Sign on bonus refunded to employer cannot be reduced from taxable salary: case law

While salary returns are one of the easiest to prepare and file; the topic of sign on bonus and its refund to previous employer, has been a grey area for most taxpayers.

Some common questions that get asked are-

  • Should sign on bonus form part of my taxable salary if I have already returned it to the previous employer?
  • Should I bear tax on the bonus which has been returned or can I claim a refund of TDS on sign on bonus?

 

Recently a case law was decided in the courts which deals with a similar problem. Let’s understand in more detail.

 

Facts of the case:  

  • Taxpayer filed income tax return for FY 2007-08 and disclosed salary income of Rs 43,54,815. He had filed for a refund of Rs 7,72,266.
  • The AO found out that as per Form 16 the taxpayer’s salary income was Rs 68,54,815.
  • In the FY 2006-07 (previous financial year) the taxpayer had joined Barclays on 20.11.2006.
  • The taxpayer had received a sign on bonus of Rs 25 lakhs in FY 2006-07 from Barclays and included it in his income tax return for FY 2006-07. The sign on bonus was given on the condition that if he leaves Barclays within one year of joining he shall refund the sign-on bonus.
  • The taxpayer left Barclays on 31.10.2007, i.e. before completion of 1 year of receiving sign on bonus.
  • He joined Deutsche Bank who reimbursed to him the sign on bonus amount of Rs 25lakhs.
  • While filing return for FY 2007-08 the taxpayer reduced the sign-on bonus he paid to Barclays from his taxable salary.

 

The decision:

  • The AO added back Rs 25lakhs to taxable salary of FY 2007-08.
  • The tax authorities said that the income tax act does offer any details or explanation for reduction of sign on bonus which is refunded to old employer. (Section 17(1)).
  • The taxpayer has left the services of Barclays voluntarily and there was no termination of his employment.
  • Deutsche Bank agreed to pay the sign on bonus to the taxpayer so he can refund to Barclays.
  • The sign on bonus cannot be considered as a compensation by Deutsche Bank of forfeited amount. It is a revenue receipt and not a capital receipt.
  • ITAT decided that Rs 25lakhs which was refunded to old employer and reimbursed by current employer cannot be reduced from taxable income.

 

Takeaways from the case law:

Sign on bonus refunded to previous employer cannot be reduced from taxable salary.

 

Regarding TDS. TDS is deducted on sign on bonus by employer while paying sign on bonus to the employee. However, at the time of returning back this sign on bonus, no refund of TDS can be claimed by the employee.

 

 

[Details of Case Law:

Case Law: Income Tax Appellate Tribunal – Chennai, S.S.N.Ravi, Chennai vs Assessee on 6 May, 2016 I.T.A. No.933/Mds/2015. Assessment year: 2008-2009.]

Comments are closed.