section 89 l RELIEF WHEN SALARY ETC., IS
PAID IN ARREARS OR IN ADVANCE

628. Scope of relief under the section in five situations explained

1. Section 89(1) authorises grant of relief in a case where an employee receives salary in arrears or in advance or has received in any financial year salary for more than twelve months, a payment which under the provisions of section 17(3)(ii) is a profit in lieu of salary.  The effect of such increase is that the income will be assessed at a higher rate than it otherwise would have been assessed and it is for this reason that section 89(1) authorises relief to be allowed.  The relief is to be allowed in terms of rule 21A of the Income-tax Rules, 1962.

2. Rule 21A(1) enumerates the following five different situations wherein the assessees will be entitled to relief (four of these are specific situations while the fifth is a residuary one) :

   a.  salary being received in arrears or advance;

   b.  where the payment is in the nature of gratuity in respect of past services extending over a period of not less than five years is received;

   c.  where the payment is in the nature of compensation received by the employee from his employer or former employer at or in connection with termination of his employment after continuous service of not less than three years and where the unexpired portion of the term of employment is also not less than three years;

   d.  where the payment is in the nature of commutation of pension;

   e.  where the payment is not covered by the description given in (a) to (d) above.

The relief is to be worked out in the first four situations in accordance with the specific modes described in rule 21A (2)(a) to (d).

3. The authority to grant relief in the four specific cases is the Income-tax Officer assessing the employee.  In the residuary case, it is Central Board of Direct Taxes.

4. The relief under section 89(1) is to be given in the assessment in which the extra payment by way of arrears, advance, etc., is taxed. The mode of granting relief spelt out in rule 21A(2) to 21A(5) would show that in all the four different cases the exercise of giving relief is initiated by bringing to tax the whole of the extra amount in the assessment for the assessment year relevant to the year of receipt. Basically, the relief under section 89(1) is arithmetical. It involves finding out of two rates of tax. The first is the rate of tax applicable to the total income including the extra amount in the year of receipt. The second is finding out the rate by adding the arrears to the total income of the years to which they relate. For this purpose the assessee should be asked for a true and authentic statement of the total income of the earlier years to which the arrears pertain  There is no warrant for issuing a notice under section 148 or calling for returns of income of the earlier years.

Circular : No. 331 [F.  No. 174/102/79-IT(A-I)], dated 22-3-1982.

629. Relief in case of encashment of leave salary by an employee while in service - Whether admissible

1. Section 89(1) provides for relief to an assessee when salary, etc., is paid in arrears or in advance or if he receives in one financial year salary for more than 12 months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary and therefore, his income is assessed at a rate higher than at which it would have otherwise been assessed.  This relief is granted by the Income-tax Officer on an application made to him in this behalf.

2. The question of admissibility of relief under section 89(1) in respect of amounts received on encashment of leave salary while in service was considered by the Board.  The Board are advised that relief under section 89(1) read with rule 21A of the Income-tax Rules would be admissible in respect of encashment of leave salary by an employee when in service.  The encashment of leave salary on retirement whether on superannuation or otherwise has already been exempted, by insertion of clause (10AA) in section 10, by the Finance Act, 1982 with effect from 1-4-1978.

Circular : No. 431 [F.  No. 174/43/82-IT (A-II)], dated 12-9-1985.

630. Computation of relief under the section - Basis therefor

1. In modification of the instructions contained in the Board’s Circular No. 65 (LIII-I)-IT/49, dated 2-11-1951 regarding computation of relief under section 60(2) of the 1922 Act, it has been decided that the relief under section 60(2)/89(1) shall hereafter be calculated on the following basis.

2. (a) Where the payment to an employee is reasonably attributable to past services of less than 5 years (and is not of the nature of arrears of pay), no relief shall be admissible.

(b)Where the payment to an employee is reasonably attributable to past services of not less than 5 years but less than 15 years, relief will be allowed by subjecting the gratuity payment to tax at the average of the average rates determined by dividing the gratuity amount into two equal portions and adding a portion to the employee’s income in 1[each of]  the last two years of his service during which he was in receipt of salary for a full period of 12 months.

(c) Where the payment to an employee is reasonably attributable to past services of 15 years or more, the relief will be calculated by taxing the gratuity payment at the average of the average rates determined by dividing the gratuity amount into three equal portions and adding a portion to the employee’s income in 1[each of] the last three years of service during which he received salary for the full period of 12 months.

3. Where the payment is for arrears of salary, the relief shall as at present be calculated by treating the arrears as the income of the years to which the arrears relate.

1[4. Notwithstanding the above, relief due on account of a payment having been assessed in the assessment year 1965-66 and earlier years will continue to be governed according to the old formula.]

Circular : No. 9-D (LIII-6), dated 17-3-1966 as modified by Circular No. 14-D (LIII-7), dated 19-4-1966.

631. Relief in the case of amounts repaid under Additional Emoluments (Compulsory Deposit) Act - Procedure laid down for working out relief under the section

1. Section 8(2) of the Additional Emoluments (Compulsory Deposit) Act, 1974 provides that for the purposes of computing the total income under the Income-tax Act, the amount repaid to an individual is deemed to be salary paid in arrears and the provisions of section 89(1) of the Income-tax Act shall apply.  Under section 89(1), relief to be accorded in such cases is to be worked out on the basis of the rules as prescribed in rule 21A(2)(a) of the Income-tax Rules, 1962.

2. Representations have been received by the Board that the claiming of relief under section 89(1), as prescribed, is causing considerable hardship to certain categories of employees, particularly, in those cases of employees where the income of the employee was not taxable but for the repayment of compulsory deposits.

3. The Board have considered these representations and have decided with a view to removing hardship that the following procedure may be adopted by the Disbursing Officers :

   a.  compute the total income of the relevant previous year excluding the amount, received as repayment of deposit ;

   b.  allocate the amount received as repayment to the years to which the deposit relates ;

   c.  add to the amount allocated to each year, the total income of the year; and

   d.  compute the tax payable on such total income for each year at the rate applicable to that year.

4. If thereafter, it is found that no tax is payable as per (d) above for any of the years to which the repayment has been allocated, the Disbursing Officer need not deduct tax at source  from the total income of the employee in the year in which the deposit is being repaid notwithstanding the fact that in the year in which the deposit is repaid the income is taxable.

5. If, however, it is found that by allocating the repayment to the relevant years tax is payable for any year, the Disbursing Officers must deduct tax on the total income including repayment at the rate applicable to the year in which repayment is made.  Such employees will have to apply to the Income-tax Officer for claiming relief under section 89(1).

Circular : No. 239 [F. No. 174/72/78-IT(A-I)], dated 16-5-1978.