Tax Deduction for amount paid as Notice Period Buyout to Employer

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  1. ZED

    ZED Well-Known Member

    It is at the risk of assessee.

    Yes.


    Sir in previous post also said
    "However, in case the employee is required to pay notice period salary, no deduction of such amount paid is allowed to him."

    As mentioned by the experts above, there is no specific provision which provides for deduction on notice period amount.

    I personally would not advise doing that. Demand can be raised and in that you even interest will be charged however, penalty should not be levied on the ground of lack of clarity in this regards. The benefit of doubt should be given to the assessee.
    Unless you are willing to follow the channel of appeals , I would not recommend doing that.
     
  2. ZED

    ZED Well-Known Member

    I wish to add one thing.
    Some judgement suggests that such bonds are not legal.
    I am studying the cases and saying anything now would be premature.

    So far, what I studied suggest:

    Some judgement suggests that only the loss which has occurred to the employer can be recovered and not just any amount mentioned in the contract. The loss would be the expense of staff training etc and not the salary amount.The actual loss is to be determined by the court and is not determined solely on the basis of contract.

    Note: I AM NOT SAYING THAT COMPENSATION IS NOT TO BE PAID TO THE EMPLOYER. I AM SAYING THAT COMPENSATION HAS TO BE DETERMINED BY THE COURT AND ONLY THAT COMPENSATION NEEDS TO BE PAID AND NOT THE ENTIRE SALARY OR AMOUNT MENTIONED IN THE CONTRACT.


    As per S.27 of the Indian contract Act,1872 one can not be restrained for exercising a lawful employment or any business/profession.

    Further as per the THE BONDED LABOUR SYSTEM (ABOLITION) ACT, 1976 , no one can force anyone to be a bonded labour.


    S.4(2) After the commencement of this Act, no person shall- (a) make any advance under, or in pursuance of, the bonded labour system, or (b ) compel any person to render any bonded labour or other form of forced labour.


    S.3 The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act, or in any instrument having effect by virtue of any enactment other than this Act.


    S.2(g) "bonded labour system" means the system of forced, or partly forced, labour under which a debtor enters, or has, or is presumed to have, entered, into an agreement with the creditor to the effect that,-

    (i) in consideration of an advance obtained by him or by any of his lineal ascendants or descendants (whether or not such advance is evidenced by any document) and in consideration of the interest, if any, due on such advance, or

    (ii) in pursuance of any customary or social obligation, or

    (iii) in pursuance of an obligation devolving on him by succession, or

    (iv) for any economic consideration received by him or by any of his lineal ascendants or descendants, or

    (v) by reason of his birth in any particular caste or community,- he would-
    (1) render, by himself or through any member of his family, or any person dependent on him, labour or service to the creditor, or for the benefit of the creditor, for a specified period or for an unspecified period, either without wages or for nominal wages, or

    (2) for the freedom of employment or other means of livelihood for a specified period or for an unspecified period, or

    (3) forfeit the right to move freely throughout the territory of India, or

    (4) forfeit the right to appropriate or sell at market value any of his property or product of his labour or the labour of a member of his family or any person dependent on him, and includes the system of forced, or partly forced, labour under which a surety for a debtor enters, or has, or is presumed to have, entered, into an agreement with the creditor to the effect that in the event of the failure of the debtor to repay the debt, he would render the bonded labour on behalf of the debtor;


    [Explanation.-For the removal of doubts, it is hereby declared that any system of force or partly forced labour under which any workman being contract labour as defined in clause (b) of subsection (1) of section 2 of the Contract Labour (Regulation and Abolition) Act, 1970 (73 of 1970), or an inter-State migrant workman as defined in clause (e) of sub-section (1) of section 2 of the Inter-state Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979 (30 of 1979), is required to render labour or service in circumstances of the nature mentioned in sub-clause (1) of this clause or is subjected to all or any of the disabilities referred to in subclauses (2) to ( 4), is "bonded labour system" within the meaning of this clause].



    S.2(1)(b) of Contract Labour (Regulation and Abolition) Act, 1970 (73 of 1970) a workman shall be deemed to be employed as "contract labour" in or in connection with
    the work-of:-an establishment when he is hired in or in connection with such work by or

    through a contractor, with or without the knowledge of the principal employer;
     
    Last edited: Jul 16, 2016
  3. ZED

    ZED Well-Known Member

    Chandrashekhar Sir, it would be great if you can share your views in this aspect. I am still at the starting stage of understanding this bonded system process.
    I also request V.K.Khanna Sir and Karan Batra Sir to share their knowledge.
     
  4. Tax_payer_2017

    Tax_payer_2017 New Member

    I did not serve the 1 month notice period and quit the company by just sending an official mail.I was with the company for only 16 days. I got the salary as per the last working day of the month. After 3 months of leaving the company I got a mail to pay back certain recovery amount due to not serving notice period. So if I pay that amount will my net salary become the (salary paid-recovery amount )and the tax calculation will be on initial salary paid or the adjusted salary?.How this will reflect in 26AS and form 16? Already in the e-filing site the initial salary is reflecting as the amount paid to me. recovery amount is not mentioned there.
     
  5. ZED

    ZED Well-Known Member

    This is such an area where we can only take a view and can not say anything adamantly. I sense the lack of justice while interpreting the issue.

    In my personal viewpoint, the salary was paid to you as per the terms of the agreement. The Income Tax Act does not provide for deduction on account of payment or adjustment in salary due to aforementioned reason.

    As per S.15,
    The following income shall be chargeable to income-tax under the head "Salaries"—

    (a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;

    (b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;

    (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.


    Since the salary was RECEIVED by you, by definition, it will form part of your income and any amount which you will pay to your former employer would not be allowed to be deducted.


    The form-16 from the previous employer would show the gross salary only. They will not revise the TDS return because for them also, as per S.192 tax is required to be deducted when the salary is paid on the amount of salary as computed.


    Form 26-AS will show data as per the TDS return filed by your former employee, it would show the gross amount only. The tax credit should also not be changed.
     
  6. CA Abhishek Saini

    CA Abhishek Saini New Member

    No it is not taxable as salary. Please go through below case law of ITAT Mumbai.

    HIGHLIGHTS

    • The Income-tax Appellate Tribunal has held in two cases in April,2017 that an amount deducted by an employer for not serving out a notice period cannot be brought to tax.
    • In this case, 2 companies had deducted salary for notice period which the person had not served, but it was not taken into account during tax assessment.

    MUMBAI: The Income-tax Appellate Tribunal (ITAT) which adjudicates Income-tax (I-T) disputes, has held that an amount deducted by an employer for not serving out a notice period cannot be brought to tax.

    In this case, two companies while settling dues had deducted salary for the notice period which the person had not served, but this deduction was not taken into account during tax assessment. However, ITAT (Ahmedabad bench) in its order dated April 18, said only salary received would be taxable, and not portions which were deducted by a company for not serving out a notice period.

    Under the I-T Act, salary income is taxable on a due basis, regardless of whether it has been actually paid to an employee or not. And typically, when an employee resigns but does not serve out the notice period (provided for in the employment agreement), the employer deducts salary attributed to this period. However, I-T authorities do not consider such deductions and seek to tax entire salary due (that is, salary before allowing for such deduction). Hence, the latest order acquires significance.

    "The ITAT has recognized the concept of real income, which is well accepted under I-T laws. It held that the salary against which notice pay was adjusted had not become due, as the net amount was paid by the employer. The employee had no right to receive the portion of the salary that had been deducted, under the terms of employment. Thus, the deducted amount could not be held as taxable salary income," said Gautam Nayak, tax partner, CNK & Associates.


    In this case, which pertains to financial year 2009-10, N. Rebello, had resigned from two companies, viz: Reliance Communication and Sistema Shyam Teleservices. Both companies had deducted a notice pay of Rs. 1.10 lakh and Rs. 1.66 lakh respectively and handed balance salary dues to Rebello.



    Accordingly in his I-T return, Rebello claimed as a deduction Rs. 2.76 lakh from gross salary income, as this amount was not received by him. I-T authorities, in the course of assessment, denied such deduction. Commissioner (Appeals), which is the first level of appeal for a taxpayer, also upheld the action of the I-T authorities.



    The Commissioner (Appeals) pointed out that under section 15 of the I-T Act, tax is triggered when the salary becomes due, irrespective of whether it is paid or not. Secondly, section 16 of the Act does not provide for any deduction made by the employer for the notice period. Thus, the deduction of Rs. 2.76 lakh claimed by Rebello was not upheld. This led to Rebello filing an appeal before the ITAT, which decided in his favour.
     
    ZED likes this.
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