1. This appeal by the assessee relates to the assessment year 198182, for which the previous year ended on 3131981.
2. During the relevant accounting period, the assessee was the Chief Secre tary to the Government of Kerala.He claimed that a sum of Rs. 5,925 received by him by surrender of earned leave was not taxable. The service rules of the Government of Kerala provided for surrender of earned leave even while an employee was continuing in service. The surrender was made while he was continuing in service. The claim was rejected by the ITO, who merely observed that the claim for exemption of the leave surrender salary is disallowed since it is taxable.
3. The claim of the assessee was rejected by the AAC also. He observed that a reading of Sections 16 and 17 of the Income-tax Act, 1961 ('the Act') will show that any payment received from an employer for the purpose of service rendered by an employee would come within the term 'salary' unless it is specifically exempted under Section 10 of the Act. He rejected the claim of the assessee that leave was a privilege conferred on the employee. He observed that the assessee had the option to enjoy the leave or en cash the same, that the amount received by him by en cashing the leave is in the nature of an ex gratia payment exigible to tax, that even assuming that the leave was a privilege, it was earned by virtue of the service render ed, that the payment received for the leave so earned was by performance of the duties and that the payment will, therefore, constitute 'salary'. He held that salary may include payments received from an employer over and above the salary received from the employer for the normal twelve months.
4. The grounds taken by the assessee are to the following effect. The AAC erred in holding that leave surrender salary is exigible to tax. He had also erred in holding that the amount will be liable to tax unless it is exempted under Section 10 and further in holding that the amount received was an ex gratia payment. The assessee has also taken a ground that the levy of interest under Section 217 of the Act was unjustified.
5. At the time of the hearing, the learned counsel for the assessee relied upon the decision of the Madras Bench of the Tribunal in N.B.Tendolkar v. ITO  1 SOT 7 and contended that the accumulated earned leave in the hands of an employee is a capital asset and the amount realised by encashment of the leave is a capital receipt and will not, therefore, be tax able. In this connection, it was pointed out by the learned counsel that the earned leave accrued to the assessee under the terms of the contract of service and that the exchange of this right for money is a capital receipt. The decision of the Madras Bench of the Tribunal referred to above related to the encashment of earned leave at the time of retirement of the employee.
It was pointed out by the learned counsel for the assessee that the Madras Bench of the Tribunal in the case of ITO v. T.V. Hindoocha [IT Appeal No. 1637 (Mad.) of 1981] has held that leave surrender salary will not be taxable, even when the surrender was made while continuing in service. In the order dated761982, in the above case, the Bench had followed the earlier decision in the case of N.B. Tendolkar (supra).
The learned counsel also relied upon the decision of CTT v. Manjushree Plantations Ltd.  125 ITR 150 (Mad.).This only lays down that any cash payment by an employer to an employee will not be perquisite for the purpose of Section 40(c)(iii) of the Act. This does not seem to be relevant.
6. As against this, the contentions advanced by the learned departmental representative were to the following effect : As per the service rules, there is no right to leave. Leave is only a benefit provided by the terms of the employment.The assessee had the option either to enjoy the leave or to en cash the same. This right flows from the terms of employment and, therefore, partakes the character of salary. The payment is relatable directly to the services rendered by the assessee. 'Salary' has been defined in Stroud's Judicial Dictionary as 'recompense or consideration given to a person for his pains bestowed upon another man's business'. The encashment has been allowed by the State Government only to obtain the uninterrupted service of the employee. The payment is in the nature of overtime allowance which is clearly taxable. The provision to surrender the leave is a benefit provided by the employer and, therefore, is a perquisite within the meaning of Section 17(2)(iii). In support of the position, reliance was placed on the decision of the Kerala High Court in CIT v. Common wealth Trust Ltd.  135 ITR 19 (FB).The fact that the terms of employment provided for leave with salary will show that it is part and parcel of the working conditions of the employee and the payment is, therefore, relatable to the service. The fact that Section 10(10AA) introduced by the Finance Act, 1982, with retrospective effect from 1-4-1978 provided for exemption of encashment of leave salary at the time of retirement, will indicate that the encashment of leave salary while continuing in service is not exempt from tax. The reasoning of the Madras Bench of the Tribunal in the case of N.B. Tendolkar (supra) that the accumulated earned leave is a capital asset, cannot, in any case, hold good in the case of encashment of the leave while in service. The decision which related to a case of encashment at the time of retirement, cannot be applied to the present case. With regard to the subsequent decision of the Madras Bench of the Tribunal in the case of T.V. Hindoocha (supra), it was contended by the learned departmental representative that the decision will not be correct in the light of the arguments already advanced by the department.
7. In reply, it was contended by the learned counsel for the assessee that the amount received by surrender of the leave even if it is a benefit, will not become salary in the light of the provisions contained in Section 17. Similarly, it was pointed out that the benefit will not also be a perquisite within the meaning of SECTION 17(2). In this context, it was pointed out that the decision of the Kerala High Court in the case of Commonwealth Trust Ltd. (supra), relied upon by the department, was one arising under Section 40(a)(v), which clearly roped in a benefit which will not constitute salary.
8. We have considered the matter. The nature of the amount received by surrender of the earned leave has been considered at length in the decision of the Madras Bench of the Tribunal in the case of N.B.Tendolkar (supra). It was held that the leave encashment amount is not taxable as income. It is a fact that it related to a case where the surrender of earned leave was made at the time of retirement and that some of the reasonings of the Tribunal in that case were based on this aspect. These reasonings will not obviously be applicable to the present case where the encashment of the leave was while continuing in service. But the reasoning of the Madras Bench that the accumulated leave was a capital asset and that the amount received by encashment of the same will be a capital receipt, will hold good even in the caseof encashment while continuing in service. We are in agreement with the view taken by the Madras Bench,towhich one of us, namely, the Vice President, was a party, that when an employee, whois entitled to leave,does not goon leave but works, he makes a sacrifice and that the sacrifice is permitted to be accumulated and carried over as anintangible asset and further that the right to go on leave will constitute a property in his hands in the same way as an intangible asset. It wasobserved by the Madras Bench that the accumulated earned leave will not cease to be an intangible asset merely because it could be exchang ed for money or converted into money or because the encashment of the asset can be made only by surrender of the same to the employer. Once the accumulated earned leave is held to be a capital asset, the time of conversion of the same into cash does not seem to be material. It will still be a case of conversion of a capital asset into money, whether the conversion is made while continuing in service or at the time of retirement.
In this context, it is pointed out by the learned departmental representative that the Madras Bench had made an observation that the receipt was a nonrecurring receipt. This was in the light of the fact that in that particular case, the encashment was allowable only at the time of retirement. Where encashment is allowed while continuing in service, there may be more than one encashment. But it will still be a casual receipt because there cannot be any fixed periodicity about the encashment which is dependent upon the volition of the employee. Once it is held that the accumulated earned leave is a capital asset, it will not cease to be so merely because it is converted into money piecemeal and not in one lot.
9. The subsequent decision of the Madras Bench, dated 761982, in the case of T.V. Hindoocha (supra), was a case of encashment of leave salary while the assessee was continuing in service. In that case also, the revenue sought to distinguish the earlier decision of the Tribunal in the case of N.B. Tendolkar (supra). The contention was rejected by the Tribunal which held that the ratio of the earlier decision and the principles stated therein are equally applicable to a case of encashment of leave while con tinuing in service. It is observed by the Tribunal that "Evidently, the amount is sought to be charged under the head 'salary'. The definition of salary in Section 17, which is an inclusive one, sets out various items which fall within the expression 'salary' for the purpose of charge to income-tax in accordance with Sections 14, 15 and 16 of the Act but none of the clauses apparently covers a payment of the nature involved in this case, namely, a payment received for surrendering the right to any leave with pay." Since the definition was an inclusive one, the Tribunal then examin ed whether the amount can fall under the ordinary meaning of salary and it was held that it will not fall within the meaning of the word 'salary' because when the employee receives any payment for surrendering his leave or for not availing his leave, it was not for any services rendered but is as compensation for his right to enjoy the leave which he surrenders.
10. We may now consider the contention advanced by the department that the leave encashment is in any case a benefit and that it will, there fore, be salary within the meaning of Section 17. In this context, the learned departmental representative relied upon the decision of the Kerala High Courtin Comm on wealth Trust Ltd. 's case (supra). In that case, reference was made by the High Court to the term' benefit' in connection with Section 40(a)(v). It was observed by the High Court after referring to the section that the term 'salary' for the purpose of the section has to be understood as excluding all allowance sand per quisites other than dearness allowance and that the sub clause uses the term 'benefit, amenity or perquisite' as opposedto salary evidently indicating that these all together will exhaust what an employee obtains in return for his service. The word 'benefit' has not been included in Section 17 in the manner in which the same has been shown in Section 40(a)(v). The word 'benefit',however, occurs in Section 17(2) in the inclusive definition of the term 'perquisite'. Clause (3) of the same section refers to the value of a benefit in the cases mentioned in subclauses (iii)(a) to (iii)(c). These clauses are not attracted to the present case. We are, therefore, inclined to accept the contention of the learned counsel for the assessee that even if the encash ment is a benefit, it will not constitute 'salary' within the meaning of Section 17.
11. Then there remains the contention of the departmentthat by intro ducing Section 10(10 AA) by the Finance Act, 1982, with retrospective effect from 141978, the Legislature hasspecifically excluded from taxation the amount received by encashment of earned leave at the time of retirement of an employee of the Central Government or a State Government and that this will indicate that no exemption was contemp lated with regard to the encashment, of earned leave while continuing in service.This contention was alsorejected by the Madras Bench of the Tribunal in the case of T.V. Hindoocha (supra). We are in agreement with the view taken by theMadras Bench that the fact that Section 10(10AA) specifically exempted encashment of earned leave at the time of retirement, does not necessarily mean that it was chargeable otherwise and that the question has to be decidedby the Tribunalonits merits. In viewof what is stated earlier, we hold that the sum of Rs. 5,925 received by the assessee by surrender of earned leave is not taxable.