Section 17(1)

Section 17(1) — the law in short

What the courts have decided on section 17(1), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Gestetner Duplicators P Ltd v CIT Supreme CourtHelps taxpayer
  We pay our salesmen a turnover commission on top of salary and contribute to the provident fund on both. Is the contribution on the commission deductible?
  Yes. The Supreme Court held that commission payable to salesmen as a term of the contract of employment, at a fixed percentage of turnover, is salary within rule 2(h) of Part A of the Fourth Schedule, so the provident fund contribution referable to it is deductible under section 36(1)(iv). Salary and wages both mean remuneration for work done, and it makes no difference that one part is measured by time and the other by turnover; the whole remuneration partakes of the character of salary. The Court also held that while recognition of the fund stands, the assessing authorities cannot question whether it meets the conditions for recognition.
• CIT v L.W. Russel Supreme CourtHelps taxpayerValidity unconfirmed
  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.
• 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 taxpayerValidity unconfirmed
  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.
• 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 departmentValidity unconfirmed
  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.
• Suresh Pal Chauhan v ITO ITATHelps taxpayer
  My client took the package when HMT's Tractor Division was closed. CPC allowed only Rs 5 lakh under s.10(10C) and then refused s.89 relief because of it. Is the whole package exempt?
  On these facts yes. Where the Central Government approves a scheme for extending special protection to workmen of an undertaking being closed down, the second proviso to s.10(10B) displaces the monetary ceiling and the whole of the compensation is exempt. The Chandigarh Bench held the HMT Tractor Division package fell under s.10(10B) and not s.10(10C), and separately directed that s.89 relief be allowed on the net gratuity.
• Nandinho Rebello v DCIT ITATCuts both waysValidity unconfirmed
  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.

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.