Section 10(10AA) & 10(10B) IT Act | BSNL VRS Employees from DoT Entitled to Full Tax Exemption as Central Govt Employees: ITAT Bangalore

The Income Tax Appellate Tribunal (ITAT), Bangalore has delivered a significant ruling clarifying the tax treatment of retirement benefits for BSNL employees who transitioned from the Department of Telecommunications (DoT). The Tribunal held that such employees must be treated as Central Government employees for the purposes of Section 10(10AA) (leave encashment) and Section 10(10B) (retrenchment compensation) of the Income-tax Act, 1961, entitling them to full exemption on these amounts. The decision underscores the primacy of statutory rules over procedural delays and reinforces the principle that substantive exemptions cannot be denied where eligibility is established.

Background & Facts

The Dispute

The appellant, Kuppahally Venkatasubbaiah Vani, a retired BSNL employee, challenged the intimation dated 28 August 2021 issued under Section 143(1) of the Income-tax Act, 1961. The intimation denied exemption for two key retirement benefits:

1. Ex gratia of Rs. 12,30,969 under Section 10(10B) (retrenchment compensation)
2. Earned leave encashment of Rs. 11,60,420 under Section 10(10AA) (leave salary)

The appellant had initially filed her return based on professional advice that only Rs. 5,00,000 (under Section 10(10C)) and Rs. 3,65,757 (under Section 10(10AA)) were allowable. However, she later discovered that BSNL employees absorbed from DoT were entitled to full exemption under Section 10(10B) and a higher limit under Section 10(10AA).

Key Facts

• The appellant retired under the BSNL Voluntary Retirement Scheme (VRS), 2019
• BSNL’s FAQs dated 07.11.2019, clarifications dated 29.01.2020, and addendum dated 11.02.2020 created ambiguity regarding taxability of retirement benefits
• The appellant filed her original return on the understanding that only Rs. 5,00,000 was exempt under Section 10(10C)
• She later sought exemption for ex gratia under Section 10(10B) and leave encashment under Section 10(10AA)
• The Central Processing Centre (CPC) denied these exemptions in the intimation dated 28.08.2021

Procedural History

• 28.08.2021: Intimation under Section 143(1) issued by CPC denying exemptions
• 21.01.2026: Appeal filed before Commissioner of Income-tax (Appeals)-1, Guwahati
• 30.01.2026: CIT(A) dismissed the appeal solely on the ground of delay (1,577 days)
• 26.05.2026: Appeal heard by ITAT Bangalore
• 29.06.2026: ITAT allowed the appeal, directing the Assessing Officer to grant exemptions

Relief Sought

The appellant sought:

• Exemption of Rs. 12,30,969 under Section 10(10B) for ex gratia received under BSNL VRS
• Exemption of Rs. 11,60,420 under Section 10(10AA) for earned leave encashment
• Condonation of delay in filing the appeal
• Decision on merits to prevent unjust taxation

The Legal Issue

The central questions were:

1. Whether employees absorbed from DoT into BSNL under the BSNL VRS, 2019 qualify as Central Government employees for the purposes of Section 10(10AA)(i) and Section 10(10B) of the Income-tax Act, 1961?
2. Whether the retrenchment compensation and leave encashment received under the VRS are capital receipts not liable to tax under the Act?
3. Whether the CIT(A) erred in dismissing the appeal solely on the ground of delay without considering the substantive claims on merits?

Arguments Presented

For the Appellant

• Relied on CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. [(2012) 349 ITR 336 (Bom.)] to argue that appellate authorities may admit fresh claims and substantive exemptions cannot be denied merely due to procedural lapses
• Cited Circular No. 14 (XL-35) dated 11.04.1955, Dayal Singh v. ITO, Harish Kumar v. ITO, Chandraprakash Vasistha v. ITO, and Ravinder Kumar v. State of Punjab to submit that delay should be condoned where eligibility for exemption is established
• Argued that the appellant, as a BSNL employee absorbed from DoT, should be treated as a Central Government employee under Rule 37A of the CCS (Pension) Rules, 1972
• Contended that the Kerala High Court’s decision in WP(C) No. 16360 of 2023 (dated 06.02.2026) supports the view that leave encashment for such employees is fully exempt under Section 10(10AA)(i)
• Submitted that retrenchment compensation under Section 10(10B) is also fully exempt for Central Government employees

For the Respondent

• Opposed the appeal on the ground that the CIT(A) rightly dismissed it due to delay of 1,577 days
• Argued that the matter arose from an intimation under Section 143(1), which is summary in nature and does not involve detailed scrutiny
• Contended that procedural compliance (timely filing) is mandatory and delay cannot be condoned without sufficient cause

The Court's Analysis

The ITAT examined the rival submissions and the legal framework governing the taxability of retirement benefits for BSNL employees absorbed from DoT. The Tribunal’s analysis rested on the following key principles:

1. Statutory Interpretation of Section 10(10AA) and Section 10(10B)

   • Section 10(10AA)(i) provides full exemption for leave encashment received by Central Government or State Government employees
   • Section 10(10AA)(ii) limits exemption to 10 months’ salary for other employees
   • Section 10(10B) exempts retrenchment compensation for employees retrenched under schemes framed by the Central Government

2. Applicability of Rule 37A of CCS (Pension) Rules, 1972

   • The Tribunal relied on Rule 37A, which governs pensionary benefits for Government servants absorbed into Public Sector Undertakings (PSUs)
   • Sub-rule (4) states that upon absorption, such employees cease to be Government servants and are deemed to have retired from Government service
   • Sub-rule (8) provides that pensionary benefits (including leave encashment) shall be calculated as if the employee were a Central Government servant
   • Sub-rule (22) specifically mandates that pensionary benefits for BSNL/MTNL employees shall be paid by the Government
   • Sub-rule (24) clarifies that direct recruits to BSNL are not entitled to these benefits

   "The provisions of sub-rule (4) of Rule 37 A of the CCS Rules specifically states that upon absorption of the Government servants as the employees of the PSU, that shall take effect from the date on which their options are accepted by the Government, and from the date of such acceptance, those employees shall cease to be Government servants and they shall be deemed to have retired from the Government service."

   "Sub-rule (8) of Rule 37A of the CCS Rules further provides that with respect to cases of the afore nature, when a Government servant, who joins or gets absorbed in a PSU, ultimately retires, the calculation of the pension/family pension under the Rules has to be carried out in the manner prescribed thereunder. The explanation makes the position clear that in the aforementioned circumstances, the pension requires to be calculated in the same way as would be applicable in the case of a Central Government Servant retiring or dying, on the same day."

3. Harmonious Construction of Statutes

   • The Tribunal adopted the harmonious interpretation approach, as laid down in State of Kerala v. Falcon Infrastructure Limited [2025 (4) KHC 375] and Manojkumar P.P v. Secretary, Thalassery Municipality [2025 (6) KHC 371]
   • It held that Rule 37A of the CCS Rules must be read alongside Section 10(10AA) to avoid defeating the rights of BSNL employees absorbed from DoT
   • The Tribunal rejected the Revenue’s argument that Section 10(10AA)(i) applies only to current Central Government employees, noting that the framers of the statute did not envisage the present scenario

4. Precedential Support

   • The Tribunal relied on the Kerala High Court’s decision in WP(C) No. 16360 of 2023 (dated 06.02.2026), which held that BSNL employees absorbed from DoT are entitled to full exemption under Section 10(10AA)(i)
   • It also cited its own decision in Pradeep Hegde v. Income Tax Officer [2026 (6) TMI 1269 - ITAT Bangalore], which applied the same reasoning on identical facts
   • The Tribunal noted that coordinate benches (e.g., Meghmala Sudhir Pathak v. ITO and Uttam Laxmanrao Shinde v. ITO) had consistently held that BSNL VRS benefits should be treated on par with Government employees

5. Condonation of Delay

   • The Tribunal implicitly condoned the delay, emphasizing that substantive exemptions cannot be denied merely due to procedural lapses where eligibility is established
   • It relied on CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. to hold that appellate authorities have the power to admit fresh claims in the interest of justice

The Verdict

The ITAT allowed the assessee’s appeal and directed the Assessing Officer to grant the following exemptions:

• Ex gratia of Rs. 12,30,969 under Section 10(10B) of the Income-tax Act, 1961
• Earned leave encashment of Rs. 11,60,420 under Section 10(10AA)(i) of the Act

The Tribunal held that the assessee, as a BSNL employee absorbed from DoT, must be treated as a Central Government employee for the purposes of these exemptions. The CIT(A)’s order dismissing the appeal on the ground of delay was set aside, and the matter was remitted to the Assessing Officer for compliance with the directions.

What This Means For Similar Cases

BSNL Employees Absorbed from DoT Are Central Government Employees for Tax Purposes

• Rule 37A of the CCS (Pension) Rules, 1972 mandates that BSNL employees absorbed from DoT shall be deemed to have retired from Government service and are entitled to pensionary benefits as Central Government employees
• Section 10(10AA)(i) and Section 10(10B) must be interpreted harmoniously with Rule 37A to grant full exemption for leave encashment and retrenchment compensation
• Practitioners should argue that such employees qualify under Section 10(10AA)(i) (full exemption) rather than Section 10(10AA)(ii) (limited to 10 months’ salary)

Substantive Exemptions Cannot Be Denied Due to Procedural Lapses

• Appellate authorities (CIT(A), ITAT) have the power to condone delay and admit fresh claims where eligibility for exemption is established
• Reliance can be placed on CIT v. Pruthvi Brokers & Shareholders Pvt. Ltd. [(2012) 349 ITR 336 (Bom.)] to argue that procedural non-compliance should not defeat substantive rights
• Circular No. 14 (XL-35) dated 11.04.1955 supports the view that delay should be condoned where the assessee has a bona fide claim

Precedential Value of Coordinate Bench Decisions

• ITAT benches are bound by coordinate bench decisions unless distinguished or overruled by a higher court

• Practitioners can rely on:

  • Meghmala Sudhir Pathak v. ITO and Uttam Laxmanrao Shinde v. ITO (ITAT Pune) for the proposition that BSNL VRS benefits are exempt
  • Pradeep Hegde v. ITO (ITAT Bangalore) for the identical legal principle applied in this case
  • Kerala High Court’s decision in WP(C) No. 16360 of 2023 for binding precedent on the interpretation of Section 10(10AA)

• Assessees should file appeals promptly but can challenge dismissals on delay grounds by citing these precedents