My client left two jobs in the same year and each employer recovered notice pay out of his salary. The Assessing Officer has added back the gross salary from Form 26AS. Is the recovery deductible?
The Tribunal held that only the salary actually received is taxable. Where the employer recovers notice pay under the employment agreement and pays the employee the net amount, the case is one of recovery of salary and s.16 does not come into it at all; the Tribunal expressly declined to test the claim against the list of deductions in s.16.
Decided by the ITAT (Shri S.S. Godara, Judicial Member and Shri Amarjit Singh, Accountant Member ('A' Bench, Ahmedabad)) on 2017-04-18, reported as ITA No. 2378/Ahd/2013; Assessment Year 2010-11. It bears on section 15, section 16, section 17(1), section 143(3), section 147, section 148 of the Income Tax Act 1961, in Salary & Perquisites, Reassessment & Reopening and Deductions & Disallowances matters.
This is the order practitioners cite when a s.148 or s.143(3) addition is built purely on the gross figures in Form 16 or Form 26AS while the employee's bank credit was lower. The reasoning is narrow and should be pleaded narrowly: the Tribunal did not accept the taxpayer's own case that notice pay is a capital receipt, and it did not hold that s.15 yields to the real income doctrine. It held that on these facts the employer had recovered part of the salary paid, so the amount that reached the employee was the salary. The contrary reasoning is set out in the same order in the CIT(A)'s extract — that s.15 charges salary when it becomes due whether paid or not, that the deduction is not among those listed in s.16, and that a recovery of notice pay is an application of income after it has become due, with CIT v. P. Natraja Shastri (1976) 104 ITR 295 (Mad) relied on. Both lines are live, and an adviser should say so.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, an individual with income from salary, house property and other sources, filed his return for AY 2010-11 on 16 March 2011 declaring Rs 11,45,880. The case was reopened by notice under s.148 dated 4 July 2012 on the ground that he had not disclosed salary from two previous employers. In the reassessment the Assessing Officer found that he had worked with Reliance Communication Ltd from 1 April 2009 to 9 May 2009, with Sistema Shyam Teleservices Ltd from 18 May 2009 to 24 February 2010 and with Videocon Tele Communication Ltd from 3 March 2010 to 31 March 2010, receiving Rs 1,64,636, Rs 13,95,880 and Rs 5,46,060 respectively, and had returned only the Sistema Shyam salary. The undisclosed salaries were added by order dated 15 October 2012 under s.143(3) read with s.147. Of the Reliance Communication salary of Rs 1,64,636, Rs 1,10,550 had been recovered as notice pay under the agreement with the employer, and of the Sistema Shyam salary, Rs 1,66,194 had similarly been recovered, so that notice pay of Rs 2,76,744 in all had been claimed as a deduction in the return. The CIT(A) sustained the addition, holding that s.15 charges salary on the due basis whether paid or not, that no such deduction is provided in s.16, that the real income doctrine is inapplicable and that a notice-period deduction is an application of income after it has become due, relying on CIT v. P. Natraja Shastri (1976) 104 ITR 295 and distinguishing Ramchandra Dhonde Datar v. CIT (1961) 43 ITR 22 (Bom). Nobody appeared for the assessee before the Tribunal and the appeal was decided ex parte on that ground.
The appeal was partly allowed. On notice pay the Tribunal held that this is a case of recovery of the salary already paid to the assessee, that s.16 need not be referred to as the CIT(A) had done, that the assessee actually received the salary after deduction of the notice period as per the job agreement, and that the actual salary received by the assessee is only taxable; that ground was allowed (para 7). The ground on undisclosed provident fund and bank interest was dismissed for want of supporting evidence that the income was exempt (paras 8 and 9).
The Tribunal examined the two employments and the recoveries made under the respective agreements and found that the employers had made deductions from the salary paid to the assessee because he left the service, so that what he actually received was the net figure. On that footing it characterised the transaction as a recovery of salary rather than as a deduction claimed against salary, and held that the list of deductions in s.16 relied on by the CIT(A) was not the relevant test. It did not address the CIT(A)'s reasoning on s.15 charging salary on the due basis, nor did it decide the assessee's alternative case that notice pay is a capital receipt (para 7).
Therefore, in our considered view, the actual salary received by the assessee is only taxable and therefore, we allow this ground of appeal of the assessee.
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Handle my notice → Ask a CA on WhatsAppThe Tribunal held that only the salary actually received is taxable. Where the employer recovers notice pay under the employment agreement and pays the employee the net amount, the case is one of recovery of salary and s.16 does not come into it at all; the Tribunal expressly declined to test the claim against the list of deductions in s.16. This was decided by the ITAT (Shri S.S. Godara, Judicial Member and Shri Amarjit Singh, Accountant Member ('A' Bench, Ahmedabad)) and bears on section 15, section 16, section 17(1), section 143(3), section 147, section 148 of the Income Tax Act 1961. It is reported as ITA No. 2378/Ahd/2013; Assessment Year 2010-11. This is the order practitioners cite when a s.148 or s.143(3) addition is built purely on the gross figures in Form 16 or Form 26AS while the employee's bank credit was lower. The reasoning is narrow and should be pleaded narrowly: the Tribunal did not accept the taxpayer's own case that notice pay is a capital receipt, and it did not hold that s.15 yields to the real income doctrine. It held that on these facts the employer had recovered part of the salary paid, so the amount that reached the employee was the salary. The contrary reasoning is set out in the same order in the CIT(A)'s extract — that s.15 charges salary when it becomes due whether paid or not, that the deduction is not among those listed in s.16, and that a recovery of notice pay is an application of income after it has become due, with CIT v. P. Natraja Shastri (1976) 104 ITR 295 (Mad) relied on. Both lines are live, and an adviser should say so. If it applies to you, the first step is this: Get the employment agreement clause that authorises the notice-pay recovery, and the employer's full and final settlement statement showing the gross figure, the recovery and the net paid.
The assessee, an individual with income from salary, house property and other sources, filed his return for AY 2010-11 on 16 March 2011 declaring Rs 11,45,880. The case was reopened by notice under s.148 dated 4 July 2012 on the ground that he had not disclosed salary from two previous employers. In the reassessment the Assessing Officer found that he had worked with Reliance Communication Ltd from 1 April 2009 to 9 May 2009, with Sistema Shyam Teleservices Ltd from 18 May 2009 to 24 February 2010 and with Videocon Tele Communication Ltd from 3 March 2010 to 31 March 2010, receiving Rs 1,64,636, Rs 13,95,880 and Rs 5,46,060 respectively, and had returned only the Sistema Shyam salary. The undisclosed salaries were added by order dated 15 October 2012 under s.143(3) read with s.147. Of the Reliance Communication salary of Rs 1,64,636, Rs 1,10,550 had been recovered as notice pay under the agreement with the employer, and of the Sistema Shyam salary, Rs 1,66,194 had similarly been recovered, so that notice pay of Rs 2,76,744 in all had been claimed as a deduction in the return. The CIT(A) sustained the addition, holding that s.15 charges salary on the due basis whether paid or not, that no such deduction is provided in s.16, that the real income doctrine is inapplicable and that a notice-period deduction is an application of income after it has become due, relying on CIT v. P. Natraja Shastri (1976) 104 ITR 295 and distinguishing Ramchandra Dhonde Datar v. CIT (1961) 43 ITR 22 (Bom). Nobody appeared for the assessee before the Tribunal and the appeal was decided ex parte on that ground. The matter was decided on 2017-04-18 by the ITAT (Shri S.S. Godara, Judicial Member and Shri Amarjit Singh, Accountant Member ('A' Bench, Ahmedabad)). On those facts the ITAT held as follows. The appeal was partly allowed. On notice pay the Tribunal held that this is a case of recovery of the salary already paid to the assessee, that s.16 need not be referred to as the CIT(A) had done, that the assessee actually received the salary after deduction of the notice period as per the job agreement, and that the actual salary received by the assessee is only taxable; that ground was allowed (para 7). The ground on undisclosed provident fund and bank interest was dismissed for want of supporting evidence that the income was exempt (paras 8 and 9).
The Tribunal examined the two employments and the recoveries made under the respective agreements and found that the employers had made deductions from the salary paid to the assessee because he left the service, so that what he actually received was the net figure. On that footing it characterised the transaction as a recovery of salary rather than as a deduction claimed against salary, and held that the list of deductions in s.16 relied on by the CIT(A) was not the relevant test. It did not address the CIT(A)'s reasoning on s.15 charging salary on the due basis, nor did it decide the assessee's alternative case that notice pay is a capital receipt (para 7). In the words reproduced by the source cited on this page: "Therefore, in our considered view, the actual salary received by the assessee is only taxable and therefore, we allow this ground of appeal of the assessee."
It was decided by the ITAT on 2017-04-18 and is reported as ITA No. 2378/Ahd/2013; Assessment Year 2010-11. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 15, section 16, section 17(1), section 143(3), section 147, section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The appeal was partly allowed. On notice pay the Tribunal held that this is a case of recovery of the salary already paid to the assessee, that s.16 need not be referred to as the CIT(A) had done, that the assessee actually received the salary after deduction of the notice period as per the job agreement, and that the actual salary received by the assessee is only taxable; that ground was allowed (para 7). The ground on undisclosed provident fund and bank interest was dismissed for want of supporting evidence that the income was exempt (paras 8 and 9). It arises in Salary & Perquisites, Reassessment & Reopening and Deductions & Disallowances matters, on section 15, section 16, section 17(1), section 143(3), section 147, section 148 of the Income Tax Act 1961, and was decided by Shri S.S. Godara, Judicial Member and Shri Amarjit Singh, Accountant Member ('A' Bench, Ahmedabad). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Reconcile Form 16 and Form 26AS against the bank credits and put the reconciliation on record at the assessment stage, not for the first time in appeal. Frame the ground as recovery of salary by the employer, not as a deduction under s.16 and not as a capital receipt; the Tribunal here decided the case on the first footing and rejected nothing else. Be ready for the Revenue to run s.15 due-basis and application-of-income, with CIT v. P. Natraja Shastri; have an answer on why the amount never reached the employee. Where the recovery has been effected by a later employer reimbursing the earlier one, trace the money — the reasoning turns on the employer having made the deduction from the salary it paid.
Searched for later treatment; none was found. That is not the same as a source affirming it. No later decision citing this order is recorded, and no decision adopting the reasoning — that notice pay recovered by the employer leaves only the net salary chargeable under s.15 — is recorded either. No appeal to the Gujarat High Court against it is recorded. The order is much relied on in practice, and that is worth saying plainly: practice reliance is not judicial acceptance, and a reader should present it as a single Bench's order rather than as a settled rule. What the order actually holds is narrower than the use commonly made of it. It rests on two facts. The employment agreement provided for the recovery, and the employee was paid the net amount. On those facts the Tribunal treated the case as one of recovery of salary already paid, held that the actual salary received is what is taxable, and declined to test the claim against the list of deductions in s.16 at all. An employee who received the gross salary and paid the notice amount separately is not within that reasoning, and neither is one whose agreement does not provide for the recovery. The order also does not decide what the employer must do. It says nothing about whether tax deducted on the gross figure can be reopened, about how the employer should report the amount, or about the mismatch with Form 26AS that produces the assessment in the first place. And it is not wholly in the assessee's favour: the ground on undisclosed provident fund and bank interest was dismissed for want of evidence that the income was exempt. Anything that would displace the notice pay holding would come from a High Court, from a Bench taking the contrary view, or from a decision treating the recovery as an application of salary already accrued rather than as a reduction of what was received. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The figures in the order do not all reconcile. Ground 1 describes the disallowance as Rs 2,76,744 and identifies the two notice-pay amounts as Rs 1,64,636 and Rs 1,10,550; para 7 records that the Reliance Communication salary was Rs 1,64,636 of which Rs 1,10,550 was recovered as notice pay, and that the Sistema Shyam salary was Rs 13,95,880 of which Rs 1,66,194 was recovered, the two recoveries totalling Rs 2,76,744. The description in the ground is therefore inaccurate on its face. Para 3 records that nobody appeared for the assessee and the appeal was decided ex parte after hearing the Departmental Representative; para 7 nevertheless begins 'We have heard the ld. Departmental Representative and the perused the material available on record'. Ground 2, on provident fund interest, was dismissed for want of supporting evidence. The order has 10 numbered paragraphs. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was partly allowed. On notice pay the Tribunal held that this is a case of recovery of the salary already paid to the assessee, that s.16 need not be referred to as the CIT(A) had done, that the assessee actually received the salary after deduction of the notice period as per the job agreement, and that the actual salary received by the assessee is only taxable; that ground was allowed (para 7). The ground on undisclosed provident fund and bank interest was dismissed for want of supporting evidence that the income was exempt (paras 8 and 9).
TaxSphere, “Nandinho Rebello v DCIT”, https://taxnotice.vittsphere.com/caselaw/case/nandinho-rebello-v-dcit-notice-pay-recovered-by-employer/ (validity last checked 2026-09-08)
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