Income From Salary

Sujith Surendran

Salary

What is Salary:Income under heads of

salary is defined as remuneration received by
an individual for services rendered by him to
undertake a contract whether it is expressed
or implied.
The concept of salary goes back to the days
of Roman Empire. The soldiers were given Sal
(Salt) as a regard for their services. With the
passage of time, the mode has changed from
salt to money. However, salary, in its
conceptual and legal sense, remains a reward
for the services rendered.

The sine-qua-non for chargeability under the

head "salary" is that there must exist a
relationship of employee and employer
between the assessee and the person making
the payment.
A salary is given to an employee by the
employer in lieu of a contract of service and is
characterized
by
a
master
servant
relationship.

Factors distinguishing servant from agent- The

distinction between a servant or an agent can
be summarised as follows :

Lakshminarayan Ram Gopal & Son Ltd.v.Govt. of

Hyderabad[1954] 25 ITR 449 (SC)

(i) generally a master can tell his servant what

to do and how to do it;
(ii) generally a principal cannot tell his agent
how to carry out his instructions;
(iii) a servant is under more complete control
than an agent;

(iv) generally, a servant is a person who not

only receives instructions from his master but
is subject to his masters right to control the
manner in which he carried out those
instructions; an agent receives his principals
instructions but is generally free to carry out
those instructions according to his own
discretion;

(v) generally a servantquaservant has no

authority to make contracts on behalf of his
master; generally, the purpose of employing
an agent is to authorise him to make
contracts on behalf of his principal;
(vi) generally an agent is paid commission
upon effecting the result which he has been
instructed by his principal to achieve;
(vii) generally a servant is paid wages or
salary

The prima facie test to determine an

employee-employer relationship is the direct
control test under which a greater amount of
supervision over an employee and less
independence or discretion to perform work
implies a master servant relation.

Cowan v Seymour [1920] 1 KB 500 (CA)

Carter v Great West Lumber Co. [1919] 3 WWR
901
Shining Tailors v. Industrial Tribunal II, U.P AIR
1984 SC 23

But this test is not universal in its application

and does not determine in every case, having
regard to the nature of employment, that he is
a servant.
A person who is engaged to manage a
business may be a servant or an agent
according to the nature of his service and the
authority of his employment.

Generally it may be possible to say that the

greater the amount of direct control over the
person employed, the stronger is the
conclusion in favour of his being a servant.
Similarly, the greater the degree of
independence the greater the possibility of
the services rendered being in the nature of
principal and agent.

It is not possible to lay down any precise rule

of law to distinguish one kind of employment
from the other.
The nature of the particular business and the
nature of the duties of the employee will
require to be considered in each case in order
to arrive at a conclusion as to whether the
person employed is a servant or an agent.
In each case the principle for ascertaining
remains the same -Ram Prashadv.CIT[1972]
86 ITR 122 (SC)

Servant and Independent Contractor

Control and supervision are relevant factors- It
is difficult to lay down any one test to distinguish
the relationship of master and servant from that
of an employer and independent contractor.
In many cases the test laid down is that in the
case of master and servant, the master can
order or require what is to be done and how it is
to be done but in the case of an independent
contractor an employer can only say what is to
be done but not how it shall be done.

But this test also does not apply to all

cases,e.g.,in the case of ships master, a
chauffeur or a reporter of a newspaper.
InDhrangadhra Chemical Works Ltd.v.State
of Saurashtra[1957] SCR 152, it was said that
in all cases the correct method of approach is
whether having regard to the nature of work
there was due control and supervision by the
employer.

Piyare Lal Adishwar Lalv.CIT[1960] 40 ITR 17

(SC)

As an alternative the Courts use the organisation test,

namely, whether the person concerned was a part
and parcel of the organisation. Here, the fact that the
workers perform services in the employers premises,
and work on the machines belonging to him, become
relevant factors. [Citation]
This test has been modified into the integration test
which looks at whether the person performing the
services is an integral part of the company or whether
they conduct business similar to someone performing
services as a contractor. The problem with this test is
that someone can still be a contractor but also be an
integral part of an organisation.[Citation]

A further test is the economic control test

which was applied in Hussainbhai v. Alath
Factory Tozhilali Union where it was held that
where a worker produces goods or services for
the business of another, that other is, in fact,
the employer, as he had the economic control
over the workers' subsistence, skill and
continued employment. In other words it is
only
the
employer
who
takes
the
entrepreneurial risk of losing money in the
employer-employee relationship but it is not
so in case of a principle-agent or an
independent contractor relationship.

Actors and actresses are generally in the

nature of independent contractors and the
income earned by them is not taxable under
the head salaries as they do not work for one
single employer.
Partners at a firm are not in a employeeemployer relationship. A firm is not a legal
person, it is a unit of assessment, by special
provisions, but is not a full person. Since a
contract of employment requires two distinct
persons, employer and employee, there
cannot be a contract of service. Payment of
salary to a partner represents a special share
of the profits.

A different test has been the idea of 'mutuality

of obligations' as a possible factor, i.e.
whether the course of dealings between the
parties demonstrates sufficient such mutuality
for there to be an overall employment
relationship.[Citation]
In tax cases a different test namely the
holding of office test applies.

In CIT v. Govindaswaminthan an advocate general

holding an office under the State Government
terminable at the will and pleasure of the Governor
and who gets a retainer and fees could not be treated
as employee and his income is a professional income.
He is not at par with government servants though he
gets TA and DA like them as he is not subject to
conduct rules and does not hold a permanent position.
Similarly, in Union of India v. Pratibha Bonerjea it was
held that a High Court judge is not an employee of the
government. Also, a Member of Parliament is not an
employee of the Government and he does not receive
salary.

The law relating to assessment under the

head salary was thus far understood as
necessitating
an
employee-employer
relationship. However, a turning point in the
tax jurisprudence however was brought by the
case Justice Deoki Nandan Agarwala v. Union
of India where the Supreme Court held that
being constitutional functionaries like judges
receive salaries just like an employee even in
the absence of a strict employee-employer
relationship. Thus, what became relevant
were the employment and not the presence of
an employer.

Directors
Company director is not a servant- A director
of a company is not a servant but an agent
inasmuch as the company cannot act in its
own person but has only to act through
directors whohave relationship of an agent
with the company -Ram Prashadv.CIT.

Company director can have dual capacityThere is no controversy that a director of a

company enjoys dual capacity. He might be a
director as well as an employee, but that he is
an employee must not be a paper work, rather
it should be proved and established on record
as a fact -CITv.Smt. Shanti Devi[1992] 64
Taxman 251/[1993] 199 ITR 800 (Ori.).

Managing director can be a servant- Whether

or not a managing director is a servant of the
company apart from his being a director can
only be determined by the articles of
association and the terms of his employment.

If the company is itself carrying on the

business and the managing director is
employed to manage its affairs in terms of its
articles and under the agreement, he could be
dismissed or his employment could be
terminated by the company if his work is not
satisfactory, it could hardly be said that he is
not a servant of the company -Ram
Prashadv.CIT.

Professionals
Professionals rendering incidental services are
not servants- Where an assessee, deriving
income from profession as a musician,
incidentally rendered services to a college of
music, it could not be said that there was a
master and servant relationship -CITv.Jnan
Prakash Ghosh[1992] 62 Taxman 151 (Cal.).

LIC Officers
Incentive bonus/commission, whether taxable as
salary or as business income Since in addition to
salary payable to him, a Development Officer of the
LIC receives incentive bonus/commission based on
the insurance business promoted by him, but in
addition to the salary payable to him, the additional
income so derived by the Development Officer during
the course of and pursuant to the terms and
conditions of his employment, can be brought to tax
only under the head Salaries, and not under the
head Profits and gains of business or profession.

CITv.M.D. Patil[1998] 229 ITR 71 (Kar.) (FB)/H. M.

Pareekv.CIT[2002] 124 Taxman 335 (Raj.)

Where the LIC Development Officer claimed

deduction of additional conveyance allowance
and 40 per cent of incentive bonus received
by him under section 16 contending that the
net income after deducting the expenditure
and the loss should be arrived at and the net
income alone was taxable, the deduction
claimed by the assessee could not be allowed
-CITv.E.A. Rajendran[1977] 142 CTR (Mad.)
244.

Incentive bonus was assessable under the

head Salaries and not under the head Profits
and gains of business or profession, and no
separate deduction apart from the deduction
under section 16(i) was permissible -B.M.
Parmarv.CIT[1999] 102 Taxman 552 (Punj. &
Har.).

Judges
Salaries received by judges are taxable- The
salary of a Judge of a High Court and the
Supreme Court is income and is taxable by Act
of Parliament in just the same manner as is
the income of any other citizen.
It is true that such judges have no employer
but that,ipso facto, does not mean that they
do not receive salaries.

They are constitutional functionaries. Articles

125 and 221 of the Constitution deal with
salaries of such judges, and expressly state
what the judges received are salaries
-Justice Deoki Nandan Agarwalav.Union of
India[1999] 237 ITR 872 (SC).
MLAs/MPs- Section 15 is not attracted in
respect of remuneration received by an MLA
-CITv.Shiv Charan Mathur[2008] 306 ITR
126 (Raj.).

Arrears of salary
Salary due but not paid or taxed in earlier year is
taxable as arrears of salary in year of paymentSalary due to an assessee in the earlier years,
which was neither paid nor was charged to tax in
those years, will have to be treated as arrears of
salary within clause (c), and will have to be
brought to tax in the year(s) in which it was paid.
The said clause (c), broadly put, is intended to
catch such salary as has escaped the charge of
income-tax in earlier years -CITv.Sardar Arjun
Singh Ahluwalia (Decd.)[1999] 240 ITR 693/107
Taxman 246 (SC).

Retirement payments
Voluntary
retirement payments received in
instalments accrue in the initial year Where the assessee took up voluntary retirement
from a bank under a scheme which provided for
payment of only 50 per cent of theex
gratiapayment in the year of retirement and the
balance 50 per cent in annual instalments over the
succeeding years, the entireex gratiaamount
must be treated as salary which has accrued to
the assessee in the year of retirement -Y.S.C.
Babuv.Chairman
and
Managing
Director,
Syndicate Bank[2002] 253 ITR 1 (AP).

UN Pension
Pension paid by United Nations Organisations
is exempt- Pension amount received by U.N.
Pensioners is exempt from tax, since such
pension is nothing but salary -CITv.K.
Ramaiah[1980] 126 ITR 638 (Kar.)

Pension paid to the widow of a deceased U.N.

official is exempt from tax, since it was paid to
her as a recompense for the contribution made
by her deceased husband to the fund and was
received by her in her capacity of what would
have been received by her husband, had he
been alive

CITv.Smt. Janaki Loganathan[2002] 257 ITR

620/124 Taxman 266 (Mad.).
CITv.Smt. Dipali Goswami[1985] 156 ITR 36/[1986]
25 Taxman 39 (Cal.)
Smt. Usha Shahv.CIT[1989] 175 ITR 572/[1988] 41
Taxman 167 (All.)

As per Section 15, salary consists of the

following:
any salary due from an employer or a former
employer to an assessee in the previous year,
whether actually paid or not;
any salary paid or allowed to him in the
previous year by or on behalf of an employer
or a former employer, though not due or
before it became due;

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 year.
Once salary is taxed on due/receipt basis, it
will not be taxed again on receipt/falling due,
as the case may be.

Section 17 (1) defines salary as including, among

other things, perquisites and profits in lieu of
salary. Clause (2) gives the inclusive definition of
perquisites and (3) profit in lieu of salary.
These two items are also included in the definition
of income under section 2 (24) (iii).

What Income Comes Under Head

of Salary:
Under section 17 of the Income Tax Act, 1961 there are
following incomes which comes under head of salary:

Salary (including advance salary)

Wages
Fees
Commissions
Pensions
Annuity
Perquisite
Gratuity
Annual Bonus
Income From Provident Fund
Leave Encashment
Allowance
Awards

Leave encashment is the salary received by an individual

for leave period. It is a chargeable income whether he is
a government employee or not. Under section 10(10AA)
(i) there is also a provision of exemption in case of leave
encashment depending upon whether he is a
government employee or other employees.
Any salary, bonus, commission or remuneration, by
whatever name called, due to or received by, a partner
of a Firm from the firm is not regarded as salary under
this head.
The assessee can claim relief u/s 89(1) for arrears or
advance salary.
Loan from employer is not salary. Hence, advance salary
is taxable, while advance against salary is not.

Fees

Where the assessee-doctor who was employed in

a Government hospital was permitted by the
Government to work in paying clinics run in
medical colleges, and received a share of the fees
from Government, such fees would fall within the
expression fees paid in addition to salary, and
would fall within the mischief of section 17(1)(iv).
Such fees would be taxable as salary

CIT v. Dr. (Mrs.) Usha Verma [2002] 120 Taxman

738/254 ITR 404 (Punj. & Har.).

Allowances
Receipts on account of CCA, HRA and DA are in nature of income
forming part and parcel of salary entailing tax liability

Karamchari Union v. Union of India [2000] 109 Taxman 1/243 ITR 143
(SC).

Where the assessee, a Government servant, was paid, in addition

to salary, an allowance termed as family allowance to
compensate for the high cost of living, the said allowance is
taxable as part of salary, since the assessee received the
amount by virtue of his employment, and he was not given the
payment de hors his employment as a Government servant. The
mere fact that the money was payable to the family members in
case the assessee makes a nomination to that effect is not
relevant, since it was the assessee himself who has received the
payment

CIT v. Dr. P.L. Meyyappan [2000] 244 ITR 543 (Mad.)/CIT v. Dr. A. Mani
[2000] 244 ITR 546 (Mad.).

Where the assessee-employee was paid, in addition

to salary, an allowance termed as income-tax
allowance, by his employer, and the assessee was
not given the right to claim any further amount from
the employer on account of having to pay amounts
as tax in excess of the amount of the allowance, the
mere grant of such allowance would not result in his
salary becoming tax-free salary. If the assessee had
offered the allowance also as income for tax
purposes, the principle of grossing up cannot be
invoked, by treating the case as a case of payment of
tax-free salary

CIT v. Dr. Miss Pauline E. King [2000] 243 ITR 300 (Mad.).

Perquisites

Employee must have a vested right to perquisites

- One cannot be said to allow a perquisite to an
employee if the employee has no right to the
same. It cannot apply to contingent payments to
which the employee has no right till the
contingency occurs. In short, the employee must
have a vested right therein

CIT v. L.W. Russel [1964] 53 ITR 91 (SC).

Unauthorised advantages are not perquisites Any unauthorised advantage taken by the
employee (like clandestine use of employers
car by employee) without the authority of the
employer would only create a legal obligation
to restore such advantage and therefore such
an unauthorised advantage will not amount to
a benefit or advantage within the meaning of
section 17(2)(iii)

CIT v. C. Kulandaivelu Konar [1975] 100 ITR 629

(Mad.)
CIT v. S.S.M. Lingappan [1981] 129 ITR 597 (Mad.)
M.M. Mehta v. CIT [1979] 117 ITR 362 (Cal.)
CIT v. Jawaharlal Nagpal [1988] 171 ITR 136 (MP)

RENT FREE ACCOMMODATION

In case of Government employees, who have been

provided with Government accommodations, value
of rent-free accommodation as perquisite would be
licence fee determined by Government in
accordance with rules and value of concession
would be difference between such licence fee and
amount of rent paid by employee.

In relation to other employees, value of concession

would be difference between 15 per cent or 10 per
cent or 7.5 per cent of salary, as the case may be,
and amount of rent actually paid. Distinction made
between Government employees and others in
rule 3 cannot be termed as discriminatory or
unjust

Coal Mines Officers Association of India v. Union of India

[2004] 137 Taxman 92 (Cal.).

If accommodation is provided by employer,

perquisite must be valued even if it is not used by
employee - The word provided in section 17(2)(i)
means making it available for the use of the
assessee. There may be circumstances under
which the employee may not make use of the
rent-free accommodation provided to him.
But unless the assessee forgoes his right of the
provision of rent-free accommodation provided by
his employer, or waives his right before the
income accrues, the notional income has to be
brought to charge as a perquisite equivalent to the
value of the rent-free accommodation - CIT v.
Bawa Singh Chauhan [1984] 150 ITR 8 (Delhi).

Car Perquisite
Where the Assessing Officer was unable to obtain
the details of the actual expenditure incurred by
the company on the maintenance and running of
the car, and had not also gathered information
about the type of car and whether the car was
exclusively for personal use of the director or for
the use for purposes of the company as also for
private use, the Tribunal would be justified in
adopting the method prescribed in the Table in
rule 3 for valuing the perquisite

CIT v. Sir Padampat Singhania (Decd.) [2000] 245 ITR

482 (All.).

VEHICLE PROVIDED BY EMPLOYER

Nature of vehicle or ownership of vehicle - Explanation to

section 17(2)(iii)(c) envisages that the expenditure is in relation
to use of any vehicle provided by the employer to the employee
for enabling him to commute between his residence and place
of work. There is no qualification as to the nature of the vehicle
or as to the ownership of the vehicle.
In fact, the Assessing Officer had also accepted that if the
vehicle is owned by the employer or hired by the employer, the
amount of expenditure cannot be treated as perquisite in hands
of the employee. Once this is the position, it is not possible to
read any further prohibition as the revenue wanted to, namely,
if the vehicle is owned by the employee, the expenditure is not
allowable and has to be taxed as perquisite in his hands

CIT v. Reliance Industries Ltd. [2008] 175 Taxman 367/[2009] 308 ITR
82 (Guj.).

MEDICAL REIMBURSEMENT

Constitutional validity - There is no merit in submission

that medical reimbursements do not amount to
perquisite; clause (v) of first proviso to section 17(2)
cannot be said to be constitutionally invalid on that
ground

All India State Bank Officers Federation v. Union of India [2007]

159 Taxman 129/288 ITR 614 (Bom.).

Latter part of clause (v) of first proviso to section 17(2)

[appearing in section after clause (vi)] to extent it treats
medical reimbursement above Rs. 15,000 per annum as
taxable perquisite for salaried persons, is not
discriminatory and hence is constitutionally valid

All India State Bank Officers Federation v. Union of India [2007]

159 Taxman 129/288 ITR 614 (Bom.).

FREE EDUCATIONAL FACILITIES

Proviso to rule 3(5) granting exemption stands attracted

only where the educational institution is itself maintained
and owned by the employer and free educational
facilities are provided to the children of the employee.
Where, although the educational facilities were in fact
being provided in the institution owned and maintained
by the assessee itself, the educational facilities, were not
provided free of cost and admittedly, a fee was being
charged even from the children of the employees
although at a concessional rate, there was no question of
the proviso to rule 3(5) getting attracted. The value of the
perquisite in such cases is to be computed under the
main sub-rule itself

Birla Vidya Niketan v. ITO [2008] 166 Taxman 492 (Delhi.)

Where assessee-school was providing free education to children of

staff, Assessing Officer was not justified in taking cost of education
as in case of other students in same school as perquisite value in
hands of employee; as per later part of rule 3(5) determination of
value of the perquisite of free education is with reference to the cost
of such education in a similar insti tution in or near the locality

CIT v. Delhi Public School [2008] 167 Taxman 134 (Delhi).

Interest free loans - The advance of either interest-free loan or loan

at concessional rate of interest, by the employer to its employees
would result in benefit to the employee. It relieves the employee of
his liability to pay interest on such loans if the employee is required
to raise loan from outside agency. While it reduces his financial
liability, it will have to be considered as an income saved. In that
event it can undoubtedly be treated as fringe benefit, or amenity
given to the employee

BHEL Employees Association v. Union of India [2003] 128 Taxman 309/261

ITR 15 (Kar.)
P.N. Tiwari v. Union of India [2003] 133 Taxman 482/[2004] 265 ITR 224 (All.).

The provisions shall be read down with a rider that

the rate provided in the rule will be applicable
unless the assessee proves to the satisfaction of
the Assessing Officer that the rate of interest or
any part thereof charged by the employer does
not amount to any concession or benefit, having
regard to the rate of interest charged for such type
of loan by public financial institutions

V.K. Prasad v. Union of India [2004] 271 ITR 178 (Ker.)

National Federation of Insurance Field Workers of India
v. Union of India [2004] 135 Taxman 307(Uttaranchal)
Federal Bank Officers Association v. Union of India
[2004] 140 Taxman 173 (Ker.).

Interest subsidy - Where public sector undertakings

like BHEL, ECLI, instead of directly giving house
building loans, permitted employees to take loans
from different financial institutions under schemes
as per direction of Ministry of Industries and excess
interest charged by financial institutions as
compared to interest charged by Central
Government was reimbursed to employees by
these public sector undertakings, interest subsidy
could not be treated as part of salary as such or a
perquisite under section 17(2)(iv) or a benefit
within section 17(2) (iii) or a profit in lieu of salary

P.V. Rajagopal v. Union of India [1998] 233 ITR 678 (AP).

Interest subsidy is a perquisite - Where the

assessee, employee of a public sector company,
obtained house building advance from an external
source, but the employer granted interest subsidy
to the assessee, being the difference between the
interest charged and the interest otherwise
chargeable by the employer if the loan was taken
from the employer, such interest subsidy is
taxable as a perquisite

P. Bhavani Shankar v. CIT [2000] 242 ITR 152 (Mad.).

Payment of interest subsidy by employer-company directly

to financial institution from which assessee-employees had
availed house building loan, was a perquisite falling under
sub-clause (iv) of section 17(2)

Interest as perquisite - Non-charging of interest on debit

balance of employee-directors who were advanced
interest-free loans by the company cannot be regarded as
a perquisite in the hands of the directors by the company

K. Rajendran Pillai v. Union of India [2006] 156 Taxman 160 (Ker.).

V.M. Salgaocar & Bros. (P.) Ltd. v. CIT [2000] 110 Taxman 67/243
ITR 383 (SC).

Even if a loan amount has been assessed under section

2(22)(e), as deemed dividend the same can be treated as
perquisite under section 17(2)

CIT v. T.P.S.H. Selva Saroja [2000] 244 ITR 671 (Mad.).

OTHERS
Salary paid to servant : New rule 3 - The employee is taxed on
perquisite in respect of provision of a servant by the employer
which is equivalent to the monetary benefit he receives. The
servant is required to pay tax in respect of income he/she derives;
and the employee is required to pay tax in respect of the perquisite,
which is equivalent to the monetary benefit he receives. If the
service of a servant is not made available to the employee by his
employer, the employee will have to spend from his/her pocket for
the salary of a servant, if he/she intends to have one. Further, if the
employee does not intend to have one, it is open to him/her not to
have the services of a servant from his employer. It is optional.
Therefore, adding of salary of the servant provided by the employer
deputed to the residence of the employee as perquisite in hands of
the employee would not amount to double taxation

BHEL Employees Association v. Union of India [2003] 128 Taxman 309/261

ITR 15 (Kar.).

Expenditure on travel of spouse of employee :

New rule 3 - There is no relationship of master and
servant between spouse of employee and
employer and when employee undertakes travel
for purpose of his employer, taking of spouse by
employee is optional and, therefore, treating cost
of travel of spouse of employee incurred by
employer as fringe benefit or amenity cannot be
treated
as
either
irrational,
arbitrary
or
unreasonable

BHEL Employees Association v. Union of India [2003]

128 Taxman 309/261 ITR 15 (Kar.).

Monthly medical expenses paid to managing

director is a perquisite - The monthly payment as
medical expenses to managing director will fall
within the definition of perquisites in view of
section 17(2)

Gwalior Sugar Co. Ltd. v. CIT [1997] 224 ITR 321 (MP).

Provision of boarding and lodging to foreign

employees is not a perquisite - Where the
boarding and lodging expenses of foreign
nationals employed on a ship berthed in Indian
port were directly met by the employer, the
payments would not amount to a perquisite

CIT v. Vander C.C. Malen [1997] 225 ITR 41

Purchase of deferred annuity policies - Where employercompany purchased single premium deferred annuity policy
out of commission payable to employee-managing-directors
(assessees) in their names, amounts utilised for obtaining
deferred annuity policies would form part of remuneration
payable to assessees and as such be chargeable under head
Salaries

CIT v. Navnit Lal Sakar Lal [2000] 113 Taxman 692 (SC).

Keeping in view the principles laid down by the Supreme Court

in Karamchari Union v. Union of India [2000] 243 ITR 143, the
amount utilised in the purchase of deferred annuity policy by
the employer-company for the benefit of the employeeassessee, the benefit under the said policy accruing to the
assessee on his retirement or in the event of his death, was
liable to be assessed in the hands of the assessee

CIT v. P. Jaiswal [2001] 252 ITR 453 (Delhi).

Personal accident insurance policies are taxable

only if they are of nature of personal benefit of
employee - In the absence of any finding that the
personal accident insurance or motor accident
insurance taken by the company was for the
personal benefit of the employee and not to
safeguard companys own interest against
possible disablement of its employee, it is not
possible to come to conclusive finding whether
personal accident insurance premium or medical
insurance premium amounts to perquisite

Mihir Textiles Ltd. v. CIT [1996] 135 CTR (Guj.) 412.

Tax of employee paid by employer must be

grossed up - Where the income-tax due from the
employee is paid by his employer, it is a
perquisite, and must be added to the salary of the
employee like other perquisites and then tax must
be calculated subject to any admissible
deductions under the law. The contention that if
the net taxable income is arrived at after adding
the perquisite of the tax paid by the employer for
the purpose of taxation it would amount to tax on
tax, is fallacious.

S. Takenaka v. CIT [1999] 237 ITR 112 (Kar.)

Grossing-up will not apply when payment is not

directly made to employee of foreign collaborator Where, under agreement with foreign company,
the Indian company made all payments directly to
the foreign company after deducting tax at source,
and the salary of the technician-employee of the
foreign company who worked for the Indian
company was paid abroad by the foreign
company, the grossing-up principle cannot be
applied on the ground that there had been a taxfree salary paid to the technician

CIT v. Marco Brandolin [2001] 116 Taxman 768 (Mad.).

Profits in lieu of Salary

Amount received under Voluntary Separation Scheme - Amount

re ceived by assessee from his employer as payment under
Voluntary Separation Scheme, would be taxable under section
17(3)(i)

Special Bonus on retirement - Amount paid by assesseecompany to its executive director, at time of his leaving
company as special bonus for exceptional services rendered by
him, is profit in lieu of salary under section 17(3)

G.N. Badami v. CIT [1998] 144 CTR (Mad.) 289.

J.K. Helene Curtis Ltd. v. CIT [1999] 103 Taxman 162 (Bom.).

Restrictive covenant - Sum received by assessee-employee

from erstwhile employer under a restrictive covenant not to
take em ployment with competitor could not be treated as
perquisite but is a capital receipt

B.K. Kotru v. CIT [2006] 282 ITR 1 (Bom.).

Scope of the expression termination of employment - The

word any in the phrase any compensation occurring in
section 17(3)(i) indicates both the quantum and the kind of
compensation. It may be paid under a termination clause in
the contract of service or it may be paid at the time of
unexpected break of employment. The motive for the
payment of compensation is immaterial. It may be paid in
respect of loss of future remuneration or deprival of future
promotion, thereby affecting the employee adversely.
The payment of compensation may be voluntary or
contractual. It will be taxable irrespective of the question
whether the employer is liable to pay compensation in law
or not. In sum and substance, the payment of compensation
may be made by the employer at or in connection with the
termination of employment.

Even if such payment has no connection with the

termination of employment, it would fall to be taxed
as profits in lieu of salary. The phrase termination of
employment would cover a termination in the natural
course of events, the terms of employment having
been completed and period of retirement having been
arrived. It would also apply to premature termination
of employment and termination by death or voluntary
resignation. The termination of employment need not
be at the instance of the employer only. It would cover
the cases of voluntary retirement of an employee
under a scheme framed by the employer

CIT v. P. Surendra Prabhu [2005] 149 Taxman 82/279 ITR

402 (Ker.).

Others - Where assessee applied for a job in a

broadcasting agency in U.S.A. and she was
intimated about clearing of competi tive test but
job was never offered to her and in a class action
suit, claim was filed by assessee and under a
common
consent
decree,
she
received
compensation in full and final settlement of all her
claims, amount received by assessee would not be
covered within expression profits in lieu of salary
as appearing in section 17(3)(iii)

CIT v. Smt. Rani Shankar Mishra [2009] 178 Taxman 324

(Delhi).

Reimbursement of expenses can be brought under

profits in lieu of salary - The reimbursement of the
expenditure incurred by the employee has been
intended to be roped in the definition of salary by
bringing it as part of profits in lieu of salary. The
expression profits in lieu of salary is not to be
given a restricted meaning

I.E.L. Ltd. v. CIT [1993] 204 ITR 386 (Cal.).