ITAT Chandigarh Rules in Favour of Retired Govt Employee on Leave Encashment Tax Dispute

In a significant ruling dated November 13, 2025, the Income Tax Appellate Tribunal (ITAT) Chandigarh granted partial relief to Mr Saini, a retired employee of Punjab State Power Corporation Limited (PSPCL), over the taxability of his leave encashment. Believing that PSPCL was a government entity, Mr Saini had claimed full tax exemption—an eligibility granted only to Central or State Government employees under Section 10(10AA). The Income Tax Department flagged the claim, leading to a detailed examination of whether service under the erstwhile Punjab State Electricity Board (PSEB) qualifies for government-employee benefits.

Service Under PSEB and Subsequent Transfer to PSPCL

Mr Saini worked with PSEB from November 18, 1983, to April 16, 2010. Following a State Government restructuring scheme, PSEB was split, and PSPCL was formed as a government-owned corporation. His employment was automatically shifted to PSPCL until retirement in November 2015. His counsel, Mr Tej Mohan Singh, argued that, while PSPCL is a corporation, PSEB is a State undertaking; therefore, the leave encashment attributable to his earlier service should qualify for full exemption.

Arguments

The assessee distinguished his case from the earlier ITAT ruling in Arvind Kumar Jolly vs ITO, citing that his long tenure with PSEB constituted State Government service. He sought an exemption of ₹13,02,816 for leave encashment related to his PSEB years.

Expert tax commentators, including Dr Suresh Surana, explained that although Mr Saini initially did not claim the exemption, he later sought rectification under Section 154. Both the Assessing Officer and CIT(A) rejected his plea, holding that PSPCL employees are not “government employees”.

ITAT’s Findings and Relief Granted

ITAT accepted that PSPCL is not a State Government department and that the service under it does not qualify for full exemption. However, it held that denying exemption for the PSEB period would defeat the beneficial intent of Section 10(10AA). The Tribunal emphasised that the assessee’s transfer to PSPCL was compulsory and that he could not be deprived of the benefits earned during his genuine government service. Accordingly, ITAT allowed exemption only for the service rendered under PSEB and held the PSPCL-related portion taxable.

Conclusion

The ITAT Chandigarh ruling provides important clarity for employees of restructured State utilities. While corporations like PSPCL do not qualify as “State Government” employers, the Tribunal has confirmed that employees cannot be denied exemptions for government-service benefits accrued before restructuring. Mr Saini’s case underscores that leave encashment linked to service in a State undertaking remains exempt, offering relief to many similarly placed retirees.