Leave encashment

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Hemlata (Querist)
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05 February 2008 Whether leave encashment received at the time of resignation is exempt u/s 10(10AA)? Whether there are any decisions from the Chennai jurisdictional authorities on the subject?

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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05 February 2008 The phrase ‘or otherwise’ will cover only such an eventuality when there is severance of relationship of employer and employee or contract of employment - CIT v. Ram Rattan Lal Verma [2005] 145 Taxman 256 (All.).

The following view is supported by the decision of the Madras high court in CIT vs. R J Shahney (1986) 54 CTR (Mad) 360. In that case the assessee had resigned (and therefore)'retired' from employment.

Once an employee resigns, his service stand terminated from the date on which his letter of resignation is accepted by the appropriate authority, unless there is any law or statutory rule governing the conditions of service to the contrary. In other words, on acceptance of resignation, the employee stands retired from service.

It is, therefore, clear that if on retirement, even on resignation by the employee, an employee gets by way of leave encashment any amount, Section 10(10AA) would apply and the assessee will be entitled to the benefit of the said clause to the extent mentioned therein.

But this is not finally settled by apex court.

CA. Vineet Grover

CA. Vineet Grover (Expert)
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05 February 2008
Sec 10(10AA) is defined hereunder:-
(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 his 36retirement [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 otherwise, [subject to such limit as the Central 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 payment 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

The leave encashment is categorically defined u/s 10(10AA) and need not require any case law to substantiate its applicability.

Srinivas has given some value addition information.

Rgds/
Vineet

Rgds/
Vineet

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