2015 (9) TMI 905 - AT - Income Tax

Addition on account of excess salary paid by the employer in the earlier years but recovered during the present year - Held that - 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 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 in the case of Chandi Prasad Uniyal & Ors. vs. State of Uttarakhand 2012 (8) TMI 928 - 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 ₹ 2,43,689. However, since she had refunded ₹ 2,13,132 by cheque immediately upon coming to know about excess salary payments to her, she was paid the amount of ₹ 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. Viewed thus, the impugned addition is not sustainable in law. We, therefore, direct the Assessing Officer to delete the impugned addition

Summary

Issues Involved:
1. Justification of the addition of Rs. 2,13,132 on account of excess salary paid by the employer in earlier years but recovered during the present year.

Issue-Wise Detailed Analysis:

1. Justification of the Addition of Rs. 2,13,132:

The core issue to be adjudicated was whether the learned CIT(A) was justified in upholding the addition of Rs. 2,13,132, which was excess salary paid in earlier years but recovered in the assessment year 2008-09. The assessee, an Associate Professor, had her salary fixed afresh in 1998 following the Fifth Pay Commission Report. However, an audit later revealed that she had been granted three increments in excess, leading to an overpayment of Rs. 2,13,132 during the period April 1998 to November 2006. This excess amount was refunded by the assessee during the year under consideration.

In her income disclosure for the assessment year 2008-09, the assessee reported a net salary income of Rs. 2,43,689 instead of the actual salary received of Rs. 4,56,821, reflecting the refund of the excess salary. The Assessing Officer, however, added back the Rs. 2,13,132 to the total income, arguing that the gross salary for the year was Rs. 4,56,821, and the excess salary refund pertained to earlier periods and should not reduce the salary for the current year.

The CIT(A) upheld the addition, noting that the salary accrued and due for the assessment year 2008-09 was Rs. 4,56,821, and the recovery of excess salary pertained to earlier years, not the current year. Therefore, the entire salary was taxable.

Upon further appeal, it was examined whether the salary due to the assessee was Rs. 4,56,821 or Rs. 2,43,689 after adjusting the excess salary refund. The tribunal referred to Section 15 of the Income Tax Act, which taxes salary on a due or received basis, and not on an accrual basis. The tribunal emphasized that the salary becoming due represents an unqualified right to receive that income. The Hon'ble Supreme Court's decision in Chandi Prasad Uniyal & Ors. vs. State of Uttarakhand was cited, which mandated the recovery of excess salary paid due to wrong pay fixation.

The tribunal concluded that the employer was legally obligated to recover the excess salary, and the amount due to the assessee was the net salary after such recovery. Thus, the salary due to the assessee for the year was Rs. 2,43,689, and the addition of Rs. 2,13,132 was not sustainable. The tribunal directed the Assessing Officer to delete the impugned addition.

Conclusion:

The appeal was allowed, and the addition of Rs. 2,13,132 was directed to be deleted, as the salary due to the assessee was correctly reported as Rs. 2,43,689 after accounting for the recovery of the excess salary paid in earlier years. The order was pronounced in the open Court on September 15, 2015.