ITAT Grants Tax Exemption on VRS Compensation and Leave Encashment

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has granted relief to a group of former BSNL employees who opted for retirement under the BSNL Voluntary Retirement Scheme (VRS), 2019. The Tribunal held that the compensation received under the scheme qualifies for exemption under Section 10(10B) of the Income Tax Act and that the employees are also entitled to full exemption on leave encashment under Section 10(10AA).

The assessees had originally filed their income tax returns treating the retrenchment compensation received from BSNL as taxable income since tax had been deducted at source by the employer. Subsequently, after becoming aware of favourable Tribunal decisions holding that compensation received under the BSNL VRS was eligible for exemption under Section 10(10B), they approached the appellate authorities seeking relief. However, many of the appeals were dismissed by the National Faceless Appeal Centre (NFAC) on grounds such as delay in filing, maintainability, or rejection of rectification applications.

Before the Tribunal, the assessees contended that although the scheme was termed a Voluntary Retirement Scheme, it was in substance a retrenchment scheme introduced to reduce BSNL’s workforce and operational costs. They argued that several benches of the Tribunal had already recognised the compensation as exempt under Section 10(10B). They also relied on judicial precedents supporting condonation of delays in similar BSNL employee cases.

The Tribunal noted that numerous benches across the country had consistently granted exemption under Section 10(10B) to BSNL employees who received compensation under the VRS-2019 scheme. It further observed that delays ranging from several hundred to over two thousand days had been condoned in comparable cases and that denying relief solely on technical grounds would result in injustice where the claims were otherwise legally admissible.

On the issue of leave encashment, the Tribunal referred to the Kerala High Court’s decision in Sanchar Nigam Pensioners Welfare Association v. Union of India, which recognized retiring BSNL employees under the VRS scheme as being entitled to the benefit available to Central Government employees. The Tribunal also took note of decisions holding that the enhanced exemption limit of Rs.25 lakh introduced through the 2023 notification is a beneficial provision that can be considered during appellate proceedings.

Thus, the Tribunal condoned the delays, allowed all the appeals on merits, directed that exemption under Section 10(10B) be granted on the retrenchment compensation received under BSNL VRS-2019, and further allowed exemption for the entire leave encashment amount under Section 10(10AA). The Tribunal also allowed the appeal arising from the rejection of a rectification application, holding that the exemption claim was otherwise legally admissible.

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