2025 (7) TMI 1028 - AT - Income Tax

Rectification order passed u/s. 154 - assessee s claimed amount of leave encashment restricted - whether Revenue/Ld. CIT(Appeals) erred in denying assessee s claim of exemption of leave encashment u/s. 10(10AA)(ii) restricting to Rs. 3, 00, 000/- only ? HELD THAT - It is established principle of law that a circular of CBDT no doubt has the force of law can even supplant the law in case where it is beneficial to the assessee and can mitigate or relax the rigors of law. The powers of CBDT in issuing circular for general guidance are subject to two important conditions. One is that it does not entitle the Income-tax authority including the Board to issue instructions or circulars contrary to the substantive provisions of law or curtailing the relief to which the assessee is otherwise entitled under law. The circular cannot therefore curtail the benefit conferred on the assessee or be contradictory to the Act. Hon ble Apex Court in Union of India vs. Wood Paper Limited 1990 (4) TMI 55 - SUPREME COURT has held that the condition regulating the computation of benefit should be interpreted liberally. We are in respectful agreement of what has been held by the afore cited coordinate Jaipur Benches of this Tribunal as noted hereinabove. We accordingly answer the aforesaid question in favour of the assessee and against the Revenue and hold that the appellant/assessee is eligible to claim deduction in view of limits raised to Rs. 25, 00, 000/- vide Notification No. 31/2023 dated 24.05.2023. The appeal is thus liable to be allowed.

Summary

ISSUES:

• Whether the exemption limit on leave encashment under section 10(10AA)(ii) of the Income-tax Act, 1961, restricting exemption to ? 3,00,000, is applicable to the assessee who is a retiree from a nationalized bank.
• Whether the revised exemption limit prescribed by CBDT Notification No. 31/2023 dated 24.05.2023, raising the limit to ? 25,00,000, applies to the assessee's claim for leave encashment exemption.
• Whether the rectification order under section 154 of the Act restricting the exemption to ? 3,00,000 is valid in light of the subsequent CBDT notification increasing the exemption limit.

RULINGS / HOLDINGS:

• The court held that the assessee is entitled to claim exemption of leave encashment exceeding ? 3,00,000 under section 10(10AA)(ii) of the Act as per the revised limit prescribed by CBDT Notification No. 31/2023 dated 24.05.2023, which increased the exemption limit to ? 25,00,000.
• The rectification order passed under section 154 of the Act restricting the allowable exemption to ? 3,00,000 was correctly challenged and set aside because it did not consider the subsequent notification increasing the exemption limit.
• It was affirmed that a CBDT circular or notification has the force of law and can "mitigate or relax the rigors of law" and "supplant the law in case where it is beneficial to the assessee," provided it does not contravene substantive provisions of the Act.

RATIONALE:

• The court applied the framework under section 10(10AA)(ii) of the Income-tax Act, 1961, which exempts leave encashment received at retirement subject to limits prescribed by the Central Government via notification.
• The court relied on CBDT Notification No. 31/2023 dated 24.05.2023, which revised the exemption limit from ? 3,00,000 to ? 25,00,000, and held that this notification governs the exemption limit for the relevant assessment years.
• The court referenced precedent from coordinate Benches of the Tribunal which had followed the same reasoning, including reliance on a High Court notice in a writ petition challenging the outdated exemption limit and the Supreme Court's principle that circulars beneficial to the assessee should be interpreted liberally.
• The decision reflects a doctrinal position that administrative instructions or notifications that extend or enhance relief to taxpayers are valid and binding unless expressly prohibited by statute.