BSNL VRS Retirees Absorbed From DoT Entitled To Leave Encashment Tax Exemption: Kerala High Court

The Kerala High Court has held that retired BSNL employees who were originally absorbed from the Department of Telecommunications (DoT) are entitled to full income-tax exemption on leave encashment under the Income Tax Act, 1961.

The writ petition was filed by the Sanchar Nigam Pensioners' Welfare Association and two retired officers of Bharat Sanchar Nigam Limited, who had opted for the BSNL voluntary Retirement Scheme, 2019.

The grievance arose when BSNL deducted tax at source on leave encashment amounts paid at the time of retirement, relying on a 2012 corporate officer letter which treated such retirees as non-government employees and applied the limited exemption under Section 10(10AA)(ii) of the Income Tax Act.

Sub-clause (ii) of Section 10(10AA) provides for a maximum eligibility for the cash equivalent, which does not exceed ten months.

The petitioners contended that they were originally Central Government employees under the Department of Telecommunication (DoT) and were absorbed into BSNL upon its formation, and therefore continued to be governed by Rule 37A of the Central Civil Services (Pension) Rules, 1972.

They argued that for pensionary and allied benefits, including leave encashment, their retirement must be treated as retirement from Central Government service, entitling them to full exemption under Section 10(10AA)(i).

BSNL and the Income Tax Department opposed the petition, asserting that once absorbed into BSNL, the petitioners ceased to be government servants and hence fell under Section 10(10AA)(ii), justifying the deduction of tax under Section 192 of the Act.

Justice Harisankar V. Menon held that Rule 37A of the CCS Rules clearly creates a special and distinct class for DoT employees absorbed into BSNL, deeming their pension and retirement benefits to be on par with those of Central Government servants.

Rule 37A of the CCS Rules specifically provides for the conditions for payment of pension on absorption consequent upon conversion of a Government Department into a Public Sector Undertaking (PSU).

The bench opined that,

"The provisions of sub-rule (23) of Rule 37A of the CCS Rules further make it clear that the cases of the employees of DoT who joined BSNL are to be seen as a specific class and they are to be extended pension in the manner prescribed under sub-rule (23). Furthermore, sub-rule (24) of Rule 37A of the CCS Rules makes the position more clear by providing that in the cases of employees who joined directly with BSNL, they will not be entitled for the afore benefits."

The Court observed that Rule 37A must be read as a whole, and when so read, it is evident that such employees continue to enjoy Central Government retirement benefits, notwithstanding absorption into a PSU.

The bench opined that,

"the provisions of Rule 37A (4) of the CCS Rules is not to be read in isolation. It also requires to be noticed that the provisions of 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 get 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 Court further held that provisions of different statutes must be harmoniously construed, and the Income Tax Act cannot be interpreted in a manner that defeats rights expressly preserved under the CCS Rules.

Accordingly, the writ petition was allowed, and the Court declared that BSNL VRS retirees absorbed from DoT are entitled to the benefit of Section 10(10AA)(i) of the Income Tax Act.

Appearances:

For Petitioner: Advocates, H. Vishnudas, O.V. Radhakrishnan, George Varghese and S. Soorya Gayathry

For Respondent: Advocates, S. Vaidyanathan, Mathews K. Philip and Jose Joseph