Section 89 l Relief When Salary ETC., Is Paid in Arrears or in Advance
Circular No. 331 was issued by the Central Board of Direct Taxes on 22 March 1982. Its subject is Section 89 l Relief When Salary ETC., Is Paid in Arrears or in Advance.
Sets out the scope of relief under section 89(1), which applies where an employee receives salary in arrears or in advance, or in a financial year receives salary for more than twelve months, or receives a payment that is a profit in lieu of salary under section 17(3)(ii); the bunching pushes the income into a higher rate, and the relief answers that. Rule 21A(1) lists five situations: salary in arrears or advance; gratuity for past services of not less than five years; compensation from an employer or former employer on termination after continuous service of not less than three years where the unexpired term is also not less than three years; commutation of pension; and a residuary case not covered by the other four. Relief in the first four is worked out under the specific modes in rule 21A(2)(a) to (d) and is granted by the Income-tax Officer assessing the employee; in the residuary case the authority is the Central Board of Direct Taxes. The relief is given in the assessment in which the extra payment is taxed, and the whole of the extra amount is first brought to tax in the year of receipt. The computation is arithmetical, comparing the rate of tax on the total income including the extra amount in the year of receipt with the rate found by adding the arrears to the total income of the years to which they relate. For that, the assessee should be asked for a true and authentic statement of the total income of the earlier years; there is no warrant for issuing a notice under section 148 or calling for returns for those years.
To explain the five situations in which relief is available, who grants it in each, and how it is to be computed.
SECTION 89 l RELIEF WHEN SALARY ETC., IS PAID IN ARREARS OR IN ADVANCE
623. 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.
An assessment or an employer's deduction where relief on arrears was refused, or a notice questioning the earlier years' income figures used in the computation.
Rules it names. Rule 21A of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.