CENTRAL

UNIVERSITY OF SOUTH BIHAR

GAYA-824236

SCHOOL OF LAW & GOVERNANCE

TAXATION LAW

PROJECT TOPIC
CONCEPT OF SALARY
Under the Supervision of: Dr. Mani Pratap
Associate Professor,
School of Law & Governance
Central University of South Bihar.

Submitted By: -
KUNDAN KUMAR
B.A. LL.B. (Hons.)
7th Semester, Sec-A(2018-2023)
Enrollment Number - CUSB1813125053

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.A.LL.B (Hons.) project report entitle
“Concept of salary ‘’ Submitted at Central University Of South Bihar ,
Gaya a authentic record of my carried out under the supervision of Dr. Mani Pratap.
I am fully responsible for the contents of my Project report.

Name- Kundan kumar

Enrollment- CUSB1813125053
( Central University of South Bihar )

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 ACKNOWLEDGEMENT

I Kundan Kumar take extreme pleasure in expressing my profound gratitude towards my

Taxation Law Teacher Dr. Mani Pratap (associate professor, department of law and
governance) for inspiring me and giving me the guidance and constant support throughout
the course of my project work. However, it would not have been possible without the
support of my teachers, friends, colleagues, seniors and many other individual persons (like
librarians, computer lab staff and other college staff) and other e-resources. I would like to
thank all of them.
I would like to thanks to my parents, family members and God for
providing me everything and whose patient love enabled me to complete this project.
At last, I am deeply indebted to the eminent logical experts and philosophers and other
scholars of repute whose valuable work has highly useful in writing this project.

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 TABLE OF CONTENT

1. Introduction

2. General definition of Salary

3. Heads of Income

4. Salary

5. Different meaning of Salary for different purposes

6. Meaning and scope of salary

7. Deductions from salary

8. Relief when salary is paid in advance or arrears etc.

9. Case laws

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 RESEARCH METHODOLOGY

Aims and objective

 To understand the concept of Salary

 To understand concept of salary and wage

 Comparative analysis on wage and salary

Research methodology
The researcher will emphasize and use the doctrinal method for this project topic. The
researcher will be collecting valuable data from library which includes the written works and
from the field. All these data will help the researcher to solve the research problem. All the
books , journal, articles published in newspaper, bodies report. The researcher will make use
of doctrinal process includes the use of literary sources

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INTRODUCTION

The government of India imposes an income tax on taxable income of individuals, Hindu
Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as
body of individuals and association of persons) and any other artificial person. Levy of tax is
separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961.
The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT)
and is part of the Department of Revenue under the Ministry of Finance, Govt. of India.
There were 33 million income taxpayers in 2008.
The CBDT is a part of Department of Revenue in the Ministry of Finance. On one hand, CBDT
provides essential inputs for policy and planning of direct taxes in India, at the same time it
is also responsible for administration of direct tax laws through the Income Tax Department.
The Central Board of Direct Taxes is a statutory authority functioning under the Central
Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also
function as a Division of the Ministry dealing with matters relating to levy and collection of
direct taxes. The Central Board of Revenue as the Department apex body charged with the
administration of taxes came into existence as a result of the Central Board of Revenue Act,
1924. Initially the Board was in charge of both direct and indirect taxes. However, when the
administration of taxes became too unwieldy for one Board to handle, the Board was split
up into two, namely the Central Board of Direct Taxes and Central Board of Excise and
Customs with effect from 1.1.1964. This bifurcation was brought about by constitution of
the two Boards u/s 3 of the Central Boards of Revenue Act, 1963.

Organisational Structure of the Central Board of Direct Taxes:

The CBDT is headed by Chairman and also comprises of six members, all of whom are ex-
officio Special Secretary to Government of India.
Member (Income Tax) Member (Legislation and Computerisation) Member (Revenue)
Member (Personnel & Vigilance) Member (Investigation) Member (Audit & Judicial) The
Chairman and Members of CBDT are selected from Indian Revenue Service (IRS), a premier
civil service of India, whose members constitute the top management of Income Tax
Department.

Responsibilities of Chairman and Members, Central Board of Direct

Taxes

Various functions and responsibilities of CBDT are distributed amongst Chairman and six
Members, with only fundamental issues reserved for collective decision by CBDT. In addition,
the Chairman and every Member of CBDT are responsible for exercising supervisory control over
definite areas of field offices of Income Tax Department, known as Zones.

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GENRAL DEFINITION OF SALARY

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 employee. 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.

HEADS OF INCOME

Section 14 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.

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SALARY (SECTION 15 TO 17 )

1. Income Chargeable to Income-tax under the head “Salaries”

(Section 15)

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 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 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 due.

Some Important Points Regarding salary

1) 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 officials.

2) 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 an 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.

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3) 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 theother circumstances
of the case. When a person occupies a regular post or office amounting to the service, it is
an employment as distinct from mere engagement in the course of the profession.

(4) 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 accure 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.
(5) 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.

(6) 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 .

(7) 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.

(8) 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

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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.

(10) 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 ( SECTION 17)

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”.

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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

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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
recipient [CIT vs. Shoorji Vallabhdas and co. (1962) 46 ITR 144 (SC)]. 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 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 accommodation [CIT vs. Bawa Singh Chauhan
(1984) ITR 8].
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.

•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).

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CASE LAW

In Major LHG conville of convillepur vs. CIT Punjab,NWF and Delhi province, Lahore AIR
1935 Lah 978 “

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.

In Amar Dye Chemicals Ltd and another vs. Union of India and others AIR 1974 SC 636
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.

In CIT, UP,CP and Berar, Lucknow vs. ID Varshani AIR 1954 All 58 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.

In Cit vs. Navnitlal Sakarlal AIR 2001 SC 235 , 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.
The said resolution neither referred to the provision in agreement for non-payment of
remuneration nor saying that the Managing Directors should not be paid any remuneration
or part thereof. In such circumstances, it was held that the amount of
commission did accrue to the Managing Directors and could not be said to have been
diverted. Therefore, it constituted part of their remuneration and was includible in their
hands as salaries.

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CONCLUSION

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of
“Salaries” including therein (i) Wages (ii) Annuity or pension (iii) Gratuity (iv) Fees,
Commission, perquisites or profits in lieu of salary (v) Advance of Salary (vi) Amount
transferred from unrecognized provident fund to recognized provident fund (vii)
Contribution of employer to a Recognised Provident Fund in excess of the prescribed limit
(viii) Leave Encashment (ix) Compensation as a result of variation in Service contract etc. (x)
Contribution made by the Central Government to the account of an employee under a
notified pension scheme.

REFERANCE

https://taxguru.in/income-tax/taxability-salary-income-perquisites-allowances.html

https://dor.gov.in/sites/default/files/1_0_0.pdf

://www1.incometaxindiaefiling.gov.in/eFiling/Portal/StaticPDF/Instructions_ITR_1_AY_2019-20.pdf

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