The Income Tax Appellate Tribunal, Delhi, has clarified that employees of the Indian Institute of Technology, Delhi, who are governed by Central Government service rules, are entitled to the leave encashment exemption under Section 10(10AA)(ii) of the Income-tax Act, 1961, irrespective of whether their employer is formally classified as a central government department. This ruling resolves a long-standing ambiguity affecting academic and research staff in premier institutions.
Background & Facts
The Dispute
The appellant, Jayaram Bhyravabhotla, a former employee of the Indian Institute of Technology, Delhi, claimed exemption under Section 10(10AA)(ii) for leave encashment received upon retirement. The Income Tax Officer and the Commissioner of Income Tax (Appeals) denied the claim, holding that the exemption is available only to employees of the Central or State Government, and since IIT Delhi is a statutory body and not a government department, the appellant was ineligible.
Key Facts
- The appellant was appointed on 12.10.1990 pursuant to an appointment order dated 02.05.1990 (pages 1-4 of paper book)
- His service was governed by the rules framed by the Ministry of Education, Government of India (pages 5-6 of paper book)
- He retired from service and received leave encashment amounting to Rs. 12,45,000 in the assessment year 2019-20
- The Assessing Officer disallowed the exemption under Section 10(10AA)(ii) by order dated 09.05.2022
- The CIT(A) upheld the disallowance by order dated 19.12.2025
- The appellant contended that his employment conditions, including pay scales, leave rules, and retirement benefits, were aligned with Central Government service rules
Procedural History
- 12.10.1990: Appointment to IIT Delhi effective
- 02.05.1990: Appointment order issued
- 2019-20: Assessment year in dispute; leave encashment received
- 09.05.2022: Order under Section 154 passed by Assessing Officer denying exemption
- 19.12.2025: CIT(A) order upholding denial of exemption
- 18.05.2026: Hearing before ITAT Delhi
- 26.05.2026: Judgment pronounced
Relief Sought
The appellant sought reversal of the orders dated 09.05.2022 and 19.12.2025, and a direction to allow the exemption under Section 10(10AA)(ii) for the entire amount of leave encashment received, along with consequential relief in computation of taxable income.
The Legal Issue
The central question was whether an employee of the Indian Institute of Technology, Delhi, governed by rules framed by the Ministry of Education, Government of India, qualifies as an employee of the Central Government for the purpose of claiming exemption under Section 10(10AA)(ii) of the Income-tax Act, 1961.
Arguments Presented
For the Appellant
The appellant’s counsel, Sh. M.P. Rastogi, relied on the appointment order and the Ministry of Education’s service rules applicable to IIT Delhi, arguing that the institution operates under the administrative control of the Central Government and its employees are subject to the same service conditions as Central Government servants. He cited Dr. P Balasubramanian v. CCIT (2022) 448 ITR 318 (Madras), where the Madras High Court held that employees of institutions governed by Central Government service rules are entitled to the exemption, even if the employer is not a formal government department. He emphasized that the statutory framework, not the legal personality of the employer, determines eligibility.
For the Respondent
The Revenue, represented by Sh. Ravi Kant Choudhary, Sr. DR, contended that Section 10(10AA)(ii) explicitly restricts the exemption to employees of the Central or State Government, and IIT Delhi, being a statutory corporation under the IIT Act, 1961, does not fall within this category. The Revenue argued that the exemption must be interpreted strictly and that the Madras judgment was distinguishable as it involved a different factual matrix.
The Court's Analysis
The Tribunal examined the nature of IIT Delhi’s governance and the applicability of Central Government service rules to its employees. It noted that the appellant’s appointment, pay structure, leave rules, and retirement benefits were all governed by notifications issued by the Ministry of Education, Government of India, and not by any independent institutional policy.
"Such employees governed by the state or central Service Rules are very much entitled for the impugned leave encashment exemption."
The Tribunal adopted the reasoning in Dr. P Balasubramanian v. CCIT (2022) 448 ITR 318 (Madras) mutatis mutandis, holding that the key determinant under Section 10(10AA)(ii) is not the legal status of the employer as a government department, but whether the employee is subject to Central Government service rules. The Tribunal observed that the Revenue had not rebutted the appellant’s evidence showing direct application of Central Government service regulations to his employment.
The Tribunal further clarified that the exemption under Section 10(10AA)(ii) is intended to benefit employees whose service conditions mirror those of government servants, and denying it on the basis of corporate structure alone would defeat the legislative intent.
The Verdict
The appellant’s appeal was allowed. The orders of the Assessing Officer dated 09.05.2022 and the CIT(A) dated 19.12.2025 were set aside. The exemption under Section 10(10AA)(ii) is granted for the full amount of leave encashment received, amounting to Rs. 12,45,000. The appellant’s total income for assessment year 2019-20 shall be recomputed accordingly, with consequential relief in tax liability. The case is remanded to the Assessing Officer for rectification of the assessment order within four weeks.
What This Means For Similar Cases
Service Rules Trump Employer Status
- Practitioners representing employees of institutions like IITs, IIMs, AIIMS, or other autonomous bodies governed by Central Government service rules may now claim Section 10(10AA)(ii) exemption
- The focus must shift from the employer’s legal structure to the applicability of Central Government service regulations
- Documentation proving alignment with Central Government service rules (pay scales, leave rules, retirement benefits) is critical
Section 154 Rectification Can Be Used to Correct Legal Errors
- The Tribunal’s acceptance of the appeal against a Section 154 order confirms that rectification proceedings can be challenged on substantive legal grounds, not merely clerical or arithmetical errors
- Taxpayers may use this precedent to contest denials of exemptions based on misinterpretation of law, even if initially rejected under Section 154
Precedent from Other High Courts Is Binding in Principle
- The ITAT’s adoption of the Madras High Court’s reasoning signals that decisions from other jurisdictions on identical legal issues are persuasive and may be applied across benches
- Practitioners should cite analogous judgments from other High Courts or Tribunals when facing similar denials
