The Kerala High Court (Ernakulam Bench) has held that the employees of a Government department who are absorbed into a Public Sector Undertaking (PSU), and whose pensionary benefits are explicitly governed by Rule 37A of the Central Civil Services (Pension) Rules, 1972 (CCS Rules) that treat them on par with Central Government servants for the purpose of calculating such benefits, are entitled to the full tax exemption on leave encashment under Section 10(10AA)(i) of the Income Tax Act, as if they had retired from the Central Government.
The High Court explained that the legal fiction created by the service rules, which equates them with Central Government servants for pensionary purposes, must be given full effect and read harmoniously with the provisions of the Income Tax Act. Consequently, an executive instruction from the employer cannot override these statutory rights.
A Single Judge Bench of Justice Harisankar V. Menon conducted a detailed analysis of Rule 37A of the CCS Rules, which governs the pension of government servants absorbed into a PSU. While the respondents relied on sub-rule (4), which states that absorbed employees ‘cease to be Government servants’ and are ‘deemed to have retired’, the Bench found this provision could not be read in isolation.
The Bench emphasized that sub-rule (8) of Rule 37A and its Explanation create a legal fiction, which explicitly states that the pension of an absorbed employee shall be calculated ‘in the same way as calculated in the case of a Central Government servant, retiring or dying, on the same day’. Further, sub-rules (22) and (24) create a special class for employees absorbed from DoT into BSNL, clarifying that their pensionary benefits are to be paid by the Government itself, distinguishing them from employees directly recruited by BSNL.
The Bench also acknowledged that a literal reading of Section 10(10AA)(i) of the Income Tax Act refers only to employees of the Central/State Government. However, it held that the framers of the tax law did not visualize a situation like the absorption of government employees into PSUs under specific service rules. Thus, the Bench concluded that different statutes must be read harmoniously to ensure that rights granted under one (the CCS Rules) are not defeated by the provisions of another (the Income Tax Act).
Lastly, the Bench clarified that the BSNL Corporate Office Letter was merely an executive instruction, and held that executive instructions cannot modify or amend statutory provisions. Therefore, the letter could not override the statutory benefits available to the petitioners.
Briefly, the petitioners in this case were the Sanchar Nigam Pensioners’ Welfare Association (SNPWA) and two of its members, who were retired employees of Bharat Sanchar Nigam Limited (BSNL). The second and third petitioners were originally employed with the Department of Telecommunication (DoT), a Central Government department. Following the formation of BSNL, they opted to be absorbed into the service of the new company. The petitioners subsequently availed the benefits of the BSNL Voluntary Retirement Scheme, 2019.
The dispute arose when BSNL, while disbursing the retirement benefits, deducted tax at source on the leave encashment amounts paid to these retired employees. This deduction was carried out based on a BSNL Corporate Office Letter. The petitioners filed a petition challenging this letter, contending that the leave encashment amount was fully exempt from tax under the Income Tax Act. Essentially, they sought the quashing of the letter and a direction to the Income Tax Department to refund the amount deducted.
Appearances:
Senior Advocate O.V. Radhakrishnan, along with Advocates George Varghese, S. Soorya Gayathry, and H. Vishnudas, for the Petitioner
Advocates S. Vaidyanathan, Mathews K. Philip, and Jose Joseph, for the Respondent
