Salary, in simple words, means remuneration of a person, which he has received from his employer for rendering services to him. But receipts for all kinds of services rendered cannot be taxed as salary. The existence of an’ employer-employee’ relationship is a must for a payment to be taxed under the head salaries.
Accordingly, the following classes of payments do not fall under the purview of the head ‘salary’
Salary received by a partner from his partnership firm carrying on business – This income is taxable under the head “profits and gains of business and profession”.
Salary received by a person as MP or MLA– This income is taxable under the head “income from other sources”. However, the salary received by a person as a Minister of Central Government/State Government is chargeable under the head salaries.
Family pension that is pension received by the members of the family of an employee subsequent to his death – This is taxable under the head “income from other sources”. However the pension received by an employee from his former employer is taxable under the head salaries.
Salary is taxable either on due basis or receipt basis which ever matures earlier
As Per Section 15 of Income Tax Act 1961 “Salary” includes:
(a) Any salary due from an employer or a former employer to an assessee 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 an 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 year.
Salary comprises of 5 components namely:
- Basic salary
- Fees, Commission and Bonus
- Taxable value of cash allowances
- Taxable value of perquisites
- Retirement Benefits
S. 5(2)(b), 9(1)(ii) & 15 of IT Act, 1961—Income—The criteria of applying the definition of s. 5(2)(b) would be such income which is earned in India for the services rendered in India and not otherwise. Under s. 15 even on accrual basis salary income is taxable i.e., it becomes irrespective of the fact whether it is actually received or not, only when services are rendered in India, it becomes taxable by implication. However, if services are rendered outside India, such income would not be taxable in India. If the number of days worked by the assessee outside India as extracted in assessment order taken into consideration it would emerge that assessee has worked outside India for a period of 225 days and such income earned by assessee outside India is not taxable—DIT(International Taxation) vs. Prahlad Vijendra Rao (2011) 239 CTR 107 (Kar)
S. 10(10C), 15(a), 17, 43(2) of IT Act, 1961—Exemption—S. 10(10C) of the Act is inserted in order to make voluntary retirement more attractive and beneficial to employees opting for voluntary retirement and, therefore it has to be interpreted in a manner beneficial to the optec for voluntary retirement if there is any ambiguity. The amendment to clause (10C) of s. 10 of the Act by the Finance Act, 2003 w.e.f. April, 2004 adding the words RAVIPRAJor receivableRAVIPRAJ after the words RAVIPRAJreceivedRAVIPRAJ is clarificatory—ITO vs. Dhan Sai Srivas (2009) 315 ITR 318 (Chhattisgarh)
S. 15, r/w 17 and 192 of IT Act, 1961—Salaries—The obligation to deduct taxes at source under s. 192 in respect of a payment arises when an employee is responsible to make a payment, which is chargeable to tax under the head “salaries” in the hands of the recipient. As per s. 192, the employer is required to deduct tax at source out of the income of the employees chargeable under the head “Salaries” at the time of payment on the basis of estimated income of the recipient—CIT vs. ITC Ltd. (2011) 199 Taxman 412 (Delhi)
S. 15 of the IT Act, 1961—Salaries—’Notional’ interest on interest free deposit received in connection with the letting out of the property cannot be included in the rent received so as to constitute part of the Annual Letting Value of the assessee’s property depermined under s. 23(1)(b) of the Act—CIT vs. Raghunath Murti (2009) 178 Taxman 144 (Delhi)
Income Tax Act, 1961, section 15 read with section 192—Tax deducted at source—The following questions of law arose:—”(1) Whether the Tribunal was right in law in treating the payment to persons as professional charges instead of salary in the absence of any bills/ expense vouchers ? (2) Whether the Tribunal was right in law in holding that these payments were not liable to deduction of tax under section 192(1) of the Income-tax Act, 1961 ?” While dismissing the appeal, the High Court of Punjab and Haryana held that:—”We are of the considered view that the question with regard to employer-employee relationship is necessarily a question of fact. There are categorical findings that the doctors were visiting the assessee and were on call. In other words, they were not in the service of the hospital in their capacity as employee and such doctors were free to attend other hospitals as and when required. The revenue was not able to produce any evidence to show that there was employer-employee relationship. These are necessarily questions of facts and accordingly, the provisions of the Act concerning TDS and interest under section 201(1A) of the Act would not be attracted.” CIT Vs. Deep Nursing Home & Children Hospital [2007] 7 ITCD 114 (P&H)
Income Tax Act, 1961, sections 15 and 17(2)(iv)—Salary—Remuneration—The following questions of law were framed “(i) Whether remuneration/ allowances paid to the assessee as a Member of Legislative Assembly is taxable under the head “Income from salary”. (ii) If so whether in the facts and circumstances of the case, the reimbursement of medical treatment taken by the assessee, who was a Member of the Legislative Assembly for open heart surgery conducted abroad is taxable as perquisite under Section 17 (2) (iv) of the Income Tax Act, 1961?.” While dismissing the appeal, the Rajasthan High Court held that:—”When the provisions of Sec. 15 are not attracted to the remuneration received by the assessee, obviously, Sec. 17 cannot be attracted, as Sec. 17 only extends the definition of ‘salary’, by providing certain item mentioned therein, to be included in salary. The net result, of the aforesaid discussion is, that, in our view, the two questions, as framed do not arise, and at the same time, the impugned order does not suffer from any error of law, requiring interference, by this court, in appeal.” CIT Vs. Shiv Charan Mathur [2008] 8 ITCD 159 (Raj.)
S. 10(16), 15& 17 of the IT Act, 1961—Exemption—The stipend/scholarship has been specifically precluded from the mischief of sub-s cls. (1) and (2) of s. 17 and it is neither a salary/wage nor perquisite and, therefores, exempted under s. 10(ib) of the Act—Dr. Rahul Tugnait vs. ITO (2009) 123 TTJ 251 (ITAT-Chd.)
S. 4, r/w s. 15 and 56 of IT Act, 1961—Income—The assessee applied for a job of international radio broadcaster in Voice of America in 1982 and despite of clearing competitive test, she was not offered the job. Subsequently, a class action, i.e., a collective suit by several plaintifts having a common case was filed in US Court on behalf of women who were denied employment at the US Information Agencies because of their sex, in violation of the Civil Rights Act, 1964. In terms of consent decree, the US Govenment agreed to pay compensation of 508 million to the class mambers in full and final satisfaction of all claims for all relief. Further, post judgment interest was to be paid on the principal amount of settlement proposals from the date on which the consent decree was approved up to the date of actual payment. The process of payment of settlement funds was started in April, 2002, that is the financial year 2002-03 relevant of the assessment year 2003-04. The assessee recived a compensation of US $ 3.45 lakhs in July, 2002 i.e. equivalent to Rs. 1.67 crores. The amount received by the assessee is not in her capacity as employee or ex-exmployee, but is only compensation for injuiry caused to her by denying employment after having been declared employable by following a discriminatory general practice prohibited by law in USA, and thus, it is amounted to capital receipt and not liable to tax, and pre-judgment interest on compensation is a part of settlement amount and its character would be same as that of principal amount of compensation and it is capital receipt and not liable to tax. However if such interest is in addition to assessee’s share in the settlement funds of US $ 508 million, it would be taxable as ‘Income from other sources.”—ACIT vs. Smt. Rani Shanker Mishra (2010) 122 ITD 360 (ITAT-Delhi)
S. 15, 56 & 143(1)(a) of IT Act, 1961—Salary—Under Art 164(1) of the Constitution of India, the Chief Minister is to be appointed by the Governor and he holds office during his pleasure. Art. 164(5) of the Constitution provides for salaries and allowances to the ministers as determind by the Legislature of the State. Such salary received by the assessee in the capacity of Chief Minister of the State is chargeable to tax under the head “salaries” and not as “income from other sources”—Lalu Prasad vs. CIT (2009) 227 CTR 556 (Patna)
S.15, r/w S.192 and 194J, of IT Act, 1961—Salary Chargeable as—The assessee company is running hospital with branches. Since the doctors are employees of the assessee and being so, the relation between the assessee and the doctors is that of an employer and employee and the remuneration paid to them in terms of the appointment order is salary which attract the provisions of S.192. Thus, assessee is liable for deduction of tax under S.192 not under S.194J of the Act.—Dy. CIT Vs. Wockhardt Hospitals Ltd. [2012] 139 ITD 161 (ITAT-Hyd.)
S.15, of IT Act, 1961 — Salaries — Notional interest on interest free deposit made for accommodation is not part of perquisite of the assessee. — CIT Vs. Jaydev H. Raja [2012] 211 Taxman 188 (Bom)
Section 15 Income-tax Act, 1961 – Salary – CIT Vs. Ramesh Chandra Agarwal. [2006] 151 TAXMAN 179 (ALL.)
Section 15 of the Income-tax Act, 1961 – Salary – CIT Vs. Branch Manager, LIC of India. [2006] 154 TAXMAN 76 (P&H)
Section 15 of the Income-tax Act, 1961 – Salary – CIT Vs. S. Upjeet Singh Kumar, Development Officer, LIC of India. [2006] 154 TAXMAN 68 (ALL)
S. 15—Salarie—IT ACT, 1961—Sajid Mowjee Vs. ITO. [2005] 148 TAXMAN 502 (CAL.)
Section 15, read with section 17(2), of the Income-tax Act, 1961 – Salaries – CIT Vs. Taylor Instrument Co. (I) Ltd. [2006] 154 TAXMAN 92 (DEL)
Reference: – As Per Section 15 of the Income Tax Act 1961
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 assessee 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 an 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 year.
[Explanation 1].—For the removal of doubts, it is hereby declared 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 due.
[Explanation 2.—Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.]