The deducted amount (Notice Pay) cannot be held as taxable salary income.
Dated: 18/04/2017: The Income-tax Appellate Tribunal has held that an amount deducted by an employer for not serving out a notice period cannot be brought to tax.
(A) ITAT: The Income-tax Appellate Tribunal which adjudicates: I-T: Income-tax disputes, has held that an amount deducted by an employer for not serving out a notice period cannot be brought to tax i.e: only salary received would be taxable, and not portions which were deducted by a company for not serving out a notice period.
"It is pertinent to note that the assessee has actually received the salary from his previous employers after deducting the notice period as per the job agreement with them. Therefore, in our considered view, the actual salary received by the assessee is only taxable and therefore, we allow this ground of appeal of the assessee."
(B) Income-tax Act, 1961-2017
Section - 15, Salaries.
15. The following income shall be chargeable to income-tax under the head "Salaries"-
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
Section - 16
Deductions from salaries.
16. The income chargeable under the head "Salaries" shall be computed after making the following deductions, namely:-
(ii) a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;
(iii) a deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.
Section - 17
"Salary", "perquisite" and "profits in lieu of salary" defined.
17. For the purposes of sections 15 and 16 and of this section,-
(1) "salary" includes -
Section - 143
81[On the day specified in the notice issued under] sub-section (2), or as soon afterwards as may be, after hearing such evidence as the assessee may produce and such other evidence as the Assessing Officer may require on specified points, and after taking into account all relevant material which he has gathered, the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund of any amount due to him on the basis of such assessment
Income escaping assessment.
147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)
Section - 148
Issue of notice where income has escaped assessment.
Central Government Act
Article 276 in The Constitution Of India 1949
276. Taxes on professions, trades, callings and employments
(C) The latest order as above acquires great significance.
The notice period and notice pay in lieu of notice period is applicable to employee/establishment/employer as per various enactments and terms and conditions/clauses of appointment letter/ contact of employment.
In case an employee resigns without serving the notice period the employer deducts salary (Notice pay) attributed to this period. Under the I-T Act, salary income is taxable on a due basis, regardless of whether it has been actually paid to an employee or not. I-T authorities do not consider such deductions (Notice Pay) and tax entire salary due: i.e. salary before allowing for such (Notice Pay) deduction.
The employee end up facing Income Tax: on amounts of salary ((Notice Pay): that is actually not paid to him/her.
Hence: The above latest order acquires great significance
As Finally: ITAT has recognized the concept of real income (after deduction of Notice pay) which is well accepted under I-T laws.
In other words: ITAT has held that the salary against which notice pay was adjusted had not become due, as the net amount was paid by the employer (after deduction of Notice Pay). Thus the employee had no right to receive the portion of the salary that had been deducted, under the terms of employment (and/or applicable enactments).
Hence, the deducted amount (Notice Pay) cannot be held as taxable salary income.
(D) In financial year 2009-10, employee N. Rebello, had resigned from two companies, Reliance Communication, Sistema Shyam Teleservices and Videocon Tele Communication.
Both M/s Reliance Communication Ltd and M/s. Sistema Shyam Teleservices Ltd companies had deducted a notice pay of Rs. 1.10 lakh and Rs. 1.66 lakh respectively (Total Rs.2.76 Lakh) and handed balance salary dues to N. Rebello but it was not taken into account during tax assessment.
Rebello claimed, in his I-T return, the deduction Rs. 2.76 lakh from gross salary income, as this amount was not received by him.
During assessment, I-T authorities denied such deduction.
Commissioner (Appeals) i.e.: the first level of appeal for a taxpayer: also upheld the action of the I-T authorities and thus denied such deduction, pointing out that:
Under section 15 of the I-T Act, tax is triggered when the salary becomes due, irrespective of whether it is paid or not.
Secondly, section 16 of the Act does not provide for any deduction made by the employer for the notice period.
Thus, the deduction of Rs. 2.76 lakh claimed by Rebello was not allowed to Rebello.
Rebello filed an appeal before the ITAT. ITAT decided in his favor.
(E) This appeal by the assessee is directed against the order of the Commissioner of Income-Tax (Appeals)-XXI, Ahmedabad dated 14.08.2013 for Assessment Year 2010-11.
2. The grounds of appeal raised by the assessee read as under:-
1. The learned C.I.T. (Appeals) has erred in confirming the disallowance of
Rs. 2,76,744/- on the ground that the amount received as Notice pay is liable to be taxed under the head "Salary" u/s. 16 of the IT. Act.
It is submitted that the amounts received of Rs. 1,64,636/- and Rs. 1,10,550/- both as Notice pay do not form part of the Salary Income as they are capital receipts.
It is submitted that on the basis of fact and decisions by Appellate Authorities, the amount received as Notice pay of Rs. 2,76,744/- be not taxed as Salary Income and the addition made be deleted.
4. The brief facts of the case are that the assessee is an individual, deriving income from salary, house property and other sources. For the year under consideration, the return of income was filed on 16.03.2011, declaring total income of Rs.11,45,880/-. Subsequently, the case was reopened by issuing notice under Section 148 of the Act on 04.07.2012 on the ground that the assessee has not disclosed the salary received from his previous two employers namely M/s. Videocon Tele Communication Ltd and Reliance
Communication Ltd. During the course of reassessment proceedings, the Assessing Officer observed that the assessee had worked with Reliance Communication Ltd from 01.04.2009 to 09.05.2009, Sistema Shyam Teleservices Ltd from 18.05.2009 to 24.02.2010 and Videocon Tele Communication Ltd from 03.03.2010 to 31.03.2010 and received salary of Rs.1,64,636/-, Rs. 13,95,880/- and Rs.5,46,060/- respectively; out of which the assessee has only shown the salary income of Rs.11,45,880/- received from Sistema Shyam Teleservices Ltd after claiming deduction under Chapter VI-A of the Act.
Since the assessee was failed to disclose the salary income from other two employers, the undisclosed salary income ofRs.1,64,636/- received from Reliance Communication Ltd and Rs.5,46,060/- received from Videocon Tele Communications Ltd were added to the total income of the assessee vide order dated 15.10.2012, passed under Section 143(3) r.w. 147 of the Act.
5. Aggrieved by the order of the ld. Assessing Officer, the assessee preferred appeal before the ld. CIT(A) who, after considering the submissions of the assessee, sustained the additions made by the Assessing
"4.3 I have considered the order of the AO and the submissions made by the appellant in this regard. Income under the head 'salary' is computed in accordance with Section 15,16 v& 17 of Income-tax Act. As per Section 15, salary income is charged on the due basis whether paid or not. Accordingly, the AO has charged the salary to income-tax on due basis. The deduction allowed under the head 'salary' is provided under Section 16
6. Aggrieved, the assessee is now in appeal before this Tribunal.
7. We have heard the ld. Departmental Representative and the perused the material available on record. We find that during the year under consideration the assessee served with Reliance Communication for 39 days for the period 01.04.2009 to 09.05.2009 and received a total salary of Rs.1,64,636/-, out of which Rs.1,10,550/- was recovered as notice pay as per agreement with the employer. Therefore, the assessee declared salary income of Rs.54,086/- after deducting notice pay of Rs.1,10,550/-.
Thereafter, the assessee joined in Sistema Shyam Teleservices Ltd where he served for a period from 18.05.2009 to 24.02.2010 and received a total salary of Rs.13,95,880/- out of which Rs.1,66,194/- was deducted as notice pay as per agreement with employer. Therefore, notice pay of total Rs.2,76,744/- was claimed in the return of income as deduction which was recovered from the salary by assessee’s previous employers as mentioned above.
The Ld. CIT(A) was of the view that no such deduction is available under Section 16 of the Act and the salary income is taxable on due basis or on paid basis.
After considering the facts as quoted above, we find that employers have made deduction from the salary which was paid to the assessee during the year under consideration because of leaving the services as per agreement made by the assessee and the respective employer.
We find that this is a case of recovery of the salary which is already made to the assessee for which we have not to refer Section 16 of the Act as mentioned by the ld. CIT(A).
It is pertinent to note that the assessee has actually received the salary from his previous employers after deducting the notice period as per the job agreement with them. Therefore, in our considered view, the actual salary received by the assessee is only taxable and therefore, we allow this ground of appeal of the assessee.
Shri Nandinho Rebello (Appellant) Vs DCIT Circle-14 Ahmedabad (Respondent)
ITA No. 2378/Ahd/2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH, AHMEDABAD
BEFORE SHRI S. S. GODARA, JUDICIAL MEMBER AND
SHRI AMARJIT SINGH, ACCOUNTANT MEMBER
Assessment Year: 2010-11,
Date of Hearing: 29/03/2017
Date of Pronouncement: 18/04/2017
Order pronounced in the Court on 18th April, 2017 at Ahmedabad.
(S. S. GODARA)
Ahmedabad; Dated 18/04/2017