Query Regarding Salaries

The One Says:

This is interesting. Excellent question  :)

If I understand correctly what you are saying is that the employee is paid Salary (which is taxed ie TDS deducted) and from this taxed amount he pays a [b]penalty[/b] which when the employer recognised as income is taxed again.

However, this penalty for not complying with 'Notice Period Obligation' cannot be reasonably construed as an amount originating from income that is already taxed.

Even if this is the case (above), under the income tax act [b]Income[/b] is taxed whether it was previously taxed in the hands of another is not generally taken into consideration.

Further only amounts paid out of salary can be deducted therefrom for which provisions exist.

[b]In my opinion this is not a case of Double Taxation[/b]. Well I could be completely wrong also ?!!

Other opinions are welcome.

good question.

As we all know the basis of charging tax on salaries is on accrual or receipt which ever is earlier.

Here in the question you have said that the employer has treated the SUM payable as salary as Penalty income.
here we can understand that the employer has provided for the salary in the books( means due to the Mr.X ).

So the employer should have shown the penalty( sum payable as salary ) as a duduction from the salary.

Hence the amount is due to the Mr.X ( employee ) no matter whether received or not, hence taxable in the hands of the employee.

I feel the question of double taxation does not arise because the mode of chargability is diffent i.e. taxed as Salary in the hands of employee and as penalty income in the hands of employer. it is assumed that the employer has paid the salary and employee has paid the penalty as agreed.

Another view is that salary is chargable to tax only when employer has an intension to pay  and the employee has an intension to receive.

here employer has ready to pay the salary if he continued.

Can assume even more views.

The One Adds:

Under Income Tax provisions penalties in other cases are non-deductible so one case use this logic also.

Basically in htis question the person has raised the issue of taxablity of reimbusement of Notice pay by the new employer or deduction of notice pay by the exisitng employer from the taxable salary. In this regard I have to state that

1. The deduction made by the existing employer is on account of contractual obligations hence this deduction does not relates to salary hence there is no dedcution availble to the employee for deduction of notice pay.

2. Regarding charging of tax by the new employer on reimbursement of Notice pay- Being he is paying to an employee the same is taxable under the income tax Act.

3. In case the new employer sent the notice pay directly to the old employer the question of charging the tax will not arise. :P :D

Excellant Q!  

the same case i'm  faceing the current Audit of 1 comapany.  

my opinion is:

1.  the compensation received from the resigned employee is "Other income"  to the existing employer.
2. It is Breach of Contract.  No "accru or receipt" will arise.  
3.  No head-ache to the new employer.


But another doubt will arise:
Ex:  Mr.X is working in a small sized software company.  He got offer from a biggest software companies (say TCS / Infosys/ Satyam / IBM / Cognizant / etc...) if he is a key person  then the big companies will give the compensation to the existing employer of mr. X (indirectly).

In this situation:
1.  the receipt is other income to the existing employer.
2. No head-ache to the resigned employee (ie. Mr.X)
3. Woks men compensation to the new employer.

anyway i'll discuss with my Auditor and reply soooooon.  

Regs,

RK