'Joining Bonus' returned to ex-employer cannot be deducted from salary income!

'Joining Bonus' returned to ex-employer cannot be deducted from salary income! SO employee should mind Tax Liabilities also, while negotiating new employment.

'Joining Bonus' returned to ex-employer cannot be deducted from salary income!

So Employee should understand the Income Tax Liabilities and negotiate for Income Tax liability also, while negotiating his/her contract of employment and pay package. 

(A) The grey areas in Tax treatment has been bothering and affecting many Tax payers. The tax payer employees and their advisers/consultants also face anxiety on such matters. 

Whereas in this case the employee employed with multinational Banks, seemingly had not consulted in advance while negotiating his pay package with next employer; keeping in mind his Income Tax Liabilities.

The employee suffered loss.
 
The internal directions of the department that links tax collection to performance to officials of department, their future placements and promotions etc is a factor, for assessment of their performance. So they shall do their job!

Employee should not proceed to sign contract of employment till the grey areas i.e. areas on which 1st employee is not clear and then his/her advisors and consultants are not clear.

So that employee can prepare his/her strategy to deal with it and negotiate his/her contract of employment and pay package. 

The employees and their advisors and consultants should keep themselves properly informed.

A properly informed employee and that has access to very able senior LOCAL counsels is always better placed and can defend his/her interest better than other employees that are not properly informed and do not have guts to negotiate and agitate to defend their interest.

More and more employees and their advisors and consultants have been showing guts and have been discussing to avoid erroneous approach, and to defend their interest and hard earned monies.

While the guidelines laid down by decisions by High Courts, Tribunals can provide clarity, direction and relief. 

The grey areas which are not known are to be clarified with knowledgeable counsels. 

(B) Is employee liable to bear tax on the Bonus which has been returned?

Can Employee claim a refund of TDS on 'Joining Bonus' or Sign on Bonus or Signing Bonus?
Should 'Joining Bonus' or Sign on Bonus or Signing Bonus form part of Employee's taxable Salary if Employee has already returned IT to the previous Employer?

Income Tax Appellate Tribunal – Chennai (ITAT) has examined the matter and provided Crystal Clear answer: 'Joining Bonus' or Sign on Bonus or Signing Bonus returned to ex-employer cannot be deducted from salary income! 

The employee had decreased his taxable income by amount of joining/Sign-on Bonus/Signing Bonus of Rs.25,00,000/-( Rs.25 lakh) refunded to previous employer and filed for refund of Rs.7,72,266/-

The assessing officer added back the amount of Rs.25,00,000/-( Rs.25 lakh) to taxable salary.

The Income Tax Act: Section 17(1) does offer any details or explanation for reduction of joining/Sign-on Bonus/Signing Bonus, which is refunded to old employer .Tax provisions relating to salary income do not allow for such a deduction.

This deduction was not allowed by Tax Officer, then Commissioner (Appeals) and then at judiciary level: ITAT. 
Refund of Rs.7, 72,266/- was not allowed!

The employee had opted for Resignation (Voluntary Termination of Employment) and was not terminated from employment by employer.

His matter of refund was assessed from this point of view also.

(C) So when an employee joints a new employer and gets paid for 'Joining Bonus' or Sign on Bonus or Signing Bonus; a kind of salary paid in advance; the Tax Liability stares at him/her and when the employee breaches the conditions attached with such Bonus and leaves employment and refunds the amount of 'Joining Bonus'/Sign on Bonus/Signing Bonus, deduction from taxable income is not allowed.

It is dual burden of employee; entirely due to fault of employee that either does not consult in advance or do not negotiate or do not negotiate properly.

(D) The clear decision provided by ITAT shall go a long way to alert many employees facing similar situation and their advisors and consultants.

The 'Joining Bonus' or Sign-on Bonus or Signing Bonus; IT is global Concept.

In IT's simplest form: The Sign-on Bonus or Signing Bonus is incentive to attract an employee to join a Company and paid to join the Company. It is a sum of money paid to make the compensation package attractive.

It could also be to make good the loss of some penalty/notice pay that employee might have to pay to previous employer to join the next employer at short or NO notice to previous employer.

The employer that offers 'Joining Bonus'/Sign-on Bonus/Signing Bonus may attach T&C e.g; If employee leaves employment before say; 1year the employee shall have to pay back the 'Joining Bonus'/Sign-on Bonus/Signing Bonus!

It is upto the Employee to mind his /her interest and look into what is the cash in hand and what is total he/she shall earn if he/she leaves employment before 1year e.g; Joining Bonus, Notice pay etc etc and what shall be his/her net earnings and take home, after IT and his/her tax liabilities that he/she shall have to bear alone.

The break-up of pay package might be to address the needs of Tax Treatment. IT might be made part of CTC; Cost to Company.

The smart employees that are properly informed are united and discuss and have access to a very able LOCAL counsels are able to handle such matters, defend their interest and avoid LOSS. 

(E) 'Joining Bonus'/Sign-on Bonus/Signing Bonus might be made a % of CTC say; 10, 20%. 

CTC; Cost to Company; The employer and IT's Attorney's in Line management/HR/Admin/Personnel/legal cells may include anything/many things while determining cost the establishment shall bear when a new employee joins.

It might be placed before employee to sign as part of, as annexure to appointment letter and may include:

e.g; Basic Salary, DA, HRA, Conveyance Allowance, medical Allowance, LTA, Vehicle Allowance, City Compensatory Allowance, Special Allowance, Telephone/Mobile Allowance, Bonus, Incentives, Performance Bonus, Joining Bonus, etc etc  and may compute; Gratuity, PF, ESIC, Superannuation and even Group Insurance, etc etc  

Income Tax Savings 

The employee should discuss the break up with his counsels specializing in Income tax matters and prefer to insist on higher Cash in hand/Take home, and thus relative savings in say; PF, ask the employer to offer Joining Bonus without any condition attached with it and absorb the Income Tax Component also.

The employee that is being attracted by next employer is considered useful to next employer.

The employee that is leaving current employer to join to satisfy urgent needs of next employer should mind his (employee's) interest.  

(F) Why do employers make such offers? 

1st view point is that the employer does not make committement of fixed/guaranteed payouts and hence it is possible for employer and IT's Attorney's in Line management/HR/Admin/Personnel/legal cells to reduce the cost by tactics, and events that can be created for employee e.g; Forced Separation. If employee is unable to bear he/she leaves employment by resignation and employer shall force to adjust 'Joining Bonus'/Notice pay etc in Full and Final payment.

The smart employees that are properly informed, united and supported by unions and very able LOCAL counsels specializing in concerned field of law, are able to handle such matters, defend their interest and avoid LOSS. 

(G) (i) Central Government Act
Section 17(1) in The Income- Tax Act, 1995

(1) " Salary" includes-

wages, any annuity or pension, any gratuity, any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages,any advance of salary, 4 any payment received by an employee in respect of any period of leave not availed of by him,the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; and , the aggregate of all sums that are comprised in the transferred balance as referred to in sub- rule (2) of rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub- rule (4) thereof; 

(ii) Central Government Act
Section 2(24) in The Income- Tax Act, 1995
(24) " income" includes-

(H) 2. The assessee has raised only one substantive ground as under:-

''To direct the Assessing Officer to delete the addition made of ₹25,00,000/- in the reassessment, on repayment of sign on bonus back to M/s. Barclays Bank, as this receipt does not constitute income.

3. The Brief facts of the case that assessee is an individual and has disclosed income from salary and filed return of income on 28.07.2008 with total income of >43,54,815/- and as per return of income the assessee is entitled for a refund of >7,72,266/-. 

Subsequently the return of income was processed u/s.143(1) of the Act and the ld. Assessing Officer based on the form No. 16 issued by the employer found that the assessee's salary income is >68,54,815/- were as the assessee has not offered salary income of >25,00,000/- in the return of income. 

Further notice u/s.148 of the Act was issued and in compliance to notice, the ld. Authorised Representative of the assessee filed return of income on 19.07.2011 and appeared in hearing proceedings from time to time and submitted information for verification. The assessee is a employee of Barclays Bank during the financial year 2007-08 from 01.04.2007 to 31.10.2007 and received salary income of >13,46,943/- after resignation of service joined Deutsche Bank and received salary of >56,12,481/- were as the assessee has declared salary income in the return of income >43,54,815/-

The ld. Authorised Representative submitted that the assessee has joined Barclays Bank on 20.11.2006 and as per the terms and conditions with employer dated 10.09.2006, the company has paid a taxable sign-on-bonus of >25,00,000/- with conditional rider that if the employee leaves the company within a period of one year from the date of joining, he shall refund the sign-on-bonus. Considering the facts, the assessee has left Barclays Bank and joined Deutsche Bank and refunded the amount of >25,00,000/- as acknowledged by Barclays Bank on 06.11.2007. The assessee filed return of income for assessment year 2007-08 and offered sign-on-bonus for taxation since the assessee has refunded an amount of >25,00,000/- on 06.11.2007 which falls in the financial year 2007-2008 relevant to assessment year 2008-09 he has reduced >25,00,000/- from his gross salary and filed return of income. The ld. Assessing Officer considered the facts of the assessee on change in employment and is of opinion that there is no provision of the Act were such reduction of salary income is permissible. The ld. Assessing Officer has added >25,00,000/- to the income of the current assessment year and assessed total income of >68,54,820/-. Aggrieved by the order of Assessing Officer, assessee filed an appeal before Commissioner of Income Tax (Appeals).

4. In the hearing proceedings, the ld. Authorised Representative of the assessee argued on the grounds and submitted proofs pertaining to sign-on-bonus. 

The ld. Commissioner of Income Tax (Appeals) considered written submissions on facts and interpretation of laws and concurred with findings of the Assessing Officer and dismissed the appeal observed at 18 of the order as under:-

"18. In view of the above discussion, I find no infirmity in the action of the Assessing Officer in reassessing the total income of the assessee to bring to tax the amount of 'sign-on-bonus' of >25,00,000/- relating to the assessment year 2007-2008 which was tax deducted then and reduced from the assessee's total income by the assessee himself in the return of income for the subsequent assessment year 2008-09. Since the said amount was forfeited by him due to breach of contract on his part, with his employer''.
Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee filed an appeal before Tribunal.

7. We heard the rival submissions, perused the material on record and judicial decisions cited. The ld. Authorised Representative only disputed issue being sign-on-bonus should be allowed as deduction from the gross salary since it was repaid and offered to tax in assessment year 2007-08. The issue revolved around whether the provision of Act permit deduction were the assessee voluntarily resigned from Barclays Bank and joined Deutsche Bank violating the pre-conditions of employment to stay with Barclays Bank for a period :- 6 -: ITA No.933/Mds/2015 of one year. The ld. Departmental Representative vehemently argued and explained the action of the Assessing Officer and Commissioner of Income Tax (Appeals) are as per the provisions of law. The characteristic of sign in bonus is Revenue receipt and it cannot be considered as compensation of forfeited amount or additional premium prize. The assessee has received the amount during his employment and there exists employer and employee relationship and sign-in- bonus cannot treated as capital receipt. We found on the basis of submissions that the assessee has voluntarily resigned from Barclays Bank and was not a forced termination of employment. As per service certificate of bank referred at page 16 of paper book, the assessee has left the bank on his own accord. The submissions of the Revenue being the amount repaid by the assessee to the Barclays Bank was reimbursed by new employer Deutsche Bank. The assessee joined Deutsche Bank due to attractive pay package and separate amount was provided for refund of sign-on-bonus. On the perusal of provisions of Sec. 17(1) of the Act, there are no explanation were assessee should reduce refund of sign-on-bonus. Considering the apparent facts, terms of employment, characteristic of sign on bonus and the service certificate of Barclays Bank were assessee has voluntarily left the service. We are of the opinion that ld. Commissioner of Income Tax (Appeals) has examined the issue in :- 7 -: ITA No.933/Mds/2015 detail based on the observations of the Assessing Officer and the provisions of law. Therefore, we are not inclined to interfere with the order of Commissioner of Income Tax (Appeals) and uphold the same.

8. In the result, the appeal of the assessee is dismissed. Order pronounced on Friday, the 6th day of May, 2016, at Chennai.

Income Tax Appellate Tribunal - Chennai
S.S.N.Ravi, Chennai vs Assessee on 6 May, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH, CHENNAI
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER

I.T.A. No.933/Mds/2015
Assessment year: 2008-2009
Shri. S.S.N. Ravi, Chennai 
vs     
The Assistant Commissioner of Tax, Salary Circle III, Chennai.

(I)  The employee was with Banks. Still the employee suffered loss.

The employees in any sector/trade should become properly informed before signing on the dotted line.

The Refund of 'Joining Bonus'/Sign-on Bonus/Signing Bonus due to Voluntary Termination of Employment (Resignation by Employee) is  Breach of Contract by employee and deduction of such refund from salary income is not allowed.

Next employer had paid the amount to amount of 'Joining Bonus'/Sign-on Bonus/Signing Bonus to employee so as to be paid to past employer. 

The employee had to bear the Tax part on such refund.

There could be another situation: The new employer does not agree to compensate for refund of 'Joining Bonus'/Sign-on Bonus/Signing Bonus by employee, to past employer.

This amount is paid by past employer as what; Salary in Advance!
The past employer collects adjusts this amount, from employee.
The deduction of this recouped amount and its tax treatment shall again stare at employee.
The decision may again be as per facts of the matter.

Hence, the employees should consult in advance before signing on the dotted line and mind and defend their interest.