In a significant move by the Income Tax Appellate Tribunal (ITAT), which passes judgement with regards to income-tax disputes, has said that the salary deducted by the employer because of non-serving of the notice period by an ex-employee cannot be considered taxable.

This is important because section 16 of the Income Tax Act does not provide for any consideration of the income deducted by the employer. And which is why whenever an employee resigns but does not fulfill the requirement of the notice period, and despite the fact that a part of his salary is deducted by the employer, he has to pay the tax for the whole amount of that was actually due to him.

However, now this would change.

"The ITAT has recognized the concept of real income, which is well accepted under I-T laws. It held that the salary against which notice pay was adjusted had not become due, as the net amount was paid by the employer. The employee had no right to receive the portion of the salary that had been deducted, under the terms of employment. Thus, the deducted amount could not be held as taxable salary income," said Gautam Nayak, tax partner, CNK & Associates.

The judgement has been passed in the case of two companies, Reliance communication and Sistema Shyam Teleservices, both of which had deducted amounts of INR 1.10 lacs and INR 1.66 lacs respectively, and had handed the rest due to the N. Rebello in the year 2010.

Following which Rebello claimed tax deductions for INR 2.76 lacs but his plea was rejected in accordance with the section 15 of the I-T Act under which the salary income is taxable on due basis. Further, he moved his plea to ITAT which passed the judgement in his favour.