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Income is Charged under the Head Salaries - Taxation Notes | Study Income Tax for assessment year 2017-18 (Inter Level) - Taxation

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Which income is charged under the head salaries [Section 15]

  1. Where there exists a relationship of employer and employee then income is taxable under the head “Salaries”.
  2. Salary signifies remuneration for services rendered. Services may be rendered as a consultant or as an employee.
  3. If services are rendered as a consultant, then income earned is taxable either under the head ‘Profit from
    Business’ or under the head ‘Income from Other Sources’ whereas if services are rendered as an employee, then income is taxable under the head ‘Income from Salaries’.

Note 1: To determine whether there exist a relationship of employer and employee, the test to be seen is degree of control. In case of relationship of employer and employee, employee do not have the liberty to take independent decisions. Their decisions are guided by the decisions of employer. In case of relationship of consultant, the consultant has the power to take independent decisions.

What is the difference between relationship of ‘principal and agent’ and ‘master and servant’

 

Principal & Agent relationship

Master & Servant relationship

a.

Principal has the right to direct what work the agent should do.

Master has the right to direct what work the servant should do and also master has the further right to direct how the work should be done in a time bound manner. Servant is bound to follow both the directions.

b.

Here a person offers his services to any person for a price. He conduct his work at his own discretion. He is independent and provides consultancy services. He is entitled to profits and bears the losses.

Here a person offers his services to his master for a monthly or annual remuneration. He conduct his work at the will of his master. He is not independent. He is entitled to fixed remuneration.

c.

Here a person does work for his client.

E.g. Doctor’s, lawyers, Statutory Auditor, Actors

Here a person does work of his master.

d.

The income is charged either under the head ‘Business’ or under the head ‘Other Sources’.

The income is charged under the head Income from Salaries.

e.

Contract for service.

Contract of service.

 
 
P1 : Short questions and answers.
1. Under which head remuneration received by director is taxable?
2. Under which head salary received by M.P. and M.L.A. are taxable?
3. A lecturer receiving examinership remuneration is taxable under which head?
4. Tips to waiter. Explain tax treatment?
5. A doctor an employee of AIIMS also does private practice. Explain its tax treatment.
6. Only salary from present employer is taxable under the head ‘Salaries’ (True or False)
7. What is the place of accrual of salary?
8. What is the meaning of salary?
9. Salary paid by firm to its partner is taxable under the head ‘Salaries’ [True or False]
10. The question whether a particular income is “income from salary” or is “income from business” depends
upon whether the contract is a contract of service or is a contract for service. Discuss. CA N04
 
Solution
1. Income from Other Sources, since generally directors are not the employees of the company. But if the directors are given additional responsibility and appointed as an employee then salary received by director is chargeable under the head salaries. E.g. Salary of MD / WTD is charged under the head ‘Salaries’
2. Income from Other Sources since M.P. and M.L.A. are not employees of the Government. They are the representative of the people.
3. If examinership remuneration is received from the employer then under the head Income from Salaries otherwise under the head Income from Other Sources.
4. Tips received from customer charged under the head ‘Other Sources’. Tips received from employer charged under the head ‘Other Sources’. As per Supreme Court judgement tips were received by employer in a fiduciary capacity as trustee for payment that were received from customers which they disbursed to their employees for services rendered to customers.
5. Salary received from AIIMS is taxable under the head Income from Salaries and income from private practice taxable under the head Profit from Business.
6. False. Salary from all employers whether past or present is taxable under the head salaries. Even in certain
cases as per section 17(3) salary from prospective employer is also taxable under the head salaries.
7. As per section 9(1)(ii) if services are rendered in India salary accrues in India. If services are rendered outside India salary accrues outside India. But as per section 9(1)(iii) “Salaries” payable by the Government of India to a citizen of India for services rendered outside India shall be deemed to be income earned in India. However u/s 10(7) allowances and perquisites of such employees are exempt from tax.
8. Salary denotes consideration for the services rendered by employee under the contract of service from the employer. Remuneration is normally paid in cash. However there are several instances where salary is paid by way of non-monetary benefits, which is normally treated as perquisites and sometimes fringe benefits.
9. False, it is chargeable under the head business as per section 28.
10. Discuss the above difference between contract of service and contract for service.
 
 
In which Previous Year Salary is Charged to Tax [Section 15]
Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis whichever matures earlier. Thus salary is
assessed at an earliest possible time.
P1 : Find out from the following cases in which previous year salary is chargeable to tax.
 

 

Due Date of Salary

Date of receipt of salary

Taxable in PY

Case 1

31-3-2017

14-4-2017

2016-17

Case 2

30-4-2017

24-3-2017

2016-17

Case 3

31-3-2016

4-4-2016

2015-16

Case 4

30-4-2016

31-3-2016

2015-16

 
Arrears of salary: It means the salary which has fallen due but not yet received. Arrears of salary is taxable on
due basis even if salary is not received.
Advance salary: It means salary which has been received but not yet fallen due. Advance salary is taxable on
receipt basis even if salary has not fallen due.
Foregoing of salary or surrender of salary : If any salary has fallen due it is taxable even if it has been foregone. Foregoing or waiver or surrender of salary is treated as an application of income (personal expenditure) and therefore chargeable to tax. However if any employee surrenders his salary to the Central Govt. under the Voluntary Surrender of Salaries (Exemption from taxation) Act, 1961, the surrendered salary shall not be taxable whether Govt. employee or private employee.
 
Following salaries are chargeable to tax only on receipt basis
a. Advance salary. (However advance against salary is not a salary but it is treated as loan). (Tax treatment is
under rules of perquisites).
b. Bonus is chargeable only on receipt basis.
c. Salary in lieu of notice period.
d. Arrears of salary, if not taxed earlier on due basis, is chargeable on receipt basis. This can happen only when salary is increased with retrospective effect.
 
P1: Mr. X salary for the PY 2015-16 was ₹ 5,000 p.m. On 1-4-2016 his salary was increased to ₹ 7,000 p.m. w.e.f 1-4-2015. Compute salary chargeable to tax for the AY 2017-18 assuming that arrears of salary of ₹ 29,000 is received in PY 2016-17.
Ans: 84,000 + 24,000 = 1,08,000. [₹ 5,000 was already taxed in the PY 2015-16]
The document Income is Charged under the Head Salaries - Taxation Notes | Study Income Tax for assessment year 2017-18 (Inter Level) - Taxation is a part of the Taxation Course Income Tax for assessment year 2017-18 (Inter Level).
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