Service damages aren’t deductible

Kamal Rathi

Q. What is the last date of payment of the premium for enabling one to claim deduction under Section 80C? Can I claim deduction for payment made before the due date for filing of return — July 31 — and accordingly file the returns of income?

Rahul Dev

Via email

A. The last date of relevant previous year — March 31 — is the deadline for all the investments to qualify for deduction U/s 80C. The relevant LIC premium should have been made during the previous year. If the payment is made after the previous year but before the due date for filing of return, it will not qualify for deduction for the year intended by you but for the subsequent year.

Q. Recently, I resigned from an organisation by giving one month notice after serving for a period of 18 months. According to terms and conditions of my appointment letter, I was supposed to pay to the company a liquidated damage equal to my six months salary, if I quit the organisation before completing five years of service. Since I resigned against the wishes of the management, I had to pay to the company a sum of Rs 1,16,200, which is equal to my six month salary. I requested the company to refund excess income tax deducted by them as my effective income from salary for the financial year 2007-08 was reduced to the extent of six months due to the liquidated damages that I paid to the company. However, the company did not refund any income tax as they considered it as a liquidated damage and not refund of salary as claimed by me. Kindly advice me if I can claim refund of income tax?

B.S. Prasad

Via email

A. Your employer’s refusal to consider damages paid by you as refund of salary is legally correct. You have to appreciate the fact that your employer had paid you the salary mentioned in Form 16. Your employer cannot deduct the damages from the salary and such deduction will not be allowed by income tax authorities. It is pertinent to know that while the income of the company is assessed under the head income from business, in your case the income is assessable under the head "salaries" which does not allow your claim.

(Kamal Rathi is a chartered accountant, representing Rathi & Malani, a Hyderabad-based accounting firm. Readers can mail their queries on income-tax tokamalrathi.ca@gmail.com)