Computation of Total Income



SECTION 15 l INCOME chargeable

179. Commission to employees - Whether it forms part of salary or perquisite - Question has to be decided on the facts of each case

See para 4 (sub-para 3) of Circular No. 80, dated 4-3-1972, under section 40(c)(iii)/40(a)(v) [Sl. No. 381].

180. Salary and pension received from foreign Governments - Whether taxable under the head “Salaries”

1. Attention is invited to Board’s earlier circular letters wherein it has been stated that the salary or pension paid by a foreign Government was assessable under section 12 of the 1922 Act, as “income from other sources” and not under section 7 of the said Act as “salaries”.

2. The matter has been considered afresh in the light of the provisions of the 1961 Act. The Board have been advised that the salary paid by a foreign Government to its employees serving in India is taxable under the head “Salaries” under section 15 of the 1961 Act. The words “an employer” occurring in clause (a) of that section are wide enough to include a foreign Government. As regards deduction of tax at source under section 192 on the salary paid by a foreign Government to its employees serving in India who are citizens of India and thus liable to pay tax under the Act, tax would be deductible at source even though it may not be possible to enforce recovery in the event of their failure to deduct tax at source. The liability of foreign States to deduct tax at source is not absolute inasmuch as such liability is not enforceable in law in view of diplomatic immunity enjoyed by Governments of foreign States.

Circular : No. 2(LVIII-32)-D of 1966, dated 21-2-1966.

181. Pension received by erstwhile officials of United Nations - Whether exempt from tax in view of section 2 of UN (Privileges and Immunities) Act, 1947

1. Section 2 of the UN (Privileges and Immunities) Act, 1947, read with section 18, clause (b) of article V of the Schedule thereto, inter alia, grants exemption from taxation to salaries and emoluments paid by the United Nations to its officials. The question whether pension received by the erstwhile officials of the United Nations from it would be exempt from income-tax was considered by the Karnataka High Court in the case of CIT v. K. Ramaiah [1980] 126 ITR 638. The High Court held that since, under section 17 of the Income-tax Act, salary has been defined to include pension, if salary is exempted from tax, so shall be the pension. The Board have accepted the decision of the Karnataka High Court.

2. In view of the foregoing, apart from salary received by employees of the UNO or any person covered under the UN (Privileges and Immunities), Act, 1947, pension received by them from the UN will also be exempt from income-tax. Pending appeals on this point may be conceded and reference applications withdrawn.

Circular : No. 293 [F. No. 200/140/80-IT(A-I)], dated 10-2-1981.1

182. Pension paid to a widow of deceased employee - Whether liable to tax under the head “Salaries”

The Board are advised that the inclusion of pension under the head “Salaries” is only for the purpose of section 15. For section 15 to apply, the relationship of master and servant must exist in view of the Calcutta High Court’s decision in the case of David Mitchell v. CIT [1956] 30 ITR 701. The pension paid to the employee himself will be under section 15 read with section 17 but not the pension paid to the widow. The Board have, therefore, accepted the view expressed by the Commissioner of Income-tax, Madras in para 2 of his letter No. C. No. 450(7)/60, dated 20-5-1967.2

Letter : F. No. 45/118/66-ITJ, dated 21-8-1967.

183. Cash equivalent of leave salary payable to legal heirs on the death of Government/non-Govemment employees - Whether taxable under the head “Salaries”

clarification 1

1. In terms of para 1(iv) of O.M. No. 16(2)-E-IV(A)/73, dated 9-1-1974 issued by the Ministry of Finance, Department of Expenditure, the family of a Government servant, who dies in harness, is entitled to receive the cash equivalent of the leave salary that the deceased Government employee would have got if he had gone on earned leave. The amount is payable on the date immediately following the date of death, subject to a maximum leave salary for 120 days and subject to the reduction envisaged in rule 40(7)(a) of the Central Civil Service (Leave) Rules, 1972. The question whether the amount received by the family in these circumstances is taxable has been considered.

2. The Board have been advised that this receipt in the hands of the family is not in the nature of one from an employer to an employee. The deceased had no right or interest in this receipt. This payment is only by way of financial benefit to the family of the deceased Government servant, which would not have been due or paid had the Government servant been alive. In view thereof the amount will not be liable to income-tax.

Circular : No. 309 [F. No. 200/125/79-IT(A-I)], dated 3-7-1981.

clarification 2

The leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.

For being taxable as salary, the payment must be due from an employer to the assessee. If the deceased officer is regarded as the assessee in respect of the proposed payment, then the amount was not due to the assessee. Firstly, this is not a payment which was due to be paid to him after his death as a matter of contractual right. Secondly, even before his death, the payment was not due to him unless and until the leave was actually taken by him.

If the legal representative of the deceased is to be taken to be the assessee, then the amount/proposed to be paid is certainly not due to him. It is an ex gratia payment on compassionate grounds in the nature of gift. Thus, the payment is not in the nature of salary.

Letter : No. 35/1/65-IT(B), dated 5-11-1965.

Judicial analysis

Referred to in - The above letter was referred to in ACED v. Durga Devi Lara [1984] Taxation 75(6)-118 (Hyd. - Trib.). This was a case under the Estate Duty Act, and the question involved was whether salary equivalent of leave not availed by the deceased which was paid to the legal heirs was ‘property passing on death’ under section 5 of that Act. The Tribunal observed :

“The categorical statements are that the amount was not due to the deceased unless he took leave which he had not taken in the present case. It was also not a payment which was due to be paid after his death as a matter of contractual right. Therefore, the deceased was not possessed of any property. This is a case where property, viz., monetary equivalent of leave salary, was not in existence at a time before the death of the deceased. This being so, the question of any property passing on his death did not arise. In the Board’s circular it is also categorically stated that the payment was an ex gratia payment on compassionate grounds in the nature of a gift to the legal heirs. The learned departmental representative sought to submit that the amount may be ex gratia as far as the legal heirs were concerned but it did not imply that it partook of the same nature as far as the deceased was concerned. If the amount was due to the deceased, it could never be an ex gratia payment to the legal heirs, but it would be a legitimate due. So if the payment is ex gratia to the legal heirs, certainly it was not an amount due to the deceased.

Having come to the conclusion that there was no property of the deceased prior to his death, the question of any property passing on his death, albeit a moment after his death, insofar as leave salary in respect of leave not taken is concerned, did not arise. . . .” (pp. 120-121)

184. Amount received on encashment of leave salary due to employee either in service or at the time of retirement - Whether taxable as part of salary income

1. A large number of references have been received by the Board on the decision of the Income-tax Appellate Tribunal, Madras Bench, in the case of N.B. Tendolkar v. ITO [1980] 4 Taxman 129. In this decision the Tribunal has held that the amount received by an assessee on encashment of leave due to him is not taxable.

2. The Income-tax Department has not accepted the aforesaid decision of the Tribunal and is in reference before the Madras High Court. The stand of the department is that the amounts received on encashment of leave salary due to an employee either in service or at the time of his retirement are taxable as part of salary income.

3. All Income-tax Officers working in your charge and in particular the Income-tax Officers assessing salary cases may be apprised of this stand taken by the department.

Circular : No. 312 [F. No. 200/187/81-IT(A-I)], dated 31-8-1981.

185. Salary received by Members of Parliament - Whether chargeable to tax under the head “Salaries”

The salaries of Members of Parliament are governed by the Salaries and Allow-ances of Members of Parliament Act, 1954. It is undeniable that a Member of Parliament is not an employee of the Government. Therefore, the salary received by him as M.P. will not be chargeable to income-tax under the head “Salaries” but as “Income from other sources” under section 56 of the Income-tax Act.

Letter : F. No. 40/29/67-IT(A-I), dated 22-5-1967.

186. Assessment of senior executives of companies - Points to be kept in mind by assessing Income-tax Officers

1. An instance has come to the notice of the Board where enquiry regarding salary drawn abroad and the perquisites enjoyed by the senior executives of a foreign company operating in India revealed substantial understatement of income liable to tax. The detection was possible mainly due to the close co-ordination in the assessment of the foreign company and of its senior executives. In view of this, the Board would like to reiterate that where the cases of senior executives have not been assigned to the Income-tax Officer assessing the company, assessments in such cases should be completed after proper co-ordination with the Income-tax Officer assessing the company and in particular after carefully examining the following points.

2. Valuation of perquisites - rent-free accommodation - The value of this perquisite has to be determined under rule 3(iii) read with Explanation 2. In the case of premises owned by the company, the value of accommodation should be determined on the basis of market rent which a similar accommodation would realise in the same locality or the municipal value of the accommodation, whichever is higher. But while determining the fair rental value of the accommodation owned by the company, the cost of acquisition and other capital expenses on renovation, etc., incurred by the company should be kept in view. In respect of premises taken on lease or rent by the company, the actual payment by the company should be taken as fair rental value of the premises. If the company has incurred or agreed to incur expenditure on repairs, maintenance, etc., of the premises, a suitable adjustment should be made to arrive at the fair rental value. No deduction should ordinarily be allowed on the ground that a certain portion of the residence is used for the purposes of office work.

VALUE OF FURNITURE, ETC. - Senior executives are either provided with furnished accommodation or the furniture, etc. It is understood that some companies have laid down norms in this respect. The particulars of the items may be obtained from the company and utilised for valuing the perquisites. This applies to rent-free accommodation also.

ENTERTAINMENT EXPENSES - Details of entertainment expenses including club bills reimbursed by the company should be obtained. The claim that the reimbursement of the expenditure was in respect of entertainment for purposes of the business of the company should be accepted only after proper scrutiny. Thus, the value of this perquisite is to be properly ascertained.

3. Furlough pay - Furlough pay paid abroad by companies is at times not included by the executives in their returns of income. The furlough pay being related to services rendered in India is income deemed to accrue or arise in India and as such is includible in the total income of all such employees. The company should invariably be required to furnish particulars regarding furlough pay paid to the executives.

Instruction : No. 1099 [F. No. 200/73/77-IT(A-I)], dated 20-9-1977 [Source: 143rd Report (1978-79) of the Public Accounts Committee, pp. 34-36].