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Salary

Girish (Student) (67 Points)

04 January 2011

My friend is a salaried employee and he has changed his employer(company) recently. but he need to be inform to his employer 3 months prior to the resignation. since he didnt informed now he is returning back 3 months salary to his employer of earlier company. In this case can we deduct returned salary from the Total salary income or not? pls help me ....

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6 Replies

U S Sharma (glidor@gmail.com) (21056 Points)
Replied 04 January 2011

its notice pay, or penalty, there is no provision for adjusting penalty with any income

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Amit Nishania (CA Final - Student) (495 Points)
Replied 04 January 2011

THE PREVIOUS EMPLOYER WILL ISSUE THE FORM 16 BY REDUCING THE SAME AMOUNT....

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Manmohan ACA, CS (Chartered Accountant ) (14243 Points)
Replied 04 January 2011

Yes

Girish (Student) (67 Points)
Replied 05 January 2011

Originally posted by : Amit Nishania
	THE PREVIOUS EMPLOYER WILL ISSUE THE FORM 16 BY REDUCING THE SAME AMOUNT....

Can you tell me under which provision the employer has to give form 16 for taking the salary back

CA.G.Muguntha Narayanan (Internal Auditor at TVS Motors) (2195 Points)
Replied 05 January 2011

Dear Girish,

Salary is taxable once the service is rendered. in the given case, ur friend has rendered the service and received the payment. Hence, the amout is taxable under salaries. However, there is no provision for deduction of notice pay in the Income tax act. But in any case, ur friend will not have any increased tax liability. I will expain this with an example,

Assume your friends total salary for the 3 months period is Rs.50,000. Assume a TDS of Rs.5,000. This TDS would have been deducted and the balance Rs.45,000 would have been paid by the employer to ur friend. Your friend would have repaid this 45,000 as notice pay. Hence, at the time of tax computation the TDS of Rs.5,000 can be claimed by ur friend. Therefore there is no scope for any increased tax liability.

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CA. Dashrath Maheshwari (TaXpert) (15103 Points)
Replied 05 January 2011

The old employer should include in Form No. 16 total salary paid (minus notice pay recovered). Some problems will arise, if the old employer does not want to co-operate and disclose in Form No. 16 total salary paid without deducting notice pay. In such a situation, will it be correct to state that the employee is chargeable to tax on salary of 13 months?

“Salary” is the recompense or consideration given to a person for the pains he has bestowed upon another’s business—Stroud’s Judicial Dictionary. The doctrine of real income is inapplicable to salary because section 15 of the Act imposes the charge when salary becomes due, whether paid or not—CIT v. P. Nataraja Sastri [1976] 104 ITR 245 (Mad.). Moreover, sections 15, 16 and 17 lay down the method of computation of the income under the head “Salaries”. They do not provide for deduction of notice pay or compensation or payment made to relieve oneself of an inconvenient contract from wage or salary receipts. It is also a settled law that tax will be payable on salary which is surrendered after it has become due. The point for consideration is, therefore, whether the “payment equivalent to notice pay” to the previous employer company, can be reasonably construed as forfeiture or recovery of wages effected by the employer in the terms of the employment contract. It is the annual income under the head “Salaries” that is assessable ; and any forfeiture of wages made before the close of the year reduces the amount of wages, due in terms of the contract of employment, for the services rendered during the year unless the contract of employment makes it clear that salary accrues or is due from month to month. It has been held that even salary foregone before the end of the accounting year when it was strictly due could not be regarded as income—CIT v. Mehar Singh Sampuran Singh Chawla [1973] 90 ITR 219 (Delhi). If the employer is entitled to withhold six months’ salary out of the total amount due for the previous year 2009-10, it is only the balance that has fallen due to the employee at the end of the year. If this contention is raised by the employee, the revenue authorities may ask for copies of the contract of employment and of the account of employee in the company’s books.

In CIT v. Raghunath Murti [2009] 178 Taxman 144 (Delhi), the assessee-managing director revised return because he had to refund certain sum to his employer-company as the same was found in excess of limits prescribed in the Companies Act, 1956. The Delhi High Court held that as the said refund was neither voluntary nor was it for any extraneous consideration, the same could not be held to be the assessee’s income and, therefore, was not assessable.

The above text is provided from the views of Dr. Vinod K. Singhania