Income from Salaries under Sections 15–17, Income-tax Act, 1961

Introduction

Sections 15–17 deal with tax on “Income from Salaries”: when salary is charged, what deductions are allowed, and what counts as salary, perquisites and profits in lieu of salary. (Text of the Act: see India Code / Income-tax Act.)

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Section 15 — Basis of charge (short answer for exam)

Salary is chargeable to tax in the previous year on the earlier of: (a) when it is due from the employer, or (b) when it is received (paid).

Why this matters: you can be taxed even if employer hasn’t paid yet (if salary has become due), and conversely if paid in advance it may be taxed in the year of payment.

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Section 16 — Deductions from salary (short answer)

Permitted deductions from salary are:

1. Standard deduction (statutory amount — check current limit in Finance Act),
2. Entertainment allowance (restricted; available to govt employees under limits),
3. Professional tax actually paid.

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Section 17 — What “salary” includes; perquisites; profits in lieu

Section 17(1) defines salary to include wages, pension, gratuity, fees, commissions, perquisites and profits in lieu of salary. Section 17(2) lists perquisites (rent-free accommodation, concessional loans, employer-provided services, etc.). Section 17(3) covers profits in lieu of salary (compensation on termination, payment from employer in place of salary, employer’s contributions from unrecognised funds, etc.).

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Key case laws — deep explanations (use these paragraphs in exam for marks)

1) Commissioner of Income-tax, Kerala v. L. W. Russel (Supreme Court, 1964) — (on employer contributions / future annuity & perquisite)

Facts: Employer paid sums into an insurance/annuity scheme intended to secure an annuity for employee on superannuation. The Revenue treated the employer’s contribution as a perquisite or salary.
Issue: Whether the employer’s payment to such a scheme (which did not create an immediate vested right in employee) is taxable as a perquisite (part of salary) in the hands of employee.
Decision / Ratio: The Supreme Court held that such a payment was not a perquisite taxable in the year of payment because the employee had no present/vested right to the amount — the benefit was contingent (would arise only on future superannuation). The Court looked at the substance: since employee had no legal claim to the money then, it could not be treated as salary/perquisite immediately.
Significance (exam point):

• Principle: A payment by employer that creates only a future contingent benefit (no present right) may not be treated as taxable perquisite immediately.
• Use this case when answering questions on employer contributions to pension/annuity schemes / VRS payments — explain vested right vs contingent benefit.

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2) Karamchari Union, Agra v. Union of India ([2000] 243 ITR 143 (SC)) — (on scope of “salary” / allowances / nature of definition)

Facts (brief): Multiple writ petitions contested whether certain allowances/receipts (like DA, CCA, HRA components or employer payments) should be treated as part of “salary” for taxation and related statutory consequences.
Issue: How to interpret the definition of “salary” in Section 17 — is it exhaustive, and should allowances/perquisites be included as salary for tax purposes? Also whether the Income-tax Act is a self-contained code for tax treatment.
Decision / Ratio: The Court examined the statutory language and legislative scheme and held that the definition in Section 17 is comprehensive for the purposes of assessing salary income. The judgment emphasized a purposive and textual approach — what the statute includes as “salary” must govern, and the Income-tax code must be read as a whole in context.
Significance (exam point):

• Principle: Use the Karamchari Union case to show that the statutory definition in Section 17 determines taxability — courts will interpret “salary” in the context of the statute and not expand it beyond the definition.
• Practical tip for answer: When asked whether a particular receipt is taxable as salary, state the statutory head (Sec 17), then apply Karamchari Union to show statutory interpretation principle.

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3) CIT v. E. D. Sheppard (The Commissioner of Income-tax, Bombay v. E.D. Sheppard) (1963 / reported 48 ITR 237) — (on compensation / profits in lieu of salary)

Facts: The assessee (employee/agent) received a substantial payment from the employer / principal on cessation of his services. Revenue treated it as taxable “profits in lieu of salary.” The question was whether compensation for loss of office/employment is taxable as income or is capital/other non-taxable.
Issue: Whether a voluntary payment/compensation for loss of employment (not a contractual entitlement) is taxable as income under the “profits in lieu of salary” head.
Decision / Ratio: The Court’s analysis (adopted across benches) recognized that compensation in connection with termination of employment could be taxable under the head “profits in lieu of salary” depending on the character and connection of payment to employment — but there are nuanced distinctions (some payments may be capital or not taxed if truly voluntary or compensatory of capital nature). The authorities examine whether the payment is in substance remuneration for past services or compensation for termination; characterization matters.
Significance (exam point):

• Principle: Always analyse the substance — why the payment was made, and whether it is essentially in lieu of salary (taxable) or a capital/voluntary payment (may be non-taxable).
• How to use in answer: When discussing Sec 17(3) (profits in lieu), cite Sheppard to show courts look beyond labels and consider the transaction’s real nature.

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4) CIT v. Rajendra Prasad Moody (Supreme Court, 1978) — (on deductions; principle that deductions must be authorized by statute / purposive interpretation)

Facts / Context: Case concerned whether certain expenditures/interest that did not directly result in earning taxable income could be allowed as deductions under the Income-tax Act. Revenue’s stand was subject to statutory tests.
Issue: Whether certain outlays could be claimed as deductions when the statutory language requires a nexus with income.
Decision / Ratio: The Supreme Court reaffirmed that deductions are strictly a creature of statute — a taxpayer cannot claim a deduction unless the law specifically permits it. The Court applied a purposive reading but held that statutory requirements for deduction must be satisfied.

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Conclusion: Apply Section 17’s definition first; use Moody and Karamchari Union to support statutory reading; apply Russel and Sheppard to test factual payments (vested vs contingent; substance vs label).