Compensation paid for discontinuing job

vivek kumar jain (service/student) (559 Points)
Replied 09 December 2008

i think it should not be set off.....

(Guest)

No !

CA. Rajeev Aggarwal (Chartered Accountant) (3424 Points)
Replied 09 December 2008

No

Devendra (Qualified Audit Assistant) (521 Points)
Replied 09 December 2008

Nothing can be set off against income from salary.

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 09 December 2008

The set off provisions contained u/s 71 specifically provides that loss under the head Business or professionn cannot be set off against income from salaries. This implies that loss under any head [unless specifically provided otherwise e.g., capital gains, loss from race horses, etc,] other than B/P can be set off against income from salary.

But ensure that the amount paid to the employer on termination is not in the nature of capital receipt. If it is, it cannot be set off

Bala (CFO, Cogzidel) (59 Points)
Replied 09 December 2008

No, the compensation paid to employer cannot be setoff against the income.

To understand more clearly, I could refer "Loss of Pay" here. If you take leave more than the eligibility, company deducts "Loss of Pay". But, is it been adjusted against income when calculating income tax ? The answer is "NO". Because, it's a penalty for the mistake on the part of employee and hence, it's not adjusted.

Likewise, compensation is a kind of penalty for non-complying with the contractual obligation and hence, it cannot be adjusted against the income.

Regards

Bala

www.cogzidel.in

Ashish M (Chartered Accountant) (2731 Points)
Replied 10 December 2008

When the assessee pays the compensation for pre-terminating the job than the contracting period, it is in the nature of breach of contract and the amount paid by the employee is actually a kind of penalty paid under the penalty clause of the contract............

though the income tax act provides in the chapter of PGBP (explanation to Sec.37) that any expenditure paid as penalty for an offence shall not be deductibel, the same school of thought, in my view, may be applied to the income from salary, and accordingly such compensation shall never be deductibel at the very first place...........

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 10 December 2008

Sec 37 of Chapter IV D of the IT Act provides that any penalty paid for infraction of law is disallowed. But penalty paid for breach of any contract in the ordinary course of business is allowable as deduction.

Once can argue that since there is no specific provision under the head Income From Salary which allows deduction for the same, no deduction is allowable [mind it.. there is no specifice provision which disallows either]. However, there is no specific case law which deals with this issue, as far as my knowledge is concerned.

If the assessee wanna fight, he can argue that the payment made for breach of contract is for earning other source of income [i.e., from the employment he will undertake on termination] and, hence is allowable.

This is my view point.

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 10 December 2008

Sec 37 of Chapter IV D of the IT Act provides that any penalty paid for infraction of law is disallowed. But penalty paid for breach of any contract in the ordinary course of business is allowable as deduction.

Once can argue that since there is no specific provision under the head Income From Salary which allows deduction for the same, no deduction is allowable [mind it.. there is no specifice provision which disallows either]. However, there is no specific case law which deals with this issue, as far as my knowledge is concerned.

If the assessee wanna fight, he can argue that the payment made for breach of contract is for earning other source of income [i.e., from the employment he will undertake on termination] and, hence is allowable.

This is my view point.

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 10 December 2008

Sec 37 of Chapter IV D of the IT Act provides that any penalty paid for infraction of law is disallowed. But penalty paid for breach of any contract in the ordinary course of business is allowable as deduction.

Once can argue that since there is no specific provision under the head Income From Salary which allows deduction for the same, no deduction is allowable [mind it.. there is no specifice provision which disallows either]. However, there is no specific case law which deals with this issue, as far as my knowledge is concerned.

If the assessee wanna fight, he can argue that the payment made for breach of contract is for earning other source of income [i.e., from the employment he will undertake on termination] and, hence is allowable.

This is my view point.

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 10 December 2008

Sec 37 of Chapter IV D of the IT Act provides that any penalty paid for infraction of law is disallowed. But penalty paid for breach of any contract in the ordinary course of business is allowable as deduction.

Once can argue that since there is no specific provision under the head Income From Salary which allows deduction for the same, no deduction is allowable [mind it.. there is no specifice provision which disallows either]. However, there is no specific case law which deals with this issue, as far as my knowledge is concerned.

If the assessee wanna fight, he can argue that the payment made for breach of contract is for earning other source of income [i.e., from the employment he will undertake on termination] and, hence is allowable.

This is my view point.