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Recovery of Notice Pay for Notice Period is Deductible and Not Taxable-ITAT

recovery-of-notice-pay-for-notice-period-is-deductible-and-not-taxable-itat

The ITAT in a recent case ruled that notice pay recovered from an employee by the employee for not serving notice period does not amount to accrual of salary income and thus cannot be taxed.

Read the case details.

Case Title
Shri Nandinho Rebello Vs. DCIT, Circle-14, Ahmedabad
Court
ITAT, Ahmedabad Bench, Ahmedabad
Appeal No./Citation
ITA No. 2378/Mum/2013
Section covered
15
Order Result
Appeal allowed. Decided in favour of assessee.
Date of judgment
18.04.2017

Facts of the case:

The assessee is an Individual deriving income from salary, income from house property and other sources. The assessee was assessed in scrutiny assessment u/s 147/143(3) by the DCIT-Circle 14, Ahmedabad.

During the relevant previous year, the assessee was employed with three employers and resigned from two companies without serving the notice period for which both the companies had recovered notice pay. 

The salary income received and notice pay recovered are tabulated below-


Employers
Period of employment
Salary Received
Notice Pay Recovered
Salary Income offered to tax in the Income Tax Return
Reliance Communication Ltd
From 01.04.2009 to 09.05.2009
1,64,636
1,10,550
54,086
Sistema Shyam Teleservices Ltd
From 18.05.2009 to 24.02.2010
13,95,880
1,66,194
12,29,686
Videocon Tele Communication Ltd
From 03.03.2010 to 31.03.2010
5,46,060
Nil
5,46,060

Therefore, the assessee has claimed Rs. 2,76,744 as a deduction for recovery of notice pay by the employer out of the salary income and offered the net salary income to tax.

The AO disallowed the deduction claimed for the recovery of notice pay by the employer.


Against the order, the assessee went to appeal before the CIT(A). The CIT(A) dismissed the appeal and confirmed the addition made by the AO.


The CIT(A) given the following reasons for disallowing the appeal of the assessee-


1. Under the Income Tax Act, 1961, salary is taxed on 'due' basis whether paid or not u/s 15. 


2. No deduction for notice pay recovery is provided in section 16.


3. The doctrine of real income is inapplicable because Section 15 of the I.T. Act imposes the charge when the salary becomes due whether paid or not. The deduction of the notice period is the application of income after it has become due.



Issues: 

Whether payment or recovery of notice pay by the employer from the employee is allowed as a deduction from the salary income under the income tax law?

Arguments of the assessee:

Before the Tribunal, none appeared for the assessee and the Tribunal decided the case ex-parte after hearing the ld. Departmental Representative and perusing the material available on record.

Arguments of the department:

Before the Tribunal, the Ld. D/R relied upon the decision of the lower authorities.

The Decision:

The Tribunal found that Rs. 2,76,744 was recovered as notice pay as per agreement with the employer. The assessee has declared the salary income after deducting the notice pay recovered by his previous employers.

It was observed that employers have made a deduction from the salary which was paid to the assessee during the year under consideration because of leaving the services as per the agreement made by the assessee and the respective employer.

It was held that it is a case of recovery of the salary which was already paid to the assessee by his previous employers and thus references to section 16 were not required.

The assessee had actually received the salary from his previous employers after deducting the notice period as per the job agreement.

With this reasoning, the Tribunal decided the issue in favor of the assessee and held that the actual salary received by the assessee is only taxable and deleted the addition made by the AO.

Analysis:

The decision is in favor of the taxpayers and can be seen as a big relief to the salaried assessees. It happens in many cases where an employee has to resign or leave service without serving the notice period for the his employer recovers notice pay.

Such recovery of notice pay cannot be construed as income since the same was actually never received by the employee. The question of accrual of income in such cases does not arise.

The Tribunal has rightly applied the theory of real income according to which taxpayers are not subject to tax on income which was never accrued to them.

Deductions made by an employer for not serving notice period cannot be treated as income. An employee is required to pay tax only on salary income actually accrued and received by him from his employer and not on the salary income which was never received by him.


Full text of the judgment:

IN THE INCOME TAX APPELLATE TRIBUNAL
“A” BENCH, AHMEDABAD

BEFORE SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER, AM

I.T.A. No. 2378/Ahd/2013
(Assessment Year: 2010-11)

Shri Nandinho Rebello, 
A/301, Suflam Flats, Ami Kunj, 
Nr. Naranpura Post Office, Ahmedabad-380013
Vs
DCIT, Circle-14, 
Ahmedabad
PAN/GIR No. ABYPR 0637 F
Appellant

Respondent

Assessee by
:
None
Revenue by
:
Shri Deepak Sutaria, Sr DR

Date of Hearing
:
23/03/2017
Date of Pronouncement
:
18/04/2017

O R D E R

PER AMARJIT SINGH, ACCOUNTANT MEMBER :

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.

2. The learned C.I.T. (Appeals) has erred in adding Rs. 23,310/- as interest received on Employees Provident Fund. It is submitted that neither assessee nor the A.R. has accepted such addition and the addition made of Rs. 23,310/- being exempt income, the same cannot be added under the Act. It is submitted that the addition of Rs.23,310/- be deleted.

3. None appeared for the assessee at the time of hearing. The issue being small, the appeal is decided ex-parte qua the assessee, after hearing the ld. Departmental Representative and perusing the material available on record.

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 of Rs.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 Officer as under:-

“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, which is as under:

"(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.]"

Clearly the deduction made by the employer for the notice period is not provided in Section 16. The appellant's argument of the taxability of real income is not tenable as the doctrine of real income is inapplicable, because Section 15 of the I.T. Act imposes the charge when salary becomes due whether paid or not The deduction of notice period is essentially application of income, after it has become due. The Madras High Court in the case of CIT Vs. P. Natraja Shastri (1976) 104 ITR 295 has held that where remuneration has already accrued to assessee and it was waived, it was rightly brought to tax by the Assessing Officer. The appellant during the hearing has relied upon the decision of Bombay High Court in the case of Ramchandra Dhonde Datar Vs. CIT (1961) 43 ITR 22 (Bom). The above case-law is irrelevant to the fact of the case, as it relates to whether compensation paid by the employer for termination of the employment is taxable. The instant case is allowability of deduction made by the employer for the notice period. Accordingly, the ground of the appellant is dismissed. “

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.

8. With regard to Ground No.2, we observe that at the time of assessment proceedings the assessee had accepted that the interest income from bank and interest income from Reliance Infocom Ltd employee provident fund was remained undisclosed in the return of income. Thereafter, the addition made by the assessing officer was sustained by the Ld. CIT(A).

9. We have considered the rival submission and find that the assessee has not provided supporting evidence that the particular income is exempt from the income tax, therefore we do not find any reason to interfere in the finding of the Ld.CIT(A). Thus, this ground of appeal of the assessee is dismissed.

10. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Court on 18th April, 2017 at Ahmedabad.


Sd/-
(S. S. GODARA)
JUDICIAL MEMBER


Sd/-
(AMARJIT SINGH)
ACCOUNTANT MEMBER 
Ahmedabad;       Dated  18/04/2017

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