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ITAT-No Income Tax On Adjustment of Excess Salary Recoverd
ITAT-No Income Tax On Adjustment of Excess Salary Recoverd
ITAT-No Income Tax On Adjustment of Excess Salary Recoverd
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ITAT-No Income Tax Liability on Adjustment of Excess Salary paid by the Employer in the Earlier
Years but Refunded/Recovered during the Present Year | 04-10-2015 |
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15/01/2022, 14:45 ITAT-No Income Tax on Adjustment of Excess Salary Recoverd
7. We find that there is no dispute that what can be taxed under the head ‘Income from salaries’ is an income
covered by section 15 which provides as follows :-
“Salaries
The following income shall be chargeable to income-tax under the head "Salaries":
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(a) any salary due from an employer or a former employer to an assessee in the previous year, whether
paid or not ;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer
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though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former
employer, if not charged to income-tax for any earlier previous year.
For EU Explanation 1 : For the removal of doubts, it is hereby declared that where any salary paid in advance is
included in the total income of any person for any previous year it shall not be included again in the
total income of the person when the salary becomes due.
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Explanation 2 : Any salary, bonus, commission or remuneration, by whatever name called, due to, or received
Accurately by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section.”
(Emphasis, by underlining, is supplied by us now)
Import and reconcile
8. It is thus clear that what can be taxed under section 15 is salary ‘due’, whether received or not, as also
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‘salary paid or allowed” to the assessee whether due or not. Of course, in certain situations, arrears of salary
Reporting are also taxable under this section, but that aspect of the matter, for the time being, is not relevant for our
purpose. Quite interestingly, the expression used in this section is “due” which represents amount payable,
rather than “earned” or “accrued” which would normally represent the income earned by the assessee or
avalara.com income which has accrued to the assessee. By the virtue of Explanation 1 to Section 15, where any salary is
paid in advance is assessed in the year of payment or, it being allowed, cannot be taxed in the year in which it
has become due. Similarly, by the virtue of Explanation 2 to Section 15, where an income has been assessed in
past, on the basis of it’s becoming ‘due’, it cannot be taxed again in the year of being paid or allowed. The net
effect of this statutory provision, so far s relevant to us, can be summarised as follows:-
- The salary received or allowed can be taxed on the basis of it’s becoming due or it’s being received or
allowed – whichever is earlier.
- The salary is not to be taxed on the basis of “accrual” since, in it’s conscious choice of words,
OPEN legislature has chosen the taxability on due basis or payment basis – whichever is earlier. We may add
that the use of the expression “allowed”, alongside “paid” refers to perquisites which are essentially
non monetary and cannot be paid as such.
- The Scheme of taxability of salary permits taxability of salary becoming due only once. Explanation 1
and Explanation 2 to section 15 unambiguously shows this thrust of the scheme of taxability of
salaries.
9. It is in this backdrop that we have to examine the connotations of expression “any salary due from an
employer” under section 15(1)(a) which can be brought to tax in the hands of the assessee.
10. In our considered view, in sharp contrast with the connotation of “accrual” of an income or of an income
“arising”, which refer to occurrence of an income and to income shaping into a measurable format respectively,
such as, money, the connotations of an income becoming “due from” someone refers to an unqualified right to
receive that income from that person. Viewed thus, mandate of section 15(1)(a) provides for taxability of an
income only when, and only to the extent the unqualified right to receive that salary, from the employer, has
come into existence. There are of course other clauses, i.e. 15(1)(b) and 15(1)(c) dealing with advance
payment of salaries and arrears, payments of salaries, but these clauses are not relevant for our present
discussions.
11. The question that really arises is whether the amount becoming due to the assessee in the present year
was Rs.4,56,821, as computed by the Assessing Officer, or it was only Rs.2,43,689 (i.e. net of excess salary
adjustment of Rs.2,13,132/- for earlier years) as claimed by the assessee. In other words, could the assessee
be legitimately demanded, as a matter of right, that she should be paid Rs.4,56,821 whether or not the excess
payments made in earlier years are adjusted by the employer or refunded by the assessee.
12. Hon’ble Supreme Court, in the case of Chandi Prasad Uniyal & Ors. vs. State of Uttarakhand [(2012) 8
SC 417], reproduced at www.indiankanoon.org/doc/8446951 , has, dealing with excess salary payments on
account of wrong fixation of salary- as in the present
case, observed inter alia as follows :-
"16. We are concerned with the excess payment of public money which is often described as “tax
payers money” which belongs neither to the officers who have effected over-payment nor that of the
recipients. We fail to see why the concept of fraud or misrepresentation is being brought in such situations.
Question to be asked is whether excess money has been paid or not may be due to a bona fide mistake.
Possibly, effecting excess payment of public money by Government officers, may be due to various reasons
like negligence, carelessness, collusion, favouritism etc. because money in such situation does not belong to
the payer or the payee. Situations may also arise where both the payer and the payee are at fault, then the
mistake is mutual. Payments are being effected in many situations without any authority of law and
payments have been received by the recipients also without any authority of law. Any amount
paid/received without authority of law can always be recovered barring few exceptions of extreme
hardships but not as a matter of right, in such situations law implies an obligation on the payee to repay
the money, otherwise it would amount to unjust enrichment."
(Emphasis, by underlining, supplied by us)
13. Clearly, therefore, the employer was under a legal obligation to recover the excess salary paid, on account
of wrong pay fixation, in the earlier years, from the salary which would have been normally payable after the
mistake was detected.
14. In our considered view, in the light of the above discussions, it was not open to the assessee to demand
that she should be paid entire amount of Rs.4,56,821 without any adjustments or refunds of the excess amount
received in the earlier years. We hold so in the light of the law liad down by Hon’ble Supreme Court which, as is
elementary, binds all of us under Article 141 of the Constitution of India. If the assessee was entitled to receive
only the net salary, net of recovery in respect of excess salaries received earlier, it cannot be said that the entire
amount of salary, without such a recovery, was due to her. What was due to the assessee was the salary
accrued during the year minus the excess salary received earlier.
15. On the facts of this case, the employer was well within his powers to make recovery for excess payments
made earlier. The excess payment made to the assessee was already detected. The amount which constituted
“salary due from an employer” was only the amount net of recovery, which the employer was legally
empowered to make, in respect of excess payments made on account of wrong pay fixation. The fact that the
assessee, on her own, refunded the amount of excess salary received due to wrong pay fixation, was a
gracious gesture, which is hallmark of academic fraternity anyway, on her part. Nothing, however, really turned
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15/01/2022, 14:45 ITAT-No Income Tax on Adjustment of Excess Salary Recoverd
on that. Whether she was to return the money or not, what was due to her as salary was salary accrued that
year as reduced by the recoveries sanctioned by the law laid down by Hon’ble Supreme Court. Since she was
gracious enough to refund the excess salaries received in earlier years, the periodic payments made to her
remained the same as normally due. The effect, however, remains the same. The salary due to the assessee
this year was only Rs.2,43,689. However, since she had refunded Rs.2,13,132 by cheque immediately upon
coming to know about excess salary payments to her, she was paid the amount of Rs.4,56,821/- which would
have been due to her but for this recovery. Whether she refunds the excess salary received in earlier years and
gets full salary for this year, or whether she gets net of recovery salary this year, the amount due to her from
employer, which can only be net of recoveries held permissible by Hon’ble Supreme Court, remains the same.
11 2 3 Viewed thus, the impugned addition of Rs.2,13,132 is not sustainable in law.
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16. In view of the above discussions, as also bearing in mind entirety of the case, we are unable to approve the
stand of the authorities below. We, therefore, direct the Assessing Officer to delete the impugned addition of Rs
2,13,132.
3 7 56
17 In the result, the appeal is allowed. Order pronounced in the open Court on this 15th day of September,
Google + 2015.
Sd/- Sd/-
S.S. Godara Pramod Kumar
(Judicial Member) (Accountant Member)
Ahmedabad, the 15th day of September, 2015
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