IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD “C” BENCH, AHMEDABAD

ITA No.1512/Ahd/2014
Assessment Year: 2008-09

Vrajeshwari B Parikh (Appellant) vs Income tax Officer (Respondent)
Date of Order: 15-09-2015

ORDER

Per Pramod Kumar AM:

1. The short issue that we are required to adjudicate, in this appeal, is whether or not, on the facts and in the circumstances of this case, learned CIT(A) was justified in upholding the addition of Rs.2,13,132 on account of excess salary paid by the employer in the earlier years but recovered during the present year. The assessment year involved is 2008-09 and the impugned order was passed by the learned CIT(A) on 3 ^rd February, 2014.

3. The issue in appeal lies in a very narrow compass of material facts. The assessee before us is an Associate Professor in the Government Medical College. As a result of the Fifth Pay Commission Report being implemented by her employer, i.e. Government of Gujarat, fixation of salary was done afresh in 1998. However, as the audit exercise revealed much later, this fixation of salary, which is the term used for re-deciding the salary as per revised norms, was a bit more generous than the Fifth Pay Commission Report itself. She was granted three increments in excess. When this error was detected by the auditor, she refunded the excess salary received, during the period April 1998 to November 2006, which worked out to Rs.2,13,132. It was in this backdrop that the assessee 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. However, in the course of scrutiny assessment proceedings, the Assessing Officer rejected the stand of the assessee and made an addition of Rs.2,13,132/- by justifying the same as follows :-

“Submission of the assessee is considered carefully but the same is not tenable. The assessee has put thrust on the fact that the assessee had right to receive reduced salary of Rs.2,43,689/- only for the FY 2007-08, which is not true. Actually, the employer computed her salary to the extent of Rs.4,56,821/- in respect of services rendered by her during the FY 2007-08 and therefore, the assessee was rightly paid gross salary of Rs.4,56,821/- for FY 2007-08. But, when it was observed by her employer that she was paid excessively in respect of the services rendered by her for earlier periods then only the employer directed her to return the excess salary received by her pertaining to earlier periods. Consequently, she returned excess salary of Rs.2,13,132/- through cheque to her employer which incidentally occurred during the year under consideration. The employer never reduced her right or reconsidered worth of her services for FY 2007-08 after deciding her pay of Rs.4,56,821/- for FY 2007- 08. Thus, she held the right to receive the salary of Rs.4,56,821/- for FY 2007-08 and she was paid accordingly. Further, the assessee followed mercantile system while computing her income which is evident from the fact in para 3 above that she offered interest on NSC on accrual basis. The case laws referred to are also not applicable in case of the instant assessee.

In view of the above discussions, it is evident that the assessee had the right to receive the salary of Rs.4,56,821/- and also received the same in consideration to her services during the FY 2007-08. She has wrongly reduced recovery of earlier period pay from the pay of FY 2007-08 as the same does not pertain to the period related to the FY 2007-08. Therefore, the amount of Rs.2,13,132/- is added back to the total income of the assessee for the AY 2008-09.”

4. Aggrieved, assessee carried the matter in appeal before the ld. CIT(A) but without any success. While rejecting the grievances of the assessee, learned CIT(A) observed as follows :-

“5.3 I have carefully considered the facts and circumstances of the case, the observations of the AO, the submissions of the assessee, material available on record and the judicial pronouncements on the subject. The undisputed facts of this case are that the assessee had drawn excess salary from A.Y. 1998-99 to 2007-08 from her employer and this was detected in A.Y. 2008-09, as a result of an audit objection. The employer, therefore, was obliged to recover the excess salary from the assessee, which he did in A.Y. 2008-09. It is also not disputed that the excess salary which was recovered from the assessee, did not pertain to the A.Y. under reference i.e. A.Y. 2008-09 and it pertained to earlier years. 5.4 Perusal of the records reveals that the salary accrued and due to the assessee in A.Y. 2008-09 was Rs.4,56,821/- and not Rs.2,43,689/-, as declared by the assessee. There was in fact, no recovery pertaining to A.Y. 2008-09 and all of the recoveries pertained to the period referable to A.Y. 1998-99 to 2007-08. It is also true that her employer never reduced her gross salary amount and what accrued and became due to her during the financial year 2007-08, relatable to A.Y. 2008-09, is her total salary of Rs.4,56,821/-, which is liable to be taxed. The lengthy arguments of the A/R relating to “accrual” or salary becoming “due” is misconceived and without any basis, more so over, when no amount of the recovery pertained to the period under consideration i.e. F.Y. 2007-08, referable to A.Y. 2008-09. In view of the above discussion, the order of the Assessing Officer in taxing whole of the salary accrued and due to the assessee during A.Y. 2008-09 is upheld. The assessee fails on this ground of appeal.”

5. The assessee is not satisfied and is in further appeal before us.

6. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

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":
(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 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.
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.
Explanation 2 : Any salary, bonus, commission or remuneration, by whatever name called, due to, or received 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)

8. It is thus clear that what can be taxed under section 15 is salary ‘due’, whether received or not, as also ‘salary paid or allowed” to the assessee whether due or not. Of course, in certain situations, arrears of salary 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 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, 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 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. Viewed thus, the impugned addition of Rs.2,13,132 is not sustainable in law.

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.

17 In the result, the appeal is allowed. Order pronounced in the open Court on this 15th day of September, 2015.

Sd/-                                                     Sd/-
S.S. Godara                           Pramod Kumar
(Judicial Member)                   (Accountant Member)
Ahmedabad, the 15th day of September, 2015