Salary not treated as Income under the head Salary

Any income can be taxed under the head “salary” only if there is an employer and employee relationship between the payee and payer. If such relationship does not exist then income will not be taxable under the head “salary”. Following salaries are not treated as salary:—

(i) Salary received by Member of Parliament (MP) or of a State Legislature (MLA)

Member of Parliament (M.P.)/Member of Legislative Assembly (M.L.A.) are elected by the public from their respective constituency. They discharge their respective constituency functions, so they cannot be treated as government employees. A Member of Parliament is not an employee of Government and therefore, the salary received by him as a Member of Parliament (M.P.)/Member of Legislative Assembly (M.L.A.) is not chargeable to tax under the head “Salaries”. On the other hand it will be taxed under the head “Income from other Sources”. [Letter F. No. 40/29/67 – IT (A – I), dated 22.05.1967]

Provisions of section 57 of the Income Tax Act do not provide for any deduction of expenditure from such salary income, etc. of a Member of Parliament (M.P.)/Member of Legislative Assembly (M.L.A.). As such no deduction can be claimed for expenditure under section 57.

 

S. No.	Nature of Allowance	Section	Treatment
(i)	Special Allowance	10(14)	Allowances for conveyance, helper etc. granted to meet expenses wholly, necessarily and exclusively for the performance of duties of an office or employment to the extent to which such expenses are actually incurred for the purpose are exempted up to the prescribed limit of section 10(14) and any surplus left out will be taxable
(ii)	Daily Allowance	10(17)	Daily allowances received by such Member of Parliament (M.P.) and Member of Legislative Assembly (M.L.A.) are exempted
(iii)	Constituency Allowance	10(17)	Any constituency allowance received by any person of his membership of any State Legislature

Section 15 is not attracted in respect of remuneration received by an MLA; when provisions of section 15 are not attracted to remuneration received by him, obviously, section 17 cannot be attracted, in respect of reimbursement of medical expenses, as section 17 only extends definition of ‘salary’, by providing certain items mentioned therein, to be included in salary

From reading of section 15 it is clear that fundamental requirement for attracting this section is that, there should be relationship of employer and employee, whether in existence, or in the past. Obviously, and inherently, in the very nature of things, for bringing about such relationship, the assessee, being the person concerned, should have been employed by the employer, and as a necessary corollary, the employer should have right to discharge or terminate the employee. This basic ingredient is missing in the case of MLAs and MPs, as they are not employed by anybody, rather, they are elected by the public, forming their election constituencies, and it is consequent upon such election, that they acquire constitutional position, and discharge constitutional functions and obligations. May be that they receive remunerations after swearing in, but then, it cannot be said to be salary, with the meaning of section 15, and therefore, the remuneration, received by the MLA or MP, cannot be taxed, under the head 'income form salary', but can be taxed under the head, 'income from other sources'.

When the provisions of section 5 are not attracted to the remuneration received by the assessee, obviously, section 17 cannot be attracted, in respect of reimbursement of medical expenses, as section 17 only extends the definition of ‘salary’, by providing certain item mentioned therein, to be included in salary. – [CIT v. Shiv Charan Mathur (2008) 306 ITR 126 : 219 CTR 292 (Raj.)]

(ii) Salary received by a partner from his partnership firm

Salary received by a partner from his partnership firm chargeable as “Profits & Gains from business or profession” as salary paid to a partner by a firm is an appropriation of profits. It is, therefore, not chargeable under the head “Salary”.

Further, such remuneration would be treated as “Business Income” since the partner is not an employee of the entity.

(iii) Salary received by a proprietor from his proprietorship firm

As proprietor and proprietorship firm are the same person and no one can earn from himself and Proprietor is not an employee and hence any amount received by him would not be treated as salary.

(iv) Family Pension received by widow from former employer of her husband

Any family pension received by the widow or legal heirs of a deceased employee is not taxed under the head “Salaries”, but is taxable under the head “Income from other Sources”.

DEDUCTION:—

Standard deduction is available i.e. 1/3rd of family pension or ` 15,000/-, whichever is lower is deductible from family pension.

ELIGIBLE FOR FAMILY PENSION

Ø  Spouse

Ø  Children below 25 years of age

Ø  Unmarried daughter

Ø  “Divorced wife” loses the status of a legally wedded wife and as such is not entitled to the award of family pension. However, the eligible child/children from a divorced wife shall be entitled to the share of family pension which the mother would have received at the time of death of her husband had she not been divorced.

Family pension is chargeable as “Income from other sources”. [Letter No. F. No. 45/118/66-ITJ, dated 21.08.1967]

PROVISIONS ILLUSTRATED:—
Mr. ‘X’, a Government servant, died on 01.04.2019, while in service. In terms of the rules governing his service, his widow Mrs. “X”, is paid a family pension of ` 30,000/-p.m. and a dearness allowance @ 90% thereof. Compute income of Mrs. X for the assessment year 2020-21.
SOLUTION:—
Family pension received by Mrs. ‘X’ is chargeable under the head “Income from other sources”. She can claim the lower of Rs. 15,000/-or 1/3rd of her family pension, as deduction under section 57 in respect of such income as per calculation given below :—
	Particulars	Amount (In Rs.)
(i)	Family Pension received (Rs. 30,000 x 12 months)	3,60,000
(ii)	Add : Dearness Allowance @ 90% of Rs. 3,60,000/-	3,24,000
(iii)	Total Pension received	6,84,000
(iv)	Less : Deduction under section 57 : Least of the following :
	(a) 1/3rd of Gross Pension (Rs. 6,84,000 x 1/3) = Rs. 2,28,000/-	15,000
	(b) Maximum deduction Rs. 15,000/-
(v)	TAXABLE FAMILY PENSION (iii – iv)	6,69,000

(v) Honorarium received by the visiting doctors

Honorarium received by visiting doctors is not governed by conditions of service of the doctors. Hence the same cannot be treated as profit in lieu of salary. The same is professional fee. [ITO v. Ranjan R Mehta (Dr) (1989) 33 TTJ 398 (ITAT Ahmedabad))]

Assessee-medical institute engaged number of visiting doctors as specialists for a limited period of one year only. Visiting doctors had to follow certain terms regarding attendance. They had to refer a specific number of patients to assessee-institute. Assessee-institute collected fees/charges from patients and paid same to visiting doctors after deducting a 10 per cent of collection as administrative charges. Assessee-institute had provided infrastructure for visiting doctors to carry out their professional activities in its premises in lieu of commission and whole arrangement was merely a profit-sharing arrangement between parties for fees collected. Therefore, in absence of any employer-employee relation, payments made to visiting doctors could not be held to be salary and, consequently, assessee-institute could not be held liable and penalised for not deducting tax at source. (Related Assessment year : 1990-91) – [ITO v. Calcutta Medical Research (1999) 107 Taxman 250 (ITAT Calcutta)]

(vi) Remuneration paid to lecturer for setting question paper by a university

The remuneration is not salary, as it is not received from the employer, and is taxable under the head “Income from other sources”.

(vii) Income from profession as a musician

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. [CIT v. Jnan Parkash Ghosh (1994) 205 ITR 454 (Cal)]

(viii) Acting as guarantee commission agent

Commission received by an assessee from a bank for acting as guarantee commission agent. [Bhargava (K.P.) v. CIT (1954) 26 ITR 489 (All)]

(ix) Remuneration of directors

The remuneration received by a director from a company is taxable as salary, if the director is an employee of the company in terms of a contract of employment or the Articles of Association. Otherwise it is taxable as income from business or income from other sources depending upon the facts of each case.

In other words, any amount payable to any whole time director, who is also an employee of the company would be treated as salary. In any other case, the same would be treated as “Other Income”.

A director is an employee of a company or not is dependent on nature and character of appointment and terms and conditions or other provisions contained in memorandum and articles of association. Where board of directors of a company by a resolution appointed assessee as a whole-time director for managing affairs of company by fixing his remuneration in accordance with articles and memorandum of association of company, it could be said that there was an employer and employee relationship between company and assessee. Therefore, remuneration received by assessee was assessable under section 15 not under section 56. (Related Assessment years : 1993-94, 1995-96 and 1996-97) – [Sajid Mowjee v. ITO (2005) 279 ITR 467 : 198 CTR 558 : 148 Taxman 502 (Cal.)]

Where employer-company 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 assessee and as such be chargeable under head ‘Salaries’. (Related Assessment year : 1973-74) – [CIT v. Navnit Lal Sakar Lal (2001) 247 ITR 70 (2000) 164 CTR 282 : 113 Taxman 692 (SC)]

(x) Director’s Fees

Sitting fees paid to directors for attending Board’s Meetings is not a salary but taxable as “Income from Other Sources”.

Where assessee, a B-tech from IIT, had provided professional services for students of coaching institutes for which he was provided lump sum amount as per contract; coaching institute deducted TDS by treating such payments as professional; and assessee was free to do work with other institutions also, Held that the relationship between the assessee and the coaching institute was of consultant/professional and therefore, the assessees receipts were professional and expenses claimed by the assessee were to be considered by the Assessing Officer. [In favour of assessee] (Related Assessment year : 2009-10) - [Arvind Singh v. ITO, Kota (2017) 81 taxmann.com 442 : (2016) 50 ITR(T) 108 (ITAT Jaipur)]

Where the assessee was appointed as an Assistant Honorary Surgeon in a Hospital and medical attendant of LIC, it was held that the income from honorarium received by the assessee-doctor from hospital and LIC should be assessed as income from profession and not under the head ‘Salary’ since there was no employer-employee relationship in the case of the assessee and hospital/LIC. – [Sixth ITO v. Dr. N.P. Sheth (1989) 35 TTJ 481 (ITAT Bombay)]

Assessee - HUF was partner in a firm through its karta who received salary payments from firm in terms of partnership deed for services rendered by him to firm - Said salary payment was without detriment to HUF funds. Salary payments were not includible in assessment of HUF  

It is a well settled principle that payment by way of remuneration to the karta or a coparcener of a HUF by a firm in which the HUF is a partner, cannot be assessed as the income of the family unless it has a direct nexus with the investment of funds of the family in the firm. In other words, unless such payment is to the detriment of the family funds invested in the firm, it cannot be treated as the income of the family. In the instant case, the disputed payments having been made to the karta for services rendered by him to the firm and without any detriment to the funds invested by the assessee-HUF in the firm, could not be treated as the income of the assessee-HUF. (Related Assessment years : 1972-73 and 1973-74) – [Laxman Das v. CIT (1982) 138 ITR 628 : 31 CTR 210 : (1983) 12 Taxman 58 (All.)]