Is leave encashment received by legal heir taxable?

No , as per circular letter no F.35/1/65-IT(B) dated November 5, 1965 of CBDT in this regard which exempts receipts of leave encashment in hand of legal heir of employees. Similarly, widow of govt. official receiving leave encashment is not taxable in her hand vide circular 308 dated3/7/1987.
Answer specific to your question
Compute your exemption limit as per above and if the employer has already deducted the tax on it, claim it in your return for Asst Yr 2008-09 (FY 2007-08 ) and claim any refund which arises because of it.