April 21, 2017

Amount Deducted By Employer For Not Serving Notice Period Cannot Be Brought To Tax: ITAT

Income Tax

The Income Tax Appellate Tribunal (ITAT) ruled that an amount deducted by an employer for not serving a notice period cannot be brought to tax.

This ruling stems from a case wherein two companies while settling dues had deducted salary for the notice period which a person had not served, but this deduction was not considered during tax assessment. In this regard, the Ahmedabad bench of ITAT in its order dated April 18, 2017 said, “Only salary received would be taxable and not portions which were deducted by a company for not serving a notice period.”

Under the IT 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 the notice period (provided for in the employment agreement), the employer deducts salary attributed to this period. However, IT authorities do not consider such deductions and seek to tax the entire salary due (that is, salary before allowing for such deduction). Hence, the latest order acquires significance.

In this regard, the Commissioner of Income Tax (Appeals) stated that under Section 15 of the IT 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.

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