Refunded Salary Still Taxed? High Court Slams Income Tax Dept in Major Judgment

The assessee approached the Calcutta High Court challenging the rejection of his revision applications under Section 264 of the Income Tax Act for AYs 2016–17, 2017–18, and 2018–19. The issue arose when his salary, initially approved by a shareholders’ resolution, exceeded the statutory limit due to a lack of Central Government approval after an amendment to Section 197 of the Companies Act, 2013.

Upon being asked by the company to refund the excess salary, the petitioner complied. He then filed revision applications under Section 264 of the Income Tax Act, claiming the refunded amount shouldn’t be taxed, after having already filed his tax returns for these periods and treating the excess compensation as salary. The Income Tax Department subsequently rejected these applications. The applications for assessment years 2016-17 and 2018-19 were deemed time-barred, and the application for 2017-18 was rejected on merit. The respondent, being aggrieved, filed the aforesaid writ petition before the HC, contending that there was no provision for deducting recovered salary from a previous year’s income.

Issue Raised: Whether the delay in filing revision applications under Section 264 was justified if the excess compensation was refunded, and whether the refunded sums ought to be excluded from taxable income.

High Court Held: The Hon’ble HC concluded that the respondent had neglected to take into account the proviso to Section 264(3), which allows for a delay to be excused if there is sufficient justification, for AYs 2016–17 and 2018–19. The respondent’s failure to exercise discretion was unwarranted because the cause only emerged after the company ordered and received the reimbursement of excess compensation. Due to the unjustified delay, the merits observations were deemed non-est.

It was held that the excess salary refund for AY 2017–18 was incorrectly treated as a deduction. The court acknowledged that the excess amount was held in trust by the petitioner and was not deductible from salary, citing Section 197(9) of the Companies Act. The order was found to be defective because this crucial factor was overlooked, and it was remanded for a new merits decision. Therefore, the HC set aside the Section 264 orders for AYs 2016–17, 2017–18, and 2018–19 and remanded them for fresh consideration.