Amount Deducted for Notice Period is not Taxable as Salary

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.

FULL TEXT OF ITAT ORDER

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.