Section 15

Section 15 — the law in short

What the courts have decided on section 15, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• ITC Ltd v CIT (TDS) Supreme CourtHelps taxpayer
  Our restaurant and banquet bills carry a tip that the customer adds on the card. The money lands in our bank account and we hand it to the staff with their wages. The department says that is salary we should have deducted on. Is it?
  No. The Supreme Court held that a tip is not salary at all, and that the route it travels — cash into the waiter's hand or a card entry through the employer's bank account — makes no difference. Section 15(b) taxes what is paid or allowed by or on behalf of an employer, and the word employer presupposes a contract of employment; the employee has no vested right to claim a tip from his employer, and the amount has no reference to his contract of employment. The employer receives the money in a fiduciary capacity as trustee and is only a conduit between customer and staff. The tip is the employee's income from other sources under section 56(1). Section 192 is therefore not attracted, the employer is not an assessee in default, and no interest under section 201(1A) arises.
• Arun Kumar v Union of India Supreme CourtHelps taxpayerSuperseded by amendment
  The officer has valued my company flat under Rule 3 and added the difference to my salary. I pay the licence fee my employer charges everybody. Must he first prove I actually got a concession in rent?
  On the law as the Supreme Court found it in 2006, yes: 'concession' in s.17(2)(ii) is a jurisdictional fact, and Rule 3 is only a machinery provision that cannot be reached until the officer has first found as a fact that a concession was given. That space was closed almost at once — the Finance Act 2007 inserted the very deeming provision the Court said the Act did not contain, with retrospective effect from 1 April 2002, so from AY 2002-03 a concession is deemed wherever the value computed under Rule 3 exceeds the rent recovered.
• Ram Pershad v CIT Supreme CourtHelps department
  I am the managing director of my own company. I draw a monthly amount, a car allowance and a percentage of gross profits. Is the percentage salary, or can I show it as my own business income?
  On an agreement of this kind it is salary. The Supreme Court held that ten per cent of gross profits payable to a managing director under his appointment agreement was chargeable under section 7 of the 1922 Act as salary, not under section 10 as business income. There is no single test. A servant acts under the direct control and supervision of his master and an agent does not, but that is only a rough and ready test, and the answer turns on the nature of the business and the nature of the duties. A managing director has a dual capacity - director and employee - and which he is depends on the articles of association and the terms of his employment. Here the company itself carried on the business, he could be dismissed if his work was unsatisfactory, and he exercised his powers within the limits the articles set and subject to the control of the board whose decisions he carried out.
• Raj Kumar Singh Hukam Chandji v CIT Supreme CourtHelps taxpayer
  I am the karta and my family's funds bought the shares that qualified me to be managing director. Is my managing director's salary my own income or the family's?
  Your own, on these facts. The Supreme Court held that the managing director's remuneration received by Raj Kumar Singh was assessable as his individual income and not as the income of his Hindu undivided family. The broad test is whether the remuneration was in substance a return to the family for the investment of its funds in the business, or compensation for the services of the individual coparcener. Here he was elected managing director by the board, was paid for personal services, and was not appointed as a result of any outlay or detriment to family property. The office was one of personal responsibility and ability.
• CIT v L.W. Russel Supreme CourtHelps taxpayer
  My employer pays part of the premium on a superannuation policy, but I get nothing unless I stay until retirement. Is that contribution taxable as a perquisite in my hands now?
  No, on the scheme as it stood. The Supreme Court held that the employer's contribution was not a perquisite allowed to, or due to, the employee. Until he reached the age of superannuation the money vested in the trustees, and who would benefit depended on which contingency happened: if he left, was dismissed or died in service, he got back only his own share of the premiums, and the employer's share, subject to the trustees' discretion, went back to the employer. The employee had at best a contingent right. A perquisite cannot be allowed to an employee who has no right to it.
• All India Central Bank Officers Federation v Union of India High CourtHelps departmentNo later treatment found
  My client is a bank officer taxed on a deemed concession in rent for the bank's quarters even though the market rent is lower than the percentage of salary applied. Is the deeming provision open to challenge?
  Not on the grounds run so far. A Division Bench of the Bombay High Court dismissed a batch of writ petitions by bank officers' associations challenging Explanations 1 to 4 below s.17(2) inserted by the Finance Act 2007 with limited retrospective effect. It held the legal fiction is not an impermissible legislative override of Arun Kumar v Union of India, that the retrospectivity is valid, and that classifying by city population and measuring the concession as a percentage of salary does not offend Article 14.
• Nishithkumar Mukeshkumar Mehta v Dy CIT High CourtHelps departmentUnder appeal
  Is compensation for the fall in value of stock options taxable as salary if I keep the options?
  Yes, on this decision. The Madras High Court held that where the employee paid nothing for the options and kept all of them after receiving the compensation, the whole receipt was a perquisite taxable under the head Salaries, and refused the nil-deduction certificate sought under s.197.
• Sanjay Baweja v Dy CIT High CourtHelps taxpayerHigh Courts differ
  My employer paid me for the fall in value of options I never exercised. Is that a perquisite?
  No, on this decision. The Delhi High Court held that a one-time voluntary payment made to holders of unexercised stock options after a group disinvestment was not a perquisite under s.17(2)(vi), because the value of specified securities depends on the exercise of the option and no option had been exercised. The refusal of a nil-deduction certificate under s.197 was set aside.
• Dr Mathew Cherian v ACIT High CourtHelps taxpayer
  I'm a consultant doctor at a hospital. Can the AO reopen and tax my fees as salary?
  Not on this material. The Madras High Court set aside the s.148A(d) order and s.148 notice: the contracts showed professional autonomy, a variable fee tied to patient volume, no statutory employment benefits and freedom to practise privately, so there was no information suggesting escapement of income.
• CIT v Deepak Verma High CourtHelps taxpayerSuperseded by amendment
  My employer gave me a lump sum on top of my normal dues when I resigned, described in the letter as a one-off ex gratia. The officer says it is profits in lieu of salary. Is it?
  Not under s.17(3)(i), because clause (i) taxes 'compensation' and a payment the employer makes voluntarily, in its own discretion, with no vested right in the employee, is not compensation. But do not stop there: the Delhi High Court reached that result only because the assessment year was 2001-02, and it said in terms that s.17(3)(iii), inserted with effect from 1 April 2002, 'would squarely cover the nature of payment received by the assessee'. For AY 2002-03 onwards an ex gratia received after cessation of employment is taxable as salary.
• CIT v Smt. Rani Shankar Mishra High CourtHelps taxpayer
  I received a settlement from a foreign state employer for a job I applied for but was never given. The officer says s.17(3)(iii) taxes anything received before joining employment. Does it reach me?
  No. Section 17(3)(iii) presupposes an employment with the person paying: sub-clause (A) covers the period before the assessee joins that employment and sub-clause (B) the period after it ceases. Where there never was and never could have been an employer-employee relationship, the receipt is not profits in lieu of salary at all, and compensation for having been denied the job is a capital receipt.
• SAIL DSP VR Employees Association 1998 v Union of India High CourtCuts both ways
  My VRS compensation is being paid to me in instalments over ten years. Does the section 10(10C) exemption still apply, or is it lost once the payments cross into later years?
  It still applies. The Calcutta High Court held that the whole compensation became due when the employee was released under the scheme and was chargeable under section 15(a) at that point, whether paid or not. Spreading the payment over ten years does not turn the later instalments into salary of those later years, so the second proviso to section 10(10C) is not attracted. The exemption up to Rs 5 lakh runs on the compensation component alone. Terminal benefits paid under the same scheme, such as gratuity and leave encashment, are not part of the amount received on voluntary retirement and are not covered.
• CIT v Gopal Krishna Suri High CourtHelps departmentHigh Courts differ
  I spend my own money to earn the incentive part of my pay. Can I deduct that expenditure before the amount is taxed as salary?
  No. Once a receipt falls under the head Salaries, the only deductions available are those s.16 allows; there is no provision permitting expenses incurred to earn salary to be taken out at the threshold, and 'income' in s.15 does not mean net of such expenses. An LIC development officer's incentive bonus is in the nature of commission, falls within the inclusive definition of salary in s.17(1)(iv), and is taxable in full.
• K.R. Kothandaraman v CIT High CourtHelps department
  The board passed a resolution after the year end stopping my remuneration because the company made no profit. The salary had already been credited to me month by month. Can I say it never accrued?
  No, on the Madras High Court's 1965 decision under s.7 of the 1922 Act, whose accrual principle s.15 of the 1961 Act carries forward. Once salary has accrued under the contract of service, a resolution passed after the close of the year cannot undo the accrual; at most it operates as a waiver, and a waiver after accrual is a disposal of income already earned, not a failure of income to arise. The real-income doctrine, which lets a managing agent's commission given up on grounds of commercial expediency be excluded from business income, does not extend to the accrual or receipt of salary.
• NXP India Pvt Ltd v DCIT — the Dispute Resolution Panel's theory that the employee is charged at VESTING, so the employer's stock compensation cost must be disallowed for non-deduction, did not survive; but the Tribunal's own reasoning will not bear weight ITATHelps taxpayerNo later treatment found
  The Dispute Resolution Panel says that because ESOP expenditure is allowable to the employer at vesting, the perquisite must be taxable in the employee's hands at vesting too, and has disallowed our stock compensation cost because we deducted only on exercise. Is there authority on that?
  There is one order on stage one — the perquisite that arises on employee share benefits — and it went against the Panel, but a practitioner should read it with care. It concerns the Panel's argument that the employee's charge follows the employer's deduction to the vesting date. The Bangalore Tribunal allowed the assessee's ground and deleted the disallowance of Rs 65,23,426 of stock compensation expense. Its stated reason, however, rests on the Supreme Court's decision in CIT v. Infosys Technologies Ltd., which construed the law as it stood before 1 April 2000, and the concluding paragraph contradicts itself on whether that decision applies. The value of the order is that the Panel's vesting theory did not prevail; its reasoning is not a foundation for advice.
• Sudip Rungta v DCIT ITATHelps taxpayerNo later treatment found
  The AO added my performance bonus to salary and cut my HRA exemption. Can he do that?
  No. 'Salary' for the house rent allowance exemption is not the general definition in s.17 but the one in clause (h) of rule 2 of Part A of the Fourth Schedule, which rule 2A picks up: it takes in basic salary and dearness allowance where the terms of employment so provide, and excludes all other allowances. A performance bonus therefore stays out, the ten per cent test ran on the basic salary of Rs 30 lakhs, and the assessee was held entitled to about Rs 5.20 lakhs of exemption.
• Nandinho Rebello v DCIT ITATCuts both waysNo later treatment found
  My client left two jobs in the same year and each employer recovered notice pay out of his salary. The Assessing Officer has added back the gross salary from Form 26AS. Is the recovery deductible?
  The Tribunal held that only the salary actually received is taxable. Where the employer recovers notice pay under the employment agreement and pays the employee the net amount, the case is one of recovery of salary and s.16 does not come into it at all; the Tribunal expressly declined to test the claim against the list of deductions in s.16.
• Von Der Mark v CIT Advance RulingCuts both waysNo later treatment found
  I am a German engineer on the board of an Indian company and I also consult for it from Germany. The department says everything the company pays me is directors' fees taxable in India. Is it?
  It depends, and the ruling splits the payments. The Authority held that the consultancy fees paid by Pennwalt India Ltd to a German engineering consultant for services rendered entirely from Germany were professional services within article 14 of the India-Germany agreement and taxable only in Germany, because he had no fixed base in India and his stay here was 13, 13 and 25 days in the three relevant years. It rejected the department's case that his directorship was itself a fixed base, and that his fees were salary under s.15. But the fee for attending board meetings and any similar payments fall under article 16, are taxable in India, and tax is deductible at source on them. The ruling binds only the applicant.
• Statutory position — s.17(2)(vi): stage one of the employee share charge, the perquisite on exercise, and what a "specified security" and a "sweat equity share" are CBDT Circulars & InstructionsCuts both ways
  My employer put a large ESOP figure in my Form 16 in the year I exercised my options, even though I have not sold a single share. On what provision is that being taxed, and how is the amount worked out?
  This is stage one of a two-stage charge. On the day you EXERCISE the option, s.17(2)(vi) makes the difference between the fair market value of the share on that date and the amount you actually paid a perquisite, taxable as salary — whether or not you sell anything, and whether or not you receive any cash. Stage two comes later, on sale, when the difference between the sale price and that same fair market value is a capital gain, with the cost of acquisition fixed by s.49(2AA) at the value already taxed here. The fair market value on the date of exercise is the hinge between the two stages, and it is fixed by Rule 3(8) and Rule 3(9).
• Statutory position — s.10(16) and s.10(17A): a scholarship granted to meet the cost of education, and an award or reward in the public interest, and what each of them actually requires CBDT Circulars & InstructionsCuts both ways
  My employer's trust paid my daughter's college fees and called it a scholarship, and separately I received a cash award from a State Government for community work. Is either of these taxable, and does it matter that no approval was mentioned?
  The two clauses ask different questions and only one of them looks for an approval. Clause (16) of section 10 exempts 'scholarships granted to meet the cost of education'. There is no approval requirement in it, no ceiling, no condition about who the grantor is, and no requirement that the whole of the scholarship be spent. What it does require is that the payment be a scholarship and that it be granted to meet the cost of education. Clause (17A) exempts 'any payment made, whether in cash or in kind,— (i) in pursuance of any award instituted in the public interest by the Central Government or any State Government or instituted by any other body and approved by the Central Government in this behalf; or (ii) as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in the public interest'. Approval by the Central Government is required in two places there: for an award instituted by a body other than the Central or a State Government, and for the purposes for which a reward is given by the Central or a State Government.
• Statutory position — s.5A: equal apportionment between spouses under the Portuguese Civil Code, and the one head of income it leaves alone CBDT Circulars & InstructionsCuts both ways
  We are a married couple in Goa governed by the communiao dos bens. The officer has assessed the whole of the rent and the business income on my husband. Is that right, and what happens to our salaries?
  It is not right. Section 5A applies where husband and wife are governed by the system of community of property known under the Portuguese Civil Code of 1860 as 'COMMUNIAO DOS BENS', in force in the State of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu. Sub-section (1) says that the income of the husband and of the wife under any head of income shall not be assessed as that of the community of property, whether treated as an association of persons or a body of individuals; that such income under each head of income other than under the head 'Salaries' shall be apportioned equally between the husband and the wife; and that the income so apportioned shall be included separately in the total income of each, the remaining provisions of the Act applying accordingly. Sub-section (2) carves salary out: where the husband or the wife has any income under the head 'Salaries', that income is to be included in the total income of the spouse who has actually earned it.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.