No Income Tax on Salary deducted for Notice Period Pay cut

The Income-tax Appellate Tribunal (ITAT) which adjudicates Income-tax (I-T) disputes, has held that an amount deducted by an employer for not serving out a notice period cannot be brought to tax.

In this case, two companies while settling dues had deducted salary for the notice period which the person had not served, but this deduction was not taken into account during tax assessment. However, ITAT (Ahmedabad bench) in its order dated April 18, said the only salary received would be taxable, and not portions which were deducted by a company for not serving out a notice period.

Accordingly in his I-T return, Rebello claimed as a deduction Rs. 2.76 lakh from gross salary income, as this amount was not received by him. I-T authorities, in the course of assessment, denied such deduction. Commissioner (Appeals), which is the first level of appeal for a taxpayer, also upheld the action of the I-T authorities. The Commissioner (Appeals) pointed out that under section 15 of the I-T Act, tax is triggered when the salary becomes due, irrespective of whether it is paid or not. Secondly, section 16 of the Act does not provide for any deduction made by the employer for the notice period. Thus, the deduction of Rs. 2.76 lakh claimed by Rebello was not upheld. This led to Rebello filing an appeal before the ITAT, which decided in his favour.

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