Real income principle limits salary tax to net amount received; unsupported EPF interest exemption claim failed.

Where an employer recovers notice pay from salary before payment, only the net amount actually received constitutes taxable salary income under the real income principle, and the addition on that component was deleted. For interest claimed as exempt from Employees Provident Fund, the assessee failed to produce supporting evidence to establish exemption, so the addition was sustained. The appeal therefore succeeded only on the notice pay issue, while the provident fund interest adjustment remained undisturbed.

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Issues: (i) Whether notice pay recovered by the employer from salary is taxable as salary income or only the net salary actually received is taxable; (ii) Whether interest received on Employees Provident Fund is exempt and liable to be deleted from the addition.

Issue (i): Whether notice pay recovered by the employer from salary is taxable as salary income or only the net salary actually received is taxable.

Analysis: The salary was received after deduction of notice pay under the terms of employment. The dispute was not one of an allowable deduction under section 16, but of the correct salary income actually accruing and received. Since the employer had already recovered the notice pay from the amount payable, the assessee did not in fact receive that portion as salary. The doctrine of real income and the salary charge provisions supported taxation only of the amount actually received.

Conclusion: The issue was decided in favour of the assessee, and the addition on account of notice pay was deleted.

Issue (ii): Whether interest received on Employees Provident Fund is exempt and liable to be deleted from the addition.

Analysis: No supporting evidence was produced to establish that the interest income claimed as exempt was not taxable. In the absence of proof showing entitlement to exemption, there was no basis to disturb the appellate finding sustaining the addition.

Conclusion: The issue was decided against the assessee, and the addition on this count was sustained.

Final Conclusion: The appeal succeeded only on the notice pay issue, while the addition relating to Employees Provident Fund interest remained undisturbed.

Ratio Decidendi: Where salary is recovered by the employer before payment under the employment arrangement, only the net amount actually received constitutes taxable salary income; a claimed exemption must be supported by evidence.

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