Posted in Advance Salary, Arrears, Provident Fund, Section 89(1) of the Income Tax Act, Slogging, Tax

Relief under Section 89(1) of the Income Tax Act, 1961-2015 – The ‘logical’ treatment of amount received as a part of arrears/advance salary which is directly credited to the Provident Fund (PF) account

Disclaimer – The views expressed in this blog are solely of the blogger and these views might be contradictory to the views/stand of the majority of the learned people, as well as, the Institutes governing the professional bodies. Hence, it is my earnest request to all the readers that please consult the professionals before taking any step, based on the views expressed in this blog.


In this write-up, let us try to comprehend, in a sequential manner, what does section 89(1) of the Income Tax Act, 1961-2015 (hereinafter, referred to as the Act), talks about, along with the procedure to compute relief, as defined in rule 21A of the Act. Further, let us also understand the meaning of the word ‘relief’ in context of section 89(1) of the Act and eventually make an attempt to figure out the ‘logical’ treatment of amount received as a part of arrears/advance salary which is directly credited to the Provident Fund (PF) account. So, wear your thinking caps on, to opine on a debatable issue.

Relief under Section 89(1) when salary, etcetera, is paid in arrears or in advance – As per the section 89(1) of the Act, where an assessee is in receipt of a sum in the nature of salary, being paid in arrears or in advance, or is in receipt, in any one of the financial year salaries for more than twelve months, or a payment which under the provisions of section 17(3) of the Act is a profit in lieu of salary, or is in receipt of a sum in the nature of family pension as defined in the Explanation to clause (iia) of section 57 of the Act, being paid in arrears, due to which his/her total income is assessed at a rate higher than that at which it would otherwise have been assessed, then the assessee is eligible to claim relief as defined under section 89(1), read along with rule 21A of the Act. (Source: Website of Income Tax Department, Government of India: www.incometaxindia.gov.in)

Methodology for computing relief, as defined in rule 21A of the Act– The procedure for computing the relief as per section 89(1) is specified in rule 21A of the Act. As per the said rule, relief shall be computed in the manner described below –

Step 1: Calculate the tax payable “of the previous year” in which the arrears/advance salary is received –

  1. On the total income, including the entire additional salary received.
  2. On the total income, excluding the entire additional salary received.

The difference between a) and b) is the tax on the entire additional salary received.

Step 2: Calculate the tax payable “of each of the previous year” to which the additional salary relates –

  1. On the total income, including the additional salary pertaining to that particular previous year.
  2. On the total income of that particular previous year, excluding the additional salary.

Compute the difference between a) and b) for each of the previous years to which the additional salary relates and aggregate the same. This aggregate amount is the tax arrived on, after the additional salary received is spread over in each of the previous years to which it relates.

Step 3: If the difference in tax calculated “of the previous year” in Step 1 is more than the aggregate difference in tax calculated “of each of the previous years” in Step 2 then the excess amount is admissible as relief under section 89(1) of the Act.

However, if the difference in tax calculated “of the previous year” in Step 1 is less than the aggregate difference in tax calculated “of each of the previous years” in Step 2, then no relief is admissible under section 89(1) of the Act.

The meaning of the word ‘relief’– As per the dictionary meaning, the word relief means “The feeling that comes when something burdensome is removed or reduced” (Source: WordWeb). Now, in context of section 89(1) of the Act, the word relief means reducing the tax liability/burden on the assessee, on account of lump sum salary being received in arrears/advance, due to which the assessee’s total income in the previous year of receipt of the arrear/advance is assessed at a tax rate higher than what it would otherwise have been assessed, if the amount was received in the year to which it actually pertains.Thus, in simple words, it’s a relief to reduce the tax liability.

Total Income – The tax payable is calculated on the ‘Total Income’. So, let us understand what does total income means. The aggregate amount of the income computed under the five heads of the income i.e. Income from Salaries, House Property, Business or Profession, Capital Gains and Other Sources is termed as Gross Total Income. From the Gross Total Income so computed, the amount spent/invested as eligible under section 80C to 80U (Chapter VI-A) is deducted to arrive at the balance amount which is known as Total Income.

Thus, from the aforementioned explanation, it is clear that the tax payable calculated on the total income under rule 21A of the Act has to be computed after deducting the amount eligible under section 80C to 80U.

Provision of Section 80C of the Act – Contribution to Provident Funds is covered under section 80C of the Act. As per the provisions of the said section, the deduction is allowed only when the specified amount has been actually paid during the previous year.

Thus, by plain reading of this section, it would be construed that the amount received “as a part of arrears” which is directly credited to the PF account could not be spread over to the earlier years to which this PF contribution actually relates because it has not been ‘actually paid’ in those years.

Provision of Section 192 of the Act – Section 192, deals with the deduction of tax from salary. As per section 192, the liability to deduct tax arises only “at the time of payment”, unlike most of the other sections dealing with deduction of tax at source, wherein it is specifically mentioned that tax should be deducted at source at the time of credit or payment of the amount, whichever is earlier.

Thus, by plain reading of this section, it would be construed that the total amount received as a part of arrears/advance salary has to be taxed in the year of receipt of additional salary and it could not be taxed by spreading the amount received as a part of arrears over to the earlier years to which it actually relates because liability to deduct tax in case of salary arises only “at the time of payment”.

‘Logical’ treatment of amount received as a part of arrears/advance which is directly credited to the PF account – As mentioned in the above paragraphs, by plain reading of the provisions of Section 80C and Section 192 of the Act, it could be concluded that tax has to be paid in the previous year in which the entire amount of arrears/advance salary is received. This is actually very much correct in the normal circumstances. However, the relief under section 89(1) has been introduced by the legislature to override the relevant provisions of the Act, which would otherwise have been followed in normal circumstances.

It is a well-settled position of law that any enactment/rule/section etcetera should not be read and understood in a narrow sense, but rather should be interpreted keeping in mind the intention of the legislature behind framing the law. Hence, the relief under section 89(1) has to be interpreted in a broader sense in view of the intention of the legislature to provide relief to the assessee from tax liability.

Similarly, it is a well-settled position of law that whenever any amount is added to the total income of the assessee, the corresponding investments pertaining to that period has to be allowed as an eligible deduction, while computing the taxable income of the assessee. As far as, investment under section 80C is concerned, in normal circumstances, the deduction is allowed only when the amount is paid in that particular previous year, which is absolutely in line with the provisions of the said section. However, when the income itself is not received in that previous year, how someone could make an investment out of that income in that respective year itself is a logical question to be answered before one reach on to the conclusion that whether the PF amount could be spread over to the earlier years or not, for claiming relief under section 89(1) of the Act.

Hence, from the above-mentioned explanations, it is clear that when income is spread over the relevant previous year, the investments pertaining to that particular year has to be spread over to that previous year, as well. Else, the very purpose of the relief is defeated if only income is added to the previous year, keeping aside the corresponding investments pertaining to that particular year. Thus, the spreading effect has to be provided on both, the income, as well as, the amount directly credited to the PF account in order to give relief under section 89(1) of the Act.This will be the ‘Logical’ treatment of amount received as a part of arrears/advance which is directly credited to the PF account.

Judicial Pronouncement – The Tribunal in R. J. Basu v Second ITO (1991) 37 ITD 49 (Mad) (SMC) had pointed out that the fiction enabling spread over, under Sec. 89(1) will have to be carried to its logical extent, so that if income could be spread over, there is no reason at all why the deposits in provident fund account should also not be taken as spread over on the same basis, so as to qualify for rebate in the years in which it could be deemed to have been deposited.(Source: Website of The Hindu newspaper: www.thehindu.com)

While, interpreting the provisions of section 89(1) of the Act, a lot of the learned people have taken the stand that although, for tax calculation the additional salary received shall be spread over to the particular years to which it actually relates, but the investment portion i.e. the amount contributed directly to the provident funds could not be spread over to the earlier years. The reason for such stand is as mentioned in the above paragraphs i.e. deduction under section 80C is allowed only when the specified amount has been actually paid during the previous year. Isn’t it equivalent to applying different logic on the income and investment portion while interpreting the same section 89(1) of the Act? Just because the section is silent on one point it could not be construed that the intention behind relief under section 89(1) was not to allow the relief on the investment portion.

Conclusion – Herewith, I would like to conclude the issue, backed by logical reasoning and the judgement of the Tribunal, by stating that the spreading effect has to be provided on both the income, as well as, the amount directly credited to the PF account while computing the relief under section 89(1) of the Act. If only the additional salary received is spread over the relevant previous years and the investment portion is not spread over to the previous years then the relief will not reach to its logical end and it will not be a relief in totality as intended by the legislature.

At last, I would also like to request the legislature to clarify the issue with regard to spreading or not of the amount received as a part of arrears/advance salary which is directly credited to the Provident Fund (PF) account, while claiming relief under section 89(1) of the Act. In absence of which, it will always be open for interpretation and arguments thereof.

 

Peyush Jain

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