Monday, 28 September 2015

Ahmedabad Tribunal upholds salary taxation net of refund of excess salary of past years


This Tax Alert summarizes a recent ruling of Ahmedabad Tribunal, in case of Vrajeshwari B. Parikh (Taxpayer) v. ITO on the issue of tax treatment of refund of excess salary paid in earlier years.


The Tribunal held that current year’s salary needs to be reduced by refund of excess salary paid in earlier years and the net salary alone is taxable. This is for the reason that salary is taxable on “due” basis and if it is found that excess salary has been erroneously paid in the past to which employee was never entitled, the employer can validly recover it from current year’s salary. In such circumstance, the net salary after reduction of past years’ excess salary alone becomes “due” to the employee. The mode of recovery of excess salary whether through payment of cheque by employee or by deduction from current year’s salary is not relevant.


The present ruling addresses a peculiar situation which may arise in salary taxation. In the present case, the salary paid in earlier years which was taxed in those years was discovered to be excessive in subsequent year and hence, recovered from salary of subsequent year.  The Tribunal held that what becomes “due” to the employee is the net amount of salary after recovery of excess of earlier years which alone is taxable as salary on “due” basis. The ratio of this ruling will be very useful to employees who are posed with similar situations like recovery of notice pay, forfeiture of deposits etc.


In certain circumstances, it is possible to exclude the excess salary in the respective base year itself. Reference may be made to Delhi High Court ruling in the case of CIT v. Raghunath Murti where the taxpayer had to refund salary received in excess of corporate law limits (in view of losses) which the High Court held was not taxable.

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