Excess Salary refunded - Income Tax Liability

By Vijay Kumar

HERE is an interesting story:

Vrajeshwari is an Associate Professor in a Medical College. As a result of the V Pay Commission, her salary was re-fixed in 1998. However, it came to be known in 2006 that her pay was fixed wrongly and she was paid an excess salary of Rs.2,13,132. When this error was detected, she refunded the excess amount to her department by cheque. It was in this backdrop that she disclosed net salary income of Rs.2,43,689 as against actual salary received by her at Rs.4,56,821. The same net salary was disclosed in form no.16 issued by the employer as well.

But the ITO did not agree. And the learned Commissioner (Appeals) agreed with the AO.

The aggrieved professor took the matter in appeal to the ITAT.

The question before the ITAT 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.

The Tribunal observed:

++ 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, 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.

The ITAT further observed,

++ 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. 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.

++ 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.

++ 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, remains the same.

The ITAT did not approve the stand of the authorities below and therefore, directed the Assessing Officer to delete the impugned addition of Rs 2,13,132.