2017 (4) TMI 965 - AT - Income Tax

Tribunal rules in favor of assessee on notice pay issue but dismisses appeal on EPF interest.

The Tribunal partially allowed the appeal, ruling in favor of the assessee on the disallowance of Notice pay issue under Section 16 of the IT Act. The ... Taxability of notice pay as salary - Chargeability of salary on due basis - Deduction for notice period under Section 16 of the Income-tax Act - Taxability/exemption of interest on Employees Provident Fund - Burden of proof on assessee to establish exemptionTaxability of notice pay as salary - Chargeability of salary on due basis - Deduction for notice period under Section 16 of the Income-tax Act - Whether amounts recovered by employers as notice pay, and thereby not paid to the assessee, are taxable as salary or excluded from taxable salary for the year. - HELD THAT: - The Tribunal examined the factual position that the employers paid gross salary to the assessee after deducting sums on account of notice pay pursuant to contractual agreement, so that the assessee actually received reduced amounts. The CIT(A) had applied the principle of chargeability of salary on a due basis and observed that Section 16 does not provide a deduction for notice pay, relying on precedents concerning accrual and waiver. The Tribunal distinguished that line of reasoning on the facts: here the sums in question were recovered by the employers before payment to the assessee and thus represent amounts not received by the assessee. The Tribunal held that where salary has been paid to the assessee only after recovery of notice pay under the employment agreement, the taxable quantum is the actual salary received by the assessee; there was no requirement to invoke Section 16 to permit such a deduction when the employer has already withheld the amount. Applying this reasoning to the facts, the Tribunal allowed the ground of appeal and held that the withheld notice pay is not chargeable to tax as salary in the hands of the assessee for the year under consideration. [Paras 7]Allowed - the actual salary received by the assessee, after recovery of notice pay by employers under agreement, alone is taxable; withheld notice pay not taxed as salary.Taxability/exemption of interest on Employees Provident Fund - Burden of proof on assessee to establish exemption - Whether the addition of interest income on Employees' Provident Fund (EPF) is sustainable where the assessee failed to furnish evidence of exemption. - HELD THAT: - The record shows the assessee had accepted that interest income from bank and interest from Reliance Infocom Ltd employee provident fund remained undisclosed. The Assessing Officer made additions which were sustained by the CIT(A). The Tribunal noted that the assessee did not produce supporting evidence to establish that the particular EPF interest income was exempt from tax. In absence of proof to attract any statutory exemption, the Tribunal found no reason to interfere with the concurrent finding of the authorities that the income is taxable. [Paras 8, 9]Dismissed - addition of EPF interest sustained because assessee failed to substantiate claim of exemption.Final Conclusion: Partly allowed: appeal allowed insofar as notice-pay amounts recovered by employers and not received by the assessee are not taxable as salary; appeal dismissed insofar as additions of interest (including EPF interest) are sustained for lack of evidence of exemption. Issues:1. Disallowance of amount received as Notice pay under the head 'Salary' u/s. 16 of the IT Act.2. Addition of interest received on Employees Provident Fund.Issue 1: Disallowance of Notice Pay:The case involved the disallowance of &8377; 2,76,744/- received as Notice pay under the head 'Salary' u/s. 16 of the IT Act. The Assessing Officer added the undisclosed salary income received from two previous employers to the total income of the assessee. The CIT(A) upheld the additions made by the Assessing Officer, stating that the deduction of notice pay is not provided in Section 16. The CIT(A) referred to the doctrine of real income and case laws to support the taxability of such income. However, the Tribunal found that the deduction made by the employer for the notice period was essentially a recovery of salary already paid to the assessee. The Tribunal held that the actual salary received by the assessee is taxable, allowing the ground of appeal of the assessee.Issue 2: Addition of Interest on Employees Provident Fund:Regarding the addition of &8377; 23,310/- as interest received on Employees Provident Fund, the assessee had accepted during assessment proceedings that this income was undisclosed in the return of income. The CIT(A) sustained the addition made by the Assessing Officer. The Tribunal noted that the assessee did not provide supporting evidence that this income was exempt from income tax. Therefore, the Tribunal dismissed this ground of appeal of the assessee.In conclusion, the Tribunal partly allowed the appeal of the assessee, ruling in favor of the assessee on the disallowance of Notice pay issue but dismissing the appeal on the addition of interest received on Employees Provident Fund.