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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
PER ASTHA CHANDRA, JM : The appeal filed by the assessee is directed against the order dated 28.03.2024 of the Ld. Commissioner of Income Tax (Appeals)/NFAC, Delhi [“CIT(A)”] pertaining to Assessment Year (“AY”) 2019-20.
Briefly stated, the facts of the case are that the assessee is a retired employee of Maharashtra State Electricity Transmission Co. Ltd. He retired from the service on 30.11.2018. For AY 2019-20 he filed his return of income declaring total income of Rs.12,49,980/- on 24.06.2019 which was subsequently revised by filing revised return on 13.12.2019. He has also shown income u/s 44AD of the Income Tax Act, 1961 (the “Act”) from engineering and technical consultancy along with salary income from Maharashtra State Electricity Transmission Co. Ltd. The case of the assessee was selected for complete scrutiny under the E-assessment Scheme, 2019 on the basis of selection being salary income and refund claim. Out of gross salary of Rs.70,29,533/- the assessee claimed a total of Rs.55,85,920/- as exempt on account of death cum retirement gratuity amounting to Rs.31,86,180/- u/s 10(10) and earned leave encashment on retirement exempt u/s 10(10AA) amounting to Rs.23,99,740/-. Statutory
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notice(s) u/s 143(2) and 142(1) of the Act along with questionnaire were issued and served upon the assessee, in response to which the assessee furnished his reply providing partial details and supporting documents called for including therein proof of retirement of the assessee on 30.11.2018 and receipt of retirement gratuity of Rs.31,86,180/- and leave encashment of Rs.23,99,740/-. However, no computation/explanation was provided with regard to the exempt amount of gratuity and leave encashment claimed by the assessee. Taking support of the relevant provisions of the Act, the Ld. Assessing Officer (“AO”) observed that the exemption u/s 10(10) and 10(10AA) of the Act is available only in the case of employees of State and Central Civil Services and Armed Forces in the entirety. The assessee being an employee of Maharashtra State Electricity Transmission Co. Ltd. which is a Public Sector Undertaking (PSU), cannot be said to be a member of State or Central Service. In any other case, exemption for gratuity received is subject to a limit of Rs.20,00,000/- as prescribed by the Payment of Gratuity (Amendment) Act, 1972 effective from 29.03.2018. Similarly, exemption for leave encashment, for civilian employees other than members of State and Central Civil Service, is subject to a limit of Rs.3,00,000/- vide Notification No. SO 588(E) dated 31.05.2002. In the draft assessment order the Ld. AO therefore proposed a disallowance of Rs.11,86,180/- (Rs.31,86,180/- - Rs.20,00,000/-) and Rs.20,99,740/- (Rs.23,99,740/- - Rs.3,00,000/-) on account of excess exemption claimed by the assessee for retirement gratuity and leave encashment respectively. A show cause notice was thereafter issued to the assessee requiring him to show cause as to why the assessment proceedings should not be concluded as per the draft assessment order. In the absence of any response to the said SCN, the Ld. AO made the addition of Rs.11,86,180/- on account of excess exemption claimed by the assessee for retirement gratuity u/s 10(10) and Rs.20,99,740/- on account of excess exemption claimed for leave encashment u/s 10(10AA) of the Act, to the assessee’s income from salary.
2.1 The Ld. AO also found from the information available on Department’s database that during the AY 2019-20 under consideration, the assessee has invested Rs.50,00,000/- in mutual funds. The assessee was asked to explain the source of investment in mutual funds made during the year vide issue of notice(s) u/s 142(1) and also a show cause notice requiring him to show cause as to why the assessment proceedings should not be concluded as per the draft assessment order wherein an
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addition of Rs.50,00,000/- had been proposed u/s 69 of the Act on account of unexplained investment in mutual funds. In this regard, the Ld. AO in para 17 of the assessment order noted that one of the annexure submitted by the assessee on this issue could not be opened and the assessee was asked to resubmit the same. However, the assessee failed to file any further reply during the entire assessment proceedings and the annexure remained inaccessible and hence the Ld. AO was constrained not to allow its benefit to the assessee based on the content provided therein.
2.2 The Ld. AO therefore, concluded the assessment on 28.09.2021 u/s 143(3) r.w.s. 144B of the Act by making the following additions : i. Rs.32,85,920/- (Rs.11,86,180/- on account of excess exemption claimed for gratuity + Rs.20,99,740/- on account of excess claimed for leave encashment u/s 16 of the Act); and ii. Rs.50,00,000/- on account of unexplained investment u/s 69 of the Act.
Aggrieved, the assessee carried the matter before the Ld. CIT(A) challenging the above additions made by the Ld. AO. Before the Ld. CIT(A) the assessee contended that he is eligible for full exemption for retirement gratuity and leave encashment as he is the employee of a company which was formed by Notification in the Official Gazette of Industries Energy and Labour Department of Government of Maharashtra and under Electricity Act, 2003. The employees of these statutory establishments are holders of civil post. The assessee also referred to Annexure 1 of Question No. 1923 on 14.03.2013 in Rajya Sabha by Hon’ble Minister of State in the Ministry of Personnel Public Grievances and Pensions and Minister of State in Prime Minister’s Office stating clearly the definition of Government servant under clause (b) & (c). He also took support of the decision of Delhi Tribunal wherein it has been held that the employees of these statutory establishments are holders of civil post. As regards, the investment in mutual funds of Rs.50,00,000/-, the assessee contended before the Ld. CIT(A) that the said investment was made from the retirement benefits i.e. Provident Fund, Gratuity, Leave Encashment etc. received by him and submitted the bank statement for the relevant period in support thereof.
3.1 On the issue of full exemption for retirement gratuity and leave encashment claimed by the assessee, the Ld. CIT(A) found the above submissions of the assessee bereft of merit and decided the impugned
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issue against the assessee. The Ld. CIT(A) in para 5 of the appellate order observed that Maharashtra State Electricity Transmission Co. Ltd. is a corporate entity incorporated under the Companies Act in June, 2005. Public Sector Undertakings are separate from the Government, their employees are not paid out of the consolidate fund of the Government and they do not hold a Civil post under a State Undertakings are legal entities, separate from the Government. Reference to All India Service Rules in this context is misplaced since the assessee is not a Member of All India services whose services have been placed at the disposal of a company and so reference is untenable.
3.2 As regards the investments in mutual funds out of the total addition of Rs.50,00,000/- made by the Ld. AO, the Ld. CIT(A) restricted the said addition to Rs.25,00,000/- treating it as unexplained investment u/s 69 of the Act and gave relief to the extent of Rs.25,00,000/- for the reason that the assessee though has furnished a copy of bank statement which shows investments in mutual funds on different dates, no details have been submitted regarding the deposits to justify the investments made by the assessee. The relevant observations and findings of the Ld. CIT(A) in this regard reads as under : “The other Grounds of appeal is regarding investment in Mutual Funds to the tune of Rs.50,00,000/-, Assessee has merely furnished a copy of Bank Account from 01/11/2018 to 31/03/2019 only held jointly with Pallavi Mohan Bhise and Pranav Mohan Bhise wherein some investments seem to have been made dated 05/11/2018 for Rs.25,00,000/- in Mutual Funds, dated 24/12/2018 for Rs.25,00,000/- in Mutual Funds, dated 26/12/2018 for Rs.11,00,000/- in Mutual funds. A deposit of Rs.32,00,000/-has been made in the account dated 07/12/2018. However, no details regarding the deposit have been submitted. Even if it is presumed that Rs.32,00,000/- deposited out of retirement benefits, the investment of Rs.25,00,000/- in Mutual Funds dated 05/11/2018 remains unexplained in the absence of explanation.”
Dissatisfied, the assessee in appeal before the Tribunal against the order of the Ld. CIT(A) by raising the following grounds of appeal : “1. National Faceless Appeals Centre (hereinafter referred to as “learned CIT(A)") erred in law and on facts in confirming the assessed income of the appellant to the tune of Rs.69,99,930 thereby partially sustaining the additions made by National Faceless Assessment Centre. 2. The learned CIT(A) erred in law and on facts in not appreciating the fact that, the appellant was a Government employee as covered in Section 10(10)(i) and Section 10(10AA) (i) of Income Tax Act, 1961. 3. The learned CIT(A) erred in law and on facts in not allowing the exemption of Retirement Gratuity to the tune of Rs.11,86,180 u/s 10(10) and Leave Encashment amounting to Rs.20,99,740 u/s
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10(10AA) of Income Tax Act, 1961 entitled to State Government Employees or holders of Civil Posts under the State. 4. Alternatively, and without prejudice to Ground Nos. 2 and 3 above; the learned CIT(A) erred in law and on facts in not allowing full exemption of Retirement Gratuity amounting to Rs.20,36,601 u/s 10(10)(i) and full exemption of Leave Encashment amounting to Rs.15,33,910 u/s 10(10AA)(i) of Income Tax Act, 1961 being portions of retirement benefits accrued to the appellant during his employment with State Government. 5. Alternatively, and without prejudice to Ground Nos. 2 and 3 above; learned CIT(A) erred in law and on facts in not allowing full exemption of Retirement Gratuity of Rs.11,49,579 since it is covered in exemption ceiling limit of Rs. 20,00,000 accrued during his employment tenure with PSU. 6. Alternatively, and without prejudice to Ground Nos. 2 and 3 above; the learned CIT(A) erred in law and on facts in not restricting the addition made on account of Leave Encashment to the tune of Rs. 5,65,830 after allowing benefit of exemption ceiling of Rs.3,00,000 for the leave encashment accrued during his employment tenure with PSU. 7. The learned CIT(A) erred on facts in not sustaining the addition made of Rs.25,00,000 on account of Unexplained Investments u/s 69 by not appreciating the fact that, the investments in Mutual Funds are made out of retirement benefits and source of such investments are supported by legitimate bank entries and not from un-explained sources. 8. The appellant craves / leave to add / modify / delete / amend all / any of the grounds of appeal.”
As regards the claim of exemption for retirement gratuity amounting to Rs.11,86,180/- u/s 10(10) of the Act and leave encashment amounting to Rs.20,99,740/- u/s 10(10AA) of the Act, the Ld. AR submitted that the assessee is entitled to claim full exemption as the assessee is a Government employee as he was employed by a company, namely Maharashtra State Electricity Transmission Co. Ltd. which was formed by Notification in official Gazette of Industries Energy and Labour Department of Government of Maharashtra and under Electricity Act, 2003. The assessee is covered by the provisions of section 10(10)(i) and section 10(10AA)(i) of the Act available to State Government employees or holders of Civil Posts under the State.
5.1 The Ld. AR also raised an alternate plea that the exemption for retirement gratuity and leave encashment should be allowed to the assessee on pro-rata/proportionate basis. He submitted that the assessee should be eligible for full exemption in respect of receipts attributable to the period of his employment with State Government i.e. Maharashtra State Electricity Board and thereafter as per the prescribed limits under
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section 10(10)(ii) and 10(10AA)(ii) of the Act for the period of his employment with PSU i.e. Maharashtra State Electricity Transmission Co. Ltd. The Ld. AR therefore urged that full exemption of retirement gratuity amounting to Rs.20,36,601/- u/s 10(10)(i) and full exemption of leave encashment amounting to Rs.15,33,910/- u/s 10(10AA)(i) of the Act being portions of retirement benefits accrued to the assessee during his employment with State Government i.e. Maharashtra State Electricity Board should be allowed. He further submitted that the Ld. CIT(A) ought to have allowed full exemption for retirement gratuity of Rs.11,49,579/- accrued during his employment tenure with PSU i.e. Maharashtra State Electricity Transmission Co. Ltd. since it is covered with in the exemption ceiling limit of Rs.20,00,000/-. With respect to the exemption claim of leave encashment, he submitted that the addition should be restricted to Rs.5,65,830/- after allowing benefit of exemption ceiling limit of Rs.3,00,000/- accrued during the assessee’s employment tenure with PSU i.e. Maharashtra State Electricity Transmission Co. Ltd. The Ld. AR submitted a chart showing the calculation of exempted and taxable portion for gratuity and leave encashment on prorata/proportionate basis by way of an additional evidence filed before us, which is reproduced below :
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5.2 As regards addition made on account of investments in mutual funds of Rs.25,00,000/-, the Ld. AR submitted that all the investments were made out of retirement benefits which duly explains the source of investments. The assessee has filed the bank statement of HDFC Bank Limited Saving Account No. 02221000019047 for the period 01.09.2018 to 20.03.2019 showing the details of deposits made during this period out of which the investments in mutual funds were made (Pages 6 to 12 of the Paper Book-I refers). The Ld. AO made an addition of Rs.50,00,000/- for the want of satisfactory explanation regarding the source of investments by the assessee which has been reduced to Rs.25,00,000/- by the Ld. CIT(A). He, therefore, urged that this issue may be remanded back to the file of Ld. AO for verification of the assessee’s claim.
5.3 The Ld. AR relied upon the various judicial precedents in support of its above contentions which are listed below :
i. Som Prakash Rekhi Vs. Union of India, 1981 AIR 212 (SC), dated 13.11.1980; ii. Dr. P. Balasubramanian Vs. CCIT, 448 ITR 318 (Madras-HC), dated 10.08.2022; iii. Mohan Baliramji Thakre and Ors. Vs. ITO in ITA No. 375/NAG/2022 (Nagpur-Tribunal), dated 19.04.2024; iv. Smt. Sapna Raysoni Vs. ITO, 159 ITD 1 (Pune-Tribunal), dated 29.02.2016; v. ITO Vs. Mahatma Gandi University, 177 ITD 508 (Cochin Tribunal), dated 14.05.2019; vi. Ram Kanwar Rana Vs. ITO, 159 ITD 431 (Delhi-Tribunal), dated 16.06.2016; vii. Adinath Wandhekar Vs. ITO in ITA No. 1388/PUN/2023 (Pune- Tribunal), dated 08.03.2024; and viii. Ravindra Kharche Vs. ACIT in ITA No. 228/NAG/2023 (Nagpur- Tribunal), dated 16.04.2024.
The Ld. DR, on the other hand, supported the order of Ld. AO/CIT(A) and submitted that since the assessee was an employee of PSU at the time of his superannuation, he is not a Government employee and therefore not entitled to claim of full exemption in respect of retirement gratuity and leave encashment received by him u/s 10(10)(i) and 10(10AA)(i) of the Act respectively. He relied on the decision of the Hon’ble High Court of
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Judicature at Bombay, Nagpur Bench in the case of Srikantha Gopal Mandyam Vs. Union of India Vs. Union of India in Writ Petition No. 1039 of 2017 dated 19.09.2018 wherein the Hon’ble High Court observed that “even otherwise, when employees are under different employers and in different sectors with different service conditions, material on record is insufficient to claim parity. Service conditions of Government servants cannot be compared with employees in banking sector”.
6.1 So far as the investments in mutual funds is concerned, the Ld. DR submitted that the source of investment of Rs.25,00,000/- remained unexplained by the assessee and therefore the Ld. CIT(A) was fully justified in retaining the addition of Rs.25,00,000/- as against Rs.50,00,000/- made by the Ld. AO.
We have heard the Ld. Representatives of the parties and perused the records. We have also perused the various judicial precedents relied upon by the Ld. AR as well as Ld. DR. Considering the totality of the facts and judicial precedents cited above on the issue relating to claim of exemption for retirement gratuity and leave encashment, in our considered view, the alternate plea of the assessee is acceptable. The facts are not in dispute. The assessee was an employee of the State Government i.e. Maharashtra State Electricity Board and his employment was subsequently transferred to PSU i.e. Maharashtra State Electricity Transmission Co. Ltd. incorporated under the Companies Act in June, 2005. He attained superannuation on 30.11.2018. Perusal of the chart submitted by the Ld. AR (reproduced above) reveals that the assessee joined Maharashtra State Electricity Board on 02.07.1981 and he retired on 30.11.2018 from Maharashtra State Electricity Transmission Co. Ltd. Out of his total service tenure of about 37 years, his tenure with Maharashtra State Electricity Board was about 24 years and with Maharashtra State Electricity Transmission Co. Ltd. was about 13 years. Accordingly, the assessee is entitled to claim exemption for retirement gratuity and leave encashment received by him at the time of superannuation on the proportionate/prorata basis based on his employment tenure with the State Government i.e. Maharashtra State Electricity Board and his employment tenure with PSU i.e. Maharashtra State Electricity Transmission Co. Ltd. For his employment tenure with the State Government, he should be entitled to claim full exemption of the proportionate amount of gratuity i.e. Rs.20,36,601/- and the exemption
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with respect to the balance amount of Rs.11,49,579/- shall be available to him as per the prescribed limits under the provisions of section 10(10)(ii) of the Act. The assessee has contended before us that the balance amount of retirement gratuity of Rs.11,49,579/- is also eligible for full exemption as it is fully covered within the limit laid down as per section 4(3) of the Payment of Gratuity Act, 1972 (as amended). With respect to the claim of exemption for leave encashment amounting to Rs.23,99,740/- full exemption shall be available in respect of the proportionate amount of Rs.15,33,910/- and for the balance of Rs.8,65,830/- the assessee shall be entitled to claim exemption to the extent of Rs.3,00,000/- only and the remaining amount of Rs.5,65,830/- shall be taxable. This view finds support by the decision of the Co-ordinate Bench of the Pune Tribunal in the case of Adinath Wandhekar Vs. ITO in ITA No. 1388/PUN/2023 (supra) (Pages 127 to 132 of Paper Book-I refers). However, the present facts need verification. Accordingly, we set aside this issue to the file of Ld. AO for verification of the details/calculation submitted by the assessee and allow the claim of exemption for retirement gratuity and leave encashment received by the assessee at the time of his superannuation on proportionate basis, as per law keeping in view his employment tenure with Maharashtra State Electricity Board and Maharashtra State Electricity Transmission Co. Ltd. The assessee shall co-operate fully before the Ld. AO and provide requisite details/explanation as may be required/called for in support of his claim. We order accordingly.
Now coming to the next issue on the investments made in mutual funds, the sole grievance of the assessee before us is that the Ld. AO made the addition of Rs.50,00,000/- u/s 69 of the Act as the source of the said investments remained unexplained by the assessee. The Ld. CIT(A) restricted the said addition to Rs.25,00,000/- for the same reason in spite of the bank statement furnished by the assessee showing the deposits and investments made during the relevant period. The Ld. AR therefore urged that given an opportunity the assessee is in a position to explain the source of investments in mutual funds of Rs.50,00,000/- by filing supporting documentary evidence before the Ld. AO. In this view of the matter, we deem it fit to restore this issue back to the file of Ld. AO to verify the claim of the assessee and if found correct delete the addition of Rs.25,00,000/- sustained by the Ld. CIT(A) by suitable modifying the assessment order. We order accordingly.
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In the result, the appeal of assessee is treated as allowed for statistical purposes with the above directions.
Order pronounced in the open court on 10th October, 2024.
Sd/- Sd/- (R.K. Panda) (Astha Chandra) JUDICIAL MEMBER VICE PRESIDENT पुणे / Pune; दिन ांक / Dated : 10th October, 2024. रदि
आदेश की प्रधिधलधप अग्रेधर्ि / Copy of the Order forwarded to : अपील र्थी / The Appellant. 1. प्रत्यर्थी / The Respondent. 2. 3. The Pr. CIT concerned. दिभ गीय प्रदिदनदि, आयकर अपीलीय अदिकरण, “ए” बेंच, 4. पुणे / DR, ITAT, “A” Bench, Pune. ग र्ड फ़ इल / Guard File. 5. //सत्य दपि प्रदि// True Copy// आिेश नुस र / BY ORDER,
िररष्ठ दनजी सदचि / Sr. Private Secretary आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune