Salary Income not treated as Income under Salary head | RJA (2024)

What are the Salaries Income which is not treated as Income under Salary head?

Income taxable under the head of “salary” when there is existing a relationship of employer and employee between payer and payee. If such relationship does not exist between payer and payee, income shall not be taxable under the head “salary”.

Following salaries are not treated as income under the head of salary: —

(i) Salary obtained by Member of State Legislature or of a Parliament

• Member of Legislative Assembly/ Member of Parliament they are not government employee because they are elected by public from their respective constituency/Locality/Areas. They discharge their duties for public interest within their respective constituency, so they cannot treated as a government employee for Income Tax Act prospective. A Member of Parliament is not an employee of Govt & therefore, Salary received by him as a Member of Parliament /Member of Legislative Assembly shall not be chargeable to tax under the head “Salaries”. On the other hand it shall be taxable under “Income from other Sources” head.
• Provisions of u/s 57 shall not provide for any deduction of expenditure from such said salary incomes, etc. of a Member of Legislative Assembly/ Member of Parliament. As such no deduction can be available for expenditure under section 57.

The remuneration received by MLA shall not attracted u/s 15of income tax act; when provisions ofsec 15are not attracted to remuneration received by him, as well as,section17 will not be attracted, in respect of reimbursem*nt of medical expenses, assection17 only extends definition of ‘salary’, by providing certain items mentioned therein, to be included in salary

According tosection 15there must be built a relationship of employer and employee between payer and payee, whether in existence, or in the past. For this section employer and employee relationship means where employee is appointed by employer and employer have control over the work of employee, and employer must have a right to terminate or discharge the employee. This basic conditions is missing in thecaseof Member of Legislative Assembly (M.L.A.)/ Member of Parliament (M.P.), as they are not employed by anybody, rather, they are elected by the public by election process for their respective constituencies, and it is consequent upon such election, that they acquire constitutional position, and discharge constitutional functions and obligations. that may be they receive remunerations after swearing in, but then, it cannot be said to be salary, with the meaning ofsection 15, and therefore, the remuneration, received by the Member of Legislative Assembly (M.L.A.)/ Member of Parliament (M.P.), shall not be taxed, under the head ‘income form salary’, but it will be taxed under the head, ‘income from other sources’.

If the provisions of U/s 15 are not attracted to the remuneration received by the assesse , then it will also not attracted section 17, in respect of reimbursem*nt of medical expenses, as section 17 only extends the definition of ‘salary’, by providing certain item mentioned in section 17, to be included in salary. –[Commissioner of Income Tax v. Shiv Charan Mathur (2008) 306 ITR 126:219 CTR 292 (Raj.)]

Employer’s TDS liability under New ‘default’ Tax Regime u/s 115BAC(1A)

(ii) Income under the head salary getting by the partners from his partnership firm?

• Salary given to partners by the firm Taxable under the head of “Profits & Gains from business or profession” as salary paid to a partner by a firm is an appropriation of profits. Hence the amount of salary being received by the partner shall not be subject to tax under the head “Salary”.
• However, the said amount of remuneration shall be taxed under the head “Business Income” since the partner cannot be an employee of the entity.

(iii) Income from Salary by proprietor from his proprietorship firm

• Proprietor and proprietorship firm are not distinguish form each other and no one can earn from himself, and proprietor is not an employee. Hence any amount received by him would be treated as salary.

(iv)Income under the Head Family Pension getting by widow from former employer of her husband

• Family pension received by legal heirs or widow of deceased employee shall not be taxed under the head “salary”, but it shall be taxed under Income from Other sources. Any family pension received by the widow or legal heirs of a deceased employee shall not taxed under the head “Salaries” However is taxable under the head “Income from other Sources”.

THE DEDUCTION FOR FAMILY PENSION :—

• A standard deduction is available, which deducts 1/3 of the family pension or Rs. 15,000/- whichever is less, from the family pension.

FAMILY PENSION ELIGIBLETY

• Unmarried daughter of deceased employee
• Children below 25 years of age
• Spouse of deceased employee
• Children of “Divorced wife” who 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 will 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”.

(v) Income as Honorarium obtained by the visiting doctors

• Honorarium obtained by visiting doctors is not treated as salary because it is not covered by conditions of service of the doctors. Hence the same shall not be treated as profit in lieu of salary hence it is treated as professional fee. [Income tax officer v. Ranjan R Mehta (Dr) (1989)(ITAT Ahmedabad))]
• A 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 of medical institut. They had to refer a certain 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 is 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.
• Hence, in absence of any employer-employee relation, payments made to visiting doctors cannot be held to be salary and, consequently, assessee-institute could not be held liable and penalised for not deducting tax at source. (Above case related AY : 1990-91) –[Income tax officer v.Calcutta Medical Research(1999)]

(vi) Income as Remuneration paid to College lecturer for setting up question bank paper by a university

• Income or remuneration is not getting from the employer hence it is not treated as ‘salary’ U/s 15 and is taxable under the head “Income from other sources”.

(vii) Revenue/Income from a musician profession

• Amount received from profession as a musician, incidentally rendered services to a college of music shall not be treated as salary because there does not existed and employer and employee relationship. [Commissioner of Income Tax v. Jnan Parkash Ghosh (1994)].

(viii) Acting as guarantee commission agent

• Earning from Commission income getting by the taxpayers from a Bank for performing as guarantee commission agent shall not be considered to be taxed under the head of salary. [Bhargava (K.P.) v. Commissioner of Income Tax (1954)]

(ix) In case of Directors Remuneration

• Director Remuneration shall be taxed under salary, if the director is an employee of the company in terms of a contract of employment or the AOA. Otherwise it is taxable as income from business and profession or income from other sources depending upon the facts of each case.
• Moreover, any amount payable to any whole time director, who is also an employee of the company would be treated as salary. Otherwise, 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 of employment or other provisions contained in MOA and AOA. When 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 assesse. Hence, remuneration received by assessee was assessable under section 15 not under section 56.(Related Assessment years: 1993-94, 1995-96 & 1996-97) –[Sajid Mowjee v. Income tax officer (2005)]
• 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) –[Commissioner of Income Tax v. Navnit Lal Sakar Lal (2001)]

(x) Fees from as Director’s

• Sitting fees given to the director for attending Board of Director meeting not covered under the head of salary but taxable under the head of “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 Tax deduction at source by treating such payments as professional; and assessee was free to do work with other institutions also,Heldthat 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 AO.[In favour of assessee] (Related Assessment year: 2009-10) –[Arvind Singh v. Income tax officer, Kota(2017) (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 Income tax officer v. Dr. N.P. Sheth (1989) (ITAT Bombay)]
• In case of Assesse Hindu Undivided Family 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 then such salary is determine without including the income of Hindu Undivided Family unless it has direct link with the investment of family fund in the said firm.
• It is a well-established rule that payment form of remuneration to a coparcener of a Hindu Undivided Family or the Karta by a firm in which the Hindu Undivided Family 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 word if family funds is not invested in the said 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 assesse- Hindu Undivided Family in the firm, could not be treated as the income of the assesse- Hindu Undivided Family. (above is related AY: 1973-74 or 1972-73) – [Laxman Das v. Commissioner of Income Tax (1982)]

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