JAMIA MILLIA ISLAMIA

PROJECT ON SALARIES (SESSION-2018-2019)

SUBMITTED BY – DEEPESH KUMAR SINGH

B.A.LL.B(HONS) SEMESTER-6

ROLL NO- 16

SUBMITTED TO – PROF. KIRAN BALA

SUBMISSION DATE

………………………………
ACKNOWLEDGMENT

It gives me immense pleasure and gratitude to thank my TAX LAW teacher, KIRAN BALA
MAAM, who gave me opportunity to do this wonderful project which helped me in doing a lot
of research and I came to know about so many new things. I am thankful to him.

Secondly, I would like to give thanks to all my seniors who have guided throughout the research
process.

Lastly, I feel that my project would not have been completed without the help of my parents
and friends.

YOURS SINCERELY,

DEEPESH KUMAR SINGH

 CONTENTS

1. Introduction
2. Heads of Income
3. Salary
4. Some important points regarding salary
5. Meaning and scope of salary
6. Deductions from salaries
7. Case Laws
8. Bibliography
INTRODUCTION

Salary is a fixed amount of money or compensation paid to an employee by an employer in

return for work performed. Salary is paid, most frequently, in a bi-weekly paycheck to an
exempt or professional employee1. In most years, an employee’s salary is paid in 26
even paychecks over the course of the year.

An employee who is paid a salary is expected to complete a whole job in return for the salary.
This is different from a non-exempt employee who is paid an hourly rate or by the piece
produced. This employee is generally eligible to collect overtime.

The salaried employee or employee who is paid by salary does not track hours worked and is
not paid for overtime. (Some public sector, often union represented, employees expect to
account for hours and collect compensatory time off. This is not the norm in the private sector).

Because of Fair Labor Standards Act (FLSA) rules about overtime payment, employers are
required to closely track the hours and partial hours worked by non-exempt or hourly
employees.

Salary is determined by market pay rates for people doing similar work in similar industries in
the same region. Salary is also determined by the pay rates and salary ranges established by an
individual employer. Salary is also affected by the number of people available to perform the
specific job in the employer’s employment locale. Many companies participate in salary market
surveys to create a trustworthy resource for salary research. More and more salary research is
occurring online using salary calculators.

1
http://humanresources.about.com/od/glossary/g/salary.htm.
HEADS OF INCOME.

Section 142 provides that save as otherwise provided by this Act, all income shall, for
the purpose of charge of income-tax and computation of total income, be classified under the
following heads of income:

A) Salaries.

B) Income from house property.

C) Profits and gains of business or profession.

D) Capital Gains.

E) Income from other sources

In order to be chargeable to income-tax, an income must be brought under anyone of the heads,
stated above. The words “save as otherwise provided under this Act” refer only to the
exemptions granted under this Act.

2
Income tax act, 1961.
SALARY (Sec. 15 to 17)

Income chargeable under Income tax under the head “Salaries”.

According to Section 15, the following income shall be chargeable to income – tax under the
head “Salaries”:

(a) Any salary due from an employer or a former employer to an assesse in the previous year,
whether paid or not;

(b) Any salary paid or allowed to him in the previous year by or on behalf of the employer or
a former employer, though not due or before it became due to him;

(c) Any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, if not charged to income-tax for any earlier previous years.

For the removal of doubts, an explanation to Section 15 declares that where any salary paid in
advance is included in the total income of any person for any previous year, it shall not be
included again in the total income of the person when the salary becomes due3.

3
Taxation law, Ninth edn., 2007, Kailash Rai, pg. 47.
Some Important Points Regarding salary4

● Salaries

Every kind of remuneration of every kind of servant, public or private, and however highly or
lowly placed he may be , is covered under the scope of this term used in the income tax act,
there is no difference between the wages of labourer or High official.

● Relationship of employer and employee

It is very essential for the payment to fall under the heads of “salaries” that the relationship of
the employer and employee must exist between the payer and the payee. Every servant is an
employee; but an agent may or may not be an employee. It is very essential that a distinction
is drawn between income from employment which is taxable under this section, and income
from an office not amounting to employment which is taxable under head “ Income from other
sources” or as“ Profit and Gains from Business or Profession”.

If an employee does any work for his employer which is not connected with its service then
the remuneration for such work shall not be treated as salary. For example, examiner’s
remuneration received by a University teacher from his University.

● Salaries and Professional income

Every profession involves the making of successive engagement and successive contracts. If
the employment is merely incidental to the profession the gains from such employment would
be professional earning under section 28 and not under section 15. For instance, a professional
lawyer may be engaged in a case. His earning from this engagement will be taxable as
professional earning under section 28; but if he is employed by a mill company as its legal
adviser and also to work as standing counsel for the company, the remuneration received by
him would be taxable under the head “Salaries”. In fact, whether, an engagement is merely
incidental to the profession amounts to employment depends upon the duration of the
employment and the other circumstances of the case. When a person occupies a regular post or

4
Income tax and accounts, 1983 edn., Dr. H.C. Mehotra, pg. 54.
office amounting to the service, it is an employment as distinct from mere engagement in the
course of the profession.

● Receipts from persons other than the employer

Perquisites or profits or any remuneration received from person other than the employer would
be taxable under the head “Income from other Sources “ even if they accrue to the employee
by reason of his employment . For example, remuneration received by a professor of a college
for acting as a examiner in a University or Board.

● Payment made after cessation of employment

Payment made by an employer to his employee after the cessation of his employment is also
taxable under the head “Salaries”. It is taxable under this head because it represents
remuneration for services rendered in the past.

● Payment in commutation of pension

A lump- sum received in commutation of pension by a government is excluded from his salary
income. If it is received by a non-government employee besides receiving a gratuity it is
excluded from his salary income to the extent of the commuted value of one – third of the
pension which he is normally entitled to receive. If a non- government employee doesn’t get a
gratuity then the commuted value of one half of such pension is excluded from his salary
income.

● Application of salary - Voluntary foregoing.

The voluntary foregoing by an employee of the salary due to him is normally mere application
of the income and the salary is none the less taxable. It would be taxable on the further ground
that salary is taxable if it is due, whether paid or not. But in reality there is no agreement to pay
any salary, the apparent foregoing of a fictional salary would not attract tax.

● Tax free salary

– When a salary is paid tax free, the employee has to include the total
income, the gross salary i.e. the aggregate of the net salary received plus the amount of tax paid
on his behalf by employer, except under provisions of sub clauses (vii) and (ix)
of Section 10(6)
(9)
 ● Deductions by employer

Compulsory deduction from salary are also instances of mere application of income. The fact
that a portion of salary has to be devoted compulsorily to some purpose under contractual
obligation does not prevent it from being assessable as income under the head “salary”, for it
is a case of application of income. For example, an assessee was engaged on a fixed salary
upon the obligatory condition that the employer should provide him with board, lodging etc.
for which he should pay an amount which is deducted from his gross salary before payment.
Held, the tax was chargeable on the gross salary without any allowance for compulsory
deduction made by the employer.

● Salary of a Member of Parliament

This is not chargeable under the head “salaries” as a Member of Parliament is not a government
employee. The relation between him and the government is not of a servant and master. It is
taxable under the head “Income from other Sources.”
MEANING AND SCOPE OF SALARY

The term “salary” has been defined under section 17(1). According to this section, “Salary
includes the following:

1. Wages – The term “salary” includes wages. “Wages” means “pay given for labour, usually
manual or mechanical, at short stated intervals, as distinguished from salaries or fees. “

2. Annuity or pension – The term “salary” includes any annuity or pension. Thus, annuity and
pension paid by the employer are taxable under he head “salary” whether they are paid
voluntarily or under a contractual obligation. If annuity or pension is paid by the employer, it
is taxable under the head “salary”, but if it is paid by a person other than the employer, e.g.,
annuities paid under an insurance policy or under a deed or will, it is taxable as under “income
from other sources” and not a “ salary”. In a simple language an “annuity” is a sum of money
payable yearly or at any rate periodically , from a source which is exclusively or at any rate
primarily personal estate .Thus, in a legal parlance,”annuity” means a fixed sum payable yearly
or periodically. Pension is a periodical allowance or a stipend granted on account of past
services. Pension is taxable under the head salary but payment in communication of pension
falling under section 10 (10-A) is exempted from income-tax.

3. Gratuity – “Salary” also include gratuity. A gratuity may be understood as a payment made
by the employer to the employee for the services rendered by him to the employer. Certain
gratuities are exempted under section 10 (10). It is to be noted that gratuity paid by the employer
is taxed under the head “salary” but if paid by a person other than the employer, it will be table
as “Income from other sources “and not as “salary”.

4. Fees, commission, Perquisites or Profits in lieu of or in addition to salary or wages:

(A) Fee.

Fees may be understood to mean “reward or compensation for services rendered or to be

rendered : especially payment for professional services , optional amount, or fixed by custom
or laws , charge ; pay . “

(B) Commission

Commission means “ the percentage or allowance made to a factor or agent for transacting
business for another .For this purpose , there is no difference between the commission which
is wholly dependent upon the work done and fixed salary on a monthly basis. Thus, fees,
commissions, perquisites or profits may be in lieu of or addition to regular remuneration and
include honorarium or purely voluntary payments. They are all as much taxable as regular
salary or wages.

(C) Perquisites

Perquisites mean any casual emoluments, fees or profit attached to an office in addition to
salary and wages. In simple words, it’s a personal advantage. It does not cover a mere
reimbursement of any expenditure incidental to the employment. Like if an employee is
provided with a watchman for official use there is no personal advantage to the employee,
hence there is no perquisites. If the watchman is provided for personal as well as official use,
the value of the perquisites only relating to personal use is taxable. Similarly if the traveling
bills for official duties are reimbursed to the employee, there is no advantage to the assesse, so
it is not a perquisite. The perquisites may be in cash or in kind or in the money or money’s
worth and also in amenities which are not convertible to the money.

All cash allowance is included in the ordinary meaning of perquisites: - all cash allowance is
included and hence taxable under section 17(2) of income tax act. City compensatory

allowance, bad climate allowance, shift allowance and incentive bonus are included
as perquisites under section 17(2) of income tax act.

A perquisite is taxable as salary only when it is provided by the employer during the
continuance of employment: - any perquisites allowed by a person other than employer is
taxable as income from other sources. For example tips received by hotel waiters from
customers are taxable as income from other sources.

Non user of the perquisites by an assesse is of no consequences unless the right to perquisites
is foregone before it accrues to him: - there may be circumstances under which the employee
may not make use of the perquisites provided by the employer. Where the income is accrued
or received but it is subsequently given up, it remain the income of the recipient5.

The voluntary forgoing by the employee of the salary due to him is normally a mere application
of income and the salary is nonetheless taxable. Unless the assesse forgoes his right of the

5
CIT vs Shoorji Vallabhdas and co.(1962) 46 ITR 144 (SC)
provision of such perquisites before the income accrues, the notional income has to be brought
to charge as perquisites equitant to the value of rent free accommodation6.

Wide scope of the inclusive definition of perquisites: - the definition of the perquisites is
inclusive but not limited to them only. The scope of an inclusive definition cannot be restricted
only to those words which accrue in definition, but with extend to many other things not
mentioned in it. Therefore, any other item not listed in the definition of perquisites will have
to be evaluated in accordance with the general and commercial meaning of the word perquisites

The following propositions should also be kept in view:

• Personal benefit- “Perquisite” denotes something that benefits a man by going into his
own pocket; it does not, however, cover a mere reimbursement of necessary expenses
incurred by him.

• Cash or kind- It may be provided in cash or in kind.

• Should be provided by employer- Perquisites are included in salary income only if they are
received by an employee from his employer (maybe former, present or prospective).
Perquisites, received from a person other than employer, are taxable under the head “Profits
and gains of business or profession” or “Income from other sources”

• Enforceable right- A benefit or advantage would be taxable asperquisite only if it has a legal
origin. As an authorized advantage taken by an employee without his employer’s authority
would create a legal obligation to restore such advantage, it would not amount to” perquisite”
taxable under the Act On the other hand, if the benefit has been conferred unilaterally without
the aid of an agreement between the parties, the employee can be taxed under perquisites.

• Personal accident policy- Premium paid by employer towards personal accident policy
of employee is not taxable as perquisite.

• Pensionary deferred annuity benefits- Payments made by an employer to provide deferred

annuity benefits to his employees are taxable as perquisites only when a vested interest accrues
to the employee.

6
CIT vs Bawa Singh Chauhan (1984) ITR 8
• Personal advantage during employment- Perquisites are taxable under the head “Salaries”
only if they are:

(a) Allowed by an employer to his employee,

(b) allowed during the continuance of employment,

(c) Directly dependent upon services,

(d) Resulting in the nature of personal advantage to the employee, and

(e) Derived by virtue to employer’s authority.

It is not necessary that recurring and regular receipt alone is a Perquisite. Even a casual and
non-recurring receipt can be perquisite if the aforesaid conditions are satisfied.

According to (Sec 17 (2) 'perquisite' includes the following:

● The value of rent-free accommodation provided to the assessee by his employer.

● The value of any concession in the matter of rent with respect to any accommodation
provided to the assessee by his employer.

● The value of any benefit or amenity granted or provided free of cost or at concessional
rate in any of the following cases.

● Any benefit given by a company to an employee, who is a director thereof.

● Any benefit given by a company to an employee, being a person who has a substantial
interest in the company.

● Any benefit given by any employer (including a company) to an employee to whom the
provisions of paragraphs (a) and (b) of this sub-clause do not apply and whose income
under the head "Salaries" (whether due from, or paid or allowed by, one or more
employers), exclusive of the value of all benefits or amenities, not provided for by way
of monetary payment, exceeds Rs 50,000. However, nothing in this sub-clause shall
apply to the value of any benefit provided by a company free of cost or at a concessional
 rate to its employees by way of allotment of shares, debentures or warrants, directly or
indirectly under any Employees' Stock Option Plan or Scheme of the company offered
to such employees in accordance with the guidelines, issued in this behalf by the Central
Government. The use of any vehicle, provided by a company or an employer for
journey by the assessee from his residence to his office or other place of work, or from
such office or place to his residence, shall not be regarded as a benefit or amenity
granted or provided to him free of cost or at concessional rate for the purposes of this
sub-clause.

● Any sum, paid by the employer in respect of any obligation which, but for
such payment, would have been payable by the assessee;

● Any sum, payable by the employer, whether directly or through a fund, other than a
recognized provident fund or an approved superannuation fund or a Deposit-linked
Insurance Fund, established under section 3G of the Coal Mines Provident Fund and
Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of
the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)],
to effect an assurance on the life of the assessee or to effect a contract for an annuity;
and

● The value of any other fringe benefit or amenity as may be prescribed.

Nothing in this clause shall apply to the following7:

1. The value of any medical treatment provided to an employee or any member of his family
in any hospital maintained by the employer;

2. Any sum, paid by the employer in respect of any expenditure, actually incurred by the
employee on his medical treatment or treatment of any member of his family-

(a) In any hospital, maintained by the Government or any local authority or any other hospital
approved by the Government for the purposes of medical treatment of its employees;

(b) In respect of the prescribed diseases or ailments, in any hospital approved by the Chief
Commissioner, having regard to the prescribed guidelines. In such a case, the employee shall

7
http://finance.indiamart.com/taxation/income tax. Html.
attach, with his return of income, a certificate from the hospital specifying the disease or
ailment for which medical treatment was required and the receipt for the amount paid to the
hospital.

3. Any portion of the premium, paid by an employer in relation to an employee, to effect or to

keep in force an insurance on the health of such employee under any scheme approved by the
Central Government for the purposes of clause (ib) of sub-section (1) of section 36;

4. Any sum, paid by the employer in respect of any premium paid by the employee to effect or
to keep in force an insurance on his health or the health of any member of his family under any
scheme, approved by the Central Government for the purposes of section 80D;

5. Any sum paid by the employer in respect of any expenditure actually incurred by the
employee on his medical treatment or treatment of any member of his family other than the
treatment referred to in clauses (i) and (ii); so, however, that such sum does not exceed Rs
15,000 in the previous year;

6. Any expenditure incurred by the employer on the following:

7. Medical treatment of the employee, or any member of the family of such employee, outside
India;

8. Travel and stay abroad of the employee or any member of the family of such employee for
medical treatment;

9. Travel and stay abroad of one attendant who accompanies the patient in connection with
such treatment, subject to the following conditions:

10. The expenditure on medical treatment and stay abroad shall be excluded from perquisite
only to the extent permitted by the Reserve Bank of India; and

11. The expenditure on travel shall be excluded from perquisite only in the case of an employee
whose gross total income, as computed before including therein the said expenditure, does not
exceed two lakh rupees;

12. Any sum, paid by the employer in respect of any expenditure actually incurred by the
employee for any of the purposes specified in clause (vi) subject to the conditions specified in
or under that clause:
For the assessment year beginning on the 1st day of April, 2002, nothing contained in this
clause shall apply to any employee whose income under the head "Salaries" (whether due from,
or paid or allowed by, one or more employers) exclusive of the value of all perquisites, not
provided for by way of monetary payment, does not exceed Rs.1,00,000.

Explanation

For the purposes of clause (2),

i. 'Hospital' includes a dispensary or a clinic or a nursing home;

ii. 'Family', in relation to an individual, shall have the same meaning as in clause (5) of section
10; and

'Gross total income' shall have the same meaning as in clause (5) of section 80B.

D. Profits in lieu of or in addition to any salary or wages.

According to section 17(3), profits in lieu of salary includes:

(1). The amount of any compensation due to or received by an assessee from his employer or
former employer at or in connection with the termination of his employment or the
modification of the terms and conditions relating thereto.

(2). Any payment (other than any payment referred to in clause (10) clause (10A)clause(10B,
clause (11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an
assessee from an employer or a former employer or from a provident or other fund, to the extent
to which it does not consist of contributions by the assessee or interest on such contributions
or any sum, received under a Keyman insurance policy, including the sum allocated by way of
bonus on such policy. The expression "Keyman Insurance policy" shall have the meaning
assigned to it in clause (10D) of section 10.

(3) Any amount, due to or received, whether in lump sum or otherwise, by any assessee from
any person in the following cases:

(a) Before his joining any employment with that person; or

(b) After cessation of his employment with that person.

The word “profit” in the expression “profit in lieu of salary “ should be taken to mean advantage
or gain employee by receipt of any amount and such payment is not required to be out of profits
of the employer .

5. Any advance of salary.

The term “salary” includes any advance of salary.

5-A. payment in respect of leave not availed of.

Any payment received by an employee in respect of any period of leave not availed of by him
shall be included within the meaning of ‘salary’ chargeable to income – tax.

6. Annual accretion to provident fund.

That portion of the annual accretion in any previous years to the balance at the credit of an
employee participating in a recognised provident fund as consist of:

(a) Contributions made by the employer in excess of 10% of the employee’s salary and

(b) Interest thereon which is in excess of one-third of the employee’s salary or in excess of the
amount calculated at the rate of 7.5% per annum, shall be deemed to have been received by the
employee in that previous year and shall be included in his total income for the purpose of
income- tax.

7. Sums in transferred balance.

The amount transferred from an unrecognised provident fund to a recognised provident fund
account of the employee is included in the employee’s total income under the head “salary”.
Clause (vii) of sub-section (1) of Section 17 provides that “salary” includes 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.

8. Contribution by the Central Government or any other employer to the account

of employee under pension scheme [Section 17 (1) (viii)].

It provides that “salary” shall include the contribution made by the Central Government or any
other employer in the previous year, to the account of an employee under a pension scheme
referred to in section 80CCD.
It is obvious that the above definition of salary under Section 17 (1) is inclusive and not
exhaustive. Consequently, the receipts not covered under the categories of receipts stated under
section 17 (1) may also be included in salary.

DEDUCTIONS FROM SALARIES.

Deduction under Section 16:

The income chargeable under the head “salaries” shall be computed after making the following
deductions:

(i) Expenditure incidental to the employment (i.e., standard deduction) [Section 16(i)].

The income chargeable under the head "Salaries" shall be computed after making the following
deductions, namely :-

(i) In the case of an assessee whose income from salary, before allowing a deduction under the
clause,

(a) Does not exceed one lakh rupees, a deduction of a sum equal to thirty-three and one-third
per cent of the salary or twenty-five thousand rupees, whichever is less;

(b) Exceeds one lakh rupees but does not exceed five lakh rupees, a deduction of a sum
of twenty thousand rupees.

For the purposes of above clause, where salary is due from, or paid or allowed by, more than
one employer, the deduction under this clause shall be computed with reference to the
aggregate salary due, paid or allowed to the assessee and shall in no case exceed the amount
specified under this clause;

(ii) A deduction in respect of any allowance in the nature of an entertainment allowance

specifically granted to the assessee by his employer –

(a) In the case of an assessee who is in receipt of a salary from the Government, a sum
equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite)
or five thousand rupees, whichever is less; and
 (b) In the case of any other assessee who is in receipt of such entertainment allowance and
has been continuously in receipt of such entertainment allowance regularly from
his present employer from a date before the 1st day of April, 1955, the amount of such
entertainment allowance regularly received by the assessee from his present
employer in any previous year ending before the 1st day of April, 1955, or a sum equal
to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or
seven thousand five hundred rupees, whichever is the least;

(iii) Deduction of any sum paid on account of a tax on employment [Section 16 (iii)].

In computing the income chargeable under the head ‘salary’, it allows a deduction of any sum
paid by the assessee on account of a tax on employment within the meaning of clause (2) of
Article 276 of the Constitution of India leviable by or under any law.

CASE LAWS

● Major LHG conville of convillepur vs. CIT Punjab, NWF and Delhi province8

“salary signifies a recompense given to any man for his pains bestowed upon another man’s
business “. Where a father and son are joint owners of agricultural property and son gets certain
allowances for managing the property besides his share of the income from the property. Only
the surplus allowance can be taxed as his salary, his share of the income is to be treated as
agricultural.

● Amar Dye Chemicals Ltd and another vs. Union of India and others9

Salary – Managing Director of Company whether servant or agent – Test – Assessee appointed
as Managing Director to manage business of company in terms of and within powers prescribed
in articles of association and under terms of agreement he could be removed for not discharging
work diligently or not acting in interest of company – Assessee held was servant and not agent
of company – Remuneration payable to assessee would be salary.

8
AIR 1935 Lah 938.
9
AIR 1974 SC 636.
 ● CIT, UP,CP and Berar, Lucknow vs. ID Varshani10

in this the assessee was called a Managing Agent but the powers conferred upon him under the
Articles were more in the nature of powers given to a servant and those powers could be
terminated, he was admitted to the benefits of the Company’s Provident Fund as being an
employee of the company and value of rent-free quarters occupied by him was added as income
under the head ‘salary’. It was held that the assessee was in fact the Chief Manager of the
Company and his remuneration was properly assessed as salary.

● CIT vs. Navnitlal Sakarlal11

agreements between the company and its Managing directors entitled them to remuneration but
also empowered the Board of Directors to resolve in respect of any year not to pay any
remuneration to them. For the previous rear relevant to AY 1973-74, the Board of Directors
resolved that “the amount of commission payable to each of the Managing directors” should
be expended to purchase single premium deferred annuity policies on their lives.

10
AIR 1954 All 58
11
AIR 2001 SC 235.
 BIBLIOGRAPHY

Books consulted

 Balram Sangal and Jagdish Rai Goel: Direct Tax, Income Tax, Wealth Tax and Tax
Planning.
 Dr. V.K. Singhania: Students guide to Income-Tax.
 Girish Ahuja and Ravi Gupta Systematic Approach to Income tax, Service Tax
 J.K. Mittal: Law, Practice and Procedure of Service Tax.

Sites Referred

 www.lawbites.com
 www.lawcorner.com
 www.ipleaders.com