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STATUTORY COMPANY

STATUTORY COMPANY

Project submitted
to
Mr. Shyamtanu Paul

(Faculty: Corporate Law)


Project submitted
by
Sumit Sharma
(Roll no.-157)
(Section-C, Sem-V)

HIDAYATULLAH NATIONAL LAW UNIVERSITY


RAIPUR, C.G.

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Table of Contents

TOPICS

PAGES

Acknowledgements03
Introduction................................................................................................................04
Objectives...05
Research Methodology...05
Meaning oF Salary..06
Characteristics of Salary.06
Deduction allowed from salary10
Deduction in respect of Life insurance premia, (section 80C) ....12
Conclusion 16
References .17

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Acknowledgements

At the outset, I would like to express my heartfelt gratitude and thank my teacher, Mr.
Shyamtanu Paul for putting her trust in me and giving me a project topic Statutory
Company such as this and for having the faith in me to deliver.
My gratitude also goes out to the staff and administration of HNLU for the infrastructure in
the form of our library and IT Lab that was a source of great help for the completion of this
project.

Name Sumit Sharma


Roll no.- 157

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Introduction
Among the five heads of income listed by S.14, Salaries isthe first and most important head
of income. The concept ofSalaries is very wide and includes not only the salary in
commonparlance but also various other receipts, gifts, perquisites andbenefits.
Salary includes :
(i) Wages or Salary: Salary is generally used in respect of payment for services of a higher
class, whereas wages is confined to the earnings of labourers. However, for income-tax
purposes there is no difference between salary and wages.
(ii) Annuity is annual grant made by the employer to the employee.
(iii) Pension is a periodical payment for past services.
(iv) Gratuity is a lump sum payment for past services.
(v) Fees and Commission: It is a remuneration to encourage employees.
(vi) Perquisites: These include all benefits and amenities provided by the employer to the
employee, either in cash or kind.
(vii) Profit in lieu of or in addition to salary or wages.
(viii) Advance of Salary.
(ix) Any payment received by an employee in respect of any period of leave not availed of by
him.
(x) Taxable portion of annual accretion: Where the employee is a member of a Recognised
Provident Fund, the amount contributed by the employer in this fund in excess of 12 per cent
of the salary of the employee and interest credited on the amount of the fund in excess of the
prescribed rate of interest is to be included in the salary income.

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Objective
To understand the significance and meaning of the term Salary and study its
application in the tax legislations.
To study how tax is deducted from salary.

Research Methodology
The project is descriptive in nature. Data have been collected on the basis of secondary
resources. This includes books, literature, articles, journals, web pages, etc. Books and other
reference as guided by Faculty of Law of Taxation have been primarily helpful in giving this
project a firm structure. Websites and articles have also been referred.

Meaning of salary

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The relationship of payer and payee must be of employer and employeefor an income to be
categorized as salary income. For example: Salaryincome of a Member of Parliament cannot
be specified as salary, since it isreceived from Government of India which is not his
employer.
Salary, in simple words, means remuneration of a person, which he has receivedfrom his
employer for rendering services to him. But receipts for all kinds ofservices rendered cannot
be taxed as salary. The remuneration received byprofessionals like doctors, architects,
lawyers etc. cannot be covered under salarysince it is not received from their employers but
from their clients. So, it is taxedunder business or profession head. In order to understand
what is included insalary, let us discuss few characteristics of salary.1
Characteristics of Salary
1. 2. The Act makes no distinction between salary and wages, though generallysalary is paid
for non-manual work and wages are paid for manual work.

3. Salary received from employer, whether one or more than one is includedin this head.
4. Salary is taxable either on due basis or receipt basis which ever maturesearlier:
i) Due basis when it is earned even if it is not received in the previousyear.
ii) Receipt basis when it is received even if it is not earned in the previousyear.
iii) Arrears of salary- which were not due and received earlier are taxablewhen due or
received, which ever is earlier.
5. Compulsory deduction from salary such as employees contribution toprovident fund,
deduction on account of medical scheme or staff welfarescheme etc. are examples of
instances of application of income. In thesecases, for computing total income, these
deductions have to be addedback.

1 Mahesh Chandra & D.C. Shukla;- Income-tax Law and Practice, Pragati Publications

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Salary

The meaning of the term salary for purposes of income tax is much wider than what
isnormally understood. Every payment made by an employer to his employee for
servicerendered would be chargeable to tax as income from salaries. The term salary for
thepurposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic
salary,bonus, commission, allowances etc.) as well as non-monetary facilities (e.g.
housingaccommodation, medical facility, interest free loans etc).

(1) Employer-employee relationship : Before an income can become chargeable under


the head salaries, it is vital that there should exist between the payer and the payee,
therelationship of an employer and an employee. Consider the following examples:

(a) Sujatha, an actress, is employed in Chopra Films, where she is paid a


monthlyremuneration of 2 lakh. She acts in various films produced by various producers.
Theremuneration for acting in such films is directly paid to Chopra Films by the
differentproducers. In this case, 2 lakh will constitute salary in the hands of Sujatha, since
therelationship of employer and employee exists between Chopra Films and Sujatha.

(b) In the above example, if Sujatha acts in various films and gets fees from
differentproducers, the same income will be chargeable as income from profession since
therelationship of employer and employee does not exist between Sujatha and the
filmproducers.

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(c) Commission received by a Director from a company is salary if the Director is
anemployee of the company. If, however, the Director is not an employee of the company,the
said commission cannot be charged as salary but has to be charged either as incomefrom
business or as income from other sources depending upon the facts.
Where the employee is a resident and ordinarily resident in india and rendering services in
india salary shall be deemed to accrue or arise in india even if the employer who is nonresident pays some amount being part of salary outside india.2
(d) Salary paid to a partner by a firm is nothing but an appropriation of profits. Any
salary,bonus, commission or remuneration by whatever name called due to or received
bypartner of a firm shall not be regarded as salary. The same is to be charged as incomefrom
profits and gains of business or profession. This is primarily because therelationship between
the firm and its partners is not that of an employer and employee.

(2) Full-time or part-time employment: It does not matter whether the employee is a full
time employee or a part-time one. Once the relationship of employer and employee exists, the
income is to be charged under the head salaries. If, for example, an employee works
withmore than one employer, salaries received from all the employers should be clubbed
andbrought to charge for the relevant previous years.

(3) Foregoing of salary: Once salary accrues. the subsequent waiver by the employeedoes
not absolve him from liability to income-tax. Such waiver is only an application andhence,
chargeable to tax.

Example: Mr. A, an employee instructs his employer that he is not interested n receiving the

2 [CIT v Eli Lilly and co.(india) Pvt. Ltd. (2009) 312 ITR 225 (SC)]

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salary for April 2012 and the same might be donated to a charitable institution. In this
case,Mr. A cannot claim that he cannot be charged in respect of the salary for April 2012. It is
onlydue to his instruction that the donation was made to a charitable institution by his
employer. Itis only an application of income. Hence, the salary for the month of April 2012
will be taxablein the hands of Mr. A. He is however, entitled to claim a deduction under
section 80G for theamount donated to the institution.

(4) Surrender of salary: However, if an employee surrenders his salary to the


CentralGovernment under section 2 of the Voluntary Surrender of Salaries (Exemption from
Taxation)Act, 1961, the salary so surrendered would be exempt while computing his taxable
income.

(5) Salary paid tax-free: This, in other words, means that the employer bears the burdenof
the tax on the salary of the employee. In such a case, the income from salaries in the handsof
the employee will consist of his salary income and also the tax on this salary paid by
theemployer.

Definition of Salary
The term salary has been defined differently for different purposes in the Act. The definition
as to what constitute salary is ver wide. As already discussed earlier, it s an
inclusivedefinition and includes monetary as well as non-monetary items. There are different
definitionsof salary say for calculating exemption in respect of gratuity, house rent allowance
etc.

Salary under section 17(1), includes the following:


wages,

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(ii) any annuity or pension,

(iii) any gratuity,

(iv) any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages,

(y) any advance of salary,

(vi) any payment received in respect of any period of leave not availed by him i.e. leave
salary or leave encashment,

(vii) the portion of the annual accretion in any previous year to the balance at the credit of an
employee participating in a recognised provident fund to the extent it is taxable and

(viii) transferred balance in recognized provident fund to the extent it is taxable,

(ix) the contribution made by the Central Government or any other employer in the
previousyear to the account of an employee under a pension scheme referred to in section
8000D.

What is salary-

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Salary is said to be the remunerationreceived by or accruing to an


individual for service rendered aa result of an express or implied contract.
The statute, gives an inclusive but not exhaustive definition of salary.
Salary includes therein3
(i)

Wages (ii) Annuity or pension (iii) Gratuity (iv) fees, commission,


perquisites or profits in lieu of salary (v) Advance salary (vi)
Receipt from provident fund (vii) Contribution of employer to a
recongnised provident fund in excess of prescribed limit (viii)
Leave encashment (ix) compensation as a result of variation of
service contract etc. (x) Government contribution to a pension
scheme.4

Exceptions to salary income:


The existence of anemployer-employee relationship is a must for a payment to be taxed
under the head salaries. Accordingly, the following classes of payments do not fall under the
purview of the head salary
(i) Salary received by a partner from his partnership firm carrying on business - This
income is taxable underthe head profits and gains of business and profession.
(ii) Salary received by a person as MP or MLA- This income is taxable under the head
income from other sources. However, the salary received by a person as a Minister of
Central Government/State Government is chargeable under the head salaries.
(iii) Family pension that is pension received by the members of the family of an
employee subsequent to his death - This is taxable under the head income fromother
sources. However the pension received by anemployee from his former employer is
taxable under thehead salaries.
3Section 17(1),Exemption from Taxation) Act, 1961.
4H.C. Mehrotra- Income-tax Law and Accounts , 27th edition (2006).

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Deduction allowed from salary


The following amounts shall be deducted in order to arrive at the chargeable income under
the head Salaries.
(A) Standarddeduction: Omitted by Financial Act, 2005 w.e.f. 1.4.2006. Section 16(i)
(B) Entertainmentallowance : Where the employee is in receipt of entertainment allowance,
the amount so received shall first be included in the salary income and thereafter the
following deduction shall be made - Section 16(ii) :
16(ii). A deduction in respect of any allowance in the nature of an entertainment allowance
specifically granted by an employer to the assessee who is in receipt of a salary from the
Government, a sum equal to onefifth of his salary (exclusive of any allowance, benefit or
other perquisite) or five thousand rupees, whichever is less.
W.e.f. April 1, 2002 entertainment allowance will be allowed in computing income from
salary only in case of employees of the Government and will cease to be allowable for
persons other than those employed in Government i.e. entertainment allowance deduction
will not be allowed to other employees.
For this purpose Salary excludes any allowance, benefit or other perquisites:
Where an employee, not entitled to claim deduction under this clause, spends some money on
the entertainment of customers of the concern, the amount so spent cannot be deducted from
the salary income. The condition makes exemption well-nigh impossible for the employees of
private sector. For them, the better course would be to get the entertainment expenses
reimbursed.
(C) Taxonemployment or Professional Tax:From the assessment year 1990-91, deduction
shall be allowed in respect of any sum paid by the assessee on account of a tax on
employment within the meaning of clause (2) of article 276 of the Constitution, leviable by a
State under any law passed by its legislature. Where Professional/Employment tax is paid by
the employer on behalf of the employee, it will first be included in his gross salary as a
perquisite, being a monetary obligation of the employee discharged by the employer.
Thereafter, a deduction on account of such professional tax shall be allowed to the employee
from his gross salary. Professional tax due but not paid shall not be allowed as deduction.

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Deduction in respect of Life insurance premia, deferred annuity,


contributions to provident fund, subscription to certain equity
shares or debentures, etc. (section 80C)
Section 80C, entitles an employee to deductions for the whole of amounts paid or deposited
in the current financial year in the following schemes, subject to a limit of Rs. 1,00,000/-:

(1) Payment of insurance premium to effect or to keep in force an insurance on the life of the
individual, the spouse or any child of the individual.
(2) Any payment made to effect or to keep in force a contract for a deferred annuity, not being
an annuity plan as is referred to in item (7) herein below on the life of the individual, the
spouse or any child of the individual, provided that such contract does not contain a provision
for the exercise by the insured of an option to receive a cash payment in lieu of the payment
of the annuity;
(3) Any sum deducted from the salary payable by, or, on behalf of the Government to any
individual, being a sum deducted in accordance with the conditions of his service for the
purpose of securing to him a deferred annuity or making provision for his spouse or children,
in so far as the sum deducted does not exceed 1/5th of the salary;
(4) Any contribution made :
a. by an individual to any Provident Fund to which the Provident Fund Act, 1925
applies;
b. to any provident fund set up by the Central Government, and notified by it in this
behalf in the Official Gazette, where such contribution is to an account standing in the
name of an individual, or spouse or children;
c. [The Central Government has since notified Public Provident Fund vide Notification
S.O. No. 1559(E), dated 3-11-2005]
d. by an employee to a Recognized Provident Fund;
e. by an employee to an approved superannuation fund;
f. It may be noted that "contribution" to any Fund shall not include any sums in
repayment of loan;
(5) Any subscription :-

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a. to any such security of the Central Government or any such deposit scheme as
the Central Government may, by notification in the Official Gazette, specify in
this behalf;
b. to any such saving certificates as defined under the Government Saving
Certificate Act, 19595 as the Government may, by notification in the Official
Gazette, specify in this behalf.
(6) Any sum paid as contribution in the case of an individual, for himself, spouse or any
child,
a. for participation in the Unit Linked Insurance Plan, 1971 of the Unit Trust of India;
b. for participation in any unit-linked insurance plan of the LIC Mutual Fund referred to
section 10 (23D) and as notified by the Central Government.
(7) Any subscription made to effect or keep in force a contract for such annuity plan of the
Life Insurance Corporation or any other insurer as the Central Government may, by
notification in the Official Gazette, specify;
(8) Any subscription made to any units of any Mutual Fund, of section 10(23D), or from the
Administrator or the specified company referred to in Unit Trust of India (Transfer of
Undertaking & Repeal) Act, 2002 under any plan formulated in accordance with any scheme
as the Central Government, may, by notification in the Official Gazette, specify in this behalf;
The investments made after 1-4-2006 in plans formulated in accordance with Equity Linked
Saving Scheme, 1992 or Equity Linked Saving Scheme, 1998 shall also qualify for deduction
under section 80C.
(9) Any contribution made by an individual to any pension fund set up by any Mutual Fund
referred to in section 10(23D), or, by the Administrator or the specified company referred to
in Unit Trust of India (Transfer of Undertaking & Repeal) Act, 2002, as the Central
Government may, by notification in the Official Gazette, specify in this behalf;
(10) Any subscription made to any such deposit scheme of, or, any contribution made to any
such pension fund set up by, the National Housing Bank, as the Central Government may, by
notification in the Official Gazette, specify in this behalf;
(11) Any subscription made to any such deposit scheme, as the Central Government may, by
notification in the Official Gazette, specify for the purpose of being floated by (a) public
sector companies engaged in providing long-term finance for construction or purchase of
houses in India for residential purposes, or, (b) any authority constituted in India by, or, under
5 Section 2(c), The Saving Certificate Act, 1959.

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any law, enacted either for the purpose of dealing with and satisfying the need for housing
accommodation or for the purpose of planning, development or improvement of cities, towns
and villages, or for both.6
(12) Any sums paid by an assessee for the purpose of purchase or construction of a residential
house property, the income from which is chargeable to tax under the head "Income from
house property" (or which would, if it has not been used for assessee's own residence, have
been chargeable to tax under that head) where such payments are made towards or by way of
any instalment or part payment of the amount due under any self-financing or other scheme
of any Development Authority, Housing Board etc.7
The deduction will also be allowable in respect of re-payment of loans borrowed by an
assessee from the Government, or any bank or Life Insurance Corporation, or National
Housing Bank, or certain other categories of institutions engaged in the business of providing
long term finance for construction or purchase of houses in India. Any repayment of loan
borrowed from the employer will also be covered, if the employer happens to be a public
company, or a public sector company, or a university established by law, or a college
affiliated to such university, or a local authority, or a cooperative society, or an authority, or a
board, or a corporation, or any other body established under a Central or State Act.
The stamp duty, registration fee and other expenses incurred for the purpose of transfer shall
also be covered. Payment towards the cost of house property, however, will not include,
admission fee or cost of share or initial deposit or the cost of any addition or alteration to, or,
renovation or repair of the house property which is carried out after the issue of the
completion certificate by competent authority, or after the occupation of the house by the
assessee or after it has been let out. Payments towards any expenditure in respect of which
the deduction is allowable under the provisions of section 24 of the Act will also not be
included in payments towards the cost of purchase or construction of a house property.
Where the house property in respect of which deduction has been allowed under these
provisions is transferred by the tax-payer at any time before the expiry of five years from the
end of the financial year in which possession of such property is obtained by him or he
receives back, by way of refund or otherwise, any sum specified in section 80C(2)(xviii), no
deduction under these provisions shall be allowed in respect of such sums paid in such
6https://doresearch.stanford.edu/research.../major.../allocation-expenses

7Supra Note 4.

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previous year in which the transfer is made and the aggregate amount of deductions of
income so allowed in the earlier years shall be added to the total income of the assessee of
such previous year and shall be liable to tax accordingly.8
(13) Tuition fees, whether at the time of admission or thereafter, paid to any university,
college, school or other educational institution situated in India, for the purpose of full-time
education of any two children of the employee.
Full-time education includes any educational course offered by any university, college, school
or other educational institution to a student who is enrolled full-time for the said course. It is
also clarified that full-time education includes play-school activities, pre-nursery and nursery
classes.9
It is clarified that the amount allowable as tuition fees shall include any payment of fee to any
university, college, school or other educational institution in India except the amount
representing payment in the nature of development fees or donation or capitation fees or
payment of similar nature.10
(14) Subscription to equity shares or debentures forming part of any eligible issue of capital
made by a public company, which is approved by the Board or by any public finance
institution.
(15) Subscription to any units of any mutual fund referred to in clause (23D) of Section 10
and approved by the Board, if the amount of subscription to such units is subscribed only in
eligible issue of capital of any company.
(16) Investment as a term deposit for a fixed period of not less than five years with a
scheduled bank, which is in accordance with a scheme framed and notified by the Central
Government, in the Official Gazette for these purposes.
(17) Subscription to such bonds issued by the National Bank for Agriculture and Rural
Development, as the Central Government may, by such notification in the Official Gazette,
specify in this behalf.11
(18) Any investment in an account under the Senior Citizens Savings Scheme Rules, 2004.
8 Direct taxes: Law and Practice by Dr.GirishAhuja and Dr. Ravi Gupta, 4th Edition, Bharat Publishers (2012).

9Ibid.
10www.lawbookshop.net/journals
11 Ibid.

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(19) Any investment as five year time deposit in an account under the Post Office Time
Deposit Rules, 1981.

CONCLUSION
The art of dodging tax without breaking the law is tax avoidance.
-

Justice C.Reddy

Among the five heads of income listed by S.14, Salaries isthe first and most important head
of income. The concept ofSalaries is very wide and includes not only the salary in
commonparlance but also various other receipts, gifts, perquisites andbenefits.The lesson is
divided into various sections dealing with theconcept of salary income and its characteristics,
which define as towhat constitutes salaries followed by the incomes falling underthis head
the computation of basic salary, types of allowances andperquisites, valuation of the
perquisites, various income taxprovisions for computing taxable value of allowances etc and
theirdetailed descriptions along with the applicable legal provisions ofincome tax.
Tax, though an essential element of the fiscal and revenue system of a government has to be
used judiciously and smartly in order to ensure that it falls proportionately on people
according to their spending habits and earning capacity. Tax methods must also be of such a
nature as to ensure that no loopholes are present so as make avoidance a cake walk.
People are however the micro subjects of tax policies. Taxation must be aimed at the bigger
fish and the larger picture is what must be taken into consideration. Companies, firms and
other corporations must be subject to higher tax owing to their larger earning capacity as well
as the nature of their function.

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Bibliography
Forms of Taxation by Lawrence George, 1st Edition, iUniverse (2002)
Direct taxes: Law and Practice by Dr.GirishAhuja and Dr. Ravi Gupta, 4th
Edition, Bharat Publishers (2012)
Student Guide to Income Tax by Dr.VinodSinghania and Dr. Monica Singhania,
Taxmanns (2013)
Taxation: Direct and Indirect by Dr.VinodSinghania and Dr. Monica Singhania,
Taxmanns (2013)

Webliography
Manupatra, www.manupatra.com
West Law, www.westlaw.com
www.accounting-n-taxation.com/Salary-Income.html
https://doresearch.stanford.edu/research.../major.../allocation-expenses
www.niser.ac.in/docs/rnd-manual.pdf
grants.nih.gov/grants/policy/nihgps_2013/nihgps_ch7.htm
www.icai.org/
www.taxmann.com/bookstore/
www.lawbookshop.net/journals
www.lawbookshop.net

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