue(s) i.e., entitlement of these four assessees’ in claiming sec.10(10A) and 10(10AA) of the Income Tax Act, 1961 (in short "the Act") exemptions; as the case may be regarding their entitlement benefits of leave encashment etc. Needless to say, sec.10(10A) grants exemption to pensionary benefits (including gratuity) whereas sec.10(10AA) applies in case of leave encashment; wherein, the employee is of the “Central Government” or a “State Government” as the case may be followed by the prescribed quantum of the retiral benefits; as the case may be. A few key facts may be noticed hereunder.
There is hardly any dispute between the parties that all these four assessees had joined the erstwhile Maharashtra State Tara Chand Kansal Electricity Board, [in different capacities], way back in 1980’s. They have admittedly superannuated in the impugned assessment years herein. They have received their impugned retiral benefits i.e., gratuity(ies) and leave encashment(s) involving varying sums. These four assessees claimed exemption(s) u/sec. 10(10A) and u/sec. 10(10AA) regarding the same. Needless to say, the learned lower authorities are of the view that since these assessees’ have superannuated from the Maharashtra State Power Generation Company i.e., “MSPGC” and Maharashtra State Electricity Distribution Company i.e., “MSEDC”; as the case may be; they are not entitled for the impugned exemption(s) beyond the statutory limit applicable to the employees other than those Central Government and State Government(s). Their identical stand in otherwords is that foregoing employer entities carrying-out their respective activities in power generation; transmission and distribution sectors etc. could not be treated as a “State Government” entitling the appellants-assessees herein to claim the impugned exemption(s). This leaves all these assessees aggrieved.
4. Learned DR quotes Kamal Kumar Kalia vs. Union of India [2019] 111 taxmann.com 409 (Del.) that even the foregoing employees entities are treated as “PSUs”; they are still not a “State Government” u/sec.10(10A)(i) as well as u/sec.10(10AA)(i); as the case may be.
I have given my thoughtful consideration to the vehement rival stands. The undisputed fact herein is that these four assessees’ had joined the then Maharashtra State Electricity Board in regular employment in different pay scales. All of them admittedly ended- up retiring from the re-designated power company(ies); be it distribution or generation or transmission of electricity; constituted under the provisions of the newly introduced “The Electricity Act, 2003” by the Parliament of India. The Revenue’s endeavor herein is that be it Maharashtra State Electricity Board or the newly re-designated company(ies), these assessees’ could not be treated as having an employer-employee relationship with the Maharashtra State Government so as to be eligible for the impugned sec.10(10A) and sec.10(10AA) exemption(s).
I find no merit in the Revenue’s foregoing vehement stand. This is for the precise reason that so far as the assessees’ claim of having employer-employee relationship with the Maharashtra State Government since having employed with the then Maharashtra State Electricity Board is concerned, hon’ble Madras high court’s in Dr. P. Balasubramanian vs. Chief Commissioner of Income Tax (TDS) [2022] 142 taxmann.com 25 (Madras) has settled the issue that an employee working in establishments constituted under a State Act is indeed entitled for sec.10(10AA) benefits as under :
Hon’bel High cou8rt has distinguished “Kamal Kumar 7. Hon’bel High cou8rt has distinguished “Kamal Kumar 7. Hon’bel High cou8rt has distinguished “Kamal Kumar Kalia” (supra) in Kalia” (supra) in para-21 to hold that the university 21 to hold that the university employee(s) therein are duly covered by sec.10(10AA) employee(s) therein are duly covered by sec.10(10AA) employee(s) therein are duly covered by sec.10(10AA) since the same had been set since the same had been set-up under a “State Act” and up under a “State Act” and the service conditions had also been framed by the the service conditions had also been framed by the the service conditions had also been framed by the State.
It would indeed be relevant at this stage to 8. It would indeed be relevant at this stage to 8. It would indeed be relevant at this stage to reproduce the relevant amendments in the Electricity produce the relevant amendments in the Electricity produce the relevant amendments in the Electricity Act, 2003 regarding vesting of the erstwhile “State Act, 2003 regarding vesting of the erstwhile “State Act, 2003 regarding vesting of the erstwhile “State Electricity Board” along with all of the latter’s assets, Electricity Board” along with all of the latter’s assets, Electricity Board” along with all of the latter’s assets, liabilities liabilities liabilities as as as well well well as as as staff staff staff (including (including (including officers officers officers and and and employees) of the latter, in the “State Go employees) of the latter, in the “State Government”, in vernment”, in sections 131-133 as follows : 133 as follows :
Tara Chand Kansal “Section 131. (Vesting of property of Board in State Government): (1) With effect from the date on which a transfer scheme, prepared by the State Government to give effect to the objects and purposes of this Act, is published or such further date as may be stipulated by the State Government (hereafter in this Part referred to as the effective date), any property, interest in property, rights and liabilities which immediately before the effective date belonged to the State Electricity Board (hereinafter referred to as the Board) shall vest in the State Government on such terms as may be agreed between tire State Government and the Board. (2) Any property, interest in property, rights and liabilities vested in the State Government under subsection (1) shall be re-vested by the State Government in a Government company or in a company or companies, in accordance with the transfer scheme so published along with such ether property, interest in property, rights and liabilities of the State Government as may be stipulated in such scheme, on such terms and conditions as may be agreed between the State Government and such company or companies being State Transmission Utility or generating company or transmission licensee or distribution licensee, as the case may be: Provided that the transfer value of any assets transferred hereunder shall be determined, as far as may be, based on the revenue potential of such assets at such terms and conditions as may be agreed between the State Government and the State Transmission Utility or generating company or transmission licensee or distribution licensee, as the case may be. (3) Notwithstanding anything contained in this section, where,- (a) the transfer scheme involves the transfer of any property or rights to any person or undertaking not wholly owned by the State Government, the scheme shall give effect to the transfer only for fair value to be paid by the transferee to the State Government; (b) a transaction of any description is effected in pursuance of a transfer scheme, it shall be binding on all persons including third parties and even if such persons or third parties have not consented to it. (4) The State Government may, after consulting the Government company or company or companies being State Transmission Utility or generating company or Tara Chand Kansal transmission licensee or distribution licensee, referred to in sub-section (2) (hereinafter referred to as the transferor), require such transferor to draw up a transfer scheme to vest in a transferee being any other generating company or transmission licensee or distribution licensee, the property, interest in property, rights and liabilities which have been vested in the transferor under this section, and publish such scheme as statutory transfer scheme under this Act. (5) A transfer scheme under this section may- (a) provide for the formation of subsidiaries, joint venture companies or other schemes of division, amalgamation, merger, reconstruction or arrangements which shall promote the profitability and viability of the resulting entity, ensure economic efficiency, encourage competition and protect consumer interests; (b) define the property, interest in property, rights and liabilities to be allocated – (i) by specifying or describing the property, rights and liabilities in question; or (ii) by referring to all the property, interest in property, rights and liabilities comprised in a described part of the transferor's undertaking; or (iii) partly in one way and partly in the other; (c) provide that any rights or liabilities stipulated or described in the scheme shall be enforceable by or against the transferor or the transferee; (d) impose on the transferor an obligation to enter into such written agreements with or execute such other instruments in favour of any other subsequent transferee as may be stipulated in the scheme; (e) mention the functions and duties of the transferee; (f) make such supplemental, incidental and consequential provisions as the transferor considers appropriate including provision stipulating the order as taking effect; and (g) provide that the transfer shall be provisional for a stipulated period. (6) All debts and obligations incurred, all contracts entered into and all matters and things engaged to be Tara Chand Kansal done by the Board, with the Board or for the Board, or the State Transmission Utility or generating company or transmission licensee or distribution licensee, before a transfer scheme becomes effective shall, to the extent specified in the relevant transfer scheme, be deemed to have been incurred, entered into or done by the Board, with the Board or for the State Government or the transferee and all suits or other legal proceedings instituted by or against the Board or transferor, as the case may be, may be continued or instituted by or against the State Government or concerned transferee, as the case may be. (7) The Board shall cease to be charged with and shall not perform the functions and duties with regard to transfers made on and after the effective date. Explanation.- For the purpose of this Part, - (a) Government company" means a Government Company formed and registered under the Companies Act, 1956. (b) company" means a company to be formed and registered under the Companies Act, 1956 to undertake generation or transmission or distribution in accordance with the scheme under this Part. Section 132. (Use of proceeds of sale or transfer of Board, etc.): In the event that a Board or any utility owned or controlled by the Appropriate Government is sold or transferred in any manner to a person who is not owned or controlled by the Appropriate Government, the proceeds from such sale or transfer shall be utilised in priority to all other dues in the following order, namely (a) dues (including retirement benefits due) to the officers and employees of such Board or utility, who have been affected by the aforesaid sale or transfer; (b) payment of debt or other liabilities of the transferor as may be required by the existing loan covenants. “Section 133. (Provisions relating to officers and employees): — (1) The State Government may, by a transfer scheme, provide for the transfer of the officers and employees to the transferee on the vesting of properties, rights and liabilities in such transferee as provided under section 131.
Tara Chand Kansal 2) Upon such transfer under the transfer scheme, the personnel shall hold office or service under the transferee on such terms and conditions as may be determined in accordance with the transfer scheme: Provided that such terms and conditions on the transfer shall not in any way be less favourable than those which would have been applicable to them if there had been no such transfer under the transfer scheme: Provided further that the transfer can be provisional for a stipulated period. Explanation. - For the purposes of this section and the transfer scheme, the expression "officers and employees" shall mean all officers and employees who on the date specified in the scheme are the officers and employees of the Board or transferor, as the case may be.”
The Revenue could hardly dispute that going by a conjoint reading of section(s) 131 r.w.s. 133 hereinabove, the services of all officers and employees of the erstwhile “MSEB” first stood “vested” in the “State Government” of Maharashtra on “Reorganization of the Board”, followed by the transfer to various “transferee” entities in generation, transmission and distribution company(ies) (supra). The same appears to be the most clinching fact herein since all these assessees had been assigned to their respective new employers’ after getting protection of their service conditions in light of sec.133(2) read with “Proviso” and “Explanation” thereto. Needless to state, these four assessees have also undergone the very reorganization finally culminating in their respective superannuation(s). It is thus concluded that not only these four assessees have to be held entitled for sec.10(10A) and sec.10(AA) as employees of “MSEB” but also they have to held eligible for the impugned exemptions in the newly set-up transferee entities (once their services vested in the State Government); which in turn, carried “grand- fathering” clause in sec.133 of the Electricity Act. The necessary corollary thereof is that these four assessees have to be invariably treated as employees of a “State Government” duly eligible for sec. 10(10A) and sec.10(10AA) benefits; as the case may be. These four assessees identical sole substantive ground is accepted in very terms. Necessary computation shall follow as per law. Ordered accordingly.”
Tara Chand Kansal 6. I adopt the above detailed discussion mutatis mutandis to accept the assessee’s instant sole substantive ground levying section 10(10AA) leave encashment exemption; in very terms.