An employee has joined in the marketing department recently. Before joining our company, he was with a consultancy company at Chennai. Our company has paid one month notice pay to him. It is paid by the employee to the old employer. However, the old employer does not want to deduct the notice pay from the salary paid to the employee. Can we deduct notice pay from the salary to be paid by our company during the current financial year in Form No. 16 ? If the old employer and our company do not deduct notice pay from the salary paid, the employee will be liable to pay tax on salary of 13 months during the current year.
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Your company should include in Form No. 16 actual payment of salary (including notice pay) to the employee during the current year. 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 decision will help in your case to claim reduction for notice pay recovery. Even the employer can provide such reduction at the time of deduction of tax at source on the basis of this decision.
By - Dr. Vinod K Singhania
CAclubindia
