Salary Taxation-Very urgent

[Dhirendra Srivastava]

I had a question regarding Taxation of salary. suppose if an employee who is working in a company for 5 years now got a job in another company.He had worked for 6 months in the previous year with a salary of Rs. 100000 pm. Now his contract of employment require him to give either 3 months notice or 3 months salary in lieu of notice i.e Rs. 3 Lac. His new salary is Rs. 200000 pm. So if employee paid 3 months salary to the company, at the time of computation of income from salary can he claimed deduction of Rs. 300000.00

[CA Rachit Agarwal]

There is no such deduction section for the sacrifice of the salary. 

No doubt that sacrifice of salary has enabled the assessee to earn a higher income and offer the same for taxation, however there is no such deduction clause.

General deduciton clause is only in case of Business/ Profession, Capital Gain, House Property and Income from other Sources.

[DEV KUMAR KOTHARI]

Dear Mr. Dhirendra Srivastava,
It would be better if you give your own views and information which you have gathered on the subject matter for discussion.

There seems  no specific provision for such a deduction. However, by applying theory of diversion by way of overriding title a case can be made out that the amount paid to ex-employer in lieu of notice does not accrue as salary. Better course  in order of priority  can be as follows:

I. If the new employer pays to the ex-employer  the amount of compensation as compensation for hiring employee of ex employer during notice period of employee. In this case salary from new employer will be reduced , there iwll be no accrual of salary to that extent. 

II. The ex employer  deduct compensation and do not pay salary or other dues to that extent and deduction is made as reversal of salary or reduction of salary by treating 'no notice' as non compliance of terms of employment leading to reduction of salary due.

III. A case can be made out for allowability of amount of compensation as business loss  which arises as a commercial adventure is undertaken by leaving old job without giving due notice to ex employer and  accepting new job at higher salary.  however, such business loss shall not be set off against salary , however, can be set off against other business/ professional or other income.  

[B L Bhojwani]

"The total income has to be computed in accordance with the provisions of the Act. The computation of income under each of the five heads will have to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction or adjustment on account of any expenditure can be made except as provided by the Act."_ Tuticorin Alkali Chemical and Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC).

 

In (2000) 3 SC 485 (K.V. Shivakumar Kumar Vs. Appropriate Authority), Hon'ble Supreme Court has held that equity or hardship are not relevant consideration for interpretation for taxing law.

 

In view of the foregoing, the payment of 3 month's salary by the employee to the Company in lieu of notice period is not an allowable deduction under the head "Income from salaries". No other head of income is applicable in this case.

AI Summary

Deductibility of salary paid in lieu of notice not allowed under Income from salaries; statutory deductions control. Payment of salary in lieu of notice is not an allowable deduction under the head Income from salaries; the tax law permits deductions only as expressly provided for each head. Alternative factual characterisations-new employer paying the ex employer, employer reducing salary, diversion by overriding title, or treating it as a commercial loss-are theoretical routes noted by commentators but do not establish a statutory deduction under the salaries head.