Legal Opinion

1. Back Ground

Facts:

The XYZ Corporation of India Limited ((hereinafter referred as “ABCD private limited” or “querist”), is an Indian state-owned electric utilities company headquartered in Gurugram, India. POWERGRID transmits about 50% of the total power generated in India on its transmission network. Being Govt.Company, it is subjected to Propriety Audit conducted by CAG/MAB. During the course of audit Govt. Auditors had pointed-out the less recovery of “House Rent”(HRR) based on predetermined licence fees fixed by POWERGRID Management instead of 10% of basic pay of executives who were availing self/third party lease accommodation as per extended DPE circular applicable in this regard.

Consequently,ABCD private limited

 vide its IOM dated 24.07.2019 ref. CC/HR/POLOCY/7.1/2019, has issued instruction to its finance team to recover the Licence Fee/HRR on company leased accommodation for the period from 01.04.2012 to 31.12.2016 from the “salary” of executives who had availed company leased accommodation during the captioned period.

The above recovery is planned to be affected in the current financial year. If it would have been recovered in the relevant financial year, the taxable income of the concerned employee would have been reduced by this recovery amount.

Queries:

ABCD private limited has sought our opinion to clarify the taxable/non-taxable treatment in the current year with respect to above recovery in the following situations: –

• The employee is drawing HRA in the current year;
• The employee is availing company lease facility in current year.
• The employee is in company owned accommodation.

Further, ABCD private limited wants to know:-

1. In the situation 2 and 3 above, whether the recovery amount can be adjusted in HRR perk of current year?
2. Whether it can be reduced directly from taxable salary of the concerned employee in current year as had it would have been deducted in the relevant previous year it would have reduced the HRR perk and resulting in  reduction in taxable salary amount.

1.Analysis

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.”

 

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 employee 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 as 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.

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 employee.

 

In our view, in 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.

 

By virtue of the provisions of Section 17 of the Income Tax Act 1961, value of perquisites, less any recovery from employee, is treated as income under the head salary. Accordingly, any less recovery of HRR is added in the taxable income as perks. It may be seen from Form 16 (relevant portion is stated below) of the employees that the perks valued as per the provisions of Income Tax Act 1961, is added as salary of the employees

 

Once any component is treated as salary, any recovery from such component would also be treated as Salary. Once excess/short-deducted portion was taxed as salary income in past years, any adjustment made in future should also be treated as Salary.

Hon’ble ITAT Ahmedabad, in the case of “Vrajeshwari B Parikh, Baroda Vs ITO (2015) 61 taxmann.com 235 (Ahd.). had dealt with similar issue and held as under:

“12.     Hon’ble Supreme Court, in the case of Chandi Prasad Uniyal&Ors Vs State of Uttarakhand [(2012) 8 SC 417] had dealt with excess salary payments and observed inter alia as follows:

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 assesse to demand that she should be paid entire amount of ₹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 laid down by Hone’ble Supreme Court which, as is elementary, binding all of us under Article 141 of the Constitution of India. If the assesse 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 recovery, was due to her. What was due to the assesse was the salary accrued during the year minus the excess salary received earlier.”

In our view, it was not open to the employees to demand that he/she should be paid the entire amount without any adjustments or refunds of the excess amount received in the earlier years. If the employee 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 employee 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 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 non-recovery of LICNCE FEE/HRR.

1.            Conclusion

In light of the above discussions, we are of the view that: –

The said recovery of salary during current year can be made directly from gross taxable salary of the concerned employee and net of deduction may be shown as salary income for the current year i.e. FY 2019-20.