Apr 21, 2017, 02.07 PM IST
MUMBAI: The Income-tax Appellate Tribunal
(ITAT) which adjudicates Income-tax (I-T) disputes, has held that an
amount deducted by an employer for not serving out a notice period
cannot be brought to tax.
In this case, two companies while settling
dues had deducted salary for the notice period which the person had not
served, but this deduction was not taken into account during tax
assessment. However, ITAT (Ahmedabad bench) in its order dated April 18,
said only salary received would be taxable, and not portions which were
deducted by a company for not serving out a notice 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. And typically, when an employee resigns but does not
serve out the notice period (provided for in the employment agreement),
the employer deducts salary attributed to this period. However, I-T
authorities do not consider such deductions and seek to tax entire
salary due (that is, salary before allowing for such deduction). Hence,
the latest order acquires significance.
"The ITAT has recognized the concept of real
income, which is well accepted under I-T laws. It held that the salary
against which notice pay was adjusted had not become due, as the net
amount was paid by the employer. The employee had no right to receive
the portion of the salary that had been deducted, under the terms of
employment. Thus, the deducted amount could not be held as taxable salary income," said Gautam Nayak, tax partner, CNK & Associates.
In this case, which pertains to financial year
2009-10, N. Rebello, had resigned from two companies, viz: Reliance
Communication and Sistema Shyam Teleservices. Both companies had
deducted a notice pay of Rs. 1.10 lakh and Rs. 1.66 lakh respectively
and handed balance salary dues to Rebello.
Accordingly in his I-T return, Rebello claimed
as a deduction Rs. 2.76 lakh from gross salary income, as this amount
was not received by him. I-T authorities, in the course of assessment,
denied such deduction. Commissioner (Appeals), which is the first level
of appeal for a taxpayer, also upheld the action of the I-T authorities.
The Commissioner (Appeals) pointed 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 upheld. This led to Rebello filing an appeal
before the ITAT, which decided in his favour.
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